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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 29, 2003
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: 1-12955
JOURNAL REGISTER COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 22-3498615
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 WEST STATE STREET, TRENTON, NEW JERSEY 08608-1298
(Address of Principal Executive Offices) (Zip Code)
(609) 396-2200
(Registrant's Telephone Number, Including Area Code)
-----------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act, Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 12, 2003,
41,138,854 shares of common stock, $.01 par value per share, were outstanding.
================================================================================
JOURNAL REGISTER COMPANY
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page No.
- ------- --------------------- --------
Item 1.Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets.............................1
Condensed Consolidated Statements of Income.......................2
Condensed Consolidated Statements of Cash Flows...................3
Notes to Condensed Consolidated Financial Statements..............4
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................9
Item 3.Quantitative and Qualitative Disclosures About Market Risk.......18
Item 4.Controls and Procedures..........................................19
PART II. OTHER INFORMATION
- -------- -----------------
Item 4.Submission of Matters to a Vote of Security Holders..............20
Item 6.Exhibits and Reports on Form 8-K.................................20
Signature...............................................................21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Dollars in thousands June 29, December 29,
FISCAL PERIOD ENDED 2003 2002
===============================================================================
ASSETS:
Current assets:
Cash and cash equivalents $ 30 $ 33
Accounts receivable, less allowance for doubtful
accounts of $6,275 in 2003 and $6,388 in 2002,
respectively 45,075 48,101
Inventories 6,631 6,869
Deferred income taxes 4,471 4,208
Other current assets 6,435 6,172
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 62,642 65,383
- -------------------------------------------------------------------------------
Property, plant and equipment:
Land 10,720 10,408
Buildings and improvements 75,424 71,356
Machinery and equipment 170,169 170,297
Construction in progress 6,661 5,568
- -------------------------------------------------------------------------------
TOTAL 262,974 257,629
Less accumulated depreciation (136,407) (131,949)
- -------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 126,567 125,680
- -------------------------------------------------------------------------------
Intangible and other assets:
Goodwill 491,385 491,385
Other intangible assets, net of accumulated
amortization of $8,962 in 2003 and $8,269 in 2002,
respectively 15,192 15,885
Other assets 3,554 3,370
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 699,340 $ 701,703
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of long-term debt $ 35,382 $ 32,912
Accounts payable 11,804 11,942
Accrued interest 2,289 2,446
Deferred subscription revenue 10,768 10,514
Accrued salaries and vacation 6,477 6,472
Fair market value of hedges 4,046 5,162
Other accrued expenses and current liabilities 14,685 15,533
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 85,451 84,981
- -------------------------------------------------------------------------------
Senior debt, less current maturities 424,440 450,457
Deferred income taxes 44,139 39,350
Accrued retiree benefits and other liabilities 19,545 18,373
Income taxes payable 112,567 112,421
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value per share, 300,000,000
shares authorized, 48,437,581 issued at
June 29, 2003 and December 29, 2002 484 484
Additional paid-in capital 358,248 358,242
Accumulated deficit (215,682) (239,416)
- -------------------------------------------------------------------------------
143,050 119,310
- -------------------------------------------------------------------------------
Less treasury stock, shares at cost,
2003 - 7,299,357; 2002 - 6,815,197 (107,461) (100,074)
Accumulated other comprehensive loss, net of tax (22,391) (23,115)
- -------------------------------------------------------------------------------
NET STOCKHOLDERS' EQUITY 13,198 (3,879)
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 699,340 $ 701,703
===============================================================================
See accompanying notes.
1
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Thirteen weeks Twenty-six weeks
In thousands, except per share data ended ended
June 29, June 30, June 29, June 30,
FISCAL PERIOD ENDED 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Revenues:
Advertising $ 77,725 $77,691 $ 147,482 $146,628
Circulation 22,245 22,793 44,962 45,631
- --------------------------------------------------------------------------------
Newspaper revenues 99,970 100,484 192,444 192,259
Commercial printing and other 4,190 5,359 8,348 10,217
- --------------------------------------------------------------------------------
TOTAL REVENUES 104,160 105,843 200,792 202,476
- --------------------------------------------------------------------------------
Operating expenses:
Salaries and employee benefits 39,069 37,993 77,919 75,128
Newsprint, ink and printing charges 7,728 8,392 15,174 16,280
Selling, general and administrative 13,059 13,041 26,024 25,974
Other 14,477 14,185 28,650 28,011
Depreciation and amortization 3,914 3,798 7,764 7,531
- --------------------------------------------------------------------------------
78,247 77,409 155,531 152,924
- --------------------------------------------------------------------------------
OPERATING INCOME $25,913 $28,434 $ 45,261 $49,552
Net interest expense and other (3,770) (6,412) (7,729) (12,825)
- --------------------------------------------------------------------------------
Income before provision for income
taxes 22,143 22,022 37,532 36,727
Provision for income taxes 8,212 8,204 13,798 13,677
- --------------------------------------------------------------------------------
NET INCOME $13,931 $13,818 $ 23,734 $23,050
================================================================================
Net income per common share:
Basic $ 0.34 $0.33 $ 0.57 $ 0.55
Diluted $ 0.34 $0.33 $ 0.57 $ 0.54
Weighted-average shares outstanding:
Basic 41,137 41,565 41,286 41,545
Diluted 41,566 42,494 41,618 42,412
See accompanying notes.
2
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Dollars in thousands Twenty-six weeks ended
FISCAL PERIOD ENDED June 29, 2003 June 30, 2002
================================================================================
Cash flows from operating activities:
Net income $ 23,734 $ 23,050
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts receivable 1,808 2,128
Depreciation and amortization 7,764 7,531
Increase in deferred income taxes 4,134 5,449
Decrease in accounts receivable 1,218 2,169
Decrease in accounts payable (138) (3,386)
Other, net 1,081 (4,450)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 39,601 32,491
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Net additions to property, plant and
equipment (8,676) (5,137)
Purchases of newspaper businesses - (6,264)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (8,676) (11,401)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayments of long-term debt (23,547) (22,272)
Exercise of stock options for common stock 524 1,110
Purchase of Company stock (7,905) -
- --------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (30,928) (21,162)
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (3) (72)
Cash and cash equivalents, beginning of
period 33 110
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30 $ 38
================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,860 $ 12,467
Income taxes $ 10,546 $ 9,009
================================================================================
See accompanying notes.
3
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2003
(Unaudited)
1. Organization and Basis of Presentation
The accompanying condensed consolidated financial statements include
Journal Register Company and all of its wholly-owned subsidiaries (the
"Company"). The Company primarily publishes daily and non-daily newspapers
serving markets in Greater Philadelphia, Connecticut, the Greater Cleveland area
of Ohio, Central New England and the Capital-Saratoga and Mid-Hudson regions of
New York. The Company also owns and manages commercial printing operations in
Connecticut and Pennsylvania. In addition, the Company currently operates 150
individual Web sites featuring the Company's daily newspapers and non-daily
publications.
The Company has authorized 1,000,000 shares of Preferred Stock, none of
which were issued or outstanding during the periods for which the financial
statements are presented.
