10-Q 1 omc_10q-40413.txt U.S. Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED February 29, 2004 -------------------------------------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD FROM TO ------------------- --------------------- Commission File Number 000-21623 OBIE MEDIA CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OREGON 93-0966515 -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 4211 West 11th Ave., Eugene, Oregon 97402 -------------------------------------------------------------------------------- (Address of principal executive offices) 541-686-8400 FAX 541-345-4339 -------------------------------------------------------------------------------- (Issuer's telephone number) Indicate by check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ]. No [ ]. Indicate by check mark whether the issuer is an accelerated filer as defined in amended SEC Rule 12-b2. Yes [ ] No [ x ] As of April 1, 2004, 5,985,110 shares of the issuer's common stock were outstanding. OBIE MEDIA CORPORATION FORM 10-Q INDEX

1 OBIE MEDIA CORPORATION Consolidated Condensed Balance Sheets ASSETS

See accompanying notes 2 OBIE MEDIA CORPORATION Consolidated Condensed Statement of Operations (Unaudited)

See accompanying notes 3 OBIE MEDIA CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited)

See accompanying notes 4 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The interim financial statements have been prepared by Obie Media Corporation ("Obie", "Obie Media" or the "Company") without audit. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of the Company as of February 29, 2004 and 2003, and the results of operations and cash flows of the Company for the three months ended February 29, 2004 and 2003, as applicable. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and all significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by rules and regulations of the Securities and Exchange Commission. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company's financial statements filed as part of the Company's November 30, 2003 Form 10-K. This quarterly report should be read in conjunction with such annual report. 2. STOCK OPTIONS STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NO. 123 AND NO. 148 The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" , (APB 25), and provides pro forma disclosures of net income (loss) and net income (loss) per common share as if the fair value method had been applied in measuring compensation expense in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", (SFAS 123). In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, (SFAS No. 148), "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FAS 123." SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, (SFAS No. 123) "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Finally, SFAS No.148 amends APB Opinion No. 28 ("APB 28"), "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The amendments to the transition and disclosure provisions is effective for fiscal years ending after December 15, 2002. The amendment to APB 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We adopted the disclosure provisions of SFAS No. 148 during our quarter ended May 31, 2003. As required by SFAS 123, the Company computed the value of options granted during the three months ended February 28, 2003 using the Black-Scholes option pricing model for pro forma disclosure purposes. There were no options granted during the three months ended February 29, 2004. The weighted average assumptions used for stock option grants for the three months ended 5 February 28, 2003 were risk-free interest rate of 4.9% , expected dividend yields of 0%, expected lives of 6.0 years and expected volatility of 81.48%. Options are assumed to be exercised upon vesting for purposes of this valuation. Adjustments are made for options forfeited as they occur. For the three months ended February 28, 2003 the total value of the options granted was approximately $5,000 which would be amortized on a straight-line basis over the vesting periods of the options. Had Obie accounted for these plans in accordance with SFAS 123, the Company`s net loss and pro forma net loss per share would have been reported as follows: Three Months Ended February 29 and 28 (In thousands, except per share amounts)

The effects of applying SFAS No. 123 for providing pro forma disclosure for the three months ended February 29, 2004 and February 28, 2003 are not likely to be representative of the effects on reported net (loss) and net (loss) per share for future years since options vest over several years and additional awards are made each year. The Company entered into restricted stock agreements with five executives in November 2003 in exchange for certain of their stock options. The restricted stock agreements were approved by the Company's board of directors. Under the terms of the agreements, 71,508 shares of restricted stock were exchanged for 143,008 stock options. The restricted stock vests over three and one-half years. The fair value of the restricted stock on the date of grant amounted to $187,351, of which $32,117 was recorded as compensation expense during the three months ended February 2004. Unamortized compensation expense at February 29, 2004 totaled $117,763 and has been recorded as Deferred Stock Based Compensation in the balance sheet. The restricted stock shares were issued in December 2003. 