ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward Looking Information
The following discussion of 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 described under the heading ‘‘Risk Factors’’ in our Annual Report on Form 10-KSB and our Definitive Proxy Statement dated June 15, 2007 that 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 identified by us under the heading ‘‘Risk Factors’’ included in our Annual Report on Form 10-KSB and our Definitive Proxy Statement dated June 15, 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 community newspaper publishers in the United States, operating within four major U.S. markets: Minneapolis – St. Paul, Minnesota; Dallas, Texas; Northern Virginia (suburban Washington, D.C.); and Columbus, Ohio. Our goal is to be the preeminent provider of local content and advertising in any market we serve.
Our publications reach approximately 1,386,000 households in the communities we serve. Although revenues from home delivery constitute only a small portion of our revenues and households reached, circulation, calculated based on homes delivered and papers distributed from racks, is one of the principal drivers of our advertising rates. While we are not directly compensated by the readers of our controlled distribution publications as they are distributed for free, such controlled distribution is the primary factor in the advertising revenue earned by us. Our core products include:
|
|
|
|
•
|
83 weekly newspapers (published between one and two times per week) with total controlled circulation of approximately 1,017,000 and total paid circulation of approximately 76,000;
|
|
|
|
|
•
|
14 niche publications with total controlled circulation of approximately 227,000 and total paid circulation of approximately 53,000;
|
|
|
|
|
•
|
Three daily newspapers with total paid circulation of approximately 10,000 and total controlled circulation of approximately 3,000; and
|
|
|
|
|
•
|
85 locally focused websites with average monthly page views and visitors of approximately 4.7 million and 1.3 million, respectively, which extend the reach and frequency of our products beyond their geographic print distribution area and onto the Internet.
|
22
Table of Contents
We were formed on March 18, 2005, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. On July 2, 2007, we utilized a combination of cash derived from the proceeds of the Offering and newly issued preferred stock and loans, in effecting the MOTV Acquisition. The MOTV Acquisition was accounted for using the purchase method of accounting.
A key element of our business strategy is geographic clustering of publications to realize operating efficiencies, revenue opportunities and provide consistent management. The clustering strategy has helped allow us to launch numerous new products in our existing clusters, leveraging off of our existing fixed cost base. We believe that these advantages, together with the generally lower overhead costs associated with operating in our markets, allow us to generate high operating profit margins and create an advantage against competitors and potential entrants in our markets.
We generate revenues principally from advertising, and to a smaller extent, from 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. In addition, circulation revenue from single copy and newspaper rack sales is recognized upon collection from the customer. The revenue for commercial printing is recognized upon delivery of the printed product to the customers. Deferred revenue arises as a normal part of business principally from advance circulation payments.
Factors affecting our advertising revenues include, among others, the size and demographic characteristics of the local population, local economic conditions in general and the economic condition of the retail segments of the communities that our publications serve. If the local economy, population or prevailing retail environment of a community we serve experiences a downturn, our publications, revenues and profitability in that market would be adversely affected. Our advertising revenues are also susceptible to negative trends in the general economy that affect consumer spending. The advertisers in our newspapers and other publications and related websites include many businesses that can be significantly affected by regional or national economic downturns and other developments.
Our advertising revenue tends to follow a seasonal pattern. Our first quarter is, historically, our weakest quarter of the year in terms of revenue. Correspondingly, our second and third fiscal quarters are, historically, our strongest quarters, because they include heavy seasonal and certain holiday advertising, including Easter, Mother’s Day, Graduation, back to school and other special events. We expect that this seasonality will continue to affect our advertising revenue in future periods.
Our operating costs consist primarily of newsprint, labor and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.
We have not been significantly impacted by general inflationary pressures over the last several years. We anticipate that changing costs of newsprint, our basic raw material, may impact future operating costs. We are a member of a newsprint-buying consortium, which enables us to obtain favorable newsprint pricing. Price increases (or decreases) for our products are implemented when deemed appropriate by management. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation. Additionally, we have taken steps to cluster our operations geographically, 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. Other factors that affect our quarterly revenues and operating results include changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs and general economic factors.
