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2: EX-31.1 Certification Pursuant to Section 302 HTML 10K
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(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 Common Stock outstanding as of May 15, 2007 was
2,298,346.
*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, 2006 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 MARCH 31, 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 4: CONTROLS AND PROCEDURES
As of March 31, 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 CEO, President, and CFO, 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.
The information required by this item is filed as part of this report on Form 10-Q as Note 4
of the Notes to Condensed Consolidated Financial Statements. See Index to Financial Information on
page 6 of this report on Form 10-Q.
ITEM 1A: RISK FACTORS
In addition to the other information set forth in this report, see factors discussed in Part
I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2006,
which 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 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 30,2006 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.
Accounts receivable, less allowance for doubtful accounts
of $12,982 at March 31, 2007 and $9,282 at June 30, 2006
154,978
106,032
Inventories of newsprint and supplies
27,035
21,289
Prepaid expenses and other assets
20,654
11,954
TOTAL CURRENT ASSETS
207,547
139,699
PROPERTY, PLANT AND EQUIPMENT
Land
58,753
41,871
Buildings and improvements
233,341
131,336
Machinery and equipment
511,753
397,949
Construction in progress
13,804
57,657
TOTAL PROPERTY, PLANT AND EQUIPMENT
817,651
628,813
Less accumulated depreciation and amortization
(274,770
)
(249,588
)
NET PROPERTY, PLANT AND EQUIPMENT
542,881
379,225
OTHER ASSETS
Investment in unconsolidated JOAs (Denver and Salt Lake City)
255,050
228,925
Equity investments
51,074
54,457
Subscriber accounts, less accumulated amortization of $170,511 at
March 31, 2007 and $161,776 at June 30, 2006
68,130
39,365
Excess of cost over fair value of net assets acquired
864,593
424,161
Newspaper mastheads
383,554
101,829
Advertiser lists, covenants not to compete and other identifiable
intangible assets, less accumulated amortization of $50,144 at
March 31, 2007 and $34,506 at June 30, 2006
178,839
15,656
Other
48,876
44,466
TOTAL OTHER ASSETS
1,850,116
908,859
TOTAL ASSETS
$
2,600,544
$
1,427,783
See notes to condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL 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, 2006. In the opinion of
management, all adjustments considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended March 31, 2007 are not necessarily
indicative of the results that may be expected for future interim periods or for the year ended
June 30, 2007.
In addition, 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 St.
Paul Pioneer Press beginning August 2, 2006 (see Note 7: Acquisitions, Dispositions and Other
Transactions). 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 March 31, 2007, the Company
participated 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, 2006 Annual Report on Form 10-K for a
description of the Company’s accounting for the Denver and Salt Lake City JOAs.
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
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 FINANCIAL 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 and pays them a management fee. 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 and nine-month periods 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.
Revisions/Reclassifications
For comparability, certain prior year balances have been reclassified to conform to current
reporting classifications. In particular, the statement of cash flows has been revised for the
nine months ended March 31, 2006 to reflect distributions in excess of net income from
unconsolidated JOAs and equity investments as cash flows from investing activities in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 95, Statement of Cash Flows. For the
nine months ended March 31, 2006, the revision decreased the reported net cash flows from operating
activities by $18.5 million, increased the reported net cash flows from investing activities by
$22.2 million and decreased the reported net cash flows from financing activities by $3.7 million.
NOTE 2: Comprehensive Income
The Company’s comprehensive income consisted of the following:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3: Denver and Salt Lake City Joint Operating Agencies
The following tables present the summarized results of the Denver and Salt Lake City JOAs on a
combined basis. The financial information presented under the captions Salt Lake City JOA and
Denver JOA is presented at 100%, with the other partners’ share of income from the related JOAs
subsequently eliminated. The editorial costs, miscellaneous revenue 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, are combined in the column
“Associated Revenues and Expenses.”
Partners’ share of income from
unconsolidated JOAs
(17,643
)
(7,702
)
—
Income (loss) from unconsolidated JOAs
$
24,518
$
7,702
$
(48,623
)
$
(16,403
)
Depreciation and amortization expense was greater in the prior year due to accelerated
depreciation on certain fixed assets at the production facilities in Denver and Salt Lake City
which will be or were retired earlier than originally expected due to the construction of new
production facilities at the respective locations. The accelerated depreciation for the three and
nine months ended March 31, 2007 is only related to the Denver JOA.
In addition, the fiscal year 2007 depreciation and amortization for the Salt Lake City JOA
includes depreciation and amortization on assets previously owned outside of the JOA. Prior to July1, 2006, each partner owned the fixed assets used in the operations of the Salt Lake City JOA as
tenants in common. Effective July 1, 2006, most of the operating assets utilized by the Salt Lake
City JOA are owned by Salt Lake Newspapers Production Facilities, LLC (“SLNPF”), which leases those
assets to the Salt Lake City JOA. SLNPF is owned 58% by the Company, and 42% by our partner in the
Salt Lake City JOA, Deseret News Publishing Company. Accordingly, for fiscal year 2007 the related
depreciation is included in “Salt Lake City JOA” income statement data instead of the “Associated
Revenues and Expenses” column. Management of SLNPF is shared equally between the Company and
Deseret News Publishing Company in the same manner as the Salt Lake JOA. The Company’s $45.5
million investment in the fixed assets contributed to SLNPF as of July 1, 2006 was reclassified
from Property, Plant and Equipment to Investment in Unconsolidated JOAs.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4: Contingent Matters and Commitments
In January 2001, the Company acquired Kearns-Tribune, LLC (“Kearns-Tribune”) and The Salt Lake
Tribune. Prior to and since the acquisitions, MediaNews and Salt Lake Tribune Publishing Company
(“SLTPC”) have been involved in litigation over SLTPC’s option (“the Option Agreement”) to acquire
the assets used, held for use or usable in connection with the operation and publication of The
Salt Lake Tribune (the “Tribune Assets”). For additional discussion on the litigation, please refer
to 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, 2006. The following is a
summary of updates with regard to this litigation.
One issue in dispute has been the option exercise price. The terms of the Option Agreement
specify an appraisal process for determination of the fair market value of the Tribune Assets. In
this appraisal process, each party engaged an appraisal firm to value the Tribune Assets at their
fair market value. Kearns-Tribune’s appraisal valued the Tribune Assets at $380.0 million, whereas
SLTPC’s appraisal valued the Tribune Assets at $218.0 million. Because Kearns-Tribune’s and
SLTPC’s appraisals were more than 10% apart, the appraisers appointed by Kearns-Tribune and SLTPC
were required to jointly select a third appraiser. Under the terms of the Option Agreement, the
final option purchase price is based on the average of the two closest of the three appraisals. On
June 11, 2003, the third appraiser issued its final report valuing the Tribune Assets at $331.0
million. Accordingly, the option exercise price was set at $355.5 million for the Tribune Assets.
