10-Q 1 omc_10q40531.txt QUARTERLY REPORT 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 May 31, 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 [ v ]. No [ ]. Indicate by check mark whether the issuer is an accelerated filer as defined in amended SEC Rule 12-b2. Yes [ ] No [v ] As of July 1, 2004, 5,985,110 shares of the issuer's common stock were outstanding. OBIE MEDIA CORPORATION FORM 10-Q INDEX

PART I - FINANCIAL INFORMATION PAGE ------------------------------- ---- ITEM 1. Financial Statements Consolidated Condensed Balance Sheets as of ~~February~~May 2931, 2004 and November 30, 2003 2 Consolidated Condensed Statements of Operations for the three ~~months~~month and six month periods ended ~~February~~May 2931, 2004 and 2003 3 Consolidated Condensed Statements of Cash Flows for the three ~~months~~month and six month periods ended ~~February~~May 2931, 2004 and 2003 4 Notes to Consolidated Condensed Financial Statements 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1011 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 1520 ITEM 4. Controls and Procedures 1520 PART II - OTHER INFORMATION ---------------------------- ITEM 4. Submission of Matters to Vote of Security Holders 1621 ITEM 6. Exhibits and Reports on Form 8-K 1621 Certifications 1722

~~February~~OBIE 29MEDIA CORPORATION Consolidated Condensed Balance Sheets ASSETS May 31, 2004 November 30, (Unaudited) 2003 ------------~~------~~ ------------~~-------~~ CURRENT ASSETS: Cash $ ~~712~~447,~~938~~059 $ 1,943,169 Accounts receivable, net 45,~~462~~194,~~465~~777 5,774,226 Prepaids and other current assets 56,~~847~~410,~~901~~081 5,099,504 Deferred income taxes 1,~~541~~540,~~745~~315 1,543,750 ------------~~------~~ ------------~~-------~~ Total current assets 1213,~~565~~592,~~049~~232 14,360,649 Property and equipment, net 14,~~572~~341,~~955~~446 14,886,619 Goodwill, net 5,448,552 5,448,552 Other assets 1,~~709~~658,~~098~~828 749,936 ------------~~------~~ ------------~~-------~~ $3435,~~295~~041,~~654~~058 $ 35,445,756 ============~~======~~ ============~~=======~~ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,000,000 $ 1,723,695 Working capital revolver 45,~~151~~082,~~793~~876 3,890,483 Accounts payable ~~396~~219,~~914~~665 307,901 Accrued transit fees ~~594~~710,~~146~~361 1,148,124 Accrued expenses ~~882~~1,~~564~~239,774 1,220,754 Income taxes payable - 214,540 Unearned revenue 1982,~~221,506~~013 928,051 ------------~~------~~ ------------~~-------~~ Total current liabilities 89,~~246~~234,~~923~~689 9,433,548 Deferred tax liability 1,~~583~~581,~~468~~212 1,586,631 Long-term debt, net 18,~~914~~643,~~404~~718 17,246,748 ------------~~------~~ ------------~~-------~~ Total liabilities 2829,~~744~~459,~~795~~619 28,266,927 ------------~~------~~ ------------~~-------~~ Shareholders' equity: Preferred stock, without par value, 10,000,000 shares authorized, no shares issued or outstanding Common stock, without par value, 20,000,000 shares authorized, 5,985,110 and 5,913,602 shares issued and outstanding at ~~February~~May 2931, 2004 and November 30, 2003 respectively 17,469,554 17,282,128 Deferred stock based compensation (~~117~~103,~~763~~041) - Other comprehensive ~~income (~~loss) (8474,~~947~~286) (45,495) Accumulated deficit (11,~~715~~710,~~985~~788) (10,057,804) ------------~~------~~ -----------~~--------~~ Total shareholders' equity 5,~~550~~581,~~859~~439 7,178,829 ------------~~------~~ -----------~~--------~~ $ 3435,~~295~~041,~~654~~058 $ 35,445,756 ============~~======~~ ===========~~========~~ See accompanying notes

