================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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 September 28, 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 October 30, 2003,
41,152,807 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 6. Exhibits and Reports on Form 8-K...............................19
Signature ...............................................................20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
DOLLARS IN THOUSANDS SEPTEMBER 28, DECEMBER 29,
FISCAL PERIOD ENDED 2003 2002
================================================================================
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 31 $ 33
Accounts receivable, less allowance for doubtful
accounts of $6,365 in 2003 and $6,388 in 2002,
respectively 44,196 48,101
Inventories 6,849 6,869
Deferred income taxes 4,319 4,208
Other current assets 6,276 6,172
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 61,671 65,383
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 10,720 10,408
Buildings and improvements 75,659 71,356
Machinery and equipment 171,376 170,297
Construction in progress 6,687 5,568
- --------------------------------------------------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 264,442 257,629
- --------------------------------------------------------------------------------
Less accumulated depreciation (139,922) (131,949)
- --------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 124,520 125,680
- --------------------------------------------------------------------------------
INTANGIBLE AND OTHER ASSETS:
Goodwill 491,385 491,385
Other intangible assets, net of accumulated
amortization of $9,308 in 2003 and $8,269 in
2002, respectively 14,846 15,885
Other assets 3,245 3,370
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 695,667 $ 701,703
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current maturities of long-term debt $ 36,618 $ 32,912
Accounts payable 10,268 11,942
Accrued interest 2,194 2,446
Deferred subscription revenue 10,637 10,514
Accrued salaries and vacation 6,715 6,472
Fair market value of hedges 3,466 5,162
Other accrued expenses and current liabilities 17,222 15,533
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 87,120 84,981
- --------------------------------------------------------------------------------
Senior debt, less current maturities 405,883 450,457
Deferred income taxes 45,927 39,350
Accrued retiree benefits and other liabilities 19,578 18,373
Income taxes payable 91,711 112,421
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share,
300,000,000 shares authorized, 48,437,581
issued at September 28, 2003 and
December 29, 2002 484 484
Additional paid-in capital 358,248 358,242
Accumulated deficit (183,818) (239,416)
- --------------------------------------------------------------------------------
174,914 119,310
- --------------------------------------------------------------------------------
Less treasury stock, shares at cost,
2003 - 7,298,727; 2002 - 6,815,197 (107,452) (100,074)
Accumulated other comprehensive loss, net of tax (22,014) (23,115)
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 45,448 (3,879)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 695,667 $ 701,703
================================================================================
SEE ACCOMPANYING NOTES.
1
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
IN THOUSANDS, EXCEPT PER SHARE DATA SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
FISCAL PERIOD ENDED 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------
REVENUES:
Advertising $ 73,516 $ 72,865 $ 220,998 $ 219,493
Circulation 22,870 22,894 67,832 68,525
- --------------------------------------------------------------------------------------------------------------
Newspaper revenues 96,386 95,759 288,830 288,018
Commercial printing and other 4,420 4,698 12,768 14,915
- --------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 100,806 100,457 301,598 302,933
- --------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 38,759 38,054 116,678 113,182
Newsprint, ink and printing charges 7,872 7,843 23,046 24,123
Selling, general and administrative 13,356 12,952 39,380 38,926
Other 15,107 14,642 43,757 42,653
Depreciation and amortization 3,861 3,767 11,625 11,298
- --------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 78,955 77,258 234,486 230,182
- --------------------------------------------------------------------------------------------------------------
OPERATING INCOME 21,851 23,199 67,112 72,751
Net interest expense and other (4,442) (6,008) (12,171) (18,833)
- --------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 17,409 17,191 54,941 53,918
Provision (benefit) for income taxes (14,455) 5,261 (657) 18,938
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 31,864 $11,930 $ 55,598 $34,980
==============================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.77 $ 0.29 $ 1.35 $ 0.84
Diluted $ 0.76 $ 0.28 $ 1.34 $ 0.83
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 41,139 41,592 41,237 41,561
Diluted 41,717 42,146 41,643 42,329
SEE ACCOMPANYING NOTES.
