UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2005
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-112246
Morris Publishing Group, LLC
Morris Publishing Finance Co.*
(Exact name of Registrants as specified in their charters)
| Georgia | 58-1445060 | |
| Georgia | 20-0183044 | |
| (State of organization) | (I.R.S. Employer Identification Numbers) |
| 725 Broad Street | ||
| Augusta, Georgia | 30901 | |
| (Address of principal executive offices) | (Zip Code) |
(706) 724-0851
(Registrants’ Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if either Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n/a
Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, or non-accelerated filers. See definition of “accelerated filer and large accelerated filer” in Rule 12-b2 of the Exchange Act. Check one:
Large Accelerated Filer ¨ Accelerated Filer ¨ Non-Accelerated Filer x
Indicate by check mark whether the Registrant Morris Publishing Group, LLC is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate by check mark whether the Registrant Morris Publishing Finance Co. is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The aggregate market value of the voting and non-voting common equity of the Registrants held by non-affiliates is $0 as of June 30, 2004 and currently.
* Morris Publishing Finance Co. meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.
EXPLANATORY NOTE
We are filing this Amendment No. 1 on Form 10-K/A solely to correct a typographical error in the Report of Independent Registered Public Accounting Firm. The typographical error was the inadvertent omission of the signature of Deloitte & Touche LLP on the Report of Independent Registered Public Accounting Firm contained in Item 8. Financial Statements and Supplementary Data of our original Annual Report on Form 10-K filed on March 31, 2006 (Original Report). There are no changes to the financial or supplemental information contained in Part II, Item 8 or Part IV, Item 15(c). This Amendment relates solely to the Report of Independent Registered Public Accounting Firm.
In order to comply with certain technical requirements of the Securities and Exchange Commission’s rules in connection with the filing of this amendment on Form 10-K/A, we are including in this amendment the complete text of Part II, Item 8,Financial Statements and Supplementary Data, and Part IV, Item 15(c),Financial Statement Schedule-Valuation and Qualifying Accounts. We are also including in this amendment updated certifications of our principal executive and principal financial officers (Exhibits 31.1, 31.2 and 32.1).
This Amendment No. 1 to our Annual Report on Form 10-K as originally filed on March 31, 2006 continues to speak as of the date of the Original Report, and we have not updated the disclosures contained in this Amendment No. 1 to reflect any events that occurred at a date subsequent to the filing of the Original Report.
ii
| Page | ||||
| Part II | ||||
Item 8. | Financial Statements and Supplementary Data | 1 | ||
| Part IV | ||||
Item 15. | Exhibits and Financial Statement Schedules | 25 | ||
iii
Item 8—Financial Statements and Supplementary Data
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Morris Communications Company, LLC and Morris Publishing Group, LLC:
We have audited the accompanying consolidated balance sheets of the Morris Publishing Group, LLC and subsidiaries (formerly the Morris Communications Company, LLC newspaper business segment) (the “Company”) as of December 31, 2005 and 2004 and the related consolidated statements of income, member’s deficit, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Morris Publishing Group, LLC as of December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole; present fairly in all material respects the information set forth therein.
As discussed in Note 1, the 2003 consolidated financial statements have been restated for a change in reporting entity.
/s/ Deloitte & Touche LLP |
| Atlanta, Georgia |
| March 31, 2006 |
2
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Consolidated balance sheets
| December 31, | ||||||||
(Dollars in thousands) | 2005 | 2004 | ||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 12,458 | $ | 20,098 | ||||
Accounts receivable, net of allowance for doubtful accounts of $2,227 and $2,981 at December 31, 2005 and 2004, respectively | 54,660 | 53,973 | ||||||
Inventories | 4,773 | 4,645 | ||||||
Deferred income taxes, net | 2,632 | 2,556 | ||||||
Due from Morris Communication | 1,387 | 1,323 | ||||||
Prepaid and other current assets | 1,360 | 1,715 | ||||||
Total current assets | 77,270 | 84,310 | ||||||
LOAN RECEIVABLE FROM MORRIS COMMUNICATIONS | — | 1,500 | ||||||
NET PROPERTY AND EQUIPMENT | 149,811 | 155,198 | ||||||
OTHER ASSETS: | ||||||||
Restricted cash held in escrow | 6,780 | — | ||||||
Goodwill | 186,034 | 186,034 | ||||||
Intangible assets, net of accumulated amortization of $58,402 and $52,842 at December 31, 2005 and 2004, respectively | 15,451 | 21,011 | ||||||
Deferred loan costs and other assets, net of accumulated amortization of loan costs of $3,062 and $2,024 at December 31, 2005 and 2004, respectively | 12,723 | 13,138 | ||||||
| 220,988 | 220,183 | |||||||
Total assets | $ | 448,069 | $ | 461,191 | ||||
| LIABILITIES AND MEMBER’S DEFICIT | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 12,359 | $ | 9,841 | ||||
Accrued interest | 9,368 | 8,802 | ||||||
Current maturities of long-term debt | — | 6,500 | ||||||
Deferred revenues | 17,009 | 16,962 | ||||||
Accrued employee costs | 13,662 | 12,359 | ||||||
Other accrued liabilities | 1,517 | 2,270 | ||||||
Total current liabilities | 53,915 | 56,734 | ||||||
LONG-TERM DEBT, LESS CURRENT PORTION | 521,000 | 543,500 | ||||||
DEFERRED INCOME TAXES, LESS CURRENT PORTION | 21,056 | 24,227 | ||||||
POSTRETIREMENT BENEFITS DUE TO MORRIS COMMUNICATIONS | 23,939 | 22,314 | ||||||
OTHER LONG-TERM LIABILITIES | 3,471 | 3,552 | ||||||
Total liabilities | $ | 623,381 | $ | 650,327 | ||||
COMMITMENTS AND CONTINGENCIES (NOTE 9) | ||||||||
MEMBER’S DEFICIT | ||||||||
Member’s deficiency in assets | (159,657 | ) | (189,136 | ) | ||||
Loan receivable from Morris Communications | (15,655 | ) | — | |||||
Total member’s deficit | (175,312 | ) | (189,136 | ) | ||||
Total liabilities and member’s deficit | $ | 448,069 | $ | 461,191 | ||||
See notes to consolidated financial statements.
3
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Consolidated statements of income
| Year Ended December 31, | ||||||||||||
(Dollars in thousands) | 2005 | 2004 | 2003 | |||||||||
NET OPERATING REVENUES: | ||||||||||||
Advertising | $ | 378,338 | $ | 367,560 | $ | 348,798 | ||||||
Circulation | 70,615 | 70,197 | 71,519 | |||||||||
Other | 16,154 | 17,977 | 18,093 | |||||||||
Total net operating revenue | 465,107 | 455,734 | 438,410 | |||||||||
OPERATING EXPENSES: | ||||||||||||
Labor and employee benefits | 176,832 | 177,905 | 172,261 | |||||||||
Newsprint, ink and supplements | 55,932 | 53,848 | 50,608 | |||||||||
Other operating costs (excluding depreciation and amortization) | 127,688 | 121,353 | 115,434 | |||||||||
Depreciation and amortization expense | 21,965 | 21,097 | 20,535 | |||||||||
Total operating expenses | 382,417 | 374,203 | 358,838 | |||||||||
OTHER EXPENSES (INCOME): | ||||||||||||
Interest expense, including amortization of debt issuance costs | 35,662 | 32,281 | 26,088 | |||||||||
Loss on extinguishment of debt | 986 | — | 5,957 | |||||||||
Interest income | (120 | ) | (1,249 | ) | (122 | ) | ||||||
(Gain) loss on sale of fixed assets | (4,810 | ) | (181 | ) | 323 | |||||||
Other, net | (94 | ) | 678 | (260 | ) | |||||||
Total other expenses, net | 31,624 | 31,529 | 31,986 | |||||||||
INCOME BEFORE INCOME TAXES | 51,066 | 50,002 | 47,586 | |||||||||
PROVISION FOR INCOME TAXES | 19,776 | 19,694 | 18,744 | |||||||||
NET INCOME | $ | 31,290 | $ | 30,308 | $ | 28,842 | ||||||
See notes to consolidated financial statements.