The condensed consolidated interim financial statements included herein
have been prepared by the Company, without audit, in accordance with accounting
principles generally accepted in the United States ("GAAP") and pursuant to the
rules and regulations of the Securities and Exchange Commission. The condensed
consolidated interim financial statements do not include all of the information
and footnote disclosure required by GAAP for complete financial statements. In
the opinion of the Company's management, the accompanying unaudited condensed
consolidated financial statements contain all material adjustments (consisting
only of normal recurring accruals) necessary to present fairly its financial
position as of June 29, 2003 and December 29, 2002 and the results of its
operations and cash flows for the thirteen and twenty-six week periods ended
June 29, 2003 and June 30, 2002. These financial statements should be read in
conjunction with the Company's December 29, 2002 audited Consolidated Financial
Statements and Notes thereto. The interim operating results are not necessarily
indicative of the results to be expected for an entire year.
Certain prior-year information has been reclassified to conform with the
current year presentation. The reclassification had no impact on revenue, total
operating expenses, operating income or net income.
2. Earnings Per Common Share
The following table sets forth the computation of weighted-average shares
outstanding for calculating both basic and diluted earnings per share ("EPS"):
Thirteen weeks ended Twenty-six weeks ended
(In thousands) June 29, June 30, June 29, June 30,
FISCAL PERIOD ENDED 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Weighted-average shares -
basic 41,137 41,565 41,286 41,545
Effect of dilutive
securities:
Employee stock options 429 929 332 867
- --------------------------------------------------------------------------------
Weighted-average shares -
diluted 41,566 42,494 41,618 42,412
================================================================================
Options to purchase approximately 2.2 million shares of common stock at ranges
of $17.63 to $22.50 per share and $16.81 to $22.50 per share were outstanding
during the thirteen and twenty-six week periods ended June 29, 2003,
respectively, but were not included in the computation of diluted EPS in either
period because the exercise prices were greater than the average market price of
the common shares. Similarly, options to purchase approximately 1.5 million
shares of common stock at a range of $21.67 to $22.50 per share were outstanding
during the thirteen week period ended June 30, 2002, and options to purchase
approximately 2.2 million shares of common stock at a range of $21.00 to $22.50
per share were outstanding during the twenty-six week period ended June 30,
2002, but were not included in the computation of diluted EPS in either period
because the exercise prices were greater than the average market price of the
common shares.
4
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2003
(Unaudited)
3. Common Stock
The Company's Board of Directors has authorized the use of up to $100
million per year for the repurchase of the Company's Common Stock. Shares under
the stock repurchase program are to be purchased at management's discretion,
either in the open market or in privately negotiated transactions. Since January
13, 1999, and as of June 29, 2003, the Company has repurchased approximately 7.5
million shares at a total cost of approximately $110.2 million.
4. Stock-Based Compensation Costs
In December 2002, the Financial Accounting Standards Boards ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting
for Stock-Based Compensation - Transition and Disclosure, to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The additional disclosure requirements of SFAS No. 148
are effective for fiscal years ending after December 15, 2002. The Company
elected to continue to follow the intrinsic value method of accounting as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related interpretations in accounting for its
employee stock options. SFAS No. 148 did not require the Company to change to
the fair value based method of accounting for stock-based compensation.
For purposes of pro forma disclosures, the estimated fair value of the
options is expensed evenly over the vesting period for such options. The
Company's quarterly pro forma information, had compensation costs for the
Company's stock option plans been determined in accordance with SFAS No. 123, is
as follows :
(Dollars in thousands, except
per share amounts) Thirteen weeks ended Twenty-six weeks ended
June 29, June 30, June 29, June 30,
FISCAL PERIOD ENDED 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income:
As reported $ 13,931 $ 13,818 $ 23,734 $ 23,050
Add: Stock-based employee
compensation expense
included in reported net -- -- -- --
income, net of related tax
effects
Deduct: Total stock-based (768) (800) (1,504) (1,639)
employee compensation expense
determined under
fair value based method
for all awards, net
of related tax effects
- --------------------------------------------------------------------------------
Pro forma $13,163 $13,018 $22,230 $21,411
================================================================================
Net income per common share:
As reported:
Basic $ 0.34 $ 0.33 $ 0.57 $ 0.55
Diluted $ 0.34 $ 0.33 $ 0.57 $ 0.54
Pro forma:
Basic $ 0.32 $ 0.31 $ 0.54 $ 0.52
Diluted $ 0.32 $ 0.31 $ 0.53 $ 0.51
================================================================================
5
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2003
(Unaudited)
5. Acquisitions
The Company applies the purchase method of accounting for acquisitions.
Acquisitions and dispositions of newspaper properties are subject to the
finalization of customary purchase price adjustments and closing costs.
The Company completed the following three acquisitions in 2002: (i) on
March 18, the Company completed the acquisition of the assets of News Gleaner
Publications, Inc. and Big Impressions Web Printing, Inc., based in Northeast
Philadelphia, Pennsylvania, which includes eight weekly newspapers, with total
circulation of 121,000, serving Northeast Philadelphia, seven monthly
publications, with total circulation of 59,000, serving Montgomery County,
Pennsylvania, and a commercial printing operation; (ii) on March 22, the Company
completed the acquisition of the assets of the Essex, Connecticut-based Hull
Publishing, Inc., which includes a weekly newspaper with total circulation of
5,000 and two annual magazines with total distribution of approximately 20,000;
and (iii) on October 14, the Company completed the acquisition of County Press
Publications, which includes seven weekly newspapers serving Delaware County,
Pennsylvania, with total circulation of 24,000. The aggregate purchase price of
these acquisitions was approximately $7.6 million and was paid in cash.
6. Hedging Activity
In accordance with the requirements of its Credit Agreement dated July 15,
1998, the Company is required to maintain certain Interest Rate Protection
Agreements ("IRPAs") on a portion of its debt, to reduce the potential exposure
of the Company's future cash flows to fluctuations in the variable interest
rates on which the interest on the outstanding debt is calculated. The minimum
requirement varies depending on the Company's Total Leverage Ratio, as defined
in the Credit Agreement. From time to time the Company may enter into additional
IRPAs for nominal amounts on the outstanding debt that will, at a minimum, meet
the requirements of the Credit Agreement. Each IRPA is designated for all or a
portion of the principal balance and term of a specific debt obligation.
Pursuant to the requirements of the Credit Agreement, the Company entered
into certain interest rate hedges (the "Collars") on November 9, 2001. The
Collars establish an interest rate ceiling (the "CAP") and an interest rate
floor ("floor"). The CAP on the Company's Collars, which became effective on
October 29, 2002, is 6.0 percent and the floor averages approximately 2.66
percent. These rates are based upon the 90-day LIBOR. In the event 90-day LIBOR
exceeds 6.0 percent, the Company will receive cash from the issuers to
compensate for the rate in excess of the 6.0 percent CAP. If the 90-day LIBOR is
lower than 2.66 percent, the Company will pay cash to the issuers to compensate
for the rate below the floor. The Collars became effective on October 29, 2002
for a notional amount of $170 million. The Collars amortize over two years to a
notional aggregate amount of $135 million and terminate on October 29, 2004. As
of June 29, 2003, the notional aggregate amount of these Collars was $160
million.
