MEDIANEWS GROUP INC - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 033-75156

MEDIANEWS GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		76-0425553 (I.R.S. Employer Identification Number)

1560 Broadway, Suite 2100 Denver, Colorado (Address of principal executive offices)		80202 (Zip Code)

Registrant’s telephone number, including area code: (303) 563-6360

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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The total number of shares of the registrant’s Class A Common Stock outstanding as of May 13, 2005 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, 2004 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.

PART I — FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

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, 2005, we 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 effective to provide reasonable assurance that material information regarding us and our subsidiaries required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported 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 control 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.

FORWARD-LOOKING STATEMENTS

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, the following factors: (a) increased consolidation among major retailers, bankruptcy or other events that may adversely affect business operations of major customers and depress the level of local and national advertising, (b) an economic downturn in some or all of our principal newspaper markets that may lead to decreased circulation or decreased local or national advertising, (c) a decline in general newspaper readership patterns as a result of competitive alternative media or other factors, (d) increases in newsprint costs over the level anticipated, (e) labor disputes which may cause revenue declines or increased labor costs, (f) acquisitions of new businesses or dispositions of existing businesses, (g) costs or difficulties related to the integration of businesses acquired by us may be greater than expected, (h) increases in interest or financing costs, (i) rapid technological changes and frequent new product introductions prevalent in electronic publishing, including the ongoing evolution of the Internet and (j) 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.


	MEDIANEWS GROUP, INC.

Dated: May 13, 2005	By:	/s/ Ronald A. Mayo

		Ronald A. Mayo
		Vice President, Chief Financial Officer and Duly Authorized Officer of Registrant

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	March 31, 2005			June 30, 2004
	(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	509		$	64,736
Accounts receivable, less allowance for doubtful accounts of $7,414 at March 31, 2005 and $7,625 at June 30, 2004		79,387			81,925
Inventories of newsprint and supplies		22,359			16,526
Prepaid expenses and other assets		15,600			8,280

TOTAL CURRENT ASSETS		117,855			171,467

PROPERTY, PLANT AND EQUIPMENT
Land		37,403			37,226
Buildings and improvements		105,290			104,993
Machinery and equipment		351,054			342,661
Construction in progress		31,636			7,110

TOTAL PROPERTY, PLANT AND EQUIPMENT		525,383			491,990
Less accumulated depreciation and amortization		(203,237	)		(184,614	)

NET PROPERTY, PLANT AND EQUIPMENT		322,146			307,376

OTHER ASSETS
Investment in unconsolidated JOAs		158,997			179,846
Equity investments		92,407			92,681
Subscriber accounts, less accumulated amortization of $145,661 at March 31, 2005 and $134,487 at June 30, 2004		53,169			63,980
Excess of cost over fair value of net assets acquired		427,945			418,600
Newspaper mastheads		141,295			139,266
Covenants not to compete and other identifiable intangible assets, less accumulated amortization of $31,466 at March 31, 2005 and $30,745 at June 30, 2004		5,477			5,011
Other		19,090			19,398

TOTAL OTHER ASSETS		898,380			918,782

TOTAL ASSETS	$	1,338,381		$	1,397,625

See notes to condensed consolidated financial statements

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	(Unaudited)
	March 31, 2005			June 30, 2004
	(Dollars in thousands, except share data)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Trade accounts payable	$	9,127		$	7,180
Accrued liabilities		56,485			68,230
Unearned income		27,200			26,281
Current portion of long-term debt and obligations under capital leases		4,048			5,278

TOTAL CURRENT LIABILITIES		96,860			106,969

LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES		837,367			923,189

OTHER LIABILITIES		23,100			26,450

DEFERRED INCOME TAXES, NET		109,310			88,913

MINORITY INTEREST		163,329			165,084

SHAREHOLDERS’ EQUITY
Common stock, par value $0.001; 3,000,000 shares authorized:
2,314,346 shares issued and 2,298,346 shares outstanding		2			2
Additional paid-in capital		3,631			3,631
Accumulated other comprehensive loss, net of taxes		(21,727	)		(19,976	)
Retained earnings		128,509			105,363
Common stock in treasury, at cost, 16,000 shares		(2,000	)		(2,000	)

