UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
Commission File Number: 333-112246
Morris Publishing Group, LLC
Morris Publishing Finance Co.*
(Exact name of Registrants as specified in their charters)
| Georgia | 58-1445060 | |
| Georgia | 20-0183044 | |
| (State of organization) | (I.R.S. Employer Identification Numbers) |
725 Broad Street
Augusta, Georgia 30901
(Address of principal executive offices)
(706) 724-0851
(Registrants’ Telephone number)
Indicate by check mark whether the Registrants (1) have 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) have been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the Registrants are accelerated filers (as defined in Rule 12b-2 of the Act). Yes ¨ No x
| * | Morris Publishing Finance Co. meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. |
MORRIS PUBLISHING FINANCE CO.
QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
TABLE OF CONTENTS
| Page | ||
| Item 1. Financial Statements: |
||
| Condensed consolidated balance sheets as of March 31, 2004 (unaudited), and December 31, 2003 |
2 | |
| 3 | ||
| 4 | ||
| 5 | ||
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
8 | |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk |
11 | |
| Item 4. Controls and Procedures |
11 | |
| Item 1. Legal Proceedings. |
12 | |
| Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
12 | |
| Item 3. Defaults Upon Senior Securities. |
12 | |
| Item 4. Submission of Matters to a Vote of Security Holders. |
12 | |
| Item 5. Other Information |
12 | |
| Item 6. Exhibits and Reports on Form 8-K |
12 |
Morris Publishing Group, LLC is a wholly-owned subsidiary of Morris Communications Company, LLC, a privately held media company. Morris Publishing Finance Co., a wholly-owned subsidiary of Morris Publishing Group, LLC, was incorporated in 2003 for the sole purpose of serving as a co-issuer of Morris Publishing’s 7% Senior Subordinated Notes Due 2013 in order to facilitate their issuance. Morris Publishing Finance Co. does not have any operations or assets of any kind and will not have any revenues. Separate financial statements for Morris Publishing Finance Co. are not provided. In this report, “Morris Publishing,” “we,” “us” and “our” refer to Morris Publishing Group, LLC and its subsidiaries. “Morris Communications” refers to Morris Communications Company. Morris Publishing Group was formed in 2001 and took over the operations of the newspaper business segment of our Parent, Morris Communications. Discussions of Morris Publishing and our operations prior to November 2001 refer to our business as previously conducted by the Morris Communications newspaper business segment.
FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. These are statements that relate to future periods and include statements regarding our anticipated performance. You may find discussions containing such forward-looking statements in in “Managements discussion and analysis of financial condition and results of operations” in Item 2 of this report.
Generally, the words anticipates, believes, expects, intends, estimates, projects, plans and similar expressions identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements or industry results, to differ materially from any future results, performance or achievements expressed or impled by these forward-looking statements.
Although we believe that these statements are based upon reasonable assumptions, we can give no assurance that these statements will be realized. Given these uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are made as of the date of this report. We assume no obligation to update or revise them or provide reasons why actual results may differ. Important factors that could cause our actual results to differ materially from our expectations include, without limitation:
| • | delay in any economic recovery or the recovery not being as robuse as might otherwise have been anticipated; |