On October 10, 2002, the Company entered into additional interest rate
collars (the "Additional Collars"). The effective date of the Additional Collars
was January 29, 2003. The Additional Collars are for a notional aggregate amount
of $150 million, which is fixed over the two-year term. Similar to the existing
Collars, the Additional Collars establish a CAP and a floor at no initial cost
to the Company. The CAP on the Additional Collars is 4.0 percent and the floor
averages approximately 1.54 percent. These rates are also based upon the 90-day
LIBOR. In the event that 90-day LIBOR exceeds 4.0 percent, the Company will
receive cash from the issuers to compensate for the rate in excess of the 4.0
percent CAP. If the 90-day LIBOR is lower than 1.54 percent, the Company will
pay cash to the issuers to compensate for the rate below the floor. From time to
time the Company may enter into additional IRPAs. The Company expects that each
IRPA will be designated for all or a portion of the principal balance and term
of a specific debt obligation.
Under Financial Accounting Standard No. 133 Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") as amended, the fair market
value of derivatives is reported as an adjustment to Other Comprehensive
Income/Loss ("OCI"). The IRPAs were fully effective in hedging the changes in
cash flows related to the debt obligation during the thirteen and twenty-six
week periods ended June 29, 2003 and the fiscal year ended December 29, 2002.
The total deferred loss reported in OCI as of June 29, 2003 and December 29,
2002 was approximately $2.7 million and $3.4 million, respectively (net of $1.4
and $1.8 million of deferred taxes, respectively).
6
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2003
(Unaudited)
7. Comprehensive Income
The components of comprehensive income for the thirteen and twenty-six
week periods ended June 29, 2003 and June 30, 2002 are as follows:
Thirteen weeks ended Twenty-six weeks ended
(Dollars in thousands) June 29, June 30, June 29, June 30,
FISCAL PERIOD ENDED 2003 2002 2003 2002
- --------------------------------------------------------------------------------
Net income $ 13,931 $13,818 $ 23,734 $23,050
Reclassification of unrealized
gains on fully effective
hedges to net income, net
of tax 403 1,131 744 3,304
Net change in fair value of
fully effective
Hedges, net of tax (385) (749) (20) (1,709)
- --------------------------------------------------------------------------------
Comprehensive income $ 13,949 $14,200 $ 24,458 $24,645
================================================================================
Accumulated other comprehensive loss, net of tax, as of June 29, 2003 and
December 29, 2002 was approximately $22.4 million and $23.1 million,
respectively. These balances primarily consist of net losses from changes in the
fair value of the Company's minimum pension liabilities and IRPAs.
8. Intangible Assets
SFAS No. 142, Goodwill and Other Intangible Assets, provides that goodwill
and indefinite-lived intangible assets are no longer amortized, although they
are reviewed annually or more frequently, if required, for impairment. Separable
intangible assets that are not deemed to have an indefinite life continue to be
amortized over their useful lives. The Company performs the required annual
impairment tests as of the first day of the fourth quarter of each fiscal year.
Changes in the carrying amounts of intangible assets are as follows:
As of June 29, 2003 As of December 29, 2002
-----------------------------------------------------------
Accumulated Accumulated
(Dollars in thousands) Gross Amortization Net Gross Amortization Net
- --------------------------------------------------------------------------------
Intangible assets subject to
amortization:
Customer and
subscriber lists $ 6,743 $ (4,489) $ 2,254 $ 6,743 $ (4,124) $ 2,619
Non-compete covenants 2,870 (1,635) 1,235 2,870 (1,584) 1,286
Debt issuance costs 4,573 (2,746) 1,827 4,573 (2,469) 2,104
------------------------------------------------------------------------------
Total 14,186 (8,870) 5,316 14,186 (8,177) 6,009
------------------------------------------------------------------------------
Intangible assets not
subject to amortization:
Goodwill 554,595 (63,210) 491,385 554,595 (63,210) 491,385
Mastheads 9,968 (92) 9,876 9,968 (92) 9,876
------------------------------------------------------------------------------
Total 564,563 (63,302) 501,261 564,563 (63,302) 501,261
------------------------------------------------------------------------------
Total goodwill and
other intangible
assets $ 578,749 $(72,172) $506,577 $578,749 $(71,479) $507,270
==============================================================================
7
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2003
(Unaudited)
8. Intangible Assets (continued)
Identifiable intangible assets include customer and subscriber lists,
non-compete covenants, and debt issuance costs, which do not have an indefinite
life and are amortizable on a straight-line basis over their useful lives.
Indefinite-lived intangible assets include goodwill and mastheads, which are not
amortizable. Mastheads are included in other intangible assets on the balance
sheet. For the thirteen weeks ended June 29, 2003 and June 30, 2002,
amortization expense for intangible assets was $346,000 and $347,250,
respectively. For the twenty-six weeks ended June 29, 2003 and June 30, 2002,
amortization expense for intangible assets was $693,000 and $694,500,
respectively. Estimated amortization expense for 2003 and each of the four
succeeding fiscal years for identifiable intangible assets and other assets is
as follows (dollars in thousands):
2003 $ 1,384
2004 1,384
2005 1,361
2006 902
2007 131
Thereafter 847
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
General
The Company's principal business is publishing newspapers in the United
States, where its publications are primarily daily and non-daily newspapers. The
Company's revenues are derived primarily from advertising, paid circulation and
commercial printing.
As of June 29, 2003, the Company owned and operated 23 daily newspapers
and 235 non-daily publications strategically clustered in six geographic areas:
Greater Philadelphia; Connecticut; Greater Cleveland; Central New England; and
the Capital-Saratoga and Mid-Hudson regions of New York. As of June 29, 2003,
the Company had total paid daily circulation of approximately 550,000, total
paid Sunday circulation of approximately 526,000 and total non-daily
distribution of approximately 3.7 million.
One of the Company's objectives is to grow its revenues, EBITDA and net
income. The principal elements of the Company's strategy are to: (i) expand
advertising revenues and readership; (ii) grow by acquisition; (iii) capture
synergies from geographic clustering; and (iv) implement consistent operating
policies and standards.
The Company has been a leader in executing its clustering strategy. The
Company believes that its clustering strategy creates significant synergies and
cost savings within each cluster, including cross-selling of advertising,
sharing of certain editorial resources and consolidating certain of the
Company's production and back office activities. The Company also believes that
its clustering strategy enables it to improve print quality and distribution,
introduce new products and services in a cost-effective manner and increase
readership. In addition, clustering allows the Company to offer its advertisers
expanded reach both geographically and demographically.
From September 1993 through June 2003, the Company completed 25 strategic
acquisitions, acquiring 14 daily newspapers, 192 non-daily publications and four
commercial printing companies. Three of the four commercial printing facilities
owned by the Company print a number of the Company's non-daily publications and
the fourth is a premium quality sheet-fed printing company.
