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| GHS > SEC Filings for GHS > Form 10-Q on 11-Aug-2008 | All Recent SEC Filings |
11-Aug-2008
Quarterly Report
Cautionary Note Regarding Forward Looking Information
The following discussion of Gatehouse Media, Inc.'s and its subsidiaries ("we," "us" or "our") financial condition and results of operations should be read in conjunction with our historical condensed consolidated financial statements and notes to those statements appearing in this report. The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, including but not limited to, those described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007. Such risks, uncertainties and other factors could cause actual future growth, results of operations, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, such forward looking information.
Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views regarding, among other things, our future growth, results of operations, performance and business prospects and opportunities, as well as other statements that are other than historical fact. Words such as "anticipate(s)," "expect(s)", "intend(s)", "plan(s)", "target(s)", "project(s)", "believe(s)", "will", "would", "seek(s)", "estimate(s)" and similar expressions are intended to identify such forward-looking statements.
Forward-looking statements are based on management's current expectations and beliefs and are subject to a number of known and unknown risks, uncertainties and other factors that could lead to actual results materially different from those described in the forward-looking statements. We can give no assurance that our expectations will be attained. Factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks, uncertainties and other factors identified by us under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007. Such forward-looking statements speak only as of the date on which they are made. Except to the extent required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.
Overview
We are one of the largest publishers of locally based print and online media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, which as of June 30, 2008, includes 523 community publications and more than 260 related websites and seven yellow page directories, serves over 233,000 business advertising accounts and reaches approximately 10.0 million people on a weekly basis.
Our core products include:
• 98 daily newspapers with total paid circulation of approximately 838,000;
• 295 weekly newspapers (published up to three times per week) with total paid circulation of approximately 675,000 and total free circulation of approximately 949,000;
• 130 shoppers (generally advertising-only publications) with total circulation of approximately 2.1 million;
• over 260 locally focused websites, which extend our franchises onto the internet; and
• 7 yellow page directories, with a distribution of approximately 810,000, that covers a population of approximately 2.0 million people.
In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate. Over the last twelve months, we created approximately 125 niche publications.
We were incorporated in Delaware in 1997 for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company. We accounted for the initial acquisition using the purchase method of accounting.
On May 9, 2005, FIF III Liberty Holdings LLC, an affiliate of Fortress Investment Group, LLC, entered into an Agreement and Plan of Merger with us pursuant to which a wholly-owned subsidiary of FIF III Liberty Holdings LLC merged with and into the Company (the "Merger"). The Merger was effective on June 6, 2005, thus making FIF III Liberty Holdings LLC our principal and controlling stockholder. Prior to the effectiveness of the Merger, affiliates of Leonard Green & Partners, L.P. controlled the Company.
As of June 30, 2008, Fortress beneficially owned approximately 41.8% of our outstanding common stock.
Since 1998, we have acquired 416 daily and weekly newspapers and shoppers, including 17 dailies, 120 weeklies and 22 shoppers acquired in the acquisitions of CP Media and Enterprise NewsMedia, LLC (the "Massachusetts Acquisitions"), The Copley Press, Inc. newspapers and the Gannett Co., Inc. newspapers and launched numerous new products.
We generate revenues from advertising, circulation and commercial printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue from subscribers, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. The revenue for commercial printing is recognized upon delivery of the printed product to our customers. Directory revenue is recognized on a straight-line basis over the 12-month period in which the corresponding directory is distributed.
Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first quarter followed by our third quarter, historically, are our weakest quarters of the year in terms of revenue. Correspondingly, our second and fourth fiscal quarters, historically, are our strongest quarters. We expect that this seasonality will continue to affect our advertising revenue in future periods.
Our operating costs consist primarily of labor, newsprint, and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.
According to the Newspaper Association of America, overall annual volume for the industry, including national and urban newspapers, decreased 6.7% during 2007. We have experienced recent declines in certain advertising revenue streams and increased volatility of operating performance, despite our geographic diversity, well-balanced portfolio of products, strong local franchises, broad customer base and reliance on smaller markets. These levels of recent declines in advertising revenue we have experienced are typical in the current slow economy. We believe our local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels through which to reach their target audience.
