<PAGE> 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 March 31, 1997
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
----- -----
<PAGE> 2
INDEX TO GARDEN STATE NEWSPAPERS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C> <C>
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
</TABLE>
2
<PAGE> 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
<PAGE> 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
1. On January 13, 1997, the Company filed an 8-K/A disclosing the
unaudited pro forma financial information and audited financial
statements related to the October 31, 1996, acquisition of the San
Gabriel Valley Tribune, Whittier Daily News, Pasadena Star,
Times-Standard and The Evening Sun.
2. On February 28, 1997, the Company filed an 8-K containing unaudited
pro forma financial statements related to the sale of the Potomac News
on February 13, 1997.
3. On March 5, 1997, the Company filed an 8-K regarding the February 28,
1997, acquisition of the Sentinel & Enterprise, The Daily News and The
Daily Nonpareil.
No other reports on Form 8-K were filed during the quarter ended March 31,
1997.
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 12, 1997 By: /s/ JOSEPH J. LODOVIC, IV
-------------- -----------------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer, and
Duly Authorized Officer of Registrant
4
<PAGE> 5
GARDEN STATE NEWSPAPERS, INC.
Index to Financial Information
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS: PAGE
----
<S> <C>
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
</TABLE>
5
<PAGE> 6
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
ASSETS 1997 1996
---------------- -----------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 3,599 $ 4,415
Accounts receivable, less allowance for doubtful
accounts of $3,796 and $2,426 at March 31, 1997
and June 30, 1996, respectively . . . . . . . . . . . . . 33,851 27,612
Inventories of newsprint and supplies . . . . . . . . . . . 7,095 3,966
Prepaid expenses and other assets . . . . . . . . . . . . . 4,107 2,780
---------------- -----------------
Total Current Assets . . . . . . . . . . . . . . . . . 48,652 38,773
PROPERTY, PLANT AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,137 5,168
Buildings and improvements . . . . . . . . . . . . . . . . 40,741 32,687
Machinery and equipment . . . . . . . . . . . . . . . . . . 117,896 87,522
---------------- -----------------
Total Property, Plant and Equipment . . . . . . . . . . 165,774 125,377
Less accumulated depreciation and amortization . . . . . . 54,560 50,027
---------------- -----------------
Net Property, Plant and Equipment . . . . . . . . . . . 111,214 75,350
OTHER ASSETS
Investment in partnership . . . . . . . . . . . . . . . . 6,448 6,369
Subscriber accounts, less accumulated amortization of
$43,289 and $48,594 at March 31, 1997 and June 30,
1996, respectively . . . . . . . . . . . . . . . . . . . 67,814 44,220
Excess of cost over fair value of net assets acquired,
less accumulated amortization of $11,815 and $13,267
at March 31, 1997 and June 30, 1996, respectively . . . . 167,236 65,715
Covenants not to compete and other identifiable
intangible assets, less accumulated amortization
of $15,395 and $19,673 at March 31, 1997 and
June 30, 1996, respectively . . . . . . . . . . . . . . 7,151 8,461
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,929 1,871
---------------- -----------------
Total Other Assets . . . . . . . . . . . . . . . . . . 250,578 126,636
---------------- -----------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 410,444 $ 240,759
================ =================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE> 7
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, June 30,
LIABILITIES AND SHAREHOLDER'S DEFICIT 1997 1996
---------------- -----------------
(In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable . . . . . . . . . . . . . . . . . . $ 4,773 $ 5,884
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 20,311 18,174
Unearned income . . . . . . . . . . . . . . . . . . . . . . 10,073 7,048
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 2,082 373
Current portion of long-term debt and
capital lease obligations . . . . . . . . . . . . . . . . 5,942 11,190
---------------- -----------------
Total Current Liabilities . . . . . . . . . . . . . . . 43,181 42,669
LONG-TERM DEBT AND CAPITAL
LEASE OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . 348,534 199,399
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . 5,286 7,728
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . 12,491 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 . . . . . . . . . . . . . . . . . . . . . . . . . . (77,619) (99,363)
---------------- -----------------
