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 March 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
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
--- ---
INDEX TO GARDEN STATE NEWSPAPERS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 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
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
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 March 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.
GARDEN STATE NEWSPAPERS, INC.
Dated: May 11, 1999 By: /s/ Joseph J. Lodovic, IV
---------------- -----------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer and
Duly Authorized Officer of Registrant
4
GARDEN STATE NEWSPAPERS, 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
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1999 1998
------------ ------------
ASSETS (In thousands)
CURRENT ASSETS
Cash and cash equivalents ....................................... $ 80,087 $ 999
Accounts receivable, less allowance for doubtful
accounts of $6,464 and $6,239 at March 31, 1999
and June 30, 1998, respectively ............................... 57,641 51,731
Inventories of newsprint and supplies ........................... 9,297 7,286
Prepaid expenses and other assets ............................... 4,292 3,475
Income tax receivable ........................................... -- 1,687
------------ ------------
Total Current Assets .......................................... 151,317 65,178
PROPERTY, PLANT AND EQUIPMENT
Land ............................................................ 16,471 16,658
Buildings and improvements ...................................... 62,443 61,060
Machinery and equipment ......................................... 187,617 179,670
------------ ------------
Total Property, Plant and Equipment ......................... 266,531 257,388
Less accumulated depreciation and amortization .................. 75,213 63,588
------------ ------------
Net Property, Plant and Equipment ........................... 191,318 193,800
OTHER ASSETS
Investment in partnerships ...................................... 17,411 7,479
Subscriber accounts, less accumulated amortization of
$63,477 and $53,446 at March 31, 1999 and June 30,
1998, respectively ............................................ 96,473 98,712
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $24,353 and $18,492
at March 31, 1999 and June 30, 1998, respectively ............. 287,196 251,196
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $23,109 and
$19,846 at March 31, 1999 and June 30, 1998,
respectively .................................................. 15,967 15,810
Other ........................................................... 13,412 7,468
------------ ------------
Total Other Assets .......................................... 430,459 380,665
------------ ------------
TOTAL ASSETS ...................................................... $ 773,094 $ 639,643
------------ ------------
------------ ------------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1999 1998
------------ ------------
LIABILITIES AND SHAREHOLDER'S EQUITY (In thousands, except share data)
CURRENT LIABILITIES
Trade accounts payable ............................................. $ 2,459 $ 5,684
Accrued liabilities ................................................ 49,743 49,279
Unearned income .................................................... 14,984 14,829
Income taxes ....................................................... 1,001 --
Current portion of long-term debt and capital lease obligation ..... 6,184 5,644
------------ ------------
Total Current Liabilities ...................................... 74,371 75,436
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION .......................... 651,389 511,686
OTHER LIABILITIES .................................................... 7,102 6,479
DEFERRED INCOME TAXES ................................................ 16,289 12,495
SHAREHOLDER'S EQUITY
Common stock, par value $1.00 per share;
authorized 1,000 shares; 1,000 shares issued
and outstanding .................................................. 1 1
Additional paid-in capital ......................................... 65,984 78,570
Deficit ............................................................ (42,042) (45,024)
------------ ------------
Total Shareholder's Equity ..................................... 23,943 33,547
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 773,094 639,643
------------ ------------
------------ ------------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended March 31, Ended March 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
REVENUES
Advertising ................................ $ 97,563 $ 83,488 $ 306,797 $ 234,333
Circulation ................................. 26,943 24,469 80,629 64,308
Other ....................................... 3,652 3,370 11,479 10,632
---------- ---------- ---------- ----------
TOTAL OPERATING REVENUES .................. 128,158 111,327 398,905 309,273
COST AND EXPENSES
Cost of sales ............................... 43,066 38,242 131,454 103,185
Selling, general, and administrative ........ 60,111 51,098 178,645 136,792
Depreciation and amortization ............... 10,549 9,722 31,756 26,229
Interest expense ............................ 13,335 12,062 40,463 32,203
Other, (net) ................................ 6,076 1,209 7,921 9,156
---------- ---------- ---------- ----------
