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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, 1999
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
MediaNews Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 76-0425553
(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) 563-6360
(MEDIANEWS GROUP IS THE SUCCESSOR ISSUER TO GARDEN STATE NEWSPAPERS, INC.,
PURSUANT TO RULE 15d-5 UNDER THE SECURITIES ACT OF 1933)
(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
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INDEX TO MEDIANEWS GROUP, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1999
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
27 - Financial Data Schedule.
Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 1999.
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.
MediaNews Group, Inc.
Dated: February 11, 2000 By: /s/ Joseph J. Lodovic, IV
--------------------- --------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer and
Duly Authorized Officer of
Registrant
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5
MEDIANEWS GROUP, INC.
Index to Financial Information
PAGE
----
ITEM 1. FINANCIAL STATEMENTS:
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
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) Garden State
MediaNews Group, Newspapers, Inc.
Inc. and Subsidiaries and Subsidiaries
December 31, 1999 June 30, 1999
--------------------- -----------------
(in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................... $ -- $ 2,882
Accounts receivable, less allowance for doubtful
accounts of $11,404 and $8,163 at December 31, 1999
and June 30, 1999, respectively ............................ 124,085 72,776
Inventories of newsprint and supplies ......................... 16,439 9,278
Prepaid expenses and other assets ............................. 6,125 4,574
Income tax receivable.......................................... 3,692 3,016
----------- -----------
TOTAL CURRENT ASSETS ....................................... 150,341 92,526
PROPERTY, PLANT AND EQUIPMENT
Land .......................................................... 31,205 25,151
Buildings and improvements .................................... 112,157 84,437
Machinery and equipment........................................ 363,218 242,077
----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT ........................ 506,580 351,665
Less accumulated depreciation and amortization................. (146,236) (76,236)
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT .......................... 360,344 275,429
OTHER ASSETS
Investment in newspaper partnerships .......................... 18,877 18,378
Subscriber accounts, less accumulated amortization of
$74,846 and $68,084 at December 31, 1999 and June 30,
1999, respectively ......................................... 121,314 127,075
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $31,759 and $26,319
at December 31, 1999 and June 30, 1999, respectively ....... 328,304 286,022
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $27,601 and
$23,704 at December 31, 1999 and June 30, 1999,
respectively................................................ 13,021 16,175
Other.......................................................... 43,877 13,973
----------- -----------
TOTAL OTHER ASSETS.......................................... 525,393 461,623
----------- -----------
TOTAL ASSETS ............................................... $ 1,036,078 $ 829,578
=========== ===========
See notes to unaudited condensed consolidated financial statements
6
7
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) Garden State
MediaNews Group, Newspapers, Inc.
Inc. and Subsidiaries and Subsidiaries
December 31, 1999 June 30, 1999
--------------------- ----------------
(in thousands, except share data)
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Trade accounts payable ........................................... $ 28,077 $ 7,831
Accrued liabilities .............................................. 59,676 46,862
Unearned income .................................................. 25,880 18,140
Current portion of long-term debt and obligations under
capital leases ................................................. 9,873 7,830
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TOTAL CURRENT LIABILITIES ...................................... 123,506 80,663
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES ................. 842,884 750,107
OTHER LIABILITIES ................................................... 15,550 7,543
DEFERRED INCOME TAXES ............................................... 40,683 18,370
MINORITY INTEREST ................................................... 131,365 123,796
SHAREHOLDERS' DEFICIT
Common stock, par value $0.01 and $1.00 per share; at December 31,
1999 and June 30, 1999, respectively; 2,314,346 and 1,000 shares
authorized, issued and outstanding at December 31, 1999 and June
30, 1999, respectively ......................................... 23 1
Additional paid-in capital ....................................... 3,610 --
Deficit .......................................................... (121,543) (150,902)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT .................................... (117,910) (150,901)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT..................... $1,036,078 $ 829,578
========== =========
See notes to unaudited condensed consolidated financial statements
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8
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended December 31, Six Months Ended December 31,
------------------------------------ ----------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- ----------------
(In thousands, except share data)
MediaNews Garden State MediaNews Garden State
Group, Inc. and Newspapers, Inc. Group, Inc. and Newspapers, Inc.
