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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 26, 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 [ ] No [X]
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, 41,956,260 shares outstanding (exclusive of treasury shares) as of
November 1, 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.....................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....22
Item 4. Controls and Procedures.......................................22
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K..............................23
Signature ..............................................................24
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
DOLLARS IN THOUSANDS SEPTEMBER 26, DECEMBER 28,
FISCAL PERIOD ENDED 2004 2003
================================================================================
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 50 $ 31
Accounts receivable, less allowance
for doubtful accounts of $ 8,454
and $ 5,785, respectively 64,039 43,591
Inventories 9,301 6,597
Deferred income taxes 13,979 3,719
Other current assets 8,650 4,149
- -------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 96,019 58,087
- -------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 13,036 10,720
Buildings and improvements 90,026 76,759
Machinery and equipment 194,085 174,519
Construction in progress 11,577 7,413
- -------------------------------------------------------------------------------
TOTAL 308,724 269,411
Less accumulated depreciation (151,915) (143,398)
- -------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 156,809 126,013
- -------------------------------------------------------------------------------
INTANGIBLE AND OTHER ASSETS:
Goodwill 850,719 491,833
Other intangible assets, net of
accumulated amortization
of $ 7,559 and $ 9,654,
respectively 55,608 14,500
Other assets 4,194 2,627
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 1,163,349 $ 693,060
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Current maturities of long-term debt $ - $ 37,853
Accounts payable 15,920 9,454
Accrued interest 3,158 2,062
Deferred subscription revenue 14,848 10,614
Accrued salaries and vacation 10,514 6,455
Fair market value of hedges 246 2,483
Other accrued expenses and current
liabilities 36,358 14,564
- -------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 81,044 83,485
- -------------------------------------------------------------------------------
Senior debt, less current maturities 789,100 380,492
Deferred income taxes 60,624 47,379
Accrued retiree benefits and other
liabilities 27,279 19,462
Income taxes payable 34,488 89,898
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share,
300,000,000 shares authorized,
48,437,581 issued at September 26, 2004
and December 28, 2003 484 484
Additional paid-in capital 360,269 359,359
Unearned compensation (97) -
Accumulated deficit (76,331) (167,426)
- -------------------------------------------------------------------------------
284,325 192,417
- -------------------------------------------------------------------------------
Less treasury stock, 6,482,571 and 6,837,948
shares, respectively, at cost (95,577) (100,817)
Accumulated other comprehensive loss,
net of tax (17,934) (19,256)
- -------------------------------------------------------------------------------
NET STOCKHOLDERS' EQUITY 170,814 72,344
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,163,349 $ 693,060
===============================================================================
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 26, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 28,
FISCAL PERIOD ENDED 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
REVENUES:
Advertising $ 93,737 $ 73,516 $ 247,873 $ 220,998
Circulation 24,968 22,870 69,576 67,832
- ------------------------------------------------------------------------------------------------------------------
Newspaper revenues 118,705 96,386 317,449 288,830
Commercial printing and other 4,347 4,420 12,412 12,768
- ------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 123,052 100,806 329,861 301,598
- ------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 48,085 38,759 126,772 116,678
Newsprint, ink and printing charges 10,257 7,872 26,127 23,046
Selling, general and administrative 17,160 13,356 44,958 39,380
Depreciation and amortization 4,745 3,861 12,134 11,625
Other 17,393 15,107 46,877 43,757
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 97,640 78,955 256,868 234,486
- ------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 25,412 21,851 72,993 67,112
Net interest expense and other (5,307) (4,442) (11,770) (12,171)
Write-off of prior debt issuance costs (1,211) - (1,211) -
- ------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 18,894 17,409 60,012 54,941
Net benefit for income taxes (47,194) (14,455) (31,083) (657)
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 66,088 $ 31,864 $ 91,095 $ 55,598
==================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 1.58 $ 0.77 $ 2.17 $ 1.35
Diluted $ 1.55 $ 0.76 $ 2.14 $ 1.34
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 41,952 41,139 41,886 41,237
Diluted 42,604 41,717 42,631 41,643
SEE ACCOMPANYING NOTES.
2
JOURNAL REGISTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THIRTY-NINE WEEKS ENDED
-----------------------------------
(DOLLARS IN THOUSANDS) SEPTEMBER 26, SEPTEMBER 28,
FISCAL PERIOD ENDED 2004 2003
==================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 91,095 $ 55,598
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on accounts receivable 2,813 2,851
Depreciation and amortization 12,134 11,625
Increase in deferred income taxes 2,070 6,466
(Increase) decrease in accounts receivable (6,745) 1,054
Increase (decrease) in accounts payable 984 (1,674)
Decrease in income taxes payable (53,675) (20,710)
Other, net 9,512 3,130
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 58,188 58,340
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (8,426) (10,102)
Purchases of businesses (414,741) -
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (423,167) (10,102)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments of) long-term debt (51,672) (40,868)
Proceeds from issuance of long-term debt 795,000 -
Extinguishment of prior long-term debt (372,573) -
Financing costs (11,907) -
Exercise of stock options for common stock 6,150 533
Purchase of Company stock - (7,905)
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES 364,998 (48,240)
- ------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 19 (2)
Cash and cash equivalents, beginning of period 31 33
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 50 $ 31
==================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,531 $ 11,526
Income taxes $ 11,919 $ 13,542
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Comprehensive income -- mark-to-market hedge
adjustments, net of tax $ 1,322 $ 1,101
==================================================================================================================
SEE ACCOMPANYING NOTES.
3
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 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, Michigan, 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 194 individual Websites 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 September 26, 2004 and December 28, 2003, the results of its
operations for the thirteen and thirty-nine week periods ended September 26,
2004 and September 28, 2003 and its cash flows for the thirty-nine week periods
ended September 26, 2004 and September 28, 2003. These financial statements
should be read in conjunction with the Company's December 28, 2003 audited
consolidated financial statements and notes thereto. Interim operating results
are not necessarily indicative of the results to be expected for an entire year.
