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Journal Register Company Reports Third Quarter 2008 Results and Extends Forbearance Agreement

Tuesday 04. November 2008 - Journal Register Company (the "Company") (PINKSHEETS: JRCO) today reported a net loss of $8.7 million, or $(0.22) per diluted share, for the third quarter ended September 28, 2008 as compared to net income of $11.2 million, or $0.28 per diluted share, for the prior year quarter ended September 30, 2007.

Effective October 31, 2008, the Company and certain of its lenders agreed to extend the termination date of the Forbearance Agreement entered into by the parties on July 24, 2008 until January 16, 2009. The extension contains substantially the same conditions as the original Forbearance Agreement (more fully described under Debt and Credit Agreements below). Additionally, the amended Forbearance Agreement requires the Company to meet certain milestones during the forbearance period, including the delivery of a term sheet setting forth the terms of a comprehensive restructuring of the Company’s capital structure and the delivery of definitive documentation for the implementation of the restructuring.
Operating Results
Total revenues for the quarter ended September 28, 2008 were $102.1 million, a decrease of 9.6 percent from the same prior year period. Advertising revenues decreased 13.4 percent to $74.3 million, as compared to $85.8 million for the same prior year period. Online revenues, which are included in advertising revenues, increased by 6.2 percent for the quarter ended September 28, 2008 as compared to the same prior year period. Online revenues were 6.9 percent of total advertising revenues for the third fiscal quarter 2008 period, compared to 5.6 percent in the third fiscal quarter of 2007. The Company reported 101.2 million page views for its Web sites for the third fiscal quarter of 2008, an increase of 3.6 percent to the third fiscal quarter of 2007. Circulation revenues totaled $24.0 million for the quarter ended September 28, 2008 increasing approximately $1.2 million, or 5.1 percent, as compared to the prior year period due in large part to price increases and the benefit of delivery outsourcing in the New York and Connecticut clusters.
Commercial printing and other revenues for the quarter ended September 28, 2008 decreased by approximately $0.5 million, or 12.4 percent, as compared to the same prior year period, to $3.8 million.
Advertising Revenue Performance by Category:
The following table sets forth the Company’s total advertising revenues, by category:
For the Quarter Ended
September 28, September 30,
2008 2007 % Decrease
————- ————- ———-
Local $ 43,499 $ 46,490 6.4%
Classified 28,421 36,141 21.4
National 2,334 3,124 25.3
————- ————- ———-
Total advertising revenues $ 74,254 $ 85,755 13.4%
============= ============= ==========
Local. Local retail advertising revenues for the third fiscal quarter of 2008 decreased 6.4 percent as compared to the prior year quarter. Weakness in the department/discount store and building/hardware/garden store advertising revenue categories were partially offset by an improvement in local advertising revenues in the financial/insurance category.
Classified. Classified advertising revenues decreased 21.4 percent in the third fiscal quarter of 2008, as compared to the prior year fiscal quarter. Classified real estate advertising revenues decreased 26.5 percent in the third fiscal quarter of 2008, as compared to the same prior year period. The overall softness in the housing market continues to exacerbate a general downward trend in real estate advertising in the majority of the Company’s clusters. Classified employment advertising revenues were down 31.1 percent for the quarter, as compared to the same prior year period. Classified automotive advertising revenues were down 21.0 percent for the third fiscal quarter of 2008 as compared to the prior year fiscal quarter due, in large part, to the continued weak automotive market. Classified other advertising revenues decreased approximately 3.5 percent in the third fiscal quarter of 2008, as compared to the prior year fiscal quarter. This category, which encompasses private party, legal advertisements and obituaries has been the strongest performing category for over a year and comprised approximately 30.3 percent of the Company’s total classified advertising revenues in the third quarter of 2008.
National. National advertising revenues decreased 25.3 percent for the fiscal quarter ended September 28, 2008, as compared to the prior year fiscal quarter.
Operating Expenses:
The Company’s non-newsprint operating expenses for the third fiscal quarter of 2008 increased 1.8 percent compared to the same prior year period. Excluding costs related to the Company’s restructuring efforts, which consist primarily of advisor fees, non-newsprint operating expenses declined 2.8 percent for the third fiscal quarter of 2008, as a result of the Company’s continued commitment to cost containment efforts.
Salaries and employee benefits. Salaries and employee benefit expenses were 42.8 percent of the Company’s revenues for the fiscal quarter ended September 28, 2008, as compared to 40.6 percent for the fiscal quarter ended September 30, 2007. Salaries and employee benefits decreased $2.2 million, or 4.7 percent, for the fiscal quarter ended September 28, 2008 to $43.7 million, as compared to $45.8 million in the prior year period, primarily due to an 8.6 percent reduction in average head count. The expense reduction resulting from headcount was partially offset by non-contractual severance charges and increases in medical benefit costs.