The Company completed the following three acquisitions in 2002: (i) on
March 18, the Company completed the acquisition of the assets of News Gleaner
Publications, Inc. and Big Impressions Web Printing, Inc., based in Northeast
Philadelphia, Pennsylvania, which includes eight weekly newspapers, with total
circulation of 121,000, serving Northeast Philadelphia, seven monthly
publications, with total circulation of 59,000, serving Montgomery County,
Pennsylvania, and a commercial printing operation; (ii) on March 22, the Company
completed the acquisition of the assets of the Essex, Connecticut-based Hull
Publishing, Inc., which includes a weekly newspaper with total circulation of
5,000 and two annual magazines with total distribution of approximately 20,000;
and (iii) on October 14, the Company completed the acquisition of County Press
Publications, which includes seven weekly newspapers serving Delaware County,
Pennsylvania, with total circulation of 24,000. The aggregate purchase price of
these acquisitions was approximately $7.6 million and was paid in cash.
The Company's management believes that its newspapers are effective in
addressing the needs of local readers and advertisers. The Company's management
believes that because its newspapers rely on a broad base of local retail and
local classified advertising, rather than more volatile national and major
account advertising, its advertising revenues tend to be relatively more stable
than large metropolitan and national newspapers.
As part of the Company's strategy, the Company focuses on increasing
advertising and circulation revenues and expanding readership at its existing
and newly acquired properties. The Company has also developed certain operating
policies and standards, which it believes have resulted in significant
improvements in the cash flow and profitability of its existing and acquired
newspapers, including: (i) focusing on local content, (ii) maintaining and
improving product quality, (iii) enhancing distribution and (iv) promoting
community involvement.
9
In addition, the Company is committed to expanding its business through
its Internet initiatives. The Company's online objective is to make its Web
sites, all of which are accessible either directly or through
www.journalregister.com, the indispensable source of useful and reliable
community news, sports and information in their markets by making the Web sites
the local information portal for their markets. As of June 29, 2003, the Company
operated 150 Web sites, which represent each of the Company's publications.
RESULTS OF OPERATIONS
Thirteen Week Period Ended June 29, 2003 as Compared to the Thirteen Week
Period Ended June 30, 2002
For comparison purposes, where noted, the Company's financial results are
presented on a same-store basis, which excludes the results of the Company's
acquisitions completed in 2002.
Summary. Net income for the thirteen week period ended June 29, 2003 was
$13.9 million, or $0.34 per diluted share, versus $13.8 million, or $0.33 per
diluted share, for the thirteen week period ended June 30, 2002.
Revenues. For the thirteen week period ended June 29, 2003, the Company's
revenues were $104.2 million, a decrease of approximately $1.7 million, or 1.6
percent, as compared to the thirteen week period ended June 30, 2002. Newspaper
revenues for the thirteen weeks ended June 29, 2003 as compared to the prior
year period decreased $514,000, or 0.5 percent, to $100.0 million, principally
due to a decrease in circulation revenues of $548,000, or 2.4 percent.
Circulation revenues were adversely affected by significant rainfall in the
Spring of 2003, particularly during April and May. This decrease was partially
offset by an increase in advertising revenues for the thirteen week period ended
June 29, 2003 of approximately $34,000 as compared to the prior year period.
This increase in total advertising revenues resulted primarily from the
inclusion in the 2003 period of the operating results of an acquisition
completed in the third quarter of 2002. Commercial printing and other revenues
for the thirteen weeks ended June 29, 2003 decreased approximately $1.2 million,
or 21.8 percent, to $4.2 million as compared to the prior year period and
represented 4.0 percent of the Company's revenues for the thirteen weeks ended
June 29, 2003. The decrease in commercial printing and other revenues is
primarily attributable to a reduction in commercial printing activity. Online
revenues for the thirteen weeks ended June 29, 2003, included in advertising
revenues, were approximately $1.2 million, an increase of approximately 16.6
percent as compared to the prior year period, primarily as a result of increases
in display and special section advertisements.
The following table sets forth the Company's total advertising revenues,
by category, for the thirteen week periods ended June 29, 2003 and June 30,
2002:
Thirteen Weeks Ended
----------------------------
June 29, June 30, Increase/
2003 2002 (Decrease)
------- ------- ----------
Local $43,014 $42,602 1.0%
National 3,670 3,792 (3.2)%
Classified 31,041 31,297 (0.8)%
------- ------ ------
Total advertising
revenues $77,725 $77,691 0.0%
======== ======= ====
Same-store newspaper revenues. For the thirteen week period ended June 29,
2003, same-store newspaper revenues decreased $1.1 million, or 1.1 percent, as
compared to the thirteen week period ended June 30, 2002. Same-store advertising
revenues decreased $484,000, or 0.6 percent, as compared to the thirteen week
period ended June 30, 2002, primarily as a result of continued weakness in
classified employment advertising revenues partially offset by strong gains in
classified real estate advertising revenues. For the thirteen week period ended
June 29, 2003, on a same-store basis, retail advertising revenues were up
slightly, classified advertising revenues were down 1.2 percent and national
advertising revenues declined 3.2 percent, in each case as compared to the prior
year period. The decline in classified advertising revenues during the 2003
period resulted from declines in classified employment and classified automotive
advertising revenues of 15.7 percent and 2.0 percent, respectively, partially
offset by a 15.0 percent increase in classified real estate advertising
revenues. Same-store circulation revenues, which were negatively impacted by
substantial rainfall during April and May, decreased $590,000, or 2.6 percent,
as compared to the thirteen week period ended June 30, 2002.
10
In addition, advertising and circulation revenues, on a total and
same-store basis, were negatively impacted in the thirteen weeks ended June 29,
2003 by significant rainfall, geopolitical events and an unsettled economic
environment.
Salaries and employee benefits. Salaries and employee benefit expenses
were 37.5 percent of the Company's revenues for the thirteen week period ended
June 29, 2003, as compared to 35.9 percent for the thirteen week period ended
June 30, 2002. Salaries and employee benefits increased $1.1 million, or 2.8
percent, for the thirteen week period ended June 29, 2003 to $39.1 million,
principally as a result of an increase in pension and employee benefit costs, as
well as additional salaries and benefits associated with the Company's third
quarter 2002 acquisition, offset in part by a decrease in employee headcount of
approximately 0.5 percent on a same-store basis (i.e., excluding the additional
employees related to the third quarter 2002 acquisition).
Newsprint, ink and printing charges. For the thirteen week period ended
June 29, 2003, newsprint, ink and printing charges were 7.4 percent of the
Company's revenues, as compared to 7.9 percent for the thirteen week period
ended June 30, 2002. Newsprint, ink and printing charges for the thirteen week
period ended June 29, 2003 decreased approximately $664,000, or 7.9 percent, as
compared to the prior year period, principally due to the decline in expenses
resulting from a reduced volume of commercial printing, offset by an increase in
newsprint expense of 1.3 percent. The increase in total newsprint expense is
attributable to an increase in newsprint consumption associated with the
Company's third quarter 2002 acquisition and a 5.2 percent increase in the unit
cost of newsprint, offset in part by a 4.6 percent decrease in same-store
newsprint consumption.
Selling, general and administrative. Selling, general and administrative
expenses were 12.5 percent and 12.3 percent of the Company's revenues for the
thirteen week periods ended June 29, 2003 and June 30, 2002, respectively. As
compared to the prior year period, selling, general and administrative expenses
for the thirteen week period ended June 29, 2003 increased $18,000, or 0.1
percent, to $13.1 million, principally as a result of an increase in general
insurance costs and additional selling, general and administrative expenses
associated with the Company's October 2002 acquisition, almost entirely offset
by savings resulting from additional cost control efforts.