2. EARNINGS PER COMMON SHARE
The following table sets forth the computation of weighted-average
shares outstanding for calculating both basic and diluted earnings per share
("EPS"):
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- -----------------------------------
(IN THOUSANDS) SEPTEMBER 26, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 28,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Weighted-average shares - basic 41,952 41,139 41,886 41,237
Effect of dilutive securities:
Employee stock options 652 578 745 406
- --------------------------------------------------------------------------------------------------------------------
Weighted-average shares - diluted 42,604 41,717 42,631 41,643
====================================================================================================================
Options to purchase approximately 2.6 million shares of common stock at
a range of $19.40 to $22.50 per share and approximately 2.2 million shares at a
range of $21.00 to $22.50 per share were outstanding during the thirteen and
thirty-nine week periods ended September 26, 2004, but were not included in the
computation of diluted EPS in either period because the exercise prices were
greater than the average market price of the common shares during such periods.
Similarly, 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 because the exercise prices were
greater than the average market price of the common shares during such periods.
3. INCOME TAXES
The provision for income taxes for the thirteen and thirty-nine week
periods ended September 26, 2004 and September 28, 2003 reflect the reversal of
previously recorded income tax accruals of approximately $54.6 million and $20.9
million, respectively, that were determined to no longer be required.
4
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(Unaudited)
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. Based on the
terms of the Credit Agreement (defined in Note 6 below), the Company may
currently use up to $50 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 26, 2004, the Company
has repurchased approximately 7.5 million shares at a total cost of
approximately $110.2 million.
5. STOCK-BASED COMPENSATION COSTS
The Company has 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.
For purposes of pro forma disclosure, 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:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SEPT. 26, SEPT. 28, SEPT. 26, SEPT. 28,
PER SHARE AMOUNTS) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 66,088 $ 31,864 $ 91,095 $ 55,598
Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects 22 - 29 -
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects (525) (761) (1,525) (2,265)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma $ 65,585 $ 31,103 $ 89,599 $ 53,333
=========================================================================================================================
Net income per common share:
As reported:
Basic $ 1.58 $ 0.77 $ 2.17 $ 1.35
Diluted $ 1.55 $ 0.76 $ 2.14 $ 1.34
Pro forma:
Basic $ 1.56 $ 0.76 $ 2.14 $ 1.29
Diluted $ 1.54 $ 0.75 $ 2.10 $ 1.28
=========================================================================================================================
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 adjustments and closing costs.
On August 12, 2004, the Company completed the acquisition of 21st
Century Newspapers, Inc., a Delaware corporation ("21st Century"), pursuant to
an Agreement and Plan of Merger (the "Agreement"), dated July 2, 2004, with 21st
Century and Wolverine Acquisition Corp., a Delaware corporation ("Merger Sub")
and a wholly-owned subsidiary of the Company. Pursuant to the Agreement, Merger
Sub merged with and into 21st Century, with 21st Century surviving as an
indirect wholly-owned subsidiary of the Company (the "Merger"). The assets of
21st Century include four daily newspapers and 87 non-daily publications located
in Michigan.
5
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(Unaudited)
6. ACQUISITIONS (CONTINUED)
In connection with the transactions described in the Agreement, the
Company entered into a Credit Agreement, dated August 12, 2004, with JPMorgan
Chase Bank as Administrative Agent and Co-Documentation Agent, J.P. Morgan
Securities Inc., as Sole Lead Arranger and Sole Bookrunner, The Bank of New
York, Key Bank National Association, SunTrust Bank and Wachovia Bank, National
Association, as Co-Syndication Agents, and The Royal Bank of Scotland PLC, as
Co-Documentation Agent (the "Credit Agreement").
The purchase price for the acquisition was $415 million and was
financed with borrowings under the Credit Agreement. The purchase price has been
allocated to the net assets acquired based on the estimated fair value of such
assets. The estimated fair values contained herein are preliminary in nature,
and may not be indicative of the final purchase price allocation, which will be
based on, among other things, an assessment of fair value of such assets
performed by an independent appraiser. Accordingly, the final determination of
value could result in a significant increase or decrease in amortization expense
in future periods from the amounts currently estimated. The preliminary purchase
price allocation for 21st Century, as of September 26, 2004, is as follows
(DOLLARS IN THOUSANDS):
Current assets $ 23,554
Property, plant and equipment, net 33,182
Goodwill 359,527
Intangible and other long-term assets 31,268
-------
Total assets acquired 447,531
Current liabilities 19,360
Non-current liabilities 4,162
-------
Total liabilities assumed 23,522
-------
Net assets acquired 424,009
Less: acquisition costs (net of
related tax effect) 9,009
-------
Purchase price $ 415,000
=======
Acquisition costs noted above include transaction costs and certain
costs incurred or expected to be incurred in connection with the integration and
consolidation of 21st Century's operations. There is no tax deductible goodwill
arising in connection with the Company's acquisition of 21st Century.
The following table presents the unaudited pro forma consolidated
results of operations of the Company as though the 21st Century acquisition
occurred on the first day of each period presented:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SEPTEMBER 26, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 28,
PER SHARE AMOUNTS) 2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Net revenues $ 141,191 $ 138,436 $ 420,774 $ 416,589
Net income $ 66,305 $ 32,808 $ 92,064 $ 58,950
Net income per share:
Basic $1.58 $0.80 $2.20 $1.43
Diluted $1.56 $0.79 $2.16 $1.42
The pro forma results are not necessarily indicative of what actually would have
occurred if the 21st Century acquisition had been in effect for the entire
periods presented and are not intended to be a projection of future results.
6
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(Unaudited)
6. ACQUISITIONS (CONTINUED)
The Company also completed one acquisition during 2003 and three
additional acquisitions during the first nine months 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 serving 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. On May 4, 2004, the Company
completed the acquisition of the assets of Mohawk Valley Media, a group of
non-daily publications based in Rome, New York serving Rome and neighboring
communities.
7. DEBT AND INTEREST RATE DERIVATIVES
The Credit Agreement, which was executed August 12, 2004, provides for
(i) two secured term loan facilities ("Term Loan A" and "Term Loan B" or
collectively, the "Term Loans"), with Term Loan A having a face amount of $275
million and Term Loan B having a face amount of $350 million, and (ii) a secured
revolving credit facility (the "Revolving Credit Facility") of $425 million. 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.
