10-Q 1 y42712e10-q.txt TRI-STATE OUTDOOR MEDIA GROUP, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------- FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER SEPTEMBER 30, 2000 333-59137 ----------------- TRI-STATE OUTDOOR MEDIA GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) KANSAS 48-1061763 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3416 Highway 41 South Tifton, GA 31793 (Address of Principal Executive Offices) (Zip Code) 800-732-8261 (Registrant's telephone number, including area code) ----------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. As of September 30, 2000, there were issued and outstanding 200 shares of the registrant's Common Stock, par value $10.00 per share. 2 TABLE OF CONTENTS

3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS TRI-STATE OUTDOOR MEDIA GROUP, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

See Notes to Financial Statements. 4 TRI-STATE OUTDOOR MEDIA GROUP, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE OR PER SHARE AMOUNTS) (UNAUDITED)

See Notes to Financial Statements. 5 TRI-STATE OUTDOOR MEDIA GROUP, INC. STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) (UNAUDITED)

6 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired under capital leases $ 920 $ 1,975 ======= ======= Early Extinguishment of capital leases from sale of property and equipment $ 872 $ -- ======= =======

See Notes to Financial Statements. 7 Notes to Financial Statements (Unaudited) NOTE 1 BASIS OF REPRESENTATION The accompanying unaudited financial statements of Tri-State Outdoor Media Group, Inc., (the "Company") have been prepared in conformity with generally accepted accounting principles and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position and results of operations have been included. The operating results for the three and nine month periods ended September 30, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the financial statements for the fiscal year ended December 31, 1999 and notes thereto included in the Company's Report on Form 10-K for the fiscal year ended December 31, 1999. NOTE 2 FINANCINGS The Company has $100 million aggregate principal 11% Notes (the "Notes") outstanding. The Company entered into an amended and restated loan agreement ("The Agreement") to the original credit agreement ("Credit Agreement") with The First National Bank of Chicago originally dated September 20, 1998 on August 12, 1999 and further amended on August 14, 2000. The Agreement consists of a term loan for $10 million and a revolving credit of $10 million. All of the company's assets are pledged to secure this credit facility. This facility matures July 1, 2001. Annual interest payments on the Notes are $11.0 million and with other debt outstanding annual interest expense is currently running at approximately $13.8 million. Substantially all of the Company's cash flow will have to be devoted to interest payments on the Notes and to its credit facility. There can be no assurance that the cash flow will be sufficient for such purpose, or if borrowings are necessary, that the Company will be able to borrow funds sufficient for its purposes. Failure to make the interest payments on the Senior Notes of the Credit Agreement would have a material adverse effect on the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements concerning, among other things, the Company's expected future revenues, operations and expenditures, competitors or potential competitors, acquisition activity, and the regulation of the outdoor advertising industry. These forward-looking statements are identified by their use of terms and phrases such as "anticipate," "believe," "could," "estimate," "expect," "intent," "may," "plan," "predict," "project," "will" and similar terms and phrases, including references to assumptions. These statements are contained in certain sections of this Quarterly Report and in the documents incorporated by reference herein. These forward-looking statements represent the expectations of the Company's management as of the filing date of this Report on Form 10-Q. The Company's actual results could differ materially from those anticipated by the forward-looking statements due to a number of factors, including (i) risks and uncertainties relating to leverage; (ii) the need for additional funds; (iii) the integration of companies acquired by the Company and the Company's ability to recognize cost savings or operating efficiencies as a result of such acquisitions; (iv) the continued popularity of outdoor advertising as an advertising medium; (v) the regulation of the outdoor advertising industry and (vi) the risks and uncertainties described under the caption "Factors Affecting Future Operating Results" under Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 Net revenues. Net revenues increased 18% to $7.9 million for the three months ended September 30, 2000 from $6.7 million for the three months ended September 30, 1999. The assets acquired in October 1999 accounted for approximately $.6 million of the period-to-period