<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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number
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GARDEN STATE NEWSPAPERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2675173
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(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
--- ---
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INDEX TO GARDEN STATE NEWSPAPERS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998
-----------------------------------------------------------
<TABLE>
<CAPTION>
Item No. Page
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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
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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
- -------------------
No reports on Form 8-K were filed during the quarter ended December 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: February 11, 1999 By: /s/ Joseph J. Lodovic, IV
----------------- ------------------------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer and
Duly Authorized Officer of Registrant
4
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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
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
ASSETS December 31, June 30,
1998 1998
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(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ......................................... $ -- $ 999
Accounts receivable, less allowance for doubtful
Accounts of $6,637 and $6,239 at December 31, 1998
and June 30, 1998, respectively ................................. 62,870 51,731
Inventories of newsprint and supplies ............................. 9,334 7,286
Prepaid expenses and other assets ................................. 4,603 3,475
Income tax receivable ............................................. -- 1,687
-------- --------
Total Current Assets ............................................ 76,807 65,178
PROPERTY, PLANT AND EQUIPMENT
Land .............................................................. 16,471 16,658
Buildings and improvements ........................................ 62,380 61,060
Machinery and equipment ........................................... 184,664 179,670
-------- --------
Total Property, Plant and Equipment ........................... 263,515 257,388
Less accumulated depreciation and amortization .................... 71,299 63,588
-------- --------
Net Property, Plant and Equipment ............................. 192,216 193,800
OTHER ASSETS
Investment in partnerships ........................................ 17,372 7,479
Subscriber accounts, less accumulated amortization of
$60,320 and $53,446 at December 31, 1998 and June 30,
1998, respectively .............................................. 99,630 98,712
Excess of cost over fair value of net assets acquired, less
Accumulated amortization of $22,394 and $18,492
at December 31, 1998 and June 30, 1998, respectively ............ 288,691 251,196
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $21,939 and
$19,846 at December 31, 1998 and June 30, 1998,
respectively .................................................... 16,548 15,810
Other ............................................................. 7,851 7,468
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Total Other Assets ............................................ 430,092 380,665
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TOTAL ASSETS $699,115 $639,643
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</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
LIABILITIES AND SHAREHOLDER'S EQUITY December 31, June 30,
1998 1998
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(In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable ............................................... $ 7,707 $ 5,684
Accrued liabilities .................................................. 44,777 49,279
Unearned income ...................................................... 14,154 14,829
Income taxes ......................................................... 966 --
Current portion of long-term debt and capital lease obligation ....... 13,209 5,644
--------- ---------
Total Current Liabilities ........................................ 80,813 75,436
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION ............................ 558,155 511,686
OTHER LIABILITIES ...................................................... 6,446 6,479
DEFERRED INCOME TAXES .................................................. 12,592 12,495
SHAREHOLDER'S EQUITY
Common stock, par value $1.00 per share;
Authorized 1,000 shares; 1,000 shares issued
and outstanding .................................................... 1 1
Additional paid-in capital ........................................... 78,570 78,570
Deficit .............................................................. (37,462) (45,024)
--------- ---------
Total Shareholder's Equity ....................................... 41,109 33,547
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 699,115 $ 639,643
--------- ---------
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</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
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GARDEN STATE NEWSPAPERS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
----------------------------- ------------------------------
1998 1997 1998 1997
----------------------------- ------------------------------
(In thousands)
<S> <C> <C> <C> <C>
REVENUES
Advertising ..................................... $111,170 $ 79,210 $ 209,234 $ 150,845
Circulation ..................................... 27,385 20,235 53,686 39,838
Other ........................................... 4,037 3,826 7,827 7,262
-------- --------- --------- ---------
TOTAL OPERATING REVENUES ...................... 142,592 103,271 270,747 197,945
COST AND EXPENSES
Cost of sales ................................... 45,355 33,334 88,388 64,941
Selling, general, and administrative ............ 60,278 42,802 118,534 85,694
Depreciation and amortization ................... 10,918 8,470 21,207 16,507
Interest expense ................................ 14,095 10,977 27,127 20,141
