<PAGE>
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, 1998
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 (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
--- ---
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INDEX TO GARDEN STATE NEWSPAPERS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
ITEM NO. PAGE
- -------- ----
<S> <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
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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
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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 29, 1998, the Company filed a report on Form 8-K regarding the
January 29, 1998, acquisition of the DAILY NEWS.
No other reports on Form 8-K were filed during the quarter ended March 31, 1998.
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, 1998 By: /S/ JOSEPH J. LODOVIC, IV
-------------- ------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer, and
Duly Authorized Officer of Registrant
4
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GARDEN STATE NEWSPAPERS, INC.
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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.............................. 14
</TABLE>
5
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<TABLE>
<CAPTION>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS March 31, June 30,
1998 1997
---------- ----------
(In thousands, except share data)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................. $ 3,423 $ 8,944
Accounts receivable, less allowance for doubtful
accounts of $5,783 and $4,252 at March 31, 1998
and June 30, 1997, respectively ........................ 49,828 36,170
Inventories of newsprint and supplies ..................... 9,473 6,170
Income tax receivable ..................................... 1,643 --
Prepaid expenses and other assets ......................... 4,570 3,295
---------- ----------
Total Current Assets .................................. 68,937 54,579
PROPERTY, PLANT AND EQUIPMENT
Land ...................................................... 16,880 8,307
Buildings and improvements ................................ 60,505 43,462
Machinery and equipment ................................... 160,124 126,450
---------- ----------
Total Property, Plant and Equipment ................... 237,509 178,219
Less accumulated depreciation and amortization ............ 57,205 57,670
---------- ----------
Net Property, Plant and Equipment ..................... 180,304 120,549
OTHER ASSETS
Investment in partnership ................................. 6,925 6,365
Subscriber accounts, less accumulated amortization of
$50,129 and $45,808 at March 31, 1998 and June 30,
1997, respectively ...................................... 101,453 69,960
Excess of cost over fair value of net assets acquired, less
accumulated amortization of $16,825 and $12,718
at March 31, 1998 and June 30, 1997, respectively ....... 264,695 154,294
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $18,730 and
$15,861 at March 31, 1998 and June 30, 1997,
respectively ............................................ 15,759 6,684
Other ..................................................... 6,372 2,000
---------- ----------
Total Other Assets .................................... 395,204 239,303
---------- ----------
TOTAL ASSETS ................................................ $644,445 $414,431
---------- ----------
---------- ----------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
6
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<TABLE>
<CAPTION>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
1998 1997
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY (In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable ....................... $ 5,944 $ 6,286
Other accrued liabilities .................... 55,272 23,714
Unearned income .............................. 14,393 10,746
Income taxes ................................. -- 1,308
Current portion of long-term debt and
capital lease obligation (Note 2) .......... 5,265 6,247
---------- ----------
Total Current Liabilities ................ 80,874 48,301
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION .... 507,908 344,575
OTHER LIABILITIES .............................. 6,617 5,092
DEFERRED INCOME TAXES .......................... 17,092 12,516
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 ................... 78,570 78,570
Deficit ...................................... (46,617) (74,624)
---------- ----------
Total Shareholder's Equity ............... 31,954 3,947
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY ..... $ 644,445 $ 414,431
---------- ----------
---------- ----------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
7
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<TABLE>
<CAPTION>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended March 31, Ended March 31,
-------------------- ---------------------
1998 1997 1998 1997
--------- ------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES
Advertising ..................................... $ 83,488 $59,616 $ 234,333 $ 173,141
Circulation ..................................... 18,007 13,224 48,889 34,689
Other ........................................... 3,370 3,013 10,632 7,989
--------- ------- --------- ---------
TOTAL OPERATING REVENUES ...................... 104,865 75,853 293,854 215,819
COST AND EXPENSES
