UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file Number: 000-21623
OBIE MEDIA CORPORATION
4211 West 11th Avenue, Eugene, Oregon 97402
(Address of principal executive offices)
Issuer's telephone number: 541-686-8400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, without par value
(Title of class)
Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 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.
X Yes No
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State issuer's revenues for its most recent fiscal year: $66,263,376
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing: $16,248,587 aggregate market value as of December 31,
2001, based on the price at which the stock was sold.
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 5,908,577 shares of Common
Stock, without par value, on February 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates information from the issuers definitive
proxy statement for the annual meeting of shareholders to be held on April 26,
2002.
FORM 10-K
This Annual Report 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 Annual
Report. You should recognize that these forward-looking statements, which speak
only as of the date of this Annual 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. Unless
otherwise indicated, the information contained in this Annual Report has been
restated to give retroactive effect to 11-for-10 stock splits declared in
October 1997, November 1998 and November 1999. Unless the context otherwise
requires, references in this Annual Report to "Obie Media," the Company", "we,"
"us" or "our" are to Obie Media Corporation, its subsidiaries, and the
management personnel of those entities. Some information in this Annual Report
has been derived from government and industry sources. Although management
believes this information is reliable, it has not been independently verified.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Obie Media Corporation is an out-of-home advertising company which markets
advertising space primarily on transit vehicles and outdoor advertising displays
such as billboards and wallscapes. As of November 30, 2001, we had 41 exclusive
agreements with transit districts in the United States and Canada to operate
transit advertising displays. Subsequent to the date of this report, in December
2001, transit authorities canceled our contracts in Chicago and in St.
Catharines and Pickering, Ontario. The number of transit vehicles related to
these contracts totaled 3,115. For the purposes of forward-looking statements
regarding the number of transit contracts and vehicles available for
advertising, we have excluded these contracts.
The markets in which these transit districts are located include nine of the 30
largest U.S. markets (as defined by DMA, or demographic market area)-Dallas;
Portland, Oregon; Sacramento; Hartford; Ft. Lauderdale; St. Louis; Tampa;
Indianapolis; and Kansas City-and the third largest Canadian market, Vancouver,
British Columbia. Since our initial public offering in November 1996, the number
of vehicles on which we have the right to operate transit advertising displays
has increased from approximately 1,200 to over 8,000. We also operate and
generally own over 1,200 advertising displays on billboards and walls primarily
in Washington, Oregon, California, Montana, Wyoming and Idaho. Obie was formed
in 1987 as a subsidiary of Obie Industries Incorporated ("Obie Industries"), a
family-owned outdoor advertising business. To facilitate its IPO, Obie was
separated from Obie Industries in November 1996.
In September 1998, Obie acquired P & C Media ("P & C"), which had operated in
the out-of-home advertising industry for over 50 years. P & C had 19 agreements
with transit districts, including districts located in Hartford, New Haven, and
Stamford, Connecticut; Fort Lauderdale and West Palm Beach, Florida; Cincinnati
and Cleveland, Ohio; Richmond, Virginia; and Milwaukee, Wisconsin. In August
1999, we completed a public offering of an additional 1,100,000 shares of common
stock. The net proceeds of the offering, approximately $9.7 million, were used
to reduce debt, including the debt incurred in our acquisition of P & C.
Industry Overview
We have focused our business in the out-of-home advertising industry, which
includes displays on buses, trains, taxis, subways, transit benches and
shelters, billboards, wallscapes on urban buildings, and displays in shopping
centers, malls, airports, stadiums, movie theaters and supermarkets. The
industry has grown significantly in recent years. According to estimates of the
Outdoor Advertising Association of America (the "OAAA"), between 1993 and 2001,
annual revenues generated by the out-of-home advertising industry increased
76.7% to $5.3 billion from $3.0 billion, representing a compound annual growth
rate of approximately 6.5%. In 2001, billboard-related outdoor expenditures on
products such as 30-sheet posters, 8-sheet posters and bulletins totaled 60% of
that $5.3 billion amount, or approximately $3.2 billion; transit-related outdoor
expenditures on products located on buses and trains, and venues such as
commuter rail stations or airports, totaled 17%, or approximately $901 million;
street furniture-related outdoor expenditures on products such as bus shelters
or in-store displays totaled 17%, or approximately $901 million; and,
alternative outdoor-related expenditures in venues such as sports arenas or
stadiums totaled 6%, or approximately $318 million. As of 1999, the OAAA
estimated that there were approximately 560,000 outdoor advertising displays in
the United States, operated by more than 500 companies.
We believe the out-of-home medium offers several advantages to advertisers. As
compared with television, newspapers, magazines and direct mail marketing,
out-of-home advertising offers repetitive consumer impacts at a comparatively
low cost-per-thousand impressions relative to other media alternatives (cost-per
thousands impressions is a commonly used advertising measurement). Because of
its cost-effective nature, we market out-of-home advertising as a good vehicle
to build mass-market support. Out-of-home advertising can also be used to target
a defined audience in a specific location. This allows local businesses to
target a particular geographic area and/or demographic group. Additionally,
increases in automobile travel times due to highway congestion and continued
migration of businesses and residences from cities to outlying suburbs has
increased consumer exposure to out-of-home advertising.
Transit advertising represents a significant portion of the out-of-home
advertising industry, and we have focused our business in this segment of the
industry. According to estimates of the Federal Transit Administration, in 1997
there were approximately 331 transit districts in the United States operating
more than 40,000 transit buses. The Canadian Urban Transit Association estimated
that approximately 11,548 urban transit vehicles were in use in Canada in 1999.
Transit districts range in size from very large districts with thousands of
vehicles to small districts with 10 or fewer vehicles. Advertising displays
represent a significant source of revenue to transit districts.
Agreements with transit districts are generally awarded through a competitive
proposal process. Each transit district evaluates proposals based on a number of
criteria, but primarily on the basis of the minimum amount that the bidder
guarantees to pay to the district. A transit agreement typically requires the
transit advertising operator to guarantee to pay the transit district the
greater of a minimum stated amount or a percentage of the advertising revenues
generated by the operator's use of the district's vehicles. These expenses
appear on our financial statements included under the heading "Direct
Advertising Expenses" and totaled in aggregate $34,031,882 in fiscal 2001.
The out-of-home advertising industry includes several large advertising and
media companies with operations in multiple markets. It also includes many small
and local companies operating a limited number of displays in a single or a few
local markets. There has been, and we expect there will continue to be,
consolidation in the out-of-home advertising industry.
Obie Media Strategy
Obie Media's overall business strategy is to expand upon our national presence
to become a leader in the out-of-home advertising industry. Our strategy is to
increase revenues and improve profitability by providing local, regional and
national advertisers with efficient access to one or multiple markets. The
following are components of our strategy:
* Develop Regional Operating Centers. We seek to increase revenues,
profitability and operating efficiencies by developing and using regional
operating centers, or hubs. In developing hubs, we seek to establish an
initial base of operations in a geographic region by obtaining exclusive
agreements with one or more significant transit districts. We then seek to
expand our market presence by bidding for contracts with other transit
districts in that region and by expanding the range of non-transit products
and services we can offer there. We believe this hub strategy will help us
grow revenue and reduce costs by enabling us to provide sales and
administrative services efficiently to several intra-regional markets from
one strategically located operating base.
* Acquire Additional Transit Advertising Agreements. We believe that by
acquiring additional transit advertising agreements we can increase our
operating efficiencies and geographic diversity while creating additional
bases from which to achieve further market penetration. We expect to
experience increased revenue and profitability from additional transit
agreements as we continue to implement our direct sales and product
strategies.
* Maintain a Significant, Proactive Sales Force. We believe we can increase
display occupancy levels by developing, training and retaining a
significant, proactive sales force that sells directly to local advertisers
and, more traditionally, to advertising agencies, thereby maximizing our
advertising revenues. We believe our ratio of sales personnel to display
inventory is higher than the industry average. We devote significant
resources to recruit and train individuals who will excel in our culture
and in our expected competitive environment. The sales force is motivated
by an incentive-based compensation program and supported by a network of
experienced local managers who operate under a centrally coordinated
marketing plan. Management believes the size, quality and motivation of
Obie's sales force afford us a competitive advantage.
* Increase Revenues From Existing Display Space. We seek to increase the
revenue potential of our available transit and outdoor advertising display
inventory by offering innovative transit products and maximizing the
percentage of time our display space is occupied. We offer innovative
transit products including vinyl displays that are physically larger than
traditional transit advertisements. These vinyl displays offer customers
greater impact while providing us with more revenue from a given transit
display space. We seek to sell advertising on transit and outdoor displays
under extended contracts, which enable us to fill display space that would
normally be vacant between traditional advertising campaigns.
* Selectively Pursue Acquisition Opportunities. Obie regularly evaluates
opportunities to enter new markets and increase its presence in existing
markets through the selective acquisition of out-of-home advertising
companies or assets. We intend to continue focusing our acquisition efforts
on expanding around our existing hubs and developing new hubs in regions
where attractive growth and consolidation opportunities exist.
* Increase Inventory of Outdoor Displays. We look to increase Obie's market
penetration by acquiring or building additional outdoor displays in new and
existing markets. Management believes that a resulting increase in
inventory will provide advertisers a greater variety of display
alternatives and leverage Obie's existing sales, design and production
capabilities.
* Expand Obie Media's National Sales Effort. To coordinate and expand our
sales efforts more effectively to national advertisers and national
advertising agencies, Obie Media has established national sales offices in
Los Angeles, Chicago, New York City, San Francisco and Toronto, and we have
a national sales presence in Dallas and a sales representation arrangement
in Montreal. Management believes further growth and expansion into new
markets will continue to increase our national sales.
* Attract New Advertisers Through Direct Local Sales. By selling directly to
local businesses not represented by advertising agencies, we seek to obtain
a larger share of the overall advertising expenditures in our markets and
broaden our customer base for out-of-home advertising. We dedicate
substantial resources to directly target local businesses whose advertising
expenditures may not typically include out-of-home advertising and
introduce them to the benefits of the medium. In fiscal 2001, Obie hired 33
additional local direct sales executives across many of our North American
markets to help us compete better against other forms of local advertising
media. Obie also offers comprehensive sales, marketing and creative
services that make it easier for these potential customers to purchase
out-of-home advertising.
* Produce In-House the Vast Majority of the Product Generated Through Direct
Local Sales. We seek to produce a significant amount of display content for
our transit advertising customers which had previously been subcontracted
to outside vendors.
Products and Markets
Obie Media offers advertisers a wide range of out-of-home advertising
products, including transit advertising and outdoor advertising displays. Obie's
product mix provides advertisers with significant flexibility in their
advertising programs and allows it to cross-sell multiple products and leverage
its design and production capabilities. We also have benefited from improvements
in production technology, including the use of computerized design, vinyl
advertising copy and improved lighting techniques. These improvements have
facilitated a more dynamic, colorful and creative use of the out-of-home medium.
Transit Advertising. As of November 30, 2001, we had 41 exclusive agreements
with transit districts in the United States and Canada to operate transit
advertising displays on over 8,000 transit vehicles, excluding those contracts
with districts in Chicago and Ontario that were canceled in December 2001. The
markets in which these remaining transit districts are located include nine of
the 30 largest U.S. markets-Dallas; Portland, Oregon; St. Louis; Sacramento;
Hartford; Ft. Lauderdale; Tampa, Indianapolis, and Kansas City, Missouri-and the
third-largest Canadian market, Vancouver, British Columbia. Pursuant to Obie's
transit advertising agreements, we are the exclusive seller of exterior
advertising on the transit vehicles operated by the contracting transit
districts. Typically, these agreements also provide us the right to sell
advertising on the interior of the vehicles.
Agreements with transit districts are awarded through a competitive proposal
process. Each transit district evaluates proposals based on a number of
criteria, but primarily on the basis of the minimum amount that the bidder
guarantees to pay to the district and the maximum total revenues available to
the district under the agreement. A transit agreement typically requires the
transit advertising operator to guarantee the transit district the greater of a
minimum stated amount or a percentage of the advertising revenues generated by
the operator's use of the district's vehicles. Transit advertising operators
often must post performance bonds or letters of credit to secure their
guarantees under their transit agreements. Obie Media's transit agreements
typically have terms of three -to five years, with renewals or extensions
granted either unilaterally at the discretion of the transit district or upon
the mutual agreement of the district and Obie Media. Some of our transit
district agreements provide that the transit district may terminate the
agreement before the end of the specified term at the convenience of the transit
district, or if the transit district determines that such termination is in the
public best interest. These expenses appear on Obie's financial statements
included under the heading "Direct Advertising Expenses" and totaled in
aggregate $34,031,882 million in fiscal 2001. Obie also sells advertising on
more than 700 transit benches in Portland, Oregon, approximately 100 transit
shelters in Cincinnati, and more than 300 benches in Fort Worth, Texas.