2
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
DOLLARS IN THOUSANDS THIRTY-NINE WEEKS ENDED
FISCAL PERIOD ENDED SEPTEMBER 28, 2003 SEPTEMBER 29, 2002
================================================================================
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 55,598 $ 34,980
Adjustments to reconcile net
income to net cash provided by
(used for) operating activities:
Provision for losses on accounts
receivable 2,851 2,926
Depreciation and amortization 11,625 11,298
Increase in deferred income taxes 6,466 11,491
Decrease in accounts receivable 1,054 671
Decrease in accounts payable (1,674) (4,779)
Decrease in income taxes payable (20,710) (2,842)
Other, net 3,130 (6,058)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,340 47,687
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and
equipment (10,102) (7,843)
Purchases of newspaper businesses - (6,264)
- --------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (10,102) (14,107)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of long-term debt (40,868) (35,371)
Exercise of stock options for common stock 533 1,713
Purchase of Company stock (7,905) -
- --------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (48,240) (33,658)
- --------------------------------------------------------------------------------
Decrease in cash and cash equivalents (2) (78)
Cash and cash equivalents, beginning of
period 33 110
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31 $ 32
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 11,526 $ 18,471
Income taxes $ 13,542 $ 11,367
================================================================================
SEE ACCOMPANYING NOTES.
3
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 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"). All significant intercompany activity has been eliminated. 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 annual financial
reporting. 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 September 28, 2003 and December 29, 2002
and the results of its operations and cash flows for the thirteen and
thirty-nine week periods ended September 28, 2003 and September 29, 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 to the
current year presentation. The reclassification has 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"):
(IN THOUSANDS) THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
FISCAL PERIOD ENDED SEPTEMBER 28, 2003 SEPTEMBER 29, 2002 SEPTEMBER 28, 2003 SEPTEMBER 29, 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares - basic 41,139 41,592 41,237 41,561
Effect of dilutive securities:
Employee stock options 578 554 406 768
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares - diluted 41,717 42,146 41,643 42,329
=================================================================================================================================
Options to purchase approximately 2.2 million shares of common stock at a range
of $21.00 to $22.50 per share and approximately 2.6 million shares at a range of
$17.55 to $22.50 per share were outstanding during the thirteen and thirty-nine
week periods ended September 28, 2003, respectively, but were not included in
the computation of diluted EPS in either period because their effect would have
been anti-dilutive. Similarly, 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 thirteen and thirty-nine week periods ended September 29, 2002, but
were not included in the computation of diluted EPS in either period because
their effect would have been anti-dilutive.
4
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 2003
(UNAUDITED)
3. INCOME TAXES
The provision for income taxes for the thirteen and thirty-nine week
periods ended September 28, 2003 and September 29, 2002 reflect the reversal of
previously recorded income tax accruals of approximately $20.9 million and $1.2
million, respectively, that were determined to no longer be required.
4. 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 September 28, 2003, the Company has repurchased
approximately 7.5 million shares at a total cost of approximately $110.2
million.
5. 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, THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
EXCEPT PER SHARE AMOUNTS) SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
FISCAL PERIOD ENDED 2003 2002 2003 2002,
- ------------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 31,864 $ 11,930 $ 55,598 $ 34,980
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects -- -- -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (761) (801) (2,265) (2,440)
- ------------------------------------------------------------------------------------------------------------------------
Pro forma $ 31,103 $ 11,129 $ 53,333 $ 32,540
========================================================================================================================
Net income per common share:
As reported:
Basic $ 0.77 $ 0.29 $ 1.35 $ 0.84
Diluted $ 0.76 $ 0.28 $ 1.34 $ 0.83
Pro forma:
Basic $ 0.76 $ 0.27 $ 1.29 $ 0.78
Diluted $ 0.75 $ 0.26 $ 1.28 $ 0.77
========================================================================================================================
5
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 2003
(UNAUDITED)
6. 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.