Other, (net) .................................... 1,049 7,111 1,846 7,947
-------- --------- --------- ---------
TOTAL COST AND EXPENSES ....................... 131,695 102,694 257,102 195,230
GAIN ON SALE OF NEWSPAPERS ........................ -- 31,829 -- 31,829
-------- --------- --------- ---------
NET INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS .......................... 10,897 32,406 13,645 34,544
INCOME TAX EXPENSE ................................ 2,726 6,492 3,584 6,929
-------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY LOSS .................. 8,171 25,914 10,061 27,615
EXTRAORDINARY LOSS (NET OF TAXES OF $1,134) ....... -- -- (2,499) --
-------- --------- --------- ---------
NET INCOME ........................................ $ 8,171 $ 25,914 $ 7,562 $ 27,615
-------- --------- --------- ---------
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</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>
<CAPTION>
Six Months Ended December 31,
-----------------------------
1998 1997
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(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 7,562 $ 27,615
Adjustments to reconcile income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 20,606 16,177
Gain on sale of newspaper properties and other assets .................. -- (31,831)
Provision for losses on accounts receivable ............................ 2,879 1,922
Amortization of debt discount .......................................... 1,636 1,366
Debt issuance cost and repurchase premiums ............................. 3,698 6,616
Distributions less than earnings from investment in partnerships ....... (560) (813)
Deferred income tax (benefit) expense .................................. 97 (206)
Change in operating assets and liabilities ............................. (17,664) (907)
--------- ---------
NET CASH FLOWS FROM OPERATING ACTIVITIES .......................... 18,254 19,939
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper property assets ...................................... -- 43,000
Purchase of newspaper properties ....................................... (53,986) (91,740)
Purchase of machinery, equipment (net) ................................. (3,890) (3,794)
--------- ---------
NET CASH FLOWS FROM INVESTING ACTIVITIES .......................... (57,876) (52,534)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt ............................................. 100,629 303,538
Debt issuance cost and repurchase premiums ............................. (3,698) (6,616)
Reduction of long-term debt ............................................ (57,991) (253,833)
Reduction of non-operating liabilities ................................. (317) (419)
--------- ---------
NET CASH FLOWS FROM FINANCING ACTIVITIES .......................... 38,623 42,670
--------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS ....................................... (999) 10,075
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................................................... 999 8,944
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ -- $ 19,019
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid .......................................................... $ 25,382 $ 19,750
--------- ---------
--------- ---------
Income taxes paid ...................................................... $ 3 $ 2,664
--------- ---------
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</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
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulations S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
consolidated financial statements and should be read in conjunction with the
consolidated financial statements and footnotes thereto included in Garden State
Newspapers, Inc.'s Annual Report on Form 10-K for the year ended June 30, 1998.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended December 31, 1998, are not
necessarily indicative of the results that may be expected for the year ended
June 30, 1999.
The unaudited condensed consolidated financial statements include the
accounts of Garden State Newspapers, Inc. (the "Company" or "Garden State") and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated upon consolidation. Garden State is a wholly owned subsidiary of
Affiliated Newspapers Investments, Inc.
RELATED PARTY TRANSACTIONS
MediaNews Group, Inc., an affiliate of Company, provides management services
to the Company and its subsidiaries. Related management fees are included in
selling, general and administrative expenses in the accompanying Consolidated
Statements of Operations.
RECLASSIFICATION
Certain balances for the periods ended December 31, 1997, have been
reclassified to conform with the current quarterly and year to date
presentation.
INCOME TAXES
The effective income tax rate varies from the federal statutory rate
primarily because of the nondeductibility of certain expenses and the
utilization of net operating losses that were previously subject to valuation
allowances.
SEASONALITY
Newspaper companies tend to follow a distinct and recurring seasonal
pattern, with higher advertising revenues in months containing significant
events or holidays. Accordingly, the fourth calendar quarter, or the Company's
second fiscal quarter, is the Company's strongest revenue quarter of the year.
Due to generally poor weather and lack of holidays, the first calendar quarter,
or the Company's third fiscal quarter, is the Company's weakest revenue quarter
of the year.
BUSINESS ACQUISITIONS
On August 21, 1998 the Company acquired a 50% interest in Charleston
Newspapers, a joint venture, which publishes the CHARLESTON GAZETTE (morning)
and Charleston DAILY MAIL (evening), six days a week and the SUNDAY
GAZETTE-MAIL, under the terms of a Joint Operating Agreement ("JOA"). Charleston
Newspapers has daily and Sunday paid circulation of approximately 90,000 and
99,000, respectively, as of September 30, 1998. The acquisition included rights
to the masthead of the Charleston DAILY MAIL; thus the Company is responsible
for the editorial content of the Charleston DAILY MAIL. The acquisition price of
approximately $47.0 million was funded with borrowings under the Company's Bank
Credit Agreement.