Management believes these products complement Obie's other product offerings and
intends to attempt to secure additional shelters, dioramas and transit benches
in our markets.
Transit districts range in size from very large districts with thousands of
vehicles to small districts with 10 or fewer vehicles. Through our hub strategy
and proactive marketing to local advertisers, we can offer our services
efficiently to large and small transit districts. The following table sets forth
certain information about Obie Media's transit district agreements as of
November 30, 2001:
Transit District Agreements DMA Rank No. of Vehicles Served Since Expiration Date (fiscal)
British Columbia
Vancouver 3 (CDN) 1,136 1998 2005
Victoria and 27 smaller districts NA 380 1998 2003
Ohio
Cincinnati 32 385 1981 (2) 2003
Texas
Dallas 7 809 1997 2002
Austin 58 303 1998 2002
San Antonio 37 619 2001 2006
Oregon
Portland 23 726 1994 2002
Eugene and Springfield 122 102 1980 (1) 2005
Salem NA 54 1994 2006
Missouri
St. Louis 22 534 1999 2004
Kansas City 30 280 1999 2002
Wisconsin
Milwaukee 33 500 1992 (2) 2006
Madison 84 170 1999 2004
Racine NA 23 1997 (2) 2002
Kenosha NA 47 1996 (2) 2003
Connecticut
Hartford, New Haven and Stamford 27 380 1996 (2) 2004
Danbury NA 52 1999 2004
Bridgeport NA 52 1981 (2) 2003
New Britain NA 20 1981 (2) Year-to-year
Waterbury NA 41 1981 (2) Year-to-year
California
Sacramento 19 246 1994 2002
Santa Cruz NA 112 1997 2002
Stockton NA 111 1989 Year-to-year
Florida
Ft. Lauderdale 16 202 1998 (2) 2002
West Palm Beach 43 139 1998 (2) 2003
Daytona Beach NA 50 1981 (2) 2004
Tampa 14 150 2001 2006
Indiana
Indianapolis 26 141 2001 2004
Ontario, Canada
London NA 170 1999 2004
Burlington NA 46 1999 2004
Oshawa NA 41 1999 2004
Cambridge NA 27 1999 2002
Niagara Falls NA 26 1999 2004
Whitby NA 26 1999 2002
Washington
Spokane 77 133 1999 2004
Jefferson County NA 16 1999 2002
Yakima 125 22 1999 2004
Tri-Cities 125 60 2001 2006
Vancouver 23 101 2001 2006
Wenatchee NA 20 2001 2006
Total 8,452
(1) This agreement was serviced by a division of Obie Industries (Obie
Media's parent corporation until 1996) prior to 1987, when Obie Media was
formed.
(2) These dates reflect periods of service under agreements with P & C,
which Obie Media acquired in September 1998.
The above transit district agreements are scheduled to expire as follows:
Approximate
Number of Vehicles
Number of Covered Under
Agreements Agreements
Fiscal Scheduled to Scheduled to
Year Expire Expire
2002 13 2,770
2003 6 1,003
2004 12 1,765
2005 2 1,238
2006 8 1,504
Certain of our transit district agreements provide for additional one-year to
five-year renewals beyond the specified expiration date, either unilaterally by
the transit district or by mutual agreement of Obie Media and the transit
district. The table above represents the expiration date in the contract,
excluding possible extensions.
Transit Display Products. We offer traditional and innovative, non-traditional
transit advertising products. Traditionally, transit advertisements have been
inserted into metal frames mounted on the exterior or interior of a bus.
Industry standard sizes include "Kings," "Queens," "Tails" and "Heads."
While still offering traditional advertising products, Obie Media also offers
vinyl displays that cover almost the entire side and/or rear of a bus. These
vinyl products create significant additional revenue potential per bus when
compared to traditional products. Management believes these products also give
Obie a competitive advantage in bidding for transit advertising agreements in
districts that use, or are willing to use them.
Outdoor Advertising Displays. Obie Media owns and operates over 1,200 billboards
primarily in Washington, Oregon, California, Montana, Wyoming and Idaho. Many of
Obie's billboards are directional bulletins, which are large format displays
ranging from 160 to 672 square feet in size. Obie's bulletins are generally
located on major thoroughfares and provide greater impact and higher value than
traditional posters.
We lease the property underlying our billboards, generally under 10-year leases
that give us renewal rights for two additional five-year periods. The lessor
typically reserves the right to cancel the lease if construction of permanent
improvements on the subject property conflicts with the billboard.
Most of Obie's billboards were designed and installed within the last decade,
and most are built of steel and engineered to withstand high winds. More than
two-thirds of our billboards are illuminated. The displays are insured against
damage caused to them by storms, vandalism and most other causes. Obie Media
also leases building walls in urban areas for wallscape displays. Wallscapes are
painted or printed on vinyl surfaces or directly on the sides of buildings. Obie
currently leases 28 building walls for wallscape displays in Seattle and owns a
50% interest in a corporation that leases 16 building walls for wallscape
displays in Portland. The following table gives the number of Obie's outdoor
displays at November 30, 2001:
Market Displays
Washington 467
Oregon 156
California 87
Montana 247
Wyoming, Idaho
and other 259
Total 1,216
Sales and Service. In each of Obie's principal markets, Obie Media maintains a
large, high quality, proactive sales force. Management believes Obie's ratio of
sales personnel to display inventory is higher than the industry average. At
November 30, 2001, Obie had 154 sales and marketing employees. Obie's superior
sales and service efforts are a key element in maximizing our inventory
occupancy levels.
Management views our proactive sales efforts as an important part of our
culture. In recruiting a sales force, we screen applicants carefully. We
typically hire college graduates who have demonstrated their suitability and
aptitude to excel in our unique sales environment. New sales employees undergo
extensive training and are supervised by regional sales managers with
substantial advertising sales experience. Obie Media and each of our sales
representatives jointly establish individual sales targets. Management meets
monthly with all our salespeople to acknowledge and reward individuals who are
meeting or exceeding their targets. A sales representative's compensation
depends significantly on meeting or exceeding individual targets. Sales
representatives also participate in Obie's broad-based stock option plan.
Obie has significantly expanded its national sales presence in recent years. To
complement our growth, we have established national sales and marketing offices
in Los Angeles, Chicago, New York City, San Francisco and Toronto. Obie's
national sales team services national advertising accounts, calls on customers
in major cities where Obie Media does not have sales offices and supports Obie's
sales force in local markets.
Management works directly with companies and advertising agencies to coordinate
the marketing, production and installation of advertising displays. Obie's sales
personnel also serve as customer service representatives, maintaining frequent
and regular contact with our advertising customers to resolve customer concerns
in the field. Management believes that our high quality customer service
contributes to customer loyalty and improves renewal rates.
Out-of-home advertisements are traditionally sold for a few months at a time. To
increase occupancy, we employ several techniques to encourage customers to
commit to longer contracts, including offering incentives through Obie's rate
structure and pricing policies. We sell certain innovative transit products
primarily by means of year-long contracts. We also sell space on almost all of
our outdoor advertising displays by means of extended contracts, and offer
outdoor display customers the opportunity to rotate their advertisements among
several display faces within the same market.
Design and Production
Obie maintains its own design and production facilities in Eugene, Oregon. Obie
offers advertisers customized design and production services as well as display
space. Charges for design and production are typically added to the cost of the
space and billed to customers over the life of the advertising contract.
Management believes that Obie's design and production capabilities give it a
significant competitive advantage in direct sales to advertisers, particularly
those it targets who do not have an advertising agency, and brings new customers
to the out-of-home advertising medium.
The design department works with these advertisers and with Obie's sales
representatives to create advertising copy, design and layout. Customers that
are represented by advertising agencies generally arrange for the production of
their ads, with Obie Media providing installation services. We increasingly act
as a broker with respect to this production. In the second quarter of fiscal
2001, we acquired a second large-format digital production printer for an
approximate cost of $400,000. Subsequent to November 30, 2001, we acquired a
third large-format digital production printer for approximately $250,000. These
purchases complement existing equipment used to produce transit and outdoor
advertising display content. This additional capacity will allow us to produce a
significant amount of product previously subcontracted to outside vendors.
Customers
Obie Media maintains a broad base of local, regional and national advertising
customers. Most of our regional and national customers are represented by
advertising agencies. Customers represented by advertising agencies accounted
for approximately 47% of our gross revenues (excluding Chicago advertising
agency business) in fiscal 2001 (61% in fiscal 2000). Consistent with standard
industry practice, advertising agencies working with Obie Media typically retain
15% of the gross advertising revenues from their accounts. Advertising agencies
generally create the artistic design and written content of their customers'
advertising. They plan and implement their customers' overall advertising
campaigns, including the selection and purchase of advertising media. Obie
Media's sales personnel, including its national sales team, are trained to work
closely with advertising agencies to service the needs of these customers.
A key component of Obie's sales and marketing strategy is the proactive
marketing of services to local advertisers. Local advertisers tend to have
smaller advertising budgets and require greater assistance from our production
and creative personnel to design and produce advertising copy. With respect to
local sales, we often expend significant sales efforts on educating potential
out-of-home advertising customers about the cost and reach benefits of the
medium and on developing advertising strategies. While price and availability of
display space are important factors in local sales, service and customer
relationships are also critical. Management believes that our strength in sales,
design and service gives us an advantage in local sales, and that our direct
sales focus on local companies significantly contributes to increased occupancy
and renewal rates. Further, management believes this focus is an important
competitive advantage that enables us to serve smaller transit districts
efficiently.
No single advertising customer represented more than 10 percent of Obie's
revenues for any of the periods presented in the accompanying financial
statements.
Competition
Obie Media's markets are highly competitive. In the transit advertising market,
we compete with other out-of-home advertising companies that submit proposals
for exclusive agreements with transit districts by means of a formal proposal
process. In the outdoor advertising display market, we compete with other
out-of-home advertising companies for customers. We also compete for customers
with other advertising media, including broadcast, satellite and cable
television, radio, print media, direct mail marketing and displays in shopping
centers and malls, airports, stadiums, movie theaters and supermarkets and on
taxis, trains and subways. Substantial competition exists among all advertising
media on a cost-per-thousand-impressions basis and on the ability to effectively
reach a particular demographic section of the market. As a general matter,
competition is confined to defined geographic markets.
In recent years, there has been significant consolidation among Obie's
competitors, including consolidation between out-of-home advertising companies
and broadcast or other media companies. For example, in May 1999, Infinity
Broadcasting Corporation ("Infinity"), now a subsidiary of Viacom Inc. and the
sole shareholder of Viacom Outdoor (formerly TDI Worldwide, Inc.), agreed to
acquire Outdoor Systems, Inc., a leading company in the outdoor advertising
display market. In 2001, Clear Channel Communications, Inc. agreed to acquire
The Ackerley Group, Inc., the parent of outdoor media company, AK Media.
Several of our competitors, including diversified media companies such as
Viacom, are substantially larger, better capitalized, more widely known and have
access to substantially greater resources than Obie Media. These traits may
provide competitive advantages, particularly in large advertising markets.
Transit. The transit advertising market has historically been fragmented,
consisting of a few national transit advertising companies with operations in
multiple markets and numerous small companies operating under one or a few
agreements. In large advertising markets, we encounter direct competition for
transit agreements from Viacom Outdoor, the largest transit advertising company
in the United States, and a dominant competitor in such markets. Competition
among transit advertising companies is primarily based on obtaining and
retaining agreements with transit districts. Agreements with transit districts
are awarded primarily on the basis of the minimum amount the bidder guarantees
to the district. Other factors that transit districts may consider in awarding
agreements are the bidder's financial ability to support its minimum revenue
guarantee, the bidder's business reputation and the soundness of the bidder's
marketing plan. The agreements generally give the operator the exclusive right
to provide transit advertising services within the transit district. The number
and nature of competitors for each agreement depend upon the desirability of the
market, including the number of vehicles operated by the transit district, and
the size and rank of the market.