Subsidiaries and Subsidiaries Subsidiaries and Subsidiaries
---------------- ---------------- --------------- ----------------
REVENUES
Advertising.............................. $ 200,149 $ 111,170 $ 384,428 $ 209,234
Circulation.............................. 38,063 27,385 76,429 53,686
Other.................................... 6,771 4,037 12,947 7,827
---------- ----------- ---------- -----------
TOTAL OPERATING REVENUES................. 244,983 142,592 473,804 270,747
COST AND EXPENSES
Cost of sales............................ 84,693 45,355 166,004 88,388
Selling, general, and administrative..... 107,208 60,278 211,255 118,534
Depreciation and amortization............ 15,626 10,918 31,194 21,207
Interest expense......................... 18,790 14,095 37,540 27,127
Other, (net)............................. 3,214 1,049 4,107 1,846
---------- ----------- ---------- -----------
TOTAL COST AND EXPENSES.................. 229,531 131,695 450,100 257,102
GAIN ON SALE OF NEWSPAPERS................ -- -- 3,323 --
MINORITY INTEREST......................... 7,719 -- 15,465 --
---------- ----------- ---------- -----------
NET INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS.................... 7,733 10,897 11,562 13,645
INCOME TAX EXPENSE........................ 1,698 2,726 2,028 3,584
---------- ----------- ---------- -----------
INCOME BEFORE EXTRAORDINARY
LOSS...................................... 6,035 8,171 9,534 10,061
EXTRAORDINARY LOSS
(NET OF TAXES OF $1,134).................. -- -- -- (2,499)
---------- ----------- ---------- -----------
NET INCOME................................ $ 6,035 $ 8,171 $ 9,534 $ 7,562
========== =========== ========== ===========
Pro Forma Pro Forma
----------- -----------
NET INCOME (LOSS) PER COMMON SHARE:
Net income before extraordinary loss... $ 2.61 $ 5.11 $ 4.12 $ 6.30
Extraordinary loss..................... -- -- -- (1.56)
---------- ----------- ---------- -----------
Net income per common share............ $ 2.61 $ 5.11 $ 4.12 $ 4.74
========== =========== ========== ===========
Weighted average number of
shares outstanding................... 2,314,346 1,596,022 2,314,346 1,596,022
========== =========== ========== ===========
See notes to unaudited condensed consolidated financial statements.
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9
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31,
------------------------------------------
1999 1998
--------------------- ----------------
Garden State
MediaNews Group, Newspapers, Inc.
Inc. and Subsidiaries and Subsidiaries
--------------------- ----------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................... $ 9,534 $ 7,562
Adjustments to reconcile net income to net cash provided
By operating activities:
Depreciation and amortization..................................... 30,421 20,606
Provision for losses on accounts receivable....................... 5,609 2,879
Amortization of debt discount .................................... 1,990 1,636
Net gain on sale of assets........................................ (1,714) --
Debt repurchase premium........................................... -- 3,698
Distributions less than earnings from Joint Operating Agreements.. (500) (560)
Change in defined benefit plan assets............................. (1,170) --
Deferred income tax benefit....................................... 665 97
Minority Interest in net income................................... 15,465 --
Change in operating assets and liabilities........................ (23,532) (17,664)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES....................... 36,768 18,254
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper assets.......................................... 8,000 --
Acquisition of newspaper properties............................... (3,200) (53,986)
Purchase of machinery and equipment (net)......................... (13,794) (3,890)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES....................... (8,994) (57,876)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt....................................... (41,305) (57,991)
Reduction of non-operating liabilities........................... (9,092) (317)
Debt repurchase premium........................................... -- (3,698)
Issuance of long-term debt........................................ 27,158 100,629
Distributions paid to minority interest........................... (7,417) --
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES....................... (30,656) 38,623
-------- --------
CHANGE IN CASH AND CASH EQUIVALENTS.................................... (2,882) (999)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... 2,882 999
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ -- $ --
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid..................................................... $ 31,489 $ 25,382
======== ========
Income taxes paid................................................. $ 159 $ 3
======== ========
See notes to unaudited condensed consolidated financial statements
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10
MEDIANEWS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: REORGANIZATION AND BASIS OF PRESENTATION
As a result of a corporate reorganization, as is more fully described
below, MediaNews Group, Inc. (the "Company" or "MediaNews", f.k.a. Affiliated
Newspapers Investments, Inc.) became the successor issuer to Garden State
Newspapers, Inc., pursuant to Rule 15d-5, under the Securities Act of 1933.