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)
The Company accounts for its JOA operations by including its pro rata share
of revenue and expenses generated by the operation of the JOA on a line by line
basis in the Consolidated Statement of Operations. The pro rata results of
operations have been included since the date of acquisition since Charleston
Newspapers is a JOA. The Company's 50% interest in the joint venture and the
intangible assets acquired has been recorded at their estimated fair market
value as of the date of acquisition. The 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 8 years, respectively.
Effective October 1, 1998, the Company acquired substantially all of the
assets used in the publication of the DAILY TIMES, a morning newspaper published
in Farmington, New Mexico, for cash and discounted notes, with the prior owners.
The newspaper has daily and Sunday paid circulation of approximately 16,700 and
18,000, respectively, at September 30, 1998. The acquisition was accounted for
as a purchase; accordingly, the results of operations were included since the
date of acquisition. The assets acquired and the liabilities assumed have been
recorded at their estimated fair market value as of the date of acquisition.
These estimates are based on management's preliminary estimate and are subject
to change upon the final allocation of the purchase price. The excess of cost
over fair market value of the net assets acquired and intangible assets related
to subscriber lists are being amortized on a straight line basis over 40 and 15
years, respectively.
NOTE 2: LONG TERM DEBT
In the first quarter of fiscal year 1999, the Company repurchased $36.0
million of its 12% Senior Subordinated Secured Notes at a premium of
approximately $3.6 million. The premium was recognized as an extraordinary loss
in the first quarter of fiscal year 1999. Proceeds from borrowings under RCC and
RCB of the Company's Bank Credit Agreement were used to repurchase the 12.0%
Senior Subordinated Secured Notes.
The following table sets forth, after giving effect to borrowings associated
with the August 21, 1998 and October 1, 1998 acquisitions previously discussed,
and borrowings associated with the repurchase of 12.0% Senior Subordinated
Secured Notes, the approximate expected scheduled maturities of long-term debt
of the Company for the fiscal years indicated, are as follows (in thousands):
<TABLE>
<S> <C>
1999. . . . . . . . . . . . . . . . . . . $ 5,658
2000. . . . . . . . . . . . . . . . . . . 12,623
2001. . . . . . . . . . . . . . . . . . . 17,203
2002. . . . . . . . . . . . . . . . . . . 20,562
2003. . . . . . . . . . . . . . . . . . . 42,399
Thereafter. . . . . . . . . . . . . . . . 465,456
--------
$563,901
--------
--------
</TABLE>
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, 1998 and 1997, the interest
rate swap had a market loss of $0.3 and $0.5 million, respectively. The Company
is exposed to a credit loss related to the interest rate swap to the extent such
interest rate swap has a market gain and the counterparty to the agreement fails
to perform under the agreement. The Company does not anticipate that the
counterparty will fail to meet its obligation due to its high credit rating.
11
<PAGE>
NOTE 3: COMMITMENTS
The Company, through MediaNews Group, Inc., has entered into newsprint swaps
covering 37,500 metric tons of newsprint, which expires over the next seven to
ten years. Garden State uses the swap to minimize in part, the Company's
exposure to the uncertainty of future newsprint price fluctuations. Settlements
are made on a monthly or quarterly basis, and vary based on the difference
between the fixed contract price and the price as published in the Paper Trader
(also known as the RISI index). The weighted average fixed price of newsprint
under the swaps is $602 per metric ton. Garden State accounts for amounts
received or paid under these agreements as an adjustment to newsprint expense.
Garden State also participates in fixed price contracts, which currently allow
the Company to purchase 30 pound newsprint at a weighted average price of $537
per metric ton.
NOTE 4: SUBSEQUENT EVENTS
BUSINESS ACQUISITION
The Company agreed, subject to final contract, to form a partnership with
the Donrey Newspapers LLC, to which Garden State will contribute its Alameda
Newspaper Group, comprised of six daily newspapers published in the San
Francisco Bay area; its San Gabriel Valley Newspapers, which includes three
daily newspapers published in the Los Angeles area; the TIMES-STANDARD, a daily
newspaper published in Eureka, California; and all the weekly publications
published by these daily newspapers. Donrey Newspapers LLC will contribute its
ten daily newspapers and two non-daily newspapers located in California, most of
which are located in close proximity to Garden State Newspaper publications. The
partnership will publish twenty daily newspapers with daily circulation of
523,000 and Sunday circulation of 487,000. The partnership will be majority
owned and controlled by Garden State. The partnership is expected to be formed
in Garden State's fiscal third quarter.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
Three Months Ended December 31, 1998 and 1997
- ---------------------------------------------
REVENUES
Revenues increased $39.3 million or 38.1% in the second quarter of fiscal
year 1999 as compared to the same quarter of fiscal year 1998. The increase in
revenue was primarily attributable to the December 16, 1997, acquisition of the
PRESS-TELEGRAM; the January 29, 1997, acquisition of the DAILY NEWS; the August
21, 1998 acquisition of the 50% interest in the Charleston Newspaper joint
venture; and the October 1, 1998 acquisition of the DAILY TIMES. Excluding
newspaper acquisitions and dispositions, operating revenue at the Company's
remaining newspaper operations ("existing newspapers") also increased in the
first quarter 1999. The increase in operating revenue at existing newspapers was
driven by a 3.6% increase in advertising revenue from continued growth in
classified, retail and preprint advertising.