Term Loan A and Term Loan B mature on November 12, 2011 and August 12,
2012, respectively, and the Revolving Credit Facility matures on November 12,
2011. The Term Loans are repayable in quarterly installments commencing in
December 2006 and the availability of the Revolving Credit Facility is subject
to certain quarterly reductions that commence in December 2009. In addition,
under the terms of the Company's Credit Agreement, under certain circumstances
the Company may be required to prepay a portion of the Term Loans and any loans
under an Incremental Facility in an amount equal to (i) excess net proceeds from
the sale of newspaper properties that are not reinvested within at least 365
days or (ii) 50 percent of excess cash flow, as defined in the Credit Agreement,
provided that there will be no prepayment of excess cash flow in any year where
the Company's leverage is equal to or less than 5.00 to 1.
The amounts outstanding under the Credit Agreement bear interest at (i)
1.5 percent to 0.625 percent above LIBOR (as defined in the Credit Agreement) or
(ii) 0.25 percent to 0 percent above the higher of (a) the Prime Rate (as
defined in the Credit Agreement) or (b) 0.5 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).
In accordance with the requirements of the 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 these requirements, as well as similar requirements
contained in the Company's prior credit agreement, the Company entered into
certain interest rate hedges ("Collars") that establish a base interest rate
ceiling ("CAP") and a base interest rate floor ("floor") at no initial cost to
the Company. In the event 90-day LIBOR exceeds the CAP, the Company will receive
cash from the issuers to compensate for the rate in excess of the CAP. If the
90-day LIBOR is lower than the floor, the Company will pay cash to the issuers
to compensate for the rate below the floor. Each of the Collars is for a two
year term and amortizes over its term to the notional amount set
7
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(Unaudited)
forth below. As of September 26, 2004, the aggregate notional amount of
outstanding Collars in effect was $335 million.
7. DEBT AND INTEREST RATE DERIVATIVES (CONTINUED)
The following table summarizes the Company's existing Collars and
executed contracts for Collars not yet effective, in each case at September 26,
2004:
Effective Date Cap (%) Floor (%) Notional Amount
------------- ------- -------- ---------------
October 29, 2002 6.0 2.66 $135 million
January 29, 2003 4.0 1.54 $150 million
August 20, 2004 4.5 2.05 $50 million
October 29, 2004 4.5 2.08 $100 million
January 29, 2005 4.5 2.38 $50 million
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 obligation during the thirteen and
thirty-nine week periods ended September 26, 2004 and the fiscal year ended
December 28, 2003. The total deferred loss reported in OCI as of September 26,
2004 and December 28, 2003 was approximately $0.1 million and $1.5 million,
respectively (net of $0.1 million and $1.0 million of deferred taxes,
respectively). Each IRPA is 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.
8. COMPREHENSIVE INCOME
The components of comprehensive income for the thirteen and thirty-nine
week periods ended September 26, 2004 and September 28, 2003 are as follows:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------------- ----------------------------------
(DOLLARS IN THOUSANDS) SEPT. 26, 2004 SEPT. 28, 2003 SEPT. 26, 2004 SEPT. 28, 2003
- --------------------------------------------------------------------------------------------------------------------
Net income $ 66,088 $ 31,864 $ 91,095 $ 55,598
Reclassification of unrealized gains on fully
effective hedges to net income, net of tax 277 467 1,107 1,211
Net change in fair value of fully effective
hedges, net of tax (78) (90) 215 (110)
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 66,287 $ 32,241 $ 92,417 $ 56,699
====================================================================================================================
Accumulated other comprehensive loss, net of tax, as of September 26,
2004 and December 28, 2003, was approximately $17.9 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.
9. INTANGIBLE AND OTHER ASSETS
On July 25, 2001, the FASB issued Statement of Financial Accounting
Standard No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142"). Under SFAS
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. During fiscal year 2001, the Company adopted the
amortization
8
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(Unaudited)
provisions of SFAS 142, which currently apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company adopted SFAS 142 at the beginning of
fiscal year 2002. 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 26, 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 $ 8,107 $ (5,515) $ 2,592 $ 6,743 $ (4,853) $ 1,890
Non-compete covenants 2,870 (1,762) 1,108 2,870 (1,686) 1,184
Advertiser accounts 16,100 (78) 16,022 - - -
Debt issuance costs 11,907 (204) 11,703 4,573 (3,023) 1,550
- ---------------------------------------------------------------------------------------------------------------------
Total 38,984 (7,559) 31,425 14,186 (9,562) 4,624
- ---------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS NOT SUBJECT
TO AMORTIZATION:
Goodwill 913,929 (63,210) 850,719 555,043 (63,210) 491,833
Mastheads 24,275 (92) 24,183 9,968 (92) 9,876
- ---------------------------------------------------------------------------------------------------------------------
Total 938,204 (63,302) 874,902 565,011 (63,302) 501,709
- ---------------------------------------------------------------------------------------------------------------------
Total goodwill and
other intangible assets $ 977,188 $ (70,861) $ 906,327 $ 579,197 $ (72,864) $ 506,333
=====================================================================================================================
Identifiable intangible assets include customer and subscriber lists,
non-compete covenants, advertiser accounts 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. Mastheads are included in other intangible assets on
the balance sheet. The purchase price of the 21st Century acquisition has been
allocated to the net assets acquired based on the estimated fair value of such
assets. The estimated fair values contained herein are preliminary in nature,
and may not be indicative of the final purchase price allocation, which will be
based on, among other things, an assessment of fair value of such assets
performed by an independent appraiser. Accordingly, the final determination of
value could result in a significant increase or decrease in amortization expense
in future periods from the amounts currently estimated.
The change in goodwill reflects the Company's acquisitions during the
thirteen and thirty-nine week periods ended September 26, 2004. For the thirteen
week periods ended September 26, 2004 and September 28, 2003, amortization
expense for intangible assets was $660,000 and $346,000, respectively. For the
thirty-nine week periods ended September 26, 2004 and September 28, 2003,
amortization expense for intangible assets was $1,353,000 and $1,039,000,
respectively. Estimated amortization expense for identifiable intangible assets
and other assets is as follows (DOLLARS IN THOUSANDS):
2004 $ 2,237
2005 3,654
2006 3,305
2007 2,977
2008 2,977
Thereafter 16,425
9
JOURNAL REGISTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 2004
(Unaudited)
10. PENSION AND OTHER POST-RETIREMENT BENEFITS
Net Periodic Benefit Cost for the thirty-nine weeks ended September 26,
2004 and September 28, 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 $ 1,678 $ 1,461 $ 3 $ 6
Interest Cost 4,469 4,293 187 201
Expected Return on Plan Assets (5,446) (5,139) - -
Amortization of Net:
Transition Obligation - (30) - -
Prior Service Cost (267) (267) (69) (69)
(Gain)/Loss 1,470 1,635 (231) (246)
- --------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost $ 1,904 $ 1,953 $ (110) $ (108)
====================================================================================================================
The Company currently does not expect to contribute to the
Company-sponsored pension plans in fiscal year 2004, other than a contribution
of approximately $39,000 during the fourth quarter of 2004 to certain pension
plans acquired in connection with the 21st Century acquisition. The Company
expects to contribute an amount, in the range of approximately $115,000 to
$200,000, to such 21st Century plans during fiscal year 2005. For the
post-retirement health and life insurance plans, the Company expects to
contribute approximately $400,000 in fiscal year 2004. As of September 26, 2004,
approximately $150,000 has been contributed by the Company to post-retirement
health and life insurance plans.