4
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Consolidated statements of member’s deficit
(Dollars in thousands) | ||||
DECEMBER 31, 2002 - | $ | (153,909 | ) | |
Net income | 28,842 | |||
Net change due to allocations and intercompany reimbursements with Morris Communications | (45,695 | ) | ||
DECEMBER 31, 2003 - As Previously Reported | (170,762 | ) | ||
Change in reporting entity (Note 1) | 1,301 | |||
DECEMBER 31, 2003- As Restated | (169,461 | ) | ||
Net income | 30,308 | |||
Change in reporting entity (Note 1) | 17 | |||
Cash dividend payment to Morris Communications | (50,000 | ) | ||
DECEMBER 31, 2004 - | (189,136 | ) | ||
Net income | 31,290 | |||
Loan receivable from Morris Communications | (15,655 | ) | ||
Property dividend distribution to Morris Communications | (1,811 | ) | ||
DECEMBER 31, 2005- | $ | (175,312 | ) | |
See notes to consolidated financial statements.
5
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Consolidated statements of cash flows
| December 31, | ||||||||||||
(Dollars in thousands) | 2005 | 2004 | 2003 | |||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 31,290 | $ | 30,308 | $ | 28,842 | ||||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 21,965 | 21,097 | 20,535 | |||||||||
Deferred income taxes | (3,247 | ) | 1,601 | 974 | ||||||||
Amortization of debt issuance costs | 1,465 | 1,612 | 1,337 | |||||||||
(Gain) loss on disposal of property and equipment, net | (4,810 | ) | (181 | ) | 323 | |||||||
Loss on extinguishment of debt | 986 | — | 5,957 | |||||||||
Changes in assets and liabilities, net of effects of businesses acquired: | ||||||||||||
Accounts receivable | (687 | ) | (1,751 | ) | (2,202 | ) | ||||||
Inventories | (128 | ) | (849 | ) | 823 | |||||||
Prepaids and other current assets | 354 | (629 | ) | (118 | ) | |||||||
Other assets | (197 | ) | (1,183 | ) | (981 | ) | ||||||
Accounts payable | 2,105 | (3,081 | ) | 2,690 | ||||||||
Accrued employee costs | 1,303 | 1,769 | (144 | ) | ||||||||
Accrued interest | 566 | (187 | ) | 5,233 | ||||||||
Due from Parent | (64 | ) | (1,650 | ) | — | |||||||
Deferred revenues and other liabilities | (706 | ) | 5,958 | 1,577 | ||||||||
Postretirement obligations due to Morris Communications | 1,625 | 2,767 | 2,696 | |||||||||
Other long-term liabilities | (81 | ) | 147 | 1,134 | ||||||||
Net cash provided by operating activities | 51,739 | 55,748 | 68,676 | |||||||||
INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures | (14,155 | ) | (21,514 | ) | (17,704 | ) | ||||||
Rectricted cash held in escrow | (6,780 | ) | — | — | ||||||||
Proceeds from sale of property and equipment | 6,549 | 1,315 | — | |||||||||
Acquisitions of businesses, net of cash acquired | — | (785 | ) | (108 | ) | |||||||
Net cash used in investing activities | (14,386 | ) | (20,984 | ) | (17,812 | ) | ||||||
FINANCING ACTIVITIES: | ||||||||||||
Proceeds from revolving credit facility | 46,000 | — | — | |||||||||
Proceeds from/(repayment of) long-term debt | (75,000 | ) | 25,000 | 525,000 | ||||||||
Repayment of long-term debt due Morris Communications | — | — | (516,000 | ) | ||||||||
Payment of debt issuance costs | (1,838 | ) | — | (12,683 | ) | |||||||
Loan receivable from Morris Communications | (14,155 | ) | 3,000 | (4,500 | ) | |||||||
Cash dividends paid to Morris Communications | — | (50,000 | ) | — | ||||||||
Net change due to allocations and intercompany reimbursements with Morris Communications | — | — | (43,340 | ) | ||||||||
Net cash used in financing activities | (44,993 | ) | (22,000 | ) | (51,523 | ) | ||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (7,640 | ) | 12,764 | (659 | ) | |||||||
CASH AND CASH EQUIVALENTS, beginning of period | 20,098 | 7,334 | 7,993 | |||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 12,458 | $ | 20,098 | $ | 7,334 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||||||
Interest paid | $ | 33,630 | $ | 30,731 | $ | 19,587 | ||||||
Income taxes paid to Morris Communications | $ | 22,698 | $ | 18,045 | $ | 17,770 | ||||||
Cash dividends paid to Morris Communications | $ | — | $ | 50,000 | $ | — | ||||||
Property dividends distributed to Morris Communications | $ | 1,811 | $ | — | $ | — | ||||||
See notes to consolidated financial statements.
6
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Notes to consolidated financial statements as of years ended December 31, 2005, 2004 and 2003
(Dollars in thousands)
1. Nature of operations and summary of significant accounting policies
Basis of presentation and nature of operations—Morris Publishing Group, LLC (“Morris Publishing” or the “Company”) was formed in November 2001 from the newspaper assets of Morris Communications Company, LLC (“Morris Communications” or the “Parent”). Prior to the formation of Morris Publishing, the newspaper business segment operated as a division of Morris Communications. Between its formation and July 2003, Morris Publishing operated as MCC Newspapers, LLC.
These consolidated financial statements of Morris Publishing, a wholly owned subsidiary of Morris Communications, include the consolidated financial statements of Morris Publishing subsequent to July 2003 and the combined financial statements of the Morris Communications Company, LLC Newspaper Business Segment for all periods prior to July 2003. In November 2001 and August 2003, Morris Communications legally transferred the net assets of its newspaper business segment to the Company. As a result, the Company has accounted for the assets and liabilities at historical cost, in a manner similar to that in pooling of interest accounting. The assets and operations of the Morris Communications newspaper business segment have been presented in the accompanying consolidated financial statements as if they were a separate stand-alone entity for all periods presented.
The accompanying consolidated financial statements furnished here reflect all adjustments, which in the opinion of management, are necessary for the fair presentation of the Company’s financial position and results of operations. All such adjustments are of a normal recurring nature.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and present the Company’s financial position, results of operations, and cash flows. Significant intercompany transactions have been eliminated in consolidation. As further described in Note 9, certain expenses, assets and liabilities of Morris Communications have been allocated to the Company. These allocations were based on estimates of the proportion of corporate expenses, assets and liabilities related to the Company, utilizing such factors as revenues, number of employees, salaries and wages expenses, and other applicable factors. In the opinion of management, these allocations have been made on a reasonable basis. The costs of these services charged to the Company may not reflect the actual costs the Company would have incurred for similar services as a stand-alone company.
The Company and Morris Communications have executed various agreements with respect to the allocation of assets, liabilities and costs. See Note 9.
Change in Reporting Entity—In April 2004, Morris Communications contributed the ownership ofSkirt!Charleston, a free monthly publication for women, to the Company. As a result, there was a change in reporting entity in 2004 and the Company restated its beginning member’s interests and its 2003 consolidated financial statements to reflect the net assets and results of the operations for the new reporting entity from November 2003, the time of theSkirt!Charleston acquisition by Morris Communications.
All transfers have been recorded at historical carrying amounts. Member’s interest at December 31, 2003 was increased by $1,301 for the net assets contributed. The net operating income (loss) of the contributed entity was ($3) and $20 during the fourth quarter 2003 and first quarter 2004, respectively.
7
Business segments—The Company’s various newspapers engage in business activities and incur expenses. These operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about the resources to be allocated to assess performance. The Company has aggregated its various newspaper operations into a single operating segment, as these newspapers have similar long-term economic characteristics. These economic characteristics include the nature of the products and production processes, the methods used to distribute their products and the type or class of customers for their products.
Use of estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.
Revenue recognition—Advertising revenues are recognized when the advertisements are printed and distributed. Circulation revenues are recorded as newspapers are delivered over the subscription term. Amounts billed for circulation and subscriptions prior to such period are recorded as deferred revenues in the accompanying consolidated financial statements. Other revenue is recognized when the related product or service has been delivered.