Other expenses. Other expenses were 13.9 percent and 13.4 percent of the
Company's revenues for the thirteen week periods ended June 29, 2003 and June
30, 2002, respectively. Other expenses increased approximately $292,000, or 2.1
percent, to $14.5 million for the thirteen week period ended June 29, 2003 due
primarily to an increase in circulation expenses, as well as additional other
expenses associated with the Company's October 2002 acquisition.
Depreciation and amortization. Depreciation and amortization expenses were
3.8 percent of the Company's revenues for the thirteen week period ended June
29, 2003 as compared to 3.6 percent for the thirteen week period ended June 30,
2002. Depreciation and amortization expenses for the period ended June 29, 2003
increased approximately $116,000, or 3.1 percent, to $3.9 million, as a result
of increased depreciation expense.
Operating income. Operating income was $25.9 million for the thirteen week
period ended June 29, 2003 as compared to $28.4 million for the thirteen week
period ended June 30, 2002.
Net interest and other expense. Net interest and other expense decreased
approximately $2.6 million, or 41.2 percent, for the thirteen week period ended
June 29, 2003 as compared to the thirteen week period ended June 30, 2002,
principally due to lower interest rates. A reduction in the Company's
weighted-average debt outstanding also contributed to the decline.
Provision for income taxes. The provision for income taxes increased by
approximately $8,000, or 0.1 percent, for the thirteen week period ended June
29, 2003 as compared to the thirteen week period ended June 30, 2002.
Other information. EBITDA (which the Company defines as operating income
plus depreciation and amortization) was $29.8 million for the thirteen week
period ended June 29, 2003 as compared to $32.2 million for the thirteen week
period ended June 30, 2002. See "Reconciliation of Certain Non-GAAP Financial
Measures"
11
below for more information reconciling EBITDA to operating income.
Operating income was $25.9 million for the thirteen week period ended June 29,
2003 as compared to $28.4 million for the thirteen week period ended June 30,
2002.
Twenty-Six Week Period Ended June 29, 2003 as Compared to the Twenty-Six Week
Period Ended June 30, 2002
For comparison purposes, where noted, the Company's financial results are
presented on a same-store basis, which excludes the results of the Company's
acquisitions completed in 2002.
Summary. Net income for the twenty-six week period ended June 29, 2003 was
$23.7 million, or $0.57 per diluted share, versus $23.1 million, or $0.54 per
diluted share, for the period ended June 30, 2002.
Revenues. For the twenty-six week period ended June 29, 2003, the
Company's revenues were $200.8 million, a decrease of $1.7 million, or 0.8
percent, as compared to the twenty-six week period ended June 30, 2002.
Newspaper revenues increased $185,000, or 0.1 percent, to $192.4 million as a
result of an increase in advertising revenues of $854,000, or 0.6 percent,
partially offset by a decline in circulation revenues of $669,000, or 1.5
percent. The increase in advertising revenues is principally due to gains in
classified real estate advertising revenues, as well as additional revenues
associated with the Company's 2002 acquisitions, partially offset by declines in
classified employment and classified automotive advertising revenues. Commercial
printing and other revenues decreased $1.9 million, or 18.3 percent, to $8.3
million and represented 4.2 percent of the Company's revenues in the twenty-six
week period ended June 29, 2003, as compared to 5.0 percent in the period ended
June 30, 2002. The decrease in commercial printing and other revenues is
primarily attributable to a reduction in commercial printing activity. Online
revenues, included in advertising revenues, were approximately $2.2 million and
increased approximately 17.5 percent from the prior year period, primarily as a
result of increases in display and special section advertisements.
The following table sets forth the Company's total advertising revenues,
by category, for the twenty-six week periods ended June 29, 2003 and June 30,
2002:
Twenty-Six Weeks Ended
-----------------------------
Increase/
June 29, 2003 June 30, 2002 (Decrease)
------------- ------------- ----------
Local $80,960 $79,659 1.6%
National 7,401 7,257 2.0%
Classified 59,121 59,712 (1.0)%
------- ------- ------
Total advertising
revenues $147,482 $146,628 0.6%
========= ========= ====
Same-store newspaper revenues. For the twenty-six week period ended June
29, 2003, same-store newspaper revenues decreased $1.6 million, or 0.8 percent,
to $189.6 million as compared to the twenty-six week period ended June 30, 2002.
Same-store advertising revenues decreased $793,000, or 0.5 percent, and
same-store circulation revenues decreased $780,000, or 1.7 percent, both as
compared to the twenty-six week period ended June 30, 2002. The decline in
same-store advertising revenues is mainly attributable to increases in retail
advertising revenues and classified real estate advertising revenues, offset by
lower classified employment and classified automotive advertising revenues. For
the twenty-six week period ended June 29, 2003, on a same-store basis, retail
advertising revenues were down 0.1 percent, classified advertising revenues were
down 1.5 percent and national advertising revenues increased 2.0 percent, in
each case as compared to the prior year period. The decline in classified
advertising revenues during the 2003 period resulted from declines in classified
employment and classified automotive advertising revenues of 13.4 percent and
2.9 percent, respectively, partially offset by a 14.0 percent increase in
classified real estate advertising revenues. Same-store circulation revenues for
the 2003 twenty-six week period were negatively impacted by unusually high
amounts of snow and rainfall during the period.
In addition, advertising and circulation revenues, on a total and
same-store basis, were negatively impacted in the twenty-six weeks ended June
29, 2003 by unusually high amounts of snow and rainfall, geopolitical events and
an unsettled economic environment.
12
Salaries and employee benefits. Salaries and employee benefit expenses
were 38.8 percent of the Company's revenues in the twenty-six week period ended
June 29, 2003, as compared to 37.1 percent in the twenty-six week period ended
June 30, 2002. As compared to the prior year period, salaries and employee
benefits increased $2.8 million, or 3.7 percent, to $77.9 million in the period
ended June 29, 2003, primarily as a result of an increase in pension and
employee benefit costs, as well as additional salaries and employee benefit
expenses associated with the Company's 2002 acquisitions, offset in part by a
decrease in employee headcount of approximately 0.5 percent on a same-store
basis (i.e., excluding the additional employees related to the 2002
acquisitions).
Newsprint, ink and printing charges. In the twenty-six week period ended
June 29, 2003, newsprint, ink and printing charges were 7.6 percent of the
Company's revenues, as compared to 8.0 percent in the twenty-six week period
ended June 30, 2002. Newsprint, ink and printing charges in the twenty-six week
period ended June 29, 2003 decreased approximately $1.1 million, or 6.8 percent,
as compared to the twenty-six week period ended June 30, 2002. This decrease is
principally due to the decline in expenses resulting from a reduced volume of
commercial printing, partially offset by an increase in newsprint expense of 0.8
percent. The increase in total newsprint expense is attributable to an increase
in newsprint consumption associated with the Company's 2002 acquisitions and a
2.5 percent increase in the unit cost of newsprint, offset in part by a 3.1
percent decrease in same-store newsprint consumption.
