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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 26, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
50 WEST STATE STREET
TRENTON, NEW JERSEY 08608-1298
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (609) 396-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $0.01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 27, 2004 was $803.9 million.
As of March 15, 2005, 42,015,728 shares of the registrant's Common Stock,
par value $0.01 per share, were outstanding (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE. The information called for by Part III
is incorporated by reference to the definitive Proxy Statement for the Company's
2005 Annual Meeting of Stockholders, which will be filed on or before April 25,
2005.
================================================================================
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, FORECASTS, PROJECTIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING
THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING 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 HEREINAFTER DEFINED) AS OF THE DATE
THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS,
EXCEPT AS REQUIRED BY LAW. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING, BUT NOT LIMITED TO, THE UNAVAILABILITY OR A MATERIAL INCREASE IN THE
PRICE OF NEWSPRINT, THE SUCCESS OF THE COMPANY'S ACQUISITION STRATEGY, INCLUDING
THE ACQUISITION OF 21ST CENTURY NEWSPAPERS, INC., DISPOSITIONS, THE ABILITY OF
THE COMPANY TO ACHIEVE COST REDUCTIONS AND INTEGRATE ACQUISITIONS, INCLUDING THE
ACQUISITION OF 21ST CENTURY NEWSPAPERS, INC., COMPETITIVE PRESSURES, GENERAL OR
REGIONAL ECONOMIC CONDITIONS, ADVERTISING TRENDS AND MATERIAL INCREASES IN
INTEREST RATES, AMONG OTHER THINGS. THESE AND OTHER FACTORS ARE DISCUSSED IN
MORE DETAIL BELOW UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CERTAIN FACTORS WHICH MAY AFFECT
THE COMPANY'S FUTURE PERFORMANCE." SUCH FACTORS SHOULD NOT BE CONSTRUED AS
EXHAUSTIVE. 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.
PART I
ITEM 1. BUSINESS.
GENERAL
Journal Register Company (the "Company") is a leading U.S. newspaper
publisher that owns and operates 27 daily newspapers and 338 non-daily
publications strategically clustered in seven geographic areas: Greater
Philadelphia, Michigan, Connecticut, Greater Cleveland, Central New England, and
the Capital-Saratoga and Mid-Hudson regions of New York. The Company's total
paid circulation is approximately 653,000 daily and 700,000 Sunday, and total
non-daily distribution is approximately 5 million. The Company's mission is for
its newspapers to be the number one provider of local information in the markets
they serve, both in print and online.
The Company's newspapers are characterized by their intense focus on
the coverage of local news and local sports, their compelling graphic design and
their colorful, reader-friendly packages. The Company is also committed to
expanding its business through its Internet initiatives, and currently operates
195 Websites that are affiliated with the Company's daily newspapers and
non-daily publications.
The principal elements of the Company's strategy are to: (i) expand
advertising revenues and readership; (ii) grow by acquisition; (iii) capture
synergies from geographic clustering; and (iv) implement consistent operating
policies and standards. The Company's objective is to produce high quality
products every day that enable the Company to grow its revenues, cash flows and
net income.
The Company is a leader in the newspaper industry in executing a
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.
1
From September 1993 through December 2004, the Company successfully
completed 30 acquisitions and two dispositions.
During fiscal year 2004, the Company completed four acquisitions,
highlighted by the August 12, 2004 acquisition of 21st Century Newspapers, Inc.
("21st Century"), which operates one of the largest newspaper clusters in the
United States. Located in Michigan, the Company's 21st Century subsidiary owns
four daily newspapers with combined average daily net paid circulation of
approximately 134,000 and combined average Sunday net paid circulation of
approximately 176,500. The daily newspapers owned by 21st Century include THE
OAKLAND PRESS in Pontiac, THE MACOMB DAILY in Mt. Clemens, THE DAILY TRIBUNE in
Royal Oak, and THE MORNING SUN in Mt. Pleasant. The Company's 21st Century
subsidiary also owns 85 non-daily publications with approximately 1.5 million
non-daily distribution. The purchase price for the acquisition was $415 million
and was paid in cash with the proceeds of a new senior credit facility provided
by JPMorgan.
The majority of the Company's daily newspapers have been published for
more than 100 years and are established franchises with strong identities in the
communities they serve. For example, the NEW HAVEN REGISTER, the Company's
largest newspaper based on daily circulation, has roots in the New Haven,
Connecticut area dating back to 1755. In many cases, the Company's daily
newspapers are the only general circulation daily newspapers published in their
respective communities. The Company's non-daily publications serve well-defined
suburban areas.
The Company manages its newspapers to best serve the needs of its local
readers and advertisers. The editorial content of its newspapers is tailored to
the specific interests of each community served and includes coverage of local
youth, high school, college and professional sports, as well as local business,
politics, entertainment and culture. The Company maintains high product quality
standards and uses extensive process color and compelling graphic design to more
fully engage existing readers and to attract new readers. The Company's
newspapers typically are produced using advanced prepress pagination technology,
and are printed on efficient, high-speed presses.
The Company's revenues are derived from advertising (76.0 percent of
fiscal year 2004 revenues), paid circulation (20.3 percent of fiscal year 2004
revenues), including single copy sales and subscription sales, and commercial
printing and other activities (3.7 percent of fiscal year 2004 revenues). The
Company's advertiser base is predominantly local. The Company's newspapers seek
to produce desirable results for local advertisers by targeting readers based on
certain geographic and demographic characteristics. The Company seeks to
increase readership, and thereby generate traffic for its advertisers, by
focusing on high product quality, compelling and often proprietary local content
and creative and interactive promotions. The Company 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, as well as 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.
The Company's advertising revenues in 2004 were derived primarily from
a broad group of local retailers (approximately 55 percent) and classified
advertisers (approximately 40 percent). No single advertiser accounted for more
than one percent of the Company's total fiscal year 2004 revenues. The Company's
management believes that its advertising revenues tend to be relatively stable
because its newspapers rely primarily on a broad base of local retail and local
classified advertising, rather than the generally more volatile national and
major account advertising that accounts for only approximately five percent of
the Company's advertising revenues.
Substantially all of the Company's operations relate to newspaper
publishing. In addition to its daily newspapers and non-daily publications, the
Company currently owns three commercial printing operations that complement and
enhance its publishing operations.
2
OVERVIEW OF OPERATIONS
The Company's operations are clustered in seven geographic areas:
GREATER PHILADELPHIA. The suburban Philadelphia area is one of the
fastest growing and most affluent areas in Pennsylvania. Since 1990, the
population of the areas covered by the Company's Greater Philadelphia Cluster
has increased approximately 10 percent, and average household income has
increased approximately 58 percent.
The Company owns seven daily newspapers and 123 non-daily publications
serving areas surrounding Philadelphia. These publications include, in
Pennsylvania: the DELAWARE COUNTY DAILY AND SUNDAY TIMES (Primos); the DAILY
LOCAL NEWS (West Chester); THE MERCURY (Pottstown); THE TIMES HERALD
(Norristown); THE REPORTER (Lansdale); THE PHOENIX (Phoenixville); Montgomery
Newspapers, a group of 25 non-daily publications; News Gleaner Publications,
which includes eight weekly publications serving Northeast Philadelphia and
seven monthly publications serving Montgomery County, Pennsylvania; the
InterCounty Newspaper Group, a group of 18 weekly newspapers serving suburban
Philadelphia and central and southern New Jersey; Chesapeake Publishing, a group
of 15 non-daily publications; Town Talk Newspapers (Media), a group of seven
non-daily publications; Acme Newspapers, a group of four non-daily newspapers,
including the MAIN LINE TIMES, serving Philadelphia's affluent Main Line, and
the NEWS OF DELAWARE COUNTY, one of the largest community newspapers in the
United States audited by the Audit Bureau of Circulations ("ABC"); and the Penny
Pincher Shopper publications (Pottstown). Also, in New Jersey, the Company owns
THE TRENTONIAN (Trenton, NJ), a daily newspaper operation. The Company also owns
two commercial printing companies in Pennsylvania, one of which prints more than
60 of the Company's non-daily publications in addition to printing for other
non-affiliated customers, and the other is a premium quality sheet-fed printing
operation.
The seven Greater Philadelphia Cluster daily newspapers have aggregate
daily and aggregate Sunday circulation of approximately 180,000. The Company's
aggregate non-daily distribution in the Company's Greater Philadelphia Cluster
is approximately 1.3 million.
In October 2004, the Company purchased Berks-Mont Newspapers, a group
of nine non-daily publications serving the western suburbs of Philadelphia.
These publications are adjacent to other Company publications, including THE
MERCURY (Pottstown) and Montgomery Newspapers. The acquisition expanded the
Company's publications into an area with a population of 765,417 which has grown
18 percent since 1990. The population in the area has an average household
income of $66,395, which is 5 percent above the national average.
In October 2003, the Company launched EL LATINO EXPRESO, a weekly
Spanish-language publication distributed in the Trenton, New Jersey market. This
publication was originally launched as a monthly and the distribution frequency
was subsequently increased to twice monthly and, in September 2004, to weekly.
In 2003, the Company launched HUNTERDON COUNTY TOWN & Country Living Magazine, a
quarterly publication with distribution of approximately 20,000 serving affluent
and fast-growing Hunterdon County, New Jersey, as part of the Company's Town and
Country Magazine division.
In 2002, the Company launched the Lansdale edition of THE SUNDAY TIMES
HERALD, adding circulation of approximately 15,000 on Sunday in Montgomery
County. This edition provides advertisers with a local Sunday newspaper to reach
the desirable Lansdale market. The Company also expanded its Greater
Philadelphia Cluster with the completion of two strategic acquisitions in 2002,
acquiring the News Gleaner publications and the County Press publications.
3
The following table sets forth information regarding the Company's
publications in Greater Philadelphia:
YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
PUBLICATION ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3)
DELAWARE COUNTY DAILY AND
SUNDAY TIMES............. 1876 1998 Primos, PA 45,718 44,105
DAILY LOCAL NEWS.......... 1872 1986 West Chester, PA 28,779 29,393
THE MERCURY............... 1930 1998 Pottstown, PA 24,203 26,502
THE TIMES HERALD.......... 1799 1993 Norristown, PA 16,501 29,306
THE REPORTER.............. 1870 2001 Lansdale, PA 17,872 15,496
THE PHOENIX............... 1888 1986 Phoenixville, PA 3,694
THE TRENTONIAN............ 1945 1985 Trenton, NJ 43,925 34,622
Montgomery Newspapers
25 publications........ 1872 2001 Ft. Washington, PA 274,382
News Gleaner Publications
15 publications........ 1882 2002 Philadelphia, PA 167,946
Berks-Mont Newspapers
9 publications......... 1857 2004 Quakertown, PA 147,950
Chesapeake Publishing
15 publications........ 1869 2001 Kennett Square, PA 85,468
Town Talk Newspapers
7 publications......... 1964 1998 Ridley, PA 85,200
InterCounty Newspaper
Group
18 publications........ 1869 1997 Newtown, PA 73,651
Penny Pincher Shoppers
7 publications......... 1988 1998 Pottstown, PA 57,200
Acme Newspapers
4 publications......... 1930 1998 Ardmore, PA 53,907
Suburban Publications
3 publications......... 1885 1986 Wayne, PA 30,007
County Press Publications
6 publications......... 1931 2002 Newtown Square, PA 21,575
TRI-COUNTY RECORD......... 1975 1986 Morgantown, PA 40,200
REAL ESTATE TODAY......... 1978 1998 Pottstown, PA 35,000
THE HOMES MAGAZINE........ 1988 1988(4) West Chester,PA 18,053
CHESTER COUNTY KIDS....... 2001 2001(4) West Chester, PA 18,000
THE VILLAGE NEWS.......... 1980 1986 Downingtown, PA 18,000
TOWNSHIP VOICE............ 1991 1991 Phoenixville, PA 15,000
EL LATINO EXPRESO......... 2004 2004(4) Trenton, NJ 14,300
THE TIMES RECORD.......... 1980 1986 Kennett Sq., PA 9,000
BLUE BELL JOURNAL......... 1999 1999(4) Blue Bell, PA 5,225
Total Market Coverage
("TMC") (5 publications).. 103,100
- -----------------------------------------------------------------------------------------------------------------------
TOTAL 180,692 179,424 1,273,164
=======================================================================================================================
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released Audit
Bureau of Circulation ("ABC") Audit Reports.
(3) Non-daily distribution includes both paid and free distribution.
(4) Represents the year the Company started the publication.
4
The majority of the Company's Pennsylvania publications are located
within a 30-mile radius of Philadelphia. The Company's newspapers serve
geographic areas with highly desirable demographics. The DELAWARE COUNTY DAILY
AND SUNDAY TIMES serves an area that has a population of 588,276. The population
grew slightly from 1980 to 2004. The DELAWARE COUNTY DAILY AND SUNDAY TIMES'
market area has average household income of $76,477, which is 21 percent above
the national average. The DAILY LOCAL NEWS serves an area which has a population
of 449,075 and had population growth of approximately 52 percent from 1980 to
2004. The DAILY LOCAL NEWS serves an area that has average household income of
$91,966, which is 46 percent above the national average. THE MERCURY, located
west of Philadelphia, serves an area that has a population of 487,749 and had
population growth of approximately 32 percent from 1980 to 2004. The area THE
MERCURY serves has average household income of $76,255, which is 21 percent
above the national average. THE TIMES HERALD serves an area that has a
population of 191,643 and had population growth of approximately 20 percent from
1980 to 2004. THE TIMES HERALD's market area has average household income of
$82,494, which is 31 percent above the national average. The Reporter serves an
area that has a population of 416,058 and had population growth of approximately
25 percent from 1990 to 2004. THE REPORTER's market area has an average
household income of $89,463, which is 42 percent above the national average. THE
PHOENIX serves an area that has a population of 141,570 and had population
growth of approximately 54 percent from 1980 to 2004. The Phoenix's market area
has average household income of $98,529, which is 56 percent above the national
average. The Company's weekly newspaper group, Suburban Publications, which is
located on the Main Line in suburban Philadelphia, serves an area that has a
population of 347,470 and had population growth of approximately 28 percent from
1980 to 2004. The market area served by Suburban Publications has average
household income of $108,316, which is 71 percent above the national average.
The MAIN LINE TIMES, the flagship of the Company's Acme Newspapers group, serves
an area that has a population of 401,357 and had population growth of
approximately three percent from 1980 to 2004. The MAIN LINE TIMES' market area
has average household income of $101,472, which is 61 percent above the national
average. The majority of the Company's Pennsylvania properties are located
within 20 miles of the area's largest retail complex, the King of Prussia Mall,
which is the largest shopping center in the United States based on retail square
footage.
THE TRENTONIAN is published in Trenton, the capital of New Jersey,
which is located 35 miles northeast of Philadelphia and 65 miles southwest of
New York City. THE TRENTONIAN serves an area that has a population of 299,422
and had population growth of approximately 12 percent from 1980 to 2004. This
area has average household income of $73,890, which is 17 percent above the
national average.
As a result of the synergies in the Company's Greater Philadelphia
Cluster, the Company has been able to cross-sell advertising into multiple
publications. The nature of the cluster also allows for the implementation of
significant cost savings programs. For example, in December 2001, the Company
commenced operations at a new production facility, Journal Register Offset,
located in Exton, Pennsylvania. This plant produces five of the Company's seven
dailies - the DAILY LOCAL NEWS, THE MERCURY, THE TIMES HERALD, THE REPORTER and
THE PHOENIX - and 57 of the Company's 123 non-daily publications in the
Company's Greater Philadelphia Cluster. The Exton facility produces
award-winning product quality and generates significant cash operating expense
savings. In addition, the Company's publications in its Greater Philadelphia
Cluster share several news gathering resources.
MICHIGAN. In August 2004, the Company acquired 21st Century, which
publishes four daily newspapers and 85 non-daily publications. The daily
newspapers are THE OAKLAND PRESS (Pontiac), THE MACOMB DAILY (Mt. Clemens), THE
DAILY TRIBUNE (Royal Oak), and THE MORNING SUN (Mt. Pleasant). The non-daily
publications are primarily aggregated in four groups: the Lapeer Group (Lapeer);
Morning Star Group (Mt. Pleasant); Independent Newspapers (Mt. Clemens); and
Heritage Newspapers (Southgate). The aggregate circulation of the daily
newspapers is approximately 134,000 daily and approximately 176,500 Sunday. The
non-daily publications have an aggregate distribution of approximately 1.5
million.
The following table sets forth information regarding the Company's
publications in Michigan:
5
PUBLICATION YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3)
OAKLAND PRESS................. 1844 2004 Pontiac 65,581 81,526
MACOMB DAILY.................. 1839 2004 Mt. Clemens 44,076 66,912
DAILY TRIBUNE................. 1902 2004 Royal Oak 12,676 15,120
THE MORNING SUN............... 1879 2004 Mt. Pleasant 11,654 12,866
Morning Star Group
27 publications............. 1947 2004 Mt. Pleasant 400,456
Heritage Group
21 publications............. 1869 2004 Southgate 374,095
Independent Newspapers
16 publications............. 1902 2004 Mt. Clemens 275,176
Lapeer Group
15 publications............. 1879 2004 Lapeer 210,840
HOMES FOR SALE................ 1982 2004 Pontiac 56,500
METRO DETROIT JOB SEARCH...... 2001 2004 Pontiac 50,323
TMC (4 publications).......... 156,014
- ------------------------------------------------------------------------------------------------------------------
TOTAL 133,987 176,424 1,523,404
==================================================================================================================
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released ABC Audit
Reports.
(3) Non-daily distribution includes both paid and free distribution.
THE OAKLAND PRESS and THE DAILY TRIBUNE are in Oakland County, located
in the northwest suburbs of Detroit and one of the most affluent counties in
Michigan. Oakland County has a population of 1,204,736 and had population growth
of 11 percent from 1990 to 2004. The county has an average household income of
$89,969, which is 42 percent above the national average. THE MACOMB DAILY is in
Macomb County, which is in the northern suburbs of Detroit. The county has a
population of 820,704 and had population growth of 14 percent from 1990 to 2004.
It has an average household income of $66,903, which is approximately six
percent above the national average. THE MORNING SUN is in Isabella County, which
is located in the central part of the state. Isabella County has a population of
65,334 and had population growth of 20 percent from 1990 to 2004. The county has
an average household income of about $49,026. Heritage Newspapers serves an area
in the southern and southwestern suburbs of Detroit. The area has a population
of 1,016,313 and had population growth of seven percent from 1990 to 2004. The
area has an average household income of $65,799, which is four percent above the
national average. Independent Newspapers serves an area in the northern part of
the Detroit metro area. The area has a population of 610,492 and had population
growth of 26 percent from 1990 to 2004. The area has an average household income
of $71,720, which is 13 percent above the national average. The Lapeer Group
serves an area in the Lake area of the state that includes Lapeer, Sanilac,
Huron, Tuscola and Saginaw counties. The area has a population of 563,729 and
had population growth of 14 percent from 1990 to 2004. The area has an average
household income of $62,313. The Morning Star Group serves a large area in the
central and northern part of Michigan. The area has a population of 966,565 and
had population growth of 18 percent from 1990 to 2004. The area has an average
household income of $52,615.
CONNECTICUT. In Connecticut, the Company owns the NEW HAVEN REGISTER, a
small metropolitan daily newspaper with daily circulation of approximately
94,000 and Sunday circulation of approximately 98,000, four suburban daily
newspapers, 74 suburban non-daily publications and one commercial printing
company. The suburban daily newspapers in the Connecticut Cluster are THE HERALD
(New Britain), THE BRISTOL PRESS, THE REGISTER CITIZEN (Torrington) and THE
MIDDLETOWN PRESS. The five daily newspapers have aggregate daily and Sunday
circulation of approximately 140,000. The non-daily publications have aggregate
distribution of approximately 1.6 million. Included in the non-daily
publications is CONNECTICUT MAGAZINE, the state's premier lifestyle magazine
that was acquired in September 1999. The Company's Connecticut daily newspapers
and non-daily publications serve a statewide audience with concentrations in
western Connecticut (Litchfield and Fairfield counties) to Hartford and its
suburban areas, to the Greater New Haven area, as well as the Connecticut
shoreline from New Haven northeast to New London.
6
In March 2004, the NEW HAVEN REGISTER launched PLAY, a weekly
entertainment and lifestyle publication targeting readers 18 to 34 years old in
the Greater New Haven market. PLAY has a distribution of approximately 24,000.