Operating cost categories of newsprint, labor and delivery costs have experienced increased upward price pressure in the industry over the three year period from 2003 to 2006. Newsprint prices then declined in late 2006 and 2007. However, we expect newsprint costs to continue to increase per metric ton in 2008. We have previously experienced these upward pressures and have taken steps to mitigate some of these increases with consumption declines. In addition, we are a member of a newsprint-buying consortium which enables our local publishers to obtain favorable pricing versus the general market. Additionally, we have taken steps to cluster our operations thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy.
Recent Developments
The newspaper industry and the Company have experienced declining same store revenue over the last two quarters. This has led to increased losses, reduced cash flow from operations and the need to record impairment charges for certain long term assets. It has also made it more difficult to meet debt covenants and has eliminated the availability of additional borrowings under our revolving debt agreement. As a result of these trends in the industry and the company, management is implementing plans to reduce costs and preserve cash flow. This includes plans to suspend the payment of our cash dividend, issue preferred stock, repay borrowings under the revolving debt agreement, continued implementation of cost reduction programs, and the potential sale of non-core assets. We believe these initiatives will provide the financial resources necessary to invest in the business and ensure our future success.
On August 8, 2008, FIF III Liberty Holdings LLC ("FIF III") executed a Subscription Agreement whereby it irrevocably committed to purchase by August 25, 2008 an aggregate of $11.5 million in 10% cumulative preferred stock of GateHouse Media Macomb Holdings, Inc. ("Macomb"), an operating subsidiary of ours. Macomb, an Unrestricted Subsidiary under the terms of our 2007 Credit Facility, will use the proceeds from such sale of preferred stock to make an $11.5 million cash investment in Holdco non-voting 10% cumulative preferred stock. FIF III may require us to purchase its Macomb preferred stock during the five-year period following our full repayment of the 2008 Bridge Facility for an amount equal to the original purchase price, plus accrued but unpaid dividends. Upon closing of this transaction, we will have remained in compliance as of June 30, 2008 with the Total Leverage Ratio financial covenant under our 2007 Credit Facility. FIF III is an affiliate of Fortress Investment Group, LLC, the owner of approximately 41.8% of our outstanding Common Stock.
Pro Forma
We have presented our operating results on a pro forma basis for the three and six months ended June 30, 2007. This pro forma presentation for the three and six months ended June 30, 2007 assumes that the acquisitions of the newspapers from The Copley Press Inc. and Gannett Co, Inc. and the 2007 Financings occurred at the beginning of the pro forma period. This pro forma presentation is not necessarily indicative of what our operating results would have actually been had the acquisitions of the newspapers from The Copley Press, Inc. and Gannett Co., Inc., and the 2007 Financings occurred at the beginning of the pro forma period.
Critical Accounting Policy Disclosure
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make decisions based on estimates, assumptions and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.
A summary of our significant accounting policies are described in Note 1 of our consolidated financial statements for the year ended December 31, 2007, included in our Annual Report filed on Form 10-K.
There have been no changes in critical accounting policies in the current year from those described in our Annual Report on Form 10-K for the year ended December 31, 2007.
Results of Operations
The following table summarizes our historical results of operations for the
three and six months ended June 30, 2008 and 2007 and our pro forma results of
operations for the three and six months ended June 30, 2007.