Deferred circulation revenue—Deferred circulation revenue arises as a normal part of business from prepaid subscription payments for newspapers and other publications. Revenue is realized in the period the publication is delivered.
Cash and Cash Equivalents—Cash is stated at cost and the Company considers all liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company had no outstanding debt instruments at December 31, 2005.
Fair Value of Financial Instruments—The Company’s financial instruments consist primarily of cash equivalents, accounts receivable, notes receivable, accounts payable and long-term debt. At December 31, 2005 and 2004, the fair value of the senior subordinated notes were approximately $283,125 and $306,000, respectively. At December 31, 2005, the fair value on the Tranche A term loan and revolver were estimated at par. At December 31, 2004, the fair value of the Tranche A and Tranche C term loans totaled $251,250 and the revolver was estimated at par. In management’s opinion, the carrying amounts of cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short maturity of these instruments. For further explanation of the Company’s debt instruments, see Note 6.
Accounts Receivable—Accounts receivables are mostly from advertisers and newspaper subscribers. We extend credit and set the appropriate reserves for receivables, which is a subjective decision based on the knowledge of the customer and industry. The level of credit is influenced by each customer’s credit history with us and other industry specific data. In the past, the credit limits and the management of the overall credit portfolio was decentralized, however, the Company has recently centralized this function as part of the Company’s shared services initiative.
The Company provides an allowance for doubtful accounts equal to estimated uncollectible accounts. The Company’s estimate is based on regular review of individual account balances over 90 days, historical collection experience and consideration of other factors such as customer’s financial status and other business risk. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. Write-offs of uncollectible accounts receivable net of recoveries were $2,176, $3,024 and $2,607 in 2005, 2004 and 2003, respectively.
Inventories—Inventories consist principally of newsprint, prepress costs and supplies, which are stated at the lower of cost or market value. The cost of newsprint inventory, which represented approximately 64% and 70% of the Company’s inventory at December 31, 2005 and 2004, respectively, is determined by the last in, first out
8
method. Costs for newsprint inventory would have been $1,848 and $1,214 higher at December 31, 2005 and 2004, respectively, had the FIFO method been used for all inventories. The turnover of inventory ranges from 30 days to 60 days depending on availability and market conditions. Obsolete inventory is generally not a factor.
Net Property and Equipment—Property and equipment is stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the expected useful lives of the assets, which range from seven to 40 years for buildings and improvements, five to 11 years for machinery and production equipment, and five to 10 years for office equipment, fixtures and vehicles.
The cost and related accumulated depreciation of property and equipment that are retired or otherwise disposed of are relieved from the respective accounts, and the resulting gain or loss is reflected in the results of operations.
Construction in progress (“CIP”) is progress payments on uninstalled machinery and equipment or newly acquired fixed assets not yet placed in service.
Repairs and replacement costs on the property and equipment are expensed in the period the cost is incurred.
Goodwill and Intangible Assets—Intangible assets consist primarily of goodwill, advertiser and subscriber relationships, mastheads, domain names and noncompetition agreements. Mastheads have an indefinite life and are not being amortized. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets,the Company does not amortize goodwill and indefinite-lived intangible assets. Intangible assets with finite lives are amortized over their estimated useful lives, which generally range from three to 20 years. Other finite-lived intangible assets, noncompetition agreements and domain names, are amortized on a straight-line basis over the terms of the related agreements or their estimated useful lives.
The Company is required to test its goodwill and indefinite-lived intangible assets (including mastheads) for impairment on an annual basis, which occurs on December 31st. Additionally, goodwill and other indefinite-lived intangible assets are tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has performed the required impairment tests of goodwill and indefinite-lived intangible assets, which resulted in no impairments.
Impairment of long-lived assets—In accordance with SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets, long-lived assets, other than indefinite-lived intangible assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are reported in the period in which the recognition criteria are first applied, based on the undiscounted cash flows. Long-lived assets and certain intangibles to be disposed of are reported at the lower of carrying amount or estimated fair value less cost to sell. No impairment losses have been recognized since adoption of this standard on January 1, 2002.
Income taxes—The Company is a single member limited liability company and is not subject to income taxes. However, the Company’s results are included in the consolidated federal income tax return of Morris Communications. Tax provisions are settled through the intercompany account and Morris Communications makes income tax payments based on results of the Company. The Company and Morris Communications have entered into a formal tax sharing agreement, under which the Company is required to provide for its portion of income taxes. Under the terms of the agreement, the Company remits taxes for its current tax liability to Morris Communications. Accordingly, the Company recognizes an allocation of income taxes in its separate financial statements in accordance with the agreement.
The Company accounts for income taxes under the provisions of the liability method (SFAS 109- “Accounting for Income Taxes”), which requires the recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The recognition of future tax benefits is required to the extent that realization of such benefits is more likely than not.
9
Member’s deficit—Member’s deficit includes the original investment in the Company by Morris Communications, accumulated income of the Company, and the distributions to and contributions from Morris Communications, including those arising from the forgiveness of the net intercompany receivables and payables between Morris and the Company. Management of the Company and Morris Communications has agreed that all such intercompany amounts are deemed distributions and contributions. See Note 9.
Reclassification of Loan Receivable from Morris Communications—Prior to the third quarter period ended September 30, 2005, the Company had reported the loan receivable from Morris Communications (see Note 9) as a long-term asset on its balance sheets and had reported interest income related to the loan receivable in the statement of income. Based on the historical practice of the Company and its Parent in settling a significant portion of the outstanding loan receivable balance during 2004 with a dividend, the Company concluded that the arrangement should be considered in substance a capital distribution transaction and classified as contra-equity within member’s deficit. As a result of this conclusion, the Company has classified the outstanding $15,655 loan receivable balance at December 31, 2005 as part of member’s deficit. The Company has also accrued $1,484 in loan receivable interest on this loan receivable through December 31, 2005 as contra equity, of which $647 had previously been reported as interest income through June 30, 2005.
The Company has not reclassified the outstanding loan receivable balance from long-term asset to member’s deficit at December 31, 2004 or reversed the previously reported 2004 or 2003 loan receivable interest income, as such amounts were considered immaterial.
Due from Morris Communications—Due from Morris Communications represents a net short term receivable that resulted from operating activities between the Company and its Parent.
Restricted Cash Held in Escrow—Cash held in escrow is comprised of proceeds from the sale of the Company’s former Savannah newspaper facility which the Company elected to be deposited into an escrow account in order to potentially fund other acquisitions by the Company or its Parent through a tax-deferred Section 1031 exchange. The Company has identified the replacement properties and has 180 days after September 28, 2005 to complete the acquisition(s) in order to defer the taxable gain on the sale of the Savannah facility. The Parent acquired $460 and $5,280 in qualified replacement property during 2005 and 2006, respectively, with the reductions in the restricted escrow account being offset by an increase in loan receivable from Morris Communications. The remaining $1,430 in escrow became unrestricted at March 27, 2006, the expiration date for the tax-deferred exchange.
Performance Unit Grants—During 2004, Morris Publishing executed the 2004 Morris Publishing Group Performance Unit Grant in order to grant 1,000,000 performance units to various senior executive and other business unit managers, effective as of January 1, 2004, under the terms of the Shivers Trading & Operating Company (Morris Communications’ parent company) Performance Unit Plan, dated April 1, 2004. The 2004 Performance Unit Grants expired on December 31, 2005, which is the final valuation date. Each unit was valued annually based on the net operating income of the consolidated newspaper business segment, adjusted for taxes and a 10% capital charge based on the average invested capital. We have accrued $200 in employee bonus costs for the total value of the 1,000,000 performance unit grants at the final December 31, 2005 valuation date. The performance unit grants had no value at the end of 2004.
