10-Q 1 omc_10q40831.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 August 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 October 1, 2004, 6,001,442 shares of the issuer's common stock were outstanding. OBIE MEDIA CORPORATION FORM 10-Q INDEX

OBIE MEDIA CORPORATION Consolidated Condensed Balance Sheets ASSETS

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

3 OBIE MEDIA CORPORATION Consolidated Condensed Statement of Cash Flows (Unaudited) Nine Months Ended August 31, - 2004 2003 ----------------------------- Cash Flows From Operating Activities: Net loss (1,142,191) $ (1,911,049) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,450,066 1,242,061 Loss on debt extinguishment 961,411 - Compensation expense from restricted stock 65,781 - Changes in assets and liabilities: (Increase) decrease in: Accounts receivable 280,938 1,960,681 Prepaid and other assets (1,145,861) (618,688) Deferred income taxes 1,158 - Increase (decrease) in: Accounts payable 201,296 (62,485) Other liabilities (253,865) (442,820) ------------- ------------- Net cash used in operating activities 418,733 167,700 ------------- ------------- Cash Flows From Investing Activities: Capital expenditures (1,195,382) (413,725) ------------- ------------- Net cash used in investing activities (1,195,382) (413,725) ------------- ------------- Cash Flows From Financing Activities: Net borrowings on line of credit 1,044,731 810,000 Borrowings of long-term debt 20,215,535 92,679 Payments on long-term debt (20,345,125) (1,480,555) Loan fees incurred with financing (1,241,432) - ----------------------------- Net cash used in financing activities (326,291) (577,876) ----------------------------- Effect of exchange rate changes on cash (42,397) (51,915) Net decrease in cash (1,145,337) (875,816) Cash, beginning of period 1,943,169 1,815,886 ----------------------------- Cash, end of period $ 797,832 $ 940,070 ============================= 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 August 31, 2004 and November 30, 2003, and the results of operations and cash flows of the Company for the three and nine months ended August 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 nine month periods ended August 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 nine month periods ended August 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 79.76% 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 month periods ended August 31, 2004 and 2003, the total value of the options granted was approximately $7,100 and $7,200, respectively. For the nine month periods ended August 31, 2004 and 2003 the total value of options granted was 5 approximately $139,000 and $20,600 respectively. The value 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 No. 123, the Company`s net income (loss) and pro forma net income (loss) per share would have been reported as follows: THREE MONTHS ENDED AUGUST 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The effects of applying SFAS No. 123 for providing pro forma disclosure for the three and nine month periods ended August 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. 6 The Company entered into restricted stock agreements with eight executives in November 2003 and February 2004 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, 87,945 shares of restricted stock were exchanged for 175,890 stock options. 71,508 shares vest over three and one-half years and 16,437 shares vest over five years. The fair value of the restricted stock on the date of grants amounted to $247,184, of which $65,781 was recorded as compensation expense during the nine months ended August 31, 2004. Unamortized compensation expense at August 31, 2004 totaled $146,523 and has been recorded as Deferred Stock Based Compensation in the balance sheet. The restricted stock shares were issued in December 2003 and June 2004. 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 parties entered into a settlement agreement effective May 28, 2002 with respect to outstanding issues. The settlement agreement required the Company to pay the CTA approximately $17 million, substantially less than the original contracted guaranteed payment of $21.8 million. 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 agreement includes a $17.5 million term loan and a $6.0 million revolving line of credit to Obie Media Corporation. Both obligations mature on November 30, 2008. The agreement 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. Funds from the revolving line of credit were 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 revolving line of credit 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 revolving line of credit and term loans at August 31, 2004 were 9.0% and 10.0%, 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 August 31, 2004. 7 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 quarter ending August 31, 2004 and have found no instances of impairment. Goodwill at August 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 nine months ended August 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: Nine Months ended August 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 11.3% 7.3% -------- -------- Effective income tax rate 11.3% 7.3% ======== ======== 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 August 31, 2004 2003 ---- ---- Basic Shares (weighted average) 6,000,464 5,908,577 Dilutive effect of stock options 41,054 - ---------- ---------- Diluted shares (weighted average) 6,041,518 5,908,577 ========== ========== 8 Nine Months Ended August 31, 2004 2003 ---- ---- Basic Shares (weighted average) 5,989,180 5,908,577 Dilutive effect of stock options 18,506 - ---------- ---------- Diluted shares (weighted average) 6,007,686 5,908,577 ========== ========== At August 31, 2004 and 2003 options to acquire 521,990 and 654,908 shares, respectively, of the Company's common stock were outstanding. 