On June 24, 2003, the third appraiser’s final report was issued and SLTPC filed a lawsuit (the
“appraisal lawsuit”) in the United States District Court for the District of Utah (“District
Court”) challenging the valuation performed by the third appraiser and seeking to set aside the
third appraisal and the $355.5 million exercise price. The District Court ruled that the appraisal
process constituted an arbitration under the Federal Arbitration Act (“FAA”) and that any challenge
must therefore be made under the procedures set forth in the FAA. The District Court subsequently
denied SLTPC’s motion under the FAA procedures seeking to set aside the appraisal, and, as a
consequence of its arbitration rulings, also dismissed the appraisal lawsuit. SLTPC appealed the
District Court’s rulings to the United States Court of Appeals for the Tenth Circuit (“Tenth
Circuit”), and on November 30, 2004, the Tenth Circuit reversed the District Court’s rulings.
While taking no position on the merits of the dispute as to the finality of the third appraisal and
the validity of the $355.5 million exercise price, the Tenth Circuit held that the Option
Agreement’s appraisal procedure did not constitute arbitration within the meaning of the FAA. The
Tenth Circuit accordingly reinstated SLTPC’s appraisal lawsuit.
In the reinstated appraisal lawsuit, SLTPC filed an amended complaint against MediaNews,
Kearns-Tribune and the third appraiser, Management Planning Inc. (“MPI”), seeking relief that
includes, among other things, (a) the setting aside of the third appraisal; (b) monetary damages
from the third appraiser for alleged breaches of contractual and fiduciary duties; and (c) what
SLTPC refers to as an “abatement” of the purchase price pursuant to allegations that the value of
the Tribune Assets has decreased since SLTPC sought to exercise the option. MediaNews and
Kearns-Tribune and MPI filed separate motions to dismiss SLTPC’s amended complaint in the appraisal
lawsuit. On October 24, 2005, the District Court granted those motions and dismissed the appraisal
lawsuit, ruling that SLTPC’s allegations in its amended complaint did not set forth grounds for the
invalidation of the third appraisal. SLTPC subsequently filed a motion for reconsideration or, in
the alternative, for leave to file a second amended complaint, which the District Court denied on
December 7, 2005. SLTPC appealed to the Tenth Circuit. On July 19, 2006, the Tenth Circuit
reversed the District Court, holding that SLTPC had alleged grounds for invalidation of the third
appraisal by alleging that MPI had (a) used the wrong definition of Fair Market Value; (b) failed
to consider relevant evidence; and (c) failed to comply with professional appraisal standards. The
Tenth Circuit remanded the case to the District Court for further proceedings to determine if those
allegations could be sustained. On October 26, 2006, the Tenth Circuit denied Kearns-Tribune’s
petition for rehearing.
When the appraisal lawsuit again returned to the District Court in November 2006, SLTPC sought
leave to file a second amended complaint that would include allegations of fraud and evident
partiality on the part of MPI. Over MediaNews and Kearns-Tribune’s objection, the District Court
granted the motion. On December 13, 2006, SLTPC filed a Second Amended Complaint, which MediaNews
and Kearns-Tribune answered on December 22, 2006.
Also in November 2006, MediaNews and Kearns-Tribune filed a motion to dismiss or stay SLTPC’s
claims that were unrelated to the validity of MPI’s appraisal on the ground that those claims were
either (a) already at issue in the main action or (b) premature and speculative. On December 12,2006, the District Court granted the motion in part, staying SLTPC’s claim for an abatement of the
option exercise price and staying the damages issues on all of SLTPC’s claims. The District
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Court also entered a scheduling order setting the case for trial in September 2007. The
parties are in the process of completing discovery in this case, and dispositive motions are due by
May 23, 2007.
At a scheduling conference held on April 18, 2007, SLTPC’s counsel stated that SLTPC no longer
sought a new third appraisal and would no longer seek to acquire the Tribune Assets for the
Exercise Price established under the Option Agreement. Instead, SLTPC’s counsel indicated that
SLTPC would move to amend its complaint in its original lawsuit to allege that MediaNews and
Kearns-Tribune breached or repudiated the Option Agreement by changing and disposing of Tribune
Assets in connection with the construction of a new plant and the move of the newspaper’s
operations to new facilities. SLTPC’s counsel indicated at that scheduling conference that SLTPC
would be seeking monetary and equitable relief designed to place SLTPC in the position that it
would have been in if the assets had not been changed.
Also in the appraisal case, in January 2007 SLTPC filed a motion for a preliminary injunction
against the sale of certain real estate and equipment formerly used to publish The Salt Lake
Tribune. On April 27, 2007, the District Court denied the motion, based in part on the
representations by counsel for SLTPC at the April 18 scheduling conference.
During the time in which the appraisal and exercise price issues were on appeal before the
Tenth Circuit, SLTPC’s main action was stayed. In the main action, SLTPC’s pending claims against
MediaNews and Kearns-Tribune include claims for specific performance, damages for breach of
contract (in the event some or all of the Tribune Assets are not transferred to SLTPC) and for
interference with contract (arising out of the amendment of the JOA in 2001). MediaNews and
Kearns-Tribune have pending counterclaims against SLTPC, which include claims for damages for
breaches of contract, breach of fiduciary duty, interference with contract, negligence and
conversion. Additionally, MediaNews and Kearns-Tribune have pending counterclaims for declaratory
judgment, but no damage claims against Deseret News Publishing Company (“Deseret Publishing”).
Deseret Publishing has pending claims against SLTPC for damages, and claims that do not seek
damages against Kearns-Tribune as to the meaning and enforceability of the Option Agreement and
related Management Agreement. No schedule has yet been set for the litigation of these issues. On
October 20, 2006, however, the District Court granted SLTPC’s motion to lift the stay in the main
case. SLTPC had also moved for leave to file an amended complaint in the case, and that motion was
denied without prejudice because the proposed amended complaint was not presented to the District
Court. The District Court has directed SLTPC to file its motion to amend the complaint in the main
case by May 18, 2007. The District Court has ordered that the case otherwise remain stayed.
As previously disclosed, on April 24, 2006, the District Court granted summary judgment to
MediaNews and Kearns-Tribune on a separate complaint by the McCarthey siblings (who own a majority
interest in SLTPC), who had alleged a separate oral agreement guaranteeing, among other things, the
return of The Salt Lake Tribune to them or their company at a fair price. Oral argument on the
McCartheys’ appeal of that judgment took place before the United States Court of Appeals for the
Tenth Circuit on May 9, 2007.
The Company is not in a position at this time to predict the likely outcome of this
litigation. However, the Company does not believe that the litigation will have a material adverse
impact on its financial condition, results of operations, or liquidity. Approximately $1.5 million
and $2.3 million, respectively, was recorded in other (income) expense, net for the three and nine
months ended March 31, 2007, respectively, related to the cost of defending these lawsuits. The
cost of defending these lawsuits may continue to be substantial.
Other
The Company owns certain life insurance policies received in conjunction with an acquisition.
In fiscal year 2006, the Company determined one of the policies, with a face value of $5.0 million,
related to an individual who passed away in 2002. In October 2006, the Company received the policy
proceeds of $5.0 million, plus interest and reimbursement of the policy’s cash surrender value for
premiums since the individual’s death, for a total payment of $6.6 million. The total proceeds
from the policy were recorded in other (income) expense, net during the three months ended
September 30, 2006.