Selling, general and administrative. Selling, general and administrative
expenses were 13.0 percent and 12.8 percent of the Company's revenues in the
twenty-six week periods ended June 29, 2003 and June 30, 2002, respectively.
Selling, general and administrative expenses in the twenty-six week period ended
June 29, 2003 increased $50,000, or 0.2 percent, to $26.0 million, principally
as a result of an increase in general insurance costs and additional selling,
general and administrative expenses associated with the Company's 2002
acquisitions, partially offset by reductions in professional fees and savings
resulting from additional cost control efforts.
Other expenses. Other expenses were 14.3 percent and 13.8 percent of the
Company's revenues in the twenty-six week periods ended June 29, 2003 and June
30, 2002, respectively. Other expenses increased $639,000, or 2.3 percent, to
$28.7 million in the twenty-six week period ended June 29, 2003, primarily due
to an increase in circulation expenses and additional other expenses associated
with the Company's 2002 acquisitions.
Depreciation and amortization. Depreciation and amortization expenses were
3.9 percent of the Company's revenues in the twenty-six week period ended June
29, 2003 as compared to 3.7 percent in the twenty-six week period ended June 30,
2002. Depreciation and amortization expenses in the twenty-six week period ended
June 29, 2003 increased $233,000, or 3.1 percent, to $7.8 million as a result of
increased depreciation expense.
Operating income. Operating income was $45.3 million for the twenty-six
week period ended June 29, 2003 as compared to $49.6 million in the twenty-six
week period ended June 30, 2002.
Net interest and other expense. Net interest and other expense decreased
$5.1 million, or 39.7 percent, in the twenty-six week period ended June 29, 2003
as compared to the twenty-six week period ended June 30, 2002, principally due
to lower interest rates. A reduction in the Company's weighted-average debt
outstanding also contributed to the decline.
Provision for income taxes. The provision for income taxes increased
approximately $121,000, or 0.9 percent, for the twenty-six week period ended
June 29, 2003 as compared to the twenty-six week period ended June 30, 2002,
primarily due to an increase in pretax income, partially offset by a Federal
Empowerment Zone tax credit of approximately $150,000 related to 2002.
Other information. EBITDA (which the Company defines as operating income
plus depreciation and amortization) was $53.0 million in the twenty-six week
period ended June 29, 2003 as compared to $57.1 million for the twenty-six week
period ended June 30, 2002. See "Reconciliation of Certain Non-GAAP Financial
Measures" below for more information reconciling EBITDA to operating income.
Operating income was $45.3 million for the twenty-six week period ended June 29,
2003 as compared to $49.6 million in the twenty-six week period ended June 30,
2002.
13
Liquidity and Capital Resources
The Company's operations have historically generated strong positive cash
flow. The Company believes that cash flows from operations and the availability
of funds from external sources will be sufficient to fund its operating needs,
capital expenditure requirements and long-term debt obligations and will provide
it with flexibility to finance its acquisition strategy and share repurchase
program.
Cash flows from operations. Net cash provided by operating activities for
the twenty-six week period ended June 29, 2003 was $39.6 million as compared to
$32.5 million for the twenty-six week period ended June 30, 2002. The increase
in cash provided by operating activities is mainly attributable to lower
interest expense and the impact of the final payments made in 2002 related to
costs associated with the Company's Greater Philadelphia printing facility that
commenced operations in December 2001.
Cash flows from investing activities. Net cash used in investing
activities was $8.7 million for the twenty-six week period ended June 29, 2003.
Cash used in investing activities in 2003 was for investments in property, plant
and equipment. Net cash used in investing activities was $11.4 million for the
twenty-six week period ended June 30, 2002. Cash used in investing activities in
2002 was for funding the Company's acquisitions of two newspaper properties
further described in Note 5 to the Condensed Consolidated Financial Statements
and investments in property, plant and equipment.
The Company has a capital expenditure program of approximately $15 million
in place for 2003, which includes spending on buildings, machinery and
equipment, technology, including prepress and business systems, computer
hardware and software, and vehicles. The Company believes its capital
expenditure program is sufficient to maintain its current level and quality of
operations. The Company reviews its capital expenditure program periodically and
modifies it as required to meet current needs.
Cash flows from financing activities. Net cash used in financing
activities was $30.9 million for the twenty-six week period ended June 29, 2003,
reflecting the utilization of cash flow to repay $23.5 million of debt and to
repurchase $7.9 million of the Company's common stock, offset in part by
approximately $500,000 received from the exercise of stock options. Net cash
used in financing activities was $21.2 million for the twenty-six week period
ended June 30, 2002, reflecting $22.3 million used to repay debt, partially
offset by $1.1 million received from the exercise of stock options.
As of June 29, 2003, current assets were $62.6 million and current
liabilities, excluding $35.4 million of current maturities of long-term debt,
were $50.1 million. The Company manages its working capital through the
utilization of its Revolving Credit Facility. The outstanding balance on the
Revolving Credit Facility is classified as a long-term liability.
Debt and derivative activity. The Company entered into a credit agreement
in July 1998 with a group of lenders, led by Chase Manhattan Bank (the
predecessor to J.P. Morgan Chase & Co.) as administrative agent (the "Credit
Agreement"). The Credit Agreement provided for two secured term loan facilities
("Term Loan A" and "Term Loan B" or collectively, the "Term Loans") each at a
face amount of $250 million, and a secured revolving credit facility (the
"Revolving Credit Facility") for $400 million. Proceeds under these loan
facilities were used to repay existing debt and to fund the acquisition of the
Pennsylvania, New York, and Ohio newspaper businesses of The Goodson Newspaper
Group (the "Goodson Acquisition") in July 1998. The Credit Agreement also
provides for an uncommitted, multiple draw term loan facility (the "Incremental
Facility") in the amount of up to $500 million, as permitted by the
administrative agent, to be repaid under conditions as defined in the Credit
Agreement. To date, the Company has not drawn down on the Incremental Facility.
The Term Loans mature on March 31, 2006 and September 30, 2006, and the
Revolving Credit Facility matures on March 31, 2006. The Term Loans are
repayable in quarterly installments and the availability of the Revolving Credit
Facility is subject to certain quarterly reductions that commenced in 2002. In
addition, under the terms of the Company's Credit Agreement, net proceeds, as
defined in the Credit Agreement, from the sale of newspaper properties which are
not reinvested within 365 days must be used to prepay debt.
The amounts outstanding under the Credit Agreement bear interest at (i) 1
3/4 percent to 1/2 percent above LIBOR (as defined in the Credit Agreement) or
(ii) 1/2 percent to 0 percent above the higher of (a) the Prime Rate (as defined
in the Credit
14
Agreement) or (b) 1/2 percent above the Federal Funds Rate (as
defined in the Credit Agreement). The interest rate spreads ("the applicable
margins") are dependent upon the ratio of debt to trailing four quarters Cash
Flow (as defined in the Credit Agreement) and are reduced or increased as such
ratio declines or increases, respectively. The estimated fair value of the Term
Loans and Revolving Credit Facility approximates their carrying value.
