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November 13, 1998
OUTDOOR SYSTEMS INC (OSI)
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Operating results for the three and nine months ended September 30, 1998 include the operations of Van Wagner Communications, Inc., the acquisition of which was completed May 22, 1997, the outdoor advertising operations of Minnesota Mining and Manufacturing Company, the acquisition of which was completed August 15, 1997, the several other acquisitions completed during 1997 (collectively, the "1997 Acquisitions"), the several acquisitions completed during the first nine months of 1998 (the "1998 Acquisitions"), including Philadelphia Outdoor, completed on April 7, 1998, Gator Outdoor Advertising, Inc., completed on May 19, 1998 and the acquisition of Vendor, S.A. de C.V. and MM Billboard, S.A. de C.V. completed on July 1, 1998 (the "Mexico Acquisitions").
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Gross revenues increased 46.2% to $216.6 million during the third quarter of 1998 compared to $148.2 million in the third quarter of 1997. Gross revenues increased approximately 11.5% during the third quarter of 1998 compared to the third quarter of 1997 for markets where the Company operated both in the 1998 and 1997 periods. The balance of the increased revenues were a result of the 1997 and 1998 Acquisitions.
Agency commissions were 12.9% and 13.7% of gross revenues in the third quarter of 1998 and the third quarter of 1997, respectively. The decrease in agency commissions as a percentage of gross revenues was primarily a result of a slightly lower proportion of revenues generated through advertising agencies in the 1998 period.
Net revenues increased by 46.9% to $193.9 million in the third quarter of 1998 compared to $132.0 million in the third quarter of 1997, primarily as a result of the increase in gross revenues combined with an increase of $0.9 million of other income. Other income increased primarily due to the inclusion of license fee revenue from perpetual easements acquired in the third quarter of 1997.
Direct advertising expenses increased to $87.8 million in the third quarter of 1998 compared to $64.3 million in the third quarter of 1997. This was primarily a result of the 1997 Acquisitions and the 1998 Acquisitions. As a percentage of net revenues, direct advertising expenses were approximately 45.3% in the third quarter of 1998 compared to 48.7% in the third quarter of 1997 primarily because of efficiencies realized from economies of scale.
General and administrative expenses increased to $9.4 million in the third quarter of 1998 compared to $7.1 million in the third quarter of 1997. This was primarily a result of the 1997 and 1998 Acquisitions. As a percentage of net revenues, general and administrative expenses decreased to approximately 4.9% in the third quarter of 1998 from 5.4% in the third quarter of 1997 primarily because of efficiencies realized from economies of scale.
As a result of the above factors, EBITDA increased by 59.4% to $96.6 million in the third quarter of 1998 from $60.6 million in the third quarter of 1997. The performance of an outdoor advertising business, such as the Company, is measured by its ability to generate EBITDA. EBITDA is defined as operating income (loss) before interest, taxes, depreciation, amortization and foreign currency translation gain (loss). Although EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles, the Company believes that EBITDA is accepted by the outdoor advertising industry as a generally recognized measure of performance and is used by analysts who report publicly on the performance of outdoor advertising companies. Nevertheless, this measure should not be considered in isolation or as a substitute for operating income, net
income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles.
Depreciation and amortization expense increased to $33.7 million for the third quarter of 1998 compared to $23.0 million in the third quarter of 1997, primarily due to the 1997 and 1998 Acquisitions, offset in part by certain assets becoming fully depreciated during the third quarter of 1998. As a percentage of net revenues, depreciation and amortization expense decreased to 17.4% from 17.5% in the third quarter of 1998 compared to the third quarter of 1997 primarily because of higher net revenues for the third quarter of 1998.
Interest expense increased to $37.1 million in the third quarter of 1998 compared to $23.5 million in the third quarter of 1997, as a result of interest expense related to the obligations incurred in connection with the 1997 and certain of the 1998 Acquisitions. As a percentage of net revenues, interest expense increased to 19.1% for the third quarter of 1998 compared to 17.8% for the third quarter of 1997.
The Company recorded an income tax provision of approximately $10.7 million in the third quarter of 1998 compared to $6.3 million in the third quarter of 1997.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Gross revenues increased by 64.9% to $574.4 million during the first nine months of 1998 compared to $348.4 million in the first nine months of 1997. Gross revenues increased approximately 12.0% during the first nine months of 1998 compared to the first nine months of 1997 for markets where the Company operated both in the 1998 and 1997 periods. The balance of the increased revenues were a result of the 1997 and 1998 Acquisitions.
Agency commissions were 13.0% and 13.9% of gross revenues in the first nine months of 1998 and the first nine months of 1997, respectively. The decrease in agency commissions as a percentage of gross revenues was primarily a result of a slightly lower proportion of revenues generated through advertising agencies in the 1998 period.
Net revenues increased by 65.1% to $514.4 million in the first nine months of 1998 compared to $311.6 million in the first nine months of 1997, primarily as a result of the increase in gross revenues combined with an increase of $3.2 million of other income. Other income increased primarily due to the inclusion in 1998 of a full nine months' license fee revenue from perpetual easements acquired in the second quarter of 1997.
Direct advertising expenses increased to $243.9 million in the first nine months of 1998 compared to $161.8 million in the first nine months of 1997. This was primarily a result of the 1997 and 1998 Acquisitions. As a percentage of net revenues, direct advertising expenses decreased to approximately 47.4% in the first nine months of 1998 from 51.9% in the first nine months of 1997 primarily because of efficiencies realized from economies of scale.
General and administrative expenses increased to $26.6 million in the first nine months of 1998 compared to $20.0 million in the first nine months of 1997. This was primarily a result of the 1997 and 1998 Acquisitions. As a percentage of net revenues, general and administrative expenses decreased to approximately 5.2% in the first nine months of 1998 from 6.4% in the first nine months of 1997 primarily because of efficiencies realized from economies of scale.