On December 8, 2003, the President signed into law the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (the "Act"). The
Act provides for an expansion of Medicare, primarily adding a prescription drug
benefit for Medicare eligible-retirees starting in 2006. The Act also provides a
federal subsidy to sponsors that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Company is currently unable to conclude
whether the benefits provided by the plans are actuarially equivalent to
Medicare Part D under the legislation. Even if one or more of the plans could
satisfy the actuarial equivalence requirement, the Company believes that the
effects of the Act on medical obligations and costs would not be significant.
Therefore, the Company's retiree medical obligations and costs reported do not
reflect any impact associated with the legislation.
11. SUBSEQUENT EVENTS
On October 4, 2004, the Company acquired the assets of Berks-Mont
Newspapers, Inc., a privately held non-daily newspaper group based in Boyertown,
Pennsylvania. The acquisition included ten non-daily publications with combined
circulation of approximately 168,000.
On October 27, 2004, the Company entered into an additional interest
rate Collar for a notional amount of $100 million, which is fixed for its
two-year term. The CAP on this Collar is 4.5 percent and the floor is 2.47
percent. See Note 7, "Debt and Interest Rate Derivatives."
10
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 September 26, 2004, the Company owned and operated 27 daily
newspapers and 337 non-daily publications strategically clustered in seven
geographic areas: Greater Philadelphia; Michigan; 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 635,000, total paid Sunday circulation of approximately 665,000
and total non-daily distribution of approximately 5 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. The
Company 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 also seeks to increase overall 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 the Company operates, and can be difficult to predict.
In addition, the Company is committed to expanding its business through
its Internet initiatives. Online revenues of $4.3 million are included in
advertising revenues for the thirty-nine week period ended September 26, 2004
and constituted approximately 1.7 percent of total advertising revenues during
the period. The Company's online objective is to make its Websites, all of which
are accessible through WWW.JOURNALREGISTER.COM, the local information portal for
their respective markets by establishing such Websites as the indispensable
source of useful and reliable community news, sports and information in their
markets. The Company currently operates 194 Websites, which are affiliated with
the Company's daily newspapers and non-daily publications.
11
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
On August 12, 2004, the Company completed the acquisition of 21st
Century Newspapers, Inc., a privately-held operator of one of the largest
newspaper clusters in the United States. Located in Michigan, 21st Century owns
four daily newspapers with combined average daily net paid circulation of
approximately 132,000 and combined average Sunday net paid circulation of
approximately 177,000, and 87 non-daily publications with approximately 1.5
million non-daily distribution. The 21st Century newspaper cluster is the
Company's second largest cluster based on revenues, after the Company's Greater
Philadelphia cluster. THE OAKLAND PRESS and THE MACOMB DAILY, two of 21st
Century's daily newspapers, are the Company's second and third largest
newspapers, respectively, with the NEW HAVEN REGISTER remaining the Company's
flagship and largest newspaper.
The Company also completed one acquisition during 2003 and three other
acquisitions during 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. On May 4, 2004, the Company completed the
acquisition of the assets of Mohawk Valley Media, a group of non-daily
publications based in Rome, New York serving Rome and neighboring communities.
On October 4, 2004, subsequent to the end of the 2004 third quarter, the Company
acquired the assets of Berks-Mont Newspapers, Inc., a privately held non-daily
newspaper group, based in Boyertown, Pennsylvania, that includes ten non-daily
publications with combined circulation of approximately 168,000.
From September 1993 through October 31, 2004, the Company completed 30
strategic acquisitions, acquiring 18 daily newspapers, 294 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.
RESULTS OF OPERATIONS
THIRTEEN WEEK PERIOD ENDED SEPTEMBER 26, 2004 AS COMPARED TO THE THIRTEEN WEEK
PERIOD ENDED SEPTEMBER 28, 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 COMPLETED IN 2003 AND 2004 FROM THE RESULTS OF THE PERIODS
PRESENTED.
SUMMARY. Net income for the thirteen week period ended September 26,
2004 was $66.1 million, or $1.55 per diluted share, versus $31.9 million, or
$0.76 per diluted share, for the thirteen week period ended September 28, 2003.
12
REVENUES. For the thirteen week period ended September 26, 2004, the
Company's revenues increased $22.2 million, or 22.1 percent, to $123.1 million.
This increase resulted from an increase in same-store advertising revenues and
from the additional revenues associated with the Company's acquisitions. Total
newspaper revenues for the thirteen weeks ended September 26, 2004 as compared
to the prior year period increased $22.3 million, or 23.2 percent, to $118.7
million, reflecting an increase in advertising revenues of $20.2 million, or
27.5 percent, and an increase in circulation revenues of $2.1 million, or 9.2
percent, to $25.0 million. Commercial printing and other revenues for the
thirteen weeks ended September 26, 2004 decreased approximately $0.1 million, or
1.7 percent, to $4.3 million as compared to the prior year period and
represented 3.5 percent of the Company's revenues for the thirteen weeks ended
September 26, 2004. Online revenues for the thirteen weeks ended September 26,
2004 were approximately $1.6 million, an increase of approximately 24.2 percent
as compared to the prior year period, and constituted approximately 1.8 percent
of total advertising revenues during the period.