Recent Accounting Pronouncements—In March 2005, the FASB issued FIN 47,Accounting for Conditional Asset Retirement Obligations, which clarifies the accounting for conditional asset retirement obligations as used in SFAS No. 143,Accounting for Asset Retirement Obligations. A conditional asset retirement obligation is an unconditional legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Therefore, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation under SFAS No. 143 if the fair value of the liability can be reasonably estimated. FIN 47 permits, but does not require, restatement of interim financial information. The provisions of FIN 47 are effective for reporting periods ending after December 15, 2005. The adoption of FIN 47 had no material impact on the Company’s consolidated financial statements.
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In November 2004, the FASB issued SFAS No. 151,Inventory Costs, an amendment of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 requires that abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as current period charges, and it requires the allocation of fixed production overhead costs to the costs of conversion based upon the normal capacity of the production facility. SFAS No. 151 is effective for fiscal years beginning after June 14, 2005. As required by SFAS No. 151, the Company adopted this new accounting standard on January 2, 2006. The adoption of SFAS No. 151 is not expected to have a material impact on the Company’s financial statements.
2. Acquisitions
In March 2004, the Company acquiredCapital City Weekly, a weekly newspaper located in Juneau, Alaska. The acquisition was accounted for as a purchase and had an aggregate purchase price, including closing costs of approximately $852. The purchase price was allocated to the estimated fair value of assets and liabilities acquired. The excess purchase price over the $52 fair value of the tangible net assets was allocated with $472 allocated to goodwill, $274 allocated to subscriber and advertiser relations, and $50 allocated to noncompetition agreements. The subscriber and advertiser relations are being amortized over a 15-year life and the noncompetition agreement over a 5-year life. The results of operations have been recorded in the consolidated statements of income from the date of acquisition.
In April 2004, Morris Communications contributed the ownership of Skirt MagazineCharleston, a monthly free women’s publication, to the Company. All transfers have been recorded at their historical carrying amounts, which approximated $1,318 as of November 2003, the date of the Skirt MagazineCharleston acquisition by Morris Communications. The excess capital contribution over the $138 fair value of the net assets was allocated with $788 allocated to goodwill and $392 allocated to subscriber and advertiser relations. See Note 1.
In November 2003, the Company acquiredGirard Press, a weekly newspaper located in Girard, Kansas, for cash. The acquisition was accounted for as a purchase and had an aggregate purchase price, including closing costs of approximately $160. The purchase price was allocated based on the fair value of assets and liabilities acquired. The excess purchase price over fair value of the net assets acquired of $155 was allocated to identifiable intangible assets.
In September 2002, the Company acquired Fall Line Publishing, a weekly newspaper located in Louisville, Georgia, for cash. In 2003, the Company paid, as part of the contingent consideration as determined under the acquisition agreement, an additional $250, which was allocated to goodwill, to complete the purchase.
The results of operations have been recorded in the consolidated statements of income from the dates of acquisition. The pro forma effect on net income had the acquisitions been reflected as of the beginning of the year acquired and the previously reported year would not have been material.
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3. Gain on sale of fixed assets
On September 28, 2005, the Company sold Savannah’s former production facility to a third party. At closing, the Company received proceeds, net of closing costs, of $7,170. This, net of $735 in clean up costs, gave the Company net proceeds from the sale of $6,435 resulting in a pretax gain of $5,018. The Company elected to have the $7,170 in proceeds deposited into an escrow account in order to potentially fund other acquisitions by the Company or its Parent through a tax-deferred Section 1031 exchange. See Note 1.
During 2005 the Company also sold miscellaneous fixed assets for $113 which resulted in a loss of $208.
In 2004, the Company received a total of $1,315 in net proceeds from the sale of its Savannah warehouse and from the sale of other machinery and equipment. The net gain from these fixed asset sales totaled $181.
During 2003, we scrapped $323 in net book value of various machinery and equipment.
4. Property and equipment
Property and equipment at December 31, 2005 and 2004 consisted of the following:
| 2005 | 2004 | |||||||
Land | $ | 13,337 | $ | 15,675 | ||||
Buildings and improvements | 107,389 | 109,095 | ||||||
Machinery and production equipment | 171,210 | 169,779 | ||||||
Office equipment, fixtures and vehicles | 85,361 | 86,499 | ||||||
Construction in progress | 5,697 | 2,145 | ||||||
| 382,994 | 383,193 | |||||||
Less accumulated depreciation | (233,183 | ) | (227,995 | ) | ||||
| $ | 149,811 | $ | 155,198 | |||||
Depreciation expense for the years ended December 31, 2005, 2004, and 2003 was $16,404, $15,541, and $15,015, respectively.
5. Goodwill and other intangible assets
The Company tested goodwill and indefinite-lived intangible assets for impairment utilizing a combination of valuation techniques including the expected present value of future cash flows, a market multiple approach and a comparative value approach.
Other intangible assets acquired consist primarily of mastheads and licenses on various acquired properties, customer lists, as well as other assets. Certain other intangible assets acquired (mastheads) have indefinite lives and are not currently amortized, but are tested for impairment annually or if certain circumstances indicate a possible impairment may exist. Certain other intangible assets acquired (subscriber lists, non-compete agreements, domain names and other assets) are amortized over their estimated useful lives (from 3 to 20 years).
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Changes in the carrying amounts of goodwill of the Company for the years ended December 31, 2005, 2004 and 2003 are as follows:
| Goodwill | |||
Balance at December 31, 2003 | $ | 185,558 | |
Additions | 476 | ||
Balance at December 31, 2004 | 186,034 | ||
Additions | — | ||
Balance at December 31, 2005 | $ | 186,034 | |
The Company recorded approximately $5,560, $5,556, and $5,520 of amortization expense during the years ended December 31, 2005, 2004, and 2003, respectively, associated with its finite-lived intangible assets. The gross carrying amounts and related accumulated amortization of the Company’s finite-lived and indefinite-lived intangible assets at December 31, 2005 and 2004 were as follows:
| Cost | Accumulated amortization | Net cost | |||||||
December 31, 2005: | |||||||||
Finite-lived intangible assets | |||||||||
Subscriber lists | $ | 68,409 | $ | 57,470 | $ | 10,939 | |||
Non-compete agreements and other assets | 60 | 25 | 35 | ||||||
Total finite-lived intangible assets | 68,469 | 57,495 | 10,974 | ||||||
Indefinite-lived intangible assets | |||||||||
Newspaper mastheads | 5,310 | 874 | 4,436 | ||||||
Domain names | 74 | 33 | 41 | ||||||
Total indefinite-lived intangible assets | 5,384 | 907 | 4,477 | ||||||
Total other intangible assets | $ | 73,853 | $ | 58,402 | $ | 15,451 | |||
December 31, 2004: | |||||||||
Finite-lived intangible assets | |||||||||
Subscriber lists | $ | 68,409 | $ | 51,924 | $ | 16,485 | |||
Non-compete agreements and other assets | 60 | 12 | 48 | ||||||
Total finite-lived intangible assets | 68,469 | 51,936 | 16,533 | ||||||
Indefinite-lived intangible assets | |||||||||
Newspaper mastheads | 5,310 | 874 | 4,436 | ||||||
Domain names | 74 | 32 | 42 | ||||||
Total indefinite-lived intangible assets | 5,384 | 906 | 4,478 | ||||||
Total other intangible assets | $ | 73,853 | $ | 52,842 | $ | 21,011 | |||
Estimated amortization expense of the Company’s finite-lived intangible assets for the next five years as of December 31, 2005 is as follows:
Intangible Amortization
2006 | $ | 5,556 | |
2007 | 2,221 | ||
2008 | 569 | ||
2009 | 550 | ||
2010 | 533 |
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6. Long term debt
Original financing-2003:
On August 7, 2003, the Company refinanced substantially all of its long-term indebtedness by issuing $250 million of 7% senior subordinated notes (“Notes”) due 2013 and entering into a $400 million bank credit agreement (“Credit Agreement”). In September 2003, an additional $50 million of senior subordinated notes were issued. The loss incurred on the extinguishment of the prior debt was $5,957 during 2003.
The Notes are due in 2013 with interest payments due February 1 and August 1, with the first payment being paid on February 1, 2004.
