1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
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 _____________
GARDEN STATE NEWSPAPERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2675173
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1560 Broadway
Denver, Colorado 80202
---------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303)837-0886
-------------
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether a registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and 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) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
2
INDEX TO GARDEN STATE NEWSPAPERS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1996
Item No. Page
-------- ----
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements 3
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 3
2 Changes in Securities 3
3 Defaults Upon Senior Securities 3
4 Submission of Matters to a Vote of Security Holders 3
5 Other Information 4
6 Exhibits and Reports on Form 8-K 4
2
3
PART I
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
The information required by this item is filed as part of this Form 10-Q. See
Index to Financial Information at page 5 of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is filed as part of this Form 10-Q. See
Index to Financial Information at page 5 of this Form 10-Q.
PART II
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of
business, none of which is expected to result in material loss.
ITEM 2. CHANGES IN SECURITIES
There were no changes in the rights of security holders during the quarter for
which this report is filed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the quarter for which this
report is filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter for which this report is filed.
3
4
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
10.26 Employment Agreement between Garden State Newspapers, Inc. and William
Dean Singleton
27 Financial Data Schedule
Reports on Form 8-K
A Form 8-K was filed on November 13, 1996, with the Securities and Exchange
Commission containing audited financial statements of the acquired assets and
pro forma financial information related to the purchase of substantially all of
the assets used in the publication of the Star-News, Whittier Daily News, San
Gabriel Valley Tribune, Times-Standard, The Evening News and various related
publications. No other reports on Form 8-K were filed during the quarter ended
December 31, 1996.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GARDEN STATE NEWSPAPERS, INC.
Dated: February 13, 1997 By: /s/ Joseph J. Lodovic, IV
------------------- -----------------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer, and
Duly Authorized Officer of Registrant
4
5
GARDEN STATE NEWSPAPERS, INC.
Index to Financial Information
ITEM 1. FINANCIAL STATEMENTS: PAGE
----
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated Statements of Operations . . . . . . 8
Unaudited Condensed Consolidated Statements of Cash Flows . . . . . . 9
Notes to Unaudited Condensed Consolidated Financial Statements . . . . 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . 13
5
6
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
ASSETS 1996 1996
-------------- --------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 2,168 $ 4,415
Accounts receivable, less allowance for doubtful
accounts of $3,694 and $2,426 at December 31, 1996
and June 30, 1996, respectively . . . . . . . . . . . . . 37,091 27,612
Inventories of newsprint and supplies . . . . . . . . . . . 6,168 3,966
Prepaid expenses and other assets . . . . . . . . . . . . . 4,390 2,780
------------- -------------
Total Current Assets . . . . . . . . . . . . . . . . . 49,817 38,773
PROPERTY, PLANT AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,567 5,168
Buildings and improvements . . . . . . . . . . . . . . . . 37,956 32,687
Machinery and equipment . . . . . . . . . . . . . . . . . . 114,278 87,522
------------- -------------
Total Property, Plant and Equipment . . . . . . . . . . 159,801 125,377
Less accumulated depreciation and amortization . . . . . . 54,837 50,027
------------- -------------
Net Property, Plant and Equipment . . . . . . . . . . . 104,964 75,350
OTHER ASSETS
Investment in partnership . . . . . . . . . . . . . . . . 6,614 6,369
Subscriber accounts, less accumulated amortization of
$51,945 and $48,594 at December 31, 1996 and June 30,
1996, respectively . . . . . . . . . . . . . . . . . . . 57,069 44,220
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $14,595 and $13,267
at December 31, 1996 and June 30, 1996, respectively . . 148,731 65,715
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $20,547 and
$19,673 at December 31, 1996 and June 30, 1996,
respectively . . . . . . . . . . . . . . . . . . . . . . 7,588 8,461
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,862 1,871
------------- -------------
Total Other Assets . . . . . . . . . . . . . . . . . . 221,864 126,636
------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 376,645 $ 240,759
============= =============
See notes to unaudited condensed consolidated financial statements.
