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2: EX-3.1 Fourth Amended and Restated Certificate of HTML 63K
Incorporation
3: EX-10.1 Seventh Amendment to Credit Agreement HTML 73K
4: EX-10.2 Shareholders' Agreement HTML 145K
5: EX-31.1 Certification Pursuant to Section 302 HTML 12K
6: EX-31.2 Certification Pursuant to Section 302 HTML 12K
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8: EX-32.1 Certification Pursuant to Section 906 HTML 9K
9: EX-32.2 Certification Pursuant to Section 906 HTML 8K
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
101 W. Colfax Avenue, Suite 1100
Denver, Colorado
(Address of principal executive offices)
80202
(Zip Code)
Registrant’s telephone number, including area code: (303) 954-6360
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. Item (1) Yes [X] No [ ];
Item (2) Yes [ ] No [X]*
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The total number of shares of the registrant’s Class A and Class C Common Stock outstanding as of
November 14, 2007 was 2,278,352 and 100, respectively.
*The registrant’s duty to file reports with the Securities and Exchange Commission has been
suspended in respect of its fiscal year commencing July 1, 2007 pursuant to Section 15(d) of the
Securities Exchange Act of 1934. It is filing this Quarterly Report on Form 10-Q on a voluntary
basis.
INDEX TO MEDIANEWS GROUP, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007
The information required by this item is filed as part of this report on Form 10-Q. See Index
to Financial Information on page 6 of this report on Form 10-Q.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is filed as part of this report on Form 10-Q. See Index
to Financial Information on page 6 of this report on Form 10-Q.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The information required by this item is filed as part of this report on Form 10-Q. See Index
to Financial Information on page 6 of this report on Form 10-Q.
ITEM 4T: CONTROLS AND PROCEDURES
As of September 30, 2007, we had carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer, President, and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange
Act”). Based upon that evaluation, the Chief Executive Officer, President, and Chief Financial
Officer concluded that our disclosure controls and procedures were sufficiently effective to
provide reasonable assurance that material information regarding us and/or our subsidiaries
required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, as required, within the time periods specified in the
Securities and Exchange Commission rules and forms.
During the period covered by this quarterly report, there have been no changes in our internal
control over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
The Company’s management, including the Chief Executive Officer, President, and Chief
Financial Officer, does not expect that our disclosure controls or our internal controls will
prevent all errors and all fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Our disclosure controls
and procedures are designed to provide reasonable assurance of achieving their objectives. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within the Company have been
detected. These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons or by collusion of two or more people.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
See factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K
for the year ended June 30, 2007 for risk factors that could materially affect our business,
financial condition or future results. The risks described in our Annual Report on Form 10-K are
not the only risks facing our Company. Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As of October 1, 2007, the holders of 93.1% of all outstanding shares of our Class A Common
Stock acted by written consent in lieu of an annual meeting to re-elect Richard B. Scudder, William
Dean Singleton, Jean L. Scudder and Howell E. Begle to our Board of Directors. Following the
effectiveness of that action, our Board of Directors consisted of Richard B. Scudder, William Dean
Singleton, Jean L. Scudder and Howell E. Begle.
As
of October 19, 2007, the holders of 93.1% of all outstanding shares of our Class A Common Stock acted by
written consent in lieu of a meeting to amend and restate the certificate of incorporation of the
Company to, among other things, create a new class of Class C Common Stock.
ITEM 6: EXHIBITS
See Exhibit Index for list of exhibits filed with this report.
This report on Form 10-Q includes “forward-looking statements” within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements contained
herein and elsewhere in this report are based on current expectations. Such statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The
terms “expect,”“anticipate,”“intend,”“believe,” and “project” and similar words or expressions
are intended to identify forward-looking statements. These statements speak only as of the date of
this report. These forward-looking statements are subject to certain risks and uncertainties that
could cause actual results and events to differ materially from those anticipated and should be
viewed with caution. Potential risks and uncertainties that could adversely affect our ability to
obtain these results, and in most instances are beyond our control, include, without limitation,
those listed under “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30,2007 and the following additional factors: (a) acquisitions of new businesses or dispositions of
existing businesses, (b) costs or difficulties related to the integration of businesses acquired by
us may be greater than expected, (c) increases in interest or financing costs, and (d) other
unanticipated events and conditions. It is not possible to foresee or identify all such factors. We
make no commitment to update any forward-looking statement or to disclose any facts, events, or
circumstances after the date hereof that may affect the accuracy of any forward-looking statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Excess of cost over fair value of net assets acquired
840,787
842,353
Newspaper mastheads
380,669
380,669
Advertiser lists, covenants not to compete and other identifiable
intangible assets, less accumulated amortization of $53,895 at
September 30, 2007 and $52,611 at June 30, 2007
190,927
192,211
Other
54,031
50,424
TOTAL OTHER ASSETS
1,827,071
1,835,806
TOTAL ASSETS
$
2,580,171
$
2,595,309
See notes to condensed consolidated financial statements
Current portion of long-term debt and obligations under capital leases
22,440
17,588
TOTAL CURRENT LIABILITIES
260,155
272,617
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
1,118,810
1,107,045
DEFINED BENEFIT AND OTHER POST EMPLOYMENT BENEFIT
PLAN LIABILITIES
31,791
33,342
OTHER LIABILITIES
24,622
25,509
DEFERRED INCOME TAXES, NET
119,052
119,890
MINORITY INTEREST
598,889
606,052
PUTABLE COMMON STOCK
29,881
33,165
ST. PAUL, MONTEREY AND TORRANCE PURCHASE PRICE
(HEARST)
311,098
306,525
SHAREHOLDERS’ EQUITY
Common stock, par value $0.001; 3,150,000
shares authorized: 2,314,346 shares
issued and shares outstanding of 2,276,846 at
September 30, 2007 and 2,298,346 at June 30, 2007
2
2
Accumulated other comprehensive loss, net of taxes
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
18,824
17,336
Provision for losses on accounts receivable
3,302
2,765
Amortization of debt discount and deferred debt issuance costs
192
216
Net (gain) loss on sale of assets
37
(16,330
)
Proportionate share of net income from unconsolidated JOAs
(12,223
)
(9,785
)
Distributions of net income from unconsolidated JOAs (a)
9,435
9,456
Equity investment (income) loss, net
1,451
(717
)
Distributions of net income from equity investments (b)
6
625
Change in defined benefit plan assets, net of cash contributions
(2,322
)
(997
)
Deferred income tax (benefit) expense
(696
)
5,000
Change in estimated option repurchase price
—
125
Minority interest
13,465
13,351
Distributions of net income paid to minority interest
(12,931
)
(13,351
)
Unrealized loss on hedging activities and amortization of prior service
costs and actuarial losses, reclassified to earnings from accumulated
other comprehensive loss
456
114
Change in operating assets and liabilities
(19,755
)
32,059
NET CASH FLOWS FROM OPERATING ACTIVITIES
(1,769
)
53,185
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions and related costs, net of cash acquired
(1,729
)
(400,506
)
Business dispositions
—
14,000
Distributions in excess of net income from JOAs(a)
2,371
6,373
Distributions in excess of net income from equity investments(b)
619
618
Investments, net
(173
)
(547
)
Capital expenditures
(2,877
)
(5,936
)
Proceeds from the sale of assets
7,154
19,820
NET CASH FLOWS FROM INVESTING ACTIVITIES
5,365
(366,178
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt, net of credit amendment fees
36,998
404,815
Repurchase of common stock
(3,010
)
—
Reduction of long-term debt and other liabilities
(23,143
)
(65,122
)
Distributions in excess of net income to minority interests
(7,681
)
(19,579
)
NET CASH FLOWS FROM FINANCING ACTIVITIES
3,164
320,114
INCREASE IN CASH AND CASH EQUIVALENTS
6,760
7,121
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
9,085
424
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
15,845
$
7,545
(a) Total distributions from unconsolidated JOAs were $11.8 million
and $15.8 million for
the three months ended September 30, 2007 and
2006, respectively.
