===============================================================================
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 March 28, 2004
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: common stock, $.01 par value
per share, 41,941,577 shares outstanding (exclusive of treasury shares) as of
April 28, 2004.
===============================================================================
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....................10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................18
Item 4 Controls and Procedures................................18
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 MARCH 28, DECEMBER 28,
FISCAL PERIOD ENDED 2004 2003
- -------------------------------------------------------------------------------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 31 $ 31
Accounts receivable, less allowance for doubtful
accounts of $6,400 and $5,785 respectively 42,331 43,591
Inventories 6,302 6,597
Deferred income taxes 3,828 3,719
Other current assets 6,054 4,149
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 58,546 58,087
- -------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 10,720 10,720
Buildings and improvements 76,766 76,759
Machinery and equipment 175,948 174,519
Construction in progress 8,061 7,413
- -------------------------------------------------------------------------------------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 271,495 269,411
Less accumulated depreciation (146,718) (143,398)
- -------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 124,777 126,013
- -------------------------------------------------------------------------------------------------------------------
INTANGIBLE AND OTHER ASSETS:
Goodwill 491,869 491,833
Other intangible assets, net of accumulated amortization
of $10,000 and $9,654, respectively 14,625 14,500
Other assets 2,422 2,627
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $692,239 $ 693,060
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current maturities of long-term debt $ 38,696 $37,853
Accounts payable 9,600 9,454
Accrued interest 2,030 2,062
Deferred subscription revenue 11,269 10,614
Accrued salaries and vacation 5,825 6,455
Fair market value of hedges 2,111 2,483
Other accrued expenses and current liabilities 19,804 14,564
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 89,335 83,485
- -------------------------------------------------------------------------------------------------------------------
Senior debt, less current maturities 356,704 380,492
Deferred income taxes 49,334 47,379
Accrued retiree benefits and other liabilities 19,024 19,462
Income taxes payable 89,978 89,898
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share, 300,000,000 shares authorized,
48,437,581 issued at March 28, 2004 and December 28, 2003 484 484
Additional paid-in capital 359,899 359,359
Accumulated deficit (157,179) (167,426)
- -------------------------------------------------------------------------------------------------------------------
203,204 192,417
- -------------------------------------------------------------------------------------------------------------------
Less treasury stock
6,531,841 shares and 6,837,948 shares, respectively, at cost (96,304) (100,817)
Accumulated other comprehensive loss, net of tax (19,036) (19,256)
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 87,864 72,344
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 692,239 $ 693,060
===================================================================================================================
SEE ACCOMPANYING NOTES
1
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
IN THOUSANDS, EXCEPT PER SHARE DATA THIRTEEN WEEKS ENDED
FISCAL PERIOD ENDED MARCH 28, 2004 MARCH 30, 2003
- ---------------------------------------------------------------------------------------------------------------------
REVENUES:
Advertising $ 72,677 $ 69,757
Circulation 22,501 22,717
- ---------------------------------------------------------------------------------------------------------------------
Newspaper revenues 95,178 92,474
Commercial printing and other 3,980 4,158
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 99,158 96,632
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 39,249 38,850
Newsprint, ink and printing charges 7,708 7,446
Selling, general and administrative 13,474 12,965
Depreciation and amortization 3,711 3,850
Other 14,841 14,173
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 78,983 77,284
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 20,175 19,348
Net interest expense and other (3,335) (3,959)
- ---------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 16,840 15,389
Provision for income taxes 6,593 5,586
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 10,247 $ 9,803
=====================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.25 $ 0.24
Diluted $ 0.24 $ 0.24
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 41,767 41,437
Diluted 42,571 41,664
- ---------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
2
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
DOLLARS IN THOUSANDS THIRTEEN WEEKS ENDED
FISCAL PERIOD ENDED MARCH 28, 2004 MARCH 30, 2003
=======================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,247 $ 9,803
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on accounts receivable 843 883
Depreciation and amortization 3,711 3,850
Increase in deferred income taxes 1,694 1,709
Decrease in accounts receivable 417 3,529
Increase (decrease) in accounts payable 146 (448)
Other 3,394 3,985
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,452 23,311
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (2,053) (2,194)
Purchases of businesses (507) -
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,560) (2,194)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (22,945) (14,032)
Proceeds from exercise of stock options 5,053 411