As a result of the above factors, EBITDA increased by 87.9% to $243.9 million in the first nine months of 1998 from $129.8 million in the first nine months of 1997.
Depreciation and amortization expense increased to $88.5 million in the first nine months of 1998 compared to $48.2 million in the first nine months of 1997, primarily due to the 1997 and 1998 Acquisitions, offset in part by certain assets becoming fully depreciated during the first nine months of 1998. As a percentage of net revenues, depreciation and amortization expense increased to 17.2% from 15.5% in the first nine months of 1998 compared to the first nine months of 1997 primarily because of a full nine months depreciation and amortization for the 1997 Acquisitions.
Interest expense increased to $101.3 million in the first nine months of 1998 from $55.2 million in the first nine months of 1997, as a result of interest expense related to the obligations incurred in connection with the 1997 and certain of the 1998 Acquisitions. As a percentage of net revenues, interest expense increased to 19.7% for the first nine months of 1998 compared to 17.7% for the first nine months of 1997.
The Company recorded an income tax provision of approximately $22.4 million in the first nine months of 1998 compared to $11.3 million in the first nine months of 1997. The Company reported a $6.8 million extraordinary loss, net of $4.5 million tax benefit, in the first nine months of 1997 resulting from one time bridge loan commitment costs in connection with one of the 1997 Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased to $96.6 million at September 30, 1998 compared to $61.2 million at December 31, 1997. This increase resulted primarily from the increase in cash from operations, accounts receivable and taxes recoverable relating to the Mexico Acquisitions, partially offset by the increase in accrued interest.
Net cash provided by operating activities increased by $34.6 million to $116.4 million for the nine months ended September 30, 1998, compared to $81.8 million for the nine months ended September 30, 1997, primarily due to the increase in net income, the effect of a larger depreciation and amortization expense as a component of net income offset in part by changes in working capital accounts and the extraordinary loss in 1997. Net cash used in investing activities decreased to $388.6 million in the first nine months of 1998 from $1,240.1 million in the first nine months of 1997, primarily because of lower cash expenditures required for the 1998 Acquisitions as compared to the 1997 Acquisitions. Net cash provided by financing activities decreased to $283.0 million for the first nine months of 1998 compared to $1,165.1 million for the first nine months of 1997, primarily because of the higher level of borrowings under the senior credit facility used for the 1997 Acquisitions compared with borrowings under the senior credit facility used for the 1998 Acquisitions.
On July 1, 1998, pursuant to an Asset Purchase and Assignment Agreement, dated June 4, 1998, the Company completed the acquisition of substantially all of the assets of Vendor, S.A. de C.V., the outdoor advertising subsidiary of Televisa, S.A. de C.V. for approximately US$216.0 million. In addition, pursuant to an Asset Purchase and Assignment Agreement, dated June 4, 1998, the Company completed the acquisition of substantially all of the outdoor advertising assets of MM Billboard, S.A. de C.V., an outdoor advertising company in northern Mexico, for approximately US$21.9 million. The Company financed the purchase price of these acquisitions with borrowings under the Company's senior credit facility.
On May 19, 1998, the Company acquired Gator Outdoor Advertising, Inc. for approximately $49.8 million in stock and the assumption of approximately $3.7 million of net indebtedness.
On April 7, 1998, the Company acquired Philadelphia Outdoor for approximately $52.8 million in cash. The Company financed the purchase price of this acquisition with borrowings under the Company's senior credit facility.
The Company made approximately $25.9 million of capital expenditures during the first nine months of 1998, an increase from approximately $20.8 million during the first nine months of 1997. Currently, the Company has no material commitments for capital expenditures, although it anticipates ongoing capital expenditures in the ordinary course of business, other than for acquisitions, will be approximately $33.0 million to $38.0 million in each of the next two years.
The Company believes that internally generated funds and available borrowings under the senior credit facility will be sufficient to satisfy its operating cash requirements for at least the next twelve to twenty-four months. The Company may, however, require additional capital to consummate significant acquisitions in the future and there can be no assurance that such capital will be available.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures. The Company has identified all significant applications that will require modification to ensure Year 2000 compliance ("Year 2000 Compliance"). Internal and external resources are being used to make the required modifications and test Year 2000 Compliance for both software and hardware. Although the Company can provide no assurances, the incremental cost to make the business systems Year 2000 compliant is estimated to be no more than approximately $300,000. The Company plans on completing all upgrades by the end of the second quarter of 1999.
In addition, the Company has communicated with others with whom it does significant business to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be material to the Company's financial condition or results of operations in any given year. These costs and the date on which the Company plans to complete the Year 2000 modification and testing processes are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans.
Based on the results of its review of the Year 2000 issues to date, the Company does not believe that a contingency plan to handle Year 2000 problems is necessary at this time and has not developed such a plan. The Company will, however, continue to monitor the Year 2000 compliance program and evaluate the need for a contingency plan to handle the most reasonably likely worst case Year 2000 scenario.
FORWARD-LOOKING STATEMENTS
This report contains certain statements that are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in this report, the words "estimate", "expect", "anticipate", "believe" and similar expressions are intended to identify forward-looking statements. The Company cautions that reliance on any forward-looking statement involves risk and uncertainties, and that although the Company believes that the assumptions on which the forward-looking statements contained herein are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be incorrect. The uncertainties in this regard include, but are not limited to, those identified in this report and the risk factors discussed under "Risk Factors" in the Company's Prospectus dated July 24, 1997 included in the Company's Registration Statement on Form S-4 (Reg. No. 333-30957).
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