On July 14, 2006, an individual filed suit against the Company in California alleging
antitrust violations based on the Company’s purchase of certain California newspapers from The
McClatchy Company and The Hearst Corporation’s proposed investment in the Company’s non-Bay area
assets (see Note 7: Acquisitions, Dispositions and Other Transactions). The parties settled the
case and the case was dismissed on April 25, 2007.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company and S.F. Holding Corporation (“Stephens”) have
agreed to form a new partnership whereby the
Company would contribute The Monterey County Herald to a newly formed partnership and Stephens
would pay the Company approximately $27.4 million in exchange for a 32.64% interest in the new
partnership. This transaction is expected to be completed shortly
after The Monterey County Herald is acquired from Hearst (see
Note 7: Acquisitions, Dispositions and Other Transactions-Hearst
Stock Purchase Agreement).
In January 1998, the Company entered into an option agreement in association with the
acquisition financing related to one of its newspapers. The option entitles the holder to purchase
the assets used in the publication of one of the Company’s newspaper properties, which the option
holder can currently exercise or put to the Company based on a predetermined formula. At June 30,2006, the option repurchase price was recorded in the Company’s balance sheet (as a component of
other long-term liabilities) at approximately $6.6 million. During the quarter ended December 31,2006, the Company wrote the option repurchase price down to $0 with a credit to other (income)
expense as a result of the performance of the publication and a clarification in the interpretation
of how to calculate the option repurchase price. The purchase price of the option can change each
quarter based on the performance of the publication because a significant component of the option
repurchase formula is the twenty-four month trailing cash flows of the publication. The option
expires in January 2010 at which time, if the option remains outstanding, the Company would be
required to repurchase it at the then option repurchase price as determined by the option
agreement.
There have been no other 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, 2006.
NOTE
5: Amendment of Bank Credit Facility and Long-Term Debt
On August 2, 2006, the Company entered into an amendment to its December 30, 2003 bank credit
facility (the “amended facility”). The amended facility was entered into in order to authorize a
new $350.0 million term loan “C” facility and to approve the purchase of the Contra Costa Times,
San Jose Mercury News, The Monterey County Herald and the St. Paul Pioneer Press by the Company
(see Note 7: Acquisitions, Dispositions and Other Transactions).
The amended facility maintains the $350.0 million revolving credit facility, the $100.0
million term loan “A,” the $147.3 million term loan “B,” and provides for the $350.0 million term
loan “C” facility, which was borrowed on August 2, 2006 and used, along with borrowings under the
Company’s bank revolver of $56.3 million, to fund the remainder of its portion of the purchase
price for the Contra Costa Times and the San Jose Mercury News and to pay the related fees to amend
the facility. At March 31, 2007, the balances outstanding under the revolving credit portion of
the bank credit facility, term loan “A,” term loan “B” and term loan “C” were $86.0 million, $100.0
million, $144.7 million and $347.4 million, respectively.
Term loan “C” bears interest based upon, at the Company’s option, either Eurodollar, plus a
borrowing margin of 1.75%, or base rate, plus a borrowing margin of 0.75%. Term loan “C” requires
quarterly principal payments as follows: $0.875 million through June 2012; and $82.25 million from
June 2012 through March 2013, with the remaining balance due at maturity on August 2, 2013. Amounts
repaid under the term loan “C” facility will not be available for re-borrowing. The terms for the
existing borrowings remain unchanged.
The amended facility also contained certain definitional changes used in calculating the
consolidated debt to consolidated operating cash flow ratio as well as increasing the maximum
coverage ratio for certain future periods. As of March 31, 2007, the Company was in compliance
with the covenant requirements of the bank credit facility, as well as those of its Senior
Subordinated Notes.
The Company paid approximately $5.1 million in fees to amend its credit facility and syndicate
its term loan “C.” Such payment was capitalized as a deferred financing cost and is included in
other assets in the consolidated balance sheet and is being amortized to expense over a period of
seven years.
The nature of the Company’s other long-term debt and related maturities has not materially
changed since June 30, 2006.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Maturities of long-term debt, excluding $5.8 million of capital lease obligations, for the
five fiscal years ending June 30, 2011 (except for June 30, 2007 which is only for the remaining
three months of fiscal year 2007) and thereafter are shown below (in thousands):
2007
$
1,940
2008
17,121
2009
31,848
2010
202,262
2011
100,647
Thereafter
792,449
$
1,146,267
NOTE 6: Employee Benefit Plans
Components of Net Periodic Benefit Cost (Pension and Other Benefits)
The
decrease in net periodic pension plan expense for the three and nine months ended March 31, 2007 as
compared to the same period for the prior year is mostly the result of an increase in the discount
rate assumption from 5.25% in fiscal year 2006 to 6.25% in fiscal year 2007. Also impacting the
change is the employee benefit plan expense related to the purchase of the San Jose Mercury News
and management and consolidation of the St. Paul Pioneer Press (See Note 7: Acquisitions,
Dispositions and Other Transactions). The preliminary purchase accounting related to the assumption
of the employee benefit plans for the San Jose Mercury News and the St. Paul Pioneer Press resulted
in the Company recording liabilities of $31.7 million related to pension obligations and $1.2
million related to other postretirement employment benefits. The discount rate used to account for
the assumption of these plans was 6.0%. In December 2006, the Company decided to freeze the
defined benefit plan at the San Jose Mercury News to be effective at the end of February 2007. The
current impact to the plan was immaterial and no curtailment gain or loss was recognized.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Employer Contributions
The Company expects to contribute approximately $7.2 million to its pension plans in fiscal
year 2007, including contributions related to pension plan liabilities assumed in conjunction with
the management and consolidation of the St. Paul Pioneer Press (see Note 7: Acquisitions,
Dispositions and Other Transactions). Contributions of approximately $5.8 million have been made
through March 31, 2007 by the Company.
NOTE 7: Acquisitions, Dispositions and Other Transactions
Acquisition (San Jose Mercury News, Contra Costa Times, The Monterey County Herald and St. Paul Pioneer Press)
On August 2, 2006, MediaNews and The McClatchy Company (“McClatchy”) consummated the closing
under the Stock and Asset Purchase Agreement dated as of April 26, 2006, between the Company and
McClatchy, pursuant to which the California Newspapers Partnership (“CNP”), a 54.23% subsidiary of
the Company, purchased the Contra Costa Times and the San Jose Mercury News and related
publications and Web sites for $736.8 million. The acquisition, including estimated fees, was
funded in part with contributions of $340.1 million from the Company’s partners in CNP ($337.2
million was paid by the partners directly to McClatchy). The Company’s share of the acquisition,
including estimated investment banking fees, was approximately $403.0 million and was funded with
borrowings under a new term loan “C” and its existing bank revolver (see Note 5: Amendment of Bank
Credit Facility). The $403.0 million acquisition cost excludes cash acquired and other deal costs
(principally legal and accounting consultations).
On August 2, 2006, Hearst and McClatchy consummated the closing under the Stock and Asset
Purchase Agreement dated as of April 26, 2006, between Hearst and McClatchy, pursuant to which
Hearst purchased The Monterey County Herald and the St. Paul Pioneer Press and related publications
and Web sites for $263.2 million.