OBIE MEDIA CORPORATION Consolidated Condensed Statement of Operations (Unaudited) Three Months Ended ~~February~~May Six Months Ended May 2004 2003 2004 2003 ----------- ----------- ------------ ------------ REVENUES: Transit advertising $ 89,~~018~~795,~~497~~336 $ 69,~~980~~053,~~462~~680 $17,813,833 16,076,911 Outdoor advertising 12,~~960~~092,~~026~~556 1,~~674~~581,~~329~~634 4,052,582 3,255,963 ----------- ----------- ------------ ------------ Net revenue 911,~~978~~887,~~523~~892 810,~~654~~635,~~791~~314 21,866,415 19,332,874 OPERATING EXPENSES: Production and installation 1,~~517~~695,~~761~~157 1,~~355~~559,~~132~~641 3,212,918 2,921,725 Transit and outdoor occupancy 34,~~784~~679,~~741~~686 34,~~601~~546,~~759~~695 8,464,427 8,170,787 Selling 2,~~216~~161,~~171~~704 12,~~794~~029,~~589~~521 4,377,875 3,825,040 General and administrative 2,~~110~~198,~~938~~555 1,~~832~~686,~~142~~656 4,309,493 3,519,596 Depreciation and amortization ~~483~~475,~~363~~572 ~~468~~449,~~952~~992 958,935 918,944 ----------- ----------- ------------ ------------ Total operating expenses 11,210,674 10,~~112~~272,~~974~~505 921,~~052~~323,~~574~~648 19,356,092 Operating ~~loss~~income (~~134,451~~loss) 677,218 362,809 542,767 (~~397~~23,~~783~~218) OTHER EXPENSE: Interest expense ~~548~~608,~~574~~588 ~~543~~583,~~998~~760 1,157,162 1,127,758 Loss on debt extinguishment - - 961,411 ~~LOSS~~- ~~FROM~~----------- ~~CONTINUING OPERATIONS~~ ----------- ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 68,630 (220,951) (1,~~644~~575,~~436~~806) (~~941~~1,~~781~~150,976) INCOME TAX PROVISION ~~(BENEFIT)~~46,415 -134,531 46,415 134,531 ----------- ----------- ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 22,215 (355,482) (1,~~644~~622,~~436~~221) (~~941~~1,~~781~~285,507) DISCONTINUED OPERATIONS, NET OF INCOME TAXES (1317,~~745~~018) (~~100~~105,~~831~~914) ~~TAXES~~(30,763) (218,501) ----------- ----------- ------------ ~~NET~~------------ ~~LOSS~~$ 5,197 $ (461,396) $(1,~~658~~652,~~181~~984) $ (1,~~042~~504,~~612~~008) =========== =========== ============ ============ Earnings (loss) per share: Basic and diluted, from continuing operations $ 0.00 $ (0.2806) $ (0.1627) $ (0.21) Basic and diluted, from discontinued operations $0.00 (0.0002) $(0.01) (0.0204) Basic and diluted, on net loss $ 0.00 $ (0.08) $ (0.28) $ (0.1825) See accompanying notes

3 OBIE MEDIA CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) Six Months Ended May 31, - 2004 2003 ------------ ------------ Cash Flows From Operating Activities: Net loss $(1,652,984) $(1,504,008) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 958,935 843,885 Loss on debt extinguishment 961,411 - Compensation expense from restricted stock 46,837 - Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 579,449 1,810,466 Prepaid and other assets (1,208,097) (906,574) Deferred income taxes 3,435 Increase (decrease) in: Accounts payable (88,236) 24,021 Other liabilities (705,285) (420,938) ------------ ------------ Net cash used in operating activities (1,104,535) (153,148) ------------ ------------ Cash Flows From Investing Activities: Capital expenditures (277,203) (350,709) ------------ ------------ Net cash used in investing activities (277,203) (350,709) ------------ ------------ Cash Flows From Financing Activities: Net borrowings on line of credit 1,192,393 400,000 Borrowings of long-term debt 20,038,614 - Payments on long-term debt (20,075,156) (1,178,225) Loan fees incurred with financing (1,241,432) ------------ ------------ Net cash used in financing activities (85,581) (778,225) ------------ ------------ Effect of exchange rate changes on cash (28,791) (65,622) Net decrease in cash (1,496,110) (1,347,704) Cash, beginning of period 1,943,169 1,815,886 ------------ ------------ Cash, end of period $ 447,059 $ 468,182 ============ ============ 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 May 31, 2004 and 2003, and the results of operations and cash flows of the Company for the three and six months ended May 31, 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 No. 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 SFAS No. 123 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 No. 123, the Company computed the value of options granted during the three and six month periods months ended May 31, 2004 and 2003 using the Black-Scholes option pricing model for pro forma disclosure purposes. The weighted average assumptions used for stock option grants for the three and six month periods ended May 31, 2004 and 2003 were a risk-free interest rate of 3.46% and 4.9%, respectively, expected dividend yields of 0%, expected lives of 6.0 years and expected volatility of 78.72% and 81.48%, respectively. 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 and six month periods ended May 31, 2004 and 2003, the total value of the options granted was approximately $132,600 and $7,500, respectively, which would be amortized on a straight-line basis over the vesting periods of the options. 5 Had Obie accounted for these plans in accordance with SFAS No. 123, the Company`s net loss and pro forma net loss per share would have been reported as follows:

~~Three~~THREE ~~Months~~MONTHS ~~Ended~~ENDED ~~February~~MAY 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 ---- ----~~----------------------------~~ ~~Cash Flows From Operating Activities:~~ Net ~~loss~~income $ (~~1,658,181~~loss) as reported $5 $(~~1,042,612~~461) ~~Adjustments~~Deduct tototal ~~reconcile~~stock-based ~~net~~compensation ~~loss~~expense todetermined ~~net~~under ~~cash~~fair ~~used~~value inbased ~~operating~~method ~~activities:~~for ~~Depreciation~~all ~~and~~awards, ~~amortization~~net ~~483,363~~of ~~416,069~~related ~~Loss~~tax oneffects ~~debt~~(40) ~~extinguishment~~(80) ~~961,411~~-------- -------- ~~Compensation expense from restricted stock 32,117~~ Pro-forma ~~Changes~~net inloss ~~assets~~$(35) ~~and liabilities:~~ $(~~Increase~~541) ~~decrease~~======== ~~in:~~======== ~~Accounts~~Net ~~receivable~~loss ~~1,311,761~~per ~~1,470,894~~Share ~~Prepaid~~Basic: ~~and~~As ~~other~~reported ~~current~~$ ~~assets~~0.00 $(~~778,474~~0.08) Pro forma $(~~477,072~~0.01) ~~Deferred income taxes 2,005 4,861 Increase~~ $(~~decrease~~0.09) inFully diluted: ~~Accounts~~As ~~payable~~reported ~~89,013 125,833 Other liabilities~~ $(~~778,865~~0.00) $(~~465,377~~0.08) ~~------------------------------------~~Pro ~~Net~~forma ~~cash~~ $(~~used in~~0.01) ~~operating activities~~ $(~~335,850~~0.09) ~~32,596~~SIX ~~------------------------------------~~MONTHS ~~Cash~~ENDED ~~Flows~~MAY ~~From~~31, ~~Investing~~(IN ~~Activities:~~THOUSANDS, ~~Capital~~EXCEPT ~~expenditures~~PER ~~(108,951)~~SHARE ~~(160,055~~AMOUNTS) 2004 2003 ---- ----~~----------------------------~~ Net ~~cash~~loss ~~(used~~as ~~in)~~reported ~~investing activities~~ $(~~108~~1,~~951~~653) $(~~160~~1,~~055~~504) ~~------------------------------------~~Deduct ~~Cash~~total ~~Flows~~stock-based ~~From~~compensation ~~Financing~~expense ~~Activities:~~determined ~~Net~~under ~~borrowings~~fair onvalue ~~line~~based ofmethod ~~credit~~for ~~261~~all awards,~~310~~ -net ~~Borrowings~~ of ~~long-term~~related ~~debt~~tax ~~20,038,614~~effects ~~- Payments on long-term debt~~ (~~19,804,470~~80) (~~807,296~~160) ~~Loan fees incurred with financing (1,241,432)~~ -------- -------- Pro-~~-------------------~~forma ~~Net~~net ~~cash~~income ~~(used~~loss ~~in) financing activities~~ $(~~745~~1,~~978~~733) $(~~807~~1,~~296~~664) ~~------------------------------------~~======== ~~Effect~~======== ofNet ~~exchange~~loss ~~rate~~per ~~changes~~Share onBasic: ~~cash~~As ~~(39,452)~~reported $(~~29,824~~0.28) ~~Net~~ $(~~decrease~~0.25) inPro ~~cash~~forma $(~~1,230,231~~0.29) $(~~964,579~~0.28) ~~Cash,~~Fully ~~beginning~~diluted: ofAs ~~period~~reported ~~1,943,169~~$(0.28) ~~1,815,886~~$(0.25) ~~------------------------------------~~Pro ~~Cash,~~forma ~~end of period~~ $(0.29) ~~712,938~~ $ ~~851,307 ====================================~~(0.28)

The effects of applying SFAS No. 123 for providing pro forma disclosure for the three and six month periods ended May 31, 2004 and 2003 are not likely to be representative of the effects on reported net income (loss) and net income (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, 6 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 $46,837 was recorded as compensation expense during the six months ended May 31, 2004. Unamortized compensation expense at May 31, 2004 totaled $103,041 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 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 is prime plus 4.5% on the revolver and prime plus 5.5% on the term loans. These margins may be reduced by up to 1.0% depending on the Company's leverage ratio. The effective rates on the revolver and term loans at May 31, 2004 were 8.5% and 9.5%, respectively. The first date the margins may be adjusted is the quarter ending November 30, 2004. 