An annual commitment fee is incurred on the average daily-unused portion
of the Revolving Credit Facility, payable quarterly in arrears, at a percentage
that varies from 0.375 percent to 0.250 percent based on the quarterly
calculation of the Total Leverage Ratio (as defined in the Credit Agreement).
Pursuant to the requirements of the Credit Agreement, the Company entered
into certain interest rate hedges (the "Collars") on November 9, 2001. The
Collars establish an interest rate ceiling ("CAP") and an interest rate floor
(the "floor"). The CAP on the Company's Collars, which became effective on
October 29, 2002, is 6.0 percent and the floor averages approximately 2.66
percent. These rates are based upon the 90-day LIBOR. In the event the 90-day
LIBOR exceeds 6.0 percent, the Company will receive cash from the issuers to
compensate for the rate in excess of the 6.0 percent CAP. If the 90-day LIBOR is
lower than 2.66 percent, the Company will pay cash to the issuers to compensate
for the rate below the floor. The Collars became effective on October 29, 2002
for a notional amount of $170 million. The Collars amortize over two years to a
notional aggregate amount of $135 million and terminate on October 29, 2004. As
of June 29, 2003, the notional aggregate amount of these Collars was $160
million.
On October 10, 2002, the Company entered into additional interest rate
Collars (the "Additional Collars"). The effective date of the Additional Collars
was January 29, 2003. The Additional Collars are for a notional aggregate amount
of $150 million, which is fixed over its two-year term. Similar to the existing
Collars, the Additional Collars establish a CAP and a floor at no initial cost
to the Company. The CAP on the Additional Collars is 4.0 percent and the floor
averages approximately 1.54 percent. These rates are also based upon the 90-day
LIBOR. In the event that 90-day LIBOR exceeds 4.0 percent, the Company will
receive cash from the issuers to compensate for the rate in excess of the 4.0
percent CAP. If the 90-day LIBOR is lower than 1.54 percent, the Company will
pay cash to the issuers to compensate for the rate below the floor. From time to
time the Company may enter into additional IRPAs. The Company expects that each
IRPA will be designated for all or a portion of the principal balance and term
of a specific debt obligation.
Under Financial Accounting Standard No. 133 Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133") as amended, the fair market
value of derivatives is reported as an adjustment to Other Comprehensive
Income/Loss ("OCI"). The IRPAs were fully effective in hedging the changes in
cash flows related to the debt obligation during the thirteen and twenty-six
weeks ended June 29, 2003 and the fiscal year ended December 29, 2002. The total
deferred loss reported in OCI as of June 29, 2003 and December 29, 2002 was
approximately $2.7 million and $3.4 million, respectively (net of $1.4 and $1.8
million of deferred taxes, respectively).
The Company's weighted-average effective interest rate was approximately
3.2 percent for the twenty-six week period ended June 29, 2003. These interest
rates reflect the effect of a $1.1 million pre-tax charge realized and reported
as a component of interest expense for the twenty-six week period ended
June 29, 2003 related to the Company's IRPAs in place during 2003.
Contractual Obligations and Commitments. As of June 29, 2003, the Company
had outstanding indebtedness under the Credit Agreement, due and payable in
installments through 2006, of $459.8 million, of which $141.0 million was
outstanding under the Revolving Credit Facility and $318.8 million was
outstanding under the Term Loans. In addition, the Company had approximately
$101.4 million of unused and available Revolving Credit Facility funds subject
to the terms of the Credit Agreement at June 29, 2003. The total unused balance
on the Revolving Credit Facility was $204.0 million on June 29, 2003. The
remaining aggregate maturities payable under the Term Loans for the following
fiscal years are as follows (dollars in thousands):
2003 $ 17,692
2004 37,853
2005 86,875
2006 176,417
15
The Revolving Credit Facility is available until March 31, 2006.
Availability reduces each quarter through March 31, 2006, in an aggregate amount
for each twelve-month period commencing on the dates set forth below, equal to
the amount set forth opposite such date, with reductions during each such period
being equal in amount (dollars in thousands):
June 30, 2002 $ 55,000
June 30, 2003 65,000
June 30, 2004 100,000
June 30, 2005 180,000
The Term Loans and Revolving Credit Facility are secured by substantially
all of the assets of the Company and the common stock and assets of the
Company's subsidiaries. The Term Loans and Revolving Credit Facility require
compliance with certain covenants, which require, among other things,
maintenance of certain financial ratios, which may restrict among other things,
the Company's ability to declare dividends, purchase treasury stock, incur
additional indebtedness, create liens, sell assets, consummate mergers and make
capital expenditures, investments and acquisitions. The Company is in compliance
with the financial covenants contained in the Credit Agreement.
The Company leases office space and equipment under non-cancellable
operating leases. Several of these leases contain renewal options for periods up
to five years. The Company's future minimum lease payments under non-cancellable
operating leases in effect as of December 30, 2002, are as follows (dollars in
thousands):
2003 $ 1,884
2004 1,296
2005 1,064
2006 366
2007 32
Thereafter 24
Critical Accounting Policies and Estimates
General
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's condensed consolidated
interim financial statements, which have been prepared, by the Company, without
audit, in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, inventories, investments, remaining useful
lives of long-lived assets, income taxes, pensions and other post-retirement
benefits, as well as contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The Company believes
the following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its condensed consolidated interim
financial statements.
Accounts Receivable and Bad Debt
Accounts receivable consist primarily of amounts due to the Company from
normal business activities. The allowance for doubtful accounts represents
reserves for the estimated loss from the inability of customers to make required
payments. The Company uses historical experience as well as current market
information in determining the estimate. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, the Company could be required to increase the
allowance for doubtful accounts.
16
Long-Lived Assets
Identifiable intangible assets, such as customer lists and covenants not
to compete, were amortized using the straight-line method over their estimated
useful lives for the years presented in the Company's consolidated financial
statements. In addition, goodwill associated with the excess purchase price over
the fair value of assets acquired is currently reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Under SFAS No. 142, goodwill and indefinite-lived
intangible assets are no longer amortized but are reviewed annually, or more
frequently if required, for impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives.
Pension and Post-retirement Benefits
Pension and post-retirement benefit costs and credits are developed from
actuarial valuations. Inherent in these valuations are key assumptions including
discount rates and expected return on plan assets. The Company considers current
market conditions, including changes in interest rates, in selecting these
assumptions.
Changes in the related pension and post-retirement benefit costs or
credits may occur in the future as a result of fluctuations in the Company's
headcount, changes in actuarial assumptions and market performance.
Litigation
The Company is involved in litigation matters that have arisen in the
ordinary course of business. The Company believes that the outcome of these
legal proceedings will not have a material adverse effect on the Company's
financial condition or results of operations.
Revenue Recognition
Revenue is earned from advertising sales, circulation and commercial
printing. Advertising revenues are recognized in the period when advertising is
printed or placed on the Company's Web sites. Circulation revenues are
recognized when purchased newspapers are distributed. Amounts received from
customers in advance of revenue recognition are reported as liabilities in the
Company's financial statements.
Reconciliation of Certain Non-GAAP Financial Measures.
The Company believes that the presentation of the Company's EBITDA enables
the Company and its analysts, investors and other interested parties to evaluate
the Company's results from operations in a more complete and meaningful manner.