The bank credit agreement dated August 7, 2003, consisted of a Tranche B $225,000 term loan and a $175,000 revolving credit line. The Tranche B principal payments were due each quarter commencing December 31, 2004, through December 31, 2010, with the final payment to have been due March 31, 2011. The quarterly payments were $563 with final payment being $210,938. The revolving credit loan would have terminated September 30, 2010. Borrowings under the August 7, 2003 Credit Agreement bore interest at either the alternative base rate (ABR) or the Eurodollar rate, plus applicable margin as defined. The ABR was the greater of the federal funds rate plus 0.5% or prime. The Eurodollar rate was the LIBOR rate.
The 2003 Credit Agreement required, among other things, that the Company and Morris Communications on a consolidated basis (1) maintain a debt-to-cash flow ratio not to exceed 6.00 to 1 initially and adjusting downward periodically to 5.50 to 1 on September 30, 2006, and all times thereafter; (2) maintain a fixed charge coverage ratio greater than or equal to 1.05 to 1 initially and adjusting upward to 1.15 to 1 on March 31, 2006, and all times thereafter; (3) maintain an interest coverage ratio to be greater than or equal to 2.25 to 1 initially and adjusting upward to 2.50 to 1 on September 30, 2005, and all times thereafter.
On August 7, 2003, the Company repaid its intercompany debt due to its parent, Morris Communications, which in turn repaid its existing senior secured credit facilities. As a result, the Company incurred non-cash financing loss on extinguishment of debt of approximately $5,957 related to the write-off of the unamortized deferred loan costs. Prior to this repayment, the Company’s debt due to its parent increased by $18,100, which borrowings were used to repay other indebtedness of its Parent. As a result, the Company recorded an $18,100 distribution to its parent. See Note 9.
Modification of original bank credit facility-2004:
On July 16, 2004, the Company realigned various aspects of its credit facility. The $225 million Tranche B Term Loan (“Tranche B”) under the August 7, 2003 agreement was increased by $25 million and split into two pieces, a $100 million Tranche A Term Loan (“Tranche A”) and a $150 million Tranche C Term Loan (“Tranche C”). At the same time, the revolving credit line was reduced from $175 million to $150 million. The total facility remained unchanged at $400 million. The immediate impact of the amendment was to reduce interest rates by 0.75% on the Tranche A and 0.50% on the Tranche C, below the rate on the Tranche B. The debt covenants generally remained unchanged. Scheduled principal payments changed with the replacement of the single term loan with the two term loans (Tranche A and Tranche C). The final payment on the Tranche A and the Tranche C loans were scheduled for September 30, 2010 and March 31, 2011, respectively. The revolving credit loan would have terminated September 30, 2010 and the commitment fee on the unborrowed amount available against the revolving credit line was 0.5%.
The $575 in loan origination fees associated with the modification of the credit facility were capitalized and would have been amortized along with the Tranche B loan’s unamortized costs over the lives of the Tranche A and Tranche C loans in accordance with EITF Issue No. 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments. The Company wrote off $209 in unamortized loan costs associated with the original revolving credit facility in accordance with EITF Issue No. 98-14,Debtor’s Accounting for Changes in Line-of Credit or Revolving-Debt Arrangements, and was to amortize the remaining $1,256 over the term of the revolving credit loan.
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Refinancing of bank credit facility-2005:
On December 14, 2005, the Company, as borrower, entered into a Credit Agreement for $350 million of senior secured term and revolving credit facilities. The refinancing terminated and replaced the $400 million credit facilities. The new credit facilities consist of a $175 million Revolving Credit Facility and a $175 million Tranche A Term Loan. The maturity date for both facilities is September 30, 2012, with unequal quarterly principal payments on the Tranche A Term Loan commencing on December 31, 2007.
The new Tranche A term loan facility requires the following principal amortization with the final payment due on September 30, 2012.
2006 | $ | — | |
2007 | 2,188 | ||
2008 | 10,937 | ||
2009 | 19,688 | ||
2010 | 28,437 | ||
Thereafter | 113,750 |
The facilities bear interest (i) at a spread above a base rate equal to the higher of (x) JPMorgan Chase Bank’s prime lending rate or (y) the applicable federal funds rate plus 0.5% (“ABR”), or (ii) at a spread above the Eurodollar rate (LIBOR). The spread applicable to borrowings will be determined by reference to Morris Communications Company’s consolidated trailing total debt to cash flow ratio. The spread applicable for ABR borrowings will range from 0% to 0.25%. The spread applicable for Eurodollar rate borrowings will range from 0.675% to 1.25%. A commitment fee on unborrowed funds available under the revolver is 0.375%.
The loans are guaranteed by Morris Communications Company, LLC, and substantially all of its subsidiaries. The obligations of Morris Publishing and these guarantors are secured with substantially all of the assets of the parties, with certain exceptions. The Credit Agreement contains various representations, warranties and covenants generally consistent with the old credit facilities. Financial covenants require Morris Publishing to meet certain financial tests on an on-going basis, including minimum interest coverage ratio, minimum fixed charge coverage ratio, and maximum cash flow ratios, based upon consolidated financial results of Morris Communications and substantially all of its subsidiaries (including Morris Publishing).
In accordance with EITF Issue No. 96-19,Debtor’s Accounting for a Modification or Exchange of Debt Instruments, the $2,046 in loan fees associated with the refinancing of the credit facility were capitalized and are being amortized over the life of the term loan and the $986 in unamortized loan costs associated with the original and the July 16, 2004 credit facility were written off.
Year end debt summary:
Total debt was $521 million at December 31, 2005, down $29 million compared to the end of 2004, with $46 million outstanding on the $175 million revolving credit facility. At December 31, 2005, the interest rates on the Tranche A term loan outstanding was 5.50% and the weighted average interest rate on the revolver was 5.3791%. The weighted cost of debt outstanding was approximately 6.35% at the end of 2005.
At the end of 2005, the Company could borrow and use for general corporate purposes $90 million under the most restrictive covenants of its debt arrangements.
Total debt was $550 million at December 31, 2004, up $25 million compared to the end of 2003. The Company had no loans outstanding under the $150 million revolving credit facility at the end of 2004. At December 31, 2004, the interest rates on the Company’s term loans outstanding were 3.9375% and 4.1875% on the Tranche A and Tranche C term loans, respectively, and the interest rate on the revolver was 4.6875%. The weighted cost of debt outstanding was approximately 5.68% at the end of 2004.
The Company paid $4.9 million, $0.0 million and $0.0 million in principal amortization during the 12 months ended December 31, 2005, 2004, and 2003, respectively, on the various term loan facilities.
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7. Income taxes
The components of the Company’s income tax provision for the years ended December 31, 2005, 2004 and 2003 are as follows:
| 2005 | 2004 | 2003 | ||||||||
Current tax provision: | ||||||||||
Federal | $ | 19,455 | $ | 15,333 | $ | 15,016 | ||||
State | 3,568 | 2,813 | 2,754 | |||||||
| 23,023 | 18,146 | 17,770 | ||||||||
Deferred tax provision (benefit): | ||||||||||
Federal | (2,744 | ) | 1,308 | 823 | ||||||
State | (503 | ) | 240 | 151 | ||||||
| (3,247 | ) | 1,548 | 974 | |||||||
Total income tax provision | $ | 19,776 | $ | 19,694 | $ | 18,744 | ||||
A reconciliation of income tax provision, computed by applying the statutory federal income tax rate of 35% to income before income taxes for the years ended December 31, 2005, 2004 and 2003 is as follows:
| 2005 | 2004 | 2003 | ||||||||
Tax provision at statutory rate | $ | 17,873 | $ | 17,501 | $ | 16,656 | ||||
State tax provision, net of federal benefit | 1,990 | 1,950 | 1,856 | |||||||
Domestic manufacturing deduction | (377 | ) | — | — | ||||||
Meals and entertainment expenses | 290 | 243 | 232 | |||||||
| $ | 19,776 | $ | 19,694 | $ | 18,744 | |||||
The net deferred tax liabilities as of December 31, 2005 and 2004 are comprised of the following:
| 2005 | 2004 | |||||||
Current deferred tax assets: | ||||||||
Provision for doubtful accounts | $ | 1,131 | $ | 1,160 | ||||
Other accrued expenses | 1,501 | 1,396 | ||||||
Total current deferred tax assets | 2,632 | 2,556 | ||||||
Noncurrent deferred tax assets (liabilities): | ||||||||
Intangible assets | (11,749 | ) | (13,513 | ) | ||||
Depreciation and amortization | (20,499 | ) | (20,896 | ) | ||||
Postretirement benefits | 9,312 | 8,680 | ||||||
Other accrued expenses | 1,880 | 1,502 | ||||||
Total noncurrent deferred tax liabilities | (21,056 | ) | (24,227 | ) | ||||
| Net deferred tax liability | $ | (18,424 | ) | $ | (21,671 | ) | ||
Management believes that realization of its deferred tax assets is more likely than not; therefore, the Company did not record any valuation allowance against these deferred tax assets as of December 31, 2005 and 2004.