Cost of sales ................................... 38,244 27,129 103,185 77,418
Selling, general, and administrative ............ 44,634 33,580 121,373 91,767
Depreciation and amortization ................... 9,722 6,324 26,229 17,290
Interest expense ................................ 12,062 8,755 32,203 23,145
Other, (net) .................................... 1,209 1,461 9,156 6,274
--------- ------- --------- ---------
TOTAL COST AND EXPENSES ....................... 105,871 77,249 292,146 215,894
GAIN ON SALE OF NEWSPAPERS ........................ -- 30,883 31,829 30,883
--------- ------- --------- ---------
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS .......................... (1,006) 29,487 33,537 30,808
INCOME TAX EXPENSE ................................ 1,399 1,080 (5,530) (292)
--------- ------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ........... 393 30,567 28,007 30,516
EXTRAORDINARY LOSS (NET OF TAXES OF $689) ......... -- -- -- (8,772)
--------- ------- --------- ---------
NET INCOME (LOSS) ................................. $ 393 $30,567 $ 28,007 $ 21,744
--------- ------- --------- ---------
--------- ------- --------- ---------
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
8
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
---------------------------
1998 1997
----------- ----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) ......................................... $ 28,007 $ 21,744
Adjustments to reconcile loss to net
cash provided by operating activities:
Depreciation and amortization ............................ 25,751 16,385
Gain on sale of newspaper properties and other assets .... (31,819) (30,883)
Provision for losses on accounts receivable .............. 3,171 2,431
Amortization of debt discount ............................ 2,034 1,339
Debt issuance cost and repurchase premiums ............... 7,121 13,763
Undistributed earnings in partnership .................... (561) (61)
Deferred income tax benefit .............................. (303) (3,251)
Change in operating assets and liabilities, net of current
assets and liabilities acquired or sold ................. 3,074 (6,726)
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES ............ 36,475 14,741
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper business and other assets .............. 43,029 47,699
Purchase of newspaper business ........................... (220,806) (183,176)
Purchase of machinery, equipment and other (net) ......... (6,621) (6,541)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES ............ (184,398) (142,018)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt ............................... 475,287 257,350
Debt issuance cost and repurchase premiums ............... (7,121) (13,763)
Reduction of long-term debt .............................. (324,467) (114,649)
Reduction of non-operating liabilities ................... (1,297) (2,477)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES ............ 142,402 126,461
--------- ---------
CHANGE IN CASH AND CASH
EQUIVALENTS ............................................... (5,521) (816)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ................................................. 8,944 4,415
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 3,423 $ 3,599
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid ............................................ $ 31,620 $ 26,538
--------- ---------
--------- ---------
Income taxes paid ........................................ $ 8,862 $ 1,228
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
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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, 1997. 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, 1998 are not necessarily
indicative of the results that may be expected for the year ended June 30,
1998.
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.
RECLASSIFICATION
Certain prior year balances have been reclassified.
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 January 29, 1998, the Company acquired substantially all the assets
used in the publication of the DAILY NEWS, a daily newspaper published in the
San Fernando Valley of Los Angeles, California, for approximately $130.0
million, which included working capital of approximately $2.0 million. This
daily newspaper has daily and Sunday circulation of approximately 200,000 and
215,100, respectively.
10
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--CONTINUED
On December 16, 1997, the Company acquired substantially all the assets
used in the publication of the PRESS-TELEGRAM, a daily newspaper published in
Long Beach, California, for approximately $38.2 million in cash, plus an
adjustment for working capital. Proceeds from the sale of the NORTH JERSEY
HERALD & NEWS (discussed below) were used to fund the acquisition. The
newspaper has daily and Sunday circulation of approximately 102,000 and
118,000, respectively.
On July 31, 1997, the Company acquired substantially all of the assets
used in the publication of THE SUN, an evening newspaper published in Lowell,
Massachusetts. The assets were purchased for $49.0 million in cash plus an
adjustment for working capital and a covenant not to compete with the prior
owners, with a discounted value of approximately $11.8 million. The newspaper
has daily and Sunday circulation of approximately 52,000 and 56,000,
respectively.