Accordingly, EBITDA has been disclosed in this Quarterly Report to permit a more
complete comparative analysis of the Company's operating performance relative to
other companies in the industry. EBITDA is also presented to provide an analysis
of operating results using the same measures used by Journal Register Company's
chief operating decision makers to measure the operating results and performance
of the Company and its field operations, as well as to provide information with
respect to the Company's resources available for debt service, taxes, capital
expenditures and working capital requirements.
Journal Register Company calculates EBITDA as operating income plus
depreciation and amortization. Journal Register Company's calculation of EBITDA
may or may not be consistent with the calculation of EBITDA by other companies.
EBITDA should not be considered as an alternative to GAAP measures of
performance, such as operating income, net income or cash flow from operations,
or as a measure of liquidity.
The table below provides a reconciliation between operating income and
EBITDA for the thirteen and twenty-six week periods ended June 29, 2003 and
June 30, 2002.
17
Thirteen weeks ended Twenty-six weeks ended
(Dollars in thousands) June 29, June 30, June 29, June 30,
FISCAL PERIOD ENDED 2003 2002 2003 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Operating income $ 25,913 $ 28,434 $ 45,261 $ 49,552
Add: Depreciation and amortization 3,914 3,798 7,764 7,531
- --------------------------------------------------------------------------------
EBITDA $ 29,827 $ 32,232 $ 53,025 $ 57,083
======== ======== ======== ========
Cautionary Note Regarding Forward-Looking Statements
Statements in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the Company's expectations, hopes, intentions or strategies
regarding the future. Forward-looking statements include the plans and
objectives of the Company for future operations and trends affecting the
Company's financial condition and results of operations. In addition, the words
"anticipates," "projects," "plans," "intends," "estimates," "expects," "may,"
"believes" and similar words are intended to identify these forward-looking
statements. All forward-looking statements in this Report are based on
information available to the Company as of the date this Report is filed with
the Securities and Exchange Commission ("SEC"), and the Company assumes no
obligation to update any such forward-looking statements, except as required by
law. All forward-looking statements involve risks and uncertainties. Actual
results may differ materially from those expressed or implied by such
forward-looking statements as a result of certain factors including, but not
limited to, the success of the Company's acquisition strategy, dispositions, the
ability of the Company to achieve cost reductions and integrate acquisitions,
competitive pressures, general or regional economic conditions, advertising
trends, the unavailability or a material increase in the price of newsprint, and
material increases in interest rates, among other things. These and other
factors are discussed in more detail in the Company's other filings with the
SEC, including its Annual Report on Form 10-K for the year ended December 29,
2002. The Company undertakes no obligation to release publicly the results of
any future revisions it may make to forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risk arising from changes in interest
rates associated with its long-term debt obligations. The Company's long-term
debt is at variable interest rates based on the LIBOR, the Prime Rate or Federal
Funds Rate, plus a certain interest rate spread as defined in the Credit
Agreement. To manage its exposure to fluctuations in interest rates as required
by its Credit Agreement, the Company enters into certain IRPAs on a portion of
its debt, which minimize the effect of changes in variable interest rates. The
Company's objective with respect to these agreements is for hedging activities
and not for trading or speculative activity.
At June 29, 2003, the Company had interest rate collar agreements that had
no initial cost to the Company for an aggregate notional amount of $310.0
million. Assuming a 10 percent increase or reduction in interest rates, the
annual impact on the Company's pre-tax earnings would be approximately $0.6
million, excluding the effect of the Company's IRPAs.
The Company seeks to manage the effects of increases in the price of
newsprint through a combination of, among other things, technology improvements,
including reductions in page size, inventory management and advertising and
circulation price increases. The Company also has reduced fringe circulation in
response to increased newsprint prices, as it is the Company's experience that
such circulation does not provide adequate response for advertisers.
18
Item 4. Controls and Procedures
-----------------------
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in alerting them in a timely
manner to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
filings with the SEC. No significant changes were made in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the Company's most recent evaluation.
The Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files under the Exchange
Act is accumulated and communicated to the Company's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Stockholders on May 14, 2003.
At the Annual Meeting, the stockholders elected Robert M. Jelenic, John L.
Vogelstein and Errol M. Cook as Class C directors of the Company to hold office
until the 2006 Annual Meeting of Stockholders. The stockholders also ratified
the appointment of Ernst & Young LLP as independent auditors for the Company for
fiscal year 2003.
Each of the Class C directors nominated by the Company were elected with the
following voting results:
VOTES VOTES
FOR WITHHELD
----- --------
Robert M. Jelenic 30,357,895 1,086,446
John L. Vogelstein 30,300,487 1,143,854
Errol M. Cook 30,523,240 921,101
The other proposal submitted to the stockholders was approved with the following
voting results:
VOTES VOTES
CAST FOR CAST AGAINST ABSTENTIONS
--------- ------------ -----------
The appointment of Ernst &
Young LLP as independent
auditors for the Company
for the fiscal year 2003 30,666,313 773,828 4,200
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
31.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350
31.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350
32 Certification of Principal Executive Officer and Principal
Financial Officer
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 23, 2003,
furnishing pursuant to Item 12 under Item 9 thereof certain information
regarding the text of a press release issued by the Company, dated July
17, 2003, titled "Journal Register Company
Reports Second Quarter Results."
20
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 12, 2003 JOURNAL REGISTER COMPANY
By: /s/ Jean B. Clifton
------------------------------
Jean B. Clifton
Executive Vice President,
Chief Financial
Officer and Secretary
(signing on behalf of the
registrant and as principal
financial officer)
21
EXHIBIT 31.1
Certification
I, Robert M. Jelenic, Chairman, President and Chief Executive Officer of
Journal Register Company (the "Registrant"), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; and
b. Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: August 12, 2003 /s/ Robert M. Jelenic
--------------------------------------
Robert M. Jelenic
Chairman, President and Chief
Executive Officer
EXHIBIT 31.2
Certification
I, Jean B. Clifton, Executive Vice President, Chief Financial Officer and
Secretary of Journal Register Company (the "Registrant"), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared; and
b. Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors:
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: August 12, 2003 /s/ Jean B. Clifton
--------------------------------------
Jean B. Clifton
Executive Vice President, Chief
Financial Officer and Secretary
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Journal Register Company
(the "Company") on Form 10-Q for the period ended June 29, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), we,
Robert M. Jelenic, Chairman, President and Chief Executive Officer of the
Company, and Jean B. Clifton, Executive Vice President and Chief Financial
Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Robert M. Jelenic
- ---------------------
Robert M. Jelenic
Chairman, President and Chief Executive Officer
August 12, 2003
/s/ Jean B. Clifton
- -------------------
Jean B. Clifton
Executive Vice President, Chief Financial Officer and Secretary
August 12, 2003
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or incorporated by reference in any filing under the Securities Act of
1933, as amended, or the Exchange Act, except as may be expressly set forth by
specific reference in any such filing. A signed original of this written
statement required by Section 906, or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906,
has been provided to Journal Register Company and will be retained by Journal
Register Company and furnished to the Securities and Exchange Commission or its
staff upon request.