Purchase of Company stock - (7,501)
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NET CASH USED IN FINANCING ACTIVITIES (17,892) (21,122)
-----------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents - (5)
Cash and cash equivalents, beginning of period 31 33
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31 $ 28
=======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,438 $ 4,044
Income taxes $ 551 $ 766
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Comprehensive income - mark-to-market hedge
adjustments, net of tax $ 220 $ 706
- -----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
3
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2004
(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 152
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 March 28, 2004 and December 28, 2003 and the results of its
operations and cash flows for the thirteen week periods ended March 28, 2004 and
March 30, 2003. These financial statements should be read in conjunction with
the December 28, 2003 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 operating expenses related to certain of the Company's
acquisitions have been reclassified in the first quarter of 2003 to conform to
the Company's current period financial presentation. The reclassification had no
impact on 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:
THIRTEEN WEEKS ENDED
(IN THOUSANDS) MARCH 28, 2004 MARCH 30,2003
- ------------------------------------------------------------------------
Weighted-average shares - basic 41,767 41,437
Effect of dilutive securities:
Employee stock options 804 227
- ------------------------------------------------------------------------
Weighted-average shares - diluted 42,571 41,664
========================================================================
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 week
period ended March 28, 2004, but were not included in the computation of diluted
earnings per share for such period because the exercise prices were greater than
the average market price of the common shares during such period. Similarly,
options to purchase 2.2 million shares of common stock at a range of $16.81 to
$22.50 were outstanding during the thirteen week period ended March 30, 2003,
but were not included in the computation of the diluted earnings per share for
such period because the exercise prices of those options were greater than the
average market price of the common shares during such period.
4
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2004
(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 March 28, 2004, 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, "Accounting for
Stock-Based Compensation," 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
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 amortized to expense 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
FISCAL PERIOD ENDED MARCH 28, 2004 MARCH 30, 2003
- --------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 10,247 $ 9,803
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 (481) (736)
- --------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 9,766 $ 9,067
====================================================================================================================
Net income per share:
As reported:
Basic $ 0.25 $ 0.24
Diluted $ 0.24 $ 0.24
Pro forma:
Basic $ 0.23 $ 0.22
Diluted $ 0.23 $ 0.22
====================================================================================================================
5
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2004
(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 one acquisition during 2003 and another acquisition during the
first quarter of 2004. On November 17, 2003, the Company completed the
acquisition of the assets of THE NORTH ATTLEBOROUGH FREE PRESS, based in North
Attleborough, Massachusetts. This acquisition included a weekly newspaper
servicing North Attleborough, Attleboro Falls and certain neighboring
communities, including Plainville, South Attleboro and Attleboro. On January 28,
2004, the Company completed the acquisition of O JORNAL, a weekly
Portuguese-language newspaper based in Fall River, Massachusetts, with
circulation of approximately 14,300 serving more than 30 communities in
Massachusetts and Rhode Island.
6. HEDGING ACTIVITY
In accordance with the requirements of its Credit Agreement, 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 variable interest rates. The minimum requirement
varies depending on the Company's 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 established an interest rate ceiling ("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
at 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. On
October 10, 2002, the Company entered into additional interest rate collars
("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 for its two-year term. Similar to the existing Collars,
the Additional Collars established 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.
On April 8, 2004, the Company entered into an additional interest rate
collar (the "New Collar") to replace the existing collar that will terminate on
October 29, 2004. The effective date of the New Collar will be October 29, 2004.
The New Collar is for a notional amount of $100 million, which is fixed for its
two-year term. Similar to the existing Collars, the New Collar establishes a CAP
and a floor at no initial cost to the Company. The CAP on the New Collar is 4.5
percent and the floor is 2.08 percent. These rates are based on the 90-day
LIBOR.
Under Statement of Financial Accounting Standards 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 obligations during the thirteen weeks
ended March 28, 2004 and the fiscal year ended December 28, 2003. The
accumulated deferred loss reported in OCI as of March 28, 2004 and December 28,
2003 was $1.2 million and $1.5 million, respectively (net of $0.9 million and
$1.0 million of deferred taxes, respectively).