COST OF SALES
Cost of sales increased $12.0 million or 36.1% in the second quarter of
fiscal year 1999 compared to the same quarter of fiscal year 1998. The
aforementioned acquisitions caused the majority of the cost of sales increase
for the quarter ended December 31, 1998. Excluding newspaper acquisitions and
dispositions, cost of sales decreased approximately 1.6%.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $17.5
million or 40.8% in the second quarter of fiscal year 1999 as compared to the
same quarter of fiscal year 1998. The aforementioned acquisitions caused the
majority of the SG&A expense increase in the second quarter of fiscal year 1999.
Excluding newspaper acquisitions and dispositions, SG&A expense increased
approximately 2.7%. The increase in SG&A is associated with increases in
advertising expenditures, which were primarily related to ongoing efforts to
increase advertising lineage.
EBITDA
EBITDA increased $9.8 million or 36.2%. The majority of the increase was due
to acquisitions; however, the Company's existing newspapers realized a 7.0%
increase in EBITDA, converting over 68.0% of the increase in revenue to EBITDA.
EBITDA represents total revenues less cost of sales and selling, general and
administrative expense. Although EBITDA is not a measure of performance
calculated in accordance with GAAP, the Company believes that EBITDA is an
indicator and measurement of its leverage capacity and debt service ability.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2.4 million in the second quarter
of fiscal year 1999 as compared to the same period of fiscal year 1998. The
aforementioned acquisitions caused the majority of the increase in depreciation
and amortization expense.
INTEREST EXPENSE
Interest expense increased $3.1 million in the second quarter of fiscal year
1999 as compared to the same period in fiscal year 1998. Interest expense
increased as a result of a $173.9 million increase in average debt outstanding,
primarily associated with acquisitions.
13
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER EXPENSE
Other expense decreased approximately $6.1 million in the second quarter of
fiscal year 1999 as compared to the same quarter of fiscal year 1998. The
decrease is primarily attributable to the Company writing off $6.6 million of
fees and other cost associated with Garden State's issuance of $250.0 million of
Senior Subordinated Notes in October, 1997.
NET INCOME
Garden State recorded net income of approximately $8.2 million in the
second quarter of fiscal year 1999, as compared to an adjusted net income of
$0.7 million in the second quarter of 1998 after excluding the gain on sale
of newspapers and debt issuance cost discussed above. The increase in
adjusted net income is primarily attributable to a $7.4 million increase in
operating profit and a $3.8 million decrease in tax expense offset by a $3.1
million increase in interest expense, primarily as a result of acquisitions.
Six Months Ended December 31, 1998 and 1997
- -------------------------------------------
REVENUES
Revenues increased $72.8 million or 36.8% in the first six months of fiscal
year 1999 as compared to the same six months of fiscal year 1998. The increase
in revenue was primarily attributable to the July 31, 1997, acquisition of THE
SUN; the December 16, 1997, acquisition of the PRESS-TELEGRAM; the January 29,
1997, acquisition of the DAILY NEWS; the August 21, 1998 acquisition of the 50%
interest in the Charleston Newspaper joint venture; and the October 1, 1998
acquisition of the Daily Times. Excluding newspaper acquisitions and
dispositions, the operating revenues at the Company's existing newspapers also
increased in the first six months of fiscal year 1999. The increase in operating
revenue at existing newspapers was driven by a 3.3% increase in advertising
revenue from continued growth in classified, retail and preprint advertising.