revenue growth. Direct operating expenses. Direct operating expenses (which include sales, lease and production expenses) increased 16.7% to $2.8 million for the third quarter of 2000 from $2.4 million for the comparable period in 1999. This increase was primarily the result of the increase in sales expense. Sales expense increased as a percentage of net revenues from 9.4% in the third quarter of 1999 to 10.6% in 2000. The Company has increased the quantity and quality of its sales force, including new regional sales and marketing positions, to support future growth. Lease expense increased as a percentage of net revenues in the third quarter from 14.6% in 1999 to 16.1% in 2000 primarily due to assets acquired in October 1999. Production expense decreased as a percentage of net revenues from 11.7% in the third quarter of 1999 to 9.2% in 2000, due to a shift in sales mix and lower sign maintenance costs. General and administrative expenses. General and administrative expenses increased by 10.0% to $1.1 million for the quarter ended September 30, 2000 from $1.0 million in 1999, a decrease as a percentage of net revenues to 13.7% from 14.4% primarily due to operating leverage. Depreciation and amortization expense. Depreciation and amortization expense increased to $3.5 million for the quarter ended September 30, 2000 from $2.2 million in 1999. The increase is due primarily to the assets acquired in October 1999. Interest expense. Interest expense increased to $3.6 million for the third quarter ended 2000 from $3.2 million for the comparable period in 2000. This increases was primarily due to an increase in interest rates and the amount outstanding with Bank One. 9 Income taxes. At December 31, 1999, the Company had net operating loss carry forwards of approximately $34.6 million for federal and state income tax purposes, which expire in varying amounts from 2009 through 2018. During the quarter ended September 30, 2000, the Company recorded a valuation allowance of $1.3 million on deferred tax assets. At September 30, 2000, the total valuation allowance recorded aggregated $8.9 million on deferred tax assets of $15.1 million to reduce the total to an amount that management believes will more likely than not be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income. If the Company is unable to generate sufficient taxable income in the future, increases in the valuation allowance may be required through a charge to income tax expense. NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 Net revenues. Net revenues increased 16.7% to $23.1 million for the nine months ended September 30,2000 from $19.8 million for the nine months ended September 30, 1999. The assets acquired in October 1999 accounts for approximately $2.0 million of the period-to-period revenue growth. Direct operating expenses. Direct operating expenses (which include sales, lease and production expenses) increased 17.1% to $8.2 million for the first nine months of 2000 from $7.0 million for the comparable period in 1999. Sales expense increased as a percentage of net revenues from 8.7% in the first nine months of 1999 to 10.0% in 2000 due to an increase in sales personnel. The Company has increased the quantity and quality of its sales force, including new regional sales and marketing positions, to support future growth. Lease expense increased as a percentage of net revenues from 14.9% in the first nine months of 1999 to 15.8% in 2000 primarily due to assets acquired in October 1999. Production expense decreased as a percentage of net revenues from 11.7% in the first nine months of 1999 to 9.7% in 2000, primarily due a shift in sales mix and lower sign maintenance expense. General and administrative expenses. General and administrative expenses increased by 16.1% to $3.6 million for the nine months ended September 30, 2000 from $3.1 million in 1999, a decrease as a percentage of net revenues to 15.6% from 15.7%. Depreciation and amortization expense. Depreciation and amortization expense increased to $9.8 million for the nine months ended September 30, 2000 from $6.7 million in 1999 due primarily to the assets acquired in October 1999. Interest expense. Interest expense increased to $10.4 million for the nine months ended 2000 from $9.4 million for the comparable period in 1999. This increase was primarily due to an increase in interest rates and the amount outstanding with Bank One. Income taxes. At December 31, 1999, the Company had net operating loss carry forwards of approximately $34.6 million for federal and state income tax purposes, which expire in varying amounts from 2009 through 2018. During the nine months ended September 30, 2000, the Company recorded a valuation allowance of $3.5 million on deferred tax assets. At September 30, 2000 the total valuation allowance recorded aggregated $8.9 million on deferred tax assets of $15.1 million to reduce the total to an amount that management believes will more likely than not be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry forwards are expected to be available to reduce taxable income. If the Company is unable to generate sufficient taxable income in the future, increases in the valuation allowance may be required through a charge to income tax expense. 