TOTAL SHAREHOLDERS’ EQUITY		108,415			87,020

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,338,381		$	1,397,625

See notes to condensed consolidated financial statements

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2005			2004			2005			2004
	(Dollars in thousands, except share data)
REVENUES
Advertising	$	142,945		$	136,915		$	451,158		$	431,399
Circulation		32,164			33,020			97,807			99,813
Other		9,636			9,242			29,049			28,681

TOTAL REVENUES		184,745			179,177			578,014			559,893

INCOME FROM UNCONSOLIDATED JOAS		1,948			952			16,754			16,695

COST AND EXPENSES
Cost of sales		59,314			57,769			181,039			174,971
Selling, general and administrative		95,029			93,126			284,913			271,855
Depreciation and amortization		10,178			10,553			30,395			30,603
Interest expense		12,375			14,409			36,694			42,497
Other (income) expense, net		1,855			1,285			7,254			15,199

TOTAL COSTS AND EXPENSES		178,751			177,142			540,295			535,125

EQUITY INVESTMENT INCOME, NET		2,791			1,927			8,028			7,304

MINORITY INTEREST		(5,407	)		(4,715	)		(21,885	)		(24,603	)

INCOME BEFORE INCOME TAXES		5,326			199			40,616			24,164

INCOME TAX EXPENSE		(3,026	)		(135	)		(17,470	)		(9,806	)

NET INCOME	$	2,300		$	64		$	23,146		$	14,358

NET INCOME PER COMMON SHARE:
Net income per common share	$	1.00		$	0.03		$	10.07		$	6.25

Weighted average number of shares outstanding		2,298,346			2,298,346			2,298,346			2,298,346

See notes to condensed consolidated financial statements

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended March 31,
	2005			2004
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	23,146		$	14,358
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		33,534			33,921
Provision for losses on accounts receivable		6,301			5,773
Amortization of debt discount and deferred debt issuance costs		799			635
Net (gain) loss on sale of assets		414			(348	)
Loss on early extinguishment of debt		9,236			9,292
Proportionate share of net income from unconsolidated JOAs		(52,945	)		(51,976	)
Distributions from unconsolidated JOAs		66,695			58,011
Equity investment income, net		(8,028	)		(7,304	)
Change in defined benefit plan assets, net of cash contributions		694			954
Deferred income tax expense		20,434			9,460
Change in estimated option repurchase price		(5,431	)		(709	)
Minority interest		21,885			24,603
Distributions paid to minority interest		(23,036	)		(26,570	)
Unrealized loss on hedging activities, reclassified to earnings from accumulated other comprehensive loss		342			1,686
Unrealized loss on swaps		—			2,369
Change in operating assets and liabilities		(23,388	)		(18,336	)

NET CASH FLOWS FROM OPERATING ACTIVITIES		70,652			55,819

CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from equity investments		8,402			6,397
Investments in equity investments		(100	)		(50	)
Business acquisitions		(11,164	)		(11,798	)
Capital expenditures		(34,626	)		(29,621	)
Proceeds from the sale of assets		428			5,131

NET CASH FLOWS FROM INVESTING ACTIVITIES		(37,060	)		(29,941	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt		416,850			522,466
Reduction of long-term debt and other liabilities		(506,045	)		(505,918	)
Repurchase premiums and related costs associated with long-term debt		(8,624	)		(9,465	)

NET CASH FLOWS FROM FINANCING ACTIVITIES		(97,819	)		7,083

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(64,227	)		32,961
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		64,736			3,343

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	509		$	36,304

See notes to condensed consolidated financial statements

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

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, 2004. 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, 2005 are not necessarily indicative of the results that may be expected for future interim periods or for the year ended June 30, 2005.