| • | increases in financing, labor, health care and/or other costs, including costs of raw materials, such as newsprint; |
| • | general economic or business conditions, either nationally, regionally or in the individual markets in which we conduct business (and, in particular, the Jacksonville, Florida market), may deteriorate and have an adverse impact on our advertising or circulation revenues or on our business strategy; and |
| • | other risks and uncertainties. |
1
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Condensed consolidated balance sheets
| (Dollars in thousands) |
March 31, 2004 |
December 31, 2003 |
||||||
| (unaudited) | ||||||||
| ASSETS |
||||||||
| CURRENT ASSETS: |
||||||||
| Cash and cash equivalents |
$ | 4,844 | $ | 7,342 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $3,172 at March 31, 2004 and $2,793 at December 31, 2003 |
49,903 | 52,042 | ||||||
| Inventories |
3,957 | 3,796 | ||||||
| Deferred income taxes |
2,374 | 2,458 | ||||||
| Prepaid and other current assets |
273 | 1,086 | ||||||
| Total current assets |
61,351 | 66,724 | ||||||
| LOAN RECEIVABLE FROM MORRIS COMMUNICATIONS |
22,000 | 4,500 | ||||||
| NET PROPERTY AND EQUIPMENT |
148,688 | 150,350 | ||||||
| OTHER ASSETS: |
||||||||
| Goodwill |
185,194 | 184,770 | ||||||
| Intangible assets, net of accumulated amortization of $48,625 at March 31, 2004 and $47,251 at December 31, 2003 |
24,793 | 25,873 | ||||||
| Deferred loan costs and other assets, net of accumulated loan amortization of $921 at March 31, 2004 and $576 at December 31, 2003 |
13,435 | 13,611 | ||||||
| 223,422 | 224,254 | |||||||
| Total assets |
$ | 455,461 | $ | 445,828 | ||||
| LIABILITIES AND MEMBER’S DEFICIT |
||||||||
| CURRENT LIABILITIES: |
||||||||
| Current maturities of long-term debt |
$ | 1,125 | $ | 563 | ||||
| Accounts payable |
8,571 | 7,542 | ||||||
| Accrued interest |
3,643 | 8,989 | ||||||
| Due to Morris Communications |
470 | 331 | ||||||
| Deferred revenues |
17,702 | 16,678 | ||||||
| Accrued employee costs |
13,742 | 10,590 | ||||||
| Other accrued liabilities |
2,795 | 2,083 | ||||||
| Total current liabilities |
48,048 | 46,776 | ||||||
| LONG-TERM DEBT, less current portion |
526,875 | 524,437 | ||||||
| DEFERRED INCOME TAXES, less current portion |
22,265 | 22,528 | ||||||
| POSTRETIREMENT BENEFITS DUE TO MORRIS COMMUNICATIONS |
20,219 | 19,547 | ||||||
| OTHER LONG-TERM LIABILITIES |
3,472 | 3,298 | ||||||
| Total liabilities |
620,879 | 616,586 | ||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 5) |
||||||||
| MEMBER’S DEFICIT |
(165,418 | ) | (170,758 | ) | ||||
| Total liabilities and member’s deficit |
$ | 455,461 | $ | 445,828 | ||||
See notes to condensed consolidated financial statements.
2
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Unaudited condensed consolidated statements of income
| Three Months Ended March 31, | ||||||
| (Dollars in thousands) |
2004 |
2003 | ||||
| (As restated, See Note 6) | ||||||
| NET OPERATING REVENUES: |
||||||
| Advertising |
$ | 85,832 | $ | 82,361 | ||
| Circulation |
17,865 | 17,935 | ||||
| Other |
4,314 | 4,471 | ||||
| Total net operating revenue |
108,011 | 104,767 | ||||
| OPERATING EXPENSES: |
||||||
| Labor and employee benefits |
43,493 | 41,626 | ||||
| Newsprint, ink and supplements |
13,022 | 12,398 | ||||
| Other operating costs (excluding depreciation and amortization) |
29,303 | 26,796 | ||||
| Depreciation and amortization |
5,139 | 5,735 | ||||
| Total operating expenses |
90,957 | 86,555 | ||||
| Operating income |
17,054 | 18,212 | ||||
| OTHER EXPENSES: |
||||||
| Interest expense, including amortization of debt issuance costs |
7,812 | 5,856 | ||||
| Other, net |
390 | 77 | ||||
| Total other expense |
8,202 | 5,933 | ||||
| INCOME BEFORE INCOME TAXES |
8,852 | 12,279 | ||||
| PROVISION FOR INCOME TAXES |
3,532 | 4,830 | ||||
| NET INCOME |
$ | 5,320 | $ | 7,449 | ||
See notes to condensed consolidated financial statements.