In November 2004, the NEW HAVEN REGISTER launched LUXURY LIVING, a quarterly
lifestyle magazine with distribution of 30,000 serving selected affluent markets
in the Greater New Haven and the Connecticut Shoreline areas. In 2003, the
Company launched PASSPORT, a quarterly regional lifestyle magazine serving the
fast-growing and affluent areas of Litchfield and Fairfield counties in
Connecticut, Dutchess and Columbia counties in New York, and the Berkshire
Mountains region of Massachusetts. PASSPORT has distribution of 18,900 and was
launched by the Litchfield County Times Group, which is based in New Milford,
Connecticut. In May 2004, the Company launched EL LATINO EXPRESO, a weekly
Spanish-language publication distributed in the New Britain market. This
publication was originally launched as a monthly and the distribution frequency
was subsequently increased to twice monthly and, in September 2004, to weekly.
The following table sets forth information regarding the Company's
publications in Connecticut:
YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
PUBLICATION ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3)
NEW HAVEN REGISTER............... 1755 1989 New Haven 94,126 98,432
THE HERALD....................... 1881 1995 New Britain 14,479 29,538(5)
THE BRISTOL PRESS................ 1871 1994 Bristol 12,091 (5)
THE REGISTER CITIZEN............. 1889 1993 Torrington 9,709 8,972
THE MIDDLETOWN PRESS............. 1884 1995 Middletown 8,273 (5)
CONNECTICUT MAGAZINE
3 publications................. 1938 1999 Trumbull 620,434
Shore Line Newspapers
10 publications................ 1877 1995 Guilford 150,678
Imprint Newspapers
12 publications................ 1880 1995 Bristol 93,630
Litchfield County Times Group
3 publications................. 1981 2001 New Milford 52,545
Elm City Newspapers
6 publications................. 1931 1995 Milford 47,066
Housatonic Publications
7 publications................. 1825 1998 New Milford 37,321
Minuteman Newspapers
2 publications................. 1993 1998 Westport 35,283
LUXURY LIVING.................... 2004 2004(4) New Haven 30,000
PLAY............................. 2004 2004(4) New Haven 24,000
EL LATINO EXPRESO................ 2004 2004(4) New Britain 10,000
Gamer Publications
3 publications................. 1981 1995 Bristol 55,000
FOOTHILLS TRADER
3 publications................. 1965 1995 Torrington 49,113
CONNECTICUT COUNTY KIDS
2 publications................. 1989 1996 Westport 40,000
MAIN STREET NEWS
3 publications................. 1989 2002 Essex 24,251
EAST HARTFORD GAZETTE............ 1885 1995 East Hartford 19,100
HOMEFINDER....................... 1976 1995 New Britain 16,065
THOMASTON EXPRESS................ 1874 1994 Thomaston 1,511
TMC (14 publications)............ 310,257
- ------------------------------------------------------------------------------------------------------------------
TOTAL 138,678 136,942 1,616,254
==================================================================================================================
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released ABC Audit
Reports.
(3) Non-daily distribution includes both paid and free distribution. The
CONNECTICUT VACATION GUIDE, one of CONNECTICUT MAGAZINE's publications,
which is published annually, has annual distribution of 500,000. Another
CONNECTICUT MAGAZINE publication, CONNECTICUT BRIDE, is published twice per
year with distribution of 30,000 per issue.
(4) Represents the year the Company started the publication.
(5) The SUNDAY HERALD PRESS is a combined Sunday newspaper that serves the
markets served by THE HERALD, THE BRISTOL PRESS and THE MIDDLETOWN PRESS
with three zoned editions.
7
The Company's Connecticut publications serve communities with
attractive demographics. The NEW HAVEN REGISTER is the Company's largest
newspaper based on daily circulation and is the second largest daily circulation
newspaper in Connecticut. The NEW HAVEN REGISTER serves a primary circulation
area comprised of the majority of New Haven County and portions of Fairfield,
Middlesex and New London counties. This area (including the portions of
Fairfield County, which are also served by related non-daily publications) has a
population of 819,364 and had population growth of approximately 18 percent from
1980 to 2004. This area has average household income of $76,909, which is 22
percent above the national average, and a retail environment comprised of
approximately 7,200 stores. The NEW HAVEN REGISTER's primary circulation area is
home to a number of large and well-established institutions, including Yale
University and Yale-New Haven Hospital. As a result of its proximity to the
large media markets of New York City, Boston and Hartford, New Haven has only
two locally licensed television stations (which serve a statewide, rather than a
local, audience). The radio market in New Haven is also fragmented.
Consequently, the Company's management believes that the NEW HAVEN REGISTER is a
very powerful local news and advertising franchise for the Greater New Haven
area.
THE HERALD, THE BRISTOL PRESS and THE MIDDLETOWN PRESS serve contiguous
areas between New Haven and Hartford. THE BRISTOL PRESS serves an area that has
a population of 340,384 and had population growth of approximately nine percent
from 1980 to 2004. The BRISTOL PRESS' market area has average household income
of $82,857, which is 31 percent above the national average. THE MIDDLETOWN PRESS
serves an area that has a population of 109,201 and had population growth of
approximately 28 percent from 1980 to 2004. The area served by THE MIDDLETOWN
PRESS has average household income of $76,283, which is 21 percent above the
national average. THE HERALD serves an area that has a population of 109,004,
and had population growth of approximately six percent from 1980 to 2004. THE
HERALD's market area has average household income of $56,502. THE REGISTER
CITIZEN serves an area that has a population of 258,188 and had population
growth of approximately 18 percent from 1980 to 2004. THE REGISTER CITIZEN'S
market area has average household income of $82,489, which is 31 percent above
the national average.
The Company's Connecticut publications benefit from cross-selling of
advertising, as well as from editorial, production and back office synergies.
For example, the NEW HAVEN REGISTER gathers statewide news for all of the
Company's Connecticut newspapers; the newspapers cross-sell advertising through
a one-order, one-bill system; and THE HERALD and THE MIDDLETOWN PRESS are
printed at one facility, as are THE REGISTER CITIZEN and THE BRISTOL PRESS.
Moreover, in August 1996, in order to take advantage of the contiguous nature of
the geographic areas served by THE HERALD, THE BRISTOL PRESS and THE MIDDLETOWN
PRESS, the Company launched a combined Sunday newspaper, THE HERALD PRESS, which
serves the readers of these three daily newspapers with three zoned editions and
has a Sunday circulation of approximately 30,000 as of September 30, 2003,
according to the ABC Audit Report.
GREATER CLEVELAND. The Company owns two Cleveland, Ohio area newspaper
operations, THE NEWS-HERALD (Willoughby) and THE MORNING JOURNAL (Lorain). The
aggregate daily and aggregate Sunday circulation of the Cleveland-area
newspapers is approximately 76,000 and 91,000, respectively. The five non-daily
publications in the Greater Cleveland cluster have aggregate distribution of
approximately 141,000.
The following table sets forth information regarding the Company's
publications in Greater Cleveland:
YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
PUBLICATION ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3)
THE NEWS-HERALD............... 1878 1987 Willoughby 45,571 56,000
THE MORNING JOURNAL........... 1921 1987 Lorain 30,860 35,034
COUNTY KIDS Willoughby
2 publications............. 1997 1997(4) and Lorain 33,702
EL LATINO EXPRESO............. 2004 2004(4) Lorain 10,000
TMC (2 publications).......... 97,011
- -------------------------------------------------------------------------------------------------------------------
TOTAL 76,431 91,034 140,713
===================================================================================================================
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released ABC
Audit Reports.
(3) Non-daily distribution is free distribution.
(4) Represents the year the Company started the publication.
8
In May 2004, the Company launched EL LATINO EXPRESO, a weekly
Spanish-language publication distributed in THE MORNING JOURNAL'S market area.
This publication was originally launched as a monthly and the distribution
frequency was subsequently increased to twice monthly and, in September 2004, to
weekly.
THE NEWS-HERALD and THE MORNING JOURNAL serve areas located directly
east and west of Cleveland, respectively. THE NEWS-HERALD, which is one of
Ohio's largest suburban newspapers, serves communities located in Lake and
Geauga counties, two of Ohio's five most affluent counties. Lake and Geauga
counties have populations of 229,769 and 94,462, respectively, and had
population growth of approximately nine percent and 36 percent, respectively,
from 1980 to 2004. Lake and Geauga counties have average household incomes of
$63,398 and $87,092, respectively, which are 0.3 percent and 38 percent above
the national average. THE MORNING JOURNAL serves an area that has a population
of 154,049 with population growth of approximately five percent from 1980 to
2004. Average household income is $62,430 in the area served by THE MORNING
JOURNAL. The Greater Cleveland Cluster benefits from a variety of synergies,
including advertising cross-sell arrangements and certain news gathering
resources.
CENTRAL NEW ENGLAND. The Company owns five daily and 26 non-daily
publications in the central New England area. The Company's publications in this
cluster include THE HERALD NEWS (Fall River, MA), the TAUNTON DAILY GAZETTE
(Taunton, MA), THE CALL (Woonsocket, RI), THE TIMES (Pawtucket, RI) and the KENT
COUNTY DAILY TIMES (West Warwick, RI), each of which is published daily, and two
groups of weekly newspapers serving southern Rhode Island, including South
County, THE NORTH ATTLEBOROUGH FREE PRESS (North Attleborough, MA), and O JORNAL
(Fall River, MA), a Portuguese-language weekly newspaper acquired in January
2004. The five daily newspapers have aggregate daily circulation of
approximately 64,000 and aggregate Sunday circulation of approximately 54,000.
The non-daily publications in this cluster have total distribution of
approximately 313,000.
The following table sets forth information regarding the Company's
publications in Central New England:
PUBLICATION YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3)
1872 1985 Fall River, MA 22,930 24,401
THE HERALD NEWS...........
TAUNTON DAILY GAZETTE..... 1848 1996 Taunton, MA 10,661 10,073
THE CALL.................. 1892 1984 Woonsocket, RI 14,131 19,223
THE TIMES................. 1885 1984 Pawtucket, RI 11,929
KENT COUNTY DAILY TIMES... 1892 1999 West Warwick, RI 4,142
Southern Rhode Island
Newspapers
8 publications........ 1854 1995 Wakefield, RI 38,363
Hometown Newspapers
6 publications........ 1969 1999 West Warwick, RI 44,030
Fall River, MA,
COUNTY KIDS Taunton, MA and
3 publications......... 1997 1997(4) Pawtucket, RI 49,509
Pawtucket and
NEIGHBORS................. 1999 1999(4) Woonsocket, RI 22,085
NORTHWEST NEIGHBORS....... 2002 2002 Woonsocket, RI 9,000
THE NORTH ATTLEBOROUGH North
FREE PRESS............. 1987 2003 Attleborough, MA 17,300
O JORNAL.................. 1975 2004 Fall River, MA 14,296
EL LATINO EXPRESO......... 2004 2004(4) Fall River, MA 13,500
HEALTHBEAT................ 2004 2004(4) Fall River, MA 22,219
TMC (3 publications)...... 83,066
- --------------------------------------------------------------------------------------------------------------------
TOTAL 63,793 53,697 313,368
====================================================================================================================
9
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released ABC
Audit Reports.
(3) Non-daily distribution includes both free and paid.
(4) Represents the year the Company started the publication.
THE HERALD NEWS and the TAUNTON DAILY GAZETTE are situated 14 miles
apart. Each is less than 40 miles south of Boston, Massachusetts and 25 miles
east of Providence, Rhode Island. The region's second largest shopping mall,
located in Taunton, contains one million square feet of retail space and
approximately 150 stores. THE HERALD NEWS serves an area that has a population
of 168,361 and had population growth of approximately four percent from 1980 to
2004. The market area served by THE HERALD NEWS has average household income of
$53,552. The TAUNTON DAILY GAZETTE serves an area that has a population of
143,972 and had population growth of approximately 39 percent from 1980 to 2004.
The TAUNTON DAILY GAZETTE's market area has average household income of $68,470.
THE CALL serves an area that has a population of 193,806 and had population
growth of approximately 19 percent from 1980 to 2004. THE CALL'S market area has
average household income of $69,402, which is 10 percent above the national
average. THE TIMES serves an area that has a population of 204,272 and had
population growth of approximately 16 percent from 1980 to 2004. The market area
served by THE TIMES has average household income of $58,640. Southern Rhode
Island Newspapers serve an area that has a population of 168,731 and had
population growth of approximately 38 percent from 1980 to 2004. The market area
served by Southern Rhode Island Newspapers has average household income of
$79,375, which is 26 percent above the national average.
In August 2004, the Company launched EL LATINO EXPRESO, a weekly
Spanish-language publication distributed in the Fall River market. In January
2004, the Company expanded its reach to the large Portuguese community in
Central New England by acquiring O JORNAL, a weekly Portuguese-language
newspaper based in Fall River, Massachusetts, with distribution of approximately
14,300. O JORNAL serves a Portuguese community in Massachusetts and Rhode Island
estimated to have a population of 370,000. In 2003, the Company added to its
Central New England cluster with the acquisition of THE NORTH ATTLEBOROUGH FREE
PRESS, a weekly newspaper based in North Attleborough, Massachusetts, which has
distribution of approximately 17,300.
No local television stations exist in the communities served by the
Company's Central New England newspapers. Furthermore, the Company believes that
its Central New England properties benefit from the fragmentation of local radio
markets. The Company believes that each of its newspapers is a significant media
outlet in its respective community, and is an effective vehicle for area
advertisers.
The Central New England newspapers benefit from advertising cross-sell
arrangements, as well as significant production and editorial synergies. For
example, THE TIMES, THE CALL and the KENT COUNTY DAILY TIMES are printed at the
same facility, as are the TAUNTON DAILY GAZETTE, THE HERALD NEWS and O JORNAL.
Southern Rhode Island Newspapers are printed at the Company's NEW HAVEN REGISTER
facility.
CAPITAL-SARATOGA REGION OF NEW YORK. The Company owns three daily and
seven non-daily publications in the Capital-Saratoga Region of New York. The
Company's publications in this cluster include THE RECORD (Troy), THE SARATOGIAN
(Saratoga Springs), THE ONEIDA DAILY DISPATCH and the weekly COMMUNITY NEWS,
serving Clifton Park. In 2004, the Company expanded its Capital-Saratoga cluster
with the acquisition of Mohawk Valley Media, a group of three non-daily
publications based in Rome, New York, with distribution of approximately 28,600.
The daily newspapers have aggregate daily circulation of approximately 37,000
and aggregate Sunday circulation of approximately 34,000. The non-daily
publications in this cluster have total distribution of approximately 127,000.
The following table sets forth information regarding the Company's
publications in the Capital-Saratoga Region of New York:
10
YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
PUBLICATION ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3
THE RECORD.................. 1896 1987 Troy 19,776 21,551
Saratoga
THE SARATOGIAN.............. 1855 1998 Springs 10,924 12,303
THE ONEIDA DAILY DISPATCH.. 1850 1998 Oneida 6,795
Mohawk Valley Media
3 publications........... 1993 2004 Rome 28,600
COMMUNITY NEWS.............. 1969 1998 Clifton Park 30,475
Oneida-Chittenango
Pennysaver................ 1957 1998 Oneida 23,085
TMC (2 publications)........ 45,270
- ---------------------------------------------------------------------------------------------------------------------
TOTAL 37,495 33,854 127,430
=====================================================================================================================
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released ABC
Audit Reports.
(3) Non-daily distribution includes both paid and free distribution.
THE RECORD and THE SARATOGIAN are situated approximately 26 miles apart
in the Capital-Saratoga region of New York. THE RECORD serves an area that has a
population of 175,541, which has remained relatively stable since 1980. THE
RECORD's market has average household income of $54,407. THE SARATOGIAN serves
an area that has a population of 213,455 and had population growth of
approximately 27 percent from 1980 to 2004. THE SARATOGIAN'S market area has
average household income of $66,062. THE ONEIDA DAILY DISPATCH serves an area
that has a population of 73,526, and had population growth of approximately two
percent from 1980 to 2004. THE ONEIDA DAILY DISPATCH's market area has average
household income of $57,100. No local television stations exist in the
communities that the Company's Capital-Saratoga Region newspapers serve.
Furthermore, the Company believes that its Capital-Saratoga Region properties
benefit from the fragmentation of local radio markets. As a result, the Company
believes that its newspapers in the region are significant media outlets in
their respective communities, thereby making these newspapers attractive
vehicles for area advertisers. THE RECORD, THE SARATOGIAN and the COMMUNITY NEWS
benefit from significant cross-selling of advertising. These newspapers also
benefit from significant production and news gathering synergies. For example,
THE RECORD, THE SARATOGIAN and the COMMUNITY NEWS are printed at the Company's
operating facility in Troy, taking advantage of that facility's excess capacity
and achieving significant cost efficiencies.
MID-HUDSON REGION OF NEW YORK. The Company owns one daily newspaper and
17 non-daily publications in the Mid-Hudson Region of New York. The daily
newspaper in this cluster is the DAILY FREEMAN in Kingston. The Company's
non-daily publications in this cluster are: the Taconic Press group, a group of
12 non-daily newspapers serving Dutchess and Westchester counties in New York,
and THE PUTNAM COUNTY COURIER, serving Putnam County, New York; and Roe Jan
Independent Publishing, which includes two non-daily publications. The
Mid-Hudson Region cluster has daily circulation of approximately 21,500, Sunday
circulation of approximately 27,000 and total non-daily distribution of
approximately 690,000.
The following table sets forth information regarding the Company's
publications in the Mid-Hudson Region of New York:
YEAR YEAR PRINCIPAL DAILY SUNDAY NON-DAILY
PUBLICATION ORIGINATED(1) ACQUIRED LOCATION CIRCULATION(2) CIRCULATION(2) DISTRIBUTION(3)
DAILY FREEMAN.................. 1871 1998 Kingston 21,492 27,407
Taconic Press
12 publications.............. 1846 1998 Millbrook 585,242
Roe Jan Independent Publishing
2 publications............. 1973 2001 Hillsdale 19,431
WHEELS......................... 2001 2001(4) Kingston 38,463
DOORWAYS....................... 1983 1998 Kingston 29,244
TMC (1 publication)............ 19,902
- --------------------------------------------------------------------------------------------------------------------
TOTAL 21,492 27,407 692,282
====================================================================================================================
11
(1) For merged newspapers and newspaper groups, the year given reflects the
date of origination for the earliest publication.
(2) Circulation averages are according to the most recently released ABC
Audit Reports.
(3) Non-daily distribution includes both paid and free distribution.
(4) Represents the year the Company started the publication.
The DAILY FREEMAN and TACONIC PRESS serve markets in the Mid-Hudson
region of New York. THE DAILY FREEMAN serves an area that has a population of
283,106 and had population growth of approximately 13 percent from 1980 to 2004.
THE DAILY FREEMAN'S market area has average household income of $59,472. The
Taconic Press newspaper group based in Dutchess County serves an area that has a
population of 103,738 and had population growth of approximately 17 percent from
1980 to 2004. The Taconic Press publications serve markets with average
household income of $76,366, which is 21 percent above the national average. THE
PUTNAM COUNTY COURIER, the largest Taconic Press non-daily publication, serves
an area that has a population of 99,830 and had population growth of
approximately 35 percent from 1980 to 2004. THE PUTNAM COUNTY COURIER'S market
area has average household income of $99,321, which is 57 percent above the
national average. Roe Jan Independent Publishing, Inc., which is based in
Hillsdale, New York, publishes two non-daily publications. Markets served by Roe
Jan have average household income of $67,792, which is seven percent above the
national average. Roe Jan's publications serve an area that has a population of
162,311.
The Company's management believes that its Mid-Hudson Region properties
are the leading sources of local information in the markets they serve and
provide an attractive vehicle for area advertisers. Only one independent
television station (which serves a regional, rather than a local, audience)
exists in the communities that the Mid-Hudson Region publications serve, and the
local radio markets are fragmented.
The Mid-Hudson Region newspapers benefit from significant cross-selling
of advertising, as well as production and editorial synergies. Certain
publications in this cluster also benefit from advertising cross-selling with
certain newspapers in the Company's Connecticut cluster, including THE REGISTER
CITIZEN (Torrington, CT) and certain of the Housatonic Publications (New
Milford, CT), which serve Litchfield County, Connecticut.