6
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2004
(Unaudited)
6. HEDGING ACTIVITY (CONTINUED)
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. 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.
7. COMPREHENSIVE INCOME
The components of comprehensive income for the thirteen weeks ended March
28, 2004 and March 30, 2003 are as follows:
THIRTEEN WEEKS ENDED
(DOLLARS IN THOUSANDS) MARCH 28, 2004 MARCH 30, 2003
- --------------------------------------------------------------------------------------------------------------------
Net income $ 10,247 $ 9,803
Reclassification of unrealized gains on fully effective
hedges to net income, net of tax 423 341
Net change in fair value of fully effective hedges, net of tax (203) 365
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 10,467 $ 10,509
====================================================================================================================
Accumulated other comprehensive loss, net of tax, as of March 28, 2004 and
December 28, 2003 was approximately $19.0 million and $19.3 million,
respectively. These balances primarily consist of net losses from changes in the
fair value of the Company's minimum pension liabilities and IRPAs.
7
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2004
(Unaudited)
8. INTANGIBLE AND OTHER ASSETS
On July 25, 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142,
goodwill and indefinite-lived intangible assets are no longer amortized. However
goodwill and indefinite-lived intangible assets 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. 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 MARCH 28, 2004 AS OF DECEMBER 28, 2003
------------------------------------------- ---------------------------------------
ACCUMULATED ACCUMULATED
(DOLLARS IN THOUSANDS) GROSS AMORTIZATION NET GROSS AMORTIZATION NET
- -------------------------------------------------------------------------------- ---------------------------------------
INTANGIBLE ASSETS SUBJECT TO
AMORTIZATION:
Customer and subscriber lists $ 6,743 $ (5,035) $ 1,708 $ 6,743 $ (4,853) $ 1,890
Non-compete covenants 2,870 (1,711) 1,159 2,870 (1,686) 1,184
Debt issuance costs 4,573 (3,162) 1,411 4,573 (3,023) 1,150
----------------------------------------------------------------------------- ---------------------------------------
Total 14,186 (9,908) 4,278 14,186 (9,562) 4,624
----------------------------------------------------------------------------- ---------------------------------------
INTANGIBLE ASSETS NOT SUBJECT TO
AMORTIZATION:
Goodwill 555,079 (63,210) 491,869 555,043 (63,210) 491,833
Mastheads 10,439 (92) 10,347 9,968 (92) 9,876
----------------------------------------------------------------------------- ---------------------------------------
Total 565,518 (63,302) 502,216 565,011 (63,302) 501,709
----------------------------------------------------------------------------- ---------------------------------------
Total Goodwill and $ 579,704 $ (73,210) $ 506,494 $ 579,197 $ (72,864) $506,333
other intangible assets
============================================================================= =======================================
Identifiable intangible assets include customer and subscriber lists,
non-compete covenants, and debt issuance costs, which have an estimable useful
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. The change in goodwill reflected the acquisition of O JORNAL
during the thirteen weeks ended March 28, 2004. Mastheads are included in other
intangible assets on the balance sheet. For the thirteen weeks ended March 28,
2004 and March 30, 2003, amortization expense for intangible assets was
approximately $346,000. Estimated future amortization expense for identifiable
intangible assets and other assets is as follows (dollars in thousands):
2004............................. $ 1,384
2005............................. 1,361
2006............................. 902
2007............................. 131
2008............................. 131
Thereafter....................... 715
8
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 2004
(Unaudited)
9. PENSION AND OTHER POST-RETIREMENT BENEFITS
Net Periodic Benefit Cost for the thirteen weeks ended March 28, 2004 and
March 30, 2003 included the following components:
OTHER POST-RETIREMENT
PENSION BENEFITS BENEFITS
------------------------- ----------------------------
(DOLLARS IN THOUSANDS) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------- ----------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service Cost $ 557 $ 487 $ - $ 2
Interest Cost 1,478 1,431 61 67
Expected Return on Plan Assets (1,804) (1,713) - -
Amortization of:
Net Transition Obligation - (10) - -
Prior Service Cost (89) (89) (23) (23)
(Gain)/Loss 490 545 (77) (82)
----------------------------------------------------------------------------- ----------------------------
Net Periodic Benefit Cost $ 632 $ 651 $ (39) $ (36)
============================================================================= ============================
The Company currently does not expect to contribute to the pension plans
it sponsors in fiscal year 2004. For the post retirement health and life
insurance plans, the Company expects to contribute approximately $400,000 in
fiscal year 2004. As of March 28, 2004, approximately $100,000 had been
contributed by the Company to the post-retirement health and life insurance
plans.