Hearst Stock Purchase Agreement
On August 2, 2006, MediaNews and The Hearst Corporation (“Hearst”) entered into a Stock
Purchase Agreement which was amended on May 1, 2007 (the “MediaNews/Hearst Agreement”) pursuant to
which (i) Hearst agreed to make an equity investment of up to $299.4 million (subject to adjustment
under certain circumstances) in the Company (such investment will not include any governance or
economic rights or interest in the Company’s publications in the San Francisco Bay area or “Bay
Area” assets) and (ii) the Company has 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
equity investment will afford Hearst an equity interest of approximately 30% (subject to adjustment
in certain circumstances) in the Company, excluding the Company’s economic interest in the San
Francisco Bay area newspapers. The equity investment by Hearst in the Company is subject to
antitrust review by the Antitrust Division of the Department of Justice and by the Office of the
Attorney General of the State of California, which is expected to be concluded in the near future.
The Antitrust Division has requested information and documents in connection with this review, and
the Company has substantially completed its response to this request. The Company has agreed to
manage The Monterey County Herald and the St. Paul Pioneer Press during the period of their
ownership by Hearst. Under the MediaNews/Hearst Agreement, the Company has all the economic risks
and rewards associated with ownership of these two newspapers and is entitled contractually to
retain all of the cash flows generated by them as a management fee. As a result, the Company began
consolidating the financial statements of The Monterey County Herald and St. Paul Pioneer Press
beginning August 2, 2006. The Company also agreed that, at the election of MediaNews or Hearst,
the Company will purchase The Monterey County Herald and the St. Paul Pioneer Press for $263.2 million (plus reimbursement of Hearst’s costs and cost of funds in respect
of its purchase of such newspapers) if for any reason Hearst’s equity investment in the Company is
not consummated. The Company would need to obtain additional financing to fund
this purchase, if required. As of March 31, 2007, the Company has recorded $302.0 million related
to Hearst’s cost of $290.6 million and the $11.4 million accretion of Hearst’s cost of funds for
this purchase. Hearst’s cost and cost of funds includes the December 15, 2006 purchase of the
Daily Breeze in Torrance (see further discussion later in this note).
As a result of the above transactions (acquisition of San Jose Mercury News and Contra Costa
Times and management of The Monterey County Herald and St. Paul Pioneer Press), the Company has
recorded the following: $823.0 million in intangible assets ($360.2 million — goodwill; $273.4
million — mastheads; $11.6 million — subscriber lists; and $177.8 million
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
in
advertiser lists and other finite lived intangibles) and $197.9 million in net tangible
assets (the majority of which is related to fixed assets). The purchase accounting for these
transactions is preliminary and subject to change.
The unaudited pro forma consolidated statement of income information for the three and nine
months ended March 31, 2007 and 2006, set forth below, presents the Company’s results of operations
as if the August 2, 2006 transactions (acquisition of San
Jose Mercury News, Contra Costa Times and management and
consolidation of The Monterey County Herald and
St. Paul Pioneer Press) described above had occurred at the beginning of the periods presented and
is not necessarily indicative of future results or actual results that would have been achieved had
the acquisition occurred as of the beginning of such periods.
On September 29, 2006, the California Newspapers Partnership sold the Original Apartment
Magazine for $14.0 million plus a potential earnout of $1.0 million based on increases in the
Original Apartment Magazine’s revenue over a twelve-month period ending August 2007. The sale
resulted in an immaterial loss, excluding any impact of the earnout.
Acquisition (Torrance)
On December 15, 2006, Hearst acquired the Daily Breeze and three weekly newspapers, published
in Torrance, California (the “Publications”) for
approximately $25.6 million, which included $1.375 million
of working capital. The Publications are owned by Hearst, but pursuant to the MediaNews/Hearst
Agreement, the Publications will be managed by the Company. Under the agreement, the Company has
all the economic risks and rewards associated with ownership of the
Publications and retains all of the cash flows generated by them as a management fee. As a result,
the Company began consolidating the financial statements of the Publications in Torrance beginning
December 15, 2006. The Publications are in close proximity to the Company’s operations in Long
Beach, California. The Daily Breeze had daily circulation of approximately 67,000 at March 31,2007.
Also pursuant to the MediaNews/Hearst Agreement, the Company has agreed that, at the election
of MediaNews or Hearst, the Company will purchase the Publications, if requested, from Hearst for
$25.0 million (plus reimbursement of Hearst’s costs and cost of funds in respect of its purchase of
the Publications) if for any reason Hearst’s equity is not consummated. The purchase accounting for the business combination is preliminary and subject to
change.
Acquisition (Santa Cruz)
On
February 2, 2007, the California Newspapers Partnership
(“CNP”) acquired the Santa Cruz Sentinel,
published in Santa Cruz, California, for approximately $45.0 million, plus an adjustment for
working capital. Contributions from the partners in CNP (including
the Company) were used to fund the acquisition. The
Company’s portion of the acquisition (including working capital) was approximately $25.0 million
and was funded with borrowings under the Company’s bank credit facility. Santa Cruz is in close
proximity to the Company’s operations in San Jose. The Santa Cruz Sentinel had daily circulation
of approximately 25,000 at March 31, 2007. The purchase accounting for the business combination is
preliminary and subject to change.
Management Agreement (Danbury)
On March 30, 2007, the Company entered into an agreement with Hearst regarding the management
of The News-Times (Danbury, CT), which was purchased by Hearst on March 30, 2007 for $80.0 million,
plus an adjustment for working capital. Under the agreement, the Company controls the management
of both the Connecticut Post (owned by the Company) and The News-Times and is entitled to 73% of
the net income of both newspapers on a combined basis; however, the Company and Hearst retain
ownership of the assets and liabilities of the Connecticut Post and The News-Times, respectively.
As a result of entering into the management agreement, the Company began consolidating the results of The News-Times and recording minority
interest for Hearst’s 27% interestbeginning
March 30, 2007. The accounting resulting from entering into the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
management agreement created a non-monetary
exchange (pursuant to Statement
of Financial Accounting Standards No. 153, Exchanges of
Non-Monetary Assets). The Company accounted for this exchange as two separate, but simultaneous events: (1) a sale, whereby for
accounting purposes, the Company sold to Hearst a 27% interest in the Connecticut Post, resulting
in the Company recording a non-monetary gain of approximately $27.0 million and (2) the
acquisition of a 73% interest in The News-Times. The accounting for the business combination is
preliminary and subject to change.
Sale of Building
In July 2006, the Company sold its office building in Long Beach, California for approximately
$20.0 million. The Company recognized a gain of approximately $16.7 million on the sale of the
building which was recorded in gain on sale of assets in the statement of operations. In
conjunction with the sale of the building, the Company relocated its Long Beach operations to a
leased facility. Accordingly, the Company entered into a 15-year lease agreement, with a party
unrelated to the purchaser of the building, which commenced in the second quarter of the Company’s
fiscal year 2007. The future minimum lease payments are included in the disclosure of future
minimum payments for operating leases in Note 7: Leases of the consolidated financial statements
included in the Company’s June 30, 2006 Annual Report on Form 10-K.