Total Shareholder's Deficit . . . . . . . . . . . . . . 952 (20,792)
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT . . . . . . . . . $ 410,444 $ 240,759
================ =================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
7
<PAGE> 8
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Nine Months
Ended March 31, Ended March 31,
------------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . $ 75,853 $ 57,911 $ 215,819 $ 180,937
COST AND EXPENSES
Cost of sales . . . . . . . . . . . . . . . . . . . . . 26,971 24,494 77,260 73,211
Selling, general, and administrative . . . . . . . . . 33,738 25,163 91,925 75,237
Depreciation and amortization . . . . . . . . . . . . . 6,324 5,226 17,290 15,180
Interest expense . . . . . . . . . . . . . . . . . . . 8,755 6,952 23,145 20,576
Other, (net) . . . . . . . . . . . . . . . . . . . . . 1,461 1,065 15,735 2,869
---------- ----------- ---------- -----------
TOTAL COST AND EXPENSES . . . . . . . . . . . . . . . 77,249 62,900 225,355 187,073
GAIN ON SALE OF NEWSPAPER PROPERTY . . . . . . . . . . . 30,883 -- 30,883 --
---------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . . . 29,487 (4,989) 21,347 (6,136)
INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . . . 1,080 4 397 152
---------- ----------- ----------- -----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . $ 30,567 $ (4,985) $ 21,744 $ (5,984)
========== =========== ========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
8
<PAGE> 9
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-------------------------------------
1997 1996
----------------- ----------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,744 $ (5,984)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 16,385 14,533
Gain on sale of newspaper property and other assets . . . . . . . . (30,883) (69)
Provision for losses on accounts receivable . . . . . . . . . . . . 2,431 1,882
Amortization of debt discount . . . . . . . . . . . . . . . . . . . 1,339 1,098
Debt issuance and make-whole cost . . . . . . . . . . . . . . . . . 13,763 1,092
Undistributed partnership earnings . . . . . . . . . . . . . . . . (61) (364)
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . (3,251) (705)
Change in operating assets and liabilities, net of current
assets and liabilities acquired and/or sold . . . . . . . . . . . (6,726) (12,157)
----------------- ----------------
NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . . . 14,741 (674)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper property and other assets . . . . . . . . . . . . 47,699 69
Purchase of newspaper properties . . . . . . . . . . . . . . . . . . (183,176) (33,215)
Purchase of machinery and equipment . . . . . . . . . . . . . . . . (6,541) (4,470)
----------------- ----------------
NET CASH FLOWS FROM INVESTING ACTIVITIES . . . . . . . . . . . (142,018) (37,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . 257,350 36,300
Debt issuance cost . . . . . . . . . . . . . . . . . . . . . . . . . (13,763) (1,092)
Reduction of long-term debt . . . . . . . . . . . . . . . . . . . . (114,649) (8,869)
Reduction of non-operating liabilities . . . . . . . . . . . . . . . (2,477) (3,647)
----------------- ----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . . . . . . . . 126,461 22,692
----------------- ----------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (816) (15,598)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,415 17,083
----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . $ 3,599 $ 1,485
================= ================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,538 $ 25,749
================= ================
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,228 $ 383
================= ================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
9
<PAGE> 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
nine-month periods ended March 31, 1997, 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 and the use of
net operating losses for which no tax benefit was previously recognized.
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 February 28, 1997, the Company acquired substantially all the assets used
in the publication of the Sentinel & Enterprise, The Daily News and The Daily
Nonpareil, daily newspapers located in Fitchburg and Leominster, Massachusetts;
Lebanon, Pennsylvania; and Council Bluffs, Iowa, respectively, and five weekly
newspapers distributed in and around the same cities, for a total of
approximately $51.2 million in cash. The daily newspapers acquired 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
below) and borrowings under the Company's revolving credit facility were used
to fund the acquisition.