TOTAL COST AND EXPENSES ................... 133,137 112,333 390,239 307,565
GAIN ON SALE OF NEWSPAPERS .................... -- -- -- 31,829
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS ...................... (4,979) (1,006) 8,666 33,537
INCOME TAX (EXPENSE) BENEFIT .................. 399 1,399 (3,530) (5,530)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ....... (4,580) 393 5,136 28,007
EXTRAORDINARY LOSS (NET OF TAXES OF $1,479) ... -- -- (2,154) --
---------- ---------- ---------- ----------
NET INCOME (LOSS) ............................. $ (4,580) $ 393 $ 2,982 $ 28,007
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended March 31,
---------------------------
1999 1998
----------- ------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................... $ 2,982 $ 28,007
Adjustments to reconcile income to net cash provided by operating
activities:
Depreciation and amortization ....................................... 30,806 25,751
Gain on sale of newspaper properties and other assets ............... (85) (31,819)
Provision for losses on accounts receivable ......................... 4,431 3,171
Amortization of debt discount ....................................... 2,733 2,034
Debt issuance cost and repurchase premiums .......................... 9,198 7,121
Distributions less than earnings from investment in partnerships .... (599) (561)
Deferred income tax (benefit) expense ............................... 2,055 (303)
Change in operating assets and liabilities .......................... (12,720) 3,074
---------- ----------
NET CASH FLOWS FROM OPERATING ACTIVITIES ....................... 38,801 36,475
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper property assets ................................... 1,334 43,029
Purchase of newspaper properties .................................... (57,751) (220,806)
Purchase of machinery, equipment (net) .............................. (8,154) (6,621)
---------- ----------
NET CASH FLOWS FROM INVESTING ACTIVITIES ....................... (64,571) (184,398)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt .......................................... 303,533 475,287
Debt issuance cost and repurchase premiums .......................... (9,198) (7,121)
Dividends Paid ...................................................... (12,586) --
Reduction of long-term debt ......................................... (176,361) (324,467)
Reduction of non-operating liabilities .............................. (530) (1,297)
---------- ----------
NET CASH FLOWS FROM FINANCING ACTIVITIES ....................... 104,858 142,402
---------- ----------
CHANGE IN CASH AND CASH EQUIVALENTS .................................... 79,088 (5,521)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................................................ 999 8,944
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 80,087 $ 3,423
---------- ----------
---------- ----------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid ....................................................... $ 33,755 $ 31,620
---------- ----------
---------- ----------
Income taxes paid ................................................... $ 20 $ 8,862
---------- ----------
---------- ----------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION
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, 1998. 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 nine month period ended March 31, 1999, are not necessarily indicative of
the results that may be expected for the year ended June 30, 1999.
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.
RELATED PARTY TRANSACTIONS
MediaNews Group, Inc., an affiliate of Company, provides management
services to the Company and its subsidiaries. The management fees related to
these services are included in selling, general and administrative expenses
in the accompanying Consolidated Statements of Operations.
RECLASSIFICATION
Certain balances for the periods ended March 31, 1998, have been
reclassified to conform with the current quarterly and year to date
presentation.
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.
BUSINESS ACQUISITIONS
On August 22, 1998 Garden State acquired a 50% interest in Charleston
Newspapers for approximately $47.0 million. Charleston Newspapers, a joint
venture, publishes the CHARLESTON GAZETTE (morning) and Charleston DAILY MAIL
(evening), six days a week and the SUNDAY GAZETTE-MAIL, under the terms of a
Joint Operating Agreement ("JOA"). Charleston Newspapers has average daily
and Sunday paid circulation of approximately 90,000 and 99,000, respectively,
as of September 30, 1998. The acquisition included rights to the masthead of
the Charleston DAILY MAIL; thus, we are responsible for the editorial content
of the Charleston DAILY MAIL. We account for our JOA operations by including
our pro rata share of revenue and expenses generated by the operations of the
JOA on a line by line basis in the Consolidated Statement of Operations. The
pro rata results of operations have been included since the date of
acquisition. Our 50% interest in the joint venture and the intangible assets
acquired are recorded at the estimated fair
10
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
market value as of the date of acquisition. The values recorded are based on
management's preliminary estimates and are subject to change upon the final
allocation of the 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 and 8 years, respectively.