NOTE 8: Workforce Reductions
The Company is implementing workforce reductions at certain of its newspaper properties. The
majority of the workforce reductions are related to the recently acquired newspapers or in
conjunction with the consolidation of certain recently acquired newspapers with the Company’s other
operations. The Denver JOA also has implemented significant workforce
reductions as a part of its new plant project and business
reorganization. The Company
has not finalized all of its consolidation and workforce reduction programs or made all the
announcements regarding such planned workforce reductions. All costs associated with workforce
reduction programs, the majority of which are severance related, will be recorded in accordance
with the provisions of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities or EITF Issue 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination, as applicable. Under these pronouncements, certain of the costs of the workforce
reductions at the acquired newspapers will be treated as additional acquisition costs (as of March31, 2007, approximately $3.9 million was recorded to goodwill) while those related to the
newspapers already owned by the Company will be expensed (approximately $0.7 million as of March31, 2007).
NOTE 9: Recently-Issued Accounting Standards
In October 2006, the Financial Accounting Standards Board issued 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”). SFAS No. 158
applies to all plan sponsors who offer defined benefit postretirement benefit plans and requires an
entity to:
•
recognize in its statement of financial position an asset for a defined benefit
postretirement plan’s overfunded status or a liability for a plan’s underfunded status;
•
measure a defined benefit postretirement plan’s assets and obligations that
determine its funded status as of the end of the employer’s fiscal year;
•
recognize changes in the funded status of a defined postretirement plan in
comprehensive income in the year in which the changes occur.
SFAS No. 158 does not change the amount of net periodic cost included in net income. The
requirement to recognize the funded status of a defined benefit postretirement plan and the
disclosure requirements are effective for fiscal years ending after December 15, 2006, or for the
Company, for the fiscal year ending June 30, 2007. The Company already measures its plan assets
and benefit obligations as of the date of the Company’s fiscal year-end statement of financial
position.
In September 2006, the Financial Accounting Standards Board 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. 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 or results of operations.
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 or results of operations.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements (“SAB 108”). SAB 108 provides guidance on how prior year misstatements
should be taken into consideration when quantifying misstatements in current year financial
statements for purposes of determining whether the current year’s financial statements are
materially misstated. SAB 108 permits registrants to record the cumulative effect of initial
adoption by recording the necessary “correcting” adjustments to the carrying values of assets and
liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening
balance of retained earnings. SAB 108 is effective for fiscal years ending on or after November15, 2006. The Company has assessed the effect of adopting this guidance and has determined that
there will be no impact on the Company’s consolidated financial statements.
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 creates a single model to address uncertainty in tax positions,
prescribes the minimum recognition threshold, and provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
FIN 48 also has expanded disclosure requirements, which include 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 is not expected to
have a material impact on the Company’s financial statements.
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 and nine months
ended March 31, 2007 and 2006, including the percentage change between periods.
EBITDA of Texas-New Mexico Newspapers
Partnership and Prairie Mountain Publishing
Company (c)
139
304
(54.3
)
1,189
5,099
(76.7
)
Adjusted EBITDA Available to Company
$
23,922
$
24,594
(2.7
)%
$
123,192
$
107,451
14.6
%
(a)
Prior Year Revision/Reclassification. For comparability, certain prior year balances have
been reclassified to conform to current reporting classifications. In particular, the
statement of cash flows has been revised for the three and nine months ended March 31, 2006 to
reclassify the distribution in excess of net income from unconsolidated JOAs and equity
investments as cash flows from investing activities in accordance with Statement of Financial
Accounting Standards No. 95. Statement of Cash Flows. For the three months ended March 31,2006, the revision decreased the reported net cash flows from operating activities by $3.9
million, increased the net cash flows from investing activities by $7.6 million and decreased
net cash flows from financing activities by $3.7 million. For the nine months ended March 31,2006, the revision decreased the reported net cash flows from operating activities by $18.5
million, increased the reported net cash flows from investing activities by $22.2 million and
decreased the reported net cash flows from financing activities by $3.7 million.
(b)
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 (beginning December 26, 2005), our less than
100% owned consolidated subsidiaries, as well as the Connecticut newspapers (beginning March30, 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 Texas-New Mexico
Newspapers Partnership (through December 25, 2005) and our proportionate share of EBITDA of
the Prairie Mountain Publishing Company (beginning February 1, 2006) (see footnote (c)). 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.
(c)
EBITDA of Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing Company.
The Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing Company agreements
require the partnerships to make distributions equal to the earnings of the partnership before
depreciation and amortization (EBITDA). Through December 25, 2005, our 33.8% share of the
EBITDA of Texas-New Mexico Newspapers Partnership and beginning February 1, 2006, our 50%
share of the EBITDA of Prairie Mountain Publishing Company have been included in Adjusted
EBITDA Available to Company, as they are an integral part of our cash flows from operations as
defined by our debt covenants. Beginning December 26, 2005, we became the controlling partner
of the Texas-New Mexico Newspapers Partnership, at which time we began consolidating its
results. See Note 4: Investments in California Newspapers Partnership and Texas-New Mexico Newspapers
Partnership and Note 5: Acquisitions, Dispositions and Other Transactions of the notes to the
consolidated financial statements included in our June 30, 2006 Annual Report on Form 10-K for
further discussion of the Texas-New Mexico Newspapers Partnership restructuring and the Prairie
Mountain Publishing Company formation.
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
EBITDA of Texas-New Mexico
Newspapers Partnership and Prairie
Mountain Publishing
Company (c)
139
304
(54.3
)
1,189
5,099
(76.7
)
Adjusted EBITDA Available to Company
$
23,922
$
24,594
(2.7
)%
$
123,192
$
107,451
14.6
%
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 Prior Year
Revision/Reclassification for the statement of cash flows.
(b)
See footnote (b) under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Operating Results” for discussion of Adjusted EBITDA, EBITDA of
Texas-New Mexico Newspapers Partnership and 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.”
(c)
See footnote (c) under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Operating Results” for discussion of EBITDA of Texas-New Mexico
Newspapers Partnership and 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, 2006 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 and nine months ended March 31, 2007 and 2006 were impacted by the
following transactions completed during fiscal years 2007 and 2006:
Fiscal Year 2007
•
On August 2, 2006, we acquired the San Jose Mercury News and Contra Costa Times and
began managing and consolidating The Monterey County Herald and St. Paul Pioneer Press for
the Hearst Corporation (“Hearst”). Under the agreement with Hearst, we have all of the
economic risks and rewards associated with ownership of The Monterey
County Herald and St. Paul Pioneer Press and are
entitled contractually to 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 St. Paul Pioneer Press, along with the San Jose Mercury News and Contra Costa
Times, beginning August 2, 2006.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
•
On August 2, 2006, we amended our bank 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 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 St. Paul Pioneer Press 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 a management agreement with Hearst regarding The
News-Times (Danbury, CT). Under the agreement, we control and
manage both the
Connecticut Post (owned by the Company) and The
News-Times (owned by Hearst) and are entitled to 73% of the
net income of both newspapers combined. As a result, we began consolidating the results of The
News-Times and recording minority interest for Hearst’s 27% interest beginning March 30,2007. This transaction had an immaterial effect on the results discussed below.