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 approximately $130.0 million in
cash. The daily newspapers combined had daily and Sunday circulation of
approximately 156,000 and 161,000, respectively, at September 30, 1996.
10
<PAGE> 11
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--CONTINUED
The acquisitions were accounted for as a purchase; accordingly, the
consolidated financial statements include the operations of the February 28,
1997 and October 31, 1996, acquired newspapers from March 1, 1997, and November
1, 1996, respectively. The assets acquired and the liabilities assumed have
been recorded at their estimated fair market values as of the dates of
acquisition. These fair market values are based on management's preliminary
estimates and are subject to change upon the final allocation of the purchase
price.
Business Disposition
Effective February 14, 1997, the Company sold substantially all the assets
used in the publication of the Potomac News and two weekly publications for
$48.0 million in cash plus an adjustment for working capital. The Company
recognized a pre-tax gain on the sale of approximately $31.0 million, net of
selling expenses, in its third fiscal quarter.
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. As of the date
hereof, $19.5 million is available under Revolver B.
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.
11
<PAGE> 12
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: LONG-TERM DEBT--CONTINUED
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 period or quarterly if the interest rate period
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 the stock of the Company and its
subsidiaries.
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 totaling approximately $77.6 million,
including interest of approximately $0.7 million, 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 three months of
fiscal year 1997 and for the next four fiscal years ending June 30, 2001, are
as follows (in thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . $ 987
1998 . . . . . . . . . . . . . . . . . 6,414
1999 . . . . . . . . . . . . . . . . . 44,926
2000 . . . . . . . . . . . . . . . . . 37,022
2001 . . . . . . . . . . . . . . . . . 41,347
Thereafter . . . . . . . . . . . . . . 216,295
----------
$ 346,991
==========
</TABLE>
Interest Rate Swaps
Effective April 1, 1997, the Company entered into a three-year interest rate
swap agreement with a notional principal amount of $50.0 million and a fixed
annual interest rate of 6.455%, plus the applicable spread. The Company uses
interest rate swaps to manage its floating rate debt to minimize, in part, the
Company's exposure to the uncertainty of floating interest rates. The Company
accounts for the differences paid or received under this agreement as an
adjustment to interest expense.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Three Months Ended March 31, 1997 and 1996
Revenues
Revenues increased $17.9 million or 31.0% in the third 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,
the October 31, 1996, acquisition of the Star News, San Gabriel Valley Tribune,
Whittier Daily News, Times-Standard and The Evening Sun and the February 28,
1997, acquisition of the Sentinel & Enterprise, The Daily News and The Daily
Nonpareil. Combined, the acquisitions discussed above increased revenues
approximately $23.1 million in the third quarter of fiscal year 1997. These
revenue increases were partially offset by a $5.8 million decline in revenue
resulting from the sale of the Johnstown Tribune Publishing Company on April
30, 1996, and the sale of the Potomac News on February 13, 1997. Excluding the
newspaper operations described above, the Company's remaining newspaper
operations combined posted a $0.6 million increase in operating revenues for
the third quarter of fiscal 1997.
Cost of Sales
Cost of sales increased $2.5 million or 10.1% in the third quarter of fiscal
1997 compared to the same quarter of fiscal year 1996. The aforementioned
acquisitions caused cost of sales to increase approximately $8.1 million for
the quarter ended March 31, 1996. However, this increase was offset in part by
a $2.2 million decrease in cost of sales resulting from the sale of the
Johnstown Tribune Publishing Company and the Potomac News. Excluding
acquisition and disposition transactions, cost of sales decreased approximately
$3.4 million or 17.8%. The decrease in cost of sales at existing newspapers
was entirely the result of declines in the average cost of newsprint of
approximately 27.0% combined with a 3.0% 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 $0.9 million in the third quarter of
fiscal 1997.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $8.6 million
or 34.1% in the third quarter of fiscal 1997 compared to the same quarter of
fiscal 1996. The aforementioned acquisitions resulted in SG&A expense increase
of $8.9 million; however, this was in part offset by $2.0 million reduction in
SG&A expense associated with the sale of the Johnstown Tribune Publishing
Company and the Potomac News. Excluding the acquisition and disposition
transactions, SG&A expense increased $1.7 million. The increase at existing
newspapers was caused in part by increased advertising and circulation
spending, primarily associated with efforts to increase circulation and
advertising linage.