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 had been disputing settlement of 2001 transit fees in light of the nature of the early termination and a shortage of advertising space made available to the Company, and the parties entered into an agreement effective May 28, 2002 resolving all of the outstanding issues. The agreed upon fee for the 2001 contract year has been settled at $17 million, substantially less than the original contracted guaranteed payment of $21.8 million. As of May 31, 2002, approximately $7.5 million had been paid to the CTA, and an 6 additional $1.5 million was paid on June 1, 2002. The balance was to be payable in substantially equal monthly payments of $116,080 beginning June 1, 2002 and ending May 1, 2007, with an additional $1.0 million balloon payment due January 1, 2004. The monthly payments were to be without interest through May 2003, and included a 5% interest charge thereafter. This obligation was paid in full in January 2004 from funds provided by new financing arrangements described in Note 4 below. 4. DEBT AGREEMENTS On January 14, 2004 the Company entered into a new long-term financing agreement with CapitalSource Finance, LLC. The arrangement includes a $17.5 million term loan and a $6.0 million revolver to the parent company, both of which mature on November 30, 2008. The arrangement also includes a $2.5 million term loan to Obie Media Ltd., the Company's Canadian subsidiary which expires on January 31, 2009. Funds from the term loans were used to (1) pay off the existing term loan with U.S. Bank, (2) pay off the balance of the settlement obligation with the Chicago Transit Authority, and (3) pay off the promissory note related to the purchase of the minority interest of O.B. Walls, Inc. The new revolver was used to pay off the outstanding balance on the operating line of credit due to U.S. Bank. The interest charged on the loans is the greater of prime plus a margin that is dependant upon Obie's leverage ratio, or 9.5% on the term loans or 8.5% on the revolver. The margin in effect at the time the financing closed was 5.5% on the term loans and 4.5% on the revolver. The first date that this margin may be adjusted is the quarter ending February 29, 2004. The rate was not adjusted at February 29, 2004 and remained consistent with the existing rate. This transaction resulted in a write off of the discount on the obligation with the Chicago Transit Authority in the amount of $709,817 and write off of prepaid loan costs in the amount of $251,594. These amounts have been shown as loss on debt extinguishment in the Consolidated Statement of Operations. The loan agreement with CapitalSource Finance LLC contains financial covenants regarding (1) minimum rolling EBITDA, (2) maximum leverage ratios, (3) fixed-charge coverage ratios, and (4) interest coverage ratios, all of which are measured on a quarterly basis. The first measurement date was as of February 29, 2004. The loan agreement also restricts the Company's ability to pay dividends. The loans are collateralized by substantially all of the assets of the company. The Company was in compliance with all covenants at February 29, 2004. The Company has an arrangement with Travelers Casualty & Surety Company of America ("Travelers"), to provide bonds required by the Company. The Company and Travelers have entered into a security agreement whereby Travelers maintains a second secured position on certain of the Company's assets, subordinate to the security arrangements with CapitalSource Finance LLC or any other replacement primary lender. 5. ACCOUNTING FOR GOODWILL In accordance with SFAS No. 142, goodwill amortization was discontinued as of November 30, 2002. We will complete our annual impairment analysis during the quarter ending May 31, 2004. Goodwill at February 29, 2004 and November 30, 2003 amounted to $5,448,552, net of accumulated amortization of $2,181,571. 6. INCOME TAXES The Company has net operating loss carryforwards of approximately $9.2 million. A valuation allowance has been provided for the tax benefit of the operating loss carryforward and other deferred tax items. This results in no income tax provision for the quarters ended February 2004 and 2003. 7. EARNINGS PER SHARE 7 Basic earnings per share (EPS) is calculated using the weighted average number of common shares outstanding for the period and diluted EPS is calculated using the weighted average number of common shares and dilutive common equivalent shares outstanding. The following is a reconciliation of the basic and diluted shares used in the per share calculation: Three Months Ended February 29 and 28, 2004 2003 ---- ---- Basic Shares (weighted average) 5,927,904 5,908,577 Dilutive effect of stock options - - ----------------- ------------------- Diluted shares (weighted average) 5,927,904 5,908,577 ================= =================== At February 29, 2004 and February 28, 2003 the Company had options outstanding covering 509,670 and 670,181 shares respectively of the Company's common stock that were not considered in the dilutive EPS since they would have been antidilutive for the three months ended February 2004 and 2003. 8. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS No. 130). This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The objective of SFAS No. 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. Comprehensive income did not materially differ from reported net loss for the three month periods ended February 2004 and 2003. 9. DISCONTINUED OPERATIONS Effective during its fiscal year ended November 30, 2002, the Company adopted Statements of Financial Accounting Standards No. 144 "Accounting for the Impairment of Long-Lived Assets" (SFAS 144) and No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). Pursuant to these pronouncements, the Company has classified as "Discontinued Operations" the results of operations and any exit costs associated with transit agreements that were economically not viable, and where the Company plans to or has already either exited the market or intends not to be a competitive participant in new contract awards for expiring agreements. Accordingly, the Company exited these markets and has no ongoing advertising operations. These operations qualify as components of an entity with separate financial reporting as described in SFAS No. 144. The assets associated with the discontinued markets are, in the aggregate, not material. The U.S. transit districts included in Discontinued Operations are: Chicago, San Antonio, Cincinnati, Kitsap, Santa Cruz and Bridgeport. The Canadian transit districts included are: Pickering, Whitby, Cambridge and St. Catharines. The Chicago (see Note 3 above), Pickering, Whitby, Cambridge and St. Catharines contracts were terminated during fiscal year 2002; the contract in San Antonio was terminated in December 2002. The Company did not aggressively participate in new contract awards in Cincinnati, Kitsap, Santa Cruz or Bridgeport, which contracts expired either during fiscal 2002 or early in fiscal 2003. The results of operations for these transit districts for 2003 have been reclassified to Discontinued Operations for comparability purposes. 8 Net revenues and the components of the net loss related to the discontinued operations were as follows:

10. NEW ACCOUNTING PRONOUNCEMENTS In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for the financial statements of interim or annual reports ending after December 15, 2002. The Company has adopted the requirements of FIN 45. The adoption of FIN 45 did not have a material effect on the Company s financial position or results of operations. 11. RECLASSIFICATIONS Certain amounts previously reported in the Company's financial statements as of February 28, 2003 have been reclassified to conform to the current fiscal year presentation. These reclassifications had no effect on previously reported net income or shareholders' equity. 12. CONTINGENCIES From time to time the Company is subject to legal proceedings and claims in the ordinary course of business, The Company is not currently aware of any legal proceedings or claims that will have a material adverse effect on the Company's financial position, or results of operations or cash flows. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes certain forward-looking statements that involve a number of risks and uncertainties. Obie's actual results could differ materially from the forward-looking statements. Factors that could cause or contribute to such differences include: failure to conclude favorable negotiations on pending transactions with existing transit agency partners or to successfully assimilate expanded operations; potential impairments of liquidity or capital resources; inability to generate sufficient advertising revenues to meet contractual guarantees; inability to renew existing lending arrangements as they expire; potential for cancellation or interruption of contracts with governmental agencies; a further decline in the demand for advertising in the areas where we conduct our business, or a deterioration of business conditions generally in those areas; slower than expected acceptance of our innovative display products; competitive factors, including increased competition and price pressures; changes in the seasonality of our business; and changes in regulatory or other external factors; as well as those factors listed from time to time in Obie's SEC reports, including, but not limited to, the factors discussed in this quarterly report. You should recognize that these forward-looking statements, which speak only as of the date of this quarterly report, reflect management's expectations based on information available as of that date; you should not construe our forward-looking statements as assurances of future performance. We do not intend to update our forward-looking statements except as required by law. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations following are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that the estimates, assumptions and judgements involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. Certain of these critical accounting policies affect working capital account balances, including the reserve for uncollectible accounts receivable and deferred income taxes. These policies require that we make estimates in the preparation of our financial statements as of a given date. However, since our business cycle is relatively short, actual results related to the estimates relative to uncollectible accounts receivable are generally known within the six month period following the financial statement date. Thus, these policies generally affect only the timing of reported amounts across two to three quarters. The estimate of deferred tax assets may affect reported amounts beyond that time period. Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances which would result in materially different amounts being reported. RECOGNITION OF REVENUE Revenue from advertising contracts is recognized ratably over the contract term, and the estimated cost components of a contract (cost of the advertising space and the costs of producing and installing advertising copy) are deferred and matched against the periodic recognition of revenue on essentially a straight-line basis. This method also necessitates the recognition of an unearned revenue liability for billings to customers for time periods beyond the end of the current accounting cycle. DISCONTINUED OPERATIONS 10 Effective during its fiscal year ending November 30, 2002, the Company adopted Statements of Financial Accounting Standards No. 144 "Accounting for the Impairment of Long-Lived Assets" (SFAS No. 144) and No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS No. 146). Pursuant to these pronouncements, the Company has classified as " Discontinued Operations" the results of operations and any exit costs associated with transit district contracts that were exited. As a result the Company has no further involvement with these markets. The U.S. transit districts included in Discontinued Operations are: Chicago, San Antonio, Cincinnati, Kitsap, Santa Cruz and Bridgeport. The Canadian transit districts included are: Pickering, Whitby, Cambridge and St. Catharines. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS RECEIVABLE We make ongoing estimates relating to the collectiblity of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to make required payments. In determining the amount of the reserve, we consider our historical level of credit losses, the aging spread of accounts at the date the estimate is made, trends in the overall media economy, and general business conditions. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event that a smaller or larger reserve was appropriate, we would record a credit or charge to administrative expense in the period in which we made such a determination. INCOME TAXES We record valuation allowances against our deferred tax assets, when necessary, in accordance with SFAS No. 109, "Accounting for Income Taxes." Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent that we believe recovery is unlikely, we establish a valuation allowance against our deferred tax assets increasing our income tax expense in the period such determination is made. An increase in the valuation allowance would result in a charge to income tax expense. A decrease in the valuation allowance would result in a reduction to income tax expense. On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses we continually refine our estimate based upon actual events and earnings during the year. This continual estimation process periodically results in a change to our expected tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision is in accordance with the annual anticipated rate. PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Property, plant and equipment, including buildings, equipment, and computer hardware and software is recorded at cost (including, in some cases, the cost of internal labor) and is depreciated over estimated useful lives. Changes in circumstances (such as technological advances or changes to our business operations) can result in differences between the actual and estimated useful lives. In those cases where we determine that the useful life of a long-lived asset should be shortened, we increase depreciation expense over the remaining estimated useful life to depreciate the asset to its salvage value. In accordance with SFAS No. 142, goodwill amortization was discontinued as of November 30, 2002. We conducted an impairment analysis as of November 30, 2003 and found no instances of impairment. Goodwill at February 29, 2004 and November 30, 2003 amounted to $5,448,552, net of accumulated amortization of $2,181,571. OTHER CONTINGENCIES 11 In the ordinary course of business, we are involved in legal proceedings involving contractual, employment relationships and a variety of other matters. We record contingent liabilities resulting from claims against us when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable. We disclose contingent liabilities when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Estimating probable losses requires analysis of multiple factors, in some cases including judgements about the potential actions of third party claimants and courts. Therefore, actual losses in any future period are inherently uncertain. Currently, we do not believe that any of our pending legal proceedings or claims will have a material impact on our financial position or results of operations. However, if actual or estimated probable future losses exceed our recorded liability for such claims, we would record additional charges as other expense during the period in which the actual loss or change in estimate occurred. RECENT DEVELOPMENTS