(b) Total distributions from equity investments were $0.6 million
and $1.2 million for the
three months ended September 30, 2007 and 2006, respectively.
Supplemental schedule of noncash investing activities:
Business acquisitions (St. Paul and Monterey)
$
—
$
(264,703
)
Business acquisitions (San Jose and Contra Costa)
—
(337,230
)
Investment in Salt Lake Newspaper Production Facilities, LLC
—
(45,469
)
See notes to condensed consolidated financial statements
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
Note 1: Significant Accounting Policies and Other Matters
Basis of Quarterly Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and disclosures required by generally accepted accounting principles for
complete consolidated financial statements and should be read in conjunction with the consolidated
financial statements and notes thereto included in MediaNews Group, Inc.’s (“MediaNews” or the
“Company”) Annual Report on Form 10-K for the year ended June 30, 2007. In the opinion of
management, all adjustments considered necessary for a fair presentation have been included.
Operating results for the three-month period ended September 30, 2007 are not necessarily
indicative of the results that may be expected for future interim periods or for the year ending
June 30, 2008.
The unaudited condensed consolidated financial statements include the operating results of the
San Jose Mercury News, Contra Costa Times, The Monterey County Herald and the Pioneer Press (St.
Paul) beginning August 2, 2006. Through December 31, 2006, these four entities reported on a 52- or
53-week fiscal year. Beginning January 1, 2007, these four entities began reporting on a calendar
basis consistent with the Company.
Joint Operating Agencies
A joint operating agency (“JOA”) performs the production, sales, distribution and
administrative functions for two or more newspapers in the same market under the terms of a joint
operating agreement. Editorial control and news at each newspaper party to a joint operating
agreement continue to be separate and outside of a JOA. As of September 30, 2007, the Company,
through its partnerships and subsidiaries, participates in JOAs in Denver, Colorado, Salt Lake
City, Utah, York, Pennsylvania, Detroit, Michigan and Charleston, West Virginia. See Note 3: Joint
Operating Agencies of the Company’s consolidated financial statements included in its June 30, 2007
Annual Report on Form 10-K for a description of the Company’s accounting for the Denver and Salt
Lake City JOAs.
The operating results from the Company’s unconsolidated JOAs (Denver and Salt Lake City) are
reported as a single net amount in the accompanying financial statements in the line item “Income
from Unconsolidated JOAs.” This line item includes:
•
The Company’s proportionate share of net income from JOAs,
•
The amortization of subscriber lists created by the original purchase, as the
subscriber lists are attributable to the Company’s earnings in the JOAs, and
•
Editorial costs, miscellaneous revenue received outside of the JOA, and other charges
incurred by the Company’s consolidated subsidiaries directly attributable to the JOAs in
providing editorial content and news for the Company’s newspapers party to the JOAs.
The Company’s investments in the Denver and Salt Lake City JOAs are included in the condensed
consolidated balance sheets under the line item “Investment in Unconsolidated JOAs.” See Note 3:
Denver and Salt Lake City Joint Operating Agencies for further discussion of our accounting for
these two JOAs.
Because of the structure of the Detroit partnership and the Company’s ownership interest
therein, the Company’s accounting for its investment in the Detroit JOA only includes the preferred
distributions the Company receives from the Detroit JOA. The Company’s investment in The Detroit
News, Inc. is included in other long-term assets.
Under the Charleston JOA, the Company is reimbursed for the cost of providing the news and
editorial content of the Charleston Daily Mail and is paid a management fee. The Company’s limited
partnership interest in the Charleston JOA does not entitle the Company to any share of the profits
or losses of the limited partnership.
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
The Company owns all of the York JOA and accordingly, consolidates its results. The York
Dispatch (one of the newspapers in the JOA) is edited by a third party, and the Company reimburses
the third party for all related expenses. These expenses are included in the Company’s
consolidated results.
Income Taxes
At the end of each interim period, the Company makes its best estimate regarding the effective
tax rate expected to be applicable for the full fiscal year. The rate so determined is used in
providing for income taxes on a current year to date basis. Accordingly, the effective tax rate for
the three-month period presented in this interim report on Form 10-Q may vary significantly in
future periods. The effective income tax rate varies from the federal statutory rate because of
state income taxes and the non-deductibility of certain expenses.
Seasonality
Newspaper companies tend to follow a distinct and recurring seasonal pattern, with higher
advertising revenues in months containing significant events or holidays. Accordingly, the fourth
calendar quarter, or the Company’s second fiscal quarter, is the Company’s strongest revenue
quarter of the year. Due to generally poor weather and lack of holidays, the first calendar
quarter, or the Company’s third fiscal quarter, is the Company’s weakest revenue quarter of the
year.
NOTE 2: Comprehensive Income
The Company’s comprehensive income (loss) consisted of the following:
Unrealized gain (loss) on hedging activities, net of tax
(438
)
341
Unrealized loss on newsprint hedging activities, reclassified to
earnings, net of tax
114
114
Amortization of prior service costs and actuarial losses
reclassified to earnings, net of tax
342
—
Comprehensive income (loss)
$
(992
)
$
13,773
NOTE 3: Denver and Salt Lake City Joint Operating Agencies
The following tables present the summarized results of the Company’s unconsolidated JOAs in
Denver and Salt Lake City. The Salt Lake City JOA and Denver JOA information is presented at 100%,
with the other partners’ share of income from the related JOAs subsequently eliminated. The Salt
Lake City JOA column includes its affiliate Salt Lake Newspapers Production Facilities, LLC
(“SLNPF”). The editorial costs, miscellaneous revenue received outside of the JOA, depreciation,
amortization, and other direct costs incurred outside of the JOAs by our subsidiaries associated
with The Salt Lake Tribune and The Denver Post are included in the line “Associated Revenues and
Expenses.” See Note 3: Joint Operating Agencies for further discussion of the accounting for the
Denver and Salt Lake City JOAs.
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 4: Contingent Matters and Commitments
There have been no material changes in the other contingent matters discussed in Note 11:
Commitments and Contingencies of the Company’s consolidated financial statements included in its
Annual Report on Form 10-K for the year ended June 30, 2007.