9
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, and 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 March 28, 2004, the Company owned and operated 23 daily newspapers
and 237 non-daily publications strategically clustered in six geographic areas:
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 has total paid daily circulation of approximately 534,000, total paid
Sunday circulation of approximately 521,000 and total non-daily distribution of
approximately 3.7 million.
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.
As part of its 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.
The Company is a leader in executing its clustering strategy, and believes
that its clustering strategy creates significant synergies and cost savings
within each cluster, including cross-selling of advertising, centralized news
gathering and consolidation of printing, 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 enables
the Company's advertisers to expand their reach and target their message both
geographically and demographically.
The Company's revenues are derived from advertising, paid circulation,
including single copy sales and subscription sales, and commercial printing and
other activities. Advertising revenues are comprised of three basic categories:
retail; classified; and national. The Company's advertiser base is predominantly
local. The Company's newspapers seek to produce desirable results for local
advertisers by targeting readers based on certain geographic and demographic
characteristics. The Company seeks to increase readership, and thereby generate
traffic for its advertisers, by focusing on high product quality, compelling and
often proprietary local content and creative and interactive promotions.
The Company's advertising revenues are derived primarily from a broad
group of local advertisers. No single advertiser accounted for more than one
percent of the Company's total fiscal year 2003 revenues. The Company's
management believes that its advertising revenues tend to be relatively stable
because its newspapers rely on a broad base of local retail and local classified
advertising, rather than the generally more volatile national and major account
advertising. However, the Company's advertising revenues are susceptible to
economic swings, particularly those that affect the local economies in the
markets in which it operates, and can be difficult to predict.
In addition, the Company is committed to expanding its business through
its Internet initiatives. Online revenues are included in advertising revenues
and constituted approximately 1.7 percent of total advertising revenues for the
thirteen weeks ended March 28, 2004. The Company's online objective is to make
its Websites, all of which are accessible through WWW.JOURNALREGISTER.COM, the
indispensable source of useful and reliable community news, sports and
information in their markets by making the Websites the local information portal
for their respective markets. The Company currently operates 152 Websites, which
are affiliated with the Company's daily newspapers and non-daily publications.
10
The Company promotes single copy sales of its newspapers because it
believes that such sales have even higher readership than subscription sales,
and that single copy readers tend to be more active consumers of goods and
services, as indicated by a Newspaper Association of America ("NAA") study.
Single copy sales also tend to generate higher profit margins than subscription
sales, as single copy sales generally have higher per unit prices and lower
distribution costs. Subscription sales, which provide readers with the
convenience of home delivery, are an important component of the Company's
circulation base. The Company also publishes numerous special sections and niche
and special interest publications. Such publications tend to increase readership
within targeted demographic groups and geographic areas. The Company's
management believes that as a result of these strategies, its newspapers
represent an attractive and cost-effective medium for its readers and
advertisers.
ACQUISITIONS AND DISPOSITIONS
From September 1993 through March 2004, the Company completed 27 strategic
acquisitions, acquiring 14 daily newspapers, 194 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 one acquisition during 2003 and another acquisition
during the first quarter of 2004. On November 17, 2003, the Company completed
the acquisition of the assets of THE NORTH ATTLEBOROUGH FREE PRESS, based in
North Attleborough, Massachusetts. This acquisition included a weekly newspaper
servicing North Attleborough, Attleboro Falls and certain neighboring
communities, including Plainville, South Attleboro and Attleboro. On January 28,
2004, the Company completed the acquisition of O JORNAL, a weekly
Portuguese-language newspaper based in Fall River, Massachusetts, with
circulation of approximately 14,300 serving more than 30 communities in
Massachusetts and Rhode Island.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED MARCH 28, 2004 AS COMPARED TO THE THIRTEEN WEEK
PERIOD ENDED MARCH 30, 2003
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 FROM THE PERIODS PRESENTED.