13
<PAGE> 14
Net Income
Garden State recorded an adjusted loss of approximately $0.3 million in the
third quarter of fiscal year 1997, after excluding the effect of the $30.9
million pre-tax gain on the sale of the Potomac News, compared to a loss of
approximately $5.0 million in the third quarter of fiscal year 1996. The
decrease in the adjusted loss is primarily attributable to a $5.8 million
increase in operating profit and a $1.1 million increase in income tax benefits
associated with the sale of the Potomac News, which were offset in part by a
$1.8 million increase in interest expense.
OPERATING RESULTS
Nine Months Ended March 31, 1997 and 1996
Revenues
Revenues increased $34.9 million or 19.3% in the first nine months of fiscal
year 1997 as compared to the same nine- 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; the March, 1996,
acquisition of the San Mateo Times; the April 30, 1996, acquisition of The
Transcript and The Evening News; the October 31, 1996, acquisition of the Star
News, San Gabriel Valley Tribune, Whittier Daily News, Times-Standard and The
Evening Sun; and the February 28, 1997, acquisition of the Sentinel &
Enterprise, The Daily News and The Daily Nonpareil. Combined, the acquisitions
discussed above increased revenues approximately $50.1 million in the first
nine months of fiscal year 1997. These revenue increases were partially offset
by a $14.6 million decline in revenue resulting from the sale of the Johnstown
Tribune Publishing Company on April 30, 1996, and the Potomac News on February
13, 1997. 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 nine 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 $2.6 million and was
primarily attributable to a combined 11.6% and 6.3% gain in classified and
retail revenue, respectively. Alameda Newspaper Group continued to be
negatively affected by declines in circulation revenue caused by increased use
of discounts and 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 will begin showing
year-over- year quarterly improvements in operating revenues in the fiscal
fourth quarter. North Jersey Newspaper Company, which suffered similar problems
to that of Alameda Newspaper Group, completed its turnaround in the third
quarter, posting a 1.2% increase in quarterly operating revenues primarily
through growth in classified revenue.
Cost of Sales
Cost of sales increased $4.1 million or 5.5% in the first nine months of
fiscal year 1997 compared to the same nine- month period of fiscal 1996. The
aforementioned acquisitions caused cost of sales to increase approximately
$16.8 million for the nine-month period ended March 31, 1997. However, this
increase was offset in part by a $5.3 million decrease in cost of sales
resulting from the sale of the Johnstown Tribune Publishing Company and the
Potomac News. Excluding acquisition and disposition transactions, cost of
sales decreased approximately $7.4 million or 12.5%. The decrease in cost of
sales at existing newspapers was entirely the result of declines in the average
cost of newsprint of approximately 22.0% combined with a 4.0% 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 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 nine months of fiscal 1997.
14
<PAGE> 15
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased $16.7
million or 22.2% in the first nine 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 $19.2 million; however, this was in part offset by
a $4.7 million reduction in SG&A expense associated with the sale of the
Johnstown Tribune Publishing Company and the Potomac News. Excluding the
acquisition and disposition transactions, SG&A expense increased $2.2 million
or 3.6%. 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 $12.9 million. The majority of the increase
is attributable to a second quarter fiscal year 1997 charge to write off
approximately $13.8 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.