Effective October 1, 1998, Garden State acquired substantially all of the
assets used in the publication of the DAILY TIMES, a morning newspaper
published in Farmington, New Mexico, for cash and discounted notes with the
prior owners. The newspaper has average daily and Sunday paid circulation of
approximately 16,700 and 18,000, respectively, at September 30, 1998. The
acquisition was accounted for as a purchase; accordingly, the results of
operations were included since the date of acquisition. The assets acquired
and the liabilities assumed are recorded at their estimated fair market value
as of the date of acquisition. These values are based on management's
preliminary estimate and are subject to change upon the final allocation of
the purchase price. The excess of cost over fair market value of the net
assets acquired and intangible assets related to subscriber lists are being
amortized on a straight line basis over 40 and 15 years, respectively.
On March 31, 1999 Garden State, through its wholly owned subsidiary, West
Coast MediaNews LLC, formed the California Newspaper Partnership with Donrey
Newspapers LLC ("Donrey") and the Sun Company of San Bernardino California
("Gannett"). We contributed Alameda Newspaper Group, comprised of six daily
newspapers published in the San Francisco Bay area; San Gabriel Valley
Newspapers, which includes three daily newspapers published in the Los
Angeles area; and the Times-Standard, a daily newspaper published in Eureka,
California; and all the weekly publications published by these daily
newspapers in exchange for a 58.8% partnership interest. Donrey contributed
ten daily newspapers and two non-daily newspapers, located in California,
most of which are located in close proximity to Garden State's California
newspaper publications, in exchange for a 28.5% partnership interest. Gannett
contributed the San Bernardino County Sun in exchange for a 12.7% partnership
interest. The California Newspaper Partnership publishes twenty-one daily
newspapers with average daily and Sunday paid circulation of approximately
607,000 approximately 573,000, respectively, at September 30, 1998.
NOTE 2: LONG TERM DEBT
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 was recognized as an extraordinary
loss in the first quarter of fiscal year 1999. Proceeds from borrowings under
Garden State's Bank Credit Agreement were used to repurchase the 12.0% Senior
Subordinated Secured Notes.
In the third quarter of fiscal year 1999, the Company issued $200.0
million of 8.625% Senior Subordinated Notes due 2011. Interest accruing on
the 8.625% Senior Subordinated Notes is payable semi-annually, in arrears on
January 1 and July 1. The indebtedness evidenced by the 8.625% Senior
Subordinated Notes is subordinated and junior in right of payment to
obligations under the current and future Bank Credit Agreement (see Note 4).
No principal payments are required until July 1, 2011, at which time all
outstanding principal and interest is due and payable. The 8.625% Senior
Subordinated Notes are general unsecured obligations of the Company ranking
PARI PASSU in right of payment with the existing 8.75% Senior Subordinated
Notes. Net proceeds were used or will be used to repay the existing bank
credit facility and remaining 12% Secured Subordinated Notes, debt of certain
shareholders of ANI, and pay dividends to ANI, our sole shareholder, for
purposes of repurchasing ANI's Senior Discount Debentures.
NOTE 3: COMMITMENTS
Garden State, through MediaNews Group, Inc., has entered into newsprint
swaps covering 37,500 metric tons of newsprint, which expires over the next
seven to ten years. Garden State uses newsprint swaps, its manage 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 swaps is $602 per metric ton, the majority of which expires in 10 years.
Garden State accounts for
11
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: COMMITMENTS (CONTINUED)
amounts received or paid under these agreements as an adjustment to newsprint
expense. Garden State also participates in fixed price contracts, which
currently allows it to purchase 30 pound newsprint at a weighted average
price of $523 per metric ton. The weighted average cost of newsprint
(including swaps, fixed price contracts and open market purchases) for the
nine months ended March 31, 1999 was approximately $541 per metric ton.