7. 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 September 28, 2003, the notional aggregate amount of
these Collars was $153 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 thirty-nine
week periods ended September 28, 2003 and the fiscal year ended December 29,
2002. The total deferred loss reported in OCI as of September 28, 2003 and
December 29, 2002 was approximately $2.2 million and $3.4 million, respectively
(net of $1.2 and $1.8 million of deferred taxes, respectively).
6
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 2003
(UNAUDITED)
8. COMPREHENSIVE INCOME
The components of comprehensive income for the thirteen and
thirty-nine week periods ended September 28, 2003 and September 29, 2002 are as
follows:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(DOLLARS IN THOUSANDS) SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
FISCAL PERIOD ENDED 2003 2002 2003 2002,
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 31,864 $ 11,930 $ 55,598 $ 34,980
Reclassification of unrealized gains on fully
effective hedges to net income, net of tax 467 205 1,211 3,509
Net change in fair value of fully effective
hedges, net of tax (90) (975) (110) (2,684)
- ------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 32,241 $ 11,160 $ 56,699 $ 35,805
========================================================================================================================
Accumulated other comprehensive loss, net of tax, as of September 28,
2003 and December 29, 2002 was approximately $22.0 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.
9. 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 SEPTEMBER 28, 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 $ (4,671) $ 2,072 $ 6,743 $ (4,124) $ 2,619
Non-compete covenants 2,870 (1,660) 1,210 2,870 (1,584) 1,286
Debt issuance costs 4,573 (2,885) 1,688 4,573 (2,469) 2,104
----------------------------------------------------------------------------- -----------------------------------------
Total 14,186 (9,216) 4,970 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 $ (72,518) $506,231 $578,749 $ (71,479) $507,270
============================================================================= =========================================
7
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 28, 2003
(UNAUDITED)
9. 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 September 28, 2003 and September 29, 2002,
amortization expense for intangible assets was $346,000 and $347,000,
respectively. For the thirty-nine weeks ended September 28, 2003 and September
29, 2002, amortization expense for intangible assets was approximately $1.0
million. 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
8
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 September 28, 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
September 28, 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 September 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.
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 September 28, 2003, the
Company operated 150 Web sites, which represent each of the Company's
publications.
9
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 28, 2003 AS COMPARED TO THE THIRTEEN
WEEK PERIOD ENDED SEPTEMBER 29, 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 September 28,
2003 was $31.9 million as compared to $11.9 million for the thirteen week period
ended September 29, 2002. These results include the effect of the reversal of
certain tax accruals in the 2003 third quarter of $20.9 million and the 2002
third quarter of $1.2 million, and a special charge of $850,000 (or
approximately $553,000 net of income taxes) recorded in the third quarter of
2003 related to a large potential acquisition that the Company has determined
will not be consummated. The net effect of these special items on net income was
approximately $20.4 million and $1.2 million in the 2003 and 2002 third
quarters, respectively.
REVENUES. For the thirteen week period ended September 28, 2003, the
Company's revenues were $100.8 million, an increase of approximately $349,000,
or 0.3 percent, as compared to the thirteen week period ended September 29,
2002. Newspaper revenues for the thirteen weeks ended September 28, 2003 as
compared to the prior year period increased $627,000, or 0.7 percent, to $96.4
million, principally due to an increase in advertising revenues of $651,000, or
0.9 percent. Circulation revenues for the thirteen weeks ended September 28,
2003 were $22.9 million, down 0.1 percent as compared to the prior year period.
Commercial printing and other revenues for the thirteen weeks ended September
28, 2003 decreased approximately $278,000, or 5.9 percent, to $4.4 million as
compared to the prior year period and represented 4.4 percent of the Company's
revenues for the thirteen weeks ended September 28, 2003. The decrease in
commercial printing and other revenues is attributable to a reduction in
commercial printing activity. Online revenues for the thirteen weeks ended
September 28, 2003, included in advertising revenues, were approximately $1.3
million, an increase of approximately 27.8 percent as compared to the prior year
period, primarily as a result of increases in the volume of online display and
special section advertisements.