23
Table of Contents
Pro Forma
We have presented our operating results on a pro forma basis for the three months ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 and 2006. This pro forma presentation for the three and nine months ended September 30, 2007 and 2006 assumes that the MOTV Acquisition and related 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 MOTV Acquisition and related financings occurred at the beginning of the pro forma period. However, on an actual basis almost all significant fluctuations occurred as a result of the MOTV Acquisition. This pro forma presentation is required for comparison purposes as the Company had no operations in the corresponding three and nine month periods ended September 30, 2006.
Critical Accounting Policy Disclosure
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 2 of our consolidated condensed financial statements for the nine months ended September 30, 2007, as included in this Quarterly Report on Form 10-Q.
There have been no changes in critical accounting policies in the current year from those described in our Definitive Proxy Statement dated June 15, 2007.
Results of Operations
The following table summarizes our pro forma results of operations for the three months ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
$
|
17,160,633
|
|
|
|
|
$
|
18,309,088
|
|
|
|
|
$
|
52,317,416
|
|
|
|
|
$
|
53,701,956
|
|
Circulation
|
|
|
|
|
679,843
|
|
|
|
|
|
641,816
|
|
|
|
|
|
2,377,489
|
|
|
|
|
|
2,375,794
|
|
Commercial printing and other
|
|
|
|
|
695,609
|
|
|
|
|
|
821,176
|
|
|
|
|
|
1,974,759
|
|
|
|
|
|
2,212,617
|
|
Total revenues
|
|
|
|
|
18,536,085
|
|
|
|
|
|
19,772,080
|
|
|
|
|
|
56,669,664
|
|
|
|
|
|
58,290,367
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
8,080,166
|
|
|
|
|
|
8,887,040
|
|
|
|
|
|
25,144,142
|
|
|
|
|
|
26,294,215
|
|
Selling, general and administrative
|
|
|
|
|
6,209,330
|
|
|
|
|
|
6,408,517
|
|
|
|
|
|
19,161,846
|
|
|
|
|
|
19,656,554
|
|
Depreciation and amortization
|
|
|
|
|
3,276,038
|
|
|
|
|
|
3,226,038
|
|
|
|
|
|
9,828,114
|
|
|
|
|
|
9,678,114
|
|
|
|
|
|
|
17,565,534
|
|
|
|
|
|
18,521,595
|
|
|
|
|
|
54,134,102
|
|
|
|
|
|
55,628,883
|
|
Operating income
|
|
|
|
|
970,551
|
|
|
|
|
|
1,250,485
|
|
|
|
|
|
2,535,562
|
|
|
|
|
|
2,661,484
|
|
Interest expense
|
|
|
|
|
(3,453,756
|
)
|
|
|
|
|
(3,619,756
|
)
|
|
|
|
|
(10,361,268
|
)
|
|
|
|
|
(10,859,268
|
)
|
Loss from operations before income taxes
|
|
|
|
|
(2,483,205
|
)
|
|
|
|
|
(2,369,271
|
)
|
|
|
|
|
(7,825,706
|
)
|
|
|
|
|
(8,197,784
|
)
|
Net loss
|
|
|
|
$
|
(2,483,205
|
)
|
|
|
|
$
|
(2,369,271
|
)
|
|
|
|
$
|
(7,825,706
|
)
|
|
|
|
$
|
(8,197,784
|
)
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted:
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
$
|
(0.16
|
)
|
|
|
|
$
|
(0.54
|
)
|
|
|
|
$
|
(0.56
|
)
|
Weighted average shares outstanding
|
|
|
|
|
14,623,445
|
|
|
|
|
|
14,623,445
|
|
|
|
|
|
14,623,445
|
|
|
|
|
|
14,623,445
|
|
24
Table of Contents
Three months Ended September 30, 2007 Compared to Three Months Ended October 1, 2006
The discussion of our results of operations that follows is based upon our pro forma historical results of operations for (i) the thirteen (13) week period ended September 30, 2007, and (ii) the thirteen (13) week period ended October 1, 2006. These thirteen (13) week periods are referred to as the ‘‘three months.’’
Advertising Revenue
.