Outdoor Advertising Displays. The outdoor advertising display market is also
fragmented. Several large outdoor advertising companies have operations in
multiple markets. Many more small companies operate a limited number of displays
in a single or a few local markets. Although some consolidation has occurred in
this segment of the out-of-home industry over the past few years, the OAAA
estimated that, as of 1999, there were approximately 560,000 outdoor displays in
the United States operated by more than 500 companies. The primary competitive
factors in the outdoor advertising display market are the location of a
company's displays and the price charged for their use.
Government Regulation
The government extensively regulates the outdoor advertising industry at the
federal, state and local levels. These laws and regulations limit the growth of
outdoor advertising companies and operate as a substantial barrier to entry in
the industry and, in limited circumstances, may restrict advertising content.
Construction of new outdoor structures has been substantially restricted to
commercial and industrial areas. Many jurisdictions also have restricted the
location, relocation, height and size of outdoor advertising structures. Some
jurisdictions also restrict the ability to enlarge or upgrade existing
structures, such as converting from wood to steel or from non-illuminated to
illuminated displays, and restrict the reconstruction of structures that are
substantially destroyed as a result of storms or other causes. Some
jurisdictions have enacted local laws and ordinances that prohibit wallscapes
and other outdoor advertising on urban buildings.
Management believes Obie's displays conform to current laws and regulations.
When leasing property for the installation of new outdoor advertising displays,
Obie carefully reviews applicable laws, including building, sign and zoning
ordinances. Because billboards are typically located adjacent to roads and
highways, they are also subject to condemnation or other actions by governmental
entities in the event of road or highway improvement or expansion. While
compensation for such actions is generally available, under existing state and
local regulations, Obie may not be permitted to relocate any condemned displays.
In limited circumstances, laws and governmental regulations may restrict the
content of outdoor advertising. For example, some states have banned all outdoor
advertising of tobacco products. In November 1998, 46 states signed a settlement
agreement with the four largest American tobacco companies. Among other things,
the agreement bans transit and outdoor advertising of the companies' tobacco
products in the 46 states. The U.S Congress has also considered legislation that
would severely restrict or ban such advertising. The outdoor advertising
industry is thus heavily regulated and existing or future laws or regulations
could adversely affect the industry. To date, our operations have not been
materially adversely affected by such laws and regulations.
Employees
At November 30, 2001, Obie had 284 full-time and 11 part-time employees, of whom
154 were primarily engaged in sales and marketing, 27 were engaged in art design
and production, 46 were engaged in installation, construction or maintenance of
transit or outdoor advertising displays, and 68 were employed in financial,
administrative or similar capacities. None of our employees are covered by
collective bargaining agreements, except for 4 installers in Portland, Oregon
and 10 installers in British Columbia. Management believes that our
relationships with our employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
Obie's headquarters are located in a 20,000 square foot facility in Eugene,
Oregon. The headquarters includes space for its centralized design and
production departments, as well as its accounting, credit, marketing and
management personnel. The headquarters is leased from Obie Industries, an
affiliate of Obie Media, pursuant to a lease under which Obie Media moved into
the facility and began paying rent in May 1997. Lease payments were
approximately $324,000 during fiscal 2001, $268,000 during fiscal 2000 and
$180,000 during fiscal 1999. Brian Obie, Obie's Chairman of the Board, President
and Chief Executive Officer, is the President, a director and the controlling
shareholder of Obie Industries. Delores Mord, Obie's Secretary and a director of
Obie Media, is Vice President, a director and a shareholder of Obie Industries.
Management believes the headquarters lease carries terms, including rental
rates, term, and other rights and obligations, which are substantially similar
to those that would be available in arms' length transactions from unrelated
parties.
Obie leases parcels of property beneath outdoor advertising structures. Obie's
site leases are generally for a term of ten years, with two five-year renewal
options at Obie's discretion. We also lease local operating offices for sales,
service and installation in Spokane and Yakima, Washington; Portland and Salem,
Oregon; Ft. Lauderdale, West Palm Beach and Tampa, Florida; Hartford and New
Haven, Connecticut; Cincinnati, Ohio; Dallas, San Antonio and Austin, Texas;
Sacramento, Stockton and Santa Cruz, California; St. Louis and Kansas City,
Missouri; Milwaukee and Madison, Wisconsin; Indianapolis, Indiana; Billings and
Great Falls, Montana; Vancouver and Victoria, British Columbia; and London,
Whitby, and Burlington, Ontario. Obie also leases national sales offices in Los
Angeles, Chicago, New York City, San Francisco and Toronto. Total lease payments
for the forgoing leases were $2.1 million, $1.7 million, and $1.3 million for
fiscal 2001, 2000 and 1999, respectively.
ITEM 3. LEGAL PROCEEDINGS
Heard Communications, Inc., doing business as Gateway Outdoor Advertising
("Gateway"), 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),
has contested both judicially and administratively Bi-State's award of the
transit advertising agreement for St. Louis to Obie Media. We began operating
under that agreement in July 1999. In the administrative action commenced July
2, 1999, Gateway alleges that the procurement process that awarded the contract
to Obie Media was arbitrary and capricious in part because Gateway's proposal
guaranteed greater minimum revenue to Bi-State over the term of the contract.
Bi-State denied Gateway's protest by letter dated July 19, 1999. Gateway filed a
protest with Bi-State's Executive Director requesting Obie's contract with
Bi-State be terminated and the bidding for the contract be reopened. The
Executive Director denied Gateway's protest. Gateway then appealed the Executive
Director's decision to the Federal Transit Administration ("FTA"). The appeal to
the FTA was denied.
In the judicial proceeding before the United States District Court for the
Eastern District of Missouri, Case No. 4:99-CV-1054-CAS, commenced June 30,
1999, Gateway challenged the award of the St. Louis contract to Obie Media and
sought a declaratory judgment and an injunction prohibiting Bi-State and Obie
from performing under the contract. Obie intervened in the proceeding as a party
defendant. On August 25, 2000, the Court dismissed the action for failure to
state a claim and for lack of subject matter jurisdiction.
On September 25, 2000, Gateway filed a notice of appeal of the dismissal in the
United States Court of Appeals for the Eighth Circuit. The matter was been
briefed by the parties, argued and the appeal was denied. On September 18, 2000,
Gateway filed a petition in the Circuit Court of the County of St. Louis, State
of Missouri, challenging the award of the contract to Obie Media and seeking a
preliminary and permanent injunction, including award of the remaining term of
the contract to Gateway and its bid preparation costs. Bi-State filed a motion
to dismiss and the Court dismissed the action on November 15, 2000, holding that
a disappointed bidder was not an appropriate party to bring the action. On
November 17, 2000, Gateway refiled as a taxpayer and oral arguments are
scheduled for April 2002.
In addition, Obie is defended in litigation in the ordinary course of its
business and in the aggregate such suits are not expected to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of Obie Media's shareholders during the
fourth quarter of fiscal 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Price Range of Common Stock
Since November 21, 1996, Obie Media's Common Stock has been traded on the Nasdaq
Market under the symbol "OBIE." The following table presents the high and low
bid prices of Obie's Common Stock as reported by The Nasdaq Stock Market, as
adjusted to give retroactive effect to 11-for-10 stock splits declared by Obie
Media in October 1997, November 1998 and November 1999:
Fiscal 2001 High Low
First Quarter $11.50 $ 7.25
Second Quarter 8.94 6.50
Third Quarter 7.10 2.48
Fourth Quarter 3.55 1.65
Fiscal 2000 High Low
First Quarter $11.63 $ 7.31
Second Quarter 9.38 7.31
Third Quarter 9.00 7.69
Fourth Quarter 9.00 5.50
As of February 12, 2002, there were approximately 91 holders of record of Obie's
Common Stock. Management believes the number of beneficial owners is
substantially greater than the number of record holders because a large portion
of Obie's outstanding Common Stock is held of record in "street name."
Dividends
Obie has not paid cash dividends on its common stock during the last two fiscal
years and does not anticipate doing so in the foreseeable future. We plan to
retain any future earnings to finance operations. In addition, Obie Media's
credit agreements may limit Obie's ability to pay dividends or make other
distributions on Obie's common stock.
ITEM 6. Selected Financial Data
IN THOUSANDS EXCEPT PER Years Ended November 30
SHARE AMOUNTS 2001 2000 1999 1998 1997
Statement of Operations Data
Gross Sales $66,263 $51,326 $40,466 $25,218 $14,625
Net Sales 60,283 46,656 36,460 22,718 13,303
Direct Advertising Expenses 49,562 33,961 26,438 14,793 8,005
General and Administrative 10,210 6,882 4,677 3,628 2,242
Depreciation and Amortization 2,077 1,871 1,513 935 664
Start-up Costs 353 116 668 106 237
Provision for Transit Contract Loses 6,007 - - - -
Contract Settlement - - (1,077) - -
Operating (loss) income (7,927) 3,826 4,241 3,255 2,155
Net Income (Loss) Available for
Common Shareholders (7,248) 1,618 2,012 1,501 1,000
EBITDA (1) (5,849) 5,697 5,754 4,190 2,819
Basic Net Income (Loss) per Share (1.23) $0.27 $0.40 $0.32 $0.21
Diluted Net Income (Loss) per Share (1.23) $0.27 $0.39 $0.32 $0.21
Balance Sheet Data
Working Capital $ 4,415 $10,544 $2,695 $1,033 $646
Total Assets 43,233 38,937 32,704 27,647 14,284
Long-term Debt, less Current Portion 13,881 13,695 4,919 13,354 5,695
Shareholders' Equity $12,149 $19,225 $17,365 $ 5,547 $ 3,796
(1) "EBITDA" (earnings before interest, taxes, depreciation and amortization),
a non GAAP financial measure, is defined as operating income (loss) before
depreciation and amortization expense. While EBITDA should not be
considered in isolation or as a substitute for net income (loss), cash
provided by operating activities or other income or cash flow data prepared
in accordance with generally accepted accounting principles, or as a
measure of profitability or liquidity, management believes that it is
widely used by some investors as one measure to evaluate the financial
performance of companies in the out-of-home advertising industry.
Accordingly, this information has been disclosed to facilitate the
comparative analysis of Obie's operating performance relative to other
companies in the out-of-home advertising industry.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Overview
Obie Media is an out-of-home advertising company that markets advertising space
primarily on transit vehicles and outdoor advertising displays (billboards and
wallscapes). As of November 30, 2001, Obie had 41 exclusive agreements with
transit districts in the United States and Canada to operate transit advertising
displays. Since Obie's IPO in November 1996, the number of vehicles on which we
have the right to operate transit advertising displays has increased from
approximately 1,200 to over 8,000. We also operate and generally own more than
1,200 advertising displays on billboards and walls primarily in Washington,
Oregon, Montana, Wyoming, California and Idaho.
Obie's gross revenues increased from $51.3 million in fiscal 2000 to $66.3
million in fiscal 2001, a 29% increase. Net income declined from a $1.6 million
profit in fiscal 2000 to a loss of $7.2 million in fiscal 2001. EBITDA declined
from $5.7 million in fiscal 2000 to negative $5.8 million during this same
period.
A substantial portion of our loss for fiscal 2001 results from our payment of
minimum advertising revenues guaranteed to transit districts under our transit
district contracts. Beginning in the latter half of Fiscal 2001 management began
to be increasingly concerned about these minimum revenue guarantees in the face
of declining advertising revenues in some transportation districts. Accordingly,
management began to seek to restructure or terminate certain of these
arrangements in a way that would limit Obie's exposure to these payments to an
amount that would reflect a more appropriate sharing of revenues under our
advertising contracts. Between August 31, 2001 and February 15, 2002, we have
renegotiated 9 of these contracts and were continuing to negotiate with transit
agencies to restructure an additional 7 contracts. The 9 renegotiated contracts
have resulted in occupancy expense reduction of $1.5 million in fiscal 2001,
$2.1 million in fiscal 2002, $1.5 million in fiscal 2003 and $900,000 in fiscal
2004. We anticipate additional savings for fiscal years 2002 through 2004 as we
conclude negotiations on the additional 7 contracts. We cannot assure you that
we will be able to eliminate or materially reduce this type of risk and, if not,
we may experience further adverse impacts on our operating revenues, some or all
of which may be material.
Obie's operating results are affected by general economic conditions, as well as
trends in the advertising industry. Based on industry sources, in recent years
outdoor advertising expenditures in the United States have increased more
rapidly than total U.S. advertising expenditures. However, this trend may not
continue and future outdoor advertising expenditures may grow more slowly than
expenditures for the advertising industry as a whole.