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8. Member’s deficit
Member’s deficiency in assets includes the original investment in the Company by Morris Communications, accumulated income of the Company, and the cash and property distributions to and cash and property contributions from Morris Communications, including those arising from the forgiveness of the net intercompany receivables and payables between Morris Communications and the Company from transactions described in Note 9.
Based on the Company’s practice of settling a significant portion of the outstanding loan receivable balances with dividends, the Company in 2005 classified the intercompany loan due from Morris Communications and the interest accrued and paid in 2005 on the loan as contra equity in member’s deficit. (See Note 1)
9. Transactions with Morris Communications
The Company receives certain services from, and has entered into certain transactions with, the Parent. Prior to August 2003, costs of the services that are allocated to the Company were based on actual direct costs incurred or based on the Parent’s estimate of expenses relative to the services provided to the Company. The Parent utilized factors such as percentage of revenues, number of employees and other applicable factors in estimating the proportion of corporate expenses to allocate to the Company.
The Company believes that these allocations were made on a reasonable basis, and approximate all of the material incremental costs it would have incurred had it been operating on a stand-alone basis; however, there has been no independent study or any attempt to obtain quotes from third parties to determine what costs of obtaining such services from third parties would have been. Beginning in August 2003 any such costs not directly paid by Morris Publishing are reimbursed by a management fee paid by Morris Publishing to Morris Communications equal to four percent (4%) of Morris Publishing’s revenues, and an allocation based on actual costs of technology and shared services related costs from MStar, a subsidiary of Morris Communications. In the first quarter 2005, the management agreement was amended and now allocates the technology and shared services costs, retroactive to January 1, 2005, at the lesser of two and one half percent (2.5%) of Morris Publishing’s total net operating revenue or the actual technology costs applicable to Morris Publishing based upon usage.
Cash Management— Until August 2003, the Company’s cash was immediately transferred to Morris Communications, which used the cash to meet its and the Company’s obligations. The net amounts due from Morris Communications, which have been deemed distributions to Morris Communications were approximately $45,695 for the year ended December 31, 2003.
The following table provides a reconciliation of the transactions recorded through member’s deficit during the year ended December 31, 2003.
For the Year Ended December 31, 2003: | ||||
Management Fee | $ | 7,845 | ||
Technology and Shared Services Fee | 9,645 | |||
Employer 401(k) Contribution | 2,274 | |||
Workers’ Compensation Expense | 743 | |||
Taxes - Current Provision | 17,770 | |||
Interest Expense | 14,019 | |||
Net Cash Provided from Operations | (123,977 | ) | ||
Net Cash Used in Investing | 22,304 | |||
Net Proceeds Long Term Debt | 3,682 | |||
Net Distribution to Morris Communications | $ | (45,695 | ) | |
Additionally, the Company had amounts due to Morris Communications, $23,939, $22,314, and $19,547 of allocated postretirement obligations, and $3,108, $2,610, and $2,024 included in other accrued liabilities of allocated health and disability obligations as of December 31, 2005, 2004 and 2003, respectively.
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Management Fee—The Company was charged with certain corporate allocations from Morris Communications. Prior to August 7, 2003, these allocations were based on a combination of specifically identified costs, along with an estimate of 60% of the non-identifiable expenses relating to the Company. Subsequent to August 7, 2003, a fee equal to 4% of the revenues is charged to the Company, as defined in the management agreement. These corporate allocation expenses totaled $18,604, $18,230, and $15,572 for the years ended December 31, 2005, 2004 and 2003, respectively. These allocated expenses represent corporate costs incurred by Morris Communications on behalf of the Company, including executive, legal, secretarial, tax, internal audit, risk management, employee benefit administration, airplane usage and other support services.
Technology and Shared Services Fee—The Company was charged with certain technology and shared services allocated from Morris Communications. These costs were allocated at 100% prior to August 7, 2003. Subsequent to August 7, 2003, these costs were allocated based on actual costs, as defined in the management agreement. In the first quarter 2005, the services agreement was amended allocating the costs based on the lesser of 2.5% of the Company’s total net operating revenue or the actual technology costs allocated to Morris Publishing based upon usage. These technology and shared services expenses allocated by Morris Communications to the Company totaled $11,628, $12,542, and $18,308 for the years ended December 31, 2005, 2004, and 2003, respectively.
Debt and Debt Related Allocations—The Company also charged corporate interest and amortization expense based on the corporate debt and related deferred debt cost allocations of Morris Communications to the Company. Prior to August 7, 2003, the Company was allocated Morris Communications’ debt, deferred debt costs, interest and amortization expenses. The allocated portion of Morris Communications’ debt is presented as due to Morris Communications and the deferred debt costs are presented as part of deferred loan costs and other assets on the accompanying consolidated financial statements. Interest expense, including amortization of debt issuance costs, recorded by the Company related to this debt was $14,019 for the year ended December 31, 2003, and is included in interest expense in the accompanying consolidated financial statements.
On August 7, 2003, the Company and Morris Communications realigned various aspects of their debt and capital structure. As part of this realignment, all outstanding principal and interest amounts related to the long-term debt due to Morris Communications was repaid. Additionally, all related unamortized, deferred loan costs were written off and recorded as a loss on extinguishment of debt. See Note 6.
Employees’ 401(k) Plan— The Company participates in Morris Communications’ 401(k) plan. Under this plan, contributions by employees to the 401(k) plan are matched (up to 5% of pay) by Morris Communications. Expenses were allocated to the Company based on specific identification of employer matching contributions of $4,183, $4,265, and $4,062 for the years ended December 31, 2005, 2004 and 2003, respectively.
Retiree Health Care Benefits—The Company participates in Morris Communications’ retiree health care plan, which provides certain health care benefits for eligible retired employees and their dependents. The plan requires the Company to be separately liable for its portion of the postretirement health benefit obligation. Accordingly, the Company and Morris Communications have completed a formal actuarial valuation of the postretirement obligation for the Company as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005.
Under Morris Communications’ plan, full-time employees who were hired before January 1, 1992 and retire after ten years of service are eligible for these benefits. Full-time employees hired on or after January 1, 1992 must have 25 years of service to be eligible. Generally, this plan pays a percentage of most medical expenses (reduced for any deductible) after payments made by government programs and other group coverage. This plan is unfunded. Lifetime benefits under the plan are limited to $100 per employee. Expenses related to this plan have been allocated to the Company based on total headcount. The expenses allocated to the Company, and the related contributions recorded were $1,624, $2,767, and $2,697 for the years ended December 31, 2005, 2004 and 2003, respectively.
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The Company was also allocated its portion of the postretirement benefit obligation. The amounts allocated to the Company, based on total headcount, were $23,939 and $22,314 as of December 31, 2005 and 2004, respectively.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 provided a federal subsidy beginning in 2006 to postretirement medical plans that provide prescription drug benefits to retirees. The subsidy will provide plan sponsors 28% of individual retirees’ annual prescription drug costs (in dollars) between $250 and $5,000 for retirees who are eligible for but opt out of Medicare Part D Prescription coverage.