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 nine month periods ended August 31, 2004 and 2003 respectively. 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 (a) economically not viable - and (b) 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 U.S. 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 - and 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. 9 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 regarding its obligations under certain of its guarantees. FIN 45 also requires a guarantor to 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. 10 11. RECLASSIFICATIONS Certain amounts previously reported in the Company's financial statements as of August 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. Resolution, however, is not expected to occur quickly, and the ultimate outcome cannot presently be predicted. In the opinion of the Company's management, the ultimate resolution of these claims and proceedings will not likely to have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. The Company also 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, their ultimate outcome cannot presently be predicted. Trial of this action is currently scheduled for February 2005. 13. SUBSEQUENT EVENT On September, 17, 2004, Obie entered into a definitive agreement to be merged with Lamar Advertising Company. Under the terms of the agreement Lamar will acquire all of Obie's outstanding stock for approximately $43 million or approximately $7.00 per share of Obie common stock. Lamar expects to issue an aggregate of approximately 1.0 million shares of Lamar Class A common stock in the merger. The exact exchange ratio is to be based upon the average closing price of Lamar stock for the twenty trading days three days prior to closing. Closing is expected to occur on or about January 15, 2005. In conjunction with executing the above agreement, the Company's board of directors accelerated vesting on all outstanding stock options, and effective September 30, 2004, terminated the Company's employee stock purchase plan. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS -------------------------- 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. 12 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 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 therefore is uncertain. We asses the likelihood that our deferred tax asset balance will be recovered from future taxable income on a quarterly basis. 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 13 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 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 August 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 likely have a material adverse effect on the consolidated financial condition, results of operations or cash flows of the Company. The Company also 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, their ultimate outcome cannot presently be predicted. Trial is presently scheduled in this action for February 2005. 14 RECENT DEVELOPMENTS On September 17, 2004 the Company entered into a definitive agreement to be merged with Lamar Advertising Company. Under the terms of the agreement Lamar will acquire all of Obie's outstanding stock for approximately $43 million, or approximately $7.00 per share of Obie common stock. Lamar expects to issue an aggregate of approximately 1.0 million shares of Lamar Class A common stock in the merger, the exact exchange ratio to be based upon the average closing price of Lamar stock for the twenty trading days three days prior to closing. Closing is expected to occur on or about January 15, 2005. In conjunction with executing the above agreement, the Company's board of directors accelerated vesting on all outstanding stock options, and effective September 30, 2004, terminated the Company's employee stock purchase plan. On January 14, 2004 Obie entered into a new long-term financing arrangement with CapitalSource Finance LLC. The agreement includes a $17.5 million term loan and a $6.0 million revolving line of credit with Obie Media Corporation, both of which mature on November 30, 2008. The agreement 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 rates are prime plus 4.5% on the revolving line of credit 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 revolving line of credit and term loans at August 31, 2004 were 9.0% and 10.0%, 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 revolving line of credit were used to pay off the existing revolving line of credit with the previous lender and to fund closing costs and working capital needs. Approximately $1.1 million is available for future borrowings under the revolving line of credit as of August 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 revolving line of credit 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 August 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 AUGUST 2004 AND 2003 RESULTS OF CONTINUING OPERATIONS REVENUES. Our 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 August 31, 2004 increased $1.8 million, or 15.6%, to $13.1 million from $11.4 million for the same period in fiscal 2003. Transit net revenues increased $1.5 15 million, or 15.9%, to $11.0 million for the three months ended August 31, 2004 from $9.5 million for the same period of fiscal 2003. The increase reflects our continuing success in selling annual, production included transit advertising contracts to our customers. Outdoor net revenues increased $261,000, or 14.1% to $2.1 million for the three months ended August 31,2004 compared to $1.9 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 $313,000, or 21.3%, to $1.8 million for the three months ended August 31, 2004 from $1.5 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 16.2% of net transit revenues for the three months ended August 31, 2004 as compared to 15.5% of transit net revenues for the same period of fiscal 2003. The increase is primarily due to the fact that the Company has sold this year, when compared to a year ago, a higher portion of long-term versus short-term business which has a higher production cost component. TRANSIT AND OUTDOOR OCCUPANCY EXPENSES. These expenses include fees paid to transit authorities and lease payments to landowners for billboard sites. Under our 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 decreased approximately $64,000, or 1.2%, to $5.2 million for the three months ended August 31, 2004 compared to $5.3 million in the same period of fiscal 2003. The slight decrease was related primarily to lower minimum guarantees in transit contracts that were renewed during 2004. These expenses, as a percentage of net revenues, decreased to 39.8% in the three months ended August 31, 2004 compared to 46.5% 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 $179,000, or 9.2%, to $2.1 million for the three months ended August 31, 2004 compared to $1.9 million in the same period in fiscal 2003 due to increased sales. However, selling expenses, as a percentage of net revenues, dropped to 16.1% for the three months ended August 31, 2004 compared to 17.1% in the same period in fiscal 2003. 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 $345,289, or 17.9% to $2.3 million for the three months ended August 31, 2004 as compared to $1.9 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 ($190,000) and (2) an increase in legal fees incurred in connection with the defense of the VIA lawsuit ($175,000). 16 DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased $41,000, or 9.0 %, to $491,000 in the three months ended August 31, 2004 compared to $451,000 for the same period in fiscal 2003. The increase was due to increased loan cost amortization expense relative to the new financing arrangements consummated in January 2004. OPERATING INCOME. Due to the events and factors discussed above we generated operating income of $1.2 million in the three months ended August 31, 2004 compared to operating income of $281,000 in the same period of fiscal 2003. INTEREST EXPENSE. Interest expense increased $16,000, or 2.5%, to $641,000 for the three months ended August 31, 2004 compared to $625,000 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 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 $597,000 in the three months ended August 31, 2004 compared to an operating loss of $344,000 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 our ability to manage our 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 months ended August 31, 2004 include the operations of San Antonio, Pittsburgh and Bridgeport. For the same period of fiscal 2003 discontinued operations include the operations of Chicago, 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 $511,000 during the three months ended August 31, 2004, compared to a net loss of $407,000 in the same period of fiscal 2003. 17 COMPARISON OF THE NINE MONTHS ENDED AUGUST 31, 2004 AND 2003 RESULTS OF CONTINUING OPERATIONS REVENUES. Our 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 nine months ended August 31, 2004 increased $4.3 million, or 14.0%, to $35.0 million from $30.7 million for the same period in fiscal 2003. Transit net revenues increased $3.4 million, or 13.3%, to $28.8 million for the nine months ended August 31, 2004 compared to $25.5 million for the same period of fiscal 2003. The increase reflects our continuing success in selling annual, production included transit advertising contracts to our customers. Outdoor net revenues increased $928,000, or 17.7% to $6.2 million for the nine months ended August 31, 2004 compared to $5.2 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 $604,000, or 13.8%, to $5.0 million for the nine months ended August 31, 2004 compared to $4.4 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 17.3% of net transit revenues for the nine 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 our 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 $230,000, or 1.7%, to $13.7 million for the nine months ended August 31, 2004 compared to $13.5 million in the same period of fiscal 2003. The increase was related primarily to increased land lease expenses for billboard sites ($163,000). These expenses, as a percentage of net revenues, decreased to 39.1% in the nine month period ended August 31, 2004 compared to 43.8% 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 $732,000, or 12.7%, to $6.5 million for the nine months ended August 31, 2004 compared to $5.8 million in the same period in fiscal 2003. Selling expenses, as a percentage of net revenues, decreased to 18.6% for the nine months ended August 31, 2004 compared to 18.8% in the same period in fiscal 2003. The decrease was primarily due to variable sales costs (sales commissions and incentives) 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. 