Newsprint, ink and printing charges. For the fiscal quarter ended September 28, 2008, newsprint, ink and printing charges were 10.9 percent of the Company’s revenues, as compared to 9.1 percent for the fiscal quarter ended September 30, 2007. Newsprint, ink and printing charges for the fiscal quarter ended September 28, 2008 increased 7.9 percent as compared to the fiscal quarter ended September 30, 2007 due to an increase in newsprint prices of 22.5 percent, which was partially offset by decreases in consumption of approximately 13.4 percent.
Selling, general and administrative. Selling, general and administrative expenses were 21.4 percent and 16.1 percent of the Company’s revenues for the fiscal quarters ended September 28, 2008 and September 30, 2007, respectively. As compared to the prior year period, selling, general and administrative expenses for the fiscal quarter ended September 28, 2008 increased $3.6 million, or 19.9 percent, to $21.8 million, primarily due to higher professional and consulting fees related to the Company’s ongoing strategic review of its business and restructuring efforts. Costs related to these ongoing efforts totaled $3.7 million for the third fiscal quarter of 2008.
Other expenses. Other expenses, primarily related to circulation and delivery costs, were 15.5 percent and 14.3 percent of the Company’s revenues for the fiscal quarters ended September 28, 2008 and September 30, 2007, respectively. These expenses decreased compared to the same prior period in 2007 by $0.3 million or 2.1 percent, as a result of declines in promotion and circulation costs, which were partially offset by higher outside delivery and gasoline costs.
Operating income. The Company reported operating income of $5.1 million during the third fiscal quarter of 2008 as compared to $17.6 million for the fiscal quarter ended September 30, 2007. The decline in operating income for the third fiscal quarter of 2008 as compared to the same prior year period is primarily attributable to declines in revenue and additional professional and consulting fees related to the Company’s ongoing strategic review of its business and restructuring efforts incurred in the third fiscal quarter of 2008.
Interest and Other Income:
Interest expense for the fiscal quarter ended September 28, 2008, includes approximately $2.4 million of debt amendment costs as well as an additional $1.4 million in amortization of accumulated losses in accumulated other comprehensive income (“AOCI”) related to terminated interest rate derivatives (interest rate protection agreements). The third fiscal quarter of 2007 by comparison, was favorably impacted by $0.6 million from interest rate hedging activities.
Other income, net for the third fiscal quarter of 2008 reflects a noncash $1.5 million benefit for a change in the fair market value of the Company’s derivatives. In prior periods, changes in the fair market value of the Company’s hedges were reflected in AOCI on its Balance Sheets. The change in treatment is largely a result of recent amendments to the Company’s underlying debt agreement.
Income Taxes
The Company reported benefits from income taxes of $1.9 million and $4.3 million in the third fiscal quarters of 2008 and 2007, respectively. The 2007 benefit was primarily the result of the recognition of $6.1 million of federal tax refunds, including $1.0 million of interest, due to filings amended to carry back/forward a net operating loss generated in 2001. The refund was received in October 2007.
Liquidity and Capital Resources
Current assets were $85.6 million and current liabilities were $729.7 million as of September 28, 2008 as compared to current assets of $71.2 million and current liabilities of $80.3 as of December 30, 2007. The working capital position of the Company has been impacted by the classification of all of the Company’s bank debt as current debt in the third fiscal quarter of 2008. Additionally, the Company’s current liabilities at September 28, 2008 include $11.7 million for the termination value of its interest rate derivatives (as described above), which were classified as noncurrent liabilities with a fair value of $8.6 million as of December 30, 2007. Additionally, under the Forbearance Agreement (described more fully under Debt and Credit Agreements below), the Company has continued to accrue, but not pay interest on its bank debt. Accrued interest totaled $14.5 million at September 28, 2008 compared to $6.9 million at December 30, 2007.
Cash flows from investing activities. Net cash used in investing activities of continuing operations was $5.9 million for the thirty-nine weeks ended September 28, 2008, primarily reflecting deposits made to a cash collateral account as required by the Forbearance Agreement and amounts used for capital expenditures. Net cash used in investing activities of continuing operations on capital expenditures was $22.3 million for the thirty-nine weeks ended September 30, 2007. Of these capital expenditures, $11.3 million was for costs in connection with the build-out of the Clinton Township, Michigan press and mailroom facility and $4.2 million was related to the Company’s investment in its online operations.
The net proceeds from the sale of the Company’s New England newspaper operations of $78.8 million are included in net cash provided by investing activities of discontinued operations for the thirty-nine week period ended September 30, 2007.