The following table sets forth the Company's total advertising
revenues, by category, for the thirteen week periods ended September 28, 2003
and September 29, 2002:
Thirteen Weeks Ended
(Dollars in -----------------------------------------------------------
thousands) September 28, September 29, Increase/
Fiscal period ended 2003 2002 (Decrease)
- --------------------------------------------------------------------------------
Local $38,323 $38,558 (0.6)%
Classified 31,723 30,549 3.8 %
National 3,470 3,758 (7.7)%
- --------------------------------------------------------------------------------
Total advertising
revenues $73,516 $72,865 0.9 %
================================================================================
SAME-STORE NEWSPAPER REVENUES. For the thirteen week period ended
September 28, 2003, same-store newspaper revenues increased $174,000, or 0.2
percent, as compared to the thirteen week period ended September 29, 2002.
Same-store advertising revenues increased $257,000, or 0.4 percent, as compared
to the thirteen week period ended September 29, 2002, primarily as a result of a
3.7 percent increase in classified advertising revenues partially offset by a
1.5 percent decrease in retail advertising revenues and a 7.7 percent decrease
in national advertising revenues, in each case as compared to the prior year
period. The increase in classified advertising revenues during the 2003 period
resulted from a 15.6 percent increase in classified real estate advertising
revenues and a 1.7 percent increase in classified automotive advertising
revenues, partially offset by a decline in classified employment advertising
revenues of 7.8 percent. Same-store circulation revenues decreased 0.4 percent
to $22.8 million during the thirteen week period ended September 28, 2003, as
compared to $22.9 million for the thirteen week period ended September 29, 2002.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 38.4 percent of the Company's revenues for the thirteen week period ended
September 28, 2003, as compared to 37.9 percent for the thirteen week period
ended September 29, 2002. Salaries and employee benefits increased $705,000, or
1.9 percent, for the thirteen week period ended September 28, 2003 to $38.8
million, principally as a result of an increase in pension costs, as well as
additional salaries and benefits associated with the Company's 2002
acquisitions.
10
NEWSPRINT, INK AND PRINTING CHARGES. For the thirteen week periods
ended September 28, 2003 and September 29, 2002, newsprint, ink and printing
charges were 7.8 percent of the Company's revenues. Newsprint, ink and printing
charges for the thirteen week period ended September 28, 2003 increased
approximately $29,000, or 0.4 percent, as compared to the prior year period,
principally due to an increase of approximately 7.2 percent in newsprint expense
related to the newspapers published by the Company, offset, in part, by a
decline in expenses related to commercial printing operations. The increase in
total newsprint expense primarily related to an increase of approximately 12.5
percent in the unit cost of newsprint, offset, in part by a 4.9 percent decrease
in newsprint consumption.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were 13.2 percent and 12.9 percent of the Company's
revenues for the thirteen week periods ended September 28, 2003 and September
29, 2002, respectively. As compared to the prior year period, selling, general
and administrative expenses for the thirteen week period ended September 28,
2003 increased $404,000, or 3.1 percent, to $13.4 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 savings resulting from additional cost control efforts.
OTHER EXPENSES. Other expenses were 15.0 percent and 14.6 percent of
the Company's revenues for the thirteen week periods ended September 28, 2003
and September 29, 2002, respectively. Other expenses increased approximately
$465,000, or 3.2 percent, to $15.1 million for the thirteen week period ended
September 28, 2003 due primarily to an increase in circulation expenses, as well
as additional other expenses associated with the Company's 2002 acquisitions.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were 3.8 percent of the Company's revenues for the thirteen week periods ended
September 28, 2003 and September 29, 2002. Depreciation and amortization
expenses for the period ended September 28, 2003 increased approximately
$94,000, or 2.5 percent, to $3.9 million, as a result of increased depreciation
expense.
OPERATING INCOME. Operating income was $21.9 million for the thirteen
week period ended September 28, 2003 as compared to $23.2 million for the
thirteen week period ended September 29, 2002.