NOTE 4: SUBSEQUENT EVENTS
TENDER OFFER
On April 13, 1999 Garden State made a Tender Offer to purchase the
remaining outstanding 12% Senior Subordinated Secured Notes ("12% Notes") due
2004. Under the terms of the Tender Offer, the Company has offered to
purchase the 12% Notes at a premium of 75 basis points over the yield to
maturity of U.S. Treasury Bonds due July 31, 1999, calculated on the second
business day preceding the date on which the Tender Offer expires, if the 12%
Notes are tendered by April 27, 1999. If the 12% Notes are tendered after
April 27, 1999 the premium is reduced by $20 per $1,000 principal amount. The
above described premium is solely in conjunction with repurchasing the 12%
Notes prior to the first call date of July 1, 1999. Note holders that
tendered their 12% Notes prior to April 27, 1999 will receive a payment of
approximately $1,083 per 12% Note tendered, plus accrued interest. The $4.8
million of premiums and consent payments associated with early extinguishment
of debt described above will be recorded as an extraordinary loss, net of
income tax benefits, in the Company's fiscal fourth quarter.
NEW CREDIT FACILITY
On May 11, 1999 the Company entered into a $190.0 million senior secured
reducing revolving credit facility ("New Credit Facility"), which provides
for a $10.0 million sublimit for standby letters of credit and a $5.0 million
sublimit for same day borrowings. Borrowings will bear interest at prime or
LIBOR, at the Company's option, plus the applicable borrowing margin. The
borrowing margin adjusts depending on the Company's leverage ratio and
whether the base interest rate is based on prime or LIBOR. Interest is
payable at the end of interest rate contracts or quarterly if the contract
period exceeds three months. The Company also pays an annual commitment fee
of 0.50% on the unused commitment, which reduces to 0.375% and 0.25%, if the
ratio of total debt to operating cash flow is between 5.49.x and 4.0x and
less than 4.0x, respectively. Beginning on September 30, 2004 the commitment
under the New Credit Facility is reduced by $15.0 million. Quarterly
thereafter the commitment is reduced by an additional $25.0 million
reduction, until June 30, 2006, at which time any amounts which remain
outstanding are due and payable. Borrowing under the New Credit Facility are
secured by all the capital stock of Garden State and its subsidiaries.
The New Credit Facility also contains certain restrictive covenants,
which limit Garden State's ability to incur additional debt, make
acquisitions or investments, sell assets and make distributions. Additionally
the agreement requires the maintenance of certain financial ratios based on
leverage, debt service coverage, interest coverage and fixed charges coverage.
LONG-TERM DEBT
The following table sets forth, after giving effect to the fiscal year
1999 borrowing and debt issuance including the recent Tender Offering and
borrowings under the New Credit Facility, the approximate expected scheduled
maturities of long-term debt for the fiscal years indicated. (in thousands)
1999. . . . . . . . . . . . . . . . . . . $ 1,820
2000. . . . . . . . . . . . . . . . . . . 5,244
2001. . . . . . . . . . . . . . . . . . . 5,339
2002. . . . . . . . . . . . . . . . . . . 4,941
2003. . . . . . . . . . . . . . . . . . . 5,256
Thereafter . . . . . . . . . . . . . . 739,858
----------
$ 762,458
----------
----------
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES
Revenues increased $16.8 million or 15.1% in the third quarter of fiscal
year 1999 as compared to the same quarter of fiscal year 1998. The increase
in revenue was primarily attributable to the January 29, 1997, acquisition of
the DAILY NEWS; the August 21, 1998 acquisition of a 50% interest in the
Charleston Newspaper joint venture; and the October 1, 1998 acquisition of
the DAILY TIMES. Excluding newspaper acquisitions, operating revenue at our
remaining newspaper operations ("existing newspapers") also increased in the
third quarter 1999. The increase in operating revenue at existing newspapers
was driven by a 4.9% increase in advertising revenue from continued strong
growth in classified, retail and preprint advertising.