Moreover, our historical growth has primarily resulted from: (i) growth in our
transit advertising business, primarily resulting from new agreements with
additional transit districts; (ii) the acquisition of P & C on September 1,
1998; and (iii) the development and acquisition of new outdoor displays. As a
result of these factors, our operating performance is not necessarily comparable
on a period-to-period basis. We plan to continue expanding through both internal
growth and acquisitions.
Operating Results
The following table presents certain items from Obie Media's consolidated
statements of income (and EBITDA) as a percentage of gross revenues.
Year Ended November 30
2001 2000 1999
Transit advertising revenue 89.2% 86.9% 85.3%
Outdoor advertising revenue 10.8 13.1 14.7
Gross revenue 100.0 100.0 100.0
Less agency commissions 9.0 9.1 9.9
Net revenues 91.0 90.9 90.1
Operating expenses:
Direct advertising expense 74.8 66.2 65.3
General and administrative 15.4 13.4 11.6
Start-up costs 0.5 0.2 1.7
Contract settlement - - (2.7)
Provision for transit contract
losses 9.1 - -
EBITDA (8.8) 11.1 14.2
Depreciation and amortization 3.1 3.6 3.7
Operating income (loss) (12.0) 7.5 10.5
Interest expense 2.0 2.2 2.3
Income (loss) before income taxes (13.9) 5.3 8.2
Provision for (benefit from) income taxes (3.0) 2.1 3.2
Net income (loss) (10.0)% 3.2% 5.0%
Comparison of Years ended November 30, 2001 and 2000
Revenues. Obie's gross 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. Gross
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. Over the past several years,
our transit advertising operations have expanded more rapidly than our outdoor
advertising operations. Gross revenues for fiscal 2001 increased $14.9 million,
or 29.1%, from $51.3 million in fiscal 2000 to $66.2 million. This increase was
principally associated with the addition of new agreements with the transit
districts of Chicago, San Antonio, Tampa and Indianapolis. These increases were
partially offset by a general decline in national and local advertising. Transit
revenues increased $14.5 million, or 32.5%, from $44.6 million in fiscal 2000 to
$59.1 million in fiscal 2001, primarily due to these same factors. Outdoor
advertising revenues increased approximately $500,000, or 6.8%, from $6.7
million in fiscal 2000 to $7.2 million in fiscal 2001, primarily as a result of
revenues associated with price increases, improvements to existing billboards,
and an acquisition of additional billboards in Montana. Agency commissions
increased $1.3 million, or 28.1%, from $4.7 million in fiscal 2000 to $6.0
million in fiscal 2001, slightly less than the increase in gross revenues
overall.
Net revenues represent gross revenues less agency commissions. Consistent with
standard industry practice, advertising agencies whose clients contract with
Obie typically retain 15% of the gross advertising revenues from those accounts.
Management believes Obie's focus on direct sales to accounts not served by
advertising agencies has resulted in our expenses for agency commissions as a
percentage of our aggregate gross revenues being lower than the industry
average. Customers represented by advertising agencies currently account for
approximately 47% of our gross revenues. For the reasons discussed in the
paragraph above, net revenues increased $13.6 million, or 29.2%, from $46.7
million in fiscal 2000 to $60.3 million in fiscal 2001. During the fiscal year
ended November 30, 2001 our revenues from transit advertising sales, as a
percentage of gross revenues, increased from 86.9% in fiscal 2000 to 89.2% in
fiscal 2001. Increases in gross revenues over the last two fiscal years are
primarily the result of the increased number of transit vehicles and outdoor
displays on which we market advertising space and, to a lesser extent, rate
increases.
Direct Advertising Expenses. Direct advertising expenses consist primarily of
occupancy, production and installation, and sales costs. Occupancy expense
primarily consists of two elements: (i) payments to transit districts for the
right to sell advertising displayed on their vehicles; and (ii) lease payments
to owners of property on which our outdoor advertising structures are located.
Under Obie Media'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. Sales
expenses consist primarily of employment and administrative expenses associated
with our sales force.
Direct advertising expenses increased $15.6 million, or 46.0%, from $34.0
million in fiscal 2000 to $49.6 million in fiscal 2001. This increase was
primarily the result of increased minimum transit fees associated with the new
markets described above and the impact of large minimum transit fee payments as
described in Recent Developments above. Direct advertising expenses increased,
as a percentage of gross revenues, from 66.2% in fiscal 2000 to 74.8% in fiscal
2001, primarily due to the growth of the transit advertising business where
costs, especially occupancy costs, are higher as a percentage of revenue, than
in the outdoor advertising business.
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.
General and administrative expenses increased $3.3 million, or 48.5%, from $6.9
million in fiscal 2000 to $10.2 million in fiscal 2001. The increase resulted
primarily from increases in personnel and related costs associated with managing
the growth of Obie's transit business, including the addition of new districts,
plus additions to reserves for doubtful accounts receivable. General and
administrative expenses, as a percentage of gross revenues, increased from 13.4%
in fiscal 2000 to 15.4% in fiscal 2001.
Start-Up Costs. Start-up costs are the costs Obie incurs in pursuing new transit
district agreements and the costs of establishing a sales force and office in a
new market prior to beginning to operate under a new agreement. These costs
consist primarily of travel expenses, various personnel costs, legal fees and
the costs of preparing proposals in response to transit district requests for
proposals. The amount of start-up costs we incur in the future will vary, both
in total amount and as a percentage of revenues, depending on the number and
complexity of proposals for new districts and our success in obtaining new
contracts.
Start-up costs for fiscal 2001 increased $237,000 from $116,000 in fiscal 2000
to $352,000. The increase during fiscal 2001 is a result of costs incurred to
enter the new markets described above.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased $207,000, or 11.1%, from $1.9 million in fiscal 2000 to $2.1 million
in fiscal 2001, primarily due to capital expenditures for outdoor advertising
displays as well as investment in computing and other equipment for the new
markets described above.
Provision for Contract Losses. 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
resulted in higher than acceptable direct advertising expense levels, and are
primarily responsible for the operating losses reported for the year ended
November 30, 2001.
Obie is continuing to negotiate modifications to certain of those contracts and
believes it will be substantially successful in doing so (see "Recent
Developments"). A $6.0 million provision for transit contract losses, including
a $5.2 million accrual for transit fees, has been recorded for fiscal year 2001.
Operating Income. Due to the events and factors discussed above, including the
provision for transit contract losses, we experienced an operating loss of $7.9
million in fiscal 2001, compared to operating income of $3.8 million in fiscal
2000.
Interest Expense. Interest expense increased $216,000, or 19.3%, from $1.1
million in fiscal 2000 to $1.3 million in fiscal 2001, primarily due to the
increased use of the working capital credit line and additional long-term
borrowings.
Provision for Income Taxes. The loss before income taxes resulted in a tax
benefit of $2.0 million for fiscal 2001, compared to a provision for income
taxes of $1.1 million during fiscal 2000. Obie's beneficial tax rate was 21.7%
for fiscal 2001. The difference between the statutory United States federal
income tax rate and the beneficial tax rate for fiscal 2001 is due primarily to
a deferred tax valuation reserve for net operating loss carryforwards. Obie's
effective tax rate for fiscal 2000 was 38.9%, higher than the statutory rate due
to provisions for foreign and state income taxes.
Net Income. Obie realized a net loss of $7.2 million during fiscal 2001,
compared to net income of $1.6 million in fiscal 2000. This difference arose
primarily because of a declining media revenue environment resulting from
shifting economic conditions, on the one hand, and the requirement to meet
minimum guarantee payments to transit districts, on the other hand.
Comparison of Years ended November 30, 2000 and 1999
Revenues. Gross revenues increased $10.9 million, or 26.8%, from $40.5 million
in fiscal 1999 to $51.3 million in fiscal 2000. This increase was principally
due to having a whole year's activities of transit contracts acquired in 1999
and increases in other previously acquired contracts. Transit revenues increased
$10.1 million, or 29.2%, from $34.5 million in fiscal 1999 to $44.6 million in
fiscal 2000, primarily due to the above factors. Outdoor advertising revenues
increased $769,000, or 12.9%, from $5.9 million in fiscal 1999 to $6.7 million
in fiscal 2000. Agency commissions increased $700,000, or 16.6%, from $4.0
million in fiscal 1999 to $4.7 million in fiscal 2000, primarily due to a
general increase in overall business. As a result of the foregoing reasons, net
revenues increased $10.2 million, or 28.0%, from $36.5 million in fiscal 1999 to
$46.7 million in fiscal 2000.
Direct Advertising Expenses. Direct advertising expenses increased $7.5 million,
or 28.5%, from $26.4 million in fiscal 1999 to $34.0 million in fiscal 2000.
This increase was primarily the result of activities required to support Obie's
increased level of business. Direct advertising expenses increased slightly, as
a percentage of gross revenues, from 65.3% in fiscal 1999 to 66.2% in fiscal
2000, primarily due to the growth of the transit advertising business, where
costs, especially occupancy costs, are higher as a percentage of revenue than in
the outdoor advertising business.
General and Administrative Expenses. General and administrative expenses
increased $2.2 million, or 47.2%, from $4.7 million in fiscal 1999 to $6.9
million in fiscal 2000. The increase resulted primarily from increased costs of
administering new transit districts and districts which operated for less than
all of fiscal 1999. General and administrative expenses, as a percentage of
gross revenues, increased from 11.6% in fiscal 1999 to 13.4% in fiscal 2000.
Contract Settlement. During 1999, Obie Media recognized a non-recurring pre-tax
gain of $1.1 million associated with its contract settlement with Tri-Met. Until
June 30, 1999, Obie had 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. Obie originally began servicing
Tri-Met in January 1994 pursuant to a five-year agreement that 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 Obie agreed that Obie's then effective Tri-Met
agreement would terminate on June 30, 1999. In December 1998, Obie entered into
an agreement with Tri-Met whereby Tri-Met agreed to compensate Obie for
terminating the existing contract early. The total amount of the contract
settlement was $1.1 million, and that amount is included as an offset in
operating expenses in Obie's consolidated statements of income for the year
ended November 30, 1999. Management does not expect a recurrence of this one
time revenue item. (See Note 11 to Obie's Consolidated Financial Statements).
Start-Up Costs. Start-up costs decreased $553,000, from $668,000 in fiscal 1999
to $116,000 in fiscal 2000. The larger 1999 amounts were primarily due to Obie's
increased response to requests for proposal for transit district contracts,
bidding on a greater number of large district contracts, and the costs incurred
in retaining the Portland contract.
Depreciation and Amortization Expenses. Depreciation and amortization expenses
increased $358,000, or 23.6%, from $1.5 million in fiscal 1999 to $1.9 million
in fiscal 2000, primarily due to Obie's investment in equipment in new markets,
upgrading of computer capabilities and adding outdoor displays in existing
operations and through acquisitions.
Operating Income. Due to the above factors, operating income decreased $415,000
or 9.8%, from $4.2 million in fiscal 1999 to $3.8 million in fiscal 2000.
Interest Expense. Interest expense increased $179,000 or 19.0%, from $940,000 in
fiscal 1999 to $1.1 million in fiscal 2000, primarily due to the increased use
of the working capital credit line and additional long-term borrowings.
Provision for Income Taxes. Provision for income taxes decreased $199,000, or
15.5%, from $1.3 million for fiscal 1999 to $1.1 million in fiscal 2000,
primarily due to the 18.0% decrease in income before income taxes. The effective
rate of income taxes as compared to taxable income was 40.2% in 2000 and 39.0 %
in 1999.
Net Income. As a result of the foregoing factors, net income decreased $394,000,
or 19.6%, from $2.0 million for fiscal 1999 to $1.6 million for 2000.
Recent Developments
Management is currently seeking to restructure our business strategy regarding
transit fee arrangements and guarantees with transit authorities. Most of our
transit arrangements require us to share a certain percentage of our net transit
fee revenues with the transit authorities (a certain percentage to the transit
authorities, the balance retained by Obie). Many of these arrangements provide
that we must guarantee a minimum payment to the transit district irrespective of
our revenue levels. Agreements that contain large minimum transit fee payment
guarantees significantly hamper our ability to manage operating expenses during
weak economic and/or advertising environments. These high minimum payment
requirements have resulted in higher than historical direct advertising expense
levels as a percentage of revenues, and are primarily responsible for our
operating losses during fiscal 2001.