NET INTEREST AND OTHER. Net interest and other expense decreased
approximately $1.6 million, or 26.1 percent, for the thirteen week period ended
September 28, 2003 as compared to the thirteen week period ended September 29,
2002, principally due to lower interest rates and a reduction in the Company's
weighted-average debt outstanding, partially offset by an $850,000 special
charge incurred in connection with a large potential acquisition that the
Company has determined will not be consummated.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes
decreased by approximately $19.7 million for the thirteen week period ended
September 28, 2003 as compared to the thirteen week period ended September 29,
2002. The Company reported a benefit for income taxes of approximately $14.6
million for the thirteen weeks ended September 28, 2003 as compared to a
provision for income taxes of approximately $5.3 million for the thirteen weeks
ended September 29, 2002. The 2003 and 2002 amounts reflect the reversal of
previously recorded income tax accruals that were determined to no longer be
required (approximately $20.9 million and $1.2 million, respectively). Excluding
the 2003 reversal, the Company's effective tax rate for the thirteen weeks ended
September 28, 2003 would have been approximately 37 percent.
OTHER INFORMATION. EBITDA (which the Company defines as operating
income plus depreciation and amortization) was $25.7 million for the thirteen
week period ended September 28, 2003 as compared to $27.0 million for the
thirteen week period ended September 29, 2002. See "Reconciliation of Certain
Non-GAAP Financial Measures" below for more information reconciling EBITDA to
operating income. Operating income was $21.9 million for the thirteen week
period ended September 28, 2003 as compared to $23.2 million for the thirteen
week period ended September 29, 2002.
11
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 28, 2003 AS COMPARED TO THE
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 29, 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 thirty-nine week period ended September
28, 2003 was $55.6 million as compared to $35.0 million for the period ended
September 29, 2002. These results include the effect of the reversal of certain
tax accruals in the 2003 third quarter of $20.9 million and the 2002 third
quarter of $1.2 million, and a special charge of $850,000 (or approximately
$553,000 net of income taxes) recorded in the third quarter of 2003 related to a
large potential acquisition that the Company has determined will not be
consummated. The net effect of these special items on net income was $20.4
million and $1.2 million in the 2003 and 2002 year-to-date periods,
respectively.
REVENUES. For the thirty-nine week period ended September 28, 2003,
the Company's revenues were $301.6 million, a decrease of $1.3 million, or 0.4
percent, as compared to the thirty-nine week period ended September 29, 2002.
Newspaper revenues increased $812,000, or 0.3 percent, to $288.8 million as a
result of an increase in advertising revenues of $1.5 million, or 0.7 percent,
partially offset by a decline in circulation revenues of $693,000, or 1.0
percent. The increase in advertising revenues is principally due to gains in
retail and 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 $2.1 million, or 14.4
percent, to $12.8 million and represented 4.2 percent of the Company's revenues
in the thirty-nine week period ended September 28, 2003, as compared to 4.9
percent in the period ended September 29, 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 $3.6 million and increased approximately 21.1 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 thirty-nine week periods ended September 28, 2003
and September 29, 2002:
Thirty-nine Weeks Ended
(Dollars in -----------------------------------------------------------
thousands) September 28, September 29, Increase/
Fiscal period ended 2003 2002 (Decrease)
- --------------------------------------------------------------------------------
Local $119,283 $118,217 0.9 %
Classified 90,844 90,261 0.6 %
National 10,871 11,015 (1.3)%
- --------------------------------------------------------------------------------
Total advertising
revenues $220,998 $219,493 0.7 %
================================================================================
SAME-STORE NEWSPAPER REVENUES. For the thirty-nine week period ended
September 28, 2003, same-store newspaper revenues decreased $1.4 million, or 0.5
percent, to $284.7 million as compared to the thirty-nine week period ended
September 29, 2002. Same-store advertising revenues decreased $535,000, or 0.2
percent, and same-store circulation revenues decreased $862,000, or 1.3 percent,
both as compared to the thirty-nine week period ended September 29, 2002. For
the thirty-nine week period ended September 28, 2003, on a same-store basis,
retail advertising revenues were down 0.5 percent, classified advertising
revenues were up 0.3 percent and national advertising revenues decreased 1.3
percent, in each case as compared to the prior year period. The increase in
classified advertising revenues during the 2003 period reflects a substantial
increase in classified real estate advertising revenues of 14.5 percent,
partially offset by an 11.4 percent decrease in classified employment
advertising revenues. Same-store circulation revenues for the thirty-nine week
period ended September 28, 2003 were negatively impacted by unusually high
amounts of snow and rainfall during the period.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 38.7 percent of the Company's revenues in the thirty-nine week period ended
September 28, 2003, as compared to 37.4 percent in the thirty-nine week period
ended September 29, 2002. As compared to the prior year period, salaries and
employee benefits increased $3.5 million, or 3.1 percent, to $116.7 million in
the period ended September 28, 2003, primarily
12
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.