SUMMARY. Net income for the thirteen week period ended March 28, 2004 was
$10.2 million, or $0.24 per diluted share, versus $9.8 million, or $0.24 per
diluted share, for the thirteen week period ended March 30, 2003.
REVENUES. For the thirteen week period ended March 28, 2004, the Company's
revenues increased $2.5 million, or 2.6 percent, to $99.2 million. Newspaper
revenues for the thirteen weeks ended March 28, 2004 as compared to the prior
year period increased $2.7 million, or 2.9 percent, to $95.2 million,
principally due to an increase in advertising revenue of $2.9 million, or 4.2
percent. Circulation revenues for the thirteen week period ended March 28, 2004
decreased approximately $0.2 million, or 1.0 percent, as compared to the prior
year period. Commercial printing and other revenues for the thirteen weeks ended
March 28, 2004 decreased approximately $0.2 million, or 4.3 percent, to $4.0
million as compared to the prior year period and represented 4.0 percent of the
Company's revenues for the thirteen weeks ended March 28, 2004. Online revenues
for the thirteen weeks ended March 28, 2004 were approximately $1.2 million, an
increase of approximately 20.6 percent as compared to the prior year period.
11
The following table sets forth the Company's total advertising revenues,
by category, for the thirteen weeks ended March 28, 2004 and March 30, 2003:
THIRTEEN WEEKS ENDED
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS) MARCH 28, 2004 MARCH 30, 2003 % INCREASE
-----------------------------------------------------------------------------------------------------------
Local $38,732 $37,946 2.1 %
Classified 30,031 28,080 6.9 %
National 3,914 3,731 4.9 %
-----------------------------------------------------------------------------------------------------------
Total advertising revenues $72,677 $69,757 4.2 %
===========================================================================================================
SAME-STORE NEWSPAPER REVENUES. On a same-store basis, total newspaper
revenues for the thirteen week period ended March 28, 2004 increased $2.5
million, or 2.7 percent, to $94.9 million from $92.5 million in the prior year
period. Same-store advertising revenues increased $2.7 million, or 3.9 percent,
with all three categories of advertising revenues showing positive
year-over-year trends. Classified advertising revenues increased 6.9 percent,
retail advertising revenues increased 1.5 percent and national advertising
revenues increased 4.9 percent on a same-store basis for the thirteen weeks
ended March 28, 2004 as compared to the thirteen weeks ended March 30, 2003. The
increase in classified advertising revenues resulted from a 12.1 percent
increase in same-store classified real estate advertising revenues and an 11.8
percent increase in same-store classified employment advertising revenues,
partially offset by a 4.6 percent decrease in same-store classified automotive
advertising revenues. Classified automotive advertising revenues improved during
each period of the first quarter of 2004, and were up 1.7 percent during the
four week period ended March 28, 2004, on a same-store basis. Same-store
circulation revenues declined $0.2 million, or 1.0 percent, as compared to the
thirteen week period ended March 30, 2003.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 39.6 percent of the Company's revenues for the thirteen week period ended
March 28, 2004, as compared to 40.2 percent for the thirteen week period ended
March 30, 2003. Salaries and employee benefits increased $0.4 million, or 1.0
percent, for the thirteen week period ended March 28, 2004 to $39.2 million as
compared to the prior year period.
NEWSPRINT, INK AND PRINTING CHARGES. For the thirteen week period ended
March 28, 2004, newsprint, ink and printing charges were 7.8 percent of the
Company's revenues, as compared to 7.7 percent for the thirteen week period
ended March 30, 2003. Newsprint, ink and printing charges for the thirteen week
period ended March 28, 2004 increased approximately $0.3 million, or 3.5
percent, as compared to the thirteen week period ended March 30, 2003. This
increase is principally due to an increase of approximately 6.4 percent in
newsprint expense related to operations owned in both the 2004 and 2003 periods.