6
7
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
LIABILITIES AND SHAREHOLDER'S DEFICIT 1996 1996
----------------- ------------------
(In thousands, except share data)
CURRENT LIABILITIES
Trade accounts payable . . . . . . . . . . . . . . . . . . $ 3,576 $ 5,884
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 21,818 18,174
Unearned income . . . . . . . . . . . . . . . . . . . . . . 9,494 7,048
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 750 373
Current portion of long-term debt and
capital lease obligation . . . . . . . . . . . . . . . . 12,162 11,190
-------------- --------------
Total Current Liabilities . . . . . . . . . . . . . . . 47,800 42,669
LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATION . . . . . . . . . . . . . . . . . . . . . 341,049 199,399
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 5,796 7,728
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . 11,617 11,755
SHAREHOLDER'S DEFICIT
Common stock, par value $1.00 per share;
authorized 1,000 shares; 1,000 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . 78,570 78,570
Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (108,188) (99,363)
-------------- --------------
Total Shareholder's Deficit . . . . . . . . . . . . . . (29,617) (20,792)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT . . . . . . . . . $ 376,645 $ 240,759
============== ==============
See notes to unaudited condensed consolidated financial statements.
7
8
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Six Months
Ended December 31, Ended December 31,
------------------------- --------------------------
1996 1995 1996 1995
------------------------- -------------------------
(In thousands)
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . $ 78,885 $ 66,719 $ 139,965 $ 123,026
COST AND EXPENSES
Cost of sales . . . . . . . . . . . . . . . . . . . . . 26,722 25,843 50,289 48,717
Selling, general, and administrative . . . . . . . . . 31,669 25,753 58,187 50,074
Depreciation and amortization . . . . . . . . . . . . . 5,829 5,113 10,967 9,954
Interest expense . . . . . . . . . . . . . . . . . . . 8,056 7,027 14,390 13,624
Other, (net) . . . . . . . . . . . . . . . . . . . . . 14,067 384 14,274 1,804
---------- ----------- ---------- -----------
TOTAL COST AND EXPENSES . . . . . . . . . . . . . . . 86,343 64,120 148,107 124,173
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . (7,458) 2,599 (8,142) (1,147)
INCOME TAX BENEFIT (EXPENSE) . . . . . . . . . . . . . . (629) (28) (683) 148
---------- ----------- ---------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . $ (8,087) $ 2,571 $ (8,825) $ (999)
========== =========== ========== ===========
See notes to unaudited condensed consolidated financial statements.
8
9
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31,
-------------------------------
1996 1995
-------------- --------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,825) $ (999)
Adjustments to reconcile loss to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 10,363 9,522
Gain on sale of newspaper property and other assets . . . . . . . . -- (36)
Provision for losses on accounts receivable . . . . . . . . . . . . 1,559 1,358
Amortization of debt discount . . . . . . . . . . . . . . . . . . . 921 736
Debt issuance cost and prepayment premiums . . . . . . . . . . . . . 13,475 1,089
Undistributed earnings in partnership . . . . . . . . . . . . . . . (226) (542)
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . (138) (470)
Change in operating assets and liabilities, net of current
assets and liabilities acquired or sold . . . . . . . . . . . . . (8,989) (8,368)
------------ ------------
NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . . . 8,140 2,290
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper property assets . . . . . . . . . . . . . . . . . -- 36
Purchase of newspaper properties . . . . . . . . . . . . . . . . . . (131,811) (21,678)
Purchase of machinery and equipment . . . . . . . . . . . . . . . . (4,948) (2,428)
------------ ------------
NET CASH FLOWS FROM INVESTING ACTIVITIES . . . . . . . . . . . (136,759) (24,070)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . 243,800 21,000
Debt issuance cost and repurchase premiums . . . . . . . . . . . . . (13,475) (1,089)
Reduction of long-term debt . . . . . . . . . . . . . . . . . . . . (101,990) (4,384)
Reduction of non-operating liabilities . . . . . . . . . . . . . . . (1,963) (2,697)
------------ ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . . . . . . . . 126,372 12,830
------------ ------------
DECREASE IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,247) (8,950)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,415 17,083
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . $ 2,168 $ 8,133
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,870 $ 13,731
============ ============
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 507 $ 322
============ ============
See notes to unaudited condensed consolidated financial statements.