Reorganization
- In June 1999, Affiliated Newspapers Investments, Inc., parent of Garden
State Newspapers, Inc., changed its name to MediaNews Group, Inc.
- On June 30, 1999, MediaNews purchased an additional 20% interest in The
Denver Post Corporation ("Denver Post"), bringing its total ownership
interest in the Denver Post to 80%. In addition, the Denver Post
Shareholder Agreement was modified, giving MediaNews control of the
Denver Post board of directors. Accordingly, the Denver Post became a
consolidated subsidiary of MediaNews.
- On September 1, 1999, Garden State Newspapers, Inc. was merged into
MediaNews, with MediaNews as the surviving corporation.
Basis of Presentation
As a result of the reorganization described above, the condensed
consolidated financial statements for December 31, 1999, included the
consolidated results of operations of MediaNews and its subsidiaries, which
includes the Denver Post and the subsidiaries formerly known as Garden State
Newspapers, Inc. and subsidiaries ("Garden State"). The financial statement data
for June 30, 1999 and the three and six month periods ended December 31, 1998,
included in this 10Q, only includes Garden State. All significant intercompany
accounts and transactions have been eliminated upon consolidation.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Quarterly Financial Statements
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, 1999.
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, 1999,
are not necessarily indicative of the results that may be expected for the year
ended June 30, 2000.
Income Taxes
The effective income tax rate varies from the federal statutory rate
primarily because of the nondeductibility of certain expenses and the
utilization of net operating losses that were previously subject to valuation
allowances.
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.
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MEDIANEWS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
Earnings Per Share
Earnings per share for the three and six months ended December 31, 1998,
have been restated to give effect to the merger of Garden State, into MediaNews
as if the merger occurred effective July 1, 1998. The pro forma weighted average
outstanding shares at December 31, 1998 is based on the historical number of
shares of tracking stock issued by MediaNews, which are attributable to Garden
State and its subsidiaries.
Business Acquisition
Effective October 31, 1999, the Company acquired substantially all of the
assets used in the publication of the Deming Headlight, a morning newspaper
published in Deming, New Mexico, for approximately $2.0 million cash. The
newspaper has daily paid circulation of approximately 3,850. In addition,
effective October 1, 1999 and January 1, 2000, the California Newspapers
Partnership purchased a shopper in Ukiah, California and a weekly newspaper in
Milpitas, California, respectively. The purchase price included cash and future
payments under covenants not to compete.
These acquisitions have been accounted for as purchases; accordingly, the
unaudited Consolidated Financial Statements include the operations of the
acquired newspapers from the date of acquisition. The assets acquired and the
liabilities assumed have been recorded at their estimated fair market value. The
estimated fair market value of assets acquired reflect management's current best
estimate; however, are subject to change in the final allocation of purchase
price. The excess of cost over fair market value of net assets acquired and
intangible assets related to subscriber lists are being amortized on a straight
line basis over 40 years and 15 years, respectively.
Disposition
Effective July 31, 1999, the California Newspapers Partnership sold the
assets of The Hemet News and Moreno Valley Times for a pre-tax gain of
approximately $3.3 million. Approximately $1.9 million of the proceeds from the
sale were used to purchase the newspaper assets described above. The remaining
cash was distributed to the partners in the California Newspapers Partnership.
NOTE 3: LONG TERM DEBT
In conjunction with the previously described reorganization, MediaNews
borrowed $100.4 million under a new credit facility. Proceeds from this
borrowing were used to acquire an additional 20% interest in the Denver Post,
repay the Denver Post's bank debt, redeem the Denver Post's preferred stock plus
accrued dividends and pay fees and expenses on the related borrowings. In
conjunction with this transaction, MediaNews and the Denver Post also entered
into a Master Intercompany Note, representing the amount of borrowings under the
Company's new credit facility, which are directly attributable to the operations
of the Denver Post. Amounts borrowed under the Master Intercompany note are
guaranteed by the Denver Post. The Denver Post's debt guarantee is limited to
the Permitted Debt of the Denver Post as defined in the Denver Post
Shareholder's Agreement between MediaNews and Media General.