Fiscal Year 2006
•
In August 2005, we purchased The Detroit News, Inc. which included a limited partnership
interest in the Detroit JOA. Because of the partnership structure and our ownership
interest, we account for the preferred distributions using the cost method of accounting,
with a portion of the distributions accounted for in other operating revenues for amounts
paid to us for managing and providing the news and editorial content for The Detroit News.
•
In September 2005, we amended our bank credit facility to refinance a portion of our
long-term debt and reduce certain interest rate margins charged under the bank credit
facility.
•
Effective December 26, 2005, we restructured the Texas-New Mexico Newspapers Partnership
whereby we contributed to the partnership our Pennsylvania newspapers: The Evening Sun
(Hanover), the Lebanon Daily News and our interest in the partnership that publishes the
York Daily Record and York Sunday News, which continues to operate under the terms of a
joint operating agreement with The York Dispatch. Gannett, our partner in the Texas-New
Mexico Newspapers Partnership, contributed the Public Opinion in Chambersburg,
Pennsylvania. As a result of the contributions and amendment and restatement of the
partnership agreement, the Texas-New Mexico Newspapers Partnership became a 59.4%-owned
consolidated subsidiary of ours. Prior to the partnership restructuring, this investment
was accounted for under the equity method of accounting.
•
In February 2006, Prairie Mountain Publishing Company was formed after which time we no
longer consolidate the results of Eastern Colorado Publishing Company and account for our
investment in Prairie Mountain Publishing Company under the equity method of accounting.
We own 50% of Prairie Mountain Publishing Company.
Revenues
Advertising Revenues. The aforementioned fiscal year 2007 and 2006 transactions had the net
impact of increasing advertising revenues by $101.4 million and $328.1 million for the three- and
nine-month periods ended March 31, 2007, as compared to the same periods in the prior fiscal year.
Excluding the aforementioned transactions, advertising revenues decreased 8.7% and 4.5% for the
three and nine months ended March 31, 2007, as compared to the same periods in the prior fiscal
year. All the newspaper advertising revenue categories suffered declines, except Internet
advertising revenue, which grew 9.9% and 9.6% for the three and nine months ended March 31, 2007,
respectively. Within the print classified advertising category, classified real estate gains were
offset by decreases in classified automotive and employment for the nine-month period ended March31, 2007. However, for the three-month period ended March 31, 2007, all print classified
advertising categories were down as compared to the same period in the prior year.
Circulation Revenues. The aforementioned fiscal year 2007 and 2006 transactions had the net
impact of increasing circulation revenues by $21.9 million and $62.4 million for the three- and
nine-month periods ended March 31, 2007, as compared to the same periods in the prior fiscal year.
Excluding the aforementioned transactions, circulation revenues decreased 7.6% and 5.0% for the
three and nine months ended March 31, 2007 as compared to the same periods in the prior fiscal
year. The decrease was due to home delivery pricing pressures at most of our newspapers, which
resulted in our
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
offering greater discounts to acquire new and retain existing subscribers combined with a
decline in total paid circulation at most of our newspapers.
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 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 and nine months ended March 31,2007 and 2006 were negatively impacted by the accelerated depreciation taken on certain fixed
assets at the production facilities in Denver that will be retired earlier than originally expected
due to the construction of a new production facility. The results for the three and nine months
ended March 31, 2006 were negatively impacted by the accelerated deprecation taken on certain fixed
assets at the old production facility in Salt Lake that were retired in the fourth quarter of our
fiscal year 2006 when the new production facility in Salt Lake became operational. Excluding
depreciation and amortization, which were significantly impacted by the effect of accelerated
depreciation, our income from unconsolidated JOAs in Denver and Salt Lake City was down
approximately $1.7 million for the three months ended March 31, 2007 and $6.1 million for the nine
months ended March 31, 2007 as compared to the same periods in the prior year. The results of the
Denver JOA continue to be negatively impacted by a soft advertising market. Also impacting the
nine months ended March 31, 2007, was the cost of the Denver JOA implementing workforce reductions
and buying out a lease for one of its prior locations. Our share of these costs was approximately
$1.3 million. Excluding the impact of the accelerated depreciation in the prior year, the results
of the Salt Lake City JOA were up $2.3 million for the nine months ended March 31, 2007 due to
increased revenues and reduced costs associated with operating efficiencies from the new production
facility.
Cost of Sales
The aforementioned fiscal year 2007 and 2006 transactions had the net impact of increasing
cost of sales by $45.2 million and $133.8 million for the three- and nine-month periods ended March31, 2007, as compared to the same periods in the prior fiscal year. Excluding the aforementioned
transactions, cost of sales decreased 7.8% and 4.4% for the three and nine months ended March 31,2007 as compared to the same periods in the prior fiscal year. The majority of the decrease was
caused by a reduction in newsprint expense and related production costs. Newsprint prices
increased by 4.0% and 8.0%, respectively, during fiscal year 2007 as compared to the same three-
and nine-month periods in the prior fiscal year. Our average price of newsprint was $603 and $609
per metric ton for the three- and nine-month periods ended March 31, 2007 as compared to $580 and
$564 per metric ton for the same periods in fiscal year 2006. However, the increases in newsprint
prices were more than offset by decreases in newsprint consumption of approximately 13.9% and 13.3%
for the three- and nine-month periods ended March 31, 2007 primarily as a result of lower
circulation volumes and a reduction in web-width from 50 inches to 48 inches at some of our
newspapers. The cost of newsprint began to decline in the quarter ended March 31, 2007, the full
impact of which was not realized in the March 2007 quarter as a
result of using significantly higher priced newsprint from beginning
inventories.
Selling, General and Administrative
The aforementioned fiscal year 2007 and 2006 transactions had the net impact of increasing
SG&A by $70.5 million and $196.9 million for the three and nine months ended March 31, 2007 as
compared to the prior year. Excluding the aforementioned transactions, SG&A decreased 3.3% and
0.1% for the three and nine months ended March 31, 2007 as compared to the same periods in the
prior fiscal year. Decreases were primarily in advertising expenses related to the lower
advertising revenues experienced during that same period. The current year-to-date period also includes a $1.3
million charge related to a severance obligation, payable over three years, to the Company’s former
chief operating officer, $1.9 million of bonuses awarded to certain officers and employees in
connection with the August 2, 2006 acquisitions and related transactions and increased costs
related to the growth in our Internet operations. Expenses related to our Internet
operations increased $0.4 million and $1.2 million for the three and nine months ended March 31,2007 as compared to the prior year, while Internet revenue grew $1.0 million and $2.6 million for
the same periods on a same newspaper basis.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, borrowings on August 2, 2006 for our share of CNP’s
purchase of the San Jose Mercury News and Contra Costa Times, the funding for our share of the cost
of the new production and office facility built in Salt Lake City, and the cash investment
associated with the formation of the Prairie Mountain Publishing Company. For the three months
ended March 31, 2007, our average debt outstanding increased $311.2 million, or 34.5%, to $1,212.0
million and our weighted average interest rate increased 49 basis points as compared to the prior
year due to increases in LIBOR (the average daily one month rate of LIBOR increased 71 basis
points, for the three months ended March 31, 2007 as compared to the same period in prior year).