The acquisitions discussed above were accounted for as purchases.
Accordingly, the results of their operations were included since the date of
acquisition. The assets acquired and the liabilities assumed have been
recorded at their estimated fair market value as of their date 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. 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 15 years, respectively.
BUSINESS DISPOSITION
On December 5, 1997, the Company sold substantially all the assets used
in the publication of the NORTH JERSEY HERALD & NEWS and sixteen weekly
publications for $43.0 million in cash, plus an adjustment for working
capital. The Company recognized a pre-tax gain on the sale of approximately
$31.8 million, net of selling expenses.
NOTE 2: LONG-TERM DEBT
On October 1, 1997, the Company issued $250.0 million of Senior
Subordinated Notes due 2009. The Company used the net proceeds to reduce bank
debt at Garden State and pay off and terminate a bank credit facility of one
of the Company's subsidiaries.
In the third quarter of fiscal year 1998, the Company entered into a
subordinated note purchase agreement pursuant to which the Company issued a
$47.6 million, 9.0% Subordinated Promissory Note (the "Promissory Note") due
January 31, 2010. Interest accruing on the Promissory Note is payable
quarterly beginning on March 31, 1998, provided that on each interest payment
date occurring on or prior to 2002, the Company may elect to defer payment of
any or all accrued and unpaid interest. However, in calendar years 2000, 2001
and 2002 the Company must pay the lesser of $3.0 million or all accrued and
unpaid interest due in such year. The Promissory Note is subordinated and
junior in right of payment to the Company's Bank Credit Agreement, Senior
Subordinated Secured Notes and the Senior Subordinated Notes. No scheduled
principal payments are required until January 31, 2010, at which time the
outstanding principal amount is due and payable. ANI has guaranteed the
Promissory Note. Proceeds from this Promissory Note were used for acquisition
funding.
11
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: LONG-TERM DEBT --CONTINUED
In February, 1998, the Company issued the remaining $50.0 million of its
8.75% Senior Subordinated Notes available under its indenture dated October
1, 1997, through a private placement. The additional notes were priced to
yield 8.28%, and resulted in approximately $51.4 million of net proceeds to
the Company. Proceeds from the issuance of these notes were used to pay down
bank debt. Upon registration and exchange of these notes, the Company will
have $300.0 million issued and outstanding under its indenture dated October
1, 1997.
In conjunction with the issuance of the Senior Subordinated notes, the
Company also amended its existing Bank Credit Agreement to change Term Loan B
into a revolving credit facility ("RCC"), reduce the Company's borrowing
spreads (in most cases by 0.375%), and change the amortization of the RCA
commitment.
Giving effect to the borrowings and pay downs under the Garden State
Bank Credit Agreement discussed above, Garden State had $15.0 million, $16.0
million and $19.0 million outstanding under Term Loan A, RCA and RCC,
respectively. The following table sets forth the annual commitment reductions
for RCA, RCB and RCC, as well as annual payments under Term A Loan, giving
effect to the amended Bank Credit Agreement.
<TABLE>
<CAPTION>
TERM
RCA RCB RCC A LOAN
--- --- --- ------
(In thousands)
<S> <C> <C> <C> <C>
1998 .................... $ 10,000 $ -- $ 3,000 $ --
1999 .................... 31,000 -- 7,500 --
2000 .................... 31,000 -- 7,500 --
2001 .................... 31,000 -- 12,000 --
2002 .................... 31,000 -- 12,000 3,750
Thereafter .............. 33,000 27,000 27,000 11,250
-------- ------- ------- -------
$167,000 $27,000 $75,000 $15,000
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
The following table sets forth, after giving effect to borrowings
associated with the July 31, 1997, acquisition of THE SUN, the net borrowings
associated with the January 29, 1998 acquisition of the DAILY NEWS , the
$47.6 million Subordinated Promissory Note, the issuance of $300.0 million of
Senior Subordinated Notes and the paydown of bank debt associated therewith,
the approximate expected scheduled maturities of long-term debt of the
Company for the fiscal years indicated.