The following table sets forth the Company's total advertising
revenues, by category, for the thirteen week periods ended September 26, 2004
and September 28, 2003:
Thirteen Weeks Ended
------------------------------------
(DOLLARS IN THOUSANDS) Sept. 26, 2004 Sept. 28, 2003 % Increase
-------------------------------------------------------------------------------------------------
Local $49,290 $38,323 28.6%
Classified 39,670 31,723 25.1%
National 4,777 3,470 37.7%
-------------------------------------------------------------------------------------------------
Total advertising revenues $93,737 $73,516 27.5%
=================================================================================================
SAME-STORE NEWSPAPER REVENUES. On a same-store basis, newspaper
revenues for the thirteen week period ended September 26, 2004 increased $2.2
million, or 2.2 percent, to $98.6 million from $96.4 million in the prior year
period. Same-store advertising revenues increased $2.6 million, or 3.6 percent,
with all three categories of advertising revenues showing positive
year-over-year trends. Retail advertising revenues increased 3.2 percent,
classified advertising revenues increased 2.7 percent and national advertising
revenues increased 16.1 percent on a same store basis for the thirteen weeks
ended September 26, 2004, as compared to the thirteen weeks ended September 28,
2003. The increase in same-store classified advertising revenues resulted from a
14.6 percent increase in classified real estate advertising revenues and a 4.1
percent increase in classified employment advertising revenues, partially offset
by an 8.3 percent decrease in classified automotive advertising revenues.
Same-store circulation revenues declined $0.5 million, or 2.1 percent, as
compared to the thirteen week period ended September 28, 2003.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 39.1 percent of the Company's revenues for the thirteen week period ended
September 26, 2004, as compared to 38.4 percent for the thirteen week period
ended September 28, 2003. Salaries and employee benefits increased $9.3 million,
or 24.1 percent, to $48.1 million for the thirteen week period ended September
26, 2004, primarily due to the Company's acquisitions. On a same-store basis,
salaries and employee benefits increased less than one percent in the thirteen
week period of 2004 as compared to the prior year period.
NEWSPRINT, INK AND PRINTING CHARGES. For the thirteen week period ended
September 26, 2004, newsprint, ink and printing charges were 8.3 percent of the
Company's revenues, as compared to 7.8 percent for the thirteen week period
ended September 28, 2003. Newsprint, ink and printing charges for the thirteen
week period ended September 26, 2004 increased approximately $2.4 million, or
30.3 percent, as compared to the thirteen week period ended September 28, 2003.
This increase was due to an increase in unit prices of newsprint of
approximately nine percent and an increase in consumption related to the
Company's acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were 13.9 percent and 13.2 percent of the Company's
revenues for the thirteen week periods ended September 26, 2004 and September
28, 2003, respectively. As compared to the prior year period, selling, general
and administrative expenses for the thirteen week period ended September 26,
2004 increased $3.8 million, or 28.5 percent, to $17.2 million. On a same-store
basis, selling, general and administrative expenses increased 4.4 percent, as
compared to the prior year period, primarily due to increased costs related to
compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
13
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were 3.9 percent of the Company's revenues for the thirteen week period ended
September 26, 2004 as compared to 3.8 percent for the thirteen week period ended
September 28, 2003. Depreciation and amortization expenses for the period ended
September 26, 2004 increased approximately $0.9 million, or 22.9 percent, to
$4.7 million as compared to the prior year period, due to the Company's
acquisitions.
OTHER EXPENSES. Other expenses were 14.1 percent and 15.0 percent of
the Company's revenues for the thirteen week periods ended September 26, 2004
and September 28, 2003, respectively. Other expenses increased approximately
$2.3 million, or 15.1 percent, to $17.4 million for the thirteen week period
ended September 26, 2004, as compared to the prior year period, as a result of
the Company's acquisitions.
OPERATING INCOME. Operating income was $25.4 million, or 20.7 percent
of the Company's revenues, for the thirteen week period ended September 26,
2004, as compared to $21.9 million, or 21.7 percent of the Company's revenues,
for the thirteen week period ended September 28, 2003.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
increased approximately $0.9 million, or 19.5 percent, for the thirteen week
period ended September 26, 2004 as compared to the thirteen week period ended
September 28, 2003, due to an increase in interest expense. Interest expense
increased due to an increase in the weighted-average debt outstanding during the
thirteen week period ended September 26, 2004 as compared to the thirteen week
period ended September 28, 2003, as well as an increase in interest rates.
During the thirteen weeks ended September 28, 2003, the Company recorded in net
interest and other expense a special charge of $850,000 in connection with a
potential acquisition that was not consummated.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company reported a net
benefit for income taxes of approximately $47.2 million for the thirteen weeks
ended September 26, 2004, as compared to a benefit for income taxes of
approximately $14.5 million for the thirteen weeks ended September 28, 2003. The
2004 and 2003 amounts reflect the reversal of previously recorded income tax
accruals that were determined to no longer be required, which were approximately
$54.6 million and $20.9 million, respectively. Excluding the reversals in each
period, the Company's effective tax rate for the thirteen weeks ended September
26, 2004 would have been approximately 39.4 percent, as compared to
approximately 37 percent for the thirteen weeks ended September 28, 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 $30.2
million for the thirteen week period ended September 26, 2004, as compared to
$25.7 million for the thirteen week period ended September 28, 2003. Free cash
flow (which the Company defines as EBITDA minus capital expenditures, interest
and cash income taxes) was $20.3 million, or $0.48 per diluted share, for the
thirteen week period ended September 26, 2004, as compared to $16.0 million, or
$0.38 per diluted share, for the thirteen week period ended September 28, 2003.
See "Reconciliation of Certain Non-GAAP Financial Measures" below.
THIRTY-NINE WEEK PERIOD ENDED SEPTEMBER 26, 2004 AS COMPARED TO THE THIRTY-NINE
WEEK PERIOD ENDED SEPTEMBER 28, 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 COMPLETED IN 2003 AND 2004 FROM THE RESULTS OF THE PERIODS
PRESENTED.
SUMMARY. Net income for the thirty-nine week period ended September 26,
2004 was $91.1 million, or $2.14 per diluted share, as compared to $55.6
million, or $1.34 per diluted share, for the period ended September 28, 2003.
REVENUES. For the thirty-nine week period ended September 26, 2004, the
Company's revenues increased $28.3 million, or 9.4 percent, to $329.9 million.