Three months Three months Three months Six months Six months Six months
ended ended ended ended ended ended
June 30, 2008 June 30, 2007 June 30, 2007 June 30, 2008 June 30, 2007 June 30, 2007
(Actual) (Pro forma) (Actual) (Actual) (Pro forma) (Actual)
(in thousands)
Revenues:
Advertising $ 135,816 $ 127,689 $ 117,577 $ 257,772 $ 238,459 $ 188,241
Circulation 37,525 35,165 31,967 73,766 67,941 49,140
Commercial printing and
other 10,731 8,944 8,420 21,060 18,785 14,866
Total revenues 184,072 171,798 157,964 352,598 325,185 252,247
Operating costs and
expenses:
Operating costs 98,406 89,212 81,792 195,726 176,358 133,948
Selling, general and
administrative 51,558 42,965 40,580 100,109 87,162 70,912
Depreciation and
amortization 18,857 16,307 15,427 37,607 31,720 24,229
Integration and
reorganization costs 1,603 1,615 1,615 4,210 2,453 2,453
Impairment of long-lived
assets 102,517 82 82 102,517 201 201
Loss on sale of assets 212 9 9 206 22 22
Goodwill and mastheads
impairment 340,575 - - 340,575 - -
Operating income (loss) (429,656 ) 21,608 18,459 (428,352 ) 27,269 20,482
Interest expense 23,217 25,983 22,379 47,633 51,966 32,596
Amortization of deferred
financing costs 581 317 980 1,164 634 1,203
Unrealized (gain) loss on
derivative instrument 1,037 (758 ) (758 ) 1,756 (375 ) (375 )
Other (income) expense 23 (3 ) (3 ) 36 (228 ) (208 )
Loss from continuing
operations before income
taxes (454,514 ) (3,931 ) (4,139 ) (478,941 ) (24,728 ) (12,734 )
Income tax benefit (15,787 ) (1,706 ) (1,535 ) (13,316 ) (8,957 ) (4,021 )
Loss from continuing
operations $ (438,727 ) $ (2,225 ) $ (2,604 ) $ (465,625 ) $ (15,771 ) $ (8,713 )
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Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2007
(In thousands)
GateHouse
Media Copley Gannett Adjustments
(A) (B) (C) (D) Pro forma
Revenues:
Advertising $ 117,577 $ 2,931 $ 8,322 $ (1,141 )(1) $ 127,689
Circulation 31,967 1,375 2,180 (357 )(1) 35,165
Commercial printing and other 8,420 189 592 (257 )(1) 8,944
Total revenues 157,964 4,495 11,094 (1,755 ) 171,798
Operating costs and expenses:
Operating costs 81,792 2,532 6,079 (1,191 )(1,2) 89,212
Selling, general and
administrative 40,580 769 1,951 (335 )(1,3) 42,965
Depreciation and amortization 15,427 459 373 48 (1,4) 16,307
Integration and reorganization 1,615 - - - 1,615
Impairment of long-lived assets 82 - - - 82
Other expense 9 - - - 9
Total operating expenses 139,505 3,760 8,403 (1,478 ) 150,190
Operating income (loss) 18,459 735 2,691 (277 ) 21,608
Interest expense
Debt 22,379 - - 3,604 (5) 25,983
Amortization of deferred
financing costs 980 - - (663 )(6) 317
Unrealized loss on derivative
instrument (758 ) - - - (758 )
Other income (3 ) - - - (3 )
Income (loss) from operations
before tax (4,139 ) 735 2,691 (3,218 ) (3,931 )
Income tax expense (benefit) (1,535 ) - 1,079 (1,250 )(1,7) (1,706 )
Income (loss) from continuing
operations $ (2,604 ) $ 735 $ 1,612 $ (1,968 ) $ (2,225 )
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Adjustments to Pro Forma Condensed Consolidated Statement of Operations
(A) GateHouse Media, Inc.
Reflects historical unaudited consolidated statement of operations for the Company for the three months ended June 30, 2007.
(B) Copley
Reflects historical consolidated statement of operations for the newspapers acquired from the Copley Press Inc. for the period from April 1, 2007 to April 11, 2007.
(C) Gannett
Reflects historical consolidated statement of operations for the newspapers acquired from Gannett Co. Inc. for the period from April 1, 2007 to May 7, 2007.
(D) Adjustments
(1) Reflects the adjustment to eliminate the revenue and expenses related to the group of assets and liabilities from the Gannett Acquisition held for sale:
Three months ended
June 30, 2007
Revenues:
Advertising $ 1,141
Circulation 357
Commercial printing and other 257
Operating costs and expenses:
Operating costs 1,055
Selling, general and administrative 290
Depreciation and amortization 51
Income tax expense 145
Income from operations $ 214
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(2) Reflects the elimination of expenses related to the pension and postretirement plans not continued by the Company.