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 May 31, 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 position security interest in 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 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", (SFAS No. 142), goodwill amortization was discontinued as of November 30, 2002. We continued our impairment analysis during the 7 quarter ending May 31, 2004 and have found no instances of impairment. Goodwill at May 31, 2004 and November 30, 2003 amounted to $5,448,552, net of accumulated amortization of $2,181,571. 6. INCOME TAXES The provision for (benefit from) income taxes for the six months ended May 31, 2004 and 2003 differs from the amounts computed by applying the U.S. federal income tax rate of 34 percent to pretax income as follows: Six Months ended May 31, ------- ------- 2004 2003 ------- ------- Statutory federal income tax rate (34.0%) (34.0%) Increase in income taxes resulting from: State and local taxes, net of federal benefit (3.6%) (3.6%) Net operating loss valuation allowance 37.6% 37.6% Foreign income taxes 2.9% 11.7% ------- ------- 2.9% 11.7% ======= ======= 7. EARNINGS PER SHARE 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 May 31, 2004 2003 ---- ---- Basic Shares (weighted average) 5,985,110 5,908,577 Dilutive effect of stock options 18,148 - --------- --------- Diluted shares (weighted average) 6,003,258 5,908,577 ========= ========= Six Months Ended May 31, 2004 2003 ---- ---- Basic Shares (weighted average) 5,985,110 5,908,577 Dilutive effect of stock options - - --------- --------- Diluted shares (weighted average) 5,985,110 5,908,577 ========= ========= 8 At May 31, 2004 and 2003 the Company had options outstanding covering 531,328 and 670,181 shares, respectively, of the Company's common stock. 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 income (loss) for the six month periods ended May 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 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 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. For fiscal 2004, the transit districts included in Discontinued Operations are San Antonio, Pittsburgh and Bridgeport. For fiscal 2003 the U.S. transit districts included in Discontinued Operations are: Chicago, San Antonio, Cincinnati, Kitsap, Santa Cruz and Bridgeport, and 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. Net revenues and the components of the net loss related to the discontinued operations were as follows:

Three months ended May 31, 2004 2003 ---- ---- Net ~~loss~~revenues as$ ~~reported~~- $(12,~~658~~764 Production and installation expenses (929) $(1143,~~043~~433) ~~Deduct~~Occupancy ~~total stock-based compensation~~ expense ~~determined~~(1,968) ~~under~~(17,822) ~~fair~~Sales ~~value~~expense ~~based~~55 ~~method for all awards~~(8,700) ~~net~~General ofand ~~related~~administrative ~~tax~~expense ~~effects~~ (4114,176) (6168,723) --------- ---------- 9 Loss from discontinued operations before income taxes (17,018) (105,914) Income tax expense - - --------- ------ ~~Pro~~-~~forma~~--- ~~net~~Net loss from discontinued operations $(117,~~699~~018) $(1105,~~104~~914) =========~~=========~~ ==========~~=======~~ ~~NET~~Six ~~LOSS~~months ~~PER~~ended ~~SHARE~~May ~~Basic~~31, ~~and~~2004 ~~diluted:~~2003 As---- ~~reported~~---- Net revenues $ - $247,820 Production and installation expenses (~~.28~~5,643) $(0.49,122) Occupancy expense (3,937) (139,701) Sales expense (2,792) (52,654) General and administrative expense (18,391) ~~Pro~~(224,844) ~~forma~~--------- ---------- Loss from discontinued operations before income taxes (30,763) (218,501) Income tax expense --------- ---------- Net loss from discontinued operations $(~~.29~~30,763) $(~~0.19~~218,501) ========= ==========