Newspaper revenues for the thirty-nine weeks ended September 26, 2004 as
compared to the prior year period increased $28.6 million, or 9.9 percent, to
$317.4 million, due to an increase in advertising revenues of $26.9 million, or
12.2 percent, and an increase in circulation revenues of $1.7 million, or 2.6
percent, as compared to the prior year period. Commercial printing and other
revenues for the thirty-nine weeks ended September 26, 2004 were relatively flat
compared to the prior year period and represented 3.8 percent of the Company's
revenues for the thirty-nine weeks ended September 26, 2004 as compared to 4.2
percent for the prior year period. Online revenues for the thirty-nine weeks
ended September 26, 2004 were approximately
14
$4.3 million, an increase of approximately 21.9 percent as compared to the prior
year period, and constituted approximately 1.7 percent of total advertising
revenues during the period.
The following table sets forth the Company's total advertising
revenues, by category, for the thirty-nine week periods ended September 26, 2004
and September 28, 2003:
Thirty-Nine Weeks Ended
-----------------------------------------
(DOLLARS IN THOUSANDS) Sept. 26, 2004 Sept. 28, 2003 % Increase
-----------------------------------------------------------------------------------------------------
Local $132,199 $ 119,283 10.8%
Classified 102,750 90,844 13.1%
National 12,924 10,871 18.9%
-----------------------------------------------------------------------------------------------------
Total advertising revenues $247,873 $220,998 12.2%
=====================================================================================================
SAME-STORE NEWSPAPER REVENUES. On a same-store basis, newspaper
revenues for the thirty-nine week period ended September 26, 2004 increased $7.8
million, or 2.7 percent, to $296.7 million from $288.8 million in the prior year
period. Same-store advertising revenues increased $8.7 million, or 3.9 percent,
with all three categories of advertising revenues showing positive
year-over-year trends. Classified advertising revenues increased 5.3 percent,
retail advertising revenues increased 2.1 percent and national advertising
revenues increased 12.0 percent for the thirty-nine weeks ended September 26,
2004, each on a same-store basis and as compared to the thirty-nine weeks ended
September 28, 2003. The increase in same-store classified advertising revenues
resulted from a 13.0 percent increase in classified real estate advertising
revenues and a 9.9 percent increase in classified employment revenues, partially
offset by a 6.8 percent decrease in classified automotive advertising revenues.
Same-store circulation revenues declined $0.8 million, or 1.2 percent, as
compared to the thirty-nine week period ended September 28, 2003.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 38.4 percent of the Company's revenues for the thirty-nine week period
ended September 26, 2004, as compared to 38.7 percent for the thirty-nine week
period ended September 28, 2003. Salaries and employee benefits increased $10.1
million, or 8.7 percent, for the thirty-nine week period ended September 26,
2004 to $126.8 million, primarily due to the Company's acquisitions. Excluding
the Company's acquisitions, salaries and employee benefits increased less than
one percent in the thirty-nine week period of 2004 as compared to the prior year
period.
NEWSPRINT, INK AND PRINTING CHARGES. For the thirty-nine week period
ended September 26, 2004, newsprint, ink and printing charges were 7.9 percent
of the Company's revenues, as compared to 7.6 percent for the thirty-nine week
period ended September 28, 2003. Newsprint, ink and printing charges for the
thirty-nine week period ended September 26, 2004 increased approximately $3.1
million, or 13.4 percent, as compared to the prior year period. This increase
was due to an increase in unit prices of newsprint of approximately nine percent
and an increase in consumption related to the Company's acquisitions.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were 13.6 percent and 13.1 percent of the Company's
revenues for the thirty-nine week periods ended September 26, 2004 and September
28, 2003, respectively. As compared to the prior year period, selling, general
and administrative expenses for the thirty-nine week period ended September 26,
2004 increased $5.6 million, or 14.2 percent, to $45.0 million. This increase
was largely due to the Company's acquisitions. On a same-store basis, selling,
general and administrative expenses increased 5.7 percent, or $2.2 million,
primarily due to costs related to compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 and increased insurance costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
for the thirty-nine week period ended September 26, 2004 were 3.7 percent of the
Company's revenues, as compared to 3.9 percent for the thirty-nine week period
ended September 28, 2003. Depreciation and amortization expenses for the
thirty-nine week period ended September 26, 2004 increased $0.5 million, or 4.4
percent, to $12.1 million as a result of increased depreciation and amortization
expenses related to the Company's acquisitions ($0.9 million), partially offset
by a $0.4 million, or 3.3 percent, decrease in same-store depreciation and
amortization expenses.
OTHER EXPENSES. Other expenses were 14.2 percent of the Company's
revenues for the thirty-nine week period ended September 26, 2004 as compared to
14.5 percent for the thirty-nine week period ended September 28, 2003. Other
expenses increased $3.1 million, or 7.1 percent, to $46.9 million in the
thirty-nine week period ended September 26, 2004. This increase was primarily
due to the Company's acquisitions. On a same-store basis, other expenses
increased $0.6 million, or 1.4 percent.
15
OPERATING INCOME. Operating income was $73.0 million, or 22.1 percent
of the Company's revenues, for the thirty-nine week period ended September 26,
2004, as compared to $67.1 million, or 22.3 percent of the Company's revenues,
for the thirty-nine week period ended September 28, 2003.
NET INTEREST AND OTHER EXPENSE. Net interest and other expense
decreased approximately $0.4 million, or 3.3 percent, for the thirty-nine week
period ended September 26, 2004 as compared to the thirty-nine week period ended
September 28, 2003, due to a decrease in other expense, partially offset by an
increase in interest expense of approximately $400,000. During the thirty-nine
weeks ended September 28, 2003, the Company recorded in net interest and other
expense a special charge of $850,000 in connection with a potential acquisition
that was not consummated.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company reported a net
benefit for income taxes of approximately $31.1 million for the thirty-nine
weeks ended September 26, 2004 as compared to a benefit for income taxes of
approximately $0.7 million for the thirty-nine weeks ended September 28, 2003.
The 2004 and 2003 amounts reflect the reversal of previously recorded income tax
accruals that were determined to no longer be required, which were approximately
$54.6 million and $20.9 million, respectively. Excluding the reversals in each
period, the Company's effective tax rate for the thirty-nine week period ended
September 26, 2004 would have been approximately 39.3 percent, as compared to
approximately 37 percent for the thirty-nine weeks ended September 28, 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 $85.1 million for the
thirty-nine week period ended September 26, 2004 as compared to $78.7 million
for the thirty-nine week period ended September 28, 2003. Free cash flow (which
the Company defines as EBITDA minus capital expenditures, interest and cash
income taxes) was $52.2 million, or $1.23 per diluted share, for the thirty-nine
week period ended September 26, 2004, as compared to $42.9 million, $1.03 per
diluted share, for the thirty-nine week period ended September 28, 2003. See
"Reconciliation of Certain Non-GAAP Financial Measures" below.