The following table sets forth the approximate expected scheduled maturities
of long-term debt, excluding capital leases, of the Company for the fiscal years
indicated, (in thousands):
2000............................. 4,461
2001............................. 8,794
2002............................. 8,461
2003............................. 6,329
2004............................. 55,878
Thereafter....................... 757,542
-------
841,465
=======
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MEDIANEWS GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: COMMITMENTS
MediaNews has entered into newsprint swap agreements covering 75,000 metric
tons of newsprint, which expire over the next six to nine years. MediaNews uses
the agreements to minimize in part, the Company's exposure to the uncertainty of
future newsprint price fluctuations. Settlements are made on a monthly or
quarterly basis, and vary based on the difference between the fixed contract
price and the price as published in the Paper Trader (also known as the RISI
index). The weighted average fixed price of newsprint under the agreements is
$592 per metric ton. MediaNews accounts for amounts received or paid under these
agreements as an adjustment to newsprint expense. MediaNews also participates in
fixed price contracts, which currently allow the Company to purchase 30 pound
newsprint at a weighted average price of approximately $514 per metric ton
during calendar year 2000.
The Denver Post Shareholder Agreement provides Media General and MediaNews
with a put and a call option, respectively, on Media General's remaining 20%
interest in the Denver Post. The put can be exercised by Media General beginning
June 30, 2001 and expires June 30, 2004. The call option can be exercised
beginning July 1, 2004 and expires June 30, 2005. The price of the put and call
are the same and is based on the appraised fair market value of the Denver Post,
less Permitted Debt of the Denver Post. MediaNews has one year to close on the
purchase from the date of the put notice.
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13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Three Months Ended December 31, 1999 and 1998
Revenues
Revenues increased $102.4 million or 71.8% in the second quarter of fiscal
year 2000 as compared to the same quarter of fiscal year 1999. The increase in
revenue was primarily attributable to the consolidation of the Denver Post and
the formation of the California Newspapers Partnership ("CNP"). Excluding the
consolidation of the Denver Post and the CNP partnership, our remaining
newspaper operations ("existing newspapers") had a 3.5% increase in operating
revenues for the second quarter of fiscal year 2000. Advertising revenues at
existing newspapers increased by approximately 4.3%, driven by continued growth
in all advertising categories.
Cost of Sales
Cost of sales increased $39.3 million or 86.7% in the second quarter of
fiscal year 2000 compared to the same quarter of fiscal year 1999. The
consolidation of the Denver Post and the CNP partnership caused the majority of
the cost of sales increase for the quarter ended December 31, 1999. Excluding
the consolidation of the Denver Post and the CNP partnership, cost of sales
decreased approximately 1%.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $46.9
million or 78.0% in the second quarter of fiscal year 2000 as compared to the
same quarter of fiscal year 1999. The consolidation of the Denver Post and the
CNP partnership caused almost all of the SG&A expense increase in the second
quarter of fiscal year 2000. Excluding the consolidation of the Denver Post and
the CNP partnership, SG&A expense increased approximately 8.3%. The increase in
SG&A is associated with an increase in circulation expenditures, which were
primarily related to ongoing efforts to increase total paid circulation. We have
also increased our spending in the current fiscal year as we continue to develop
our internet sales, improve and maintain our newspaper websites and support the
addition of the CNP partnership. While SG&A expense has increased as a result of
the CNP partnership, the increase is offset by management fees paid to us by the
CNP partnership, the effect of which is reflected as a reduction in minority
interest expense.
EBITDA
EBITDA, adjusted for minority interest, increased $5.8 million or 15.8% in
the second quarter of fiscal year 2000. The majority of the increase was due to
the consolidation of the Denver Post and the formation of CNP partnership;
however, our existing newspapers realized a 5.2% increase in EBITDA. EBITDA
represents total revenues less cost of sales and selling, general and
administrative expense. Although EBITDA is not a measure of performance
calculated in accordance with GAAP, we believe that EBITDA is an indicator and
measurement of its leverage capacity and debt service ability.
Depreciation and Amortization
Depreciation and amortization increased $4.7 million in the second quarter
of fiscal year 2000 as compared to the same period of fiscal year 1999. The
aforementioned consolidation of the Denver Post and the formation of the CNP
partnership caused the majority of the increase in depreciation and amortization
expense.
Interest Expense
Interest expense increased $4.7 million in the second quarter of fiscal year
2000 as compared to the same period in fiscal year 1999. Interest expense
increased as a result of a $298.1 million increase in average debt outstanding,
primarily associated with acquisitions, debt repurchases and the inclusion of
debt related to the Denver Post and MediaNews (f.k.a. Affiliated Newspapers
Investments, Inc.), which was not previously part of Garden State's consolidated
debt. This increase was partially
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14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
offset by a 67 basis point decrease in the average interest rate, associated
with repurchasing our 12% Senior Subordinated Secured Notes in fiscal year 1999,
which was funded with lower cost bank debt.