For the nine months ended March 31, 2007, our average debt outstanding increased $282.8 million, or
31.4%, to $1,182.8 million and our weighted average interest rate increased 69 basis points as
compared to the prior year primarily due to increases in LIBOR (the average daily one month rate of
LIBOR increased 120 basis points for the nine months ended March 31, 2007 as compared to the same
period in the prior year). The interest rates under our bank credit facility are based on LIBOR,
plus a borrowing margin based on our leverage ratio.
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/(income recognized) for the three months ended March 31, 2007 relate to
litigation expense of $1.5 million associated with the acquisition of Kearns-Tribune, LLC (Salt
Lake City), $0.2 million related to hedging and investing activities that did not qualify for hedge
accounting under SFAS No. 133, and $(0.2) million associated with various other items that were not
related to ongoing operations.
The charges incurred/(income recognized) for the nine months ended March 31, 2007 relate to
litigation expense of $2.3 million associated with the acquisition of Kearns-Tribune, LLC (Salt
Lake City), $0.6 million related to hedging and investing activities that did not qualify for hedge
accounting under SFAS No. 133, $(6.6) million related to the change in value of the cost to
repurchase an option we issued that provides the holder the opportunity to purchase one of our
daily newspapers, $(6.6) million related to the receipt of life insurance proceeds, including
interest, related to a policy redemption which was collected in October 2006 and $0.5 million
associated with various other items that were not related to ongoing operations.
Equity Investment Income, Net
Included in equity investment income, net is our share of the net income (or loss) of our
non-JOA equity investees as further described in Note 2: Significant Accounting Policies and Other
Matters of the notes to consolidated financial statements included in our June 30, 2006 Annual
Report on Form 10-K. The decrease in equity investment income, net is largely due to the December25, 2005 restructuring of the Texas-New Mexico Newspapers Partnership whereby as a result of the
restructuring, we no longer account for our interest in the Texas-New Mexico Newspapers Partnership
under the equity method of accounting and instead consolidate the partnership’s results.
Offsetting some of this decline was the equity investment income from Prairie Mountain Publishing
Company, which was formed on February 1, 2006.
Minority Interest
Minority
interest expense decreased by $0.4 million and increased by $20.0 million for the three and nine
months ended March 31, 2007, respectively, as compared to the
same periods in the prior year. Our year-to-date increases are partly due to the aforementioned Texas-New Mexico Newspapers Partnership December 25,2005 restructuring, which resulted in our consolidating the partnership and recording a minority
interest related to our partner’s interest in the partnership. Prior to the partnership
restructuring, our investment in the partnership was accounted for under the equity method of
accounting. In addition, a portion of the increase relates to the CNP’s acquisition of the San
Jose Mercury News and Contra Costa Times, effective
August 2, 2006 and the Santa Cruz Sentinel,
effective February 2, 2007. The quarter-to-date decrease was the
result of decreased net income for the three months ended
March 31, 2007 as compared to the same period in the prior year
for the Texas-New Mexico Newspapers Partnership.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gain on Sale of Assets
In July 2006, we sold an office building in Long Beach, California for approximately $20.0
million. We recognized a gain of approximately $16.7 million on the sale of the building. Also,
in conjunction with entering into the management agreement with Hearst regarding their Danbury
newspaper and our newspaper, the Connecticut Post, we
recognized a $27.0 million pre-tax nonmonetary gain on the
“sale” of a portion of our interest in the
Connecticut Post.
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 increased $79.5 million for the nine-month
period ended March 31, 2007 compared to the comparable prior year period. The majority of the
increase is 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. In
addition, the increase in Adjusted EBITDA also impacted this change. These increases were
partially offset by increased funding of our pension obligations during fiscal year 2007.
The net cash outflows related to investing activities increased by $333.5 million for the
nine-month period ended March 31, 2007 compared to the comparable prior year period primarily due
to the August 2, 2006 purchase of the San Jose Mercury News and Contra Costa Times, as well as the
February 2, 2007 purchase of the Santa Cruz Sentinel, offset in part by cash inflows of $33.9
million associated with the sale of Original Apartment Magazine and our office building in Long
Beach, California. Capital expenditures for the nine-month period ended March 31, 2007 were down
$14.5 million year over year, largely as a result of the funding related to the Salt Lake City
production and office facility being completed.
The net cash flows related to financing activities increased by $258.2 million for the
nine-month period ended March 31, 2007 compared to the comparable prior year period. In the
current period, borrowings of approximately $406.3 million were used to fund our share of the
August 2, 2006 transactions. We also borrowed approximately $25.0 million to fund our share of the
February 2, 2007 purchase of the Santa Cruz Sentinel. Activity for the nine-month period ended
March 31, 2007 also included normal borrowings and paydowns on long-term debt. For the nine-month
period ended March 31, 2006, activity included normal borrowings and paydowns on long-term debt, as
well as borrowings to finance the purchase of our interest in the Detroit JOA and the Prairie
Mountain Publishing Company. Excluding the August 2, 2006 transactions, refinancing costs of the
new credit facility, as well as the cash proceeds from the sale of the Long Beach building, the
Original Apartment Magazine and redemption of a life insurance policy, we repaid approximately
$106.8 million of debt for the nine-month period ended March 31, 2007.
Liquidity
On August 2, 2006, we amended our existing bank credit facility. The amendment was entered
into in order to create a new $350.0 million term loan “C” facility and to authorize us to purchase
the Contra Costa Times, San Jose Mercury News, The Monterey County Herald and the St. Paul Pioneer
Press. The amended facility maintains the $350.0 million revolving credit facility, the $100.0
million term loan “A,” the $147.3 million term loan “B” and provides for the $350.0 million term
loan “C” facility which was borrowed on August 2, 2006 and used to pay our portion of the purchase
price for the Contra Costa Times and the San Jose Mercury News along with the additional borrowings
under our revolving credit facility. The term loan “C” bears interest based upon, at the Company’s
option, Eurodollar, plus a borrowing margin of 1.75%, or base rate, plus a borrowing margin of
0.75%. The term loan “C” requires quarterly principal payments as follows: $0.875 million through
June 2012; and $82.25 million from June 2012 through March 2013, with the remaining balance due at
maturity on August 2, 2013. Amounts repaid under term loan “C” are not available for re-borrowing.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On March 31, 2007, our debt structure included our amended and restated bank credit facility
which provides for borrowings of up to $947.3 million, consisting of a $350.0 million revolving
credit facility, a $100.0 million term loan “A,” a $147.3 million term loan “B” and a $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 March 31, 2007, the balances outstanding under the
revolving credit portion of the bank credit facility, term loan “A,” term loan “B” and term loan
“C” were $86.0 million, $100.0 million, $144.7 million and $347.4 million, respectively, and we had
$251.1 million available for future borrowings, net of $12.9 million in outstanding letters of
credit. However, the total amount we can borrow at any point in time may be reduced by limits
imposed by the financial covenants of our various debt agreements. We
are evaluating our future capital needs and may reduce the total commitment available under the revolver.