LIQUIDITY AND CAPITAL RESOURCES
On August 12, 2004, the Company completed the acquisition of 21st
Century Newspapers, Inc., a privately-held operator of one of the largest
newspaper clusters in the United States. The purchase price for the acquisition
was $415 million and was paid in cash. The acquisition was financed with a
portion of the proceeds of new syndicated senior secured credit facilities. The
new facilities, which are in an aggregate amount of up to $1.05 billion, were
also used to refinance the Company's then existing indebtedness.
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
ongoing 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 thirty-nine week period ended September 26, 2004 was $67.5
million as compared to $58.3 million for the thirty-nine week period ended
September 28, 2003. Current assets were $96.0 million and current liabilities,
excluding current maturities of long-term debt, were $81.0 million as of
September 26, 2004. 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, in accordance
with its terms.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing
activities was $432.5 million for the thirty-nine week period ended September
26, 2004. Cash used in investing activities in 2004 was for investments in
property, plant and equipment and purchases of businesses. Net cash used in
investing activities was $10.1 million for the thirty-nine week period ended
September 28, 2003. The Company has a capital expenditure program of
approximately $20 million in place for 2004, including approximately $4 million
related to the Company's 21st Century operations. The Company's 2004 capital
program 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.
16
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash provided by financing
activities was $365.0 million for the thirty-nine week period ended September
26, 2004, reflecting the financing of the Company's acquisitions, particularly
21st Century, partially offset by the utilization of cash flows from operations
to repay debt and proceeds from stock option exercises. Net cash used in
financing activities was $48.2 million for the thirty-nine week period ended
September 28, 2003, of which $40.9 million was used to repay debt and $7.9
million was used to repurchase the Company's stock, offset partially by proceeds
received from stock option exercises.
DEBT AND INTEREST RATE DERIVATIVES. The Company entered into a credit
agreement on August 12, 2004 with a group of lenders, led by JPMorgan Chase Bank
as administrative agent (the "Credit Agreement"). The Credit Agreement provides
for (i) two secured term loan facilities ("Term Loan A" and "Term Loan B" or
collectively, the "Term Loans"), with Term Loan A having a face amount of $275
million and Term Loan B having a face amount of $350 million, and (ii) a secured
revolving credit facility (the "Revolving Credit Facility") of $425 million. 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.
Term Loan A and Term Loan B mature on November 12, 2011 and August 12,
2012, respectively, and the Revolving Credit Facility matures on November 12,
2011. The Term Loans are repayable in quarterly installments commencing in
December 2006 and the availability of the Revolving Credit Facility is subject
to certain quarterly reductions that commence in December 2009. In addition,
under the terms of the Company's Credit Agreement, under certain circumstances
the Company may be required to prepay a portion of the Term Loans and any loans
under an Incremental Facility in an amount equal to (i) excess net proceeds from
the sale of newspaper properties that are not reinvested within at least 365
days or (ii) 50 percent of excess cash flow, as defined in the Credit Agreement,
provided that there will be no prepayment of excess cash flow in any year where
the Company's leverage is equal to or less than 5.00 to 1.
The amounts outstanding under the Credit Agreement bear interest at (i)
1.5 percent to 0.625 percent above LIBOR (as defined in the Credit Agreement) or
(ii) 0.25 percent to 0 percent above the higher of (a) the Prime Rate (as
defined in the Credit Agreement) or (b) 0.5 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).
In accordance with the requirements of the 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 these requirements, as well as similar requirements
contained in the Company's prior credit agreement, the Company entered into
certain interest rate hedges ("Collars") that establish a base interest rate
ceiling ("CAP") and a base interest rate floor ("floor") at no initial cost to
the Company. In the event 90-day LIBOR exceeds the CAP, the Company will receive
cash from the issuers to compensate for the rate in excess of the CAP. If the
90-day LIBOR is lower than the floor, the Company will pay cash to the issuers
to compensate for the rate below the floor. Each of the Collars is for a two
year term and amortizes over its term to the notional amount set forth below. As
of September 26, 2004, the aggregate notional amount of outstanding Collars in
effect was $335 million.
17
The following table summarizes the Company's existing Collars and
executed contracts for Collars not yet effective, in each case at September 26,
2004:
Effective date Cap (%) Floor (%) Notional Amount
------------- ------ -------- ---------------
October 29, 2002 6.0 2.66 $135 million
January 29, 2003 4.0 1.54 $150 million
August 20, 2004 4.5 2.05 $50 million
October 29, 2004 4.5 2.08 $100 million
January 29, 2005 4.5 2.38 $50 million
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 26, 2004 and the fiscal year ended December 28,
2003. The total deferred loss reported in OCI as of September 26, 2004 and
December 28, 2003 was approximately $0.1 million and $1.5 million, respectively
(net of $0.1 million and $1.0 million of deferred taxes, respectively).
Each IRPA is 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 thirty-nine week period ended September 26,
2004. 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 26, 2004 related to the Company's IRPAs in place
during 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS. As of September 26, 2004, the
Company had outstanding indebtedness under the Credit Agreement, due and payable
in installments through 2012, of $789.1 million, of which $164.1 million was
outstanding under the Revolving Credit Facility and $625.0 million was
outstanding under the Term Loans. The aggregate maturities payable under the
Term Loans for the following fiscal years are as follows (DOLLARS IN THOUSANDS):
2006 $ 7,750
2007 34,438
2008 48,188
2009 61,937
2010 71,562
2011 69,500
2012 331,625
The Revolving Credit Facility is available until November 12, 2011.
Initial availability was $425 million and will be reduced by equal consecutive
quarterly reductions, commencing on December 31, 2009, 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):
December 31, 2009 $ 21,250
December 31, 2010 63,750
As of September 26, 2004, the maximum availability under the Revolving
Credit Facility was $260.9 million, with approximately $170 million available
based on the terms of the Credit Agreement.
