<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 December 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>
INDEX TO GARDEN STATE NEWSPAPERS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997
<TABLE>
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>
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>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
- --------
27 Financial Data Schedule
REPORTS ON FORM 8-K
On October 13, 1997, the Company filed a Form 8-K/A, amending the Form 8-K filed
on August 12, 1997. The Form 8-K/A was filed to include unaudited pro forma
financial statements as of June 30, 1997, giving effect to the acquisition of
THE SUN, a daily newspaper located in Lowell, Massachusetts.
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GARDEN STATE NEWSPAPERS, INC.
Dated: FEBRUARY 13, 1998 By: /s/ Joseph J. Lodovic, IV
-------------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer, and
Duly Authorized Officer of Registrant
4
<PAGE>
GARDEN STATE NEWSPAPERS, INC.
INDEX TO FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS: PAGE
----
Condensed Consolidated Balance Sheets 6
Unaudited Condensed Consolidated Statements of Operations 8
Unaudited Condensed Consolidated Statements of Cash Flows 9
Notes to Unaudited Condensed Consolidated Financial Statements 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
5
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited)
December 31, June 30,
ASSETS 1997 1997
------------ ----------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 19,019 $ 8,944
Accounts receivable, less allowance for doubtful
accounts of $5,588 and $4,252 at December 31, 1997
and June 30, 1997, respectively . . . . . . . . . . . . . 44,704 36,170
Inventories of newsprint and supplies . . . . . . . . . . . 6,530 6,170
Prepaid expenses and other assets . . . . . . . . . . . . . 4,119 3,295
---------- ----------
Total Current Assets . . . . . . . . . . . . . . . . . 74,372 54,579
PROPERTY, PLANT AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,207 8,307
Buildings and improvements . . . . . . . . . . . . . . . . 45,276 43,462
Machinery and equipment . . . . . . . . . . . . . . . . . . 130,504 126,450
---------- ----------
Total Property, Plant and Equipment . . . . . . . . . . 184,987 178,219
Less accumulated depreciation and amortization . . . . . . 53,589 57,670
---------- ----------
Net Property, Plant and Equipment . . . . . . . . . . . 131,398 120,549
OTHER ASSETS
Investment in partnership . . . . . . . . . . . . . . . . 7,178 6,365
Subscriber accounts, less accumulated amortization of
$46,848 and $45,808 at December 31, 1997 and June 30,
1997, respectively . . . . . . . . . . . . . . . . . . . 84,734 69,960
Excess of cost over fair value of net assets acquired,
less accumulated amortization of $15,174 and $12,718
at December 31, 1997 and June 30, 1997, respectively. . . 201,689 154,294
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $17,708 and
$15,861 at December 31, 1997 and June 30, 1997,
respectively . . . . . . . . . . . . . . . . . . . . . . 21,660 6,684
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,532 2,000
---------- ----------
Total Other Assets . . . . . . . . . . . . . . . . . . 320,793 239,303
---------- ----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 526,563 $ 414,431
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(Unaudited)
December 31, June 30,
LIABILITIES AND SHAREHOLDER'S EQUITY 1997 1997
------------ ------------
(In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable . . . . . . . . . . . . $ 4,591 $ 6,286
Other accrued liabilities . . . . . . . . . . . 37,260 23,714
Unearned income . . . . . . . . . . . . . . . . 11,094 10,746
Income taxes . . . . . . . . . . . . . . . . . 5,858 1,308
Current portion of long-term debt and
capital lease obligation (Note 2) . . . . . . 4,857 6,247
---------- ----------
Total Current Liabilities . . . . . . . . . 63,660 48,301
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION . . . 408,953 344,575
OTHER LIABILITIES . . . . . . . . . . . . . . . . 5,199 5,092
DEFERRED INCOME TAXES . . . . . . . . . . . . . . 17,189 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 . . . . . . . . . . . . . . . . . . . . (47,009) (74,624)
---------- ----------
Total Shareholder's Equity . . . . . . . . 31,562 3,947
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY. . . . $ 526,563 $ 414,431
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Six Months
Ended December 31, Ended December 31,
------------------ --------------------
1997 1996 1997 1996
------------------ --------------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES
Advertising . . . . . . . . . . . . . . . . . . . $79,210 $63,930 $150,845 $113,525
Circulation . . . . . . . . . . . . . . . . . . . 15,792 12,063 30,883 21,465
Other . . . . . . . . . . . . . . . . . . . . . . 3,826 2,892 7,262 4,975
------- ------- -------- --------
TOTAL OPERATING REVENUES 98,828 78,885 188,990 139,965
COST AND EXPENSES
Cost of sales . . . . . . . . . . . . . . . . . . 33,334 26,722 64,941 50,289
Selling, general, and administrative . . . . . . 38,359 31,669 76,739 58,187
Depreciation and amortization . . . . . . . . . . 8,470 5,829 16,507 10,967
Interest expense . . . . . . . . . . . . . . . . 10,977 8,056 20,141 14,390
Other, (net) . . . . . . . . . . . . . . . . . . 7,111 4,606 7,947 4,813
------- ------- -------- --------
TOTAL COST AND EXPENSES . . . . . . . . . . . . 98,251 76,882 186,275 138,646
GAIN ON SALE OF NEWSPAPERS . . . . . . . . . . . . 31,829 -- 31,829 --
------- ------- -------- --------
NET INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS . . . . . . . . . . . . . 32,406 2,003 34,544 1,319
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . (6,492) (1,318) (6,929) (1,372)
------- ------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS . . . . . . 25,914 685 27,615 (53)
EXTRAORDINARY LOSS (NET OF TAXES OF $689) . . . . . -- (8,772) -- (8,772)
------- ------- -------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . $25,914 $(8,087) $ 27,615 $ (8,825)
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Six Months Ended December 31,
-----------------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (Loss) . . . . . . . . . . . . . . . . . . . . . $ 27,615 $ (8,825)
Adjustments to reconcile loss to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . 16,177 10,363
Gain on sale of newspaper properties and other assets . . . (31,831) --
Provision for losses on accounts receivable . . . . . . . . 1,922 1,559
Amortization of debt discount . . . . . . . . . . . . . . . 1,366 921
Debt issuance cost and repurchase premiums . . . . . . . . 6,616 13,475
Undistributed earnings in partnership . . . . . . . . . . . (813) (226)
Deferred income tax benefit . . . . . . . . . . . . . . . . (206) (138)
Change in operating assets and liabilities, net of
current assets and liabilities acquired or sold . . . . . (907) (8,989)
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . 19,939 8,140
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper property assets and other assets . . . . . 43,000 --
Purchase of newspaper properties . . . . . . . . . . . . . . (91,740) (131,811)
Purchase of machinery, equipment and other (net) . . . . . . (3,794) (4,948)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES . . . . . . . . (52,534) (136,759)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt . . . . . . . . . . . . . . . . . 303,538 243,800
Debt issuance cost and repurchase premiums . . . . . . . . . (6,616) (13,475)
Reduction of long-term debt . . . . . . . . . . . . . . . . . (253,833) (101,990)
Reduction of non-operating liabilities . . . . . . . . . . . (419) (1,963)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . . . . . 42,670 126,372
--------- ---------
CHANGE IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . 10,075 (2,247)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . 8,944 4,415
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . $ 19,019 $ 2,168
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 19,750 $ 15,870
--------- ---------
--------- ---------
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . $ 2,664 $ 507
--------- ---------
--------- ---------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
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 six-month periods ended December 31, 1997 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 December 17, 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 104,000 and
120,000, respectively.
10
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--CONTINUED
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 the 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: SUBSEQUENT EVENTS
ACQUISITION
On January 30, 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 202,400 and
215,100, respectively.
The acquisition will be accounted for as a purchase; accordingly, the
consolidated financial statements will include the operations of the acquired
newspaper beginning January 31, 1998.
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.
Effective January 30, 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 to fund a portion of the DAILY
NEWS acquisition.