ONLINE OPERATIONS
Journal Register Company operates 195 Websites, which are affiliated
with the Company's daily newspapers and non-daily publications, as well as
portal sites for each of its seven geographic clusters. The Company's online
objective is to have its Websites complement its print publications by providing
certain content from these publications, as well as unique content and
interactive features. The Company's Websites also provide an online marketplace
for its advertisers.
A number of the Websites can be accessed individually, through the
Company's "cluster" portal sites, which combine publications within a specific
geographic area, or through the Company's Corporate Website
(WWW.JOURNALREGISTER.COM). The remaining Company newspapers, along with
CONNECTICUT MAGAZINE, have individual Websites.
The following is a list of the Company's cluster/portal Websites:
GEOGRAPHIC CLUSTER CLUSTER/PORTAL SITE
(number of individual Websites)
Greater Philadelphia................................www.allaroundphilly.com (79)
Michigan............................................www.micentral.com (24)
Connecticut.........................................www.ctcentral.com (46)
Greater Cleveland...................................www.allaroundcleveland.com (6)
Central New England.................................www.ricentral.com (16)
Capital-Saratoga Region of New York.................www.capitalcentral.com (9)
Mid-Hudson Region of New York.......................www.midhudsoncentral.com (14)
12
The primary source of online revenue is classified advertising. For
the year ended December 26, 2004, the Company's Websites generated approximately
$6.2 million of revenue as compared to approximately $4.7 million for the fiscal
year ended December 28, 2003, an increase of 31.0 percent.
ADVERTISING
Substantially all of the Company's advertising revenues are derived
from a diverse group of local retailers and classified advertisers. 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. Local advertising is typically more
stable than national advertising because a community's need for local services
provides a stable base of local businesses and because local advertisers
generally have fewer effective advertising vehicles from which to choose.
Advertising revenues accounted for approximately 76 percent of the
Company's total revenues for fiscal year 2004. The Company's advertising rate
structures vary among its publications and are a function of various factors,
including advertising effectiveness, local market conditions and competition, as
well as circulation, readership, demographics and type of advertising (whether
display, classified or national). In fiscal year 2004, local and regional
display advertising accounted for the largest share of the Company's advertising
revenues (approximately 55.0 percent), followed by classified advertising
(approximately 39.7 percent) and national advertising (approximately 5.3
percent). The Company's advertising revenues are not reliant upon any one
company or industry, but rather are supported by a variety of companies and
industries, including financial institutions, realtors, car dealerships, grocery
stores, universities, hospitals and many other local businesses. No single
advertiser accounted for more than one percent of the Company's total fiscal
year 2004 revenues.
The Company's corporate management works with its local newspaper
management to approve advertising rates and to establish goals for each year
during a detailed annual budget process. As a result, local management is given
little latitude for discounting from the approved rates. Corporate management
also works with local advertising staffs to develop marketing kits and
presentations utilizing the results of third-party research studies and internal
marketing resources. A portion of the compensation for the Company's publishers
is based upon increasing advertising revenues. The Company stresses the timely
collection of receivables. Compensation of the Company's sales personnel depends
in part upon performance relative to goals and timely collection of advertising
receivables. Additionally, corporate management facilitates the sharing of
advertising resources and information across the Company's publications, and the
Company's publishers aggressively pursue cross-selling of advertising within
their respective geographic areas. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors Which May Affect
the Company's Future Performance - Dependence on Local Economies."
CIRCULATION
The Company's circulation revenues are derived from home delivery sales
of publications to subscribers and single copy sales made through retailers and
vending racks. Circulation accounted for approximately 20.3 percent of the
Company's total revenues in fiscal year 2004. Approximately 62 percent of fiscal
year 2004 circulation revenues were derived from subscription sales and
approximately 38 percent from single copy sales. Single copy rates range from
$0.35 to $0.50 per daily copy and $0.75 to $1.75 per Sunday copy. 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 in
an NAA readership study. Single copy sales also tend to generate a higher profit
margin than subscription sales, as single copy sales generally have higher per
unit prices and lower distribution costs. As of December 26, 2004, the Company
had total daily paid circulation of approximately 653,000, paid Sunday
circulation of approximately 700,000 and non-daily distribution of approximately
5 million, most of which is distributed free of charge.
The Company's corporate management works with its local newspaper
management to establish subscription and single copy rates. In addition, the
Company tracks rates of newspaper returns and customer service calls in an
effort to optimize the number of newspapers available for sale and to improve
delivery and customer service. The Company also implements creative and
interactive programs and promotions to increase readership through both
subscription and single copy sales. The most recent Fall 2004 Scarborough
Research studies, which measured all 27 of the Company's daily newspapers and
several of its non-daily publications, reported a 2.1 percent average gain in
overall daily readership and a 3.1 percent average gain in overall Sunday
readership as compared to the results from Scarborough Research's Spring 2004
studies for the Company's publications that were measured.
13
In recent years, circulation has generally declined throughout the newspaper
industry, and the Company's newspapers have generally experienced this trend.
The Company believes that recent changes in telemarketing rules and regulations
have impacted the ability of the Company to solicit new subscribers, as well as
the cost of such solicitation. Other methods to attract and retain subscribers
have been, and remain, in use by the Company. The Company seeks to maximize its
overall operating performance rather than maximizing circulation of its
individual newspapers.
OTHER OPERATIONS
As of December 26, 2004, the Company owned and operated three
commercial printing facilities: Imprint Print in North Haven, Connecticut;
Nittany Valley Offset in State College, Pennsylvania; and InterPrint in Bristol,
Pennsylvania. Certain of the Company's publications are printed at these
facilities, in addition to the products printed for non-affiliated entities.
Commercial printing operations and other revenues accounted for approximately
3.7 percent of the Company's total revenues in fiscal year 2004.
EMPLOYEES
As of December 26, 2004, the Company employed approximately 6,200
full-time and part-time employees, or 5,400 full-time equivalents ("FTEs").
Approximately 20 percent of the Company's employees are employed under
collective bargaining agreements. The Company anticipates that collective
bargaining agreements at nine newspapers, representing approximately 25 percent
of the employees covered by collective bargaining agreements, will be
renegotiated in 2005.
RAW MATERIALS
The basic raw material for newspapers is newsprint. In fiscal year
2004, the Company consumed approximately 56,000 metric tons of newsprint,
excluding paper consumed in its commercial printing operations. The average
price per metric ton of newsprint based on East Coast transactions prices in
2004, 2003 and 2002 was approximately $550, $503 and $465, respectively, as
reported by the trade publication, PULP AND PAPER WEEKLY. The Company purchases
the majority of its newsprint through its central purchasing group, Journal
Register Supply. The Company has no long-term contracts to purchase newsprint.
Generally, Journal Register Supply purchases most of its newsprint from one or
two suppliers, although in the future the Company may purchase newsprint from
other suppliers. Historically, the percentage of newsprint from each supplier
has varied. The Company's management believes that concentrating its newsprint
purchases in this way provides a more secure newsprint supply and lower unit
prices. The Company's management also believes that it purchases newsprint at
price levels lower than those that are available to individually owned small
metropolitan and suburban newspapers, and consistent with price levels generally
available to the largest newsprint purchasers. The available sources of
newsprint have been, and the Company believes will continue to be, adequate to
supply the Company's needs. The inability of the Company to obtain an adequate
supply of newsprint in the future could have a material adverse effect on the
financial condition and results of operations of the Company.
Historically, the price of newsprint has been cyclical and subject to
price fluctuations. The Company's average price per ton of newsprint for the
full fiscal year increased approximately nine percent in 2004, increased
approximately eight percent in 2003 and decreased approximately 22 percent in
2002, each as compared to the preceding year. The Company believes that if any
price decrease or increase is sustained in the industry, the Company will also
be impacted by such change. The Company seeks to manage the effects of increases
in prices of newsprint through a combination of, among other things, technology
improvements, inventory management and advertising and circulation price
increases. In fiscal year 2004, the Company's newsprint cost (excluding paper
consumed in the Company's commercial printing operations) was approximately
seven percent of the Company's newspaper revenues.
COMPETITION
While most of the Company's newspapers do not have daily newspaper
competitors that are published in the same city, in certain of the Company's
markets, there is such direct competition. Most of the Company's newspapers
compete with other newspapers published in nearby cities and towns and with free
distribution and paid advertising weeklies, as well as other print and non-print
media. Competition for advertising and paid circulation comes from local,
regional and national newspapers, shoppers, television, radio, direct mail,
online services and other forms of communication and advertising media.
Competition for advertising revenue is largely based upon advertiser results,
readership, advertising rates, demographics and circulation levels, while
competition for
14
circulation and readership is based largely upon the content of the newspaper,
its price and the effectiveness of its distribution. The Company's management
believes that its publications generally have been able to compete effectively
with other publications and other forms of media advertising. Commercial
printing, a highly competitive business, is largely driven by price and quality.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors Which May Affect the Company's Future Performance -
Newspaper Industry Competition."
SEASONALITY
Newspaper companies tend to follow a distinct and recurring seasonal
pattern. The first quarter of the year (January-March) tends to be the weakest
quarter because advertising volume is then at its lowest level. Correspondingly,
the fourth quarter (October-December) tends to be the strongest quarter, as it
includes heavy holiday season advertising.
ENVIRONMENTAL MATTERS
As is the case with other newspaper and similar publishing companies,
the Company is subject to a wide range of federal, state and local environmental
laws and regulations pertaining to air and water quality, storage tanks and the
management and disposal of waste at its facilities. To the best of the Company's
knowledge, its operations are in material compliance with applicable
environmental laws and regulations as currently interpreted. Management believes
that continued compliance with these laws and regulations will not have a
material adverse effect on the Company's financial condition or results of
operations.
REGULATION
Paid or requestor circulation newspapers with "periodical" mailing
privileges are required to obtain a "periodical" permit from, and file an annual
Statement of Ownership, Mailing and Circulation with the United States Postal
Service. Recent changes in telemarketing rules and regulations have impacted the
ability of the Company to solicit new subscribers, as well as the cost of such
solicitation. There is no significant regulation with respect to acquisition of
newspapers other than filings under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
CORPORATE GOVERNANCE AND AVAILABLE INFORMATION
The Company's Board of Directors has elected a lead independent
director, who will preside over executive sessions of the Board. Currently,
seven of the nine members of the Board of Directors, constituting all of the
non-management directors, are independent under the listing standards adopted by
the New York Stock Exchange, and all directors who serve on the Board's Audit
Committee, Compensation Committee and Corporate Governance Committee are
independent. Pursuant to the Company's pre-approval policy, the Audit Committee
approves in advance the services to be provided by the Company's independent
auditors. The Company has filed the required certifications under Section 302 of
the Sarbanes-Oxley Act of 2002 regarding the quality of the Company's public
disclosures, and the Company's Chairman, President and Chief Executive Officer
has certified to the New York Stock Exchange that he is not aware, as of the
date of such certification, of any violation by the Company of the New York
Stock Exchange Corporate Governance Listing Standards.
The Company makes available a wide variety of information free of
charge on its Website at WWW.JOURNALREGISTER.COM. The Company's filings with the
U.S. Securities and Exchange Commission (the "SEC") are available on the
Company's Website as soon as reasonably practicable after the reports are
electronically filed with the SEC. The Company's Website also contains news
releases, financial information, Company profiles and certain corporate
governance information, including copies of the Company's Corporate Governance
Guidelines, the Company's Code of Business Conduct and Ethics, the Company's
Code of Ethics for CEO and Other Senior Financial Officers, the Company's Audit
Committee Pre-Approval Policy, the charters of each of the Committees of the
Board of Directors, and information regarding how interested parties may contact
the Board, the lead director or the non-management directors as a group. Mailed
copies of such information can be obtained free of charge by writing to the
Company at Journal Register Company, Investor Relations, State Street Square, 50
West State Street, Trenton, NJ 08608-1298, Attention: Corporate Secretary. The
contents of the Company's Websites are not incorporated into this filing.
15
ITEM 2. PROPERTIES.
As of December 26, 2004, the Company operated approximately 200
facilities in the course of producing and publishing its daily and non-daily
publications. Approximately 150 of these facilities are leased for terms ranging
from month-to-month to eleven years. These leased facilities range in size from
approximately 180 to approximately 60,000 square feet. Except as otherwise
noted, the facilities identified below are utilized for office space. The
location and approximate size of the principal physical properties used by the
Company at December 26, 2004, as well as the expiration date of the leases
relating to such properties that the Company leases, are set forth below:
OWNED LEASED LEASE
LOCATION SQUARE FEET SQUARE FEET EXPIRATION DATE
- -----------------------------------------------------------------------------------------------------------------
Ardmore, PA........................... 25,250
Bristol, CT........................... 40,000
Bristol, PA........................... 70,000(1)
Clinton Twp., MI...................... 33,550(1)
Exton, PA............................. 86,395(1)
Fall River, MA........................ 53,371(1)
Fort Washington, PA................... 23,490 7,500 9/30/05
Kingston, NY.......................... 25,800(1)
Lansdale, PA.......................... 22,400
Lapeer, MI............................ 10,000(1)
Lorain, OH............................ 68,770(1)
Madison Heights, MI................... 41,247 2/28/07
Middletown, CT........................ 30,000
Mt. Clemens, MI....................... 30,125 8/16/14
Mt. Pleasant, MI...................... 60,000(1) 7/31/15
New Britain, CT....................... 33,977(1)
New Haven, CT......................... 205,000(1)
Norristown, PA........................ 40,000
North Haven, CT....................... 24,000(1) 10,000(1)(2) 12/31/04
Oneida, NY............................ 24,000(1)
Pawtucket, RI......................... 41,096
Pontiac, MI........................... 79,762(1)
Pottstown, PA......................... 48,000
Primos, PA............................ 85,000(1)
State College, PA..................... 23,365(1) 3,000(2) 7/31/05
Southgate, MI......................... 19,735 10/31/09
Taunton, MA........................... 21,100
Torrington, CT........................ 41,370(1)
Trenton, NJ........................... 51,489(1) 22,172 11/30/10
Troy, NY.............................. 50,000(1)
West Chester, PA...................... 34,000
Willoughby, OH........................ 80,400(1)
Woonsocket, RI........................ 50,938(1)
- -----------------------------------------------------------------------------------------------------------------
(1) Production facility
(2) Warehouse
Management believes that all of its properties are in good condition,
are generally well maintained and are adequate for their current operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in a number of litigation matters that have
arisen in the ordinary course of business. The Company believes that the outcome
of these legal proceedings will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 15, 2005
with respect to each person who is an executive officer of the Company:
OFFICER POSITION
Robert M. Jelenic Chairman, President and Chief Executive Officer
Jean B. Clifton Executive Vice President, Chief Financial Officer and Director
Thomas E. Rice Senior Vice President, Operations
Allen J. Mailman Senior Vice President, Technology
Marc S. Goldfarb Vice President, General Counsel and Corporate Secretary
ROBERT M. JELENIC is Chairman, President and Chief Executive Officer
of the Company. He has been President and Chief Executive Officer since the
inception of the Company, and has been a director of the Company and its
predecessors for over ten years. A Chartered Accountant, Mr. Jelenic began his
business career with Arthur Andersen in Toronto, Canada. Mr. Jelenic has 29
years of senior management experience in the newspaper industry, including 12
years with the Toronto Sun Publishing Corp. Mr. Jelenic graduated Honors,
Bachelor of Commerce from Laurentian University, Sudbury, Ontario. Mr. Jelenic
is a director of the Audit Bureau of Circulations ("ABC") and Lamar Advertising
Company. Mr. Jelenic is 54 years old.
JEAN B. CLIFTON is Executive Vice President and Chief Financial Officer
of the Company, positions she has held since the Company's inception. Ms.
Clifton has also been a director of the Company and its predecessors for over
ten years. Ms. Clifton, a Certified Public Accountant, began her business career
at Arthur Young & Co. (a predecessor to Ernst & Young LLP). Ms. Clifton has 19
years of senior management experience in the newspaper industry. Ms. Clifton is
a member of the Board of Directors of the NAA, as well as a member of the Board
of Directors of the Fresh Air Fund, and the Board of Directors of the Lower
Bucks County Chapter of the American Red Cross. Ms. Clifton received a Bachelor
of Business Administration in 1983 from the University of Michigan. Ms. Clifton
is 44 years old.
THOMAS E. RICE is Senior Vice President of Operations of the Company, a
position he has held since November 2000. From the inception of the Company to
November 2000, Mr. Rice was located in St. Louis, Missouri, where he was
President and Chief Executive Officer of Suburban Newspapers of Greater St.
Louis and THE TELEGRAPH in Alton, Illinois, which the Company sold in 2000. Mr.
Rice began his career with Lee Enterprises in 1963 and has held senior
management positions with Tribune Company, The Times Mirror Company, MediaNews
Group and the Chicago Sun Times. Mr. Rice has 42 years of experience in the
newspaper industry. Mr. Rice is a member of the Newsprint Committee of the NAA.
Mr. Rice attended the University of Nebraska and Roosevelt University in
Chicago. Mr. Rice is 60 years old.
ALLEN J. MAILMAN is Senior Vice President of Technology of the Company,
a position he has held since February 1999. From March 1994 to February 1999, he
was Vice President of Technology of the Company. From the Company's inception in
1990 to March 1994, Mr. Mailman was Corporate Director of Information Services
of the Company. Mr. Mailman has 30 years of management experience in the
newspaper industry, including 14 years with Advance Publications, Inc. Mr.
Mailman received a Bachelor of Arts degree in Economics and Mathematics from the
University of Oklahoma. Mr. Mailman is 58 years old.
MARC S. GOLDFARB is Vice President, General Counsel and Corporate
Secretary of the Company. He has been Vice President and General Counsel since
January 2003, and was appointed Corporate Secretary of the Company in May 2003.
From July 1998 to January 2003, he served as Managing Director and General
Counsel of The Vertical Group, an international private equity firm. Prior to
that, Mr. Goldfarb was a Partner at Bachner, Tally, Polevoy & Misher LLP. Mr.
Goldfarb has 17 years of diverse legal, financial and strategic experience. Mr.
Goldfarb earned his Juris Doctor from the University of Pennsylvania and his
Bachelor of Science degree from Cornell University. Mr. Goldfarb is 41 years
old.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, par value $0.01 per share (the "Common
Stock"), commenced trading on the New York Stock Exchange on May 8, 1997 under
the symbol "JRC." The following table reflects the high and low sale prices for
the Common Stock, based on the daily composite listing of stock transactions for
the New York Stock Exchange, for the periods indicated:
YEAR QUARTER LOW HIGH
-----------------------------------------------------
2003 First $14.85 $18.26
Second $15.10 $18.90
Third $17.90 $19.49
Fourth $18.69 $20.40
-----------------------------------------------------
2004 First $19.60 $21.31
Second $19.08 $22.10
Third $18.50 $20.66
Fourth $17.65 $19.62
On March 15, 2005, there were approximately 60 stockholders of record
of the Company's Common Stock. The Company believes that there are approximately
7,900 beneficial owners of its shares of Common Stock.
The Company has not historically paid dividends on its Common Stock,
although the Company may elect to pay such dividends in the future. The
Company's Credit Agreement (as hereinafter defined) places certain limitations
on the Company's ability to pay dividends or make any other distributions on the
Common Stock. See Note 4 of "Notes to Consolidated Financial Statements." Any
future determination as to the payment of dividends will be subject to such
prohibitions and limitations, will be at the discretion of the Company's Board
of Directors and will depend on the Company's results of operations, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors.
Journal Register Company conducts its operations through direct and
indirect subsidiaries. The Company's available cash will depend upon the cash
flow of its subsidiaries and the ability of such subsidiaries to make funds
available to the Company in the form of loans, dividends or otherwise. The
subsidiaries are separate and distinct legal entities and have no legal
obligation, contingent or otherwise, except as required by the Credit Agreement,
to make funds available to the Company, whether in the form of loans, dividends
or otherwise. The Credit Agreement is secured by substantially all of the assets
of the Company and the common stock and assets of the Company's subsidiaries. In
addition, the Company's subsidiaries may, subject to limitations contained in
the Credit Agreement, become parties to financing arrangements that may contain
limitations on the ability of such subsidiaries to pay dividends or to make
loans or advances to the Company. In the event of any insolvency, bankruptcy or
similar proceeding of a subsidiary, creditors of such subsidiary would generally
be entitled to priority over the Company with respect to assets of the affected
subsidiary.
18
Item 6. Selected Financial Data.