Other Expense
Other expense increased $2.2 million in the second quarter of fiscal year
2000 as compared to the same period in fiscal year 1999. The increase is
primarily attributable to the loss on the sale of land and building in the CNP
partnership as a result of relocating the headquarters of ANG Newspapers and
from the recognition of equity losses from our investment in AdOne.
Net Income
We reported net income of approximately $6.0 million in the second quarter
of fiscal year 2000 compared to a net income of $8.2 million in the second
quarter of fiscal year 1999. The decrease in adjusted net income is primarily
attributable to a $4.7 million increase in interest expense and a $2.2 million
increase in other expense, which was only partially offset by a $3.7 million
increase in operating profit net of minority interest, and a $1.0 million
reduction in income tax expense.
Six Months Ended December 31, 1999 and 1998
Revenues
Revenues increased $203.0 million or 75.0% in the first six months of fiscal
year 2000 as compared to the same six month period of fiscal year 1999. The
increase in revenue was primarily attributable to the consolidation of the
Denver Post; the formation of the CNP partnership; the August 21, 1998
acquisition of the 50% interest in the Charleston Newspaper joint venture; and
the October 1, 1998 acquisition of the Daily Times. Excluding newspaper
acquisitions, consolidation of the Denver Post and the CNP partnership, our
remaining newspaper operations ("existing newspapers") had a 4.1% increase in
operating revenues for the first six months of fiscal year 2000. Advertising
revenues at existing newspapers increased by approximately 5.1%, driven by
continued growth in all advertising categories.
Cost of Sales
Cost of sales increased $77.6 million or 87.8% in the first six months of
fiscal year 2000 compared to the same six month period of fiscal year 1999. The
aforementioned acquisitions, consolidation of the Denver Post and the CNP
partnership caused the majority of the cost of sales increase for the first six
months of fiscal year 2000. Excluding newspaper acquisitions, consolidation of
the Denver Post and the CNP partnership, cost of sales decreased slightly,
primarily driven by decreased production expenses, which was offset by increases
in editorial spending.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $92.7
million or 78.2% in the first six months of fiscal year 2000 as compared to the
same six month period of fiscal year 1999. The aforementioned acquisitions,
consolidation of the Denver Post and the CNP partnership caused the majority of
the SG&A expense increase in the first six months of fiscal year 2000. Excluding
newspaper acquisitions, consolidation of the Denver Post and the CNP
partnership, SG&A expense increased approximately 8.1%. The increase in SG&A is
associated with increases in advertising and circulation expenditures, which
were primarily related to ongoing efforts to increase advertising lineage and
total paid circulation. We have also increased our spending in the current
fiscal year as we continue to develop our internet sales, improve and maintain
our newspaper websites and support the addition of the CNP partnership. While
SG&A expense has increased as a result of the CNP partnership, the increase is
offset by management fees paid to us by the CNP partnership, the effect of which
is reflected as a reduction in minority interest expense.
EBITDA
EBITDA, adjusted for minority interest, increased $13.6 million or 21.4% in
the first six months of fiscal 2000 as compared to the same six month period of
fiscal year 1999. The majority of the increase was due to the consolidation of
the Denver Post,
14
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
formation of the CNP partnership and prior year acquisitions; however, our
existing newspapers realized a 7.6% increase in EBITDA. EBITDA represents total
revenues less cost of sales and selling, general and administrative expense.
Although EBITDA is not a measure of performance calculated in accordance with
GAAP, we believe that EBITDA is an indicator and measurement of its leverage
capacity and debt service ability.
Depreciation and Amortization
Depreciation and amortization increased $10.0 million in the first six
months of fiscal year 2000 as compared to the same six month period of fiscal
year 1999. The aforementioned consolidation of the Denver Post, formation of the
CNP partnership and acquisitions caused the majority of the increase in
depreciation and amortization expense.
Interest Expense
Interest expense increased $10.4 million in the first six months of fiscal
year 2000 as compared to the same six month period in fiscal year 1999. Interest
expense increased as a result of a $313.5 million increase in average debt
outstanding, primarily associated with acquisitions, debt repurchases and the
inclusion of debt related to the Denver Post and MediaNews (f.k.a. Affiliated
Newspapers Investments, Inc.), which was not previously part of Garden State's
consolidated debt. This increase was partially offset by a 82 basis point
decrease in the average interest rate, associated with repurchasing our 12%
Senior Subordinated Secured Notes in fiscal year 1999, which was funded with
lower cost bank debt.