9
10
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulations S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete consolidated financial statements and should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in Garden State Newspapers, Inc.'s Annual Report on Form 10-K for the
year ended June 30, 1996. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six-month
periods ended December 31, 1996 are not necessarily indicative of the results
that may be expected for the year ended June 30, 1997.
The unaudited condensed consolidated financial statements include the
accounts of Garden State Newspapers, Inc. (the "Company" or "Garden State")
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated upon consolidation. Garden State is a wholly owned
subsidiary of Affiliated Newspapers Investments, Inc.
Income Taxes
The effective income tax rate varies from the federal statutory rate
primarily because of the nondeductibility of certain expenses.
Seasonality
Newspaper companies tend to follow a distinct and recurring seasonal
pattern, with higher advertising revenues in months containing significant
events or holidays. Accordingly, the fourth calendar quarter, or the Company's
second fiscal quarter, is the Company's strongest revenue quarter of the year.
Due to generally poor weather and lack of holidays, the first calendar quarter,
or the Company's third fiscal quarter, is the Company's weakest revenue quarter
of the year.
Business Acquisitions
On October 31, 1996, the Company acquired substantially all of the
assets used in the publication of the Star News, San Gabriel Valley Tribune,
Whittier Daily News, Times-Standard and The Evening Sun, daily newspapers
distributed primarily in Pasadena, West Covina, Whittier and Eureka,
California, and Hanover, Pennsylvania, respectively, and seven weekly
newspapers distributed in and around these same cities, for a total of $130.0
million in cash. The daily newspapers combined had daily and Sunday
circulation of approximately 161,000 and 163,000, respectively, at March 31,
1996.
The acquisition was accounted for as a purchase; accordingly, the
consolidated financial statements include the operations of the acquired
newspapers from November 1, 1996. The assets acquired and the liabilities
assumed have been recorded at their estimated fair market values as of the date
of acquisition. These fair market values are based on management's estimates
and are subject to change upon the final allocation of the purchase price.
10
11
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: LONG-TERM DEBT
In conjunction with the acquisitions described above, the Company
entered into a $240.0 million amended and restated bank credit facility (the
"Bank Credit Facility") which was subsequently increased to $285.0 million on
January 22, 1997. The Bank Credit Facility is comprised of the following
components:
I. A $167.0 million Senior Secured Revolving Credit Facility
("Revolver A") which matures on June 30, 2003. The commitment
under Revolver A is reduced annually, with a $13.0 million
reduction on June 30, 1997, a $26.0 million reduction on June 30,
1998 and 1999, a $27.0 million reduction on June 30, 2000 and
2001, a $26.0 million reduction on June 30, 2002, and a final
maturity of June 30, 2003. A portion of the proceeds from
Revolver A were used to purchase the newspaper assets described
above. As of the date hereof, $47.0 million is available under
Revolver A for business acquisitions.
II. A $27.0 million Senior Secured Revolving Credit Facility
("Revolver B") with sublimits of $7.0 million available for
standby Letters of Credit and $5.0 million available for same day
borrowings under a Swingline Facility. No principal payments are
required under Revolver B until March 31, 2004, at which time the
commitment is terminated and all then outstanding balances are
due and payable.
III. A $15.0 million Senior Secured Term Loan ("Term Loan A") with a
final maturity of March 31, 2004. Term Loan A requires quarterly
installments beginning June 30, 2002, with total annual payments
of $3.75 million, $7.5 million and $3.75 million in fiscal years
ending June 30, 2002, 2003 and 2004, respectively. Proceeds from
Term Loan A were used in conjunction with Revolver A to fund the
aforementioned acquisitions and to prepay a previously
outstanding term loan which had a balance of $7.5 million.