The following selected financial data (except number of publications)
has been derived from the audited financial statements of the Company and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto included elsewhere in this report:
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DEC. 26, DEC. 28, DEC. 29, DEC. 30, DEC. 31,
FISCAL YEAR ENDED(1) 2004 2003 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
REVENUES:
Advertising $ 361,591 $ 298,986 $ 297,056 $ 287,859 $ 343,130
Circulation 96,770 90,034 91,123 87,737 96,852
- ------------------------------------------------------------------------------------------------------------------------------
Newspaper revenues 458,361 389,020 388,179 375,596 439,982
Commercial printing and other 17,366 16,966 19,575 18,809 23,987
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL 475,727 405,986 407,754 394,405 463,969
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 181,888 155,355 150,614 140,522 155,161
Newsprint, ink and printing charges(2) 38,678 31,181 32,023 37,741 46,533
Selling, general and administrative(2) 66,389 51,932 52,976 47,810 47,008
Depreciation and amortization 17,153 15,447 14,927 26,317 27,616
Other 66,339 58,334 56,866 53,474 58,395
- ------------------------------------------------------------------------------------------------------------------------------
370,447 312,249 307,406 305,864 334,713
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 105,280 93,737 100,348 88,541 129,256
- ------------------------------------------------------------------------------------------------------------------------------
Net interest expense and other (19,362) (15,627) (23,677) (30,490) (48,020)
Gains on sales of newspaper properties - - - 32,212 180,720
Write-off of debt issuance costs (1,211) - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes and
equity interest 84,707 78,110 76,671 90,263 261,956
Provision (benefit) for income taxes (31,806) 6,120 27,444 10,818 90,951
- ------------------------------------------------------------------------------------------------------------------------------
Income before equity interest 116,513 71,990 49,227 79,445 171,005
Equity interest - - - (1,313) (1,624)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 116,513 $ 71,990 $ 49,227 $ 78,132 $ 169,381
==============================================================================================================================
Net income per common share:
Basic $ 2.78 $ 1.75 $ 1.18 $ 1.85 $ 3.74
Diluted $ 2.74 $ 1.72 $ 1.16 $ 1.83 $ 3.72
==============================================================================================================================
OTHER DATA:
EBITDA(3) $ 122,433 $ 109,184 $ 115,275 $ 114,858 $ 156,871
EBITDA Margin(3) 25.7% 26.9% 28.3% 29.1% 33.8%
Free cash flow, as adjusted(3) $ 71,388 $ 58,916 $ 61,631 $ 57,136 $ 86,701
Free cash flow, as adjusted, per diluted share(3) $ 1.68 $ 1.41 1.46 1.34 1.91
Capital expenditures(4) $ 14,893 $ 15,129 $ 13,010 $ 34,929 $ 21,550
Number of publications, end of period:
Daily 27 23 23 23 24
Non-Daily 338 236 233 206 158
==============================================================================================================================
BALANCE SHEET DATA:
Total current assets
$ 94,034 $ 58,087 $ 65,383 66,573 $ 79,359
Property, plant and equipment, net $ 158,005 $ 126,013 $ 125,680 $ 124,440 $ 104,178
Total assets $ 1,183,518 $ 693,060 $ 701,703 $ 711,171 $ 657,350
Total current liabilities, less current
maturities of long-term debt $ 76,884 $ 45,632 $ 52,069 $ 62,877 $ 51,542
Total senior debt, including current maturities $ 778,300 $ 418,345 $ 483,369 $ 522,771 $ 494,635
Stockholders' equity (deficit) $ 200,320 $ 72,344 $ (3,879) (36,198) $ (55,726)
19
- ------------------------
(1) The Company has a 52/53 week fiscal year generally ending on the Sunday
closest to the end of the calendar year. The Company's fiscal year ended
December 31, 2000 consisted of 53 weeks. All other fiscal years included
above consisted of 52 weeks.
(2) Certain operating expenses related to certain of the Company's
acquisitions have been reclassified in 2002 and 2003 to conform to the
Company's financial presentation. The reclassification had no impact on
total operating expenses, operating income, EBITDA or net income.
(3) EBITDA is defined by the Company 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. 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 measures of performance calculated in
accordance with generally accepted accounting principles in the United
States ("GAAP"), such as operating income or net income.
The 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. EBITDA is also the basis of certain covenants
contained in the Company's Credit Agreement. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." 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.
However, not all companies calculate EBITDA (and EBITDA margin) and free
cash flow using the same methods; therefore, the EBITDA and free cash flow
figures set forth above may not be comparable to EBITDA and free cash flow
reported by other companies. Free cash flow per share is calculated using
the weighted-average shares outstanding on a fully diluted basis.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Reconciliation of Certain Non-GAAP Financial
Measures" for a reconciliation of non-GAAP financial measures used in this
report to the most directly comparable GAAP financial measures.
(4) Capital expenditures, excluding capitalized interest, related to the
Company's Philadelphia printing facility (Journal Register Offset) were
$22.8 million and $10.8 million in fiscal years 2001 and 2000,
respectively. Capitalized interest associated with Journal Register Offset
was $1.3 million in fiscal year 2001 and $601,000 in fiscal year 2000.
These expenditures have been excluded from the calculation of free cash
flow due to the large and non-recurring nature of the Journal Register
Offset project. Journal Register Offset began operating in December 2001.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND THE
OTHER FINANCIAL INFORMATION APPEARING ELSEWHERE IN THIS REPORT.
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 December 26, 2004, the Company owned and operated 27 daily
newspapers and 338 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 653,000, total paid Sunday circulation of approximately 700,000
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 the newspaper industry in executing a
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 (76.0 percent of
fiscal year 2004 revenues), paid circulation (20.3 percent of fiscal year 2004
revenues), including single copy sales and subscription sales, and commercial
printing and other activities (3.7 percent of fiscal year 2004 revenues).
Advertising revenues are comprised of three basic categories: retail
(approximately 55.0 percent of fiscal year 2004 advertising revenues);
classified (approximately 39.7 percent of fiscal year 2004 advertising
revenues); and national (approximately 5.3 percent of fiscal year 2004
advertising revenues). The Company's advertiser base is predominantly local. The
Company's newspapers seek to produce desirable results for local advertisers by
targeting readers based on certain geographic and demographic characteristics.
The Company seeks to increase readership, and thereby generate traffic for its
advertisers, by focusing on high product quality, compelling and often
proprietary local content and creative and interactive promotions.
The Company's advertising revenues are derived primarily from a broad
group of local advertisers. No single advertiser accounted for more than one
percent of the Company's total fiscal year 2004 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 $6.2 million are included in
advertising revenues for the fiscal year ended December 26, 2004 and constituted
approximately 1.7 percent of total advertising revenues during the year. The
Company's online objective is to make its Websites, all of which are accessible
through WWW.JOURNALREGISTER.COM, the local
21
information portal for their respective markets by establishing such Websites as
the indispensable source of useful and reliable community news, sports,
information and advertising in their markets. The Company currently operates 195
Websites, which are affiliated with the Company's daily newspapers and non-daily
publications.
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 an 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
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 85 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 annualized 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 completed three additional acquisitions during 2004 and one
acquisition during 2003. 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, the Company acquired the assets of Berks-Mont
Newspapers, Inc., a privately held non-daily newspaper group, based in
Boyertown, Pennsylvania, that includes nine non-daily publications with combined
circulation of approximately 148,000. 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.
From September 1993 through December 2004, the Company completed 30
strategic acquisitions (including those described above), 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
FISCAL YEAR ENDED DECEMBER 26, 2004 COMPARED TO FISCAL YEAR ENDED DECEMBER 28,
2003
FOR COMPARISON PURPOSES, WHERE NOTED, THE COMPANY'S FISCAL YEAR 2004
AND 2003 RESULTS ARE PRESENTED ON A SAME-STORE BASIS, WHICH EXCLUDES THE
COMPANY'S ACQUISITIONS COMPLETED IN 2004 AND 2003.
SUMMARY. Net income for the fiscal year ended December 26, 2004
("fiscal year 2004") was $116.5 million, or $2.74 per diluted share, as compared
to $72.0 million, or $1.72 per diluted share, for the fiscal year ended December
28, 2003 ("fiscal year 2003"). Excluding the reversal of certain tax accruals in
fiscal year 2004 and in fiscal year 2003, which increased net income by $64.9
million in fiscal year 2004 and $22.8 million in fiscal year 2003, as well as a
special charge of approximately $0.7 million (net of tax effect) recorded in
fiscal year 2004 related to the extinguishment of the Company's refinanced
credit facility and a charge of $0.6 million (net of tax effect) recorded in
fiscal year 2003 related to a potential acquisition that was not consummated,
earnings for fiscal
22
year 2004 were $52.3 million, or $1.23 per diluted share, as compared to $49.8
million, or $1.19 per diluted share, for fiscal year 2003, an increase in net
income of 5.1 percent.
REVENUES. The Company's reported revenues were $475.7 million for
fiscal year 2004 as compared to $406.0 million for fiscal year 2003, an increase
of 17.2 percent. Newspaper revenues for fiscal year 2004 as compared to the
prior year period increased approximately $69.3 million, or 17.8 percent,
primarily as a result of an increase in revenues associated with the Company's
acquisitions of $60.7 million, an increase in same-store advertising revenues of
$10.9 million, or 3.7 percent, and an increase in reported circulation revenues
of $6.7 million, or 7.5 percent. The increase in circulation revenues was
related to the Company's acquisitions, partially offset by a 1.0 percent
decrease in same-store circulation revenues. Online revenues for fiscal year
2004, which are included in advertising revenues, were approximately $6.2
million, an increase of approximately 31.0 percent as compared to the prior year
period. Commercial printing and other revenues for fiscal year 2004 increased
$0.4 million, or 2.4 percent, to $17.4 million as compared to the prior year
period, and represented approximately 3.7 percent of the Company's revenues for
fiscal year 2004.
The following table sets forth the Company's total advertising
revenues, by category, for fiscal years 2004 and 2003:
FISCAL YEAR ENDED
-------------------------------------------------------------------
(IN THOUSANDS) DEC. 26, 2004 DEC. 28, 2003 INCREASE
---------------------------------------------------------------------------------------------------------------
Local $ 199,092 $ 164,882 20.7%
Classified 143,441 119,591 19.9%
National 19,058 14,513 31.3%
---------------------------------------------------------------------------------------------------------------
Total advertising revenues $ 361,591 $ 298,986 20.9%
===============================================================================================================
SAME-STORE NEWSPAPER REVENUES. On a same-store basis, total newspaper
revenues for fiscal year 2004 increased 2.6 percent to $399.0 million from
$389.0 million in fiscal year 2003. Same-store advertising revenues for fiscal
year 2004 were $309.9 million, a 3.7 percent increase over same-store
advertising revenues of $298.9 million in fiscal year 2003, primarily as a
result of increases in all categories of advertising revenues, including: retail
advertising revenues, up 1.7 percent; classified advertising revenues, up 4.9
percent; and national advertising revenues, up 15.8 percent, in each case as
compared to fiscal year 2003. The increase in classified advertising revenues
during fiscal year 2004 resulted primarily from a 13.4 percent increase in
classified real estate advertising revenues and a 10.5 percent increase in
classified employment advertising revenues, partially offset by a 7.4 percent
decrease in classified automotive advertising revenues. Same-store circulation
revenues decreased 1.0 percent in fiscal year 2004 to $89.1 million from $90.0
million in fiscal year 2003.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 38.2 percent of the Company's total revenues for fiscal year 2004, compared
to 38.3 percent for fiscal year 2003. Salaries and employee benefits increased
$26.5 million, or 17.1 percent, in fiscal year 2004 to $181.9 million, primarily
as a result of the Company's acquisitions. Same-store salaries and employee
benefits increased $1.0 million, or 0.7 percent, primarily due to an increase in
cash compensation partially offset by a decrease in employee benefit expense.
NEWSPRINT, INK AND PRINTING CHARGES. For fiscal year 2004, newsprint,
ink and printing charges were 8.1 percent of the Company's revenues, as compared
to 7.7 percent for fiscal year 2003. Newsprint, ink and printing charges
increased $7.5 million, or 24.0 percent, for fiscal year 2004 to $38.7 million
as compared to the prior year, due principally to the Company's acquisitions and
an increase in the unit cost of newsprint of approximately nine percent. On a
same-store basis, newsprint, ink and printing charges increased approximately
$1.4 million, or 4.5 percent, primarily due to the increase in newsprint
expense. The increase in newsprint expense was due to an increase in newsprint
prices of approximately nine percent, partially offset by a decrease in
newsprint consumption.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were 14.0 percent and 12.8 percent of the Company's
revenues for fiscal years 2004 and 2003, respectively. Selling, general and
administrative expenses increased $14.5 million, or 27.8 percent, for fiscal
year 2004 to $66.4 million as compared to the prior year, primarily due to the
Company's acquisitions and expenses associated with the Company's compliance
with Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). On a
same-store basis, selling, general and administrative expenses for fiscal year
2004 increased $3.8 million, or 7.4 percent, principally as
a result of costs associated with the Company's compliance with Sarbanes-Oxley
Section 404. The Company expects that it will continue to incur expenses
associated with ongoing Sarbanes-Oxley compliance and the initial implementation
of Sarbanes-Oxley in the Company's Michigan cluster.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were 3.6 percent and 3.8 percent of the Company's revenues for fiscal years 2004
and 2003, respectively. Depreciation and amortization expenses increased $1.7
million, or 11.0 percent, to $17.2 million for fiscal year 2004 as compared to
fiscal year 2003. This increase was primarily due to the Company's acquisitions
and increased amortization expense related to the new Credit Agreement.
OTHER EXPENSES. Other expenses were 13.9 percent and 14.4 percent of
the Company's revenues for fiscal year 2004 and 2003, respectively. Other
expenses increased 13.7 percent to $66.3 million in fiscal year 2004 from $58.3
million in fiscal year 2003, primarily as a result of the Company's
acquisitions. On a same-store basis, other expenses increased approximately $0.8
million, or 1.4 percent.
OPERATING INCOME. Operating income increased $11.5 million, or 12.3
percent, for fiscal year 2004 to $105.3 million as compared to $93.7 million in
fiscal year 2003 primarily due to the items described above.
NET INTEREST EXPENSE AND OTHER. Net interest expense and other
increased $3.7 million, or 23.9 percent, from $15.6 million in fiscal year 2003
to $19.4 million in fiscal year 2004. This increase was primarily due to higher
interest expense, which resulted from higher prevailing interest rates and an
increase in the Company's weighted average debt outstanding during fiscal year
2004 as compared to fiscal year 2003. The increase in the weighted average debt
outstanding is a result of the Company's August 2004 acquisition of 21st Century
Newspapers, partially offset by a reduction in average debt outstanding funded
by the Company's free cash flow.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate
was 39.1 percent for fiscal year 2004 as compared to 37.0 percent for fiscal
year 2003, excluding the reversal in each year of certain tax accruals, which
were determined to no longer be required.
OTHER INFORMATION. EBITDA for fiscal year 2004 was $122.4 million as
compared to $109.2 million for fiscal year 2003. Free cash flow was $71.4
million, or $1.68 per diluted share, for fiscal year 2004 as compared to $58.9
million, or $1.41 per diluted share, for fiscal year 2003. See "Reconciliation
of Certain Non-GAAP Financial Measures" below for more information regarding
non-GAAP financial measures and a reconciliation of EBITDA and free cash flow to
net income.
FISCAL YEAR ENDED DECEMBER 28, 2003 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
2002
FOR COMPARISON PURPOSES, WHERE NOTED, THE COMPANY'S FISCAL YEAR 2003
AND 2002 RESULTS ARE PRESENTED ON A SAME-STORE BASIS, WHICH EXCLUDES THE
COMPANY'S ACQUISITIONS COMPLETED IN 2003 AND 2002.
SUMMARY. Net income for the fiscal year ended December 28, 2003
("fiscal year 2003") was $72.0 million, or $1.72 per diluted share, as compared
to $49.2 million, or $1.16 per diluted share, for the fiscal year ended December
29, 2002 ("fiscal year 2002"). Excluding the reversal of certain tax accruals in
fiscal year 2003 and in fiscal year 2002, which increased net income by $22.8
million in fiscal year 2003 and $1.2 million in fiscal year 2002, as well as a
special charge of approximately $553,000 (net of related tax effect) recorded in
fiscal year 2003 related to a potential acquisition that was not consummated,
earnings for fiscal year 2003 were $49.8 million, or $1.19 per diluted share, as
compared to $48.1 million, or $1.14 per diluted share, for fiscal year 2002, an
increase in earnings per diluted share of 4.8 percent.
REVENUES. The Company's reported revenues were $406.0 million for
fiscal year 2003 as compared to $407.8 million for fiscal year 2002. Newspaper
revenues for fiscal year 2003 as compared to the prior year period increased
approximately $840,000, or 0.2 percent, primarily as a result of an increase in
advertising revenues of $1.9 million, or 0.6 percent, partially offset by a
decline in circulation revenues of $1.1 million, or 1.2 percent. The decrease in
circulation revenues was impacted by harsh winter weather in the first quarter
and at the end of fiscal year 2003. Online revenues for fiscal year 2003, which
are included in advertising revenues, were approximately $4.7 million, an
increase of approximately 19.4 percent as compared to the prior year period.
Commercial printing
24
and other revenues for fiscal year 2003 decreased $2.6 million, or 13.3 percent,
to $17.0 million as compared to the prior year period, and represented
approximately 4.2 percent of the Company's revenues for fiscal year 2003.
The following table sets forth the Company's total advertising
revenues, by category, for fiscal years 2003 and 2002:
FISCAL YEAR ENDED
-------------------------------------------------------------------
(IN THOUSANDS) DEC. 28, 2003 DEC. 29, 2002 INCREASE/(DECREASE)
---------------------------------------------------------------------------------------------------------------
Local $ 164,882 $ 164,012 0.5%
Classified 119,591 117,757 1.6%
National 14,513 15,287 (5.1)%
---------------------------------------------------------------------------------------------------------------
Total advertising revenues $ 298,986 $ 297,056 0.6%
===============================================================================================================
SAME-STORE NEWSPAPER REVENUES. On a same-store basis, total newspaper
revenues for fiscal year 2003 decreased 0.4 percent to $383.2 million from
$384.8 million in fiscal year 2002. Same-store advertising revenues for fiscal
year 2003 were $293.5 million, or basically even with same-store advertising
revenues of $293.7 million in fiscal year 2002, primarily as a result of an
increase in classified advertising revenues of 1.2 percent, offset by a 0.6
percent decrease in retail advertising revenues and a 5.1 percent decrease in
national advertising revenues, in each case as compared to fiscal year 2002. The
increase in classified advertising revenues during fiscal year 2003 resulted
from a 13.9 percent increase in classified real estate advertising revenues,
partially offset by a 2.2 percent decrease in classified automotive advertising
revenues and a decline in classified employment advertising revenues of 8.7
percent. Classified employment advertising revenues improved significantly
during the second half of fiscal year 2003, and were positive during each period
of the fourth quarter. Same-store circulation revenues, impacted by the harsh
winter weather, decreased 1.4 percent in fiscal year 2003 to $89.7 million from
$91.0 million in fiscal year 2002. Recent changes in telemarketing rules and
regulations may impact the ability of the Company to solicit new subscribers as
well as the cost of such solicitation.
SALARIES AND EMPLOYEE BENEFITS. Salaries and employee benefit expenses
were 38.3 percent of the Company's total revenues for fiscal year 2003, compared
to 36.9 percent for fiscal year 2002. Salaries and employee benefits increased
$4.7 million, or 3.1 percent, in fiscal year 2003 to $155.4 million, principally
as a result of an increase in pension costs, as well as additional salaries and
benefits associated with the Company's 2002 and 2003 acquisitions. Same-store
salaries and employee benefits increased $4.0 million, or 2.7 percent, primarily
due to an increase in pension costs.