The increase in newsprint expense is due to an increase in unit costs of
approximately 9.5 percent, partially offset by a decline in consumption.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were 13.6 percent and 13.4 percent of the Company's revenues for the
thirteen week periods ended March 28, 2004 and March 30, 2003, respectively. As
compared to the prior year period, selling, general and administrative expenses
for the thirteen week period ended March 28, 2004 increased $0.5 million, or 3.9
percent, to $13.5 million. This increase was primarily due to an increase in the
Company's insurance costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
3.7 percent of the Company's revenues for the thirteen week period ended March
28, 2004 as compared to 4.0 percent for the thirteen week period ended March 30,
2003. Depreciation and amortization expenses for the period ended March 28, 2004
decreased approximately $0.1 million, or 3.6 percent, to $3.7 million, as a
result of a decrease in depreciation expense.
OTHER EXPENSES. Other expenses were 15.0 percent and 14.7 percent of the
Company's revenues for the thirteen week periods ended March 28, 2004 and March
30, 2003, respectively. Other expenses increased approximately $0.7 million, or
4.7 percent, to $14.8 million for the thirteen week period ended March 28, 2004
principally as a result of increased promotion expenses.
12
OPERATING INCOME. Operating income was $20.2 million, or 20.3 percent of
the Company's revenues, for the thirteen week period ended March 28, 2004 as
compared to $19.3 million, or 20.0 percent of the Company's revenues, for the
thirteen week period ended March 30, 2003 due to the items described above.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense decreased
approximately $0.6 million, or 15.7 percent, for the thirteen week period ended
March 28, 2004 as compared to the thirteen week period ended March 30, 2003,
principally due to a reduction in the weighted-average debt outstanding during
the thirteen week period ended March 28, 2004 as compared to the thirteen week
period ended March 30, 2003. In addition, interest rates were slightly lower in
the 2004 period.
PROVISION FOR INCOME TAXES. The provision for income taxes increased by
approximately $1.0 million for the thirteen week period ended March 28, 2004 as
compared to the thirteen week period ended March 30, 2003, reflecting an
increase in pretax income and an increase in the Company's effective tax rate to
39.15 percent from 36.3 percent. The increase in the effective tax rate is
primarily the result of state tax law changes and a 2002 Federal Empowerment
Zone tax credit of approximately $150,000, reported in the thirteen week period
ended March 30, 2003.
OTHER INFORMATION. EBITDA (which the Company defines as net income
plus provision for income taxes, net interest expense, depreciation,
amortization and other non-cash, special or non-recurring
charges) was $23.9 million for the thirteen week period ended March 28, 2004 as
compared to $23.2 million for the thirteen week period ended March 30, 2003.
Free cash flow (which the Company defines as EBITDA minus capital expenditures,
interest expense and cash income taxes) was $14.0 million, or $0.33 per diluted
share, for the thirteen week period ended March 28, 2004, as compared to $13.1
million, or $0.31 per diluted share, for the thirteen week period ended March
30, 2003.
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 OPERATING ACTIVITIES. Net cash provided by operating
activities for the thirteen week period ended March 28, 2004 was $20.5 million
as compared to $23.3 million for the thirteen week period ended March 30, 2003.
Current assets were $58.5 million and current liabilities, excluding $38.7
million of current maturities of long-term debt, were $50.6 million as of March
28, 2004. The Company manages its working capital through the utilization of its
Revolving Credit Facility. The outstanding balance on the Revolving Credit
Facility, in accordance with its terms, is classified as a long-term liability.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing
activities was $2.6 million for the thirteen week period ended March 28, 2004.
Cash used in investing activities in 2004 was for investments in property, plant
and equipment. Net cash used in investing activities was $2.2 million for the
thirteen week period ended March 30, 2003. The Company has a capital expenditure
program of approximately $16.0 million in place for 2004, which includes:
spending on technology, including prepress and business systems, computer
hardware and software; buildings; other machinery; and equipment 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 $17.9 million for the thirteen week period ended March 28, 2004,
reflecting the utilization of free cash flow to repay $22.9 million of senior
debt, offset partially by $5.1 million of proceeds from option exercises. Net
cash used in financing activities was $21.1 million for the thirteen week period
ended March 30, 2003, of which $14.0 million was used to repay debt and $7.5
million was used to purchase Company stock.
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
13
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 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 established an interest rate ceiling ("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 at 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. On
October 10, 2002, the Company entered into additional interest rate collars
("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 for its two-year term. Similar to the existing Collars,
the Additional Collars established 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.