NOTE 5: Long-Term Debt
As disclosed in Note 6: Long-Term Debt of the Company’s consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2007, on September 17, 2007,
the Company entered into an amendment to its December 30, 2003 bank credit facility (“Credit
Facility”). The amendment addressed several provisions,
including an increase in the consolidated
total leverage ratio and the ratio of consolidated senior debt to consolidated operating cash flow
for the remaining life of the Credit Facility (effective
June 30, 2007) and a lowered ratio of
consolidated operating cash flow to consolidated fixed charges for the quarters ending September 30
and December 31, 2007. The Company also voluntarily reduced the commitments under the bank
revolver to $235.0 million from the previous $350.0 million effective October 1, 2007. As a result
of the amendment, interest margins increased by 50 basis points for all loan tranches under the
Credit Facility effective with the date of the amendment. Certain other definitional and minor
structural changes were also made to the Credit Facility. An amendment fee of 0.25% was paid to
all consenting lenders upon closing of the amendment. In connection with the amendment, the
Company wrote off a small amount of debt issuance costs that were capitalized in conjunction with
the original Credit Facility.
The nature of the Company’s other long-term debt and related maturities has not materially
changed since June 30, 2007.
NOTE 6: Employee Benefit Plans
Components of Net Periodic Benefit Cost (Pension and Other Benefits)
In July 2007, the Company repurchased 21,500 shares of Class A Common Stock from the estate of
a beneficial owner of the stock held under the Scudder Family Voting Trust for $3.0 million. The
$3.0 million repurchase price was based on the Company’s estimate of fair market value of the
shares purchased and was funded with borrowings under the Company’s Credit Facility. The estate
repurchased 1,506 shares of the Class A Common Stock held in treasury on October 26, 2007 for
approximately $0.2 million.
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
NOTE 8: Recently-Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board issued Statement of Financial
Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No.
159”). SFAS No. 159 allows entities to voluntarily choose, at specified election dates, to measure
many financial assets and financial liabilities at fair value (the “fair value option”). The
election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option
is elected for an instrument, SFAS No. 159 requires all subsequent changes in fair value for that
instrument be reported in earnings. SFAS No. 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007, or for the Company, beginning July 1, 2008.
The Company is in the process of evaluating what impact, if any, SFAS No. 159 is expected to have
on the Company’s financial position and results of operations.
In September 2006, the FASB issued Statement of Financial Standards No. 157, Fair Value
Measurements, (“SFAS No. 157”). SFAS No. 157 provides enhanced guidance for using fair value to
measure assets and liabilities and applies whenever other standards require (or permit) assets or
liabilities to be measured at fair value. Under the standard, fair value refers to the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. SFAS No. 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years, or for the
Company beginning July 1, 2008. The Company is in the process of evaluating what impact, if any,
SFAS No. 157 is expected to have on the Company’s financial position and results of operations.
In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109, effective for fiscal years beginning
after December 15, 2006. FIN 48 created a single model to address uncertainty in tax positions,
prescribed the minimum recognition threshold, and provided guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 also expanded disclosure requirements, which included a tabular rollforward of the beginning
and ending aggregate unrecognized tax benefits, as well as specific detail related to tax
uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will
significantly increase or decrease within twelve months. The adoption of FIN 48 on July 1, 2007
did not have any impact on the Company’s consolidated financial statements and the Company does not
have any unrecognized tax benefits for financial reporting purposes.
The Company adopted Statement of Financial Standards No. 158, Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106 and 132 (R) (“SFAS No. 158”) effective June 30, 2007. Because the Denver JOA operates on a
calendar year-end basis, it is not required to adopt the requirements of SFAS No. 158 until
December 31, 2007, at which time the Company will reflect its share of the change in accumulated
other comprehensive income related to the Denver JOA’s adoption of the pronouncement.
NOTE 9: Subsequent Events
Hearst Stock Purchase Agreement
On August 2, 2006, the Company and The Hearst Corporation (“Hearst”) entered into a Stock
Purchase Agreement (the “MediaNews/Hearst Agreement”) pursuant to which (i) Hearst agreed to make
an equity investment in the Company (such investment does not include any governance or economic
rights or interest in the Company’s publications in the San Francisco Bay area) and (ii) the
Company agreed to purchase from Hearst The Monterey County Herald and the St. Paul Pioneer Press
with a portion of the Hearst equity investment in the Company. The Company subsequently also
agreed to purchase from Hearst the Torrance Daily Breeze with a portion of the proceeds of such
equity investment.
The Hearst transaction discussed above was consummated on October 19, 2007 and the Company
issued to Hearst 100 shares of its Class C Common Stock. Such shares afford Hearst an equity
interest of 31% in the Company’s publications outside the San Francisco Bay area. The
purchase price for such shares was approximately $317.3 million, of which approximately
$290.3 million was applied to pay the purchase price of The Monterey County Herald, the St. Paul
Pioneer Press and the Torrance Daily Breeze and related publications and Web sites, and
approximately $27.0 million was paid to the Company in cash at closing.
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(UNAUDITED)
In connection with the consummation of the Hearst equity investment, the Company and members
of the Singleton and Scudder families restated their Shareholders’ Agreement to add Hearst as a
party and to afford Hearst certain protective rights in respect of its equity investment in the
Company’s business outside the San Francisco Bay area.
The Company will record the consummation of the Hearst equity investment in the Company’s
second quarter. Of the total $311.1 million purchase price obligation reflected in the financial
statements at September 30, 2007, $290.6 million related to the acquisition cost of the St. Paul
Pioneer Press, The Monterey County Herald and Torrance Daily Breeze will be reclassified into
shareholders’ equity as Class C Common Stock along with
Hearst’s $27.0 million cash investment. The remaining $20.5 million related to the accretion of Hearst’s cost of
funds will be eliminated as an obligation of the Company with a corresponding increase in retained
earnings, where the accretion was charged prior to the Hearst equity investment. As a result of
the Hearst equity investment, the Company will no longer report net income applicable to common
stock after this quarter.
Monterey Newspapers Partnership
On
October 19, 2007, the Company and S.F. Holding Corp. (“Stephens”) formed the Monterey
Newspapers Partnership to which the Company contributed The Monterey County Herald and Stephens
paid the Company approximately $27.4 million for a 32.64% interest in the new partnership. The
operations of The Monterey County Herald will continue to be consolidated with the operations of
the Company with a minority interest reflected to account for the 32.64% of the new partnership
owned by Stephens. Stephens has a separate right to require the Monterey Newspapers Partnership to
redeem its interest in the partnership at fair market value. Upon notification of the exercise of
this right and obtaining a valuation of the partnership interest, the Monterey Newspapers
Partnership has two years to complete the purchase. The Company is not currently aware of any
intentions on the part of Stephens to exercise its put.
Dividend Declared
On October 19, 2007, the Company declared a dividend of $10.98 per share on its Class A Common
Stock, amounting to approximately $25.0 million in the aggregate. The payment date for such
dividend was October 26, 2007. Such dividend was funded with the proceeds from the cash portion of
the purchase price paid by Hearst for its equity investment in the Company.