18 General and administrative expenses increased $1.1 million, or 20.5% to $6.6 million for the nine months ended August 31, 2004 as compared to $5.4 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 ($511,000), (2) management performance incentives accrued in the fiscal 2004 period where none were accrued in fiscal 2003 ($127,000), (3) rent on the Chicago office space in fiscal 2004 ($180,000), and (4) legal fees incurred in defending the VIA lawsuit ($185,000) DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses increased $81,000, or 5.9 %, to $1.5 million in the nine months ended August 31, 2004 compared to $1.4 million for the same period in fiscal 2003. The increase was due to increased loan cost amortization expense relative to the new financing arrangements consummated in January 2004. OPERATING INCOME. Due to the events and factors discussed above we generated operating income of $1.8 million in the nine months ended August 31, 2004 compared to an operating loss of $258,000 in the same period of fiscal 2003. INTEREST EXPENSE. Interest expense increased $61,000, or 3.5%, to $1.8 million for the nine months ended August 31, 2004 compared to $1.75 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 $979,000 in the nine months ended August 31, 2004 compared to an operating loss of $1.5 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. 19 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 nine month period of fiscal 2004 include the operations of San Antonio, Pittsburgh and Bridgeport. The same period of fiscal 2003 includes the operations of Chicago; San Antonio; Cincinnati; Kitsap, Washington; Santa Cruz, California; Bridgeport; and the Ontario, Canada markets of Pickering, Whitby, Cambridge and St. Catharines. NET INCOME (LOSS) Due to the items and factors discussed above, Obie generated a net loss of $1.1 million during the nine months ended August 31, 2004, compared to a net loss of $1.9 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 includes a $17.5 million term loan and a $6.0 million revolving line of credit. Both obligations 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 revolving line of credit 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 revolving line of credit and term loans at August 31, 2004 were 9.0% and 10.0% 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 revolving line of credit were used to pay off the existing revolver with the previous lender and to fund closing costs and working capital needs. Approximately $1.1 million of future borrowings is available under the revolving line of credit. 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 revolving line of credit 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 August 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. 20 The Company has historically satisfied our working capital requirements with cash from operations and revolving credit borrowings. Our working capital was $4.4 million at August 31, 2004 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 August 31, 2004, we had outstanding borrowings of $24.5 million, of which $24.2 million was pursuant to credit agreements with CapitalSource Finance LLC, and $300,000 in other notes. The Company's indebtedness is collateralized by substantially all of its assets Our net cash provided from operating activities was $419,000 during the nine months ended August 31, 2004, as compared to $168,000 for the same period in fiscal 2003. The difference was primarily due to (1) a decrease in year to date net loss ($769,000), (2) a smaller decrease in fiscal 2004 when compared to fiscal 2003 in accounts receivable ($1.7 million), and (3) the effect, in fiscal 2004, of the loss on debt extinguishment ($961,000). Net cash used in investing activities was $1.2 million and $414,000 during the nine month periods ended August 31, 2004 and 2003, respectively. The amounts were used in both years for equipment purchases, primarily automobiles and computing equipment; the primary difference in the nine months ended August 31, 2004 is due to billboard construction and upgrades. Net cash used in financing activities was $326,000 for the nine month period ended August 31, 2004, as compared to $578,000 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. Our future acquisitions may require additional debt or equity financing. SEASONALITY Our 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. 21 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 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 matter was submitted to the shareholders for a vote during the three month period ended August 31, 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 (b) The Company filed a form 8-K on July 15, 2004 reporting that it had issued a press release on July, 2004 reporting earnings for the fiscal quarter ended August 31, 2004. The Company filed an 8-K on July 28, 2004 announcing that it had appointed Moss Adams LLP as its auditors, replacing PricewaterhouseCoopers LLP. The Company filed an 8-K on September 20, 2004 announcing that it had entered into a definitive agreement to merge with Lamar Advertising Company. . 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 October 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 22

OBIE MEDIA CORP 10-Q