On April 8, 2004, the Company entered into an additional interest rate
collar (the "New Collar") to replace the existing collar that will terminate on
October 29, 2004. The effective date of the New Collar will be October 29, 2004.
The New Collar is for a notional amount of $100 million, which is fixed for its
two-year term. Similar to the existing Collars, the New Collar establishes a CAP
and a floor at no initial cost to the Company. The CAP on the New Collar is 4.5
percent and the floor is 2.08 percent. These rates are based on the 90-day
LIBOR.
Under Statement of 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 obligations during the thirteen weeks
ended March 28, 2004 and the fiscal year ended December 28, 2003. The
accumulated deferred loss reported in OCI as of March 28, 2004 and December 28,
2003 was $1.2 million and $1.5 million, respectively (net of $0.9 million and
$1.0 million of deferred taxes, respectively).
14
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. 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.
The Company's weighted-average effective interest rate was approximately
3.2 percent for the thirteen weeks ended March 28, 2004. This interest rate
reflects the effect of a $0.7 million pre-tax charge realized and reported as a
component of interest expense for the period ended March 28, 2004 related to the
Company's IRPAs in place during 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS. As of March 28, 2004, the Company
had outstanding indebtedness under the Credit Agreement, due and payable in
installments through 2006, of $395.4 million, of which $103.1 million was
outstanding under the Revolving Credit Facility and $292.3 million was
outstanding under the Term Loans. The remaining aggregate maturities payable
under the Term Loans for the following fiscal years are as follows (dollars in
thousands):
2004...................................................$29,008
2005....................................................64,637
2006...................................................198,655
The Revolving Credit Facility is available until March 31, 2006. Initial
availability was $400 million and has been and will continue to be reduced by
equal consecutive quarterly reductions, commencing on June 30, 2002 and ending
on March 31, 2006, in an aggregate amount for each remaining twelve month period
commencing on the dates set forth below, equal to the amount set forth opposite
such date (dollars in thousands):
June 30, 2002..........................................$55,000
June 30, 2003...........................................65,000
June 30, 2004..........................................100,000
June 30, 2005..........................................180,000
As of March 28, 2004, the maximum availability under the Revolving
Credit Facility was $193.1 million, with $143.3 million available based on the
terms of the Credit Agreement.
The Term Loans and Revolving Credit Facility are secured by
substantially all of the assets of the Company and the common stock and assets
of the Company's subsidiaries. The Term Loans and Revolving Credit Facility
require compliance with certain covenants, which require, among other things,
maintenance of certain financial ratios, which may restrict among other things,
the Company's ability to declare dividends, purchase treasury stock, incur
additional indebtedness, create liens, sell assets, consummate mergers and make
capital expenditures, investments and acquisitions. The Company is in compliance
with the financial covenants contained in the Credit Agreement.
The Company leases office space and equipment under noncancellable
operating leases. These leases contain several renewal options for periods up to
seven years. The Company's future minimum lease payments under noncancellable
operating leases in effect as of December 28, 2003, are as follows (dollars in
thousands):
2004...................................................$ 2,027
2005.....................................................1,509
2006.....................................................1,229
2007.......................................................833
2008.......................................................704
Thereafter...............................................1,169
INFLATION
The Company's results of operations and financial condition have not been
significantly affected by inflation. Subject to normal competitive conditions,
the Company generally has been able to pass along rising costs through increased
advertising and circulation rates.
15
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 actuarial studies and on other
assumptions that are believed to be reasonable and applicable 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 consolidated financial statements.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consist primarily of amounts due to the Company from
normal business activities. Allowances for doubtful accounts are 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, additional allowances may be required.
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. 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. This asset impairment review assesses the fair value
of the assets based on the future cash flows the assets are expected to
generate. An impairment loss is recognized when estimated undiscounted future
cash flows expected to result from the use of the asset plus net proceeds
expected from the disposition of the asset (if any) are less than the carrying
value of the asset. This approach uses estimates for future market growth,
forecasted revenue and costs, expected periods the assets will be utilized and
appropriate discount rates. 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.
SELF-INSURANCE
The Company is self-insured for a portion of its insurable risks. The
Company analyzes its claims experience and consults with actuaries and
administrators in determining an adequate liability for self-insured claims.