We are currently negotiating to modify these guaranteed minimum fee arrangements
with many of our transit districts, and management believes we will be
substantially successful in doing so. In appropriate circumstances, where we
cannot restructure our existing agreements we may seek to terminate our
contracts with those districts. In recognition of these issues, we recorded a
$6.0 million provision for transit contract losses, including a $5.2 million
accrual for renegotiated transit fees, for fiscal 2001.
As February 15, 2002 contracts accounting for 23.3% of 2001 gross transit
revenues (excluding $22.2 million related to the Chicago contract) had been
renegotiated, and contracts accounting for another 14.6% were under negotiation.
In addition, contracts accounting for fiscal 15.1% of 2001 gross transit
revenues will expire in March 2002 and will be subject to a re-bidding process.
On December 5, 2001, Obie was notified by the Chicago Transit Authority ("CTA")
that the CTA was unilaterally terminating their advertising contract, claiming
that Obie was in default of certain contractual provisions. Obie was originally
awarded the contract in December 2000 to be the exclusive provider of
advertising on CTA's 1,875 buses, 1,190 rapid transit cars, and 140 rail
stations.
Management believes we were in material compliance with all aspects of the CTA
contract and that Obie never received prior notice of default from the CTA
before termination, as required under the contract. Obie contends that a
restructuring of the CTA contract was appropriate because (a) a decline in
national advertising and the attendant decline in CTA advertising during 2001
made the arrangement less favorable than both parties had expected, and (b) CTA
made significantly less advertising space available to Obie than CTA had
originally held out in the Request for Proposal it issued in the Fall of 2000.
We are vigorously seeking to redress CTA's termination and are working closely
with counsel to resolve the matter favorably. However, there can be no
assurances that the matter can be resolved in a manner acceptable to Obie, and
that should a resolution be unattainable, management plans to pursue its
available legal remedies.
In the third quarter of fiscal 2001 Obie reported a $6.0 million provision for
transit contract losses . Management believes that this loss accrual is
sufficient to accommodate the resulting contract adjustments described above.
In February 2001 Obie and U.S. Bank agreed on a new financing arrangement. The
arrangement includes a $16 million term loan revolver and a $6 million working
capital revolver. Interest rates on each, at Obie's option, are based upon a
range of basis points above either the London Inter-Bank Offered Rate (LIBOR) or
U.S. Bank's prime rate, the range to be determined based upon certain financial
ratio standards. Obie used the term loan revolver to refinance all existing
debt, including the then outstanding line of credit. The term revolver does not
require any principal payments until third quarter of fiscal 2002.
As of November 30, 2001 we were not in compliance with our operating covenants
in our existing credit facility that relate to certain financial ratios, and
U.S. Bank had granted us a waiver of that noncompliance. On February 14, 2002
U.S. Bank and Obie agreed to a revised credit facility which included modified
financial ratio covenants. The revised agreement extends the term of the credit
facility through February 2003. The credit facility requires the execution and
delivery of definitive transaction documentation and Obie's continuing
compliance with the revised covenants.
In the second quarter of fiscal 2001 we acquired a second large-format digital
production printer for approximately $400,000. Subsequent to November 30, 2001,
we purchased a third large-format digital production printer for approximately
$250,000. These purchases complement existing equipment used to produce transit
and outdoor advertising display content. This additional capacity will allow us
to produce a significant amount of product previously subcontracted to outside
vendors.
Resignation of Director. Effective September 2, 2001, Wayne P. Schur resigned as
a director and officer of Obie Media Corporation and its subsidiary, Philbin &
Coine, Inc. Mr. Schur was the President and sole or principal shareholder of P &
C Media from 1981 to 1998 prior to its acquisition by Obie Media.
Seasonality
Historically, Obie Media's revenues and operating results have fluctuated by
season. Typically, Obie's results of operations are strongest in the fourth
quarter and weakest in the first quarter of our fiscal year, which ends November
30. Obie's transit advertising operations are more seasonal than our outdoor
advertising operations as the outdoor advertising display space, unlike our
transit advertising display space, is and has been sold nearly exclusively by
means of 12-month contracts. Management believes the seasonality of our revenues
and operating results will increase if 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, securing new
transit agreements and other actions we have taken and plan to continue to take
to implement our growth strategy, have contributed to fluctuations in our
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.
Liquidity and Capital Resources
Obie Media has historically satisfied its working capital requirements with cash
from operations and revolving credit borrowings. Obie's working capital at
November 30, 2000 and 2001 was $10.5 million and $4.4 million, respectively. The
decrease in working capital is due primarily to the recording of a $5.2 million
accrual for transit contract losses and an increase in the utilization of our
working capital credit line to fund operations. 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.
Obie Media's net cash used in operating activities was $1.2 million during
fiscal 2001 as compared to net cash provided by operating activities of $799,000
in fiscal 2000. The change between periods was due primarily to an increase in
accounts receivable and refundable income taxes.
Net cash used in investing activities was $5.3 million and $1.3 million in
fiscal 2000 and 2001, respectively. The decrease from fiscal 2000 to fiscal 2001
resulted primarily from our using approximately $4.8 million in 2000 for direct
billboard acquisitions compared to significantly smaller acquisitions in 2001.
Capital expenditures totaled $5.2 million and $1.3 million in fiscal 2000 and
2001, respectively. Capital expenditures consist primarily of the cost of
building and acquiring outdoor advertising displays, and in 2001 included the
cost of the digital printing equipment described above. We anticipate that our
capital expenditures will approximate $1.5 million in fiscal 2002.
Net cash provided by financing activities was $5.1 million and $2.3 million in
fiscal 2000 and 2001, respectively. The increase was primarily the result of
borrowings used to finance increases in accounts receivable associated with
sales in the transit markets added during the year.
Effective February 19, 2001 Obie entered into a new financing arrangement with
U.S. Bank. The new arrangement provides 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 its then-existing debt, including the previously outstanding line
of credit. The term revolver does not require any principal payments until third
quarter of fiscal 2002. At November 30, 2001, available borrowing capacity under
the line of credit, based on collateralized accounts, was $4.3 million. As of
November 30, 2001 we were not in compliance with our operating covenants in our
existing credit facility that relate to certain financial ratios, and U.S. Bank
has granted us a waiver of that non compliance. On February 14, 2002 U.S. Bank
and Obie agreed to a revised credit facility which included modified financial
ratio covenants. The revised agreement extends the term of the credit facility
through February 2003. The credit facility requires the execution and delivery
of definitive transaction documentation and Obie's continued compliance with the
revised covenants. Management can provide no assurances that U.S. Bank will
continue to renew our credit arrangements as they expire. (See "Recent
Developments" above.)
At November 30, 2001 Obie Media had outstanding borrowings of $14.2 million, of
which $13.9 million was pursuant to a long-term credit agreement and $325,000
was pursuant to the agreement to acquire P & C.
We expect to continue pursuing a policy of measured 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. Management believes that internally generated funds and funds available
for borrowing under Obie's 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 2002, and to fund transit contract loss accrual payments. Future
acquisitions by Obie Media, if any, may require additional debt or equity
financing.
Market Risk
We may be exposed to future interest rate changes on our debt. Management does
not believe that a hypothetical 10 per cent change in end of period interest
rates would have a material effect on Obie's cash flow.
The Effect of New Accounting Pronouncements.
In June 2000 the FASB issued Statement of Financial Accounting Standards N0.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB No. 133" ("SFAS 138"). In June 1999, the FASB
issued Statement of Financial Accounting Standards N0. 137 - "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an
amendment to Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133 and 138 establish
accounting and reporting standards for all derivative instruments. SFAS 133 and
138 are effective for fiscal years beginning after June 15, 2000. Obie adopted
SFAS 133 and 138 for its fiscal year beginning December 1, 2000. Obie does not
currently have any derivative instruments nor does it participate in hedging
activities, and therefore the adoption of these standards did not have any
impact on its financial statements or results of operations.
On June 30, 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets," which eliminates the amortization of goodwill and other acquired
intangible assets with indefinite economic useful lives. SFAS 142 is effective
for fiscal years beginning after December 15, 2001. Obie will adopt SFAS 142
effective December 1, 2002.
As of December 31, 2001, Obie had net unamortized goodwill in the amount of $5.7
million. Management expects amortization expense to be approximately $500,000 in
fiscal 2002. SFAS 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the fiscal
year. However, a company has six months from the date of adoption to complete
this first step. Obie expects to complete that first step of the goodwill
impairment testing during the first quarter of the year ending November 30, 2003
(fiscal year 2003). The second step of the goodwill impairment test measures the
amount of impairment loss (measured as of the beginning of the year of
adoption), if any, and must be completed by the end of the Company's fiscal
year. Any impairment loss resulting from the transitional impairment tests will
be reflected as the cumulative effect of a change in accounting principle in the
first quarter of fiscal year 2003. The Company has not yet determined what
effect these impairment tests will have on the Company's earnings and financial
position.
ITEM 8. FINANCIAL STATEMENTS
The financial statements and supplementary data required by this item are
included on pages F-1 to F-16 of this Annual Report. Unaudited quarterly data
for each of the eight quarterly periods in the years ended November 30, 2001 and
2000 is as follows:
In thousands, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2001
Net revenues $11,724 $15,923 $18,737 $13,899
Operating income (loss) (1,066) (24) (7,260) 423
Net (loss) (801) (249) (5,961) (237)
Basic net (loss) income per share (0.14) (0.04) (1.01) (.04)
Diluted net (loss) income per share (0.14) (0.04) (1.01) (.04)
2000
Net revenues $ 8,546 $11,329 $13,026 $13,755
Operating income 64 954 1,325 1,483
Net (loss) income (93) 404 634 673
Basic net (loss) income per share (0.02) 0.07 0.11 0.11
Diluted net (loss) income per share (0.02) 0.07 0.11 0.11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 25, 2001 and effective for the third quarter of the fiscal year, the
Company, at the recommendation of its audit committee, replaced Arthur Andersen
LLP as the Company's auditors with PricewaterhouseCoopers LLP. The change was
made in order to consolidate auditing and taxation services with one accounting
firm.
Arthur Andersen LLP's reports on the Company's November 30, 2000 and 1999
financial statements did not contain an adverse opinion, a disclaimer of opinion
nor modified as to uncertainty, audit scope or accounting principles. During
those periods and through and including the second quarter of fiscal year 2001
there were no disagreements on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information with respect to directors and executive officers is included under
"Election of Directors" and "Executive Officers" in Obie's definitive proxy
statement for its 2002 Annual Meeting of Shareholders to be filed not later than
120 days after the end of the fiscal year covered by this Annual Report, and
when so filed such information is incorporated herein by reference.
Information with respect to Section 16(a) of the Securities Exchange Act is
included under "Compliance with Section 16(a) of the Securities Exchange Act" in
Obie's definitive proxy statement for its 2002 Annual Meeting of Shareholders to
be filed not later than 120 days after the end of the fiscal year covered by
this Annual Report, and when so filed such information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included under "Executive
Compensation" in Obie's definitive proxy statement for its 2002 Annual Meeting
of Shareholders to be filed not later than 120 days after the end of the fiscal
year covered by this Annual Report, and when so filed such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners and
management is included under "Principal Shareholders and Management Ownership"
in Obie's definitive proxy statement for its 2002 Annual Meeting of Shareholders
to be filed not later than 120 days after the end of the fiscal year covered by
this Annual Report, and when so filed such information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related party transactions
is included under "Certain Transactions" in Obie's definitive proxy statement
for its 2002 Annual Meeting of Shareholders to be filed not later than 120 days
after the end of the fiscal year covered by this Annual Report, and when so
filed such information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The Financial Statements are listed in the Index
to Consolidated Financial Statements on page F-1 of this Annual Report.