On January 14, 2004 Obie entered into a new long-term financing arrangement with CapitalSource Finance LLC. The arrangement includes a $17.5 million term loan and a $6.0 million revolver with Obie Media Corporation, both of which mature on November 30, 2008. The arrangement also includes a $2.5 million term loan to Obie Media Ltd., our wholly owned Canadian subsidiary, which matures on January 31, 2009. The interest charged on the loans is the greater of prime plus a margin that is dependant upon Obie's leverage ratio, or 9.5% on the term loans or 8.5% on the revolver as of February 29, 2004. The margin in effect at the time the financing closed was 5.5% on the term loans and 4.5% on the revolver. The first date that this margin may be adjusted was the quarter ending February 29, 2004. The rates were not adjusted at that time. Funds from the term loan were used to (1) pay off the existing term loan with the previous lender, (2) pay off the balance of the settlement obligation with the Chicago Transit Authority, and (3) pay off the promissory note related to the purchase of the minority interest of O. B. Walls, Inc. in fiscal 2002. Funds from the new revolver were used to pay off the existing revolver with the previous lender and to fund closing costs and working capital needs. Availability under the revolver amounted to approximately $1.8 million as of February 29, 2004. The term loan principal payment amounts are $1.0 million in fiscal 2004, $1.0 million in fiscal 2005, $2.0 million in fiscal 2006, $3.0 million in fiscal 2007, $11.1 million in fiscal 2008, with the balance due at maturity. The revolver balance is due in full at maturity. The loan agreement with CapitalSource Finance, LLC contains financial covenants regarding (1) minimum rolling EBITDA, (2) maximum leverage ratios, (3) fixed-charge coverage ratios, and (4) interest coverage ratios, all of which are measured on a quarterly basis. The Company was in compliance with all covenants as of February 29, 2004. The loan agreement also restricts the Company's ability to pay dividends. The loans are collateralized by substantially all of the assets of the company. COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 2004 AND 2003 RESULTS OF CONTINUING OPERATIONS REVENUES. Obie's revenues are derived from providing advertising space on out-of-home advertising displays, primarily on transit vehicles under transit district agreements and on outdoor advertising displays we own or operate. Revenues are also derived from the sale of design and installation services and the production of advertising display content. Net revenues for the three months ended February 29, 2004 increased $1.3 million, or 15.3%, to $10.0 million in 2004 from $8.7 million for the same period in fiscal 2003. Transit net revenues increased $1.0 million, or 14.9%, to $8.0 million for the three month period in fiscal 2004, from $7.0 million for the same period of fiscal 2003. The increase reflects our continuing success in selling annual incentive contracts to our customers. Outdoor net revenues increased $286,000, or 17.1% to $2.0 million for the three months ended February 2004 compared to $1.7 million for the same period of fiscal 2003. This increase was due primarily to higher occupancy rates of the billboard plant. PRODUCTION AND INSTALLATION EXPENSES. These expenses relate primarily to the production of transit advertising content and the installation of the content on transit vehicles, benches and shelters. Also included is the cost of billboard content and installation. Production and installation expenses increased $163,000, or 12.0%, to $1.5 million in fiscal 2004 from $1.4 million in fiscal 2003. 12 The Company's production and installation activities are primarily related to the transit advertising part of our business, and decreased, as a percentage of net revenues, to 18.9% of net transit sales in the three month period in 2004, when compared to 19.4% in the same period of 2003 due to volume efficiencies. TRANSIT AND OUTDOOR OCCUPANCY EXPENSES. These expenses include fees paid to transit authorities and lease payments to landowners for billboard sites. 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. Transit and outdoor occupancy expenses increased approximately $183,000, or 5.1%, to $3.8 million in the fiscal quarter ended in 2004 compared to $3.6 million in the first quarter of fiscal 2003. The increase was related primarily to contracted increases in transit agency fees. These expenses, as a percentage of net revenues, decreased to 37.9% in the first quarter of fiscal 2004 as compared to 41.6% of net revenues in the same period of fiscal 2003, the result of continued cost containment efforts in this area. SELLING EXPENSES. Sales expenses consist primarily of employment and administrative expenses associated with our sales force. These expenses increased $422,000, or 23.5%, to $2.2 million for the three month period in fiscal 2004, from $1.8 million in the same period in fiscal 2003. The increase is related primarily to the cost of sales incentive programs designed to promote the sale of annual incentive contracts to our customers. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses include costs related to individual markets, as well as corporate expenses. Expenses related to individual markets include expenses for the personnel and facilities required to administer that market and neighboring markets. Corporate general and administrative expenses represent personnel and facilities costs for Obie Media's executive offices and centralized staff functions which include accounting, marketing, human resources and technology management. General and administrative expenses increased $279,000, or 15.2% to $2.1 million for the three months ended February 2004 as compared to $1.8 million in the same period of fiscal 2003. The increase was related primarily to additional costs in the corporate marketing department in support of the annual incentive contract sales mentioned above. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased $14,000, or 3.1 %, to $483,000 in fiscal 2004 as compared to $469,000 for the same period in fiscal 2003. The increase was due to increased depreciation expense relative to properties acquired during fiscal 2003. OPERATING INCOME. Due to the events and factors discussed above we generated an operating loss of $134,000 in the three month period ending February 29, 2004 compared to an operating loss of $398,000 in the same period of fiscal 2003. INTEREST EXPENSE. Interest expense increased $5,000, or .8%, to $549,000 for the three month period in fiscal 2004 from $544,000 for the comparable period of fiscal 2003. The increase was due primarily to increased interest rates on the Company's new financing arrangements with CapitalSource Finance, LLC. LOSS ON DEBT EXTINGUISHMENT. The Company experienced a loss on debt extinguishment resulting from the pay-off of its old debt in the first quarter of fiscal 2004 with the proceeds from its new financing arrangements with CapitalSource Finance, LLC. The loss is comprised of charges of approximately $709,000 relating to the write-off of unamortized discount on the Chicago Transit Authority settlement payoff, and approximately $252,000 relating to unamortized prepaid loan costs on the previous debt arrangements. PROVISION FOR INCOME TAXES. The Company accounted for all available loss carryback refunds in the fiscal 2001 provision for income taxes. The Company has substantial loss carryforwards, against which valuation allowances have been provided. Since the operating loss carryforwards expire at certain times, we have evaluated the likeliness of utilizing those carryforwards against future taxable income in that time frame and have established a valuation allowance accordingly. 13 INCOME (LOSS) FROM CONTINUING OPERATIONS. Due to the items and factors discussed above we generated a loss from continuing operations of $1.6 million in the first three month period in fiscal 2004, as compared to loss of $942,000 for the same period in fiscal 2003. RESULTS OF DISCONTINUED OPERATIONS Most transit arrangements include a provision that a certain percentage of net revenues be shared with the transit authorities (transit fees) on a revenue sharing basis (a certain percentage to the transit authority, the balance retained by Obie), but often with minimum payment requirements. Agreements that contain large minimum transit fee payment guarantees, relative to market size, significantly hinder Obie's ability to manage its operating expenses in weak economic environments. These high minimum payment requirements have prompted the Company to negotiate modifications to such contracts, negotiate or effect early terminations to such contracts, or exit such markets at the end of the contract term. As discussed above, discontinued operations contain the operating results, net of income taxes, for transit markets from which we have exited. The discontinued operations for the first three month period of both fiscal 2004 and 2003 include the operations of San Antonio, Texas; Cincinnati; Kitsap, Washington; Santa Cruz, California; Bridgeport, Connecticut; and the Ontario, Canada markets described more fully in the footnotes of the condensed consolidated financial statements. NET LOSS Due to the items and factors discussed above, Obie realized a net loss of $1.7 million during the three months ending February 29, 2004, compared to a net loss of $1.0 million in the same period of fiscal 2003. LIQUIDITY AND CAPITAL RESOURCES On January 14, 2004, we entered into a new long-term financing arrangement with CapitalSource Finance LLC. The arrangements with Obie Media Corporation includes a $17.5 million term loan and a $6.0 million revolver both of which mature on November 30, 2008. In addition, there is a $2.5 million term loan with Obie Media Ltd. (the Company's Canadian subsidiary) which matures on January 31, 2009. The interest charged on the loans is the greater of prime plus a margin that is dependant upon Obie's leverage ratio, or 9.5% on the term loans and 8.5% on the revolver. The margin in effect at the time the financing closed was 5.5% on the term loans and 4.5% on the revolver. The first date that this margin may be adjusted was the quarter ending February 29, 2004. The rates were not adjusted at that time. Funds from the term loans were used to (1) pay off the existing term loan with the previous lender, (2) pay off the balance of the settlement obligation with the Chicago Transit Authority, and (3) pay off the promissory note related to the purchase of the minority interest of O. B. Walls, Inc. Funds