10 LIQUIDITY AND CAPITAL RESOURCES The Company has historically satisfied its cash requirements with cash from operations, revolving credit borrowings, other long-term debt financing, equity financing and sales of assets. Its acquisitions have been financed primarily with borrowed funds and equity financing. The Company has $100 million aggregate principal 11% Notes (the "Notes") outstanding. The Company entered into an amended and restated loan agreement ("The Agreement") to the original credit agreement ("Credit Agreement") with The First National Bank of Chicago originally dated September 20, 1998 on August 12, 1999 and further amended on August 14, 2000. The Agreement consists of a term loan for $10 million and a revolving credit of $10 million. All of the company's assets are pledged to secure this credit facility. This facility matures July 1, 2001. On August 14 , 2000, the Credit Agreement was amended to revise the maturity date of the facilities from December 31, 2005 to July 1,2001, and to amend certain financial covenants. Furthermore, the Credit Agreement was amended to provide that the Company will be in default under the Credit Agreement if any of the following defaults occur: (1) the Company shall fail to timely pay a $200,000 fee to the Bank, or (2) SGH fails to deliver to the Bank on or before October 6, 2000 a certain warrant to purchase common stock of SGH representing 0.85% of the fully diluted common stock of SGH, or (3) SGH fails to make a contribution to the capital of the company (not to exceed $1,000,000) under a certain Capital Call Agreement dated August 14 , 2000 executed by SGH and the stockholders of SGH (which Capital Call Agreement requires such contribution to the capital of the Company in the event of a monetary default under the Credit Agreement). Delivery of the guaranty to fund under the Capital Call Agreement has been extended to November 20, 2000. In order to make the November 15, 2000 interest payment on the Notes, the Company plans to draw the full amount available under the Credit Agreement and obtained capital of up to $1 million from several of its shareholders. Under the Credit Agreement, the Company's bank loan is now classified as a current liability due July 1, 2001. Furthermore, the financial covenants in the Credit Agreement become more restrictive at the end of each quarter. The Company may not be able to meet these financial covenants in the future. If that were to happen the loan could be accelerated. The Company is seeking to arrange a refinancing of the Credit Agreement, however, there can be no assurance that the Company will be able to refinance such loan. The Company has hired an investment banking firm to explore various alternatives for the Company. Net cash provided by operating activities was $4.8 million for the first nine months of 2000 compared to net cash used in operating activities of $.4 million for the first nine months of 1999. Net cash provided by operating activities reflects the Company's net loss adjusted for non-cash items and net changes in working capital components. The Company had working capital of ($16.1) million as of September 30, 2000 due to the reclass of the Bank One loan as a current liability, compared to working capital of $3.5 million as of December 31, 1999. Annual interest payments on the Notes are $11.0 million and with other debt outstanding annual interest expense is currently running at approximately $13.8 million. Substantially all of the Company's cash flow will have to be devoted to interest payments on the Notes and to its credit facility. There can be no assurance that the cash flow will be sufficient for such purpose, or if borrowings are necessary, that the Company will be able to borrow funds sufficient for its purposes. Failure to make the interest payments on the Notes of the Credit Agreement would have a material adverse effect on the Company. 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the Company's market risk exposure from that reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 incorporated by reference herein. PART II-OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORT ON FORM 8-K A. Exhibits 27.1 Financial Data Schedule. Filed herewith. B. Report on Form 8-K. A report on form 8-K was filed on August 25, 2000 reporting that The Company entered into an amended and restated loan agreement to the original agreement dated September 20, 1998 on August 14, 2000. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Tri-State Outdoor Media Group, Inc. November 14, 2000 /s/Sheldon G. Hurst ------------------- Sheldon G. Hurst Chief Executive Officer and Director November 14, 2000 /s/ William G. McLendon ----------------------- William G. McLendon Chief Financial Officer, Secretary, Director and Principal Accounting Officer

TRI STATE OUTDOOR MEDIA GROUP INC 10-Q