Management Agreement (Connecticut)
On November 1, 2007, the Company entered into an agreement with Hearst to expand the
management agreement with regard to The News-Times (Danbury, Connecticut) and the Connecticut Post
to now include The Advocate and Greenwich Time in Stamford and Greenwich, Connecticut,
respectively, which were both purchased by Hearst on November 1, 2007 for $62.4 million, including
an adjustment to the extent working capital is greater or less than $1.8 million. Under
the amended agreement, the Company controls the management of the Connecticut Post (owned by the
Company) and The News-Times, The Advocate and Greenwich Time (owned by Hearst) and is entitled to
retain 60% of the profits and losses of all newspapers on a combined basis; however, the Company
and Hearst retain ownership of the assets and liabilities of their respective papers. Profits and
losses refer to net income, adjusted so that each partner retains 100% of any related gain or loss
taken related to the disposition of its contributed assets. As a result of the revision to the
management agreement, the Company began consolidating the results of The Advocate and Greenwich
Time, and recording minority interest for Hearst’s 40% interest in the combined results beginning
November 1, 2007. Prior to the revision to the management agreement, the Company consolidated the
results of The News-Times and recorded minority interest for Hearst’s 27% interest in the combined
profits and losses of the Connecticut Post and The News-Times. The Company is in the process of
evaluating the accounting for this business combination.
St. Paul Defined Benefit Plan
In October 2007, the Company negotiated a new contract with a union in St. Paul which will
result in the union’s defined benefit pension plan being frozen effective December 31, 2007. The
Company is in the process of evaluating the impact, but expects to realize a curtailment gain which
will be accounted for as an adjustment to the acquisition purchase price.
Investment in Kaango, LLC
On
November 14, 2007, the Company and The Hearst Corporation
jointly purchased 80% of Kaango, LLC (“Kaango”), a provider
of online classified advertising software, for approximately
$20.0 million. Kaango will be held by a newly formed limited
liability company, which is 50% owned by each of Hearst and the
Company. The remaining 20% of Kaango is owned by its founders and is
subject to a call option and is expected to be purchased in the
future.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operating Results
We have provided below certain summary historical financial data for the three months ended
September 30, 2007 and 2006, including the percentage change between periods.
Non-GAAP Financial Data. Adjusted EBITDA and Adjusted EBITDA Available to Company are
not measures of performance recognized under GAAP. However, we believe that they are
indicators and measurements of our leverage capacity and debt service ability. Adjusted
EBITDA and Adjusted EBITDA Available to Company should not be considered as an alternative
to measure profitability, liquidity, or performance, nor should they be considered an
alternative to net income, cash flows generated by operating, investing or financing
activities, or other financial statement data presented in our condensed consolidated
financial statements. Adjusted EBITDA is calculated by deducting cost of sales and SG&A
expense from total revenues. Adjusted EBITDA Available to Company is calculated by: (i)
reducing Adjusted EBITDA by the minority interest in the Adjusted EBITDA generated from the
California Newspapers Partnership and the Texas-New Mexico Newspapers Partnership, our less
than 100% owned consolidated subsidiaries as well as the Connecticut newspapers (beginning
March 30, 2007) (“Minority Interest in Adjusted EBITDA”); (ii) increasing Adjusted EBITDA
by our combined proportionate share of the Adjusted EBITDA generated by our unconsolidated
JOAs in Denver and Salt Lake City (“Combined Adjusted EBITDA of Unconsolidated JOAs”); and
(iii) increasing Adjusted EBITDA by our proportionate share of EBITDA of the Prairie
Mountain Publishing Company (see footnote (b)). See “Reconciliation of GAAP and Non-GAAP
Financial Information — Reconciliation of Cash Flows from Operating Activities (GAAP
measure) to Adjusted EBITDA (Non-GAAP measure)” for a reconciliation of Non-GAAP financial
information.
(b)
EBITDA of Prairie Mountain Publishing Company. The Prairie Mountain Publishing Company
agreement requires the partnership to make distributions equal to the earnings of the
partnership before depreciation and amortization (EBITDA). Our 50% share of the EBITDA of
Prairie Mountain Publishing Company has been included in Adjusted EBITDA Available to
Company as it is an integral part of our cash flows from operations as defined by our debt
covenants.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary Supplemental Non-GAAP Financial Data
Joint operating agencies, or JOAs, represent an operating structure that is unique to the
newspaper industry. Prior to EITF 00-1, which eliminated the use of pro-rata consolidation except
in the extractive and construction industries, we reported the results of our JOA interests on a
pro-rata consolidated basis. Under this method, we consolidated, on a line-item basis, our
proportionate share of the JOAs’ operations. Although pro-rata consolidation is no longer
considered an acceptable method for our financial reporting under GAAP, we believe it provides a
meaningful presentation of the results of our operations and the amount of operating cash flow
available to meet debt service and capital expenditure requirements. Our JOA agreements in Denver
and Salt Lake City do not restrict cash distributions to the owners and in general the Denver and
Salt Lake City JOAs make monthly distributions. We use pro-rata consolidation to internally
evaluate our performance and present it here because our bank credit agreement and the indentures
governing our senior subordinated notes define cash flows from operations for covenant purposes
using pro-rata consolidation. We also believe financial analysts and investors use pro-rata
consolidation and the resulting Adjusted EBITDA, combined with capital spending requirements, and
leverage analysis to evaluate our performance. This information should be used in conjunction with
GAAP performance measures in order to evaluate our overall prospects and performance. Net income
determined using pro-rata consolidation is identical to net income determined under GAAP.
In the table below, we have presented the results of operations of our JOAs in Denver and Salt
Lake City using pro-rata consolidation for all periods presented (the operations of the Detroit and
Charleston JOA have not been included on a pro-rata consolidated basis). See Notes 1 and 3 to the
condensed consolidated financial statements for additional discussion and analysis of the GAAP
accounting for our JOAs.
THE INFORMATION IN THE FOLLOWING TABLE IS NOT PRESENTED IN ACCORDANCE WITH GENERALLY
ACCEPTED
ACCOUNTING PRINCIPLES AND DOES NOT COMPLY WITH ARTICLE 11 OF REGULATION S-X FOR PRO
FORMA FINANCIAL
DATA
See “Reconciliation of GAAP and Non-GAAP Financial Information — Reconciliation of Income
Statement Data presented on a historical GAAP basis to Non-GAAP Income Statement Data presented on
a pro-rata consolidation basis” and “Reconciliation of Cash Flows from Operating Activities (GAAP
measure) to Adjusted EBITDA presented on a pro-rata consolidation basis (Non-GAAP measure)” for a
reconciliation of Non-GAAP financial information.
(a)
See footnote (a) under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Operating Results” for discussion of Adjusted EBITDA, EBITDA of
Prairie Mountain Publishing Company and Adjusted EBITDA Available to Company. The Minority
Interest in Adjusted EBITDA shown above is calculated in the same manner as described in
footnote (a) under “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Operating Results.”