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 May 31, 2003 have been reclassified to conform to the current fiscal year presentation. These reclassifications had no effect on previously reported net income (loss) 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 currently involved in claims and legal proceedings in which monetary damages and other relief are sought. The Company is vigorously contesting these claims; however, resolution is not expected to occur quickly, and their ultimate outcome cannot presently be predicted. In the opinion of the Company's management, the ultimate resolution of these claims and proceedings will not be likely to have an adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. Also, the Company is party to a suit in the District Court of Bexar County, Texas brought by VIA Metropolitan Transit (VIA), the transit authority for San Antonio, Texas. The suit alleges breach of contract, fraud and theft relative to a contract for transit advertising services between the Company and VIA. Damages have been claimed to be in excess of $600,000. The Company believes these claims are without merit and is vigorously contesting them; however, resolution is not expected to occur quickly, and their ultimate outcome cannot presently be predicted. 10 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 11 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 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. For fiscal 2004, the transit districts included in Discontinued Operations are San Antonio, Pittsburgh and Bridgeport. For fiscal 2003 the U.S. transit districts included in Discontinued Operations are: Chicago, San Antonio, Cincinnati, Kitsap, Santa Cruz and Bridgeport, and 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. 12 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 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets, (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 May 31, 2004 and November 30, 2003 amounted to $5,448,552, net of accumulated amortization of $2,181,571. OTHER CONTINGENCIES 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. 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. From time to time the Company is subject to legal proceedings and claims in the ordinary course of business. The Company is currently involved in claims and legal proceedings in which monetary damages and other relief are sought. The Company is vigorously contesting these claims; however, resolution is not expected to occur quickly, and their ultimate outcome cannot presently be predicted. In the opinion of the Company's management, the ultimate resolution of these claims and proceedings will not be likely to have an adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. Also, the Company is party to a suit in the District Court of Bexar County, Texas brought by VIA Metropolitan Transit (VIA), the transit authority for San Antonio, Texas. The suit alleges breach of contract, fraud and theft relative to a contract for transit advertising services between the Company and VIA. Damages have been claimed to be in excess of $600,000. The Company believes these claims are without merit and is vigorously contesting them; however, resolution is not expected to occur quickly, and their ultimate outcome cannot presently be predicted. 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 13 million term loan to Obie Media Ltd., our wholly owned Canadian subsidiary, which matures on January 31, 2009. The interest rates are prime plus 4.5% on the revolver and prime plus 5.5% on the term loans, respectively. These margins may be reduced by up to 1.0% depending on the Company's leverage ratio. The effective rates on the revolver and term loans at May 31, 2004 were 8.5% and 9.5%, respectively. The first date the margins may be adjusted is the quarter ending November 30, 2004. 