(a)(2) Exhibits:
Exhibit Description
3.1 Restated Articles of Incorporation, as amended (1)
3.2 Restated Bylaws, as amended (1)
4.1 See Articles 3, 4 and 8 of Exhibit 3.1 and Articles 1, 2, 5, 6 and
7 of Exhibit 3.2
10.1* Restated 1996 Stock Incentive Plan (4)
10.2 Form of Indemnification Agreement between Obie and its directors (4)
10.3 Form of Indemnification Agreement between Obie and its officers (4)
10.4 Lease between Obie Industries Incorporated and Obie, dated
November 12, 1996 (1)
10.5 Amendment, dated July 15, 1997, to lease agreement between Obie
Industries Incorporated and Obie (2)
10.6 Restated and Amended Loan Agreement, dated as of September 1, 1998,
among Obie, Obie Media Limited, Philbin & Coine, Inc., and U.S. Bank
National Association, and related documents (4)
10.7 Amendment to Loan Agreement, dated January 3, 2000
10.8 Stock Purchase Agreement among Registrant and Philbin & Coine, Inc.
and Wayne P. Schur dated August 25, 1998 (3)
10.9* Employment Agreement, dated September 1, 1998, between Obie and
Wayne P. Schur (4)
10.10* Amendment to Wayne P. Schur employment agreement
10.11* Non-Qualified Stock Option Agreement, dated September 1, 1998, between
Obie and Wayne P. Schur(4)
10.12 Settlement Offer Letter dated September 25, 1998 from Tri-County
Metropolitan Transportation District of Oregon to Registrant, signed by
the Registrant indicating acceptance (5)
20.1 Portions of the Definitive Proxy Statement for the 2001 Annual Meeting
of Shareholders to be held on April 27, 2001 (6)
21.1 List of Subsidiaries (4)
23.1 Consent of Pricewaterhouse Coopers, Independent Public Accountants, for
the year ending November 30, 2001
23.2 Consent of Arthur Andersen, Independent Public Accountants, for the
years ending November 30, 2000 and 1999
*Management Contract or Compensatory Plan or Arrangement.
(1) Incorporated 'erein by reference from Obie's Registration Statement on
Form SB-2 (Registration No. 333-5728-LA), declared effective on
November 21, 1996.
(2) Incorporated by reference to Obie's Annual Report on Form 10-KSB for
the year ended November 30, 1997 filed February 27, 1998.
(3) Incorporated by reference to Obie's Form 8-K filed September 14, 1998.
(4) Incorporated by reference to Obie's Annual Report on Form 10-KSB for
the year ended November 30, 1998 filed March 1, 1999.
(5) Incorporated by reference to Obie's Registration Statement on Form S-1
(Registration No. 333-79367), declared effective on August 10, 1999.
(6) To be filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.
Upon written request to Brian B. Obie, CEO and President of Obie Media
Corporation, 4211 West 11th Avenue, Eugene, OR 97402, shareholders will be
furnished a copy of any exhibit, upon payment of $.25 per page, which represents
Obie's reasonable expense in furnishing the exhibit requested.
(b) Reports on Form 8-K. Obie Media filed one report on Form 8-K during the
2001 fiscal year. That report was filed on October 25, 2001 announcing
a change in its auditors. On December 6, 2001 the Company also filed a
Form 8-K announcing the termination of its advertising contract with
the Chicago Transit Authority.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OBIE MEDIA CORPORATION
Dated: February 27, 2002 By/s/ BRIAN B. OBIE
--------------------------------
Brian B. Obie, Chairman, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
PRINCIPAL Executive OFFICER AND DIRECTOR:
Dated: February 27, 2002 By/s/ Brian B. Obie
Brian B. Obie, Chairman, President
and Chief Executive Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
Dated: February 27, 2002 By/s/ Gary F. Livesay
Gary F. Livesay, Chief Financial Officer
DIRECTORS:
Dated: February 27, 2002 By/s/ Delores M. Mord
Delores M. Mord, Director
Dated: February 27, 2002 By/s/ Randall C. Pape'
Randall C. Pape', Director
Dated: February 27, 2002 By/s/ Stephen A. Wendell
Stephen A. Wendell, Director
Dated: February 27, 2002 By/s/ Richard C. Williams
Richard C. Williams, Director
EXHIBIT INDEX
Exhibit*
23.1 Consent of Pricewaterhouse Coopers, Independent Public Accountants, for
the year ending November 30, 2001
23.2 Consent of Arthur Andersen, Independent Public Accountants, for the
years ending November 30, 2000 and 1999
* See Item 14(a)(2) of this Annual Report for a list of all exhibits,
including those incorporated by reference.
OBIE MEDIA CORPORATION
Index to Consolidated Financial Statements
Reports of Independent Accountants F-2
Consolidated Balance Sheets as of November 30, 2001 and 2000 F-3
Consolidated Statement of Operations for the years ended
November 30, 2001, 2000 and 1999 F-4
Consolidated Statement of Changes in Shareholders' Equity
for the years ended November 30, 2001, 2000 and 1999 F-5
Consolidated Statement of Cash Flows for the years ended
November 30, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
Report of Independent Accountants
To the Board of Directors and Shareholders
of Obie Media Corporation:
In our opinion, the accompanying consolidated balance sheets as of November 30,
2001 and the related consolidated statements of operations, changes in
shareholders' equity, and of cash flows present fairly, in all material
respects, the financial position of Obie Media Corporation and its subsidiaries
at November 30, 2001, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements of
the Company as of November 30, 2000 and for the each of the two years in the
period ended November 30, 2000 and 1999 were audited by other independent
accountants whose report dated February 19, 2001 expressed an unqualified
opinion on those statements.
/s/PRICEWATERHOUSE COOPERS LLP
Pricewaterhouse Coopers LLP
February 15, 2002
F-2
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Obie Media Corporation:
We have audited the accompanying consolidated balance sheets of Obie Media
Corporation (an Oregon corporation) and subsidiaries as of November 30, 2000,
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the two years in the period ended November 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Obie Media Corporation and
subsidiaries as of November 30, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended November 30, 2000
in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Portland, Oregon
February 19, 2001
F-2a
OBIE MEDIA CORPORATION
Consolidated Balance Sheets
As of November 30, 2001 and 2000
2001 2000
ASSETS
CURRENT ASSETS
Cash $404,473 $634,633
Accounts receivable, net of allowance for doubtful accounts
of $1,944,921 and $598,403 respectively 11,828,554 9,273,682
Refundable income taxes 1,881,041 -
Prepaid expenses and other current assets 4,227,021 4,837,954
Deferred income taxes 1,781,671 419,258
20,122,760 15,165,527
PROPERTY AND EQUIPMENT, net 16,603,760 16,770,943
OTHER ASSETS
Goodwill, net 5,683,805 6,423,335
Other assets, net 822,548 577,066
$43,232,873 $38,936,871
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITES
Current portion of long-term debt $340,418 $200,888
Line of credit 1,697,117 -
Accounts payable 1,202,133 1,014,179
Accrued transit fees 10,295,314 1,071,254
Accrued expenses 668,740 552,327
Income taxes payable 286,197 497,504
Unearned revenue 1,218,088 1,285,365
Total current liabilities 15,708,007 4,621,517
DEFERRED INCOME TAXES 1,461,432 1,360,392
LONG TERM DEBT, less current portion 13,881,200 13,694,941
31,050,639 19,676,850
MINORITY INTEREST IN SUBSIDIARY 32,899 35,424
COMMITMENTS (Note 9)
SHAREHOLDERS' EQUITY
Preferred stock, without par value, 10,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, without par value, 20,000,000 share
authorized, 5,908,577 and 5,896,232 shares issued
and outstanding, respectively 17,272,128 17,172,128
Note receivable on stock options (59,895)
Foreign currency translation 11,028 (2,203)
Retained earnings(accumulated (5,133,821) 2,114,567
deficit)
Total shareholders' equity 12,149,335 19,224,597
$43,232,873 $38,936,871
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
OBIE MEDIA CORPORATION
Consolidated Statements of Operations
For the Years Ended November 30, 2001, 2000 and 1999
2001 2000 1999
REVENUES:
Outdoor advertising $7,168,932 $6,710,996 $5,942,294
Transit advertising 59,094,444 44,614,802 34,523,332
Gross revenues 66,263,376 51,325,798 40,465,626
Less agency commission (5,980,355) (4,669,561) (4,005,600)
Net revenues 60,283,021 46,656,237 36,460,026
OPERATING EXPENSES:
Direct advertising expenses 49,562,195 33,961,087 26,438,100
General and administrative 10,210,227 6,882,450 4,676,977
Depreciation and amortization 2,077,365 1,870,630 1,512,890
Start-up costs 352,537 115,632 668,200
Contract Settlement (1,077,469)
Provision for transit contract losses 6,007,233
Operating income (loss) (7,926,536) 3,826,438 4,241,328
INTEREST EXPENSE 1,337,136 1,120,976 942,316
INCOME (LOSS) BEFORE INCOME TAXES (9,263,672) 2,705,462 3,299,012
PROVISION FOR (BENEFIT FROM) INCOME TAXES (2,015,284) 1,087,218 1,286,615
NET INCOME (LOSS) (7,248,388) 1,618,244 2,012,397
BASIC NET INCOME (LOSS) PER SHARE ($1.23) $0.27 $0.40
DILUTED NET INCOME (LOSS) PER SHARE ($1.23) $0.27 $0.39
The accompanying notes are an integral part of these consolidated statements
F-4
OBIE MEDIA CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended November 30, 2001, 2000 and 1999
Cumulative Retained
Other Earnings
Common Stock Note Comprehensive(Accumulated
Shares Amount Receivable Loss Deficit) Total
BALANCE, November 30, 1998 4,747,833 $7,062,816 ($1,516,074) $5,546,742
Issuance of common stock for
benefit plan and option exercises 7,434 102,149 102,149
Issuance of common stock for
public offering, net of expenses 1,100,000 9,704,745 9,704,745
Purchase of fractional shares (23) (297) (297)
Foreign currency translation (993) (993)
Net income 2,012,397 2,012,397
BALANCE, November 30, 1999 5,855,244 16,869,413 0 (993) 496,323 17,364,743
Issuance of common stock for
benefit plan and option exercises 41,060 250,880 (59,895) 190,985
Additional expenses of public offering (1,837) (1,837)
Purchase of fractional shares (72) (763) (763)
Foreign currency translation (1,210) (1,210)
Income tax benefit of nonqualified
stock option exercise 54,435 54,435
Net income 1,618,244 1,618,244
BALANCE, November 30, 2000 5,896,232 17,172,128 (59,895) (2,203) 2,114,567 19,224,597
Issuance of common stock for
benefit plan 12,345 100,000 100,000
Collection of note receivable 59,895 59,895
Foreign currency translation 13,231 13,231
Net income (loss) (7,248,388) (7,248,388)
BALANCE, November 30, 2001 5,908,577 $17,272,128 $0 $11,028 ($5,133,821) $12,149,335
The accompanying notes are an integral part of these consolidated statements.
F-5
OBIE MEDIA CORPORATION
Consolidated Statements of Cash Flows
For the Years Ended November 30, 2001, 2000 and 1999
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITES:
Net income (loss) ($7,248,388) $1,618,244 $2,012,397
Adjustments to reconciled net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,077,365 1,870,630 1,512,890
Contract Settlement - 0 (527,469)
Provision for transit contract losses 6,007,233
Deferred income taxes (1,261,373) 905,154 11,310
Income tax benefit of nonqualified stock option exercises 0 54,435
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable (2,554,872) (1,255,233) (1,841,815)
Refundable income taxes (1,881,041)
Prepaid expenses and other assets 286,843 (2,462,717) (967,558)
Increase (decrease) in:
Accounts payable 187,954 14,285 219,626
Accrued expenses 3,433,240 (370,616) (522,778)
Unearned revenues (67,277) 371,105 209,374
Income taxes payable (211,307) 53,588 144,826
Net cash provided by (used in )operating activities (1,231,623) 798,875 250,803
CASH FLOWS FROM INVESTING ACTIVITES:
Capital acquisitions, net (1,324,931) (5,230,048) (3,196,166)
Other investing activities (2,525) (30,769) (69,219)
Net cash used in investing activities (1,327,456) (5,260,817) (3,265,385)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock offering 0 0 11,000,000
Costs to issued common stock 0 (1,837) (1,077,243)
Proceeds from issuance of common stock options 0 99,825 16,221
Net borrowings on line of credit 1,697,117 2,705,717 1,090,657
Proceeds from long-term debt 697,876 4,000,000
Net payments on long-term debt (139,200) (1,739,381) (8,298,600)
Payments of debt issuance costs 0 0 (7,079)
Proceeds from common stock note receivable 59,895 (763) (297)
Net cash provided by financing activities 2,315,688 5,063,561 2,723,659
EFFECT OF EXCHANGE RATE CHANGES ON CASH 13,231 (1,210) (993)
NET INCREASE (DECREASE) IN CASH (230,160) 600,409 (291,916)
CASH, beginning of period 634,633 34,224 326,140
CASH, end of period $404,473 $634,633 $34,224
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Issuance of stock to employee benefit plan $100,000 $91,160 $85,928
Note payable issued to acquire outdoor advertising structures - - 96,000
Issuance (reduction) of note payable for business acquisition (232,888) (339,112) -
Issuance of common stock for note receivable - 59,895 -
Costs associated with financing activities - - 175,000
Interest capitalized - 12,895 14,886
CASH PAID FOR INTEREST 1,336,029 1,042,172 921,998
CASH PAID FOR TAXES 1,315,626 74,305 1,130,479
The accompanying notes are an integral part of these consolidated statements.