IV. A $76.0 million Senior Secured Term Loan ("Term Loan B") with a
final maturity of March 31, 2004. Term Loan B requires quarterly
principal payments commencing on September 30, 1997, with annual
reductions of $4.0 million in fiscal year 1998, $7.5 million in
fiscal years 1999 and 2000, $12.0 million in fiscal years 2001
and 2002, $14.0 million in 2003 and $19.0 million in 2004.
Proceeds from Term Loan B were used to prepay the Company's
10.89% Senior Secured Notes on October 31, 1996, as further
described below.
All borrowings under the Bank Credit Facility, except loans under the
Swingline Facility, bear interest at rates based upon, at the Company's option,
Eurodollar or prime, plus a spread based on the Company's leverage. Borrowings
under the Swingline Facility bear interest at prime plus a spread based on the
Company's leverage. Interest on prime borrowings under the Bank Credit Facility
is payable quarterly. Interest on Eurodollar borrowings is due at the end of
the applicable interest rate contract or quarterly if the interest rate
contract exceeds three months. In addition, the Company pays an annual
commitment fee of 0.50% on the unused commitment under Revolvers A and B. If
the ratio of total debt to operating cash flow is less than 4.00 to 1.00, the
commitment fee is reduced to 0.375%.
The Garden State Bank Credit Facility contains certain restrictive
covenants which relate to, among other things, the incurrence of additional
debt, capital expenditures and distributions. Additionally, the agreement
requires the maintenance of certain financial ratios based on leverage, debt
service coverage, interest coverage and fixed charges coverage. Borrowings
under the Garden State Bank Credit Facility are secured by substantially all of
the Company's tangible and intangible assets and stock of the Company and its
subsidiaries.
11
12
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: LONG-TERM DEBT--CONTINUED
In addition to proceeds from Term Loan B, Garden State received a
distribution of $17.4 million from borrowings under an existing bank credit
facility of a subsidiary. These funds were used to prepay in full the
Company's 10.89% Senior Secured Notes in the amount of $77,577,686, including
interest of $697,686, and $1.8 million was used to reduce the outstanding
balance of Revolver B to zero. The remaining funds were used to pay a
make-whole payment of approximately $9.5 million and bank fees and other
transactional expenses of approximately $4.5 million. The majority of these
costs, which related to the refinancings, were expensed in the quarter ended
December 31, 1996.
Maturities of the Company's long-term debt for the remaining six months
of fiscal year 1997 and for the next four fiscal years ending June 30, 2001,
are as follows (in thousands):
1997 . . . . . . . . . . . . . . . . . $ 1,415
1998 . . . . . . . . . . . . . . . . . 6,409
1999 . . . . . . . . . . . . . . . . . 45,465
2000 . . . . . . . . . . . . . . . . . 37,055
2001 . . . . . . . . . . . . . . . . . 41,383
Thereafter . . . . . . . . . . . . . . 213,989
---------
$ 345,716
=========
NOTE 3: SUBSEQUENT EVENTS
Disposition
Effective February 14, 1997, the Company has agreed to sell
substantially all the assets used in the publication of the Potomac News and
two weekly publications to Community Newspapers Holdings, Inc. for $48.0
million in cash plus an adjustment for working capital. The Company estimates
it will recognize a pre-tax gain on the sale of approximately $31.0 million,
net of selling expense, in its third fiscal quarter.
Acquisitions
Effective March 1, 1997, the Company has agreed to acquire substantially
all the assets used in the publication of the Sentinel & Enterprise, The Daily
News and The Daily Nonpareil, daily newspapers located in Fitchburg,
Massachusetts; Lebanon, Pennsylvania; and Council Bluffs, Iowa, respectively,
and five weekly newspapers distributed in and around the same cities, for a
total of approximately $51.5 million in cash. These daily newspapers had daily
and Sunday circulation of approximately 58,000 and 60,000, respectively, at
September 30, 1996. Proceeds from the sale of the Potomac News discussed above
and borrowings will be used to fund the acquisition.
The acquisition will be accounted for as a purchase; accordingly, the
consolidated financial statements will include the operations of the acquired
newspapers from March 1, 1997.