This subsidy, when integrated with current claim costs, would have the effect of decreasing liabilities and costs reported under the current accounting guidance for plans that are at least actuarially equivalent to the Medicare Part D benefit.
The Company’s actuary has determined that the Company’s plan is at least actuarially equivalent to Medicare D and estimated the financial impact of the subsidy to be $500. The Company has reflected the effect of this subsidy in the accompanying financial statements.
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The following is a reconciliation of the benefit obligation and accrued benefit cost for which the Company is separately liable for as of and for the years ended December 31, 2005 and 2004:
| 2005 | 2004 | |||||||
Change in benefit obligation: | ||||||||
Benefit obligation at beginning of year | $ | 35,342 | $ | 35,710 | ||||
Service costs | 580 | 723 | ||||||
Interest costs | 1,757 | 2,200 | ||||||
Participant contributions | 517 | 499 | ||||||
Actuarial loss | (4,396 | ) | (2,353 | ) | ||||
Benefit payments | (1,580 | ) | (1,437 | ) | ||||
Benefit obligation at end of year | $ | 32,220 | $ | 35,342 | ||||
Reconciliation of accrued benefit cost: | ||||||||
Accrued postretirement benefit cost at beginning of year | $ | 22,314 | $ | 19,547 | ||||
Net periodic postretirement benefit cost | 2,688 | 3,705 | ||||||
Net benefit payments | (1,063 | ) | (938 | ) | ||||
Accrued postretirement benefit cost at end of year (1) | $ | 23,939 | $ | 22,314 | ||||
Components of net periodic benefit cost before reflecting Medicare Part D Subsidy: | ||||||||
Service cost | $ | 652 | $ | 723 | ||||
Interest cost | 1,998 | 2,200 | ||||||
Amortization of prior service cost | 582 | 782 | ||||||
Net periodic benefit cost | $ | 3,232 | $ | 3,705 | ||||
Impact of Medicare Part D Subsidy on Components of net periodic benefit cost: 2) | ||||||||
Service cost | $ | (72 | ) | $ | — | |||
Interest cost | (241 | ) | — | |||||
Amortization of prior service cost | (231 | ) | — | |||||
Net periodic benefit cost | $ | (544 | ) | $ | — | |||
Components of net periodic benefit cost after reflecting Medicare Part D Subsidy: | ||||||||
Service cost | $ | 580 | $ | 723 | ||||
Interest cost | 1,757 | 2,200 | ||||||
Amortization of prior service cost | 351 | 782 | ||||||
Net periodic benefit cost | $ | 2,688 | $ | 3,705 | ||||
| (1) | Actual experience in future years will be used to adjust this assumed subsidy amount. Prescription drug coverage is as generous or better than standard Medicare D plan without amendment, so unrecognized prior service cost remains unchanged. |
| (2) | Sudsidy offsetting Employer Contribution for 2005 is $0 but this will be non-zero in 2006 and later. The subsidy is trended at the same rate as prescription drug claims and assumed to be $600 before tax annually per retiree. |
The principal assumptions used in determining postretirement benefit obligations for the Company’s plan as of December 31, 2005 and 2004 are as follows:
| 2005 | 2004 | |||||
Discount rate | 5.50 | % | 5.75 | % | ||
Health care cost increase rate: | ||||||
Following year | 12.00 | % | 10.00 | % | ||
Decreasing to the year 2010 | 5.00 | % | 5.00 | % |
As an indicator of sensitivity, increasing the assumed health care cost trend rate by 1% in 2005 would have increased the benefit obligation as of December 31, 2005, by $2,402 and the aggregate of benefits earned and interest components of 2004 net postretirement benefit expense by $215. Decreasing the assumed health care cost trend rate by 1% in 2005 would have decreased the benefit obligation as of December 31, 2005 by $2,167 and the aggregate of benefits earned and interest components of 2005 net postretirement benefit expense by $194.
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The following is an estimate of the Company’s future benefit payments:
2006 | $ | 1,089 | |
2007 | 1,268 | ||
2008 | 1,446 | ||
2009 | 1,616 | ||
2010 | 1,783 | ||
Years 2011-2015 | $ | 10,997 |
Health and Disability Plan—The Company has participated in Morris Communications’ health and disability plan for active employees. Accordingly, Morris Communications has allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not reported. The expense allocated to the Company, based on total headcount, was $12,938, $14,357, and $12,212 for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company was also allocated its portion of the health and disability obligation. The amounts allocated to the Company, based on total headcount, was $3,108, $2,611, and $2,025 as of December 31, 2005, 2004 and 2003, respectively.
Workers’ Compensation Expense—The Company has participated in Morris Communications’ workers’ compensation self-insurance plan. Accordingly, Morris Communications has allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not reported. The expenses allocated to the Company, based on a percentage of total salaries expense, was $2,892, $2,864, $1,753 for the years ended December 31, 2005, 2004 and 2003, respectively.
Property and Equipment—Historically, the Company has occupied and utilized certain property and equipment owned by the parent. Title to this property and equipment, along with the related depreciation and amortization, was passed to the Company on August 7, 2003. The Company was allocated $1,047 prior to the transfer in 2003 and $3,373 in depreciation and amortization expense for the 12 months ended December 31, 2003. Morris Communications conveyed legal title to the Company of the net property and equipment of $28,954 as of August 7, 2003, which is included in property and equipment in the accompanying financial statements.
Loan Receivable from and restricted payments to Morris Communications—
Loan receivable:
Under its debt arrangements, the Company is permitted to loan up to $40 million at any one time to Morris Communications or any of its wholly owned subsidiaries outside the Publishing Group, solely for purposes of funding its working capital, capital expenditures and acquisition requirements. The Company is also permitted to invest in or lend an additional $20 million at any one time outstanding to Morris Communications or any other Person(s), as defined in the debt indenture.
The interest-bearing portion of all loans from the Company to Morris Communications bear the same rate as the borrowings under the Credit Agreement. The Company distinguishes between intercompany transactions incurred in the ordinary course of business and settled on a monthly basis (which do not bear interest) and those of a more long-term nature that are subject to an interest accrual. Interest is accrued on the average outstanding long-term balance each month. For 2005 this interest rate was as follows:
1/1/2005 | to | 5/27/2005 | LIBOR + 2.25% | |||
5/28/2005 | to | 12/13/2005 | LIBOR + 2.50% | |||
12/14/2005 | to | 12/31/2005 | LIBOR + 1.00% |
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As of December 31, 2005, $15,655 was outstanding as an intercompany loan due from Morris Communications. The interest accrued on the loans to Morris Communications for the 12 months ended December 31, 2005, the 12 months ended December 31, 2004 and the five months ended December 31 2003 was approximately $1,484, $1,200, and $100, respectively, on average loan balances of $23.7 million, $27.5 million, and $5.2 million, respectively. The average annual interest rates were 5.620%, 3.724%, and 3.39% for the 12 month period ended December 31, 2005 and the 12 month period ended December 31 2004, and the five month period ended December 31, 2003, respectively.
Based on the practice of settling a significant portion of the outstanding loan receivable balances with dividends, the Company in 2005 classified the intercompany loan due from Morris Communications and the interest accrued in 2005 on the loan as contra equity in member’s deficit. See Note 1.
Restricted payments:
The Company is permitted under its debt arrangement to make restricted payments, which includes dividends and loans to affiliates in excess of the permitted limits described above, up to the sum of (1) 100% of the Company’s cumulative consolidated income before interest, taxes, depreciation and amortization (“Consolidated EBITDA”, as defined in the indenture) earned subsequent to the debt’s August 2003 issue date less (2) 140% of the consolidated interest expense of the Company for such period.
On August 31, 2004, the Company declared and paid a $50 million cash dividend to Morris Communications that, in turn, utilized the distribution to reduce its loan receivable from Morris Publishing.
In December 2005, the Company declared and distributed a $1,811 property dividend of certain land unrelated to its business operations in Alaska and Augusta, Georgia to Morris Communications.
At December 31, 2005, the Company had an additional $84 million available for future restricted payments under the credit indenture.