11
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: SUBSEQUENT EVENTS--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 8.375%, including fees, and will result in approximately $51.4 million
of net proceeds to the Company. Proceeds from the issuance of these notes
will be 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 paydowns 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>
RCA RCB RCC TERM A LOAN
--- --- --- -----------
(In thousands)
<S> <C> <C> <C> <C>
1998 . . . . . . . . . $ 10,000 $ -- $ 4,000 $ --
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 33,000 11,250
-------- ------- ------- -------
$167,000 $27,000 $76,000 $15,000
-------- ------- ------- -------
-------- ------- ------- -------
</TABLE>
The following table sets forth the pro forma debt service, after giving
effect to borrowings associated with the July 31, 1997, acquisition of THE
SUN, the net bank borrowings associated with the January 30, 1998 acquisition
of the DAILY NEWS (previously discussed), the $47.6 million 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>
FISCAL IN THOUSANDS
------ ------------
<S> <C>
1998 . . . $ 2,625
1999 . . . 4,673
2000 . . . 4,897
2001 . . . 4,703
2002 . . . 7,987
Thereafter 501,939
--------
$526,824
--------
--------
</TABLE>
12
<PAGE>
GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: SUBSEQUENT EVENTS--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 December 31, 1997, the
interest rate swap had a market loss of approximately $0.5 million.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Revenues increased $19.9 million or 25.3% in the second quarter of
fiscal year 1998 as compared to the same quarter 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; and the December 17,
1997, acquisition of the PRESS-TELEGRAM. Combined, the acquisitions discussed
above increased revenues approximately $22.3 million in the second quarter of
fiscal year 1998. These revenue increases were partially offset by a $5.3
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 $2.9 million
increase in operating revenues for the second quarter of fiscal year 1998.
Advertising revenues at these newspapers increased by 7.3%, while circulation
revenues were virtually flat.
COST OF SALES
Cost of sales increased $6.6 million or 24.7% in the second quarter of
fiscal year 1998 compared to the same quarter of fiscal year 1997. The
aforementioned acquisitions caused cost of sales to increase approximately
$6.9 million for the quarter ended December 31, 1997. However, this increase
was offset in part by a $1.7 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 $1.4 million. The majority of the increase is associated with
increases in advertising linage.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $6.7
million or 21.1% in the second quarter of fiscal year 1998 compared to the
same quarter of fiscal year 1997. The aforementioned acquisitions resulted
in SG&A expense increase of $8.8 million; however, this was in part offset by
$2.2 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 $0.1 million.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2.6 million in the second
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 $0.2 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 $2.9 million in the second quarter of fiscal
year 1998 as compared to the same quarter of fiscal year 1997. Interest
expense increased primarily as a result of approximately $111.0 million
increase in average debt outstanding associated almost entirely with
acquisition financing.
14
<PAGE>
OTHER EXPENSE
Other expense increased approximately $2.5 million in the second quarter
of fiscal year 1998 as compared to the same quarter of fiscal year 1997. The
increase is primarily attributable to the Company paying $6.6 million of debt
issuance costs and bank fees in fiscal 1997 as compared to approximately $4.4
million of debt issuance cost in fiscal 1997.
EXTRAORDINARY LOSS
On October 31, 1996, the Company paid approximately $9.5 million of
make-whole premiums to the holders of the senior secured notes, who were
prepaid in full. The make-whole premiums were included in the consolidated
statement of operations as an extraordinary loss net of applicable income tax
benefits.
NET INCOME
Garden State recorded an adjusted net income of approximately $0.7
million in the second quarter 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 $6.6 million of debt issuance cost, compared to adjusted net income
of $5.1 million in the second quarter of fiscal year 1997, after excluding
$4.4 million of debt issuance cost and the $8.8 million extraordinary loss.
The decrease in adjusted net income was caused by a $2.9 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 more than offset the $4.0 million increase in operating profit.
SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
REVENUES
Revenues increased $49.0 million or 35.0% in the first six months of
fiscal year 1998 as compared to the same six-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; and the December
17, 1997, acquisition of the PRESS-TELEGRAM. Combined, the acquisitions
discussed above increased revenues approximately $50.8 million in the first
six months of fiscal year 1998. These revenue increases were partially
offset by a $8.3 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
$6.5 million increase in operating revenues for the second quarter of fiscal
year 1998. Advertising revenues at these newspapers increased by 8.2%, driven
by strong classified revenue growth. Circulation on a same newspaper basis
was virtually flat.