NEWSPRINT, INK AND PRINTING CHARGES. For fiscal year 2003, newsprint,
ink and printing charges were 7.7 percent of the Company's revenues, as compared
to 7.9 percent for fiscal year 2002. Newsprint, ink and printing charges
decreased $0.8 million, or 2.6 percent, for fiscal year 2003 to $31.2 million as
compared to the prior year, due principally to a decrease in newsprint
consumption, partially offset by an increase in newsprint prices of
approximately eight percent. On a same-store basis, newsprint, ink and printing
charges decreased approximately $1.4 million, or 4.4 percent, primarily due to a
decrease in newsprint consumption, partially offset by an increase in newsprint
prices.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were 12.8 percent and 13.0 percent of the Company's
revenues for fiscal years 2003 and 2002, respectively. Selling, general, and
administrative expenses decreased $1.0 million, or 2.0 percent, for fiscal year
2003 to $51.9 million as compared to the prior year, primarily due to a
reduction in bad debt expense, resulting from increased monitoring and improved
collections of accounts receivable, as well as lower professional fees,
partially offset by increased general insurance costs and additional selling,
general and administrative costs associated with the Company's 2002 and 2003
acquisitions. On a same-store basis, selling, general and administrative
expenses for fiscal year 2003 decreased $1.2 million, or 2.4 percent,
principally as a result of a reduction in bad debt expense and professional
fees, partially offset by increased general insurance costs.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
were 3.8 percent and 3.7 percent of the Company's revenues for fiscal years 2003
and 2002, respectively. Depreciation and amortization expenses increased $0.5
million, or 3.5 percent, to $15.4 million for fiscal year 2003 as compared to
fiscal year 2002. This increase was primarily due to an increase in depreciation
related to recent capital expenditures.
25
OTHER EXPENSES. Other expenses were 14.4 percent and 13.9 percent of
the Company's revenues for fiscal year 2003 and 2002, respectively. Other
expenses increased 2.6 percent to $58.3 million in fiscal year 2003 from $56.9
million in fiscal year 2002, primarily as a result of increased circulation
expenses. On a same-store basis, other expenses increased approximately $1.2
million, or 2.1 percent.
OPERATING INCOME. Operating income decreased $6.6 million, or 6.6
percent, for fiscal year 2003 to $93.7 million as compared to $100.3 million in
fiscal year 2002 primarily due to the items described above.
NET INTEREST EXPENSE AND OTHER. Net interest expense and other
decreased $8.1 million, or 34.0 percent, from $23.7 million in fiscal year 2002
to $15.6 million in fiscal year 2003. This decrease was due to lower interest
expense, which resulted from lower interest rates and a reduction in the
Company's weighted average debt outstanding during fiscal year 2003 as compared
to fiscal year 2002, partially offset by an $850,000 special charge (excluding
related tax benefit) incurred in connection with a potential acquisition that
was not consummated.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate
was 37.0 percent for fiscal year 2003 as compared to 37.3 percent for fiscal
year 2002, excluding the reversal in each year of certain tax accruals which
were determined to no longer be required.
OTHER INFORMATION. EBITDA for fiscal year 2003 was $109.2 million as
compared to $115.3 million for fiscal year 2002. Free cash flow was $58.9
million, or $1.41 per diluted share, for fiscal year 2003 as compared to $61.6
million, or $1.46 per diluted share, for fiscal year 2002. See "Reconciliation
of Certain Non-GAAP Financial Measures" below for more information regarding
non-GAAP financial measures and a reconciliation of EBITDA and free cash flow to
net income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically generated strong positive
cash flow. The Company believes that cash flows from operations, future
borrowings and its ability to issue securities will be sufficient to fund its
operating needs, capital expenditure requirements and long-term debt obligations
and will provide it with the flexibility to finance its acquisition strategy and
share repurchase program.
The following table sets forth information with respect to the
Company's cash flows for fiscal years 2004, 2003 and 2002:
FISCAL YEAR ENDED
-------------------- -- ------------------ ---------------------
(IN THOUSANDS) DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
------------------------------- -------------------- -- ------------------ ---------------------
Operating activities $ 86,813 $ 81,411 $ 58,964
Investing activities $ (441,381) $(15,551) $(21,322)
Financing activities $ 354,588 $(65,862) $(37,719)
------------------------------- -------------------- -- ------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided from operating
activities was $86.8 million for fiscal year 2004 as compared to $81.4 million
in the prior year. Current assets were $94.0 million and current liabilities
were $76.9 million as of December 26, 2004. The outstanding balance on the
Revolving Credit Facility, in accordance with its terms, is classified as a
long-term liability.
CASH FLOWS FROM INVESTING ACTIVITIES. For fiscal year 2004, net cash
used in investing activities was $441.4 million as compared to $15.6 million for
fiscal year 2003. Cash used in investing activities in 2004 was for funding the
21st Century acquisition and for investments in property, plant and equipment.
The Company has a capital expenditure program of approximately $22
million in place for 2005 (excluding any payments related to a press replacement
project at The Macomb Daily), which includes spending on buildings; technology,
including prepress and business systems, computer hardware and software;
machinery; equipment; and vehicles. The Company believes its capital expenditure
program is sufficient to maintain or improve its current level and quality of
operations. The Company reviews its capital expenditure program periodically and
modifies it as required to meet current needs.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash provided by financing
activities was $354.6 million in fiscal year 2004 as compared to net cash used
in financing activities of $65.9 million in fiscal year 2003. Net cash provided
by financing activities reflects the $795.0 million of proceeds from the
Company's new Credit Agreement,
26
which were used to repay amounts outstanding under the prior credit facility, to
finance the 21st Century acquisition and to pay associated debt financing fees.
Net cash provided by financing activities also reflects the utilization of cash
flows from operations to repay debt and cash flows provided by stock option
exercises.
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. The Company
did not repurchase any shares in fiscal year 2004.
DEBT AND INTEREST RATE DERIVATIVES. The Company entered into a new
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
provided for in the Credit Agreement. To date, the Company has not drawn down on
the Incremental Facility. As of December 26, 2004, the maximum availability
under the Revolving Credit Facility was $266.3 million (including the impact of
$5.4 million in outstanding letters of credit issued under the Credit
Agreement), with approximately $160 million currently available based on the
terms of the Credit Agreement.
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.
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 the Company's debt to the Company's
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.
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, the Company entered into certain IRPAs
that consist of (i) interest rate collars ("Collars") that establish a base
interest rate ceiling ("Cap") and a base interest rate floor ("floor") and (ii)
interest rate swaps ("Swaps") in which the Company exchanges a portion of its
floating rate debt for fixed rate debt, in each case at no initial cost to the
Company. Pursuant to the terms of the Collars, 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 fixed notional amount, as set forth in the chart
below. As of December 26, 2004, the aggregate notional amount of outstanding
Collars in effect was $300 million.
The following table summarizes the Company's existing Collars and
contracts for Collars that have an effective date occurring in the future, in
each case at December 26, 2004:
EFFECTIVE DATE CAP (%) FLOOR (%) NOTIONAL AMOUNT TERM
January 29, 2003 4.0 1.54 $150 million 2 years
August 20, 2004 4.5 2.05 $50 million 2 years
October 29, 2004 4.5 2.08 $100 million 2 years
27
January 29, 2005 4.5 2.38 $50 million 2 years
January 29, 2005 4.5 2.47 $100 million 2 years
January 29, 2007 6.0 3.39 $100 million 2.75 years
Pursuant to the terms of the Swaps, in the event 90-day LIBOR exceeds
the fixed interest rate, the Company will receive cash from the issuers to
compensate for the rate in excess of the fixed rate. If the 90-day LIBOR is
lower than the fixed rate, the Company will pay cash to the issuers to
compensate for the rate below the fixed rate.
The following table summarizes the Company's existing Swaps and
executed contracts for Swaps not yet effective, in each case at December 26,
2004:
EFFECTIVE DATE FIXED RATE (%) NOTIONAL AMOUNT TERM
December 3, 2004 3.48 $50 million 3 years
April 1, 2005 4.06 $100 million 4.75 years
April 1, 2005 4.085 $112 million(1) 4.75 years
(1) Represents the average of an amortizing notional amount.
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 fiscal years ended December
26, 2004 and December 28, 2003. The total deferred loss reported in OCI as of
December 26, 2004 and December 28, 2003 was approximately $26,000 and $1.5
million, respectively (net of $18,000 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 3.5 percent for the fiscal year ended December 26, 2004. These
interest rates reflect the effect of a $2.1 million pre-tax charge realized and
reported as a component of interest expense for the period related to the
Company's IRPAs in place during 2004.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS. As of December 26, 2004, the
Company had outstanding indebtedness under the Credit Agreement, due and payable
in installments through 2012, of $778.3 million, of which $153.3 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 years are as follows (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 (IN THOUSANDS):
28
December 31, 2009 $ 21,250
December 31, 2010 63,750
November 12, 2011 340,000
As of December 26, 2004, the maximum availability under the Revolving
Credit Facility was $266.3 million (including the impact of $5.4 million in
outstanding letters of credit issued under the Credit Agreement), with
approximately $160 million currently available based on the terms of the Credit
Agreement.
The Term Loans and Revolving Credit Facility are secured by
substantially all of the assets of the Company and the common stock and assets
of the Company's subsidiaries. The Term Loans and Revolving Credit Facility
require compliance with certain covenants, which require, among other things,
maintenance of certain financial ratios, which may restrict among other things,
the Company's ability to declare dividends, purchase treasury stock, incur
additional indebtedness, create liens, sell assets, consummate mergers and make
capital expenditures, investments and acquisitions. As of December 26, 2004, the
Company was in compliance with the financial covenants contained in the Credit
Agreement.
The following table summarizes the Company's significant contractual
obligations at December 26, 2004. Information regarding recurring purchases of
materials for use in the Company's daily operations is not included, as these
amounts are generally consistent from year to year and are not long-term in
nature (typically less than three months). See "Liquidity and Capital Resources
- - Debt and Interest Rate Derivatives" for a discussion of the Company's interest
rate protection agreements.
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------
(IN THOUSANDS) TOTAL LESS THAN 1 1 - 3 3 - 5 MORE THAN
YEAR YEARS YEARS 5 YEARS
--------------------------------------- ------------ --------------- ------------- ------------ ----------------
CONTRACTUAL OBLIGATIONS:
Long-term debt $ 778,300 $ - $ 42,188 $ 110,125 $ 625,987
Operating lease obligations 10,934 3,876 3,926 2,189 943
Capital lease obligations (including
interest at 4.3% to 17.3%) 5,688 533 1,055 1,031 3,069
Purchase obligations 5,925 2,321 3,514 90 -
---------------------------------------- ------------ --------------- ------------- ------------ ----------------
Total $ 800,847 $ 6,730 $ 50,683 $ 113,435 $ 629,999
---------------------------------------- ------------ --------------- ------------- ------------ ----------------
OFF-BALANCE SHEET ARRANGEMENTS. At December 26, 2004, except as set
forth below, the Company maintained no off-balance sheet financing arrangements.
PAYMENTS DUE BY PERIOD
------------------------------------------------------------------------
(IN THOUSANDS) TOTAL LESS THAN 1 1 - 3 3 - 5 MORE THAN
YEAR YEARS YEARS 5 YEARS
---------------------------------------- ------------ --------------- ------------- ------------ ----------------
OTHER COMMERCIAL COMMITMENTS:
Standby letters of credit (1) $ 7,750 $ 7,750 $ - $ - $ -
---------------------------------------- ------------ --------------- ------------- ------------ ----------------
(1) Amounts represent the aggregate contingent liability under standby letters
of credit required as security in connection with the Company's insurance
program.
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 consolidated financial
statements, which have been prepared in accordance with generally accepted
29
accounting principles 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. The Company re-evaluates its estimates
on an on-going basis. 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.
GOODWILL AND OTHER INTANGIBLES
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 Statement of Financial Accounting Standards No. 142
("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
discounts, 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.
30
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 151, "Inventory Costs - an Amendment of ARB No. 43, Chapter 4."
This standard provides clarification that abnormal amounts of idle facility
expense, freight, handling costs, and spoilage should be recognized as
current-period charges. Additionally, this standard requires that allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this standard are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. This standard is not expected to have a material impact on the
Company's financial statements.
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No.123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and supercedes APB Opinion No.25,
"Accounting for Stock Issued to Employees." SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values, beginning
with the first interim or annual period after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no longer be an alternative
to financial statement recognition. The Company will adopt SFAS 123R effective
as of the third quarter of fiscal 2005, beginning June 27, 2005. See Note 2 of
Notes to Consolidated Financial Statements for the pro forma net income and pro
forma net income per share amounts for fiscal years 2002 through 2004, which
reflects the pro forma impact on the Company pursuant to a fair-value-based
method similar to the methods required under SFAS 123R to measure compensation
expense for employee stock incentive awards. The Company has not yet determined
the method of adoption or the effect of adopting SFAS 123R, nor has the Company
determined whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS 123.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE PERFORMANCE
NEWSPAPER INDUSTRY COMPETITION
The Company's business is concentrated in newspapers and other
publications located primarily in small metropolitan and suburban areas in the
United States. Revenues in the newspaper industry primarily consist of
advertising and paid circulation. Competition for advertising and paid
circulation comes from local, regional and national newspapers, shopping guides,
television, radio, direct mail, online services and other forms of communication
and advertising media. Competition for advertising revenues is based largely
upon advertiser results, readership, advertising rates, demographics and
circulation levels; while competition for circulation and readership is based
largely upon the content of the newspaper, its price and the effectiveness of
its distribution. Many of the Company's competitors are larger and have greater
financial resources than the Company.
DEPENDENCE ON LOCAL ECONOMIES
The Company's advertising revenues and, to a lesser extent, circulation
revenues are dependent on a variety of factors specific to the communities which
the Company's newspapers serve. These factors include, among others, the size
and demographic characteristics of the local population, local economic
conditions in general, and the related retail segments in particular, as well as
local weather conditions.
CAPITALIZATION
As of December 26, 2004, the consolidated indebtedness of the Company
was $778.3 million, which represents a leverage ratio of approximately 5.4 times
the Company's twelve months trailing EBITDA, as calculated pursuant to the
Credit Agreement (see "Reconciliation of Certain Non-GAAP Financial Measures").
As of December 26, 2004, the Company had a net stockholders' equity of $200.3
million and total capitalization of $978.6 million and, thus, the percentage of
the Company's indebtedness to total capitalization was 79.5 percent. The Company
may incur additional indebtedness to, among other things, fund operations,
capital expenditures, future acquisitions, share repurchases or dividends. The
Company's results of operations will be impacted by fluctuations in interest
rates. See "Quantitative and Qualitative Disclosures About Market Risk."
The Company's management believes that cash provided by operating
activities, future borrowings and its ability to issue securities will be
sufficient to fund its operations and to meet payment requirements under its
Term Loans and the Revolving Credit Facility. However, a decline in cash
provided by operating activities, which could
31
result from factors beyond the Company's control, such as unfavorable economic
conditions, an overall decline in advertising revenues or increased competition,
could impair the Company's ability to service its debt. The Credit Agreement
requires the maintenance of certain financial ratios and imposes certain
operating and financial restrictions on the Company, which may restrict, among
other things, the Company's ability to declare dividends, repurchase Company
stock, incur indebtedness, create liens, sell assets, consummate mergers and
make capital expenditures, investments and acquisitions.
ACQUISITION STRATEGY
The Company has grown in part through, and anticipates that it will
continue to grow in part through, acquisitions of daily and non-daily newspapers
and similar publications. On August 12, 2004, the Company completed its largest
acquisition to date, the acquisition of 21st Century. Acquisitions, including
the 21st Century acquisition, may expose the Company to risks, including,
without limitation, diversion of management's attention, assumption of
unidentified liabilities and assimilation of the operations and personnel of
acquired businesses, some or all of which could have a material adverse effect
on the financial condition or results of operations of the Company. Depending on
the value and nature of the consideration paid by the Company for acquisitions,
such acquisitions may have a dilutive impact on the Company's earnings per
share. In making acquisitions, the Company competes for acquisition targets with
other companies, many of which are larger and have greater financial resources
than the Company. There can be no assurance that the Company will continue to be
successful in identifying acquisition opportunities, assessing the value,
strengths and weaknesses of such opportunities, executing acquisitions
successfully, achieving anticipated synergies, evaluating the costs of new
growth opportunities at existing operations or managing the publications it owns
and improving their operating efficiency. Historically, the Company has financed
acquisitions through available cash, free cash flow, borrowings and sales of
non-strategic properties. The Company anticipates that it will finance future
acquisitions through these same resources. However, the Company may elect to
issue equity securities to finance any acquisition, which would result in
dilution to existing shareholders. The Credit Agreement limits acquisitions to
certain permitted investments and newspapers in the United States, and requires
that acquisitions be financed through certain permitted sources. In addition,
the financial covenants contained in the Credit Agreement, may limit the
Company's ability to make acquisitions.
PRICE AND AVAILABILITY OF NEWSPRINT
The basic raw material for newspapers is newsprint. In fiscal year
2004, the Company consumed approximately 56,000 metric tons of newsprint,
excluding paper consumed in its commercial printing operations. The average
price per metric ton of newsprint based on East Coast transactions prices in
2004, 2003 and 2002 was $550, $503 and $465, respectively, as reported by the
trade publication, PULP AND PAPER WEEKLY. The Company purchases the majority of
its newsprint through its central purchasing group, Journal Register Supply. The
Company has no long-term contracts to purchase newsprint. Generally, Journal
Register Supply purchases most of its newsprint from one or two suppliers,
although in the future the Company may purchase newsprint from other suppliers.
Historically, the percentage of newsprint purchased from each supplier has
varied. The Company's management believes that concentrating its newsprint
purchases in this way provides a more secure newsprint supply and lower unit
prices. The Company's management also believes that it purchases newsprint at
price levels lower than those that are generally available to individually-owned
small metropolitan and suburban newspapers, and consistent with price levels
generally available to the largest newsprint purchasers. The available sources
of newsprint have been, and the Company believes will continue to be, adequate
to supply the Company's needs. The inability of the Company to obtain an
adequate supply of newsprint in the future could have a material adverse effect
on the financial condition and results of operations of the Company.
Historically, the price of newsprint has been cyclical and subject to price
fluctuations. The Company's average price per ton of newsprint for the full
fiscal year increased approximately nine percent in 2004, increased
approximately eight percent in 2003 and decreased approximately 22 percent in
2002, each as compared to the preceding year. The Company believes that if any
price decrease or increase is sustained in the industry, the Company will also
be impacted by such change. The Company seeks to manage the effects of increases
in prices of newsprint through a combination of, among other things, technology
improvements, including web-width reductions; inventory management and
advertising and circulation price increases. In fiscal year 2004, the Company's
newsprint cost (excluding paper consumed in the Company's commercial printing
operations) was approximately seven percent of the Company's newspaper revenues.
32
ENVIRONMENTAL MATTERS
The Company's operations are subject to federal, state and local
environmental laws and regulations pertaining to air and water quality, storage
tanks and the management and disposal of waste at its facilities. To the best of
the Company's knowledge, its operations are in material compliance with
applicable environmental laws and regulations as currently interpreted. The
Company cannot predict with any certainty whether future events, such as changes
in existing laws and regulations or the discovery of conditions not currently
known to the Company, may give rise to additional costs that could be material.
Furthermore, actions by federal, state and local governments concerning
environmental matters could result in laws or regulations that could have a
material adverse effect on the financial condition or results of operations of
the Company.
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. EBITDA is also the basis of
certain covenants contained in the Company's Credit Agreement. 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. Adjusted net income has been
provided as a supplemental measure of financial performance to enable investors
to evaluate and compare the Company's results of operations in a more meaningful
manner by excluding the impact of certain special items that may have the effect
of distorting the results of a particular period.
All EBITDA, Free Cash Flow and Adjusted Net Income figures in this
report are non-GAAP financial measures. The 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 gains on sales of properties and the
reversal of certain tax accruals and other one-time charges, while net income as
adjusted, and after impact of SFAS 142 further excludes amortization of goodwill
and other indefinite-lived intangible assets to reflect the impact of SFAS 142,
which eliminates the amortization of goodwill and other indefinite-lived
intangibles, as if it had been adopted at the beginning of fiscal year 2001. The
Company adopted SFAS No. 142 at the beginning of fiscal year 2002. 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, the Company's calculations of these measures may not be
consistent with the calculations of these measures by other companies.
The tables below provide 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 fiscal years 2000 through 2004, and
the difference between net income and net income, as adjusted, after impact of
SFAS 142 for fiscal years 2001 through 2004.