(b)
See footnote (b) under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Operating Results” for discussion of EBITDA of Prairie Mountain
Publishing Company.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Policies
The preparation of financial statements in accordance with generally accepted accounting
principles at times requires the use of estimates and assumptions. We make our estimates based on
historical experience, actuarial studies and other assumptions, as appropriate, to assess the
carrying values of assets and liabilities and disclosure of contingent matters. We re-evaluate our
estimates on an ongoing basis. Actual results could differ from these estimates. Critical
accounting policies for us include revenue recognition; accounts receivable allowances;
recoverability of our long-lived assets, including goodwill and other intangible assets, which are
based on such factors as estimated future cash flows and current fair value estimates; pension and
retiree medical benefits, which require the use of various estimates concerning the work force,
interest rates, plan investment return, and involve the use of advice from consulting actuaries;
and reserves for the self-insured portion of our workers’ compensation programs, which are based on
such factors as claims growth and also involve advice from consulting actuaries. Our accounting for
federal and state income taxes is sensitive to interpretation of various laws and regulations and
the valuation of deferred tax assets. The notes to our consolidated financial statements included
in our Annual Report on Form 10-K for the year ended June 30, 2007 contain a more complete
discussion of our significant accounting policies.
Advertising revenue is earned and recognized when advertisements are published, inserted,
aired or displayed and are net of provisions for estimated rebates, rate adjustments and discounts.
Circulation revenue includes home delivery subscription revenue, single copy and third party sales.
Single copy revenue is earned and recognized based on the date the publication is delivered to the
single copy outlet, net of provisions for returns. Home delivery subscription revenue is earned and
recognized when the newspaper is sold and delivered to the customer or sold to a home delivery
independent contractor. Amounts received in advance of an advertising run date or newspaper
delivery are deferred and recorded on the balance sheet as a current liability (“Unearned Income”)
and recognized as revenue when earned.
The operating results of our unconsolidated JOAs (Denver and Salt Lake City) are reported as a
single net amount in the accompanying financial statements in the line item “Income (Loss) from
Unconsolidated JOAs.” This line item includes:
•
Our proportionate share of net income from JOAs,
•
The amortization of subscriber lists created by the original purchase as the subscriber
lists are attributable to our earnings in the JOAs, and
•
Editorial costs, miscellaneous revenue received outside of the JOA, and other charges
incurred by our consolidated subsidiaries directly attributable to providing editorial
content and news for our newspapers party to a JOA.
Seasonality
Newspaper companies tend to follow a distinct and recurring seasonal pattern, with higher
advertising revenues in months containing significant events or holidays. Accordingly, the fourth
calendar quarter, or our second fiscal quarter, is our strongest revenue quarter of the year. Due
to generally poor weather and lack of holidays, the first calendar quarter, or our third fiscal
quarter, is our weakest revenue quarter of the year.
Our results for the three months ended September 30, 2007 and 2006 were impacted by the
following transactions completed during fiscal years 2008 and 2007:
Fiscal Year 2008
•
On September 17, 2007, we amended our Credit Facility which, among other things,
increased interest rate margins by 50 basis points for all loan tranches under the Credit
Facility effective with the date of the amendment.
Fiscal Year 2007
•
On August 2, 2006, we acquired the San Jose Mercury News and Contra Costa Times and
began managing The Monterey County Herald and Pioneer Press (St. Paul) for The Hearst
Corporation (“Hearst”). Under the agreement with Hearst, we have all the economic risks
and rewards associated with ownership of The Monterey County Herald
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and Pioneer Press (St. Paul) and retain all of the cash flows generated by them as a
management fee. As a result, we began consolidating the financial statements of The
Monterey County Herald and Pioneer Press (St. Paul), along with the San Jose Mercury News
and Contra Costa Times, beginning August 2, 2006.
•
On August 2, 2006, we amended our Credit Facility to authorize a new $350.0 million term
loan “C” facility which was used, along with borrowings under the revolver portion of our
bank credit facility, to finance our share of the California Newspapers Partnership’s
purchase of the San Jose Mercury News and Contra Costa Times.
•
On September 29, 2006, the California Newspapers Partnership sold the Original Apartment
Magazine.
•
On December 15, 2006, we began managing for Hearst the Daily Breeze and three weekly
newspapers, published in Torrance, California. The accounting treatment of the Daily
Breeze is the same as the Pioneer Press (St. Paul) and The Monterey County Herald for the
reasons previously described. As a result, we began consolidating the financial statements
of the Torrance publications beginning December 15, 2006.
•
On February 2, 2007, the California Newspapers Partnership acquired the Santa Cruz
Sentinel.
•
On March 30, 2007, we entered into an agreement with Hearst to manage The News-Times
(Danbury, Connecticut). Under the agreement, we manage and control both the Connecticut
Post (owned by us) and The News-Times (owned by Hearst) and are entitled to 73% of the
combined profits and losses generated by the two newspapers. As a result, we began
consolidating the operating results of The News-Times and recording minority interest for
Hearst’s 27% interest in the combined operations beginning March 30, 2007. In conjunction
with entering into the management agreement, we recognized a $27.0 million pre-tax
nonmonetary gain on the “sale” of 27% of our interest in the Connecticut Post.
•
In September 2006 and June 2007, we sold office buildings in Long Beach and Woodland
Hills, California, respectively. We recognized a $16.7 million pre-tax gain related to the
Long Beach office building sale and a $20.7 pre-tax gain on the Woodland Hills office
building sale.
Revenues
On a same newspaper basis (after adjusting for the aforementioned transactions), the following
changes occurred in our significant revenue categories for the three-month period ended September30, 2007 as compared to the same period in the prior year.
Advertising Revenues. The aforementioned fiscal year 2007 transactions had the net impact of
increasing advertising revenues by $42.3 million for the three months ended September 30, 2007.
Excluding the aforementioned transactions, advertising revenues
decreased 9.3% for the three months
ended September 30, 2007 as compared to the prior year. The decrease in advertising revenues was
due principally to decreases in volumes from retail, national and classified advertisers, offset in
part by increases in revenues from our preprint advertising category. Revenues from our Internet
operations remained relatively flat. Within the classified advertising category, we had decreases
across all categories including real estate, automotive and employment.
Circulation Revenues. The aforementioned fiscal year 2007 transactions had the net impact of
increasing circulation revenues by $12.6 million for the three months ended September 30, 2007 as
compared to the same period in the prior year. Excluding the aforementioned transactions,
circulation revenues decreased 2.9% for the three months ended September 30, 2007 as compared to
the prior year. The decrease was primarily due to home delivery pricing pressures at most of our
newspapers, which resulted in our offering greater discounts to acquire new and retain existing
subscribers in order to help achieve our home delivery volume goals. To offset some of these
discounts, we have increased home delivery prices at most of our newspapers. We continue to honor
existing subscription rates through expiration, so the impact of these price increases will
continue to grow throughout the year. Total circulation volumes have
decreased; however, 26 of our newspapers increased daily circulation in
the most recent Audit Bureau of Circulation report for September 30, 2007.