COST OF SALES
Cost of sales increased $4.8 million or 12.6% in the third quarter of
fiscal year 1999 compared to the same quarter of fiscal year 1998. The
aforementioned acquisitions caused the majority of the cost of sales increase
for the quarter ended March 31, 1999. Excluding newspaper acquisitions, cost
of sales remained virtually flat. We increased our spending in editorial, the
majority of which was offset by decreases in newsprint and production costs.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $9.0
million or 17.6% in the third quarter of fiscal year 1999 as compared to the
same quarter of fiscal year 1998. The aforementioned acquisitions caused the
majority of the SG&A expense increase in the third quarter of fiscal year
1999. Excluding newspaper acquisitions, SG&A expense increased approximately
5.4%. The increase in SG&A at existing newspapers is associated with
increases in advertising expenditures, which were primarily related to
ongoing efforts to increase advertising lineage.
EBITDA
EBITDA increased $3.0 million or 13.6%. The majority of the increase was
due to acquisitions; however, EBITDA at our existing newspapers was up 4.5%.
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 our leverage capacity and debt service ability.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $0.8 million in the third quarter
of fiscal year 1999 as compared to the same period of fiscal year 1998. The
aforementioned acquisitions caused the majority of the increase in
depreciation and amortization expense.
INTEREST EXPENSE
Interest expense increased $1.3 million in the third quarter of fiscal
year 1999 as compared to the same period in fiscal year 1998. Interest
expense increased as a result of a $132.5 million increase in average debt
outstanding, primarily associated with acquisitions, which was partially
offset by a 75 basis point reduction in the weighted average interest rate.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING RESULTS (CONTINUED)
OTHER EXPENSE
Other expense increased approximately $4.9 million in the third quarter
of fiscal year 1999 as compared to the same quarter of fiscal year 1998. The
increase is primarily attributable to writing off $5.5 million of fees and
other costs associated with Garden State's $200.0 million issuance of 8.625%
Senior Subordinated Notes in March 1999.
NET INCOME
We reported adjusted net income of approximately $0.9 million in the
third quarter of fiscal year 1999 after excluding the $5.5 million of debt
issuance cost described above, as compared to net income of $0.4 million in
the third quarter of 1998. The increase in adjusted net income is primarily
attributable to a $2.2 million increase in operating profit and a $0.6
million decrease in other expense after excluding debt issuance cost, offset
by a $1.0 million reduction in tax benefits and the previously discussed $1.3
million increase in interest expense.
NINE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES
Revenues increased $89.6 million or 29.0% in the first nine months of
fiscal year 1999 as compared to the same nine months of fiscal year 1998. The
increase in revenue was primarily attributable to the July 31, 1997,
acquisition of THE SUN; the December 16, 1997, acquisition of the
PRESS-TELEGRAM; the January 29, 1997, acquisition of the DAILY NEWS; the
August 21, 1998 acquisition of a 50% interest in the Charleston Newspaper
joint venture; and the October 1, 1998 acquisition of the DAILY TIMES. The
increase in operating revenue from acquisitions was partially offset by the
sale of the NORTH JERSEY HERALD & NEWS on December 5, 1997. Excluding
newspaper acquisitions and dispositions, the operating revenues at our
existing newspapers also increased in the first nine months of fiscal year
1999. The increase in operating revenue at existing newspapers was driven by
a 3.8% increase in advertising revenue from continued growth in classified,
retail and preprint advertising.
COST OF SALES
Cost of sales increased $28.2 million or 27.4% in the first nine months
of fiscal year 1999 compared to the same nine month period of fiscal year
1998. The aforementioned acquisitions caused the majority of the cost of
sales increase for the first nine months of fiscal year 1999. Excluding
newspaper acquisitions and dispositions, cost of sales was flat.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $41.9
million or 30.6% in the first nine months of fiscal year 1999 as compared to
the same nine month period of fiscal year 1998. The aforementioned
acquisitions caused the majority of the SG&A expense increase in the first
nine months of fiscal year 1999. Excluding newspaper acquisitions and
dispositions, SG&A expense increased approximately 1.5%. The increase in SG&A
at existing newspapers is associated with increases in advertising
expenditures, which were primarily related to ongoing efforts to increase
advertising lineage.