NEWSPRINT, INK AND PRINTING CHARGES. In the thirty-nine week period
ended September 28, 2003, newsprint, ink and printing charges were 7.6 percent
of the Company's revenues, as compared to eight percent in the thirty-nine week
period ended September 29, 2002. Newsprint, ink and printing charges in the
thirty-nine week period ended September 28, 2003 decreased approximately $1.1
million, or 4.5 percent, as compared to the thirty-nine week period ended
September 29, 2002. This decrease is principally due to the decline in expenses
related to commercial printing operations partially offset by an increase in
newsprint expense of approximately three percent. The increase in total
newsprint expense is primarily related to an increase of approximately six
percent in the unit cost of newsprint, offset, in part, by a decrease in
newsprint consumption of approximately three percent.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were 13.1 percent and 12.8 percent of the Company's
revenues in the thirty-nine week periods ended September 28, 2003 and September
29, 2002, respectively. Selling, general and administrative expenses in the
thirty-nine week period ended September 28, 2003 increased $454,000, or 1.2
percent, to $39.4 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.
OTHER EXPENSES. Other expenses were 14.5 percent and 14.1 percent of
the Company's revenues in the thirty-nine week periods ended September 28, 2003
and September 29, 2002, respectively. Other expenses increased $1.1 million, or
2.6 percent, to $43.8 million in the thirty-nine week period ended September 28,
2003, primarily due to an increase in circulation expenses and additional
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 thirty-nine week period ended
September 28, 2003 as compared to 3.7 percent in the thirty-nine week period
ended September 29, 2002. Depreciation and amortization expenses in the
thirty-nine week period ended September 28, 2003 increased $327,000, or 2.9
percent, to $11.6 million as a result of increased depreciation expense.
OPERATING INCOME. Operating income was $67.1 million for the
thirty-nine week period ended September 28, 2003 as compared to $72.8 million in
the thirty-nine week period ended September 29, 2002.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
decreased $6.7 million, or 35.4 percent, in the thirty-nine week period ended
September 28, 2003 as compared to the thirty-nine week period ended September
29, 2002, due to lower interest rates and a reduction in the Company's
weighted-average debt outstanding, partially offset by an $850,000 special
charge incurred in connection with a large potential acquisition that the
Company has determined will not be consummated.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision for income taxes
decreased approximately $19.6 million for the thirty-nine week period ended
September 28, 2003 as compared to the thirty-nine week period ended September
29, 2002. The Company reported a benefit for income taxes of approximately $0.7
million for the thirty-nine weeks ended September 28, 2003 as compared to a
provision for income taxes of approximately $18.9 million for the thirty-nine
weeks ended September 29, 2002. The 2003 and 2002 amounts reflect the reversal
of previously recorded income tax accruals that were determined to no longer be
required (approximately $20.9 million and $1.2 million, respectively). Excluding
the 2003 reversal, the Company's effective tax rate for the thirty-nine weeks
ended September 28, 2003 would have been approximately 37 percent.