Income from Unconsolidated JOAs
As noted in our discussion of critical accounting policies, income from unconsolidated JOAs
(Denver and Salt Lake City) includes our proportionate share of net income from those JOAs, the
amortization of subscriber lists created by the
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
original purchase, editorial costs, miscellaneous revenue and other charges directly
attributable to providing editorial content and news for newspapers party to a JOA. The following
discussion takes into consideration all of the associated revenues and expenses just described.
The results for the three months ended September 30, 2007 as compared to the same period in the
prior year were positively impacted by a reduction in the accelerated depreciation taken on certain
fixed assets at production facilities in Denver that were or will be retired earlier than
originally expected due to the construction of a new production facility. The acceleration of
depreciation has decreased as the associated assets are becoming fully depreciated. Excluding
depreciation and amortization, which were significantly impacted by the effect of accelerated
depreciation in the prior year, our income from the Denver JOA was up approximately $2.0 million
as compared to the prior year. While the results of the Denver JOA were negatively impacted by a soft
advertising market, the impact was offset by lower newsprint prices,
reduced newsprint consumption and decreased employee costs.
The results of the Salt Lake City JOA were relatively flat year over year with cost-cutting
initiatives keeping pace with a softening advertising market in Salt Lake City.
Cost of Sales
The aforementioned fiscal year 2007 transactions had the net impact of increasing cost of
sales by $17.6 million for the three months ended September 30, 2007 as compared to the same period
in prior year. Excluding the aforementioned transactions, cost of sales decreased 13.6%. We had
decreases in editorial expenses, primarily personnel, and production expenses, mostly due to the
consolidation of certain production facilities, as well as significant decreases in newsprint
expense. There was an 8% decrease in newsprint prices as compared to the same period in prior
year, our average price of newsprint consumed was $558 per metric ton for the three months ended
September 30, 2007 as compared to $606 per metric ton for the prior year. In addition, our
newsprint consumption decreased in volume by approximately 23% for the three months ended September30, 2007.
Selling, General and Administrative
The aforementioned fiscal year 2007 transactions had the net impact of increasing SG&A by
$35.1 million for the three months ended September 30, 2007 as compared to the prior year.
Excluding the aforementioned transactions, SG&A decreased 7.2%. The year over year decrease in
SG&A was the result of a combination of cost-cutting initiatives that began in fiscal year 2007
and continue into fiscal year 2008. The first quarter of fiscal 2007
also had several charges
that caused SG&A to be above the actual run rate. These charges included the $1.3 million
severance payable to the Company’s former chief operating officer and $1.9 million of bonuses
awarded to certain officers and employees in connection with the August 2, 2006 acquisitions and
related transactions.
Interest Expense
The increase in interest expense was the result of an increase in the average debt
outstanding, as well as an increase in the weighted average cost of debt. Significant borrowings
impacting the year over year comparison related to the borrowings on February 2, 2007 for our share
of CNP’s purchase of the Santa Cruz Sentinel and the borrowings on August 2, 2006 for our share of
the purchase of the San Jose Mercury News and Contra Costa Times. For the three months ended
September 30, 2007, our average debt outstanding increased $53.8 million, or 4.8%, to
$1,166.2 million and our weighted average interest rate increased 8 basis points as compared to the
prior year due to increases in LIBOR over the prior year (the average daily one month rate of LIBOR
increased 9 basis points, for the three months ended September 30, 2007 as compared to the same
period in prior year). The interest rates under our bank credit facility are based on LIBOR, plus
a borrowing margin based on our leverage ratio. In conjunction with the September 17, 2007
amendment of our Credit Facility, interest rate margins increased by 50 basis points for all loan
tranches effective with the date of the amendment.
Other (Income) Expense, Net
We include expenses and income items that are not related to current operations in other
(income) expense, net.
The charges incurred for the three months ended September 30, 2007 relate to litigation
expense of $0.9 million associated with the acquisition of Kearns-Tribune, LLC (Salt Lake City) and
the lawsuit against the former publisher of the Pioneer Press (St. Paul), $0.2 million related to
hedging and investing activities that did not qualify for hedge accounting under SFAS No. 133,
$0.2 million related to the write-off of debt issuance costs associated with our amended bank
credit facility and $0.1 million associated with various other items that were not related to
ongoing operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Cash Flow Activity
Our sources of liquidity are existing cash and other working capital, cash flows provided from
operating activities, distributions from JOAs and partnerships and the borrowing capacity under our
bank credit facility. Our operations, consistent with the newspaper industry, require little
investment in inventory, as less than 30 days of newsprint is generally maintained on hand. From
time to time, we increase our newsprint inventories in anticipation of price increases. In general,
our receivables have been collected on a timely basis.
The
net cash flows related to operating activities decreased $55.0 million for the three-month
period ended September 30, 2007 compared to the comparable prior year period. The majority of the
decrease was attributable to changes in operating assets and liabilities associated with the timing
of payments of accounts payable and accrued liabilities and the timing of cash receipts. The
difference was a net cash outflow of $19.8 million during the first quarter of fiscal 2007 compared
to net cash inflow of $32.1 million in the same period last year.
The net cash flows related to investing activities increased by $371.5 million for the
three-month period ended September 30, 2007 as compared to the comparable prior year period, primarily
due to the prior year August 2, 2006 purchase of the San Jose Mercury News and Contra Costa Times,
which was offset in part by prior year cash inflows of $33.8 million associated with the sale of
Original Apartment Magazine and our building in Long Beach, California. Capital expenditures for
the three-month period ended September 30, 2007 were down $3.1 million year over year.
The net cash flows related to financing activities decreased by $317.0 million for the
three-month period ended September 30, 2007 compared to the comparable prior year period. In the
prior year period, borrowings of approximately $406.3 million were used to fund our share of the
August 2, 2006 transactions. Activity for the three-month period ended September 30, 2006 also
included normal borrowings and paydowns on long-term debt. Activity for the three-month period
ended September 30, 2007 generally included normal borrowings and paydowns on long-term debt and
the repurchase of $3.0 million of common stock. Excluding the refinancing costs of the new credit
facility, as well as the repurchase of common stock, we
borrowed
approximately $10.9 million of debt
in the current quarter.
Liquidity
On September 17, 2007, we amended our December 30, 2003 credit agreement (the “Credit
Facility”). The amendment changed several provisions, including an increase to the consolidated
total leverage ratio and the ratio of consolidated senior debt to consolidated operating cash flow
covenants for the remaining life of the Credit Facility (effective June 30, 2007); a decrease to
the ratio of consolidated operating cash flow to consolidated fixed charges for the quarters ending
September 30 and December 31, 2007; and a voluntary reduction to the commitments under the revolver
to $235.0 million from the previous $350.0 million effective October 1, 2007. As a result of the
amendment, interest rate margins increased by 50 basis points for all loan tranches under the
Credit Facility, effective with the date of the amendment. Certain other definitional and minor
structural changes were also made to the Credit Facility. An amendment fee of 0.25% was paid to
all consenting lenders upon closing of the amendment. The amendment maintained the revolving
credit facility (reduced to $235.0 million effective October 1, 2007), the $100.0 million term loan
“A,” the $147.3 million term loan “B” and the $350.0 million term loan “C.” Any payments on the
term loans cannot be reborrowed, regardless of whether such payments are scheduled or voluntary.