EBITDA
EBITDA increased $19.5 million or 28.2% in the first nine months of
fiscal year 1999 as compared to the same nine month period of fiscal year
1998. The majority of the increase was due to acquisitions; however, our
existing newspapers increased EBITDA by approximately 6.0%.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING RESULTS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $5.5 million in the first nine
months of fiscal year 1999 as compared to the same period of fiscal year
1998. The aforementioned acquisitions caused the majority of the increase in
depreciation and amortization expense.
OTHER EXPENSE
Other expense decreased approximately $1.2 million in the first nine
months of fiscal year 1999 as compared to the same nine month period of
fiscal year 1998. The decrease is primarily attributable to Garden State
writing off $5.5 million of fees and other costs associated with the issuance
of $200.0 million of 8.625% Senior Subordinated Notes in March 1999 as
compared to $7.1 million of fees and other costs in fiscal year 1998
associated with Garden State's issuance of $300.0 million of 8.75% Senior
Subordinated Notes in fiscal year 1998.
INTEREST EXPENSE
Interest expense increased $8.3 million in the first nine months of
fiscal year 1999 as compared to the same nine month period in fiscal year
1998. Interest expense increased as a result of a $146.4 million increase in
weighted average debt outstanding, primarily associated with acquisitions,
which was partially offset by a 50 basis point decrease in the weighted
average interest rate.
EXTRAORDINARY LOSS
In fiscal year 1999, we repurchased $37.0 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
our current borrowing rate, the repurchase will significantly reduce total
interest expense in the future.
NET INCOME
Garden State reported adjusted net income of approximately $10.6 million
in the first nine months of fiscal year 1999 after excluding the
extraordinary loss of $2.2 million and $5.5 million of debt issuance costs
described above. This compares to an adjusted net income of $3.3 million in
the same period of fiscal year 1998, after excluding the gain on sale of
newspapers and $7.1 million of debt issuance costs described above. The
increase in adjusted net income is primarily attributable to a $14.0 million
increase in operating profit and a $2.0 million decrease in tax expense
offset by the previously discussed $8.3 million increase in interest expense.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $38.8 million
and $36.5 million for the nine months ended March 31, 1999 and 1998,
respectively. The $2.3 million increase in cash flow from operating
activities was primarily the result of a $19.5 million increase in operating
profit, (excluding depreciation and amortization) and a reduction in tax
payments, offset by a $14.5 million change in operating assets and
liabilities primarily as a result of increase in accounts receivable and
inventory related to fiscal year 1998 acquisitions and an decrease in cash
interest expense.
Net cash flows from investing activities were ($64.6) million and
($184.4) million for the nine months ended March 31, 1999 and 1998,
respectively. The ($119.8) million change was primarily the result of
spending $56.4 million on acquisitions net of dispositions in fiscal year
1999 compared to $177.8 million for the same period in fiscal year 1998.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
Net cash flows from financing activities were $104.9 million and $142.4
million for the nine months ended March 31, 1999 and 1998, respectively. The
decrease in cash flow from financing activities of approximately $37.5
million was primarily attributable to the Company borrowing a net $127.2
million in the first nine months of fiscal 1999, compared to a net borrowing
of $150.8 million in fiscal 1998. The net increase in borrowing in fiscal
year 1998 was primarily associated with the previously discussed fiscal year
1998 acquisitions. Fiscal year 1999 net borrowings were used for
acquisitions, debt prepayments and debt issuance costs. In addition, fiscal
1999 borrowings were used to pay a $12.6 million dividend to ANI (used to
prepay debt of ANI). We retained a significant amount of cash from the March
debt issuance, which will be used, along with borrowings under our New Credit
Agreement, to fund the previously discussed Tender Offer.