18
The Term Loans and Revolving Credit Facility are secured by
substantially all of the assets of the Company and the common stock and assets
of the Company's subsidiaries. The Term Loans and Revolving Credit Facility
require compliance with certain covenants, which require, among other things,
maintenance of certain financial ratios, which may restrict among other things,
the Company's ability to declare dividends, purchase treasury stock, incur
additional indebtedness, create liens, sell assets, consummate mergers and make
capital expenditures, investments and acquisitions. The Company is in compliance
with the financial covenants contained in the Credit Agreement.
The Company leases office space and equipment under non-cancelable
operating leases. These leases contain several renewal options for periods up to
seven years. The Company's future minimum lease payments under non-cancelable
operating and capital leases in effect as of December 28, 2003, are as follows
(DOLLARS IN THOUSANDS):
Operating Capital
--------- -------
2004 $ 4,397 $ 980
2005 3,402 1,029
2006 2,548 536
2007 1,846 527
2008 1,559 515
Thereafter 3,207 3,218
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.
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. 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, additional allowances may be required.
19
LONG-LIVED ASSETS
Identifiable intangible assets, such as customer lists and covenants
not to compete, are amortized using the straight-line method over their
estimated useful lives for the years presented in the Company's consolidated
financial statements. Under SFAS 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.
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 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.
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 and compare the Company's results from operations
and cash resources generated from its business in a more meaningful and
consistent 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.
The Company believes the use of EBITDA is appropriate given the generally
predictable cash flow generated by the Company's operations and the short period
of time it takes to convert new orders to cash. In addition, the Company
believes that free cash flow is useful as a supplemental measure of evaluating
financial performance because it provides an alternative measure of the cash
generated by the Company after payment of expenses, including investments, and
therefore available for further investment in the business, including
acquisitions, or for other uses such as repayment of indebtedness or repurchases
of outstanding equity securities.
20
All EBITDA, Free Cash Flow and Adjusted Net Income figures in this
report are non-GAAP financial measures. Journal Register Company defines 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 and
cash income taxes. Adjusted Net Income excludes certain special items, described
elsewhere in this report, that are unrelated to the Company's current
operations. EBITDA Margin is defined as EBITDA divided by total revenues, and is
widely used within the Company's industry to illustrate the percentage of
revenue that is converted into EBITDA.
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; (ii) net income and free cash flow; and (iii) net
income and adjusted net income, in each case for the thirteen and thirty-nine
week periods ended September 26, 2004 and September 28, 2003.
Thirteen weeks ended Thirty-nine weeks ended
-------------------- -----------------------
Sept. 26, 2004 Sept. 28, 2003 Sept. 26, 2004 Sept. 28, 2003
-------------- -------------- -------------- --------------
Net income..................................... $66,088 $31,864 $91,095 $55,598
Add: Net benefit for income taxes........... (47,194) (14,455) (31,083) (657)
Add: Write-off of prior debt issuance costs. 1,211 - 1,211 -
Add: Net interest expense and other......... 5,307 4,442 11,770 12,171
----- ----- ------ ------
Operating income............................... 25,412 21,851 72,993 67,112
Add: Depreciation and amortization.......... 4,745 3,861 12,134 11,625
----- ----- ------ ------
EBITDA......................................... $30,157 $25,712 $85,127 $78,737
EBITDA margin.................................. 25% 26% 26% 26%
Less: Capital expenditures.................. (3,356) (1,426) (8,426) (10,102)
Less: Interest expense...................... (5,234) (3,570) (11,631) (11,271)
Less: Cash income taxes ................... (1,282) (4,740) (12,836) (14,434)
------- ------- -------- --------
Free Cash Flow................................. $20,285 $15,976 $52,234 $42,930
Free Cash Flow per diluted share............ $0.48 $0.38 $1.23 $1.03
Net income, as reported........................ $66,088 $31,864 $91,095 $55,598
Less: Special items ........................ (53,914) (20,358) (53,914) (20,358)
-------- -------- -------- --------
Adjusted net income ........................... $12,174 $11,506 $37,181 $35,240
Cash income taxes represent the application of the Company's expected current
year income tax liability rate to the income before provision for income taxes
for each period presented, without regard to the actual timing of such payment,
and are reduced by the anticipated benefit of the utilization of available net
operating loss carry-forwards. Adjusted net income excludes the net effect of:
(i) the reversal of certain tax accruals in the third quarter of 2004 ($54.6
million) and the third quarter of 2003 ($20.9 million); (ii) a special charge of
approximately $1.2 million ($738,000 net of tax effect) in the third quarter of
2004 related to the extinguishment of the Company's refinanced credit facility;
and (iii) special transaction-related expenses of approximately $850,000
($553,000 net of tax effect) in the third quarter of 2003.
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,
21
the success of the Company's acquisition strategy, including the acquisition of
21st Century, dispositions, the ability of the Company to achieve cost
reductions and integrate acquisitions, including the acquisition of 21st
Century, 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 September 26, 2004, the Company had in effect collar agreements with
respect to an aggregate notional amount of $335 million of the Company's
outstanding indebtedness. Assuming a 10 percent increase or reduction in
variable interest rates, the annual impact on the Company's pre-tax earnings
would be approximately $1.5 million.
Newsprint, which is the principal raw material for the Company's
newspapers, is a commodity and is exposed to 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, 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 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.
Subsequent to the end of fiscal year 2003, 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, and
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 internal and disclosure controls and its operating
efficiencies. 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. Through
September 26, 2004, the Company has not experienced any adverse effect on its
internal and disclosure controls as a result of this deployment and does not
anticipate any adverse effect during the remainder of the deployment phase.
22
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 July 7, 2004,
furnishing pursuant to Item 5 and Item 7 thereof certain
information regarding the acquisition of 21st Century.
The Company filed a Current Report on Form 8-K on July 16, 2004,
furnishing pursuant to Item 12 thereof certain information
regarding the text of a press release issued by the Company, dated
July 16, 2004, titled "Journal Register Company Reports Second
Quarter Results".
The Company filed a Current Report on Form 8-K on August 20, 2004,
furnishing pursuant to Item 2 thereof certain information
regarding the completion of the acquisition of 21st Century and
the execution of the Credit Agreement.
23
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 5, 2004 JOURNAL REGISTER COMPANY
By: /s/ Jean B. Clifton
----------------------------
Jean B. Clifton
Executive Vice President and
Chief Financial Officer
(signing on behalf of the
registrant as principal
financial officer)
24