On September 30, 2007, the balances outstanding under the revolving credit portion of the Credit
Facility, term loan “A,” term loan “B” and term loan “C” were $78.5 million, $100.0 million, $143.9
million and $345.6 million, respectively. Giving effect to the October 1, 2007 reduction to the
revolver, the amount available under the revolving portion of the Credit Facility, net of letters
of credit, would have been $139.4 million at September 30, 2007. The total amount we can borrow at
any point in time under the revolving credit portion of the bank credit facility may be reduced by
limits imposed by the financial covenants of our various debt agreements.
S.F. Holding Corporation (“Stephens”), a 26.28% partner in the California Newspapers
Partnership (“CNP”), has a right to require CNP to redeem its interest in CNP at its fair market
value (plus interest through closing). If such right is exercised, Stephens’ interest must be
redeemed within two years of the determination of its fair market value. We are not currently
aware of any intentions on the part of Stephens to exercise its put. No amounts are recorded in our
financial statements related to potential liability associated with Stephens’ put right.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On October 19, 2007, MediaNews and Stephens formed the Monterey Newspapers Partnership to
which we contributed The Monterey County Herald and Stephens paid us approximately $27.4 million in
exchange for a 32.64% interest in the new partnership. Similar to the CNP agreement, Stephens has
a right to require the Monterey Newspapers Partnership to redeem its interest in the partnership at
its fair market value (plus interest through closing). If such right is exercised, Stephens’
interest must be redeemed within two years of the determination of its fair market value. We are
not currently aware of any intentions on the part of Stephens to exercise its put.
In September 2005, the management committee of the Denver JOA authorized the incurrence of up
to $150.0 million of debt by the Denver JOA to finance furniture, fixtures and computers for its
new office building and new presses and related equipment and building costs related to
consolidation of two existing production facilities into one for the Denver JOA. We own a 50%
interest in the Denver JOA. As of September 30, 2007, our share of the debt incurred by the Denver
JOA under the $150.0 million credit facility was approximately $59.8 million. This debt is not
reflected in our consolidated financial statements. The Denver JOA debt is non-recourse to
MediaNews and is secured by the assets of the Denver JOA.
As of September 30, 2007, the Company was in compliance with all of its financial covenants
under the Company’s bank credit facility (as amended) and subordinated note agreements. In order
to remain in compliance with these covenants in the future, the Company needs to increase or
maintain its existing “Consolidated Operating Cash Flow” as defined in its credit agreements and/or
reduce its total debt outstanding.
Our ability to service our debt and fund planned capital expenditures depends on our ability
to continue to generate operating cash flows in the future. Based on current levels, we believe our
cash flow from operations, available cash and available borrowings under our bank credit facility
will be adequate to meet our future liquidity needs for at least the next twelve months.
We estimate minimum contributions to our defined benefit pension plans in fiscal year 2008
will be approximately $9.0 million to $10.0 million. We have made contributions of approximately
$1.9 million through September 30, 2007.
Off-Balance Sheet Arrangements and Contractual Obligations
Our various contractual obligations and funding commitments related to our long-term debt have
not materially changed since our Annual Report on Form 10-K for the year ended June 30, 2007.
Near Term Outlook
Newsprint Prices
North American newsprint supply and demand imbalances have continued in the second half of
calendar year 2007, putting downward pressure on prices. As a result, the cost of newsprint
declined in the September 2007 quarter. We expect the average price in the December 2007 quarter
to be significantly less than the same quarter of the prior year. The October 2007 RISI (“Resource
Information Systems, Inc.”) price index for 30-pound newsprint was $558 per metric ton compared to
$660 per metric ton in October 2006. As a large buyer of newsprint, our cost of newsprint
continues to be well below the RISI price index.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE OF MARKET RISK
Debt
We are exposed to market risk arising from changes in interest rates associated with our bank
debt, which includes the bank term loans and the revolving credit portion of our bank credit
facility. Our bank debt bears interest at rates based upon, at our option, Eurodollar or prime
rates, plus a spread based on our leverage ratio. The nature and position of our bank debt has not
materially changed from the disclosure made in our Annual Report on Form 10-K for the year ended
June 30, 2007 as the disclosure included the September 17, 2007 changes to the interest rate
margins.
Newsprint
See Near Term Outlook for further discussion regarding newsprint prices.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION
Reconciliation of GAAP and Non-GAAP Financial Information
The following tables have been provided to reconcile the Non-GAAP financial information
(Adjusted EBITDA and Pro-Rata Consolidation Income Statement Data) presented under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Operating Results” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary
Supplemental Non-GAAP Financial Data” of this report on Form 10-Q to their most directly comparable
GAAP measures (Cash Flows from Operating Activities and GAAP Income Statement Data).
Reconciliation of Cash Flows from Operating Activities (GAAP measure) to Adjusted EBITDA (Non-GAAP
measure).
Cash Flows from Operating Activities (GAAP measure)
$
(1,769
)
$
53,185
Net Change in Operating Assets and Liabilities
19,755
(32,059
)
Distributions of Net Income Paid to Minority Interest
12,931
13,351
Distributions of Net Income from Unconsolidated JOAs
(9,435
)
(9,456
)
Distributions of Net Income from Equity Investments
(6
)
(625
)
Interest Expense
20,685
19,249
Bad Debt Expense
(3,302
)
(2,765
)
Pension Expense, Net of Cash Contributions
2,322
997
Direct Costs of the Unconsolidated JOAs, Incurred Outside of the Unconsolidated JOAs(b)
11,013
12,131
Net Cash Related to Other (Income), Expense
(294
)
(5,919
)
Adjusted EBITDA
51,900
48,089
Minority Interest in Adjusted EBITDA
(18,563
)
(18,193
)
Combined Adjusted EBITDA of Unconsolidated JOAs
8,318
6,743
EBITDA of Prairie Mountain Publishing Company(c)
594
612
Adjusted EBITDA Available to Company
$
42,249
$
37,251
Footnotes for table above.
(a)
Non-GAAP Financial Data. Adjusted EBITDA and Adjusted EBITDA Available to
Company are not measures of performance recognized under GAAP. However, we believe that
they are indicators and measurements of our leverage capacity and debt service ability.
Adjusted EBITDA and Adjusted EBITDA Available to Company should not be considered as an
alternative to measure profitability, liquidity, or performance, nor should they be
considered an alternative to net income, cash flows generated by operating, investing
or financing activities, or other financial statement data presented in our condensed
consolidated financial statements. Adjusted EBITDA is calculated by deducting cost of
sales and SG&A expense from total revenues. Adjusted EBITDA Available to Company is
calculated by: (i) reducing Adjusted EBITDA by the minority interest in the Adjusted
EBITDA generated from the California Newspapers Partnership and the Texas-New Mexico
Newspapers Partnership, our less than 100% owned consolidated subsidiaries as well as
the Connecticut newspapers (beginning March 30, 2007) (“Minority Interest in Adjusted
EBITDA”); (ii) increasing Adjusted EBITDA by our combined proportionate share of the
Adjusted EBITDA generated by our unconsolidated JOAs in Denver and Salt Lake City
(“Combined Adjusted EBITDA of Unconsolidated JOAs”); and (iii) increasing Adjusted
EBITDA by our proportionate share of EBITDA of the Prairie Mountain Publishing Company
(see footnote (c)).