<TABLE>
<CAPTION>
IN
FISCAL THOUSANDS
------ ---------
<S> <C>
1998 ........... $ 2,625
1999 ........... 4,673
2000 ........... 4,897
2001 ........... 4,703
2002 ........... 7,987
Thereafter ..... 481,939
--------
$506,824
--------
--------
</TABLE>
12
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: LONG-TERM DEBT--CONTINUED
INTEREST RATE SWAPS
Effective April 1, 1997, the Company entered into a two-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. As of March 31, 1998, the
interest rate swap had a market loss of approximately $0.4 million.
13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ------------------------------------------
REVENUES
Revenues increased $29.0 million or 38.2% in the third quarter of fiscal
year 1998 as compared to the same quarter of fiscal year 1997. The increase
in revenue was primarily attributable to the February 28, 1997, acquisition
of the SENTINEL & ENTERPRISE, LEBANON DAILY NEWS and THE DAILY NONPAREIL; the
July 31, 1997, acquisition of THE SUN; the December 16, 1997, acquisition of
the PRESS-TELEGRAM; and the January 29, 1998, acquisition of the DAILY NEWS.
Combined, the acquisitions discussed above increased revenues approximately
$35.5 million in the third quarter of fiscal year 1998. These revenue
increases were partially offset by a $9.3 million decline in revenue
resulting from the sale of the POTOMAC NEWS on February 13, 1997, and the
sale of the NORTH JERSEY HERALD & NEWS on December 5, 1997. Excluding the
acquisition and disposition transactions, the Company's remaining newspaper
operations combined posted a $2.8 million increase in operating revenues for
the third quarter of fiscal year 1998. Advertising revenues at these
newspapers increased by 6.4%, while circulation and other revenues combined
were virtually flat.
COST OF SALES
Cost of sales increased $11.1 million or 41.0% in the third quarter of
fiscal year 1998 compared to the same quarter of fiscal year 1997. The
aforementioned acquisitions caused cost of sales to increase approximately
$13.1 million for the quarter ended March 31, 1998. However, this increase
was offset in part by a $3.5 million decrease in cost of sales resulting from
the sale of the POTOMAC NEWS and NORTH JERSEY HERALD & NEWS. Excluding
acquisition and disposition transactions, cost of sales increased
approximately $1.5 million. The majority of the increase is associated with
increases in advertising lineage.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $11.0
million or 32.9% in the third quarter of fiscal year 1998 compared to the
same quarter of fiscal year 1997. The aforementioned acquisitions resulted in
an SG&A expense increase of $16.7 million; however, this was offset in part
by a $5.9 million reduction in SG&A expense associated with the sale of the
POTOMAC NEWS and the NORTH JERSEY HERALD & NEWS. Excluding the acquisition
and disposition transactions, SG&A expense increased $0.2 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $3.4 million in the third
quarter of fiscal year 1998 as compared to the same quarter of fiscal year
1997. The aforementioned acquisitions caused the majority of the increase in
depreciation and amortization expense; however, the increase was in part
offset by a $0.1 million reduction in depreciation and amortization expense
associated with the sale of the POTOMAC NEWS and the NORTH JERSEY HERALD &
NEWS.
14
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INTEREST EXPENSE
Interest expense increased $3.3 million in the third quarter of fiscal
year 1998 as compared to the same quarter of fiscal year 1997. Interest
expense increased primarily as a result of approximately $131.3 million
increase in average debt outstanding associated almost entirely with
acquisition financing.
NET INCOME
Garden State recorded net income of approximately $0.4 million in the
third quarter of fiscal year 1998, compared to an adjusted loss of $0.3
million in the third quarter of fiscal year 1997, after excluding the $30.9
million pre-tax gain on the sale of the POTOMAC NEWS. The increase in net
income resulted from a $3.4 million and $0.3 million increase in operating
profit and income tax benefits, respectively, reduced by the $3.3 million
increase in interest expense previously discussed.