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10. Commitments and contingencies
Leases—In December 2002, the Company sold its recently completed facility in Savannah, Georgia to an affiliated party at carrying value for cash of $11,856, and entered into a 10-year operating lease expiring on December 31, 2012. The Company is required to make equal monthly payments of $92 beginning January 1, 2003, and continuing on the first date of each subsequent year during the term of this lease. Beginning on January 1, 2004 and January 1 of each subsequent year during the lease term the annual base rent shall increase by the lesser of (i) four percent, or (ii) the percentage increase in the Consumer Price Index for the preceding calendar year.
On February 21, 2005, Morris Publishing Group entered into an amendment with respect to its existing lease on the Savannah newspaper facilities in order to take additional space in the administration building, which was recently constructed by the current lessor and is adjacent to the other production facilities currently leased. The annual base rent for the 78,000 square foot administration building shall be $980 or a monthly rate of $82. The lease was effective as of November 1, 2004 and expires December 31, 2012, concurrent with the termination of the lease of the remainder of the facilities. Beginning on January 1, 2006 and January 1 of each subsequent year during the lease term the annual base rent shall increase by the lesser of (i) three percent, or (ii) the percentage increase in the Consumer Price Index for the preceding calendar year. The lessor is an entity indirectly owned by three of Morris Publishing Group’s directors, William S. Morris IV, J. Tyler Morris and Susie M. Baker.
The Company leases certain buildings, data processing and transportation equipment under noncancelable operating lease agreements expiring on various dates through December 2012. Aggregate future minimum lease payments for the next 5 years under noncancelable operating leases as of December 31, 2005 are as follows:
Operating leases to Morris Communications and affiliates | Other Operating Leases | Total | ||||||
2006 | $ | 2,234 | 1,456 | $ | 3,690 | |||
2007 | 2,312 | 809 | 3,121 | |||||
2008 | 2,393 | 441 | 2,834 | |||||
2009 | 2,477 | 184 | 2,661 | |||||
2010 | 2,563 | 25 | 2,588 | |||||
Total rent expense under operating leases was approximately $4,833, $3,776, and $2,651 for the years ended December 31, 2005, 2004 and 2003, respectively.
Litigation and Claims—The Company is the defendant or plaintiff in lawsuits related to normal business operations. In management’s opinion, the outcome of these matters will not have a material effect on the Company’s operations or financial position.
Environmental Matters—The nature of the Company’s operations exposes it to certain risks of liabilities and claims with respect to environmental matters. The Company does not believe that environmental compliance requirements are likely to have a material effect on it. The Company cannot predict what additional environmental legislation or regulations will be enacted in the future or how existing or future laws or regulations will be administered or interpreted, or the amount of future expenditures that may be required in order to comply with these laws. There can be no assurance that future environmental compliance obligations or discovery of new conditions will not arise in connection with the Company’s operations or facilities and that these would not have a material adverse effect on the Company’s business, financial condition or results of operations.
During 2004, the Savannah newspaper relocated to its new facility located near Savannah. The newspaper’s old warehouse was sold in 2004 along with its parking lot and the production facility was sold in 2005. During 2005, the Company completed the required environmental remediation on the parking lot at a total cost of approximately $700.
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11. Quarterly operations (unaudited)
Retail advertising revenue is seasonal and tends to fluctuate with retail sales in the Company’s various markets, which is historically highest in the fourth quarter. Classified advertising revenue has historically had a direct correlation with the state of the overall economy and has not been materially affected by seasonal fluctuations.
The following table summarizes the Company’s quarterly results of operations:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||
(Dollars in thousands) | 2005 | |||||||||||||||
Total net operating revenue | $ | 113,338 | $ | 116,991 | $ | 113,771 | $ | 121,007 | ||||||||
Total operating costs | 97,344 | 96,228 | 95,300 | 93,545 | ||||||||||||
Interest expense | 8,515 | 8,867 | 9,075 | 9,205 | ||||||||||||
Interest income | (298 | ) | (354 | ) | 604 | (72 | ) | |||||||||
Loss on Extinguishment of debt | 986 | |||||||||||||||
Other, net | 34 | (14 | ) | (5,336 | ) | 412 | ||||||||||
Total other expense | 8,251 | 8,499 | 4,343 | 10,531 | ||||||||||||
Income before taxes | 7,743 | 12,264 | 14,128 | 16,931 | ||||||||||||
Provision for income taxes | 3,101 | 4,822 | 5,591 | 6,262 | ||||||||||||
Net income | $ | 4,642 | $ | 7,442 | $ | 8,537 | $ | 10,669 | ||||||||
| 2004 | ||||||||||||||||
Total net operating revenue | $ | 108,273 | $ | 114,627 | $ | 112,927 | $ | 119,907 | ||||||||
Total operating costs | 91,201 | 93,376 | 93,518 | 96,108 | ||||||||||||
Interest expense | 7,812 | 8,008 | 8,166 | 8,295 | ||||||||||||
Interest income | (143 | ) | (361 | ) | (458 | ) | (285 | ) | ||||||||
Other, net | 530 | 102 | (195 | ) | 58 | |||||||||||
Total other expense | 8,199 | 7,749 | 7,513 | 8,068 | ||||||||||||
Income before taxes | 8,873 | 13,502 | 11,896 | 15,731 | ||||||||||||
Provision for income taxes | 3,532 | 5,306 | 4,664 | 6,192 | ||||||||||||
Net income | $ | 5,341 | $ | 8,196 | $ | 7,232 | $ | 9,539 | ||||||||
Because of the change in reporting entity, Note 1, the first quarter 2004 has been restated to reflect Morris Communications’ distribution ofSkirt!magazine Charleston to Morris Publishing in April 2004.Skirt!magazine reported a net operating income of $20 during the first quarter 2004.
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Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements
Our financial statements as set forth in the Index to Consolidated Financial Statements under Part II, Item 8 of this Annual Report are hereby incorporated by reference.
(b) Exhibits
The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed herewith or, as noted, incorporated by reference herein:
Exhibit Number | Exhibit Description | |
| 31.1 | Rule 13a-14(a) Certifications | |
| 31.2 | Rule 13a-14(a) Certifications | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
(c) Financial Statement Schedule-Valuation and Qualifying Accounts
Schedule II
Years Ended December 31, 2005, 2004, and 2003
(Dollars in thousands) | Balances at Beginning of Period | Additions Charged to Costs and | Deductions* | Balances at End of Period | ||||||||
Year Ended December 31, 2005 | ||||||||||||
Reserves and allowances deducted from asset account: | ||||||||||||
Accounts receivable allowances | $ | 2,981 | $ | 1,422 | $ | 2,176 | $ | 2,227 | ||||
Year Ended December 31, 2004 | ||||||||||||
Reserves and allowances deducted from asset account: | ||||||||||||
Accounts receivable allowances | $ | 2,793 | $ | 3,212 | $ | 3,024 | $ | 2,981 | ||||
Year Ended December 31, 2003 | ||||||||||||
Reserves and allowances deducted from asset account: | ||||||||||||
Accounts receivable allowances | 2,596 | 2,798 | 2,601 | 2,793 | ||||||||
| * | Represents uncollectible accounts written off, net of recoveries and dispositions |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Morris Publishing Group, LLC | ||
Morris Publishing Finance Co. | ||
By: | /s/ William S. Morris IV | |
| William S. Morris IV | ||
| President and Chief Executive Officer | ||
| (of both entities) | ||
Date: June 2, 2006 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of both registrants and in the capacities and on the dates indicated.
Signature | Title (for both registrants) | Date | ||
/s/ William S. Morris IV | President, CEO, Director (Principal Executive Officer) | 6/2/06 | ||
/s/ Steve K. Stone | Senior Vice President, CFO (Principal Financial and Accounting Officer) | 6/2/06 | ||
/s/ William S. Morris III | Director (Chairman) | 6/2/06 | ||
/s/ Mary S. Morris | Director | 6/2/06 | ||
/s/ J. Tyler Morris | Director | 6/2/06 | ||
/s/ Susie M. Baker | Director | 6/2/06 | ||
/s/ Craig S. Mitchell | Director | 6/2/06 | ||
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