S.F. Holding Corporation (“Stephens”), a 26.28% partner in CNP, has a right to require CNP to
redeem its interest in CNP at its fair market value (plus interest through closing), any time after
January 1, 2005. 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 Stephens’ put right.
In September 2005, the management committee of the Denver JOA authorized the incurrence of up
to $150.0 million of non-recourse 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 March 31, 2007, our share of the debt incurred by the
Denver JOA for the items mentioned was approximately $41.0 million.
As of March 31, 2007, the Company was in compliance with all its financial covenants under the
Company’s bank credit facility 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.
We estimate minimum contributions to our defined benefit pension plans in fiscal year 2007
will be approximately $7.2 million, including contributions related to pension plan liabilities
assumed in conjunction with the management of the St. Paul Pioneer Press. We have made
contributions of approximately $5.8 million through March 31, 2007.
Off-Balance Sheet Arrangements and Contractual Obligations
Our various contractual obligations and funding commitments related to our long-term debt have
changed since our Annual Report on Form 10-K for the year ended June 30, 2006 as more fully
described above and in Note 5: Amendment of Bank Credit Facility.
Significant changes in our contractual obligations since year-end 2006 include the liabilities
assumed in the acquisition and/or management of the San Jose Mercury News, Contra Costa Times, The
Monterey County Herald, St. Paul Pioneer Press, the Daily Breeze (Torrance), the Santa Cruz
Sentinel and The News-Times (Danbury). Significant items include the assumption of pension
obligations totaling $31.7 million, other postretirement
employment benefits totaling $1.2 million
and other long-term operating lease obligations.
The Denver JOA terminated its construction lease in the second quarter of fiscal year 2007 and
signed a long-term operating lease for its office building facility. Our other contractual
obligations have not materially changed from the disclosure made in our Annual Report on Form 10-K
for the year ended June 30, 2006.
Current North American newsprint supply versus demand, along with newsprint now being shipped
from China, have put further downward pressure on prices and the cost of newsprint has declined an
average $30 to $35 per metric ton so far during our third quarter of fiscal year 2007 as compared
to the second quarter of fiscal year 2007 (quarter ended December 31, 2006). The April 2007 RISI
(“Resource Information Systems, Inc.”) price index for 30
pound newsprint was $600 per metric ton
compared to $655 per metric ton in April 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 have
not materially changed from the disclosure made in our Annual Report on Form 10-K for the year
ended June 30, 2006 as the disclosure included the August 2, 2006 borrowings made in conjunction
with our August 2, 2006 acquisition of the San Jose Mercury News and Contra Costa Times.
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)
$
77,608
$
31,864
$
143,335
$
63,884
Net Change in Operating Assets and Liabilities
(70,783
)
(21,858
)
(77,712
)
(7,751
)
Distributions of Net Income Paid to Minority Interest
8,021
13,368
42,356
22,991
Distributions of Net Income from Unconsolidated JOAs
(6,169
)
(8,396
)
(28,113
)
(32,220
)
Distributions of Net Income from Equity Investments
(68
)
(418
)
(1,018
)
(4,635
)
Interest Expense
20,893
14,033
61,477
41,271
Bad Debt Expense
(2,928
)
(2,618
)
(8,798
)
(6,946
)
Pension Expense, Net of Cash Contributions
(686
)
(937
)
3,555
(1,330
)
Direct Costs of the Unconsolidated JOAs, Incurred Outside of the Unconsolidated JOAs(b)
12,243
16,252
36,786
48,623
Net Cash Related to Other (Income), Expense
(2,702
)
(7,771
)
(9,251
)
(12,609
)
Adjusted EBITDA
35,429
33,519
162,617
111,278
Minority Interest in Adjusted EBITDA
(13,404
)
(11,717
)
(58,663
)
(30,899
)
Combined Adjusted EBITDA of Unconsolidated JOAs
1,758
2,488
18,049
21,973
EBITDA of Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing Company(c)
139
304
1,189
5,099
Adjusted EBITDA Available to Company
$
23,922
$
24,594
$
123,192
$
107,451
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 (beginning December 26, 2005), 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 Texas-New Mexico Newspapers Partnership (through December 25, 2005)
and our proportionate share of EBITDA of the Prairie Mountain Publishing Company
(beginning February 1, 2006) (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 Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing
Company. The Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing
Company agreements require the partnerships to make distributions equal to the earnings
of the partnership before depreciation and amortization (EBITDA). Through December 25,2005, our 33.8% share of the EBITDA of Texas-New Mexico Newspapers Partnership and
beginning February 1, 2006, our 50% share of the EBITDA of the Prairie Mountain
Publishing Company, have been included in Adjusted EBITDA Available to Company, as they
are 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)
$
77,608
$
31,864
$
143,335
$
63,884
Net Change in Operating Assets and Liabilities
(70,783
)
(21,858
)
(77,712
)
(7,751
)
Distributions of Net Income Paid to Minority Interest
8,021
13,368
42,356
22,991
Distributions of Net Income from Unconsolidated JOAs
(6,169
)
(8,396
)
(28,113
)
(32,220
)
Distributions of Net Income from Equity Investments
(68
)
(418
)
(1,018
)
(4,635
)
Interest Expense
20,893
14,033
61,477
41,271
Bad Debt Expense
(2,928
)
(2,618
)
(8,798
)
(6,946
)
Pension Expense, Net of Cash Contributions
(686
)
(937
)
3,555
(1,330
)
Net Cash Related to Other (Income), Expense
(2,702
)
(7,771
)
(9,251
)
(12,609
)
Combined Adjusted EBITDA of Unconsolidated JOAs(b)
1,758
2,488
18,049
21,973
Direct Costs of the Unconsolidated JOAs, Incurred Outside of the Unconsolidated JOAs(c)
12,243
16,252
36,786
48,623
Adjusted EBITDA
37,187
36,007
180,666
133,251
Minority Interest in Adjusted EBITDA
(13,404
)
(11,717
)
(58,663
)
(30,899
)
EBITDA of Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing Company(d)
139
304
1,189
5,099
Adjusted EBITDA Available to Company
$
23,922
$
24,594
$
123,192
$
107,451
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
(beginning December 26, 2005), 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 proportionate share of EBITDA of the
Texas-New Mexico Newspapers Partnership (through December 25, 2005) and our proportionate
share of the EBITDA of the Prairie Mountain Publishing Company (beginning February 1, 2006)
(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 Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing
Company. The Texas-New Mexico Newspapers Partnership and Prairie Mountain Publishing
Company agreements require the partnerships to make distributions equal to the earnings of
the partnership before depreciation and amortization (EBITDA). Through December 25, 2005,
our 33.8% share of the EBITDA of Texas-New Mexico Newspapers Partnership and beginning
February 1, 2006, our 50% share of Prairie Mountain Publishing Company, have been included
in Adjusted EBITDA Available to Company, as they are 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)
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
Dates Referenced Herein and Documents Incorporated by Reference