NINE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES
Revenues increased $78.0 million or 36.2% in the first nine months of
fiscal year 1998 as compared to the same nine month period of fiscal year
1997. The increase in revenue was primarily attributable to the October 31,
1996, acquisition of the PASADENA STAR NEWS, SAN GABRIEL VALLEY TRIBUNE,
WHITTIER DAILY NEWS, TIMES-STANDARD and THE EVENING SUN; the February 28,
1997, acquisition of the SENTINEL & ENTERPRISE, LEBANON DAILY NEWS and THE
DAILY NONPAREIL; the July 31, 1997, acquisition of THE SUN; the December 16,
1997, acquisition of the PRESS-TELEGRAM; and the January 29, 1998,
acquisition of the DAILY NEWS. Combined, the acquisitions discussed above
increased revenues approximately $86.9 million in the first nine months of
fiscal year 1998. These revenue increases were partially offset by a $17.6
million decline in revenue resulting from the sale of the POTOMAC NEWS and
the NORTH JERSEY HERALD & NEWS on February 13, 1997 and December 5, 1997,
respectively. Excluding the acquisition and disposition transactions, the
Company's remaining newspaper operations combined posted a $8.7 million
increase in operating revenues for the third quarter of fiscal year 1998.
Advertising revenues at these newspapers increased by approximately 8.1%,
driven by strong classified and national revenue growth. Circulation and
other revenue combined on a same newspaper basis decreased approximately $0.5
million.
COST OF SALES
Cost of sales increased $25.7 million or 33.3% in the first nine months
of fiscal year 1998 compared to the same nine month period of fiscal year
1997. The aforementioned acquisitions caused cost of sales to increase
approximately $29.2 million for the nine month period ended March 31, 1998.
However, this increase was offset in part by a $6.4 million decrease in cost
of sales resulting from the sale of the POTOMAC NEWS and the NORTH JERSEY
HERALD & NEWS. Excluding acquisition and disposition transactions, cost of
sales increased approximately $2.9 million or approximately 5.0% primarily
driven by increased production cost associated with advertising lineage
increases.
15
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $29.6
million or 32.2% in the first nine months of fiscal year 1998 compared to the
same nine month period of fiscal year 1997. The aforementioned acquisitions
resulted in an SG&A expense increase of $37.4 million; however, this was in
part offset by a $9.3 million reduction in SG&A expense associated with the
sale of the POTOMAC NEWS and the NORTH JERSEY HERALD & NEWS. Excluding the
acquisition and disposition transactions, SG&A expense increased $1.5 million
or 2.6%.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $8.9 million in the first nine
months of fiscal year 1998 as compared to the same period of fiscal year
1997. The aforementioned acquisitions caused the majority of the increase in
depreciation and amortization expense; however, the increase was in part
offset by a $0.8 million reduction in depreciation and amortization expense
associated with the sale of the POTOMAC NEWS and the NORTH JERSEY HERALD &
NEWS.
INTEREST EXPENSE
Interest expense increased $9.1 million in the first nine months of
fiscal year 1998 as compared to the same period of fiscal year 1997. Interest
expense increased primarily as a result of a $140.0 million increase in
average debt outstanding, primarily associated with acquisitions. This
increase was partially offset by a 56 basis point decrease in the average
interest rate, mainly associated with the refinancing of the Company's 10.89%
notes and a reduction in the borrowing spread on bank debt, which was offset
in part by an increase associated with the replacement of $250.0 million of
bank debt with the Senior Subordinated Notes issued on October 1, 1997.