F-6
Obie Media Corporation
Notes to Consolidated Financial Statements
November 30, 2001,2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company
Obie Media Corporation (the Company) is a full service out-of-home advertising
company which markets advertising space primarily on transit vehicles and
outdoor advertising displays (billboards and wallscapes). At November 30, 2001,
the Company had 41 exclusive agreements with transit districts in the United
States and Canada to operate transit advertising displays. These transit
districts are located in, among other advertising markets: Dallas; Portland,
Oregon; Sacramento; Hartford; Ft. Lauderdale; Cincinnati, St. Louis and
Vancouver, British Columbia. The Company also operates and generally owns
advertising displays on billboards and walls primarily located in Washington,
Oregon, California, Montana and Idaho. On August 16, 1999, the Company completed
a secondary offering of 1,100,000 shares of its common stock, raising
$9,702,908, net of expenses of $1,297,092. The net proceeds were used primarily
to reduce previously outstanding debt.
Basis of Presentation
The consolidated financial statements include the Company, its wholly owned
subsidiary, Obie Media Limited, and its 50% owned subsidiary, OB Walls, Inc. All
significant intercompany accounts and transactions between the Company and its
subsidiaries have been eliminated in consolidation.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiary, Obie Media
Limited, are translated into United States dollars using exchange rates at the
balance sheet date for assets and liabilities, and average exchange rates for
the period for revenues and expenses. The effect of the foreign currency
translation was insignificant for the years ended November 30, 2001, 2000 and
1999.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company has contracts to provide future advertising to its customers.
Advertising revenue is recognized ratably over the period the advertising is
displayed. Payments received and amounts billed for advertising revenue in
advance of display are deferred. Costs incurred for the production and
installation of displays for advertising, which are paid for by the customer
ratably over the term of the advertising contract and are specifically
recoverable in the event the related contract is canceled, are deferred and
recognized as expense as the related revenue is recognized over the life of the
respective contracts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company
places its cash with high credit quality financial institutions. Concentrations
of credit risk with respect to accounts receivable are not significant due to
the large number of customers, and their dispersion across different industries
and geographic areas.
At November 30, 2001, the Company had agreements with 41 transit districts.
Customers advertising on transit vehicles owned by the seven largest transit
districts, excluding Chicago, of Dallas; Portland, Oregon; British Columbia; St.
Louis; Sacramento; Cincinnati and Hartford represented approximately 58.8
percent of the Company's total net revenues for the year ended November 30,
2001. The net revenues from the Chicago Transit Authority contract amounted to
$19.0 million, approximately 31.7% of the Company's net revenue for the year
ended November 30, 2001. This contract was cancelled effective November 30, 2001
(See note 3). No single advertising customer represented 10 percent or more of
the Company's revenues for any of the periods presented in the accompanying
financial statements.
Transit agreements range from one to five years and are subject to renewal
either at the discretion of the transit district or upon the mutual agreement of
the Company and the transit district. Generally, these agreements require the
Company to pay the transit district the greater of a percentage of the related
advertising revenues, net of the advertising production charges, or a guaranteed
minimum amount(Notes 8 and 9).
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, accrued expenses and debt instruments. At November 30, 2001
and 2000, the fair value of the Company's financial instruments are estimated to
be equal to their reported carrying value. The carrying value of long-term debt
approximates fair value. The resulting estimates of fair value require
subjective judgments and are approximations. Changes in the methodologies and
assumptions could significantly affect the estimates.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives. Additions and
improvements, including interest incurred during construction, are capitalized.
Normal repairs and maintenance are expensed as incurred. The cost and
accumulated depreciation of assets sold or otherwise retired are removed from
the accounts and the resulting gain or loss is recognized.
Goodwill and Other Long-Lived Assets
On September 1, 1998 the Company acquired all of the outstanding stock of
Philbin & Coine, Inc., a New York corporation doing business as P & C Media (P &
C). Goodwill resulting from the P&C acquisition is being amortized over 15 years
using the straight-line method and is net of accumulated amortization of
$1,679,192 and $1,172,550 at November 30, 2001 and 2000, respectively. Goodwill
and other long-lived assets are periodically evaluated when facts and
circumstances indicate that the value of such assets may be impaired.
Evaluations are based on undiscounted projected earnings. If the valuation
indicates that undiscounted earnings are insufficient to recover the recorded
assets, then the projected earnings are discounted to determine the revised
carrying value and a write-down for the difference is recorded.
Other assets include loan costs, which are stated at cost and amortized over the
life of the loan.
Income Taxes
The Company uses the liability method to record deferred tax assets and
liabilities that are based on the difference between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes. These
temporary differences result from the use of different accounting methods for
financial statement and tax reporting purposes.
Earnings Per Share
Basic earnings per share (EPS) and diluted EPS are computed using the methods
prescribed by Statement of Financial Accounting Standards (SFAS) No.
128,"Earnings per Share." Basic 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. Such amounts have been retroactively adjusted to
reflect the 11-for-10 stock split which occurred in November 1999 (Note 8).
Following is a reconciliation of basic EPS and diluted EPS:
Year Ended November 30, 2001
-----------------------------------
Per Share
(Loss) Shares Amount
---------- --------- ---------
Basic EPS-
Income available to common shareholders $(7,248,388) 5,904,146 ($1.23)
Effect of dilutive Securities-
Stock options -
---------- ---------
Diluted EPS-
Income available to common shareholders $(7,248,388) 5,904,146 ($1.23)
========= =========
Year Ended November 30, 2000
-----------------------------------
Per Share
Income Shares Amount
---------- --------- ---------
Basic EPS-
Income available to common shareholders $1,618,244 5,884,666 $0.27
Effect of dilutive Securities-
Stock options - 41,256
---------- ---------
Diluted EPS-
Income available to common shareholders $1,618,244 5,925,922 $0.27
========= =========
Year Ended November 30, 1999
-----------------------------------
Per Share
Income Shares Amount
---------- --------- ---------
Basic EPS-
Income available to common shareholders $2,012,397 5,089,486 $0.40
Effect of dilutive securities-
Stock options - 91,504
---------- ---------
Diluted EPS-
Income available to common shareholders $2,012,397 5,180,990 $0.39
========== =========
At November 30, 2001, 2000 and 1999, the Company had options covering 673,736,
174,833 and 75,593 shares, respectively, of the Company's common stock that were
not considered in the respective diluted EPS calculations since they would have
been antidilutive.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
(SFAS130). 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
does not materially differ from currently reported net income in the periods
presented.
Segment Reporting
Effective in its fiscal year ending November 30, 1999, the Company adopted
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). SFAS 131 changes current
practice under SFAS 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. Based upon definitions contained within SFAS
131, the Company has determined that it operates in one segment.
New Accounting Pronouncements
In June 2000 the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB 133" ("SFAS 138"). In June 1999 the FASB
issued Statement of Financial Accounting Standards No. 137 - "Accounting for
Derivative Instruments and Hedging Activities" - ("SFAS 137"). SFAS 137 is an
amendment to Statement of Financial Accounting Standards No. 133, "Accounting
for Derivatives and Hedging Activities". SFAS 133 and 138 establish accounting
and reporting standards for all derivative instruments. SFAS 133 and 138 are
effective for fiscal years beginning after June 30, 2000. The Company adopted
SFAS 133, 137 and 138 for its fiscal year beginning December 1, 2000. The
Company does not currently have any derivative instruments nor does it
participate in hedging activities, and therefore the adoption of these standards
did not have any impact on its financial statements or results of operations.
On June 30, 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible
Assets", which eliminates the amortization of goodwill and other acquired
intangible assets with indefinite economic useful lives. SFAS 142 requires an
annual impairment test of goodwill and other intangible assets that are not
subject to amortization. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The impact of adopting SFAS is not yet determinable, but may
be material.
Reclassifications
Certain amounts previously reported in the 2000 and 1999 financial statements
have been reclassified to conform to the 2001 financial statement
classifications which had no impact on net income or shareholders'equity.
2. PROVISION FOR TRANSIT CONTRACT LOSSES
The Company is in the process of restructuring its business model regarding
transit fee arrangements with transit authorities. 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 the Company), but
often with minimum payment requirements. Agreements that contain large minimum
transit fee payment guarantees significantly hinder the Company's ability to
manage its operating expenses in weak economic environments. These high minimum
payment requirements have resulted in higher than acceptable direct advertising
expense levels, and are primarily responsible for the operating losses reported
for the year ended November 30, 2001.
The Company is currently negotiating modifications to those contracts and
believes it will be substantially successful in doing so. A $6.0 million
provision for transit contract losses, including a $5.2 million accrual for
transit fees has been recorded for fiscal year 2001.
As of February 15, 2002, contracts accounting for (excluding Chicago) 23.3% of
2001 gross transit revenues have been successfully renegotiated, and contracts
accounting for 14.6% of those gross revenues are under negotiation. In addition,
contracts accounting for 15.1% of those revenues will expire in March 2002 and
will be subject to a rebidding process.
3. 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 are in the process
of negotiating a settlement for fiscal 2001 transit fees in light of the nature
of the early termination and a shortage of advertising space made available to
the Company during fiscal 2001. The Company believes that amounts accrued,
including the transit loss accrual, will be sufficient to cover the settlement
with the CTA.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
November 30,
----------------------------
2001 2000
------------- -------------
Prepaid commissions $ - $ 1,174,303
Prepaid leases 488,154 468,249
Transit advertising production costs 2,645,093 1,811,217
Other 1,093,774 1,384,185
------------- -------------
$ 4,227,021 $ 4,837,954
============= =============
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
November 30,
------------------------------
2001 2000 Asset Lives
-------------- -------------- ----------
Outdoor advertising structures $ 18,016,711 $ 17,409,636 20 years
Other equipment and leaseholds 6,467,524 5,749,667 5-20 years
-------------- --------------
24,484,235 23,159,303
Less- Accumulated depreciation 7,880,475 6,388,360
-------------- --------------
$ 16,603,760 $ 16,770,943
============== ==============
6. FINANCING ARRANGEMENTS
Long-term debt consists of the following:
November 30,
----------------------
2001 2000
---------- ----------
Term loan with U.S. Bank National Association (U.S. Bank), with quarterly
reducing availability, interest at prime rate plus 3% (7.75%
at November 30, 2001); maximum available of $15,600,000 as of
November 30, 2001; the loan is collateralized by substantially
all of the Company's assets $13,892,818 $13,194,941
Note payable to former shareholder of P&C in certain monthly
installment payments without interest due March, 2003 324,800 660,888
Note payable plus interest at 8%, 4,000 40,000
---------- ---------
14,221,618 13,895,829
Less- Current portion 340,418 200,888
---------- ---------
$13,881,200 $13,694,941
========== ==========
The Company also has a $6,000,000 operating line of credit with U.S. Bank. The
interest rate is at U.S. Bank's prime rate plus 3% (7.75% percent at November
30, 2001) and the line is collateralized by receivables, equipment, inventory
and contract rights. The outstanding balance on this line of credit at November
30, 2001 was $1,697,117. The outstanding balance at November 30, 2000 of
$5,211,251 has been reclassified into the term loan in accordance with
refinancing arrangements consummated subsequent to that date.
The aggregate principal payments due on the above debt subsequent to November
30, 2001, are:
Fiscal Year Ending
November 30,
------------------
2002 340,418
2003 2,481,200
2004 2,600,000
2005 3,200,000
2006 3,200,000
Thereafter 2,400,000
-----------
$14,221,618
===========
The US Bank loan agreements contain certain restrictive covenants and required
ratios. As of November 30, 2001 the Company was out of compliance with certain
of the ratios, and has received a waiver of such violations from the bank. On
February 14, 2002 US Bank and Obie agreed to a revised credit facility which
included modified financial ratio covenants. The credit facility requires the
execution and delivery of definitive transaction documentation and the Company's
continuing compliance with the revised covenants.