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 $917,000 as of May 31, 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 May 31, 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 MAY 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 May 31, 2004 increased $1.3 million, or 11.8%, to $11.9 million in 2004 from $10.6 million for the same period in fiscal 2003. Transit net revenues increased $742,000, or 8.2%, to $9.8 million for the three month period in fiscal 2004, from $9.1 million for the same period of fiscal 2003. The increase reflects our continuing success in selling annual transit advertising contracts to our customers. Outdoor net revenues increased $511,000, or 32.3% to $2.1 million for the three months ended May 2004 compared to $1.6 million for the same period of fiscal 2003. The increase was due primarily to higher occupancy (sell-out) 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 $136,000, or 8.7%, to $1.7 million in fiscal 2004 from $1.6 million in fiscal 2003. The Company's production and installation activities are primarily related to the transit advertising part of our business, and were approximately 17% of net transit revenues for the three month periods of both years. 14 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 $133,000, or 2.9%, to $4.7 million in the fiscal quarter ended in 2004 compared to $4.5 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 39.4% in the second quarter of fiscal 2004 as compared to 42.8% of net revenues in the same period of fiscal 2003. The decrease in the ratio was primarily due to reduced guaranteed payments on transit contracts. SELLING EXPENSES. Sales expenses consist primarily of employment and administrative expenses associated with our sales force. These expenses increased $132,000, or 6.5%, to $2.2 million for the three month period in fiscal 2004, from $2.0 million in the same period in fiscal 2003. However, selling expenses, as a percentage of net revenues, dropped to 18.2% for the three month period in 2004 as compared to 19.1% in the same period in fiscal 2003 due to increased sales. . The decrease was primarily related to cost containment elements of our sales incentive compensation programs. 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 $512,000, or 30.3% to $2.2 million for the three months ended May 2004 as compared to $1.7 million in the same period of fiscal 2003. The increase was related primarily to (1) additional costs in the corporate marketing department in support of the annual incentive contract sales mentioned above ($130,000), (2) management performance incentives accrued in the fiscal 2004 period where none were accrued in fiscal 2003 ($65,000), and rent on the Chicago office space in fiscal 2004 ($60,000). DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased $26,000, or 5.7 %, to $476,000 in fiscal 2004 as compared to $450,000 for the same period in fiscal 2003. The increase was due to increased loan cost amortization expense relative to the new financing arrangements consumated in January 2004. OPERATING INCOME. Due to the events and factors discussed above we generated operating income of $677,000 in the three month period ending May, 2004 compared to operating income of $363,000 in the same period of fiscal 2003. INTEREST EXPENSE. Interest expense increased $25,000, or 4.3%, to $609,000 for the three month period in fiscal 2004 from $584,000 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. 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 15 have evaluated the likeliness of utilizing those carryforwards against future taxable income in such time frames and have established a valuation allowance accordingly. The current provision for income taxes, both for the 2004 and 2003 fiscal periods, is comprised of Canadian income taxes of one of our subsidiaries that also operates in Canada. INCOME (LOSS) FROM CONTINUING OPERATIONS. Due to the items and factors discussed above we generated income from continuing operations of $22,000 in the three month period in fiscal 2004, as compared to an operating loss of $355,000 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 three month period of fiscal 2004 include the operations of Chicago, San Antonio, Pittsburgh and Bridgeport. For the same period of fiscal 2003 discontinued operations include the operations of San Antonio, Texas; Cincinnati; Kitsap, Washington; Santa Cruz, California; Bridgeport, Connecticut; and the Ontario, Canada markets of Pickering, Whitby, Cambridge and St. Catharines. NET INCOME (LOSS) Due to the items and factors discussed above, Obie realized net income of $5,000 during the three months ending May 31, 2004, compared to a net loss of $461,000 in the same period