Net Income
Garden State recorded adjusted net income of approximately $4.6 million in
the first nine months of fiscal year 1997, after excluding the pretax gain on
the sale of the Potomac News of $30.9 million and the effect of the $13.8
million charge described above, as compared to an adjusted net loss of $4.9
million in the first nine months of fiscal year 1996, after excluding the
write-off of $1.1 million in fees and other costs associated with the August,
1995, acquisition. The increase in adjusted net income is primarily
attributable to a $12.0 million increase in operating profit offset by a $2.6
million increase in interest expense.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $14.7 million
and ($0.7) million for the nine months ended March 31, 1997 and 1996,
respectively. The $15.4 million increase in cash flow from operating
activities was primarily the result of a $14.1 million increase in adjusted
operating profit, after excluding depreciation and amortization expense, for
the nine months ended March 31, 1997, compared to the same nine months ended
March 31, 1996.
Net cash flows from investing activities were ($142.0) million and ($37.6)
million for the nine months ended March 31, 1997 and 1996, respectively. The
$104.4 million change was primarily the result of funds totaling approximately
$183.2 million used to acquire the Star-News, Whittier Daily Review, San
Gabriel Valley Tribune, Times-Standard, The Evening Sun, The Sentinel &
Enterprise, The Daily News and The Daily Non-Pareil in fiscal year 1997 less
proceeds received from the sale of the Potomac News of $47.7 million, compared
to $33.2 million spent related to the acquisition of The Berkshire Eagle,
Brattleboro Reformer, Bennington Banner and San Mateo Times in the first nine
months of fiscal year 1996. Capital expenditures increased by approximately
$2.0 million primarily as a result of the previously announced press upgrade in
Easton and new front-end systems in Potomac and Las Cruces.
Net cash flows from financing activities were $126.5 million and $22.7
million for the nine months ended March 31, 1997 and 1996, respectively. The
change of approximately $103.8 million was attributable to the Company
borrowing approximately $133.0 million related to acquisitions as compared to
approximately $31.0 million related to acquisitions in the same period of
fiscal 1996. In addition, the Company borrowed $12.7 million during the first
nine months of fiscal 1997 in excess of that borrowed during the same period of
fiscal 1996 related to bank fees and other financing costs, including
make-whole premiums.
15
<PAGE> 16
Liquidity
Garden State and subsidiaries had a combined $74.3 million available for
future borrowings, net of approximately $5.0 million in outstanding letters of
credit at March 31, 1997. Approximately $47.0 million of the availability under
the bank credit facility is available solely for future business acquisitions.
Based upon current operations, 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 a $75 per metric ton increase in newsprint,
effective March 1, 1997, which, to date, has been only partially successful as
newsprint suppliers have only been able to obtain a portion of the $75 per ton
increase. While no additional price increases have been announced, suppliers
may attempt to increase prices before the end of calendar year 1997. If prices
increase, they are not expected to have a significant impact on the Company's
future cash flows from operations. In addition, to protect itself from rising
prices, the Company has entered into fixed price contracts with certain of its
suppliers. These contracts cover almost half of the Company's annual newsprint
usage.
As a result of the 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 its conversion to 50-inch web widths.
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1997 GARDEN STATE NEWSPAPERS, INC. FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,599
<SECURITIES> 0
<RECEIVABLES> 33,851
<ALLOWANCES> 3,796
<INVENTORY> 7,095
<CURRENT-ASSETS> 48,652
<PP&E> 165,774
<DEPRECIATION> 54,560
<TOTAL-ASSETS> 410,444
<CURRENT-LIABILITIES> 43,181
<BONDS> 348,534
0
0
<COMMON> 1
<OTHER-SE> 951
<TOTAL-LIABILITY-AND-EQUITY> 410,444
<SALES> 215,819
<TOTAL-REVENUES> 215,819
<CGS> 77,260
<TOTAL-COSTS> 186,475
<OTHER-EXPENSES> 38,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,145
<INCOME-PRETAX> 21,347
<INCOME-TAX> (397)
<INCOME-CONTINUING> 21,744
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,744
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