Cash flows from financing activities. Net cash provided by financing activities was $19.1 million for the thirty-nine weeks ended September 28, 2008, and was primarily the result of borrowings under the Company’s revolving credit facility during the first half of 2008. The Company repaid $12.5 million of its outstanding term loan in the first quarter of 2008. By comparison, net cash used in financing activities was $90.4 million for the thirty-nine weeks ended September 30, 2007, which included $52.5 million for optional prepayments on the Company’s term loan and $35.5 million net repayment on its revolving credit facility. The Company made $2.4 million in dividend payments in the same period in 2007. Dividend payments were discontinued in the fourth fiscal quarter of 2007.
Debt and Credit Agreements
As of September 28, 2008, the Company’s bank debt totaled $646.3 million, compared to $624.8 million on December 30, 2007.
Effective July 24, 2008, the Company entered into a Forbearance Agreement and Amendment No. 3 (the “Forbearance Agreement”) to its Credit Agreement. Under the Forbearance Agreement, the lenders’ commitments to make further extensions of credit, including issuing new letters of credit or making swingline loans, were suspended, although certain existing letters of credit can be renewed or replaced. During the forbearance period, certain cash management procedures also apply. In addition, certain restrictive covenants, including covenants with respect to asset sale proceeds, indebtedness, acquisitions and dispositions, were amended and made permanent.
During the forbearance period, interest will continue to accrue but will not be paid by the Company. Instead, the Company will make certain payments to the lenders of at least $2.0 million per month into a cash collateral disbursement account maintained by the administrative agent. As of September 28, 2008, the Company has made the $4.0 million in cash collateral deposits as it is required to do under the Forbearance Agreement. The Company has the right to request transfers of funds from the cash collateral disbursement account under certain conditions and the lenders will forbear from exercising certain remedies with respect to the interest payments not made during the forbearance period. As noted above and explained in more detail in Note 3 to the unaudited condensed consolidated financial statements, the terms of the Forbearance Agreement have been extended through January 16, 2009. The Forbearance Agreement’s termination date may be further extended with the agreement of all parties.
As a condition to entry into the Forbearance Agreement, the Company appointed Robert P. Conway, a Principal of Conway, Del Genio, Gries & Co., LLC, (“CDG”) as its Chief Restructuring Officer and engaged CDG to provide certain financial services effective July 23, 2008. Mr. Conway continues to serve as Chief Restructuring Officer and the services provided by CDG are still in full force and effect.
On October 13, 2008, the Company announced that it had appointed John O. Strek, a Managing Director with CDG, as its acting Chief Financial Officer, effective October 31, 2008. Mr. Strek will replace Julie A. Beck who resigned as the Company’s Executive Vice President and CFO, effective October 31, 2008 to pursue another opportunity.
Reconciliation of Certain Non-GAAP Financial Measures.
The Company believes that the use of certain non-GAAP financial measures enables the Company and its analysts, investors and other interested parties to evaluate and compare the Company’s results from operations and cash resources generated from its business in a more meaningful and consistent manner. Accordingly, this information has been disclosed in this report to permit a more complete comparative analysis of the Company’s operating performance and capitalization relative to other companies in the industry and to provide an analysis of operating results used by the Company’s chief operating decision makers to measure the operating results and performance of the Company and its operations. The Company believes the use of EBITDA is appropriate given the short period of time it takes to convert new orders to cash. In addition, the Company believes that free cash flow is useful as a supplemental measure of evaluating financial performance because it provides an alternative measure of the cash generated by the Company after payment of expenses, including capital expenditures, interest and income taxes, and therefore available for further investment in the business, or for other uses such as repayment of indebtedness.
All EBITDA, EBITDAR and free cash flow figures in this report are non-GAAP financial measures. The Company defines EBITDA as income from continuing operations plus provision for income taxes, net interest expense, depreciation, amortization and other non-cash, special or non-recurring charges. EBITDAR is defined as EBITDA plus expenses related to the Company’s current restructuring activities, including severance costs, advisor fees, and certain other legal and consulting fees. EBITDA and EBITDAR margin is defined as either EBITDA or EBITDAR divided by total revenues. Free cash flow is defined as EBITDAR minus net capital expenditures, and cash payments for interest and income taxes.
Since EBITDA, EBITDAR and free cash flow are not measures of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net income as an indicator of operating performance (or in the case of free cash flow, net cash flow provided by operating activities as a measure of liquidity). In addition, these measures do not necessarily represent funds available for discretionary use, and are not necessarily a measure of the Company’s ability to fund its cash needs. As these measures exclude certain financial information as compared to net income, the most directly comparable GAAP financial measure, users of this financial information should consider the types of events and transaction which are excluded. In addition, the Company’s calculations of these measures may not be consistent with the calculations of these measures by other companies. The table below provides reconciliations of the difference between the Company’s loss or income from continuing operations and EBITDA, EBITDAR and free cash flow, for the thirteen and thirty-nine week periods ended September 28, 2008 and September 30, 2007.