of fiscal 2003. COMPARISON OF THE SIX MONTHS ENDED MAY 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 six months ended May 31, 2004 increased $2.5 million, or 13.1%, to $21.9 million in 2004 from $19.3 million for the same period in fiscal 2003. Transit net revenues increased $1.7 million, or 10.8%, to $17.8 million for the six month period in fiscal 2004, from $16.1 million for the same period of fiscal 2003. The increase reflects our continuing success in selling annual transit advertising contracts to our customers. Outdoor net revenues increased $797,000, or 24.5% to $4.1 million for the six months ended May 2004 compared to $3.3 million for the same period of fiscal 2003. The increase was due primarily to higher occupancy (sell-out) rates of the billboard plant. 16 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 $291,000, or 10.0%, to $3.2 million in fiscal 2004 from $2.9 million in fiscal 2003. The Company's production and installation activities are primarily related to the transit advertising part of our business, and were approximately 18.0% of net transit revenues for the six month periods of both years. 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 $294,000, or 3.6%, to $8.5 million in the fiscal period ended in 2004 compared to $8.2 million in the same period of fiscal 2003. The increase was related to contracted increases in transit agency fees ($250,000) and increased land lease expenses for billboard sites ($44,000). These expenses, as a percentage of net revenues, decreased to 38.7% in the first six months of fiscal 2004 as compared to 42.3% of net revenues in the same period of fiscal 2003. The decrease in the ratio is primarily due to reduced guaranteed payments on transit contracts. SELLING EXPENSES. Sales expenses consist primarily of employment and administrative expenses associated with our sales force. These expenses increased $553,000, or 14.5%, to $4.4 million for the six month period in fiscal 2004, from $3.8 million in the same period in fiscal 2003. Selling expenses, as a percentage of net revenues, increased to 20.0% for the six month period in 2004 as compared to 19.8% in the same period in fiscal 2003. The increase was primarily due to variable sales costs that fluctuate with sales volume. 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 $790,000, or 22.4% to $4.3 million for the six months ended May 2004 as compared to $3.5 million in the same period of fiscal 2003. The increase was related primarily to (1) additional costs in the corporate marketing department in support of the annual incentive contract sales mentioned above ($350,000, (2) management performance incentives accrued in the fiscal 2004 period where none were accrued in fiscal 2003 ($85,000), and rent on the Chicago office space that was charged to discontinued operations in fiscal 2003 ($120,000). DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased $40,000, or 4.4 %, to $959,000 in fiscal 2004 as compared to $919,000 for the same period in fiscal 2003. The increase was due to increased loan cost amortization expense relative to the new financing arrangements consumated in January 2004. OPERATING INCOME. Due to the events and factors discussed above we generated operating income of $543,000 in the six month period ending May, 2004 compared to operating an operating loss of $23,000 in the same period of fiscal 2003. 17 INTEREST EXPENSE. Interest expense increased $29,000, or 2.6%, to $1.2 million for the six month period in fiscal 2004 from $1.1 million 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 such time frames and have established a valuation allowance accordingly. The current provision for income taxes, both for the 2004 and 2003 fiscal periods, is comprised of Canadian income taxes of one of our subsidiaries that also operates in Canada. INCOME (LOSS) FROM CONTINUING OPERATIONS. Due to the items and factors discussed above we generated an operating loss from continuing operations of $1.6 million in the six month period in fiscal 2004, as compared to an operating loss of $1.3 million 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 six month period of fiscal 2004 include the operations of Chicago, San Antonio, Pittsburgh and Bridgeport. The same period of fiscal 2003 includes the operations of San Antonio; Cincinnati; Kitsap, Washington; Santa Cruz, California; Bridgeport; and the Ontario, Canada of Pickering, Whitby, Cambridge and St. Catharines NET INCOME (LOSS) Due to the items and factors discussed above, Obie generated a net loss of $1.7 million during the six months ending May 31, 2004, compared to a net loss of $1.5 million in the same period of fiscal 2003. 