Three months ended June 30, 2007 Gannett-Pension and postretirement adjustment $ 136
(3) Reflects the elimination of certain expenses related to liabilities included in the historical statement of operations of Copley and Gannett but not assumed by the Company.
Three months ended
June 30, 2007
Gannett:
Pension, postretirement and other retirement plans $ 45
(4) Gannett:
Remaining
estimated Pro forma expense
useful life Three months ended
Asset Category Fair value in years June 30, 2007
Buildings $ 10,570 25 $ 35
Machinery & Equipment 26,333 3-10 192
Furniture & Fixtures 483 10 7
Auto and Trucks 546 5 4
Total pro forma depreciation expense 238
Subscriber Relationships 26,964 16 140
Advertiser Relationships 96,503 16 502
Total pro forma amortization expense 642
Total pro forma depreciation and
amortization expense $ 880
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The following tables summarize the pro forma adjustments:
Three months ended
Copley Gannett June 30, 2007
Pro forma depreciation expense $ - $ 238 $ 238
Pro forma amortization expense - 642 642
Less: historical depreciation expense (434 ) (319 ) (753 )
Less: historical amortization expense (25 ) (3 ) (28 )
$ (459 ) $ 558 $ 99
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(5) Represents adjustment to reflect the interest expense of the 2007 Financings for the periods presented. The following table illustrates the assumed interest rates and amounts of borrowings the pro forma interest expense calculation is based on. The term loan, delayed draw term loan, bridge facility and the revolving loan facility average rate is LIBOR based. The term loan and delayed draw term loan variable interest rate is effectively converted to a fixed rate loan under five interest rate swap agreements for notional amounts of $300,000, $270,000, $100,000, $250,000 and $200,000, except for a $75,000 unhedged portion of the term loan. Unused commitment fees are based on the remaining balance of the $40,000 of the total revolving credit facility. Letter of credit fees are a quarterly fee equal to the applicable margin for the LIBOR based loans on the aggregate amount of outstanding letters of credit.
Three months ended June 30, 2007
Less: Net
Pro forma Historical adjustment
Amount of interest interest to interest
Average Rate Margin Total Rate borrowing expense expense expense
Term Loan Facility - B 4.778 % 2.00 % 6.778 % $ 670,000 $ 11,354
Delayed Draw Term Loan
Facility 4.971 % 2.00 % 6.971 % 250,000 4,357
Term Loan Facility - C 5.156 % 2.25 % 7.406 % 275,000 5,091
Bridge Facility 5.320 % 1.50 % 6.820 % 300,000 5,115
Unused commitment fees 0.50 % - 0.500 % 40,000 50
Letter of credit fees 2.00 % - 2.000 % 3,269 16
$ 25,983 $ 22,379 $ 3,604
Historical weighted
average debt balance $ 1,220,100
Weighted average
interest rate 7.32 %
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(6) Deferred financing costs consist of costs incurred in connection with debt financings. Such costs are amortized to interest expense on a straight-line basis over the remaining terms of the related debt. Reflects the net adjustment to a total deferred financing cost amount of $13,091 amortized over a weighted average life of 2.7 years as follows:
Three months ended
June 30, 2007
Pro forma deferred financing costs $ 317
Less: historical costs (980 )
Net adjustment $ (663 )
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(7) The pro forma adjustment reflects the income tax effect of pro forma adjustments. The tax effect is calculated based on a 39.15% effective tax rate.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 2007
(In thousands)
GateHouse
Media Copley Gannett Adjustments
(A) (B) (C) (D) Pro forma
Revenues:
Advertising $ 188,241 $ 26,272 $ 28,511 $ (4,565 )(1) $ 238,459
Circulation 49,140 12,369 7,862 (1,430 )(1) 67,941
Commercial printing and other 14,866 2,934 2,013 (1,028 )(1) 18,785
Total revenues 252,247 41,575 38,386 (7,023 ) 325,185
Operating costs and expenses:
Operating costs 133,948 25,476 21,699 (4,765 )(1,2) 176,358
Selling, general and
. . .
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