12
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Three Months Ended December 31, 1996 and 1995
Revenues
Revenues increased $12.2 million or 18.2% in the second quarter of
fiscal year 1997 as compared to the same quarter of fiscal year 1996. The
increase in revenue was attributable to the March, 1996, acquisition of the San
Mateo Times, the April 30, 1996, acquisition of The Transcript and The Evening
News, and the October 31, 1996, acquisition of the Star News, San Gabriel
Valley Tribune, Whittier Daily News, Times-Standard and The Evening Sun.
Combined, the acquisitions discussed above increased revenues approximately
$17.3 million in the second quarter of fiscal year 1997. These revenue
increases were partially offset by a $4.9 million decline in revenue resulting
from the sale of the Johnstown Tribune Publishing Company on April 30, 1996.
Excluding the newspaper operations described above, the Company's remaining
newspaper operations combined posted a $0.2 million decline in operating
revenues for the second quarter of fiscal 1997. While operating revenues on a
same newspaper basis were down, all the Company's newspapers except Alameda
Newspaper Group (excluding San Mateo) and North Jersey Newspaper Company posted
an increase in operating revenue. The increase in operating revenue at these
newspapers was approximately $1.0 million and was primarily attributable to a
combined 8.5% and 6.1% gain in classified and retail revenue, respectively.
Alameda Newspaper Group and North Jersey Newspaper Company continue to be
negatively affected by a significant number of out-of-business accounts (either
from store mergers or bankruptcies) which have not yet been cycled through. In
addition, Alameda circulation revenue has been reduced by increased use of
discounts. The Company currently expects that Alameda Newspaper Group and
North Jersey Newspaper Company will begin showing year-over-year quarterly
improvements in operating revenues in the fiscal third quarter.
Cost of Sales
Cost of sales increased $0.9 million or 3.4% in the second quarter of
fiscal 1997 compared to the same quarter of fiscal year 1996. The
aforementioned acquisitions caused cost of sales to increase approximately $6.0
million for the quarter ended December 31, 1996. However, this increase was
offset in part by a $1.6 million decrease in cost of sales resulting from the
sale of the Johnstown Tribune Publishing Company. Excluding acquisition and
disposition transactions, cost of sales decreased approximately $3.5 million or
14.5%. The decrease in cost of sales at existing newspapers was entirely the
result of declines in the average cost of newsprint of approximately 28.2%
combined with a 1.1% decrease in consumption, primarily associated with efforts
to conserve newsprint, including the conversion to the 50-inch web width which
began in October of 1995 and was completed at the majority of newspapers during
fiscal year 1996. Excluding newsprint, cost of sales on a same newspaper basis
decreased $0.5 million in the second quarter of fiscal 1997.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $5.9
million or 23.0% in the second quarter of fiscal 1997 compared to the same
quarter of fiscal 1996. The aforementioned acquisitions resulted in SG&A
expense increase of $6.1 million; however, this was in part offset by $1.4
million reduction in SG&A expense associated with the sale of the Johnstown
Tribune Publishing Company. Excluding the acquisition and disposition
transactions, SG&A expense increased $1.2 million or 4.7%. The majority of the
increase in SG&A expense is associated with increases in advertising and
circulation expenditures at Alameda Newspaper Group, which were primarily
related to ongoing efforts to increase advertising lineage and circulation.
13
14
Other Expense
Other expense, net, increased $13.7 million. The majority of the
increase is attributable to a second quarter fiscal year 1997 charge to write
off approximately $13.5 million of fees and other costs associated with the
Company's term loan and revolving credit facility entered into on October 31,
1996, and prepayment premiums associated with the October 31, 1996, prepayment
of the Company's then outstanding Senior Secured Notes. Proceeds from the term
loan and revolving credit facility were used in part to fund the aforementioned
acquisition and refinancing the Company's Senior Secured Notes.