NET INCOME
Garden State recorded an adjusted net income of approximately $3.3
million in the first nine months of fiscal year 1998, after excluding the
effect of the $31.8 million pre-tax gain on the sale of the NORTH JERSEY
HERALD & NEWS and $7.1 million of debt issuance cost, compared to adjusted
net income of $4.0 million in the same nine month period of fiscal year 1997,
after excluding the $30.9 million pre-tax gain on the sale of the POTOMAC
NEWS, $4.4 million of debt issuance cost and the $8.8 million extraordinary
loss. The decrease in adjusted net income was caused by a $9.1 million
increase in interest expense, primarily as a result of acquisitions, and a
$5.2 million increase in tax expense resulting from the sale of the NORTH
JERSEY HERALD & NEWS, which completely offset the $13.7 million increase in
operating profit.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $36.5
million and $14.7 million for the nine months ended March 31, 1998 and 1997,
respectively. The $21.8 million increase in cash flow from operating
activities was primarily the result of a $22.7 million increase in operating
profit, excluding depreciation, for the nine months ended March 31, 1998,
compared to the same period of the prior year, combined with a $9.8 million
increase in the change in operating assets and liabilities, which were offset
by a $8.4 million increase in cash interest expense.
16
<PAGE>
Net cash flows from investing activities were ($184.4) million and
($142.0) million for the nine months ended March 31, 1998 and 1997,
respectively. The $42.4 million change was primarily the result of the
Company spending a net $220.8 million on acquisitions in fiscal year 1998
compared to $183.2 million in fiscal year 1997.
Net cash flows from financing activities were $142.4 million and $126.5
million for the nine months ended March 31, 1998 and 1997, respectively. The
change of approximately $15.9 million was primarily attributable to the
Company borrowing a net $149.5 million in the first nine months of fiscal
1998, compared to net borrowing of $140.2 million in fiscal 1997, the
majority of which was issued in conjunction with the previously discussed
acquisitions in each fiscal year. A $6.6 million reduction in debt issuance
and repurchase premium also contributed to the increase.
After giving effect to the issuance of $300.0 million of Senior
Subordinated Notes and the corresponding pay down of bank debt, Garden State
has $246.3 million available for future borrowings under the Bank Credit
Agreement, net of approximately $4.7 million in outstanding letters of credit
at March 31, 1998. Approximately $151.0 million of the availability under the
Bank Credit Agreement is available solely for future business acquisitions.
NEAR TERM OUTLOOK
The previously announced $40 to $50 per metric ton increase in
newsprint, which was to be effective April 1, 1998, did not take hold and the
published market price for 30-pound newsprint remained at $590 and $595 per
metric ton for East Coast and West Coast delivery, respectively. Newsprint
suppliers may continue to push for a $40 per ton increase; however, with the
long standing Fletcher Challenge strike being settled, the additional
newsprint coming into the market may mute or eliminate an increase in the
near term. If a future price increase is successful, the increase is not
expected to have a significant impact on the Company's cash flows from
operations as the Company expects to purchase approximately 70% of its fiscal
1999 newsprint requirements under fixed price contracts at a weighted average
price of approximately $535 per metric ton subject to a quarterly adjustment
for a portion of the tonnage. MediaNEWS Group has entered into fixed price
contracts expiring over the next twelve months to two years, to purchase
164,000 metric tons per year, approximately 94,000 metric tons of which is
currently being allocated to the Company. While there is no assurance that
the Company will receive the current allocation each year, based on current
operations, management does not expect the Company's final allocation of such
newsprint to be materially different from that discussed above.
Based upon current operations, management believes that the Company will
have sufficient cash flows from operations which, combined with the Garden
State Credit Facility and other resources available to the Company, will be
more than adequate 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.
The Company 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 the Company to the
extent current resources are insufficient.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,423
<SECURITIES> 0
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<ALLOWANCES> 5,783
<INVENTORY> 9,473
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<PP&E> 237,509
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<TOTAL-ASSETS> 644,445
<CURRENT-LIABILITIES> 80,874
<BONDS> 507,908
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0
<COMMON> 1
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<TOTAL-LIABILITY-AND-EQUITY> 644,445
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<OTHER-EXPENSES> 9,156
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