OTHER INFORMATION. EBITDA (which the Company defines as operating
income plus depreciation and amortization) was $78.7 million in the thirty-nine
week period ended September 28, 2003 as compared to $84.0 million for the
thirty-nine week period ended September 29, 2002. See "Reconciliation of Certain
Non-GAAP Financial Measures" below for more information reconciling EBITDA to
operating income. Operating income was $67.1 million for the thirty-nine week
period ended September 28, 2003 as compared to $72.8 million in the thirty-nine
week period ended September 29, 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 thirty-nine week period ended September 28, 2003 was $58.3 million as
compared to $47.7 million for the thirty-nine week period ended September 29,
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 $10.1 million for the thirty-nine week period ended September 28,
2003. Cash used in investing activities in 2003 was for investments in property,
plant and equipment. Net cash used in investing activities was $14.1 million for
the thirty-nine week period ended September 29, 2002. Cash used in investing
activities in 2002 was for investments in property, plant and equipment and for
funding the Company's acquisitions of two newspaper properties further described
in Note 6 to the Condensed Consolidated Financial Statements.
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 $48.2 million for the thirty-nine week period ended September 28,
2003, reflecting the utilization of cash flow to repay $40.9 million of debt and
to repurchase $7.9 million of the Company's common stock, offset in part by
approximately $533,000 received from the exercise of stock options. Net cash
used in financing activities was $33.7 million for the thirty-nine week period
ended September 29, 2002, reflecting $35.4 million used to repay debt, partially
offset by $1.7 million received from the exercise of stock options.
As of September 28, 2003, current assets were $61.7 million and
current liabilities, excluding $36.6 million of current maturities of long-term
debt, were $50.5 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.
14
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 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 September 28, 2003, the notional aggregate amount of these Collars was $153
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 thirty-nine
weeks ended September 28, 2003 and the fiscal year ended December 29, 2002. The
total deferred loss reported in OCI as of September 28, 2003 and December 29,
2002 was approximately $2.2 million and $3.4 million, respectively (net of $1.2
and $1.8 million of deferred taxes, respectively).
The Company's weighted-average effective interest rate was
approximately 3.2 percent for the thirty-nine week period ended September 28,
2003. These interest rates reflect the effect of a $1.9 million pre-tax charge
realized and reported as a component of interest expense for the thirty-nine
week period ended September 28, 2003 related to the Company's IRPAs in place
during 2003.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS. As of September 28, 2003, the
Company had outstanding indebtedness under the Credit Agreement, due and payable
in installments through 2006, of $442.5 million, of which $132.5 million was
outstanding under the Revolving Credit Facility and $310 million was outstanding
under the Term Loans. In addition, the Company had approximately $117 million of
unused and available Revolving Credit Facility funds subject to the terms of the
Credit Agreement at September 28, 2003. The total unused balance on the
Revolving Credit Facility was approximately $196 million on September 28, 2003.
The remaining aggregate maturities payable under the Term Loans for the
following fiscal years are as follows (DOLLARS IN THOUSANDS):
15
2003 $ 8,846
2004 37,853
2005 86,875
2006 176,417
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. As of September 28, 2003,
the Company was 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.
16
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.
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 thirty-nine week periods ended September 28, 2003
and September 29, 2002.
17
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(DOLLARS IN THOUSANDS) SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29,
FISCAL PERIOD ENDED 2003 2002 2003 2002,
- ---------------------------------------------------------------------------------------------------------------------
Operating income $21,851 $23,199 $67,112 $72,751
Add: Depreciation and amortization 3,861 3,767 11,625 11,298
- ---------------------------------------------------------------------------------------------------------------------
EBITDA $25,712 $26,966 $78,737 $84,049
======= ======= ======= =======
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 September 28, 2003, the Company had interest rate collar agreements
that had no initial cost to the Company for an aggregate notional amount of $303
million. Assuming a 10 percent change in interest rates is applied to the
weighted average floating-rate term loan debt, the impact on the Company's
annual pre-tax earnings would be approximately $0.6 million, excluding the
effect of the Company's interest rate protection agreements.
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.
PART II. OTHER INFORMATION
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 October
16, 2003, furnishing pursuant to Item 12 thereof certain
information regarding the text of a press release issued by
the Company, dated October 16, 2003, titled "Journal
Register Company Reports Third Quarter Results."
19
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: November 7, 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)
20
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: November 7, 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: November 7, 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 September 28, 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
November 7, 2003
/s/ Jean B. Clifton
- -------------------
Jean B. Clifton
Executive Vice President, Chief Financial Officer and Secretary
November 7, 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.