Net Income
Garden State recorded adjusted net income of approximately $5.4 million
in the second quarter of fiscal year 1997, after excluding the effect of the
$13.5 million charge described above, compared to net income of $2.6 million in
the second quarter of fiscal year 1996. The increase in adjusted net income is
primarily attributable to a $4.7 million increase in operating profit offset by
a $1.0 million increase in interest expense and a $0.6 million increase in tax
expense resulting from the Company's improved operating results.
OPERATING RESULTS
Six Months Ended December 31, 1996 and 1995
Revenues
Revenues increased $16.9 million or 13.8% in the first six months of
fiscal year 1997 as compared to the same six-month period of fiscal year 1996.
The increase in revenue was attributable to the August 31, 1995, acquisition of
The Berkshire Eagle, Brattleboro Reformer and Bennington Banner ("New England
Newspapers"); the March, 1996, acquisition of the San Mateo Times; the April
30, 1996, acquisition of The Transcript and The Evening News; and the October
31, 1996, acquisition of the Star News, San Gabriel Valley Tribune, Whittier
Daily News, Times-Standard and The Evening Sun. Combined, the acquisitions
discussed above increased revenues approximately $26.8 million in the first six
months of fiscal year 1997. These revenue increases were partially offset by a
$9.3 million decline in revenue resulting from the sale of the Johnstown
Tribune Publishing Company on April 30, 1996. Excluding the newspaper
operations described above, the Company's remaining newspaper operations
combined posted a $0.6 million decline in operating revenues for the first six
months of fiscal year 1997. While operating revenues on a same newspaper basis
were down, all the Company's newspapers except Alameda Newspaper Group
(excluding San Mateo) and North Jersey Newspaper Company posted an increase in
operating revenue. The increase in operating revenue at these newspapers was
approximately $1.5 million and was primarily attributable to a combined 10.4%
and 6.5% gain in classified and retail revenue, respectively. Alameda
Newspaper Group and North Jersey Newspaper Company continue to be negatively
affected by a significant number of out-of-business accounts (either from
store mergers or bankruptcies) which have not yet been cycled through. The
Company currently expects that Alameda Newspaper Group and North Jersey
Newspaper Company will begin showing year-over-year quarterly improvements in
operating revenues in the fiscal third quarter.
Cost of Sales
Cost of sales increased $1.6 million or 3.2% in the first six months of
fiscal year 1997 compared to the same six-month period of fiscal 1996. The
aforementioned acquisitions caused cost of sales to increase approximately $9.2
million for the six-month period ended December 31, 1996. However, this
increase was offset in part by a $3.1 million decrease in cost of sales
resulting from the sale of the Johnstown Tribune Publishing Company. Excluding
acquisition and disposition transactions, cost of sales decreased approximately
$4.5 million or 10.7%. The decrease in cost of sales at existing newspapers
was entirely the result of declines in the average cost of newsprint of
approximately 16.6% combined with a 3.1% decrease in consumption, primarily
associated with
14
15
efforts to conserve newsprint, including the conversion to the 50-inch web
width which began in October of 1995 and was completed at a majority of
newspapers during fiscal 1996. Excluding newsprint, cost of sales on a same
newspaper basis decreased approximately $0.9 million in the first six months of
fiscal 1997.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $8.1
million or 16.2% in the first six months of fiscal year 1997 as compared to the
same period of fiscal year 1996. The aforementioned acquisitions resulted in
SG&A expense increases of $9.7 million; however, this was in part offset by a
$2.7 million reduction in SG&A expense associated with the sale of the
Johnstown Tribune Publishing Company. Excluding the acquisition and
disposition transactions, SG&A expense increased $1.1 million or 2.5%. The
increase in SG&A expense is associated with increases in advertising and
circulation expenditures, which were primarily related to ongoing efforts to
increase advertising lineage and circulation.
Other Expense
Other expense, net, increased $12.5 million. The majority of the
increase is attributable to a second quarter fiscal year 1997 charge to write
off approximately $13.5 million of fees and other costs associated with the
Company's term loan and revolving credit facility entered into on October 31,
1996, and prepayment premiums associated with the October 31, 1996, prepayment
of the Company's then outstanding Senior Secured Notes. The increase was
partially offset by $1.1 million of financing costs recorded in the same period
of fiscal year 1996 associated with the August, 1995, acquisition. Proceeds
from the term loan and revolving credit facility were used to fund the
aforementioned October 31, 1996, acquisition.