(b)
Direct Costs of the Unconsolidated JOAs Incurred Outside of the Unconsolidated
JOA. Includes the editorial costs, revenues received outside of the JOAs,
depreciation, amortization, and other direct costs incurred outside of the JOAs by our
consolidated subsidiaries associated with The Salt Lake Tribune and The Denver Post.
See Note 1: Significant Accounting Policies and Other Matters — Joint Operating
Agencies and Note 3: Denver and Salt Lake City Joint Operating Agencies in the notes to
our condensed consolidated financial statements for further description and analysis of
this adjustment.
(c)
EBITDA of Prairie Mountain Publishing Company. The Prairie Mountain Publishing
Company agreement requires the partnership to make distributions equal to the earnings
of the partnership before depreciation and amortization (EBITDA). Our 50% share of the
EBITDA of the Prairie Mountain Publishing Company has been included in Adjusted EBITDA
Available to Company, as it is an integral part of our cash flows from operations as
defined by our debt covenants.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION
Reconciliation of Income Statement Data presented on a historical GAAP basis to Non-GAAP Income
Statement Data presented on a pro-rata consolidation basis. Dollar amounts shown are in thousands.
Unconsolidated JOAs Pro-Rata Adjustment. The adjustment to pro-rata consolidate our
unconsolidated JOAs includes our proportionate share, on a line item basis, of the income
statements of our unconsolidated JOAs (Denver and Salt Lake City). Our interest in the
earnings of the Salt Lake City JOA is 58%, while our interest in the Denver Newspaper Agency
is 50%. This adjustment also includes the editorial costs, revenues received outside of these
JOAs, depreciation, amortization, and other direct costs incurred outside of the JOAs by our
consolidated subsidiaries associated with The Salt Lake Tribune and The Denver Post. See Note
1: Significant Accounting Policies and Other Matters — Joint Operating Agencies and Note 3:
Denver and Salt Lake City Joint Operating Agencies in the notes to our condensed consolidated
financial statements for further description and analysis of the components of this
adjustment.
(2)
Adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure.
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL INFORMATION
Reconciliation of Cash Flows from Operating Activities (GAAP measure) to Adjusted EBITDA presented
on a pro-rata consolidation basis (Non-GAAP measure).
Cash Flows from Operating Activities (GAAP measure)
$
(1,769
)
$
53,185
Net Change in Operating Assets and Liabilities
19,755
(32,059
)
Distributions of Net Income Paid to Minority Interest
12,931
13,351
Distributions of Net Income from Unconsolidated JOAs
(9,435
)
(9,456
)
Distributions of Net Income from Equity Investments
(6
)
(625
)
Interest Expense
20,685
19,249
Bad Debt Expense
(3,302
)
(2,765
)
Pension Expense, Net of Cash Contributions
2,322
997
Net Cash Related to Other (Income), Expense
(294
)
(5,919
)
Combined Adjusted EBITDA of Unconsolidated JOAs(b)
8,318
6,743
Direct Costs of the Unconsolidated JOAs, Incurred Outside of the Unconsolidated JOAs(c)
11,013
12,131
Adjusted EBITDA
60,218
54,832
Minority Interest in Adjusted EBITDA
(18,563
)
(18,193
)
EBITDA of Prairie Mountain Publishing Company (d)
594
612
Adjusted EBITDA Available to Company
$
42,249
$
37,251
Footnotes for table above.
(a)
Non-GAAP Financial Data. Adjusted EBITDA and Adjusted EBITDA Available to Company are
not measures of performance recognized under GAAP. However, we believe that they are
indicators and measurements of our leverage capacity and debt service ability. Adjusted
EBITDA and Adjusted EBITDA Available to Company should not be considered as an alternative
to measure profitability, liquidity, or performance, nor should they be considered an
alternative to net income, cash flows generated by operating, investing or financing
activities, or other financial statement data presented in our condensed consolidated
financial statements. Adjusted EBITDA is calculated by deducting cost of sales and SG&A
expense from total revenues. Adjusted EBITDA Available to Company is calculated by: (i)
reducing Adjusted EBITDA by the minority interest in the Adjusted EBITDA generated from the
California Newspapers Partnership and the Texas-New Mexico Newspapers Partnership, our less
than 100% owned consolidated subsidiaries as well as the Connecticut newspapers (beginning
March 31, 2007) (“Minority Interest in Adjusted EBITDA”); (ii) increasing Adjusted EBITDA
by our proportionate share of the EBITDA of the Prairie Mountain Publishing Company (see
footnote (d)). Note that pro-rata consolidation already takes into account our
proportionate share of the results from our unconsolidated JOAs (Denver and Salt Lake
City).
(b)
Combined Adjusted EBITDA of Unconsolidated JOAs. Calculated by deducting cost of sales
and SG&A expense from total revenues from the Unconsolidated JOAs Pro-Rata Adjustment
column presented under “— Reconciliation of Income Statement Data presented on a historical
GAAP basis to Non-GAAP Income Statement Data presented on a pro-rata consolidation basis.”
(c)
Direct Costs of the Unconsolidated JOAs Incurred Outside of the Unconsolidated JOA.
Includes the editorial costs, revenues received outside of the JOA, depreciation,
amortization, and other direct costs incurred outside of the JOAs by our consolidated
subsidiaries associated with The Salt Lake Tribune and The Denver Post. See Note 1:
Significant Accounting Policies and Other Matters — Joint Operating Agencies and Note 3:
Denver and Salt Lake City Joint Operating Agencies in the notes to our condensed
consolidated financial statements for further description and analysis of this adjustment.
(d)
EBITDA of Prairie Mountain Publishing Company. The Prairie Mountain Publishing Company
agreement requires the partnership to make distributions equal to the earnings of the
partnership before depreciation and amortization (EBITDA). Our 50% share of Prairie
Mountain Publishing Company has been included in Adjusted EBITDA Available to Company, as
it is an integral part of our cash flows from operations as defined by our debt covenants.
Form of MediaNews Group, Inc.’s 6 7/8% Senior Subordinated Notes due 2013 (contained in
the Indenture filed as Exhibit 4.4 to the registrant’s Form 8-K filed January 14, 2004)
Form of MediaNews Group, Inc.’s 6 3/8% Senior Subordinated Notes due 2014 (contained in
the Indenture filed as Exhibit 4.4 to the registrant’s Form 10-Q for the period ended
December 31, 2003)
10.1
Seventh Amendment to Credit Agreement dated as of September 17, 2007, by and among
MediaNews Group, Inc., the guarantors party thereto, the lenders named therein and Bank of
America, N.A., as administrative agent.
10.2
Shareholders’ Agreement effective as of October 19, 2007, between the Company, holders
of approximately 93.1% of its Class A Common Stock and The Hearst Corporation
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
28
Dates Referenced Herein and Documents Incorporated by Reference