16
LITIGATION
The Company is involved in a number of 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 the sale of advertising, circulation and commercial
printing. Advertising revenues are recognized, net of agency commissions, in the
period when advertising is printed in the Company's publications or placed on
the Company's Websites. Circulation revenues are recognized when purchased
newspapers are distributed. Amounts received from customers in advance of
revenue recognition are deferred as liabilities.
RECLASSIFICATION OF CERTAIN OPERATING EXPENSES
Certain operating expenses related to certain of the Company's acquisitions
have been reclassified to conform to the Company's current period presentation.
The reclassifications had no impact on total operating expenses, operating
income, EBITDA (see description below) or net income.
RECONCILIATION OF CERTAIN NON-GAAP FINANCIAL MEASURES.
Journal Register Company believes that the use of certain non-GAAP
financial measures enables the Company and its analysts, investors and other
interested parties to evaluate the Company's results from operations in a more
meaningful manner. Accordingly, this information has been disclosed in this
report to permit a more complete comparative analysis of the Company's operating
performance and capitalization relative to other companies in the industry and
to provide an analysis of operating results using certain principal 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.
Journal Register Company calculates EBITDA as net income plus provision
for income taxes, net interest expense, depreciation, amortization and other
non-cash, special or non-recurring charges. Free cash flow is defined as EBITDA
minus capital expenditures, interest expense and cash income taxes.
These non-GAAP financial measures should not be considered as alternatives
to GAAP measures of performance, such as operating income or net income. In
addition, Journal Register Company's calculations of these measures may or may
not be consistent with the calculations of these measures by other companies.
The table below provides reconciliations of the differences between (i)
net income and EBITDA and (ii) net income and free cash flow, in each case for
the thirteen week periods ended March 28, 2004 and March 30, 2003.
THIRTEEN WEEKS ENDED
(DOLLARS IN THOUSANDS) MARCH 28, 2004 MARCH 30, 2003
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 10,247 $ 9,803
Add: Provision for income taxes 6,593 5,586
Add: Net interest expense and other 3,335 3,959
------------------- -------------------
Operating income 20,175 19,348
Add: Depreciation and amortization 3,711 3,850
------------------- -------------------
EBITDA $ 23,886 $ 23,198
EBITDA margin 24% 24%
Less: Capital expenditures (2,053) (2,194)
Less: Interest expense (3,309) (3,936)
Less: Cash income taxes (4,546) (4,001)
------------------- -------------------
Free Cash Flow $ 13,978 $ 13,067
===================================================================================================================
17
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
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 28, 2003. 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 reduces 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 March 28, 2004, the Company had in effect no-cost collar agreements for
an aggregate notional amount of $293.0 million. Assuming a 10 percent increase
or reduction in variable interest rates the annual impact on the Company's
pre-tax earnings would be approximately $ 0.5 million.
Newsprint, which is the principal raw material for the Company's
newspapers, is exposed to commodity price changes. 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.
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.
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, as amended
(the "Exchange Act") 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
18
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
During the first quarter of 2004, the Company commenced the deployment of
a new suite of software applications in a shared services environment. The new
suite of applications will include: (i) financial applications, including
accounts payable, general ledger, fixed assets, consolidation and reporting;
(ii) circulation management applications; and (iii) advertising management
applications. Once fully deployed, the new software, together with the change to
a shared services business model, is intended to further enhance the Company's
operating efficiencies and its internal and disclosure controls. Deployment of
the financial applications is expected to be completed by the end of fiscal year
2004, and deployment of the advertising and circulation management applications
is expected to occur thereafter. The Company does not anticipate an adverse
effect on its internal and disclosure controls during the deployment phase.
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, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification of Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on February 2, 2004,
furnishing pursuant to Item 12 thereof certain information regarding
the text of a press release issued by the Company, dated January 29,
2004, titled "Journal Register Company Announces Fourth Quarter and
Full Year 2003 Results."
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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: May 4, 2004 JOURNAL REGISTER COMPANY
By: /s/ Jean B. Clifton
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Jean B. Clifton
Executive Vice President and
Chief Financial Officer
(signing on behalf of the registrant
and as principal financial officer)
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