33
DEC. 26, DEC. 28, DEC. 29, DEC. 30, DEC. 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO EBITDA AND
FREE CASH FLOW:
Net Income $116,513 $ 71,990 $ 49,227 $ 78,132 $ 169,381
Deduct:
Gains on sales of operations -- -- -- 32,212 180,720
Add-back:
Equity interest -- -- -- 1,313 1,624
Provision (benefit) for income taxes (31,806) 6,120 27,444 10,818 90,951
Write-off of prior debt issuance costs 1,211 -- -- -- --
Net interest expense and other 19,362 15,627 23,677 30,490 48,020
----------------------------------------------------------------
Operating Income 105,280 93,737 100,348 88,541 129,256
----------------------------------------------------------------
Depreciation and amortization 17,153 15,447 14,927 26,317 27,616
----------------------------------------------------------------
EBITDA $122,433 $109,184 $115,275 $114,858 $ 156,871
EBITDA MARGIN 25.7% 26.9% 28.3% 29.1% 33.8%
Deduct:
Capital expenditures (1) 14,893 15,129 13,010 10,857 9,955
Interest expense 19,287 14,663 23,568 30,490 48,020
Cash income taxes (2) 16,865 20,476 17,066 16,375 12,195
----------------------------------------------------------------
Free Cash Flow, as adjusted $ 71,388 $ 58,916 $ 61,631 $ 57,136 $ 86,701
Free Cash Flow, as adjusted, per diluted share $ 1.68 $ 1.41 $ 1.46 $ 1.34 $ 1.91
- -------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO ADJUSTED NET
INCOME:
Net Income $116,513 $ 71,990 $ 49,227 $ 78,132 $ 169,381
Adjustments:
Reversal of tax accruals (64,925) (22,756) (1,172) (1,825) (7,993)
Special charge, net of tax 738 553 -- -- --
Gains on sale of operations, net of tax -- -- -- (42,128) (112,934)
----------------------------------------------------------------
Net Income, as adjusted $ 52,326 $ 49,787 $ 48,055 $ 34,179 $ 48,454
----------------------------------------------------------------
Net Income, as adjusted, per diluted share $ 1.23 $ 1.19 $ 1.14 $ 0.80 $ 1.07
----------------------------------------------------------------
Add-back:
Impact of SFAS 142, Amortization of
Goodwill, after-tax -- -- -- 9,965 --
Net Income, as adjusted, and after impact of SFAS
142 $ 52,326 $ 49,787 $ 48,055 $ 44,143 --
Net Income, as adjusted, and after impact of SFAS
142, per diluted share $ 1.23 $ 1.19 $ 1.14 $ 1.03 --
- -------------------------------------------------------------------------------------------------------------------
(1) Excludes capital expenditures associated with the Company's printing
facility in Exton, Pennsylvania (Journal Register Offset), which were $22.8
million and $10.8 million in fiscal years 2001 and 2000, respectively, and
the related capitalized interest of $1.3 million in fiscal year 2001 and
$601,000 in fiscal year 2000. Such amounts have been excluded due to the
large and non-recurring nature of the Exton project.
(2) Cash income taxes reflect the cash income taxes presented on the Company's
Consolidated Statements of Cash Flows, with the following exceptions: (i) in
fiscal year 2000, cash income taxes exclude $20.3 million of cash income
taxes paid on the gain on sale of properties; (ii) in fiscal year 2001, cash
taxes were increased to include $4.4 million of cash income taxes paid in
fiscal year 2000, which were applied to cash income taxes payable in fiscal
year 2001 (such amount was also included in fiscal year 2000 cash income
taxes); (iii) in fiscal year 2002, cash income taxes exclude the effect of
the $4.0 million tax benefit related to the Company's pension contribution
and excludes approximately $174,000 paid in fiscal year 2002 that related to
prior years; (iv) in fiscal year 2003, cash income taxes exclude the effect
of the $298,000 tax benefit arising from the special charge related to a
potential acquisition, excludes approximately $559,000 paid in fiscal year
2003 that related to prior years and includes approximately $278,000 related
to fiscal year 2003 to be paid in fiscal year 2004; and (v) in fiscal year
2004, cash income taxes exclude (a) the effect of a $5.1 million net tax
payment related to a state tax settlement, (b) the effect of a $1.5 million
tax benefit related to the Company's pension contribution, and (c)
approximately $459,000 paid in fiscal year 2004 that related to prior years,
and includes approximately $473,000 related to fiscal year 2004 to be paid
in fiscal year 2005.
34
ITEM 7A. 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 the
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 hedges 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.
As of December 26, 2004, the Company had Collars in place with respect
to an aggregate notional amount of $300 million of the Company's outstanding
indebtedness and Swaps with respect to an aggregate notional amount of $50
million of the Company's outstanding indebtedness. In addition, the Company had
contracts for Collars and Swaps that have effective dates occurring in the
future with respect to additional notional amounts. See Note 2 of Notes to
Consolidated Financial Statements. There was no initial cost associated with the
Company's existing Collar or Swap arrangements. Assuming a 10 percent increase
or reduction in interest rates for the year ended December 26, 2004, the effect
on the Company's pre-tax earnings would have been approximately $2 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Debt and Derivative Activity."
Newsprint, which is the principal raw material for the Company's
newspapers, is exposed to commodity price changes. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Certain Factors
Which May Affect the Company's Future Performance - Price and Availability of
Newsprint."
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
FINANCIAL STATEMENTS:
Reports of Independent Registered Public Accounting Firm........ 37
Consolidated Balance Sheets..................................... 40
Consolidated Statements of Income............................... 41
Consolidated Statements of Stockholders' Equity................. 42
Consolidated Statements of Cash Flows........................... 43
Notes to Consolidated Financial Statements...................... 44
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts................ 62
All other schedules are omitted because they are not applicable or the
requested information is shown in the consolidated financial statements or
related notes.
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Journal Register Company
We have audited the accompanying consolidated balance sheets of Journal Register
Company as of December 26, 2004 and December 28, 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 26, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 15(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Journal
Register Company at December 26, 2004 and December 28, 2003, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 26, 2004, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth within.
As discussed in Note 2 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill and other indefinite-lived intangible
assets.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Journal
Register Company's internal control over financial reporting as of December 26,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated March 25, 2005 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
March 25, 2005
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Journal Register Company
We have audited management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting" that Journal
Register Company maintained effective internal control over financial reporting
as of December 26, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Journal Register
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
38
As indicated in the accompanying "Management's Report on Internal Control Over
Financial Reporting", management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of 21st Century Newspapers, which is included in the 2004
consolidated financial statements of Journal Register Company and constituted
approximately 38% of total assets as of December 26, 2004 and 12% percent of
total revenues for the year then ended. Our audit of internal control over
financial reporting of Journal Register Company also did not include an
evaluation of the internal control over financial reporting of 21st Century
Newspapers.
In our opinion, management's assessment that Journal Register Company maintained
effective internal control over financial reporting as of December 26, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Journal Register Company maintained, in all material respects,
effective internal control over financial reporting as of December 26, 2004,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of December 26, 2004 and December 28, 2003, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 26, 2004 and our report dated March 25, 2005
expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
March 25, 2005
39
JOURNAL REGISTER COMPANY
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003
==========================================================================================================================
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51 $ 31
Accounts receivable, less allowance for doubtful
accounts of $8,143 and $5,785, respectively 64,116 43,591
Inventories 8,244 6,597
Deferred income taxes 13,097 3,719
Other current assets 8,526 4,149
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 94,034 58,087
- --------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 14,406 10,720
Buildings and improvements 93,298 76,759
Machinery and equipment 187,069 174,519
Construction in progress 5,225 7,413
- --------------------------------------------------------------------------------------------------------------------------
TOTAL 299,998 269,411
Less accumulated depreciation (141,993) (143,398)
- --------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 158,005 126,013
- --------------------------------------------------------------------------------------------------------------------------
INTANGIBLE AND OTHER ASSETS:
Goodwill 772,683 491,833
Other intangible assets, net of accumulated amortization
of $8,417 and $9,654, respectively 155,365 14,500
Other assets 3,431 2,627
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,183,518 $ 693,060
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ -- $ 37,853
Accounts payable 18,513 9,454
Accrued interest 4,051 2,062
Deferred subscription revenues 14,810 10,614
Accrued salaries and vacation 12,418 6,455
Fair market value of hedges 44 2,483
Accrued and other current liabilities 27,048 14,564
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 76,884 83,485
- --------------------------------------------------------------------------------------------------------------------------
Senior debt, less current maturities 778,300 380,492
Capital lease obligations, net of current maturities 3,647 --
Deferred income taxes 87,872 47,379
Accrued retiree benefits and other liabilities 19,256 19,462
Income taxes payable 17,239 89,898
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value per share, 300,000,000 shares authorized,
48,437,581 issued at December 26, 2004 and December 28, 2003 484 484
Additional paid-in capital 361,369 359,359
Accumulated deficit (50,913) (167,426)
- --------------------------------------------------------------------------------------------------------------------------
310,940 192,417
- --------------------------------------------------------------------------------------------------------------------------
Less treasury stock
6,422,340 shares and 6,837,948 shares, respectively, at cost (94,711) (100,817)
Accumulated other comprehensive loss, net of tax (15,395) (19,256)
Unearned compensation (514) --
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 200,320 72,344
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,183,518 $ 693,060
==========================================================================================================================
SEE ACCOMPANYING NOTES.
40
JOURNAL REGISTER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
IN THOUSANDS, EXCEPT PER SHARE DATA
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
=========================================================================================================================
REVENUES:
Advertising $361,591 $ 298,986 $ 297,056
Circulation 96,770 90,034 91,123
- -------------------------------------------------------------------------------------------------------------------------
Newspaper revenues 458,361 389,020 388,179
Commercial printing and other 17,366 16,966 19,575
- -------------------------------------------------------------------------------------------------------------------------
TOTAL 475,727 405,986 407,754
- -------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Salaries and employee benefits 181,888 155,355 150,614
Newsprint, ink and printing charges 38,678 31,181 32,023
Selling, general and administrative 66,389 51,932 52,976
Depreciation and amortization 17,153 15,447 14,927
Other 66,339 58,334 56,866
- -------------------------------------------------------------------------------------------------------------------------
370,447 312,249 307,406
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 105,280 93,737 100,348
- -------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Net interest expense and other (19,362) (15,627) (23,677)
Write-off of debt issuance costs (1,211) -- --
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 84,707 78,110 76,671
Provision (benefit) for income taxes (31,806) 6,120 27,444
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $116,513 $ 71,990 $ 49,227
=========================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $2.78 $ 1.75 $ 1.18
Diluted $2.74 $ 1.72 $ 1.16
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic 41,907 41,245 41,576
Diluted 42,474 41,834 42,323
- -------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES.
41
JOURNAL REGISTER COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL OTHER TOTAL
COMMON PAID-IN COMPREHENSIVE ACCUMULATED TREASURY UNEARNED STOCKHOLDERS'
IN THOUSANDS STOCK CAPITAL INCOME (LOSS) DEFICIT STOCK COMPENSATION EQUITY
====================================================================================================================================
BALANCE AS OF DECEMBER 30, 2001 $ 484 $ 358,263 $ (4,524) $(288,643) $(101,778) $ -- $ (36,198)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 49,227 49,227
Minimum pension liability adjustment,
net of tax benefit of $11,486 (18,956) (18,956)
Mark to market adjustment of fully
effective hedges, net of tax expense
of $189 365 365
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $30,636
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of 5,000 shares of treasury
stock (85) (85)
Exercise of stock options for common
stock (21) 1,789 1,768
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 29, 2002 484 358,242 (23,115) (239,416) (100,074) -- (3,879)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 71,990 71,990
Minimum pension liability adjustment,
net of tax benefit of $271 1,976 1,976
Mark to market adjustment of fully
effective hedges, net of tax expense
of $796 1,883 1,883
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $75,849
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of 520,100 shares of treasury
stock (7,905) (7,905)
Exercise of stock options for common
stock (95) 7,162 7,067
Tax benefit from stock option exercises 1,212 1,212
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 28, 2003 484 359,359 (19,256) (167,426) (100,817) -- $72,344
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 116,513 116,513
Minimum pension liability adjustment,
net of tax benefit of $1,665 2,402 2,402
Mark to market adjustment of fully
effective hedges, net of tax expense
of $997 1,441 1,441
Mark to market adjustment of investments
classified as held-for-sale, net of
tax expense of $12 18 18
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME $120,374
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned compensation 1,111 (514) 597
Exercise of stock options for common
stock 84 6,106 6,190
Tax benefit from stock option exercises 815 815
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 26, 2004 $484 $361,369 $(15,395) $ (50,913) $ (94,711) $ (514) $ 200,320
====================================================================================================================================
SEE ACCOMPANYING NOTES.
42
JOURNAL REGISTER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 116,513 $ 71,990 $ 49,227
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on accounts receivable 4,756 3,830 5,025
Depreciation expense 15,028 14,062 13,679
Amortization expense 2,126 1,385 1,248
Write-off of debt issuance costs 1,211 -- --
Net gain (loss) on disposal of property, plant and equipment -- -- (728)
Accrued retiree benefits and other non-current liabilities (253) 1,089 (12,692)
Provision for deferred income taxes 16,482 7,989 14,474
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable (8,350) 680 (2,405)
Decrease in income taxes payable (69,051) (21,310) (1,253)
Increase (decrease) in other assets and liabilities 8,351 1,696 (7,611)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 86,813 81,411 58,964
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,893) (15,129) (13,010)
Net proceeds from sale of property, plant and equipment -- 28 297
Purchases of businesses, net of cash acquired (426,488) (450) (8,609)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (441,381) (15,551) (21,322)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 795,000 - -
Extinguishment of prior long-term debt (372,573) - -
Debt issuance fees (11,558) - -
Payments of long-term debt (62,471) (65,024) (39,402)
Exercise of stock options for common stock 6,190 7,067 1,768
Purchase of Company stock -- (7,905) (85)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 354,588 (65,862) (37,719)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 20 (2) (77)
Cash and cash equivalents, beginning of year 31 33 110
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 51 $ 31 $ 33
============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 17,299 $ 15,047 $ 24,431
Income taxes $ 20,383 $ 20,459 $ 13,219
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
Comprehensive income (loss) - minimum pension liability and
mark to market adjustments, net of tax $ 3,861 $ 3,859 $ (18,591)
============================================================================================================================
SEE ACCOMPANYING NOTES.
43
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The accompanying consolidated financial statements include Journal
Register Company and all of its wholly-owned subsidiaries (the "Company").
Journal Register Company primarily publishes daily and non-daily newspapers
serving markets in Philadelphia and its surrounding areas, 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. The
Company was incorporated on March 11, 1997 and became a publicly traded company
in May of 1997.
The Company has authorized 1,000,000 shares of Preferred Stock, none of
which were issued or outstanding during the periods presented. The Company has a
52/53 week fiscal year generally ending on the Sunday closest to the end of the
calendar year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and all of its wholly-owned subsidiaries. Investments over which the
Company does not have voting control but exerts significant influence are
accounted for by the equity method. All significant intercompany activity has
been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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. The Company re-evaluates its estimates on an on-going basis.
Actual results may differ from these estimates under different assumptions or
conditions.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The carrying value of
cash equivalents approximates fair value due to the short-term maturity of these
instruments.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable consist primarily of amounts due to the Company
from normal business activities. Allowances for doubtful accounts are reserves
for the estimated loss from the inability to collect required payments from
customers. The Company uses historical experience as well as current market
information in determining this 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. Credit losses
have generally been within management's expectations.
INVENTORIES
Inventories, consisting of newsprint, ink and supplies, are stated at
the lower of cost (primarily first-in, first-out method) or market.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
44
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK OPTION PLAN
In December 2002, the Financial Accounting Standards Boards ("FASB")
issued Statement of Financial Accounting Standards No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure," to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The 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 stock-based employee compensation. SFAS
No. 148 did not require the Company to change to the fair value based method of
accounting for stock-based compensation. See "Recently Issued Accounting
Standards" below.
For purposes of pro forma disclosures, the estimated fair value of the
stock-based employee compensation is amortized to expense over the vesting
period for such stock-based employee compensation. The Company's fiscal year pro
forma information, had compensation costs for the Company's stock incentive plan
been determined in accordance with SFAS 123, is as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
- -------------------------------------------------------------- ---------------- -- --------------- --- ---------------
Net income as reported $ 116,513 $ 71,990 $ 49,227
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects - -
Deduct: Total stock-based employee compensation expense 596
determined under fair value based method for all awards,
net of related tax effects (2,649) (2,685) (3,307)
- -------------------------------------------------------------- ---------------- -- --------------- --- ---------------
Pro forma net income $114,460 $ 69,305 $ 45,920
============================================================== ================ == =============== === ===============
Net income per share:
As reported:
Basic $ 2.78 $ 1.75 $ 1.18
Diluted $ 2.74 $ 1.72 $ 1.16
Pro forma:
Basic $ 2.73 $ 1.68 $ 1.10
Diluted $ 2.69 $ 1.66 $ 1.09
============================================================== ================ == =============== === ===============
PROPERTY AND DEPRECIATION
Property, plant and equipment are stated at cost less any required
impairment reserve. Maintenance and repairs are charged to expense as incurred,
while costs of major additions and betterments are capitalized. Depreciation is
provided for financial reporting purposes primarily on the straight-line method
over the following estimated useful lives:
Buildings and improvements 5 to 30 years
Machinery and equipment 3 to 30 years
45
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
On December 31, 2001, which was the first day of fiscal year 2002, the
Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which superceded SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of." In
accordance with SFAS No. 144, the Company reviews the recoverability of
intangibles and other long-lived assets whenever events and circumstances
indicate that the carrying amount may not be recoverable. 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, remaining useful life and appropriate
discount rates. The carrying amount of the long-lived asset is reduced by the
difference between the carrying amounts and estimated fair value with a
corresponding charge to expense.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets recorded in connection with the acquisition of
publications or businesses generally consist of the values assigned to
subscriber lists, mastheads, non-competition covenants and the excess of cost
over the fair value of identifiable net assets of the publications or businesses
acquired. These assets are carried at the lower of unamortized cost or the
amount expected to be recovered by projected future operations after considering
attributable general and administration expense. If, in the opinion of
management, impairment in value occurs, any necessary write-downs will be
charged to expense in accordance with SFAS No. 142. The balance of intangible
assets at December 26, 2004 and December 28, 2003 was comprised principally of
debt issuance costs, customer and subscriber lists, non-compete covenants,
mastheads and the excess cost over the fair value of identifiable net assets of
companies acquired. Intangible assets excluding goodwill and mastheads are being
amortized using the straight-line method over a period of their useful life
(generally 3 to 15 years). Deferred financing costs associated with the Term
Loans and the Revolving Credit Facility (as defined in Note 4, Long-Term Debt)
are amortized over the terms of such loans.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities,
and are measured using the currently enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. A
valuation allowance is recorded against deferred tax assets when realization is
not considered to be more likely than not.
REVENUE RECOGNITION
Revenue is earned from the sale of advertising, circulation and
commercial printing. Advertising revenues are recognized, net of agency
discounts, 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.
SEGMENT REPORTING
As of December 26, 2004, the Company published 27 daily newspapers and
338 non-daily publications in the United States. The Company maintains
operations and local management in the markets that it serves. Newspapers are
distributed through local distribution channels consisting of contract carriers
and single copy outlets. The Company conducts business in one operating segment.
The operating segment consists of various operations aggregated into one segment
because the Company engages in the same essential business activities at each
operation and because management believes it helps the reader understand the
Company's performance and is consistent with the manner in which the Company's
operations are managed. The combined operations have similar economic
characteristics and each operation has similar products, services, customers,
production processes and distribution systems.
46
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
In 2004, no single customer accounted for more than one percent of
total revenues or two percent of accounts receivable. Approximately 20 percent
of the Company's employees are employed under collective bargaining agreements.
The Company anticipates that collective bargaining agreements at nine
newspapers, representing approximately 25 percent of the employees covered by
collective bargaining agreements, will be renegotiated in 2005.
DERIVATIVE RISK MANAGEMENT POLICY AND STRATEGY
In accordance with the requirements of its Credit Agreement (as defined
in Note 4, Long Term Debt), 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 on which the interest on the outstanding debt is
calculated. The minimum requirement varies depending on the Company's Total
Leverage Ratio, as defined in the Credit Agreement. From time to time, the
Company may enter into additional IRPAs for nominal amounts on the outstanding
debt that will, at a minimum, meet the requirements of the Credit Agreement.