LIQUIDITY
As previously discussed, Garden State has made a Tender Offer to
repurchase its 12% Notes. In addition, ANI has made a Tender Offer for its
13.25% Senior Discount Debentures ("Discount Debentures"). The funding
required to repurchase the Discount Debentures will be provided by Garden
State, through dividends to ANI. As of March 31, 1999, a dividend of
approximately $12.6 million has been paid by Garden State to ANI to purchase
Discount Debentures in the open market. Garden State will make additional
dividend payments to ANI with the remaining proceeds from borrowing under its
8.625% Senior Subordinated Notes and additional borrowings under its New
Credit Facility for a total dividend payment of approximately $183.6 million.
After the completion of the Tender Offer for the 12% Notes and the
Discount Debentures, Garden State will have borrowed approximately $175.0
million under its New Credit Facility, and Garden State will have total
long-term debt of approximately $762.0 million. The repurchase of Garden
State's 12% Notes and the ANI Discount Debenture, including the related
repurchase premiums and fees, have significantly increased Garden State's
leverage ratio. However, based upon current and expected future operating
results, we believe that Garden State will have sufficient cash flows from
operations to fund scheduled payment of principal and interest and to meet
anticipated capital expenditure and working capital requirements for at least
the next twelve months. In addition to cash flows from operations, the
Company has approximately $10.8 million available under its New Credit
Facility, after completing the Tender Offers, which should be more than
sufficient to fund unanticipated needs. In addition, our New Credit Agreement
provides for an increase in the facility from $190.0 million to $250.0 should
a need arise.
NEAR TERM OUTLOOK
The steady decline in newsprint prices continues as North American
newsprint supplies continue to out pace demand. The price declines began in
November of 1998, and since that time, the average price has dropped
approximately $60 per metric ton for 30 pound newsprint. While North American
newsprint is currently averaging $520 per metric ton, the Company has been
able to purchase newsprint from Europe and Asia at prices under $500 per
metric ton. Newsprint prices may continue to decline as newsprint producer's
inventories are expected to grow in the near term.
To minimize the influence of newsprint price fluctuations, Garden State,
through MediaNews Group and ANI, has entered into fixed price newsprint
contracts and newsprint swap agreements, which expire over the next twelve
months to ten years. The weighted average price for newsprint under both the
fixed price newsprint contracts and the newsprint swap, for fiscal 1999 and
2000, is $552 and $566 per metric ton, respectively. Approximately 50% of
Garden State's fiscal year 2000 consumption is expected to be purchased under
these price contracts. In addition, Garden State has a contract that allows
it to purchase 36,000 metric tons 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.
Garden State and its subsidiaries may, from time to time, consider
strategic or targeted newspaper acquisitions and dispositions. In the event
an acquisition opportunity is identified, management expects that it would be
able to arrange financing on terms and conditions satisfactory to Garden
State to the extent current resources are insufficient.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF YEAR 2000
The year 2000 issue results from computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure, disruption
of operations, and/or a temporary inability to conduct normal business
activities. Based on a recent assessment, the Company currently believes that
with modifications to existing software and conversions to new software
already scheduled to occur, the year 2000 issue will not pose significant
operational problems. If such modifications and conversions are not made, or
are not completed in a timely manner, the year 2000 issue could have a
material impact on operations.
The Company's newspapers have completed the process of identifying
computer systems that require modification or replacement and have begun the
systematic replacement or modification of all its computer systems which are
not year 2000 compliant. In addition, the Company has initiated
communications with its significant suppliers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to resolve their own year 2000 issues. The Company believes the
necessary modifications and replacement of computer systems will be completed
by the end of the first quarter of its fiscal year 2000, and thus no
contingency plan has been developed.
The Company estimates that the remaining cost of modifying or replacing
its computer systems, which are not year 2000 compliant, will be
approximately $4.0 million. The year 2000 compliance cost is based on
management's best estimate and actual results could differ from those
anticipated.
17