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 of the individual newspapers that are party to a joint operating agreement continue to be separate and outside of the related JOA. The Company, through its subsidiaries, York Newspapers, Inc., Kearns-Tribune, LLC, and The Denver Post Corporation, participates in JOAs in York, Pennsylvania, Salt Lake City, Utah, and Denver, Colorado, respectively. The editorial and related expenses of The Denver Post and The Salt Lake Tribune are incurred by the Company outside the related JOA. The Company controls the York JOA prior and subsequent to its fiscal year 2004 restructuring and accordingly consolidates its results, as well as those of the York Dispatch. However, the editorial costs associated with the York Daily Record, the other newspaper in the York JOA, were not included in the Company’s results prior to the May 1, 2004 restructuring because, until then, the newspaper was not owned by MediaNews. The Company also owned a 50% interest in a JOA in Charleston, West Virginia through May 7, 2004. See Note 3: Joint Operating Agencies of the Company’s June 30, 2004 Annual Report on Form 10-K and Note 4: Contingent Matters of this Form 10-Q regarding the York and Charleston JOA restructurings.

The Company’s unconsolidated JOAs (Denver, Salt Lake City and, through May 7, 2004, Charleston) 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 by the Company of the JOAs’ interests 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 subsidiaries directly attributable to the JOAs in providing editorial content and news for the Company’s newspapers party to a JOA.

Investments in unconsolidated JOAs are reported in the consolidated balance sheet under the line item “Investment in Unconsolidated JOAs” for the JOAs the Company does not control (see Note 3: Joint Operating Agencies for further discussion).

Reclassifications

For comparability, certain prior year balances have been reclassified to conform to current reporting classifications.

Guarantees

Through its wholly-owned subsidiary, Kearns-Tribune, LLC, the Company owns a 6.0% interest in Ponderay Newsprint Company (“Ponderay”) and is also a guarantor, on a several basis, on 6.0% of up to $125.0 million of Ponderay’s credit facility, which is due April 12, 2006. In accordance with Financial Accounting Standard Board (“FASB”) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN No. 45”), the Company has no amounts related to the guarantee recorded in its financial statements because the

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

guarantee existed prior to and has not been modified since December 31, 2002. The guarantee arose from Ponderay’s April 12, 2000 amended and restated credit agreement that replaced a previous credit facility which had been used to finance the construction of its newsprint mill. The guarantee could be triggered by Ponderay’s failure to meet any of its bank covenants, at which time the Company could be liable for its portion of the guarantee. At March 31, 2005, the Company’s share of the guarantee is approximately $4.1 million. The debt is collateralized by a deed of trust on Ponderay’s real property and a mortgage on all of Ponderay’s other assets.

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 rates for the three-month and corresponding year to date periods presented in an interim report on Form 10-Q may vary significantly. The effective income tax rate varies from the federal statutory rate because of state income taxes and the non-deductibility of certain expenses.

Seasonality

Newspaper companies tend to follow a distinct and recurring seasonal pattern, with higher advertising revenues in months containing significant events or holidays. Accordingly, the fourth calendar quarter, or the Company’s second fiscal quarter, is the Company’s strongest revenue quarter of the year. Due to generally poor weather and lack of holidays, the first calendar quarter, or the Company’s third fiscal quarter, is the Company’s weakest revenue quarter of the year.