3
(Formerly Morris Communications Company, LLC
Newspaper Business Segment)
Unaudited condensed consolidated statements of cash flows
| Three Months Ended March 31, |
||||||||
| (Dollars in thousands) |
2004 |
2003 |
||||||
| (as restated, see note 6) |
||||||||
| OPERATING ACTIVITIES: |
||||||||
| Net income |
$ | 5,320 | $ | 7,449 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
| Depreciation and amortization |
5,139 | 5,735 | ||||||
| Deferred income taxes |
(179 | ) | (532 | ) | ||||
| Amortization of debt issuance costs |
345 | 290 | ||||||
| Loss on disposal of assets |
406 | — | ||||||
| Loss on extinguishment of debt |
— | 13 | ||||||
| Changes in assets and liabilities, net of effects of businesses acquired: |
||||||||
| Accounts receivable |
2,184 | 4,821 | ||||||
| Inventories |
(161 | ) | 545 | |||||
| Prepaids and other current assets |
813 | 122 | ||||||
| Other assets |
(169 | ) | (169 | ) | ||||
| Accounts payable |
1,029 | 202 | ||||||
| Due to Morris Communications |
159 | |||||||
| Accrued employee costs |
3,152 | (614 | ) | |||||
| Accrued interest |
(5,346 | ) | (1,007 | ) | ||||
| Deferred revenues and other liabilities |
1,736 | 1,243 | ||||||
| Postretirement obligations due to Morris Communications |
672 | 121 | ||||||
| Other long-term liabilities |
174 | 85 | ||||||
| Net cash provided by operating activities |
15,274 | 18,304 | ||||||
| INVESTING ACTIVITIES: |
||||||||
| Capital expenditures |
(2,502 | ) | (5,640 | ) | ||||
| Acquisition of businesses, net of cash acquired |
(770 | ) | — | |||||
| Net cash used in investing activities |
(3,272 | ) | (5,640 | ) | ||||
| FINANCING ACTIVITIES: |
||||||||
| Repayment of long-term debt due Morris Communications |
— | (3,000 | ) | |||||
| Proceeds from long-term debt |
3,000 | — | ||||||
| Loan receivable from Morris Communications |
(17,500 | ) | — | |||||
| Net change due to allocations and intercompany reimbursements with Morris Communications |
— | (9,997 | ) | |||||
| Net cash used in financing activities |
(14,500 | ) | (12,997 | ) | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS |
(2,498 | ) | (333 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period |
7,342 | 7,993 | ||||||
| CASH AND CASH EQUIVALENTS, end of period |
$ | 4,844 | $ | 7,660 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
| Interest paid |
$ | 12,781 | $ | — | ||||
| Interest paid to Morris Communications |
$ | — | $ | 6,863 | ||||
| Income taxes paid to Morris Communications |
$ | 3,050 | $ | 5,362 | ||||
See notes to condensed consolidated financial statements.
4
(FORMERLY MORRIS COMMUNICATIONS COMPANY, LLC NEWSPAPER BUSINESS SEGMENT)
Notes to Condensed consolidated financial statements (unaudited)
(Dollars in Thousands)
| 1. | NATURE OF OPERATIONS AND BASIS OF PRESENTATION |
Basis of Presentation and Nature of Operations – Morris Publishing Group, LLC (“Morris Publishing” or the “Company”) was formerly named MCC Newspapers, LLC prior to July 2003. Prior to the formation of MCC Newspapers, LLC in 2001, the Morris Communications Company, LLC (“Morris Communications” or the “parent”) newspaper business segment operated as a division of Morris Communications.
These condensed consolidated financial statements of Morris Publishing, a wholly owned subsidiary of Morris Communications, include the consolidated financial statements of Morris Publishing subsequent to July 2003 and the combined financial statements of the Morris Communications Company, LLC Newspaper Business Segment for all periods prior to July 2003. Morris Communications legally transferred the net assets of its newspaper business segment to the Company. As a result, the Company has accounted for the assets and liabilities at historical cost, in a manner similar to that in pooling of interest accounting.
The accompanying condensed consolidated financial statements furnished here reflect all adjustments, which are in the opinion of management, necessary for the fair presentation of the Company’s financial position and results of operations. All such adjustments are of a normal recurring nature. Results of operations for the interim 2004 periods are not necessarily indicative of results expected for the full year. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, the Company believes that the disclosures herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2003. The accounting policies employed are the same as those shown in Note 1 to the consolidated financial statements as of December 31, 2003 and 2002 and for each of three years ended December 31, 2003.
Certain reclassifications of prior year amounts have been made to conform with the current year’s presentation.
| 2. | TRANSACTIONS WITH MORRIS COMMUNICATIONS |
The Company receives certain services from, and has entered into certain transactions with, the parent. In 2003, costs of the services that are allocated to the Company were based on actual direct costs incurred or based on the Parent’s estimate of expenses relative to the services provided to the Company. The parent utilized factors such as percentage of revenues, number of employees and other applicable factors in estimating the proportion of corporate expenses to allocate to the Company. The Company believes that these allocations were made on a reasonable basis, and approximate all of the material incremental costs it would have incurred had it been operating on a stand alone basis; however, there has been no independent study or any attempt to obtain quotes from third parties to determine what costs of obtaining such services from third parties would have been. In 2004, these costs are based on allocated costs and 4% of revenues for management fees.
Cash Management – Prior to August 2003, the Company’s cash was immediately transferred to Morris Communications, which used the cash to meet its and the Company’s obligations. The net amounts due to and (due from) Morris Communications, which have been deemed contributions from (distributions to) Morris Communications were approximately $(45,694) for the year ended December 31, 2003.
Management Fee – The Company was charged with certain corporate allocations from Morris Communications. Prior to August 7, 2003, these allocations were based on a combination of specifically identified costs, along with an estimate of 60% of the non-identifiable expenses relating to the Company. Subsequent to August 7, 2003, a fee equal to 4% of the revenues is charged to the Company, as defined in the management agreement. These corporate allocation expenses totaled $4,149, and $4,430 for the three months ended March 31, 2004 and 2003, respectively, and represent corporate costs incurred by Morris Communications on behalf of the Company, including executive, legal, secretarial, tax, internal audit, risk management, employee benefit administration, airplane usage and other support services.