from use of the revolver were used to pay off the existing revolver with the previous lender and to fund closing costs and working capital needs. Availability under the revolver amounted to approximately $1.8 million as of February 29, 2004. This new financing arrangement with CapitalSource Finance, LLC allowed us to consolidate debt obligations, provide additional revolver availability, and restructure principal payment obligations to better fit the growth and cash flow needs of the Company. The term loan principal payment amounts are $1.0 million in fiscal 2004, $1.0 million in fiscal 2005, $2.0 million in fiscal 2006, $3.0 million in fiscal 2007, $11.1 million in fiscal 2008, with the balance due at maturity. The revolver balance is due in full at maturity. The loan agreement with CapitalSource Finance LLC contains financial covenants regarding (1) minimum rolling EBITDA, (2) maximum leverage ratios, (3) fixed-charge coverage ratios, and (4) interest coverage ratios, all of which are measured 14 on a quarterly basis. The Company was in compliance with all covenants as of February 29, 2004. The loan agreement also restricts the Company's ability to pay dividends. The loans are collateralized by substantially all of the assets of the Company. The Company has historically satisfied our working capital requirements with cash from operations and revolving credit borrowings. Our working capital at February 29, 2004 was $4.3 million as compared to $4.9 million at November 30, 2003. The decrease was due primarily to funding the loan fees related to the new financing arrangements. Acquisitions and capital expenditures, primarily for the construction of new outdoor advertising displays, digital printing equipment and technology related assets have been financed primarily with borrowed funds. At February 29, 2004, Obie had outstanding borrowings of $24.1 million, of which $23.9 million was pursuant to credit agreements with CapitalSource Finance LLC, and $200,000 in other notes. The Company's indebtedness is collateralized by substantially all of its assets. At February 29, 2004, available borrowing capacity under the line of credit was approximately $1.8 million. Net cash used in investing activities was $109,000 and $160,000 during the three month periods ended February 2004 and 2003, respectively. The amounts spent used in both years where for equipment purchases, primarily automobiles and computing equipment. Net cash used in financing activities was $746,000 for the three month period ended February 29, 2004, as compared to $807,000 in the same period of fiscal 2003. The difference between the two periods is related to the effects of the new financing arrangements that were consumated in the first quarter of fiscal 2004. We expect to pursue a policy of measured growth through obtaining favorable new transit district agreements, acquiring out-of-home advertising companies or assets and constructing new outdoor advertising displays. We intend to finance future expansion activities using a combination of internal and external sources. We believe that internally generated funds and funds available for borrowing under lender 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 2004. Future acquisitions by Obie, if any, may require additional debt or equity financing. SEASONALITY Obie's revenues and operating results historically have fluctuated by season, generally following the advertising trends in our major transit markets. Typically, results of operations are strongest in the fourth quarter and weakest in the first quarter of our fiscal year which ends on November 30. Transit advertising operations are more seasonal than outdoor advertising operations as the Company's outdoor advertising display space, unlike its transit advertising display space, is and has been sold largely by means of 12-month contracts. The Company believes that the seasonality of revenues and operating results will increase if transit advertising operations continue to expand more rapidly than outdoor advertising operations. This seasonality, together with fluctuations in general and regional economic conditions and the timing and expenses related to acquisitions, the obtaining of new transit agreements and other actions that have been taken to implement the Company's growth strategy, have contributed to fluctuations in periodic operating results. These fluctuations likely will continue. Accordingly, results of operations in any period may not be indicative of the results to be expected for any future period. ITEM 3. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into derivative financial instruments. 15 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to applicable rules under the Securities Exchange Act of 1934, as amended, within 90 days of the date of this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS No matters were submitted to security holders for vote during the three months ended February 29, 2004. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Signature In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Obie Media Corporation Date April 14, 2004 By: /s/ GARY F. LIVESAY * Gary F. Livesay Vice President - Chief Financial Officer * Signing on behalf of the registrant as principal financial and accounting officer 16

OBIE MEDIA CORP 10-Q