NOTE 2: Comprehensive Income

The Company’s comprehensive income consisted of the following:


	Three Months Ended March 31,				Nine Months Ended March 31,
	2005		2004		2005			2004
	(Dollars in thousands)
Net income	$	2,300	$	64	$	23,146		$	14,358
Unrealized gain on hedging activities, net of tax		17		—		17			291
Unrealized loss on newsprint and interest rate hedging activities, reclassified to earnings, net of tax		114		472		342			1,686
Minimum pension liability adjustment, net of tax		163		20		(2,110	)		(359	)

Comprehensive income	$	2,594	$	556	$	21,395		$	15,976

MEDIANEWS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 3: Joint Operating Agencies

The following tables present the summarized results of the Company’s unconsolidated JOAs on a combined basis. The Salt Lake City JOA data has been presented separately because, as of June 30, 2004, it was a significant investee of the Company determined in accordance with Rule 3-09 of Regulation S-X. Beginning in fiscal year 2005, the Denver JOA data is no longer combined with the Charleston JOA data as a result of the Charleston JOA restructuring in May 2004 (see Note 1: Significant Accounting Policies and Other Matters). The fiscal year 2004 data combines the Denver JOA and Charleston JOA data in the column “Other Unconsolidated JOAs.” The Salt Lake City JOA, Denver JOA and Other Unconsolidated JOA information 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, The Denver Post, and, through May 7, 2004, the Charleston Daily Mail, are included in the column “Associated Revenues and Expenses.” The 20% minority interest associated with The Denver Post Corporation has not been reflected in the tables below.


	Three Months Ended March 31, 2005
										Total Income
							Associated			from
	Salt Lake						Revenues			Unconsolidated
	City JOA			Denver JOA			and Expenses			JOAs
	(Dollars in thousands)
*Income Statement Data:*
Total revenues	$	35,203		$	103,489		$	98

Cost of sales		8,127			31,633			8,128
Selling, general and administrative		14,199			52,001			2,796
Depreciation and amortization		—			4,500			1,047
Other		2,330			99			(51	)

Total costs and expenses		24,656			88,233			11,920

Net income		10,547			15,256			(11,822	)
Partners’ share of income from unconsolidated JOAs		(4,405	)		(7,628	)		—

Income from unconsolidated JOAs	$	6,142		$	7,628		$	(11,822	)	$	1,948


	Nine Months Ended March 31, 2005
										Total Income
							Associated			from
	Salt Lake						Revenues			Unconsolidated
	City JOA			Denver JOA			and Expenses			JOAs
	(Dollars in thousands)
*Income Statement Data:*
Total revenues	$	109,175		$	323,418		$	345

Cost of sales		24,109			100,965			25,536
Selling, general and administrative		40,546			151,208			7,855
Depreciation and amortization		—			13,828			3,139
Other		2,496			515			6

Total costs and expenses		67,151			266,516			36,536

Net income		42,024			56,902			(36,191	)
Partners’ share of income from unconsolidated JOAs		(17,530	)		(28,451	)		—

Income from unconsolidated JOAs	$	24,494		$	28,451		$	(36,191	)	$	16,754


Item No.		Page
	PART I — FINANCIAL INFORMATION
1	Financial Statements	3
2	Management's Discussion and Analysis of Financial Condition and Results of Operations	3
3	Quantitative and Qualitative Disclosure of Market Risk	3
4	Controls and Procedures	3

	PART II — OTHER INFORMATION
1	Legal Proceedings	4
2	Unregistered Sales of Equity Securities and Use of Proceeds	N/A
3	Defaults Upon Senior Securities	N/A
4	Submission of Matters to a Vote of Security Holders	N/A
5	Other Information	N/A
6	Exhibits	4

Signatures
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906


	Page
Item 1: Financial Statements

Condensed Consolidated Balance Sheets		7
Condensed Consolidated Statements of Operations		9
Condensed Consolidated Statements of Cash Flows		10
Notes to Condensed Consolidated Financial Statements		11

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

Item 3: Quantitative and Qualitative Disclosure of Market Risk		29

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	•	The Company’s proportionate share of net income from JOAs,

	•	The amortization of subscriber lists created by the original purchase by the Company of the JOAs’ interests 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 subsidiaries directly attributable to the JOAs in providing editorial content and news for the Company’s newspapers party to a JOA.