7. INCOME TAXES
The provision for income taxes for the years ended November 30, 2001, 2000 and
1999 was comprised of the following:
November 30,
--------------------------------------
2001 2000 1999
------------ ---------- ----------
Provision for income taxes (benefit)
Current $ (753,911) $ 182,064 $1,275,305
Deferred (1,261,373) 905,154 11,310
------------ ---------- ----------
Total provision (benefit) $(2,015,284) $1,087,218 $1,286,615
============ ========== ==========
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:
Current deferred tax assets:
Deferred revenue $ 784,421 $1,129,329 $ 851,800
Allowance for doubtful accounts 735,504 239,361 115,142
Accrued expenses and other 261,756 92,576 59,244
------------ ---------- ----------
Total current deferred tax assets 1,781,681 1,461,266 1,026,186
Non-current deferred tax assets:
Net operating loss carryforward 1,096,677
Valuation allowance (1,096,677)
------------ ---------- ----------
Total non-current deferred tax assets 0 0 0
------------ ---------- ----------
Current deferred tax liabilities:
Prepaid fees and other (1,042,008) (66,759)
Valuation allowance
------------ ---------- ----------
Net current deferred tax assets $ 1,781,681 $ 419,258 $ 959,427
=========== ========== ==========
Non-current deferred tax liabilities:
Property and equipment $ 1,461,432 $1,360,392 $ 995,407
=========== ========== ==========
The valuation allowance is related to net operating loss carryovers of
$2,428,989 which expire in 2021. Income tax expense for the years ended November
30, 2001, 2000 and 1999 differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income, as follows:
Year Ended
November 30,
-------------------
2001 2000 1999
---- ---- ----
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase in income taxes resulting from-
State and local taxes, net of federal income tax benefit 1.8 4.4 4.0
Net Operating Loss Valuation Allowance (8.9) - -
Other differences, net (5.2) 1.8 1.0
---- ---- ----
Actual income tax rate 21.7% 40.2% 39.0%
===== ==== =====
8. SHAREHOLDERS' EQUITY
The Company's Restated Articles of Incorporation authorize the issuance of up to
20,000,000 shares of common stock and 10,000,000 shares of preferred stock
issuable in series (Preferred Stock).
In October 1999, the Company declared an 11-for-10 stock split for shareholders
of record on November 21, 1999.
Preferred Stock
The Board of Directors is authorized, without further shareholder authorization,
to issue Preferred Stock in one or more series and to fix the terms and
provisions of each series, including dividend rights and preferences, conversion
rights, voting rights, redemption rights and rights on liquidation, including
preferences over common stock.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
requiring shareholder vote. Holders of common stock are entitled to receive
dividends when and as declared by the Board of Directors out of any funds
lawfully available therefor, and, in the event of liquidation or distribution of
assets, are entitled to participate ratably in the distribution of such assets
remaining after payment of liabilities, in each case subject to any preferential
rights granted to any series of Preferred Stock that may then be outstanding.
Stock Options
On September 1, 1998, the Company granted non statutory stock options to the
former shareholder of P&C, as part of the acquisition of P&C (Note 1),
exercisable for 151,250 shares of the Company's common stock. Additionally, as
part of the acquisition, the Company granted non statutory stock options to the
legal counsel of the P&C shareholder exercisable for 12,100 shares of the
Company's common stock. Of the 163,350 stock options granted, 24,200 were
exercisable on the date of grant at an exercise price of $7.20 per share, and
were included in the purchase price for the acquisition of P&C. The remaining
139,150 options granted to the former shareholder of P&C became fully vested in
September 2001 in conjunction with his resignation from the Company.
In addition, on October 2, 1996 (amended April 21, 2000), the Company's Board of
Directors and shareholders adopted the 1996 Stock Incentive Plan (the Plan),
which provides for the issuance of 399,300 shares of common stock pursuant to
Incentive Stock Options (ISOs), Nonqualified Stock Options (NSOs), stock bonuses
and stock sales to employees, directors and consultants of the Company. During
the year ended November 30, 2000, the Company reserved an additional 150,000
shares of the Company's common stock for the issuance of stock options under the
Plan, and an additional 100,000 shares in the year ended November 30, 2001. ISOs
may be issued only to employees of the Company and will have a maximum term of
ten years from the date of grant. The exercise price for ISO's may not be less
than 100% of the fair market value of the common stock at the time of the grant,
and the aggregate fair market value (as determined at the time of the grant) of
shares issuable upon the exercise of ISOs for the first time in any one calendar
year may not exceed $100,000. In the case of ISOs granted to holders of more
than 10% of the voting power of the Company, the exercise price may not be less
than 110% of the fair market value of the common stock at the time of the grant,
and the term of the option may not exceed five years. NSOs may be granted at not
less than 85% of the fair market value of the common stock at the date of grant.
Options become exercisable in whole or in part from time to time as determined
by the Board of Directors' Compensation Committee, which administers the Plan.
Activity under the Plan is summarized as follows:
Weighted
Shares Shares Average
Available for Subject to Exercise
Grant Options Price
---------- ---------- --------
BALANCES, November 30, 1998 175,516 210,075 6.77
Adjustment for stock split 17,551
Options granted (106,281) 106,281 12.27
Options canceled 38,358 (38,358) 11.45
Options exercised - (1,629) 6.01
---------- ----------
BALANCES, November 30, 1999 125,144 276,369 8.24
Additional shares provided 150,000 - -
Adjustment for stock split 12,515
Options granted (241,490) 241,490 9.29
Options canceled 58,429 (58,429) 9.42
Options exercised - (31,944) 5.00
---------- ----------
BALANCES, November 30, 2000 104,598 427,486 9.15
Additional shares provided 100,000 - -
Options granted (118,833) 118,833 7.08
Options canceled 49,243 (49,243) 9.91
---------- ----------
BALANCES, November 30, 2001 135,008 497,076 8.59
========== ==========
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123, which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to continue to
use the accounting treatment in APB 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes the
value of all options granted during the years ended November 30, 2001, 2000 and
1999 using the Black-Scholes option pricing model as prescribed by SFAS 123
using the following weighted average assumptions for grants:
Year Ended November 30,
----------------------------------
2001 2000 1999
------- ------- -------
Risk-free interest rate 5.2% 6.25% 5.50%
Expected dividend yield 0% 0% 0%
Expected lives 6 years 6 years 6 years
Expected volatility 71.51% 66.43% 72.00%
Using the Black-Scholes methodology, the total value of options granted during
the years ended November 30, 2001, 2000 and 1999 was $567,565, $1,470,878, and
$895,367, respectively, which would be amortized on a pro forma basis over the
vesting period of the options (typically five years). The weighted average per
share fair value of options granted during the years ended November 30, 2001,
2000 and 1999 was $4.78, $6.09, and $8.42, respectively. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS 123,
the Company's net income (loss) and net income (loss) per share would
approximate the proforma disclosures below:
Year Ended November 30,
---------------------------------------------------------------------------
2001 2000 1999
------------------------ ------------------------ -----------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $(7,248,388) $(7,882,465) $1,618,244 $1,295,509 $2,012,397 $1,765,246
Basic net income $(1.23) $(1.33) $0.27 $0.22 $0.40 $0.34
(loss) per share
Diluted net income $(1.23) $(1.33) $0.27 $0.22 $0.40 $0.34
(loss) per share
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to January 1, 1995
and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at
November 30, 2001. Options on 497,096 shares were granted under the Company's
stock option plan, and options on an additional 176,660 shares were other
option grants.
Options Outstanding Options Exercisable
- --------------------------------------------------- -------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise November 30, Contractual Exercise November 30, Exercise
Prices 2001 Life - Years Price 2001 Price
$ 5.00 - 5.68 124,827 5.9 $ 5.22 93,704 $ 5.13
6.01 - 7.20 183,130 11.5 7.03 144,948 7.16
8.00 - 8.47 116,771 10.8 8.20 6,252 8.08
8.68 - 10.97 161,336 8.3 9.39 34,409 9.43
11.48 - 12.60 51,510 8.9 11.52 - -
14.89 36,162 7.8 14.89 - -
- -------------- ---------- ------ -------- ----------- ---------
$ 5.00 - 14.89 673,736 9.1 $ 8.18 225,653 $ 6.66
============ ======= === ======= =========== =======
9. COMMITMENTS AND CERTAIN RELATED-PARTY TRANSACTIONS
Transit Agreements
Certain transit agreements require the Company to remit to the transit district
the greater of a percentage of the related advertising revenues or a guaranteed
minimum amount. At November 30, 2001 future guaranteed minimum payments under
the transit agreements are as follows:
Fiscal Year Ending
November 30,
------------------
2002 19,370,530
2003 17,328,771
2004 13,874,548
2005 6,351,386
2006 1,387,740
Operating Leases
The Company rents office and production space from affiliates. Such rents
totaled $324,246, $268,262 and $180,311 for the years ended November 30, 2001,
2000 and 1999, respectively.
The Company leases parcels of property beneath outdoor advertising structures.
These leases are generally for a term of up to ten years, with two five-year
renewal options at the Company's discretion. The Company also leases facilities
for sales, service and installation for its operating offices. Total rent
expense pursuant to these leases was $2,088,505, $1,665,334 and $1,338,141 for
the years ended November 30, 2001, 2000 and 1999, respectively.
At November 30, 2001, future minimum lease payments for all operating leases
described above are as follows:
Fiscal Year Ending
November 30,
------------------
2002 $2,183,171
2003 1,730,288
2004 1,549,217
2005 1,400,013
2006 1,160,077
Thereafter 806,500
10. EMPLOYEE BENEFIT PLAN
Substantially all of the Company's employees who have met vesting requirements
participate in a defined contribution benefit plan that provides for
discretionary annual contributions by the Company. During the years ended
November 30, 2001, 2000 and 1999, the Company accrued $100,000, $0 and $100,000
respectively, as a contribution to the plan. In 2001, the Company paid the 2001
contribution through a contribution of 12,345 shares of its common stock to the
Plan and the balance in cash. In 1999, the Company paid the 1998 accrued
contribution through a contribution of 5,643 shares of its common stock to the
Plan and the balance in cash.
11. GEOGRAPHIC INFORMATION
For geographic information, net revenues are allocated between the United States
and Canada, depending on whether the advertising contracts are to customers
within the United States or located outside the United States. Long-lived assets
outside the United States were immaterial for all periods presented.
Years Ended November 30,
----------------------------------------------
2001 2000 1999
-------------- -------------- --------------
Canada $ 6,169,939 $ 7,778,061 $ 5,275,211
United States 54,113,082 38,878,176 31,184,815
-------------- -------------- --------------
$ 60,283,021 $ 46,656,237 $ 36,460,026
============== ============== ==============
12. CONTRACT SETTLEMENT
The Company had 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. The Company 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 the Company agreed that the Company's
agreement with Tri-Met was to terminate on June 30, 1999 and in December 1998
entered into an agreement to compensate the Company for early termination of the
existing contract. The total amount of the contract settlement was $1,077,469
and is included as an offset in operating expenses in the accompanying
consolidated statement of operations for the year ended November 30, 1999.
In anticipation of the termination of the Company's transit district agreement,
Tri-Met solicited proposals for the operation of the Portland transit district.
In September 1999, the Company began a new contract with Tri-Met.
13. DEBT FINANCING ARRANGEMENTS AND LIQUIDITY
The Company experienced a net loss of $7,248,388 and negative cash flow from
operations of $1,231,623 during the year ended November 30, 2001. Despite the
unfavorable loss, the Company has been able to fulfill its needs for working
capital and capital expenditures, due in part to its ability to maintain
adequate financing arrangements. The Company's line of credit becomes due on
February 3, 2003. Company borrowings at November 30, 2001 were $15,918,735 on an
asset base of $43,232,873. The Company expects that operations will continue for
2002 with the realization of assets, and discharge of liabilities in the
ordinary course of business. The Company believes that its prospective needs for
working capital and capital expenditures will be met from cash flows generated
by operations and borrowings pursuant to the bank line of credit. If operations
are not consistent with management's plan, there is no assurance that the
amounts from these sources will be sufficient for such purposes. In that event,
or for other reasons, the Company may be required to seek alternative financing
arrangements. There is no assurance that such sources of financing will be
available if required, or if available, will be on terms satisfactory to the
Company.