Net Income
Garden State recorded adjusted net income of approximately $4.7 million
in the first six months of fiscal year 1997, after excluding the effect of the
$13.5 million charge described above, as compared to adjusted net income of
$0.1 million in the first six months of fiscal year 1996, after excluding the
write-off of $1.1 million in fees and other costs associated with the term loan
and revolving credit facility entered into in August, 1995. The increase in net
income is primarily attributable to a $6.2 million increase in operating profit
offset by a $0.8 million increase in interest expense and a $0.8 million
increase in tax expense resulting from the Company's improved operating
results.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $8.1 million
and $2.3 million for the six months ended December 31, 1996 and 1995,
respectively. The $5.8 million increase in cash flow from operating activities
was primarily the result of a $7.3 million increase in adjusted operating
profit after excluding depreciation and amortization expense for the six months
ended December 31, 1996, compared to the same six months ended December 31,
1995. The increase in adjusted operating profit was in part offset by a $0.6
million increase in cash interest expense.
Net cash flows from investing activities were ($136.8) million and
($24.0) million for the six months ended December 31, 1996 and 1995,
respectively. The $112.8 million change was primarily the result of the
Company spending approximately $130.0 million acquiring the Star-News, Whittier
Daily Review, San Gabriel Valley Tribune, Times-Standard and The Evening Sun in
fiscal year 1997 compared to $21.7 million related to the acquisition of The
Berkshire Eagle, Brattleboro Reformer and Bennington Banner in the first six
months of fiscal year 1996. Capital expenditures increased primarily as a
result of the previously announced press upgrade in Easton and new front-end
systems in Potomac and Las Cruces.
15
16
Net cash flows from financing activities were $126.4 million and $12.8
million for the six months ended December 31, 1996 and 1995, respectively. The
change of approximately $113.6 million was attributable to the Company
borrowing a net $128.4 million in the first six months of fiscal 1996,
primarily in conjunction with the previously discussed October 31, 1996,
acquisition and prepayment of the Company's Senior Secured Notes.
Liquidity
Giving effect to the January 22, 1997, increase in the Bank Credit
Facility, Garden State and subsidiaries had a combined $74.9 million available
for future borrowings, net of approximately $5.0 million in outstanding letters
of credit at January 31, 1997. Approximately $47.0 million of the availability
under the bank credit facility is available exclusively for future business
acquisitions.
Based upon current operations and newsprint consumption, management
believes that the Company will have sufficient cash to pay interest when due on
outstanding indebtedness and that cash flow from operations, together with the
Garden State Bank Credit Facility and other resources available to the Company,
will be adequate to fund scheduled payments of principal and interest and to
meet anticipated capital expenditure and working capital requirements for at
least the next twelve months.
NEAR TERM OUTLOOK
The steady increase in newsprint prices came to a halt in the second
quarter of calendar 1996 and, beginning in May, 1996, newsprint suppliers began
lowering prices. From May, 1996 to December, 1996, the discounts offered by
newsprint suppliers continued to accelerate as newsprint supply outpaced
demand. Believing that newsprint demand was beginning to strengthen, several
newsprint suppliers announced in December, 1996, a $75 per metric ton increase
in newsprint, effective February 1, 1997, but the announced increase failed to
take hold. While the February 1, 1997, price increase was unsuccessful, the
Company believes future modest price increases may occur in the near future.
If a price increase does occur, it is not expected to have a significant impact
on the Company's cash flows from operations. As a result of the recent decline
in newsprint prices, the Company is experiencing substantial year-over-year
favorable comparisons in the average cost of newsprint consumed.
Additionally, the Company's operating margins should also continue to
improve as the Company begins to realize the full annualized effect of reduced
consumption resulting from the conversion to 50-inch web widths.
16
17
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- ------------
10.26 Employment Agreement
27. Financial Data Schedule