18 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 rates are prime plus 4.5% on the revolver and prime plus 5.5% on the term loans. These margins may be reduced by up to 1.0% depending on the Company's leverage ratio. The effective rates on the revolver and term loans at May 31, 2004 were 8.5% and 9.5% respectively. The first date the margin may be adjusted is the quarter ending November 30, 2004. 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 $900,000 as of May 31, 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 on a quarterly basis. The Company was in compliance with all covenants as of May 31, 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 May 31, 2004 was $4.4 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 May 31, 2004, Obie had outstanding borrowings of $24.7 million, of which $24.6 million was pursuant to credit agreements with CapitalSource Finance LLC, and $100,000 in other notes. The Company's indebtedness is collateralized by substantially all of its assets. At May 31, 2004, available borrowing capacity under the line of credit was approximately $900,000. Obie's net cash used in operating activities was $1.1 million during the six months ended May 31, 2004 , as compared to $153,000 for the same period in fiscal 2003. The difference was primarily due to (1) a decrease in other liabilities, primarily accrued transit fees of $284,000, (2) an increase in 19 prepaid expenses of $302,000, and (3) a decrease in accounts receivable of $1.2 million less in fiscal 2004 when compared to fiscal 2003, and (4) the effect, in fiscal 2004, of the loss on debt extinguishment of $961,000. Net cash used in investing activities was $277,000 and $351,000 during the six month periods ended May 2004 and 2003, respectively. The amounts used in both years were for equipment purchases, primarily automobiles and computing equipment. Net cash used in financing activities was $86,000 for the six month period ended May, 2004, as compared to $778,000 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. 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 20 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 The Company held its annual meeting of shareholders on May 20, 2004. At the meeting, Brian Obie, Richard C. Williams, Stephen A. Wendell, Randall C. Pape and Delores Mord were elected to the Board of Directors for one year terms. Voting on the election of directors was as follows: Votes for Votes Withheld Abstained Brian Obie 5,572,660 412,450 0 Richard C. Williams 5,572,660 412,450 0 Randall C. Pape 5,572,660 412,450 0 Stephen A. Wendell 5,572,660 412,450 0 Delores Mord 5,572,660 412,450 0 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 (b) The Company filed a form 8-K on April 16, 2004 reporting that it had issued a press release on April 15, 2004 reporting earnings for the fiscal quarter ended February 29, 2004. . Signature In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Obie Media Corporation Date July 15, 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 21

Three months ended February 29 and 28, 2004 2003 ---- ---- Net revenues $6,468 $245,056 Production and installation expenses (4,714) (35,689) Occupancy expense (1,969) (121,879) Sales expense (2,847) (43,954) General and administrative expense (10,683) (144,365) ---------------------- --------------------- (Loss) from discontinued operations before income taxes (13,745) (100,831) Income tax expense ---------------------- --------------------- Net (loss) from discontinued operations $(13,745) $(100,831) ====================== =====================

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