COST OF SALES
Cost of sales increased $14.6 million or 29.1% in the first six months
of fiscal year 1998 compared to the same six-month period of fiscal year
1997. The aforementioned acquisitions caused cost of sales to increase
approximately $15.9 million for the six-month period ended December 31, 1997.
However, this increase was offset in part by a $2.9 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 $1.6 million or 4.2%, driven by increased
advertising linage.
15
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $18.6
million or 31.9% in the first six months of fiscal year 1998 compared to the
same six-month period of fiscal year 1997. The aforementioned acquisitions
resulted in SG&A expense increase of $20.6 million; however, this was in part
offset by $3.4 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 $1.4 million
or 3%.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $5.5 million in the second
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 $0.7 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 $5.8 million in the second quarter of fiscal
year 1998 as compared to the same quarter of fiscal year 1997. Interest
expense increased primarily as a result of a $143.1 million increase in
average debt outstanding associated with acquisitions. This increase was
partially offset by a 90 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.
NET INCOME
Garden State recorded an adjusted net income of approximately $2.4
million in the first six 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 $6.6 million of debt issuance cost, compared to adjusted
net income of $4.3 million in the same six-month period of fiscal year 1997,
after excluding $4.4 million of debt issuance cost and the $8.8 million
extraordinary loss. The decrease in adjusted net income was primarily caused
by a $5.8 million increase in interest expense, primarily as a result of
acquisitions, and a $5.6 million increase in tax expense resulting from the
sale of the NORTH JERSEY HERALD & NEWS, which completely offset the $10.3
million increase in operating profit.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $19.9
million and $8.1 million for the six months ended December 31, 1997 and 1996,
respectively. The $11.8 million increase in cash flow from operating
activities was primarily the result of a $3.6 million increase in net income,
excluding depreciation and amortization, the gain on sale of newspaper
properties, debt issuance costs and the extraordinary loss for the six months
ended December 31, 1997, combined with a $8.1 million increase in the change
in operating assets and liabilities.
Net cash flows from investing activities were ($52.5) million and
($136.8) million for the six months ended December 31, 1997 and 1996,
respectively. The $84.3 million change was primarily the result of the
Company spending a net $48.7 million on acquisitions in fiscal year 1998
compared to $131.8 million in fiscal year 1997.
Net cash flows from financing activities were $42.6 million and $126.3
million for the six months ended December 31, 1997 and 1996, respectively.
The change of approximately ($83.7) million was primarily attributable to the
Company borrowing a net $49.3 million in the first six months of fiscal 1998,
compared to net borrowing of $139.8 million in fiscal 1997, the majority of
which was in conjunction with the previously discussed acquisitions in each
fiscal year.
16
<PAGE>
After giving effect to the issuance of $300.0 million Senior
Subordinated Notes and the corresponding paydown of bank debt, Garden State
has $228.2 million available for future borrowings under the Bank Credit
Agreement, net of approximately $4.8 million in outstanding letters of
credit. Approximately $151.0 million of the availability under the Bank
Credit Agreement is available solely for future business acquisitions.
NEAR TERM OUTLOOK
Because of an industry wide year-over-year increase in newsprint
consumption, the continued strong worldwide demand for newsprint and the
ongoing strike at Fletcher Challenge (a major West Coast newsprint
manufacturer), a majority of newsprint suppliers have announced a $40 to $50
per ton increase effective as of April 1, 1998, which would bring average
transaction prices to approximately $635 to $645 per metric ton. If the 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 60% of its fiscal 1998 newsprint requirements under
fixed price contracts at a weighted average price of approximately $532 per
metric ton. MediaNEWS Group has entered into fixed price contracts expiring
over the next two and one-half to three years on behalf of the Company and
its affiliates. Such contracts cover the purchase of approximately 86,000
metric tons per year, the majority 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 DECEMBER
31, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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