COST OF SALES
Cost of sales increased $23.4 million or 36.1% in the first six months of
fiscal year 1999 compared to the same six month period of fiscal year 1998. The
aforementioned acquisitions caused the majority of the cost of sales increase
for the first six months first six months of fiscal year 1999. Excluding
newspaper acquisitions and dispositions, cost of sales was flat.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $32.8
million or 38.3% in the first six months of fiscal year 1999 as compared to
the same six month period of fiscal year 1998. The aforementioned
acquisitions caused the majority of the SG&A expense increase in the first
six months of fiscal year 1999. Excluding newspaper acquisitions and
dispositions, SG&A expense increased approximately 1.7%. The increase in SG&A
is associated with increases in advertising expenditures, which were
primarily related to ongoing efforts to increase advertising lineage.
EBITDA
EBITDA increased $16.5 million or 34.9% in the first six months of fiscal
year 1999 as compared to the same six month period of fiscal year 1998. The
majority of the increase was due to acquisitions; however, the Company's
existing newspapers realized a 6.1% increase in EBITDA, converting over 58.0% of
the increase in revenue to EBITDA.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $4.7 million in the first six months
of fiscal year 1999 as compared to the same period of fiscal year 1998. The
aforementioned acquisitions caused the majority of the increase in depreciation
and amortization expense.
OTHER EXPENSE
Other expense decreased approximately $6.1 million in the first six months
of fiscal year 1999 as compared to the same six month period of fiscal year
1998. The decrease is primarily attributable to the company writing off $6.6
million of fee and other cost in fiscal year 1998, associated with Garden
State's issuance of $250.0 million of Senior Subordinated Notes in October 1997.
INTEREST EXPENSE
Interest expense increased $7.0 million in the second quarter of fiscal year
1999 as compared to the same quarter in fiscal year 1998. Interest expense
increased as a result of a $139.8 million increase in average debt outstanding,
primarily associated with acquisitions.
EXTRAORDINARY LOSS
In the first quarter of fiscal year 1999 the Company repurchased $36.0
million of its 12% Senior Subordinated Secured Notes at a premium of
approximately $3.6 million. The premium net of income taxes was recorded as an
extraordinary loss. Based on the Company's current bank interest rates, the
repurchase will significantly reduce the Company's total interest expense in the
future.
NET INCOME
Garden State recorded adjusted net income of approximately $10.1 million
in the first six months of fiscal year 1999 after excluding the extraordinary
loss of $2.5 million, as compared to a net income of $2.4 million in the same
period of fiscal year 1998, after excluding the gain on sale of newspapers
and debt repurchase premium. The increase in adjusted net income is primarily
attributable to a $11.8 million increase in operating profit and a $3.3
million decrease in tax expense offset by a $7.0 million increase in interest
expense, primarily as a result of acquisitions.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $18.2 million
and $19.9 million for the six months ended December 31, 1998 and 1997,
respectively. The $1.7 million decrease in cash flow from operating activities
was primarily the result of a $15.7 million increase in the net change in
operating assets and liabilities, primarily as a result of increases in accounts
receivable and inventory related to fiscal year 1998 acquisitions and a $5.6
million increase in interest expense paid, which were offset in part by a $16.5
million increase in operating profit, excluding depreciation and amortization, a
$0.3 million decrease in partnership distributions and a $4.5 million reduction
in tax expense.
Net cash flows from investing activities were ($57.9) million and ($52.5)
million for the six months ended December 31, 1998 and 1997, respectively. The
($5.4) million change was primarily the result of the Company spending $52.7
million on acquisitions net of dispositions in fiscal year 1999 compared to
$48.7 million for the same period in fiscal year 1998.
Net cash flows from financing activities were $38.6 million and $42.7
million for the six months ended December 31, 1998 and 1997, respectively. The
change of approximately ($4.1) million was primarily attributable to the Company
borrowing a net $42.6 million in the first six months of fiscal 1999, compared
to a net borrowing of $49.7 million in fiscal 1998. The net increase in
borrowing in each year were primarily associated with the previously discussed
acquisitions. The change of approximately ($2.9) million in debt repurchase
premiums also contributed to the change.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
LIQUIDITY
After giving effect to the repurchase of $36.0 million of Senior
Subordinated Secured Notes, the recent acquisitions and a $75.0 million
voluntary commitment reduction in February 1999, Garden State has $74.3 million
available for future borrowings under the Bank Credit Agreement, net of
approximately $3.5 million in outstanding letters of credit. Approximately $60.1
million of the availability under the Bank Credit Agreement is available solely
for future business acquisitions. Based upon current and expected future
operating results management believes that the Company will have sufficient cash
flows from operations to fund scheduled payment of principal and interest and to
meet anticipated capital expenditure and working capital requirements for at
least the next twelve months. In addition to cash flows from operations, the
Company has approximately $19.6 million available under a working capital
facility as of the date of this report, which should be more than sufficient to
fund unanticipated needs.