Extraordinary Loss
In the first quarter of fiscal year 1999, Garden State repurchased $36.0
million of its 12% Senior Subordinated Secured Notes at a premium of
approximately $3.6 million. The premium, net of income taxes, was recorded as an
extraordinary loss. Based on the Company's current interest rates, the
repurchase has significantly reduced the Company's total interest expense.
Net Income
We reported adjusted net income of approximately $7.6 million for the first
six months of fiscal year 2000 after excluding our share of the gain on sale of
a CNP newspaper property of approximately $2.0 million; compared to and adjusted
net income of $10.0 million in the first six months of fiscal year 1999 after
excluding the extraordinary loss of $2.5 million. The decrease in adjusted net
income is primarily attributable to a $10.4 million increase in interest expense
and a $2.2 million increase in other expense in the second quarter of fiscal
year 2000, which was only offset in part by a $7.3 million increase in operating
profit, net of minority interest, and a $1.6 million reduction in income tax
expense.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $36.8 million
and $18.3 million for the six months ended December 31, 1999 and 1998,
respectively. The $18.5 million increase in cash flow from operating activities
was primarily the result of the $32.7 million increase in EBITDA for the six
months ended December 31, 1999, compared to the same period of the prior year.
The increase in EBITDA was offset by a $5.9 million change in operating assets
and liabilities due to timing differences and a $6.1 million increase in cash
interest paid.
Net cash flows from investing activities were ($9.0) million and ($57.9)
million for the six months ended December 31, 1999 and 1998, respectively. The
$48.9 million increase was primarily the result of our spending $53.9 million on
acquisitions in fiscal year 1999 compared to a net $4.8 million in proceeds from
buying and selling newspaper properties in the first six months of fiscal year
2000. The decrease in acquisition spending was offset in part, by a $9.9 million
increase in capital spending primarily associated with the completion of year
2000 projects and the addition of a press line at the Denver Post, in
conjunction with a long-term commercial printing contract. We will sell and
lease back the press line under a capital lease in our fiscal third quarter
2000. The long-term contract is to print and deliver the New York Times.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net cash flows from financing activities were ($30.6) million and $38.6
million for the six months ended December 31, 1999 and 1998, respectively. The
change of approximately $69.2 million was primarily attributable to our paying
down a net $23.2 million of long-term debt and other liabilities in the first
six months of fiscal 2000, compared to a net borrowing of $42.3 million in
fiscal 1999. The majority of the 1999 borrowings were made in conjunction with
the previously discussed acquisitions. The $3.7 million of debt repurchase
premiums in fiscal year 1999 and the $7.4 million of minority interest payments
in fiscal year 2000, also contributed to the change.
Liquidity
Based upon current and expected future operating results, we believe that we
will have sufficient cash flows from operations 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. We have $91.5 million
available for future borrowings under our bank credit agreement, net of
approximately $3.9 million in outstanding letters of credit, which should be
more than sufficient to fund unanticipated capital needs or other cash
requirements should they arise.
NEAR TERM OUTLOOK
Newsprint Prices
The largest North American newsprint suppliers have announced a $50 per
metric ton price increase for 30 pound newsprint effective April 1, 2000. If the
full price increase takes hold, North American 30 pound newsprint will average
$565 per metric ton for large newsprint buyers. To minimize the influence of
newsprint price fluctuations, we have entered into fixed price newsprint
contracts and newsprint swap agreements, which expire over the next one to nine
years. The weighted average price for newsprint under both the fixed price
newsprint contracts and the newsprint swap, for 2000, is $546 per metric ton.
Approximately 65% of our 2000 newsprint consumption is expected to be purchased
under fixed pricing agreements. In addition, we have a contract that allows us
to purchase 36,000 metric tons of newsprint per year at a price equal to the
lowest price at which newsprint is sold to large North America newsprint
purchasers, subject to quarterly adjustment.
YEAR 2000
The year 2000 issue results from computer programs that have time-sensitive
software, which may recognize a date using "00" as the year 1900 rather than the
year 2000. We did not have any system failures or significant disruption in our
operations or with our suppliers as a result of the year 2000.
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