Each IRPA is designated for all or a portion of the principal balance and term
of a specific debt obligation.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended by SFAS No. 137 and No. 138, specifies the
accounting and disclosure requirements for such instruments. In accordance with
these pronouncements, as of January 1, 2001, all effective hedges, as defined,
are recorded as an asset or liability with a corresponding offset to Other
Comprehensive Income ("OCI") in the equity section of the balance sheet. Any
ineffective portion of a hedging instrument or trading derivative would be
recorded as an asset or liability with a corresponding charge or credit to the
income statement. The information below describes the Company's derivative risk
management policy and strategy as required by SFAS 133, as amended.
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 OCI. The IRPAs
were fully effective in hedging the changes in cash flows related to the debt
obligation during the fiscal years ended December 26, 2004 and December 28,
2003. The total deferred loss reported in OCI as of December 26, 2004 and
December 28, 2003 was approximately $26 thousand and $1.5 million, respectively
(net of $18 thousand 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 considers its current IRPAs to be highly effective cash
flow hedges. The Company measures the effectiveness of each IRPA quarterly. As
specified in SFAS 133, any gain or loss on the effective portion of the IRPA is
recorded in OCI and the ineffective portion would be recorded directly to
current earnings. Amounts in accumulated OCI are reclassified into earnings in
the same period in which the hedged transactions affect earnings. In the event
of the early extinguishment of a designated debt obligation, any unrealized gain
or loss included in OCI is recognized in the income statement coincident with
the extinguishment.
Pursuant to the requirements of the 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 fixed notional amount set as forth below. As of December 26,
2004, the aggregate notional amount of outstanding Collars in effect was $300
million.
The following table summarizes the Company's existing Collars and
contracts for Collars that have an effective date occurring in the future, in
each case at December 26, 2004:
47
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECTIVE DATE CAP (%) FLOOR (%) NOTIONAL AMOUNT TERM
January 29, 2003 4.0 1.54 $150 million 2 years
August 20, 2004 4.5 2.05 $50 million 2 years
October 29, 2004 4.5 2.08 $100 million 2 years
January 29, 2005 4.5 2.38 $50 million 2 years
January 29, 2005 4.5 2.47 $100 million 2 years
January 29, 2007 6.0 3.39 $100 million 2.75 years
Pursuant to the terms of the Swaps, in the event 90-day LIBOR exceeds
the fixed interest rate, the Company will receive cash from the issuers to
compensate for the rate in excess of the fixed rate. If the 90-day LIBOR is
lower than the fixed rate, the Company will pay cash to the issuers to
compensate for the rate below the fixed rate.
The following table summarizes the Company's existing Swaps and
executed contracts for Swaps not yet effective, in each case at December 26,
2004:
EFFECTIVE DATE FIXED RATE (%) NOTIONAL AMOUNT TERM
December 3, 2004 3.48 $50 million 3.0 years
April 1, 2005 4.06 $100 million 4.75 years
April 1, 2005 4.085 $112 million (1) 4.75 years
(1) Represents the average of an amortizing notional amount.
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 to determine an adequate liability for self-insured claims.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No.123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No.123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values, beginning
with the first interim or annual period after June 15, 2005. The pro forma
disclosures previously permitted under SFAS 123 will no longer be an alternative
to financial statement recognition. The Company will adopt SFAS 123R effective
as of the third quarter of fiscal 2005, beginning June 27, 2005. See "Accounting
for Stock Option Plan" above in this Note 2 of Notes to Consolidated Financial
Statements for the pro forma net income and pro forma net income per share
amounts for fiscal years 2002 through 2004, which reflects the pro forma impact
on the Company pursuant to a fair-value-based method similar to the methods
required under SFAS 123R to measure compensation expense for employee stock
incentive awards. The Company has not yet determined the method of adoption or
the effect of adopting SFAS 123R, nor has the Company determined whether the
adoption will result in amounts that are similar to the current pro forma
disclosures under SFAS 123.
In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 151, "Inventory Costs - an Amendment of ARB No. 43, Chapter 4."
This standard provides clarification that abnormal amounts of idle facility
expense, freight, handling costs, and spoilage should be recognized as
current-period charges. Additionally, this standard requires that allocation of
fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of this standard are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. This standard is not expected to have a material impact on the
Company's financial statements.
48
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION OF CERTAIN OPERATING EXPENSES
Certain operating expenses related to certain of the Company's
acquisitions have been reclassified in prior periods to conform to the Company's
current period financial presentation. The reclassification had no impact on
total operating expenses, operating income, or net income.
3. INTANGIBLE AND OTHER ASSETS
Under SFAS No. 142, goodwill and indefinite-lived intangible assets are
no longer amortized; however, they 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 provisions of SFAS
No. 142, which 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 No. 142 at the beginning of fiscal year 2002. The
required transitional analysis of the Company's goodwill and indefinite-lived
intangible assets was completed as of June 30, 2002. The Company has also
performed the annual impairment tests as of the first day of the fourth quarter
of each of fiscal years 2003 and 2004, and a determination was made that such
assets were not impaired.
Changes in the carrying amounts of intangible assets are as follows:
AS OF DEC. 26, 2004 AS OF DEC. 28, 2003
--------------------------------------------------------------------------------
ACCUMULATED ACCUMULATED
IN THOUSANDS GROSS AMORTIZATION NET GROSS AMORTIZATION NET
- ------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS SUBJECT TO
AMORTIZATION:
Customer and subscriber lists $ 9,657 $ (5,934) $ 3,723 $ 6,743 $ (4,853) $ 1,890
Non-compete covenants 4,317 (1,832) 2,485 2,870 (1,686) 1,184
Debt issuance costs 11,908 (559) 11,349 4,573 (3,023) 1,550
- -------------------------------------------------------------------------------------------------------------------
Total $ 25,882 $ (8,325) $ 17,557 $ 14,186 $ (9,562) $ 4,624
- -------------------------------------------------------------------------------------------------------------------
INTANGIBLE ASSETS NOT SUBJECT
TO AMORTIZATION:
Goodwill $ 835,893 $ (63,210) $ 772,683 $ 555,043 $(63,210) $ 491,833
Mastheads 137,900 (92) 137,808 9,968 (92) 9,876
- -------------------------------------------------------------------------------------------------------------------
Total $ 973,793 $ (63,302) $ 910,491 $ 565,011 $(63,302) $ 501,709
- -------------------------------------------------------------------------------------------------------------------
Total Goodwill and
other intangible assets $999,675 $ (71,627) $ 928,048 $ 579,197 $(72,864) $506,333
===================================================================================================================
Identifiable intangible assets include customer and subscriber lists,
non-compete covenants and debt issuance costs, which have an estimable useful
life and are amortizable on a straight-line basis over their useful lives.
Indefinite-lived intangible assets include goodwill and mastheads. Mastheads are
included in other intangible assets on the balance sheet. For fiscal years 2004,
2003 and 2002, amortization expense for intangible assets was approximately $2.1
million, $1.4 million, and $1.3 million, respectively.
Estimated amortization expense for each of the five succeeding fiscal
years for identifiable intangible assets and other assets is as follows (IN
THOUSANDS):
49
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INTANGIBLE AND OTHER ASSETS (CONTINUED)
2005.......................... $ 3,447
2006.......................... 3,080
2007.......................... 2,404
2008.......................... 1,895
2009.......................... 1,856
Thereafter.................... 4,875
The changes in the carrying amount of goodwill during fiscal years 2004
and 2003 are as follows:
(IN THOUSANDS)
Balance as of December 29, 2002 $491,385
Goodwill acquired during year 448
------------------
Balance as of December 28, 2003 491,833
Goodwill acquired during year 284,111
Adjustments, principally tax benefits (3,261)
------------------
Balance as of December 26, 2004 $772,683
==================
Included in other assets is the Company's cost basis investment, in the
amount of $2,078 and $2,168 in 2004 and 2003, respectively, in PowerOne Media,
Inc. ("PowerOne"), a provider of classified advertising on the Internet.
PowerOne was created as a result of the merger in November 2001 between
PowerAdz, LLC ("PowerAdz") and AdOne, LLC ("AdOne"). The Company was an investor
in AdOne prior to the merger. In the ordinary course of business, the Company
has related party sales with PowerOne, which amounted to approximately $3.4
million, $4.0 million, and $4.5 million for fiscal years 2004, 2003 and 2002,
respectively.
4. LONG-TERM DEBT
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 provided
for in the Credit Agreement. To date, the Company has not drawn down on the
Incremental Facility. As of December 26, 2004, the maximum availability under
the Revolving Credit Facility was $266.3 million (including the impact of $5.4
million in outstanding letters of credit issued under the Credit Agreement),
with approximately $160 million currently available based on the terms of the
Credit Agreement.
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.
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 the Company's 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.
50
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT (CONTINUED)
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 Company's Total Leverage Ratio (as defined in the
Credit Agreement). At December 26, 2004, the Company's commitment fee was 0.375
percent.
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. See
Note 2 of Notes to Consolidated Financial Statements.
The Company's long-term debt as of December 26, 2004 and December 28,
2003 was comprised of the following:
(IN THOUSANDS) 2004 2003
-----------------------------------------------------------------------------
Term Loan A $275,000 $106,246
Term Loan B 350,000 194,899
Revolving Credit Facility 153,300 117,200
-----------------------------------------------------------------------------
Total Long-term debt 778,300 418,345
Less: current portion - (37,853)
-----------------------------------------------------------------------------
Total Long-term debt, less current portion $778,300 $380,492
=====================================================================================
The aggregate maturities payable under the Term Loans for the following
years are as follows (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 (IN THOUSANDS):
December 31, 2009 $ 21,250
December 31, 2010 63,750
November 12, 2011 340,000
The Term Loans and Revolving Credit Facility are secured by
substantially all of the assets of the Company and the common stock and assets
of the Company's subsidiaries. The Term Loans and Revolving Credit Facility
require compliance with certain covenants, including the maintenance of certain
financial ratios, which may restrict, among other things, the Company's ability
to declare dividends, repurchase Company stock, incur additional indebtedness,
create liens, sell assets, consummate mergers and make capital expenditures,
investments and acquisitions. As of December 26, 2004, the Company was in
compliance with the financial covenants contained in the Credit Agreement.
51
5. STOCK PLANS
STOCK INCENTIVE PLAN
During 1997, the Company's Board of Directors (the "Board") adopted and
the stockholders approved the Company's 1997 Stock Incentive Plan (the "1997
Plan"). The 1997 Plan, as amended, authorizes grants of up to 7,383,750 shares
of Common Stock through: (i) incentive stock options and non-qualified stock
options (in each case, with or without stock appreciation rights) to acquire
common stock; (ii) awards of restricted shares of Common Stock; and (iii) stock
units to such directors, officers and other employees of, and consultants to,
the Company and its subsidiaries and affiliates as may be designated by the
Compensation Committee of the Board or such other committee of the Board as the
Board may designate.
Incentive stock options are granted at no less than fair market value
of the common stock on the date of grant. The option price per share of common
stock for all other stock options is established by the Compensation Committee
of the Board. Stock options generally vest evenly over a five year period at a
rate of 20 percent per year commencing on the first anniversary after issuance,
continuing through the fifth anniversary, at which time 100 percent may be
exercised. These options generally expire ten years after issuance.
The following table summarizes the Company's stock option activity for
the fiscal years presented:
DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF EXERCISE NUMBER OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding-beginning of year 5,199,412 $18.13 5,068,454 $17.82 4,555,673 $17.06
Granted 435,038 19.41 743,275 17.63 773,875 21.67
Exercised 414,150 14.95 497,349 14.21 121,853 14.47
Forfeited 210,015 19.92 114,968 18.10 139,241 17.47
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding-end of year 5,010,285 $18.43 5,199,412 $18.13 5,068,454 $17.82
===================================================================================================================================
Exercisable at end of year 3,300,755 $18.37 3,111,879 $18.34 2,873,411 $17.77
Weighted-average fair value of
options granted during the
year $6.41 $5.62 $7.86
Further information about stock options outstanding at December 26,
2004 is as follows:
WEIGHTED-AVERAGE
REMAINING WEIGHTED- WEIGHTED-
RANGE OF EXERCISE NUMBER CONTRACTUAL LIFE AVERAGE EXERCISE AVERAGE EXERCISE
PRICES OUTSTANDING (YEARS) PRICE NUMBER EXERCISABLE PRICE
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$14.00 - 16.00 1,880,206 5.2 $14.99 1,532,974 $14.90
$16.01 - 18.00 686,075 8.3 17.53 154,015 17.49
$18.01 - 20.00 426,387 9.4 19.38 1,800 18.51
$20.01 - 22.50 2,017,617 4.4 21.73 1,611,966 21.75
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
5,010,285 5.7 $18.43 3,300,755 $18.37
===================== ================== =================== ================== =================== ==================
52
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. STOCK PLANS (CONTINUED)
In 2004, the Company issued an aggregate of 58,220 restricted stock
units pursuant to the 1997 Plan. These restricted stock units were issued in
lieu of all or a portion of the stock options that would have been granted to
the recipients. Of these restricted stock units, 7,500 were issued to directors
of the Company and vest monthly over a twelve month period, and the remainder
were issued to employees and vest based on the achievement of performance-based
milestones.
The Company adopted the disclosure requirements of SFAS No. 123 as
amended by SFAS No. 148. Accordingly, the Company discloses pro forma net income
and earnings per share determined as if the Company had accounted for its
stock-based employee compensation under the fair value method of that statement.
The fair value of stock options was estimated at the date of grant using a
Black-Scholes option pricing model assuming a weighted average risk-free
interest rate of 4.58 percent, 3.02 percent and 4.86 percent, and expected
common stock market price volatility factors of 0.18, 0.22 and 0.21 for the
years 2004, 2003 and 2002, respectively. A seven-year weighted average expected
life of each option granted and no dividend yield was assumed.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
STOCK RIGHTS PLAN
Effective July 17, 2001, the Company adopted a Stockholder Rights Plan
(the "Plan") and declared a dividend of one preferred share purchase right (the
"Rights") on each outstanding share of the Company's common stock held by
stockholders of record on July 27, 2001. The rights are exercisable if a person
or group acquires 15 percent or more of the Company's common stock, or commences
a tender or exchange offer with that goal. The rights will expire July 27, 2011.
6. EARNINGS PER COMMON SHARE
The following table sets forth the computation of weighted-average
shares outstanding for calculating basic and diluted earnings per share for the
fiscal years ended:
(IN THOUSANDS)
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
- ----------------------------------------------------------------------------------------------------------
Weighted-average shares - basic 41,907 41,245 41,576
Effect of dilutive securities:
Employee stock options 567 589 747
- ----------------------------------------------------------------------------------------------------------
Weighted-average shares - diluted 42,474 41,834 42,323
==========================================================================================================
Options to purchase the Company's common stock that were not included
in the computation of the diluted earnings per share because the options'
exercise price per share was greater than the average market price of the common
shares during each of the periods presented below (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
FISCAL YEAR OPTIONS EXERCISE PRICE RANGE
2004 2,018 $20.00 to $22.50
2003 2,176 $18.00 to $22.50
2002 2,199 $21.00 to $22.50
53
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
The Company and its subsidiaries maintain certain defined benefit
pension plans. The benefits are based on years of service and employee
compensation, primarily on career average pay. The Company's funding policy is
to contribute annually an amount that can be deducted for federal income tax
purposes using assumptions that differ from those used for financial reporting.
Assets of the plans consist principally of short-term investments, annuity
contracts, equity securities and corporate and U.S. Government obligations. The
Company uses information as of September 30 to measure the value of pension plan
assets and obligations. Certain of the Company's subsidiaries also provide
retiree health and life insurance benefits.
The fair value of the pension plan assets at the end of year was
approximately $97.3 million. The asset allocation for Company-sponsored pension
plans at the end of the 2004 and 2003 plan years, by asset category, is
presented in the table below.
Allocation of Plan Assets
2004 2003
---------------------------------------------------------------------------
Equity securities 71% 73%
Fixed income securities 27% 23%
Cash 2% 4%
-------------------------------------------------
Total 100% 100%
The equity investments are diversified across U.S. and non-U.S. stocks.
The Company employs a total return investment approach in its investment
strategy whereby a mix of equities and fixed income investments are used to
maximize the long-term return of plan assets for a prudent level of risk. Risk
tolerance is established through consideration of plan liabilities, plan funded
status and the Company's financial condition. The long-term rate of return for
plan assets is determined by consideration of the current asset mix, historical
returns and peer data analysis.
In December 2004, although not required under applicable pension law,
the Company made a $4.0 million tax-deductible cash contribution to its
qualified pension plans. The tax benefit related to this contribution was
approximately $1.5 million. At this time, the Company expects to contribute an
aggregate of approximately $200,000 to its pension plans in the 2005 fiscal
year. For the post-retirement health and life insurance plans, the Company
contributed $463,000 in fiscal year 2004 and expects to contribute approximately
$431,000 in fiscal year 2005.
The following table sets forth the plans' funded status and the amount
recognized in the Company's consolidated balance sheet:
- -------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
--------------------------- ---------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- ------------------------------------------------------------ ----------- -- ------------ ---- ----------- --- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 97,181 $ 87,275 $ 4,117 $ 4,210
Service cost 2,251 1,947 8 7
Interest cost 6,016 5,726 257 268
Actuarial loss 2,143 7,312 163 38
Benefits paid (5,201) (5,079) (463) (406)
Business combinations 4,664 0 583 0
----------- ------------ ----------- -----------
Benefit obligation at end of year $ 107,054 $ 97,181 $ 4,665 $ 4,117
----------- ------------ ----------- -----------
54
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
--------------------------- ----------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of trust assets at beginning of year $ 87,490 $ 78,646 $ 0 $ 0
Actual return on plan assets 11,691 13,819 0 0
Employer contributions 0 104 463 406
Benefits paid (5,201) (5,079) (463) (406)
Business combinations 3,306 0 0 0
----------- ------------ ----------- -----------
Fair value of trust assets at end of year $ 97,286 $ 87,490 $ 0 $ 0
----------- ------------ ----------- -----------
RECONCILIATION OF FUNDED STATUS
Funded status $ (9,768) $(9,691) $(4,665) $(4,117)
Unrecognized net
Transition (asset)/obligation 0 (2) 0 0
Prior service cost (747) (1,103) (67) (159)
(Gain)/loss 29,057 33,252 (4,146) (2,526)
Contributions after measurement date 4,039 0 0 0
----------- ------------ ----------- -----------
Net amount recognized $ 22,581 $ 22,456 $(8,878) $(6,802)
=========== ============ =========== ===========
AMOUNTS RECOGNIZED IN STATEMENT
OF FINANCIAL POSITION
Prepaid benefit cost $ 0 $ 0 $ 0 $ 0
(Accrued) benefit liability (3,470) (7,662) (8,878) (6,802)
Accumulated other comprehensive expense 26,051 30,118 N/A N/A
----------- ------------ ----------- -----------
Net amount recognized $ 22,581 $ 22,456 $(8,878) $(6,802)
=========== ============ =========== ===========
SEPARATE DISCLOSURES FOR PENSION PLANS WITH
ACCUMULATED BENEFIT OBLIGATION IN EXCESS
OF PLAN ASSETS
Projected benefit obligation at end of year $ 107,054 $ 97,181 N/A N/A
Accumulated benefit obligation at end of year 104,763 95,152 N/A N/A
Fair value of assets at end of year 97,286 87,490 N/A N/A
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 2,251 $ 1,947 $ 8 $ 7
Interest cost 6,016 5,726 257 268
Expected return on plan assets (7,315) (6,853) 0 0
Amortization of net
Transition obligation (2) (39) 0 0
Prior service cost (356) (356) (93) (93)
(Gain)/loss 1,961 2,180 (307) (326)
----------- ------------ ----------- -----------
Net periodic benefit cost $ 2,555 $ 2,605 $ (135) $ (144)
=========== ============ =========== ===========
COMPONENTS OF OTHER COMPREHENSIVE (INCOME) / EXPENSE
Decrease in intangible asset $ 0 $ 0 N/A N/A
(Decrease)/increase in additional minimum liability (4,067) (1,705) N/A N/A
----------- ------------ ----------- -----------
OTHER COMPREHENSIVE (INCOME) / EXPENSE $ (4,067) $(1,705) N/A N/A
=========== ============ =========== ===========
55
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
--------------------------- ---------------------------
(IN THOUSANDS) 2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS AT SEPTEMBER 30
Discount rate 6.00% 6.25% 6.00% 6.25%
Rate of compensation increase 3.00% 3.00% 3.00% 3.00%
WEIGHTED AVERAGE ASSUMPTIONS USED TO DETERMINE NET
PERIODIC BENEFIT COST FOR YEARS ENDED DECEMBER 26
Discount rate 6.25% 6.75% 6.25% 6.75%
Expected return on plan assets 8.50% 9.00% N/A N/A
Rate of compensation increase 3.00% 3.00% 3.00% 3.00%
=========================================================================================================================
ASSUMED HEALTH CARE COST TREND RATES AT DECEMBER 26
Health care cost trend rate assumed for next year
(initial rate) N/A N/A 9.00% 10.00%
Rate to which the cost trend rate is assumed to decline
(ultimate rate) N/A N/A 5.25% 5.25%
Year that the rate reaches the ultimate rate N/A N/A 2009 2009
EFFECT OF A CHANGE IN THE ASSUMED RATE OF INCREASE IN HEALTH BENEFIT COSTS
Effect of a one percent increase on
Total of service cost and interest cost N/A N/A $ 73 $ 26
Postretirement benefit obligation N/A N/A $ 928 $ 317
Effect of a one percent decrease on
Total of service cost and interest cost N/A N/A $ (67) $ (22)
Postretirement benefit obligation N/A N/A $ (850) $ (279)
ESTIMATED FUTURE BENEFIT PAYMENTS
Fiscal 2005 $ 5,654 N/A $ 431 N/A
Fiscal 2006 $ 5,864 N/A $ 429 N/A
Fiscal 2007 $ 6,178 N/A $ 427 N/A
Fiscal 2008 $ 6,480 N/A $ 422 N/A
Fiscal 2009 $ 6,721 N/A $ 418 N/A
Fiscal years 2010-2014 $ 37,267 N/A $ 2,001 N/A
The Company also has defined contribution plans covering certain
employees. Company contributions to these plans are based on a percentage of
participants' salaries and amounted to approximately $677,600, $636,300 and
$632,700 in fiscal years 2004, 2003 and 2002, respectively. The Company
contributes to various multi-employer union administered pension plans.