The purchase of Garden State's Class A common stock and the Series A and C
preferred stock by ANI in May 1994 was financed with debt issued by ANI. The
repayment of ANI's debt, which does not have scheduled interest payments until
January 1, 2000, is in part dependent upon Garden State's ability to pay
dividends to ANI. Garden State's debt agreements discussed above prohibit the
payment of dividends to ANI prior to June 30, 1999.
As previously discussed, the Company has repurchased $36.0 million out of
$100.0 million of its 12.0% Senior Subordinated Secured Notes. Beginning July 1,
1999, the Company can call the remaining $64.0 million outstanding 12.0% Senior
Subordinated Secured Notes at 107.5%. The Company currently expects to
repurchase the remaining Senior Subordinated Secured Notes on or before at the
first call date as a result of an anticipated annual interest savings in excess
of $5.0 million, based on the full $100.0 million. Future repurchases of the
Senior Subordinated Secured Notes will be financed by a combination of
borrowings under the existing Garden State Bank Credit Agreement or new credit
facilities, and cash flows from operations.
NEAR TERM OUTLOOK
The September 1998 price increase, which would have increased 30 pound
newsprint to $640 per metric ton, failed to take hold. Instead newsprint prices
have been declining and in January 1999, average $570 per metric ton for North
American newsprint. Contributing to the decline was the settlement of the
Abitibi-Consolidated (largest newsprint vendor in North America) strike in
December, 1998, and the continued flow of imported newsprint from Asia. Prices
may continue to decline as newsprint producer's inventories are expected to grow
in the near term and Asian suppliers continue to sell newsprint at prices well
below $570 per metric ton. To minimize the influence of newsprint price
fluctuations the Company through MediaNews Group and ANI have entered into fixed
price newsprint contracts and newsprint swap agreements, which expire over the
next twelve months to ten years. The weighted average price for newsprint under
both the fixed price newsprint contracts and the newsprint swap is $552 per
metric ton. In addition, the Company has a contract that allows it to purchase
36,000 metric tons per year at a price equal to the lowest price which newsprint
is sold to large North America newsprint purchasers, subject to quarterly
adjustment.
The Company and its subsidiaries may, from time to time, consider strategic
or targeted newspaper acquisitions and dispositions. In the event an acquisition
opportunity is identified, management expects that it would be able to arrange
financing on terms and conditions satisfactory to the Company to the extent
current resources are insufficient.
IMPACT OF YEAR 2000
The year 2000 issue results from computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure, disruption of operations, and/or a
temporary inability to conduct normal business activities. Based on a recent
assessment, the Company currently believes that with
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
modifications to existing software and conversions to new software already
scheduled to occur, the year 2000 issue will not pose significant operational
problems. If such modifications and conversions are not made, or are not
completed in a timely manner, the year 2000 issue could have a material
impact on operations.
The Company's newspapers have completed the process of identifying computer
systems that require modification or replacement and have begun the systematic
replacement or modification of all its computer systems which are not year 2000
compliant. In addition, the Company has initiated communications with its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to resolve their own year
2000 issues. The Company believes the necessary modifications and replacement of
computer systems will be completed by the end of the first quarter of its fiscal
year 2000, and thus no contingency plan has been developed.
The Company estimates that the remaining cost of modifying or replacing its
computer systems, which are not year 2000 compliant, will be approximately $4.0
million. The year 2000 compliance cost is based on management's best estimate
and actual results could differ from those anticipated.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 62,870
<ALLOWANCES> 6,637
<INVENTORY> 9,334
<CURRENT-ASSETS> 76,807
<PP&E> 263,515
<DEPRECIATION> 71,299
<TOTAL-ASSETS> 699,115
<CURRENT-LIABILITIES> 80,813
<BONDS> 558,155
0
0
<COMMON> 1
<OTHER-SE> 41,109
<TOTAL-LIABILITY-AND-EQUITY> 699,115
<SALES> 270,747
<TOTAL-REVENUES> 270,747
<CGS> 88,388
<TOTAL-COSTS> 228,129
<OTHER-EXPENSES> 28,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,127
<INCOME-PRETAX> 13,645
<INCOME-TAX> 3,584
<INCOME-CONTINUING> 10,061
<DISCONTINUED> 0
<EXTRAORDINARY> (2,499)
<CHANGES> 0
<NET-INCOME> 7,562
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