Technology and Shared Services Fee – The Company was charged with certain technology and shared services allocated from Morris Communications. These costs were allocated at 100% prior to August 7, 2003. Subsequent to August 7, 2003, these costs were allocated based on actual costs, as defined in the management agreement. These technology and shared services expenses incurred by Morris Communications on behalf of the Company totaled $3,531 and $2,700 for the three months ended March 31, 2004 and 2003, respectively.
5
Debt and Debt Related Allocations – The Company also charged corporate interest and amortization expense based on the corporate debt and related deferred debt cost allocations of Morris Communications to the Company. Prior to August 7, 2003, the Company was allocated Morris Communications’ debt, deferred debt costs, interest and amortization expenses. The allocated portion of Morris Communications’ debt is presented as due to Morris Communications and the deferred debt costs are presented as part of deferred loan costs and other assets on the accompanying consolidated financial statements. Interest expense, including amortization of debt issuance costs, recorded by the Company related to this debt was $5,865 for the three months ended March 31, 2003, and is included in interest expense in the accompanying consolidated financial statements.
Employees’ 401(k) Plan – Historically, the Company has participated in Morris Communications’ deferred compensation 401(k) plan, which is available to all employees. Under this plan, contributions by employees to the 401(k) plan are matched by Morris Communications up to 5% of pay. Expenses were allocated to the Company based on specific identification of employer matching contributions of $1,117 and $971 for the three months ended March 31, 2004 and 2003, respectively.
Retiree Health Care Benefits – Historically, the Company has participated in Morris Communications’ retiree health care plan, which provides certain health care benefits for eligible retired employees and their dependents. In June 2003, Morris Communications and the Company formally amended the plan, which requires the Company to be separately liable for its portion of the postretirement benefit obligation. Accordingly, the Company and Morris Communications completed a formal actuarial valuation of the postretirement obligation for the Company as of and for the year ended December 31, 2003.
Under Morris Communications’ plan, full-time employees who were hired before January 1, 1992 and retire after ten years of service are eligible for these benefits. Full-time employees hired on or after January 1, 1992 must have 25 years of service to be eligible. Generally, this plan pays a percentage of most medical expenses (reduced for any deductible) after payments made by government programs and other group coverage. This plan is unfunded. Expenses related to this plan have been allocated to the Company based on total headcount. The expenses allocated to the Company, and the related contributions recorded were $672 and $121 for the three months ended March 31, 2004 and 2003, respectively.
The Company was also allocated its portion of the postretirement benefit obligation. The amounts allocated to the Company, based on total headcount were $20,219 and $19,547 as of March 31, 2004 and December 31, 2003, respectively.
The following is an estimate of the Company’s net periodic benefit cost for 2004:
| Components of net periodic benefit cost: | |||
| Service cost |
$ | 723 | |
| Interest cost |
2,200 | ||
| Recognized net actuarial loss |
782 | ||
| Net periodic benefit cost |
$ | 3,705 | |
| Estimated Net Benefit Payments During 2004 |
$ | 1,021 | |
Health and Disability Plan – The Company has participated in Morris Communications’ health and disability plan for active employees. Accordingly, Morris Communications has allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. In June 2003, Morris Communications and the Company formally amended the plan, which requires Morris Communications and the Company to be separately liable for its portion of the postretirement benefit obligation. Accordingly, the Company and Morris Communications completed a formal actuarial valuation of the costs incurred but not yet reported. The expense allocated to the Company based on the formal actuarial valuation or total headcount, was $3,408 and $3,189 for the three months ended March 31, 2004 and 2003, respectively.
The Company was also allocated its portion of the health and disability obligation. The amounts allocated to the Company, based on total headcount, were $2,296 and $2,109 as of March 31, 2004 and December 31, 2003, respectively.
Workers’ Compensation Expense – The Company has participated in Morris Communications’ workers’ compensation self-insurance plan. Accordingly, Morris Communications has allocated to the Company certain expenses associated with the payment of current obligations and the estimated amounts incurred but not yet reported. The expenses allocated to the Company, based on a percentage of total salaries expense, were $538 and $319 for the three months ended March 31, 2004 and 2003, respectively.
Property and Equipment – Historically, the Company has occupied and utilized certain property and equipment owned by the parent. Title to this property and equipment, along with the related depreciation and amortization, was passed to the Company on August 7, 2003. The Company wa