Contributions to these plans amounted to approximately $317,000, $116,000 and
$148,000 in fiscal years 2004, 2003 and 2002, respectively.
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.
56
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
The annual provision (benefit) for taxes on income, in thousands, is as
follows:
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
- ---------------------------------------------------------------------------------------------------------------------
Current tax expense (benefit):
Federal $ (50,712) $ (3,775) $ 11,757
State 2,424
1,906 1,213
- ---------------------------------------------------------------------------------------------------------------------
Total current tax expense (benefit) (48,288) (1,869) 12,970
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax expense:
Federal 14,098 5,946 13,472
State 2,384 2,043 1,002
- ---------------------------------------------------------------------------------------------------------------------
Total deferred tax expense 16,482 7,989 14,474
- ---------------------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes $ (31,806) $ 6,120 $ 27,444
=====================================================================================================================
The reconciliation of income taxes computed at the U.S. federal
statutory tax rate to income tax expense, in thousands for the years presented,
is as follows:
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003 DEC. 29, 2002
----------------------------------------------------------------------------------------------------------------------
Tax at U.S. statutory rates $ 29,647 $ 27,339 $ 26,835
State taxes, net of federal tax benefit 3,125 2,566 1,439
Reversal of excess tax accruals (64,925) (22,756) (1,172)
Other 347 (1,029) 342
----------------------------------------------------------------------------------------------------------------------
Total $ (31,806) $ 6,120 $ 27,444
======================================================================================================================
At the date of its acquisition by the Company, 21st Century had federal
net operating loss carry-forwards of approximately $61.7 million available to
offset the Company's future consolidated taxable income. Such carry-forwards
expire in the years 2017 through 2023. In the 2004 post-acquisition period,
approximately $10.3 million was utilized. Approximately $27.5 million is
anticipated to be utilized in 2005 and has been recorded as a current deferred
tax asset. The remaining portion has been recorded as an asset in the deferred
tax liability account. Due to the likelihood of future utilization of these
carry-forwards, the Company has not reduced the anticipated benefits by a
valuation allowance.
The Company realized state tax benefits in connection with the
utilization of state net operating loss carry-forwards as follows: $1.4 million
in 2004; and $1.9 million in 2003. Based upon current state statutory rates, the
Company may have $7.0 million of future tax benefits. However, based upon an
assessment of the likelihood of the future utilization of such losses, the
Company's tax benefits were reduced by a valuation allowance of approximately
$4.0 million at December 26, 2004. The state net operating loss carry-forwards
expire in various years through 2024.
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets, in thousands, are as follows:
57
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
FISCAL YEAR ENDED DEC. 26, 2004 DEC. 28, 2003
- --------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $ 21,475 $ 16,628
Intangibles 88,140 43,166
Retiree benefits 5,236 5,721
- --------------------------------------------------------------------------------------
Total deferred tax liabilities 114,851 65,515
- --------------------------------------------------------------------------------------
Deferred tax assets:
Federal net operating loss carry-forwards 17,987 -
State net operating loss carry-forwards 6,959 6,678
Other comprehensive income 10,669 13,344
Other 8,468 5,580
- --------------------------------------------------------------------------------------
Total deferred tax assets 44,083 25,602
Valuation allowance (4,007) (3,747)
- --------------------------------------------------------------------------------------
Net deferred tax assets 40,076 21,855
- --------------------------------------------------------------------------------------
Net deferred tax liabilities $ 74,775 $ 43,660
======================================================================================
The Company's valuation allowances for deferred tax assets increased by
$260,000 in fiscal year 2004. The Company's federal income tax returns have not
been examined by the Internal Revenue Service.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office space, production facilities, warehouse
space, and equipment under noncancellable operating leases. These leases contain
several renewal options for periods of up to five years. The Company's future
minimum lease payments under noncancellable operating leases and future minimum
payments under capital lease agreements at December 26, 2004 are as follows (IN
THOUSANDS):
Capital Leases Operating Leases
2005..................................................... $ 533 $ 3,876
2006..................................................... 529 2,362
2007..................................................... 526 1,564
2008..................................................... 527 1,185
2009..................................................... 504 1,004
Thereafter............................................... 3,069 943
------------------------------------
$ 5,688 $10,934
=================
Less: Amount representing interest (4.3% to 17.3%)...... 1,798
------------------
Present value of capital lease obligations............... 3,890
Less: Current portion................................... 243
------------------
Non-current portion...................................... $ 3,647
==================
Total rent expense was approximately $4.0 million, $2.9 million, and
$3.0 million for the years ended December 26, 2004, December 28, 2003 and
December 29, 2002, respectively.
At December 26, 2004 the Company had unused outstanding letters of
credit in the amount of approximately $7.8 million.
The Company is involved in certain litigation matters that have arisen
in the ordinary course of business. In the opinion of management, the outcome of
these legal proceedings should not have a material adverse impact on the
Company's financial position or results of operations.
58
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ACQUISITIONS
The Company applies the purchase method of accounting for acquisitions.
Acquisitions and dispositions of newspaper properties are subject to closing
costs and may be subject to the finalization of customary adjustments.
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 85 non-daily publications located
in Michigan.
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"). See Note 4 of Notes to
Consolidated Financial Statements.
The purchase price for the acquisition, including transaction costs,
was approximately $425 million, including the $415 million purchase price
negotiated with and payable to the seller. The purchase price was financed with
borrowings under the Credit Agreement. The portion of the purchase price in
excess of $415 million consisted of direct acquisition costs and certain costs
incurred or expected to be incurred in connection with the integration and
consolidation of 21st Century's operations.
The Company is in the process of finalizing the valuation of the
business, and the allocation of the purchase price is therefore subject to
potential adjustment. There is no tax deductible goodwill resulting from the
Company's acquisition of 21st Century. The purchase price allocation for 21st
Century, as of December 26, 2004, is as follows (IN THOUSANDS):
Current assets, net of cash acquired of $1,901 $ 20,552
Property, plant and equipment, net 32,163
Goodwill 282,322
Intangible and other long-term assets 129,421
Other assets 163
-------
Total assets acquired 464,621
-------
Current liabilities 19,580
Non-current liabilities 19,683
-------
Total liabilities assumed 39,263
-------
Net assets acquired $ 425,358
=======
Intangible assets acquired in connection with the 21st Century
acquisition consist of the following (IN THOUSANDS, EXCEPT YEARS):
WEIGHTED AVERAGE
AMOUNT AMORTIZATION PERIOD (YEARS)
Amortizable intangible assets:
Customer and subscriber lists $ 2,500 3
Non-compete covenants $ 1,420 7
Non-amortized intangible assets:
Goodwill $ 282,322 -
Mastheads $ 125,500 -
59
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ACQUISITIONS (CONTINUED)
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 (IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS):
FISCAL YEAR ENDED
-----------------------------------------------------------
DECEMBER 26, 2004 DECEMBER 28, 2003
---------------------------------- --------------------------- ----------------------------
Net revenues $ 566,640 $ 558,665
Net income $ 118,320 $ 78,178
Net income per share:
Basic $ 2.82 $ 1.90
Diluted $ 2.79 $ 1.87
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.
The Company completed three additional acquisitions during fiscal year
2004. 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, the Company completed the acquisition of the assets of
Berks-Mont Newspapers, Inc., a group of non-daily publications based in
Boyertown, Pennsylvania.
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. In fiscal year 2002, the Company
completed three strategic acquisitions. On March 18, 2002, the Company completed
the acquisition of the assets of News Gleaner Publications, Inc. and Big
Impressions Web Printing, Inc., which are based in Northeast Philadelphia,
Pennsylvania. This acquisition includes eight weekly newspapers serving
Northeast Philadelphia, seven monthly publications serving Montgomery County,
Pennsylvania, and a commercial printing operation. On March 22, 2002, the
Company completed the acquisition of the assets of the Essex, Connecticut-based
Hull Publishing, Inc. This acquisition includes one weekly newspaper and two
annually produced magazines. On October 14, 2002, the Company completed the
acquisition of seven weekly newspapers serving Delaware County, Pennsylvania.
Results of operations of each of the Company's acquisitions are
included in the Company's results of operations from the dates of their
respective acquisition.
60
JOURNAL REGISTER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
years ended December 26, 2004 and December 28, 2003:
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE DATA) QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------------------------------------------
2004(1)
Revenues $ 99,158 $ 107,651 $ 123,052 $ 145,866
Operating income $ 20,175 $ 27,406 $ 25,412 $ 32,287
Net income $ 10,247 $ 14,760 $ 66,088 $ 25,418
Net income per common share:
Basic $ 0.25 $ 0.35 $ 1.58 $ 0.61
Diluted $ 0.24 $ 0.35 $ 1.55 $ 0.60
2003(1)
Revenues $ 96,632 $ 104,160 $ 100,806 $ 104,388
Operating income $ 19,348 $ 25,913 $ 21,851 $ 26,625
Net income $ 9,803 $ 13,931 $ 31,864 $ 16,392
Net income per common share:
Basic $ 0.24 $ 0.34 $ 0.77 $ 0.40
Diluted $ 0.24 $ 0.34 $ 0.76 $ 0.39
- -------------------------------------------------------------------------------------------------------------------
(1) The amounts reported above include operating results of acquisitions for the period the operations were
owned by the Company. See Note 10, Acquisitions.
61
JOURNAL REGISTER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
BALANCE AT CHARGED/ BALANCE AT
BEGINNING (CREDITED) TO END OF
DESCRIPTION OF PERIOD ADJUSTMENTS(1) INCOME DEDUCTIONS(2) PERIOD
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 26, 2004
Allowance for doubtful accounts $ 5,785 $ 1,867 $ 4,756 $ 4,265 $ 8,143
Valuation allowance for deferred
tax assets 3,747 - 260 - 4,007
YEAR ENDED DECEMBER 28, 2003
Allowance for doubtful accounts $ 6,388 $ 13 $ 3,830 $ 4,446 $ 5,785
Valuation allowance for deferred
tax assets 5,239 - (1,492) (3) - 3,747
YEAR ENDED DECEMBER 29, 2002
Allowance for doubtful accounts $ 6,365 $ 315 $ 5,025 $ 5,317 $ 6,388
Valuation allowance for deferred
tax assets 4,995 - 244 - 5,239
- --------------------------------------------------------------------------------------------------------------------------
(1) Allowance for doubtful account adjustments related to acquisitions in the
respective periods presented. See Note 10 of Notes to Consolidated
Financial Statements for a discussion of acquisitions.
(2) Includes the write-off of uncollectible accounts in the respective periods
presented.
(3) Reflects a reversal of a valuation allowance for state net operating loss
carry-forwards.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company has
established disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to the officers who certify the Company's financial reports and to
other members of senior management and the Board of Directors.
Based on their evaluation as of December 26, 2004, the principal
executive officer and principal financial officer of the Company have concluded
that the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective
to ensure that the information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Company's
management, including the principal executive officer and principal financial
officer, the Company conducted an evaluation of the effectiveness of its
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on the evaluation under the
framework in Internal Control - Integrated Framework, the Company's management
concluded that the Company's internal control over financial reporting was
effective as of December 26, 2004. The scope of management's assessment of the
effectiveness of internal control over financial reporting includes all of the
Company's businesses except for 21st Century Newspapers, Inc., a material
acquisition consummated on August 12, 2004 that was not required to be assessed
in 2004. The Company's consolidated revenues for the year ended December 26,
2004 were $475.7 million, of which 21st Century represented $58.4 million. The
Company's total assets as of December 26, 2004 were $1.2 billion, of which 21st
Century represented $464.2 million. Management's report on internal control over
financial reporting for fiscal year 2005 will include 21st Century.
Ernst & Young LLP, the Company's independent registered public
accounting firm, audited management's assessment of the effectiveness of
internal control over financial reporting and, based on that audit, issued the
report that is included herein.
CHANGES IN INTERNAL CONTROLS. During fiscal year 2004, the Company
commenced the deployment of a new suite of software applications in a shared
services environment. The new suite of applications will include (i) financial
applications, including accounts payable, general ledger, fixed assets, 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
63
Company's internal and disclosure controls and its operating efficiencies. As of
December 26, 2004, the implementation of the financial applications was in
process, and deployment of the advertising and circulation management
applications is expected to occur beginning in fiscal year 2005. The
implementation of the financial applications has involved changes in systems
that included internal controls, and accordingly, these changes have required
changes to our system of internal controls. The Company has reviewed each system
as it is being implemented and the controls affected by the implementation of
the new systems and made appropriate changes to affected internal controls as
the new systems were implemented. The Company believes that the controls
as modified are appropriate and functioning effectively.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to executive officers of the Company is
presented in Part I of this Report under the caption "Executive Officers of the
Registrant."
The information appearing under the captions "Proposal 1 - Election of
Directors", "Certain Transactions" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 2005 Annual
Meeting of Stockholders (the "2005 Proxy Statement") is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information appearing under the caption "Executive Compensation" in the
2005 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information appearing under the caption "Security Ownership of
Beneficial Owners and Management and Related Stockholder Matters" in the 2005
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information appearing under the caption "Certain Transactions" in the
2005 Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information appearing under the caption "Ratification of the Selection
of Independent Auditors" in the 2005 Proxy Statement is incorporated herein by
reference.
64
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS.
The financial statements are included in Part II, Item 8 of this
Report.
FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION REQUIRED
TO BE SUBMITTED.
Schedule of Valuation and Qualifying Accounts on Schedule II is
included in Part II, Item 8 of this report.
All other schedules have been omitted because they are inapplicable or
the required information is shown in the consolidated financial
statements or related notes.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on October 26, 2004,
furnishing pursuant to Item 2.02 thereof certain information regarding
the text of a press release issued by the Company, dated October 26,
2004, titled "Journal Register Company Reports Third Quarter Results."
The Company filed a Current Report on Form 8-K/A on November 16, 2004,
furnishing pursuant to Item 9.01 thereof certain financial information
regarding the acquisition of 21st Century.
The Company filed a Current Report on Form 8-K on December 21, 2004,
furnishing pursuant to Item 5.02 thereof certain information regarding
the election of a member of the Board of Directors.
65
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
(c) INDEX TO EXHIBITS.
The following is a list of all Exhibits filed as part of this Report:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
*2.1 Master Agreement, dated as of May 17, 1998, by and among
each of the persons listed on Annex A and Annex B thereto,
Richard G. Schneidman, as Designated Stockholder, and the
Company (filed as Exhibit 99.2 to the Company's Current
Report on Form 8-K/A, dated June 30, 1998, File No.
1-12955).
*3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3(i) to the Company's Form 10-Q/A Amendment No. 1
for the fiscal quarter ended June 30, 1997, File No. 1-12955
(the "June 1997 Form 10-Q")).
*3.2 Amended and Restated By-laws (filed as Exhibit 3(ii) to the
Company's Form 10-Q for the fiscal quarter ended September
30, 1999, File No. 1-12955 (the "September 1999 Form 10-Q)).
*4.1 Company Common Stock Certificate (filed as Exhibit 4.1 the
Company's Registration Statement on Form S-1, Registration
No. 333-23425 (the "Form S-1")).
*4.2 Rights Agreement dated as of July 17, 2001 between the
Company and the Bank of New York, as Rights Agent (filed as
Exhibit 4.1 to the Company's Report on Form 8-K dated July
18, 2001, File No. 1-12955).
*10.1(a) Amended and Restated 1997 Stock Incentive Plan (filed as
Annex B to the Company's Proxy Statement for the Company's
2004 Annual Meeting of Stockholders). +
*10.1(b) Amendment to the 1997 Stock Incentive Plan. (filed as
Exhibit 10.1(b) to the Company's Form 10-K for fiscal year
2001, File No. 1-12955 (the "2001 Form 10-K). +
*10.2 Management Bonus Plan (filed as Exhibit 10.3 to the June
1997 Form 10-Q). +
*10.3 Supplemental 401(k) Plan (filed as Exhibit 10.4 to the Form
S-1). +
*10.4 Registration Rights Agreement by and among Journal Register
Company, Warburg, Pincus Capital Company, L.P., Warburg,
Pincus Capital Partners, L.P. and Warburg, Pincus Investors,
L.P. (filed as Exhibit 10.6 to the June 1997 Form 10-Q).
*10.5 Executive Incentive Compensation Plan (filed as Exhibit 10.7
to the Company's Form 10-K for fiscal year 2001, File
No. 1-12955). +
*10.6 Employment Agreement by and between Journal Register Company
and Robert M. Jelenic dated March 5, 2003. +
*10.7 Employment Agreement by and between Journal Register Company
and Jean B. Clifton dated March 5, 2003. +
*10.8 Agreement and Plan of Merger, dated as of July 2, 2004, by
and among Journal Register Company, a Delaware corporation,
Wolverine Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Journal Register Company, and
21st Century Newspapers, Inc., a Delaware corporation (filed
as Exhibit 2.1 to the July 7, 2004 Form 8-K).
*10.9 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, Wachovia Bank, National
Association, as Co-Syndication Agents and The Royal Bank of
Scotland PLC, as Co-Documentation Agent (filed as Exhibit
10.1 to the August 20, 2004 Form 8-K).
**21.1 Subsidiaries of Journal Register Company.
**23.1 Consent of Ernst & Young LLP.
**24 Power of Attorney (appears on signature page).
**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.
__________________
+ Management contract or compensatory plan or arrangement.
* Incorporated by reference.
** Filed herewith.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Trenton, State of New Jersey, on the 25th day of March 2005.
JOURNAL REGISTER COMPANY
By: /s/ Robert M. Jelenic
_______________________________
Robert M. Jelenic
Chairman, President and Chief Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints both Robert M. Jelenic and Jean B.
Clifton his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or their or his or her
substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 25th day of March 2005.
SIGNATURE TITLE(S)
/s/ Robert M. Jelenic Chairman, President, Chief Executive Officer and Director
_____________________________ (Principal Executive Officer)
Robert M. Jelenic
/s/ Jean B. Clifton Executive Vice President, Chief Financial Officer and
_____________________________ Director (Principal Financial and Accounting Officer)
/s/ Jean B. Clifton
/s/ John L. Vogelstein Director
_____________________________
John L. Vogelstein
/s/ Errol M. Cook Director
_____________________________
Errol M. Cook
/s/ James W. Hall Director
_____________________________
James W. Hall
/s/ Joseph A. Lawrence Director
_____________________________
Joseph A. Lawrence
/s/ Stephen P. Mumblow Director
_____________________________
Stephen P. Mumblow
/s/ Gary D. Nusbaum Director
_____________________________
Gary D. Nusbaum
/s/ Burton B. Staniar Director
_____________________________
Burton B. Staniar
66