Advertising revenue for the three months ended September 30, 2007 decreased by $1.1 million, or 6.3%. The decrease was primarily due to a revenue decrease from our Minnesota operations associated with a decline in advertising resulting from lower real estate sales and a related downturn in economic activity in the Minneapolis – St. Paul market. Retail revenue decreased $0.8 million, or 9.2%, in 2007. This decrease is a result of a decline in national retail advertising. The national retail advertising decline in the third quarter of 2007 primarily reflects a discontinuation of one-time advertising programs in a number of segments (such as home improvement and furnishings, telecommunications and computer sectors) in our Minneapolis – St. Paul and Dallas regions. Classified revenue decreased $0.4 million, or 5.8%, in 2007. Internet revenue increased $0.1 million, or 40.3%, in 2007. This increase was the result of new internet advertising products launched across all of our web sites, as well as increased visitors and page views from the prior year period.
Circulation Revenue
.
Circulation revenue for the three months ended September 30, 2007 increased by $38,000, or 5.9%. The increase was primarily due to revenue increase of $66,000 from our Columbus operations, offset by a circulation revenue decrease in our other operations of $28,000. We are reaching an increasingly larger share of the market through our online website growth and our controlled distribution strategy. Circulation represents a small percentage of our revenue, 3.7% in the third quarter of 2007, due to our focus on controlled distribution products.
Commercial Printing and Other Revenue
.
Commercial printing and other revenue for the three months ended September 30, 2007 decreased by $0.1 million, or 15.3%. The decrease was primarily due to the loss of a commercial printing job in our Columbus operation which accounted for the entirety of the decrease.
Operating Costs
.
Operating costs for the three months ended September 30, 2007 decreased by $0.8 million, or 9.1%. Newsprint expense decreased $0.3 million due to decreases in the price per short ton of newsprint from $629 in 2006 to $532 in 2007. Other operating costs, which principally consist of labor, were down $0.3 million in 2007, due to decreased headcount levels. Salaries and employee benefits relating to operating costs were 17% of our total revenues for the 2007 period, as compared to 18% of our total revenues for the same period of 2006. Additional reductions include postage with a decrease of $0.1 million.
Selling, General and Administrative
.
Selling, general and administrative expenses for the three months ended September 30, 2007 decreased by $0.2 million, or 3.1%. This decrease was the result of declines in local display and classified advertising sales expense in the amount of $0.2 million primarily related to the revenue decrease from the prior period. Salaries and employee benefits relating to selling, general and administrative expenses were 18% of our total revenues for both the 2007 period and the same period of 2006.
Depreciation and Amortization
.
Depreciation and amortization expense for the three months ended September 30, 2007 increased $50,000, or 1.6%. The increase was primarily due to increased depreciation expense due to increased capital expenditures.
Interest Expense
.
Interest expense for the three months ended September 30, 2007 decreased by $0.2 million. This decrease was due to decreases in debt levels.
Loss from Continuing Operations
.
Loss from continuing operations for the three months ended September 30, 2007 increased $0.1 million, or 4.8%. The increase in loss from continuing operations was due to the factors noted above.
Net Loss
.
Net loss for the three months ended September 30, 2007 increased $0.1 million, or 4.8%. The increase in net loss was due to the factors noted above.
25
Table of Contents
Nine Months Ended September 30, 2007 Compared to Nine Months Ended October 1, 2006
The discussion of our results of operations that follows is based upon our pro forma results of operations for (i) the thirty-nine (39) week period ended September 30, 2007, and (ii) the thirty-nine (39) week period ended October 1, 2006. These thirty-nine (39) week periods are referred to as ‘‘nine months.’’
Advertising Revenue
.
Advertising revenue for the nine months ended September 30, 2007 decreased by $1.4 million, or 2.6%. The decrease was primarily due to a revenue decrease related to our Minnesota operations associated with a decline in advertising resulting from lower real estate sales and a related downturn in economic activity in the Minneapolis – St. Paul market. Retail revenue decreased $1.9 million, or 6.7%, in 2007. This decrease is a result of a decline in national retail advertising. The national retail advertising decline in the nine months of 2007 primarily reflects a discontinuation of one-time advertising programs in a number of segments (such as home improvement and furnishings, telecommunications and computer sectors) in our Minneapolis – St. Paul and Dallas regions. Classified revenue decreased $0.1 million, or 0.5%, in 2007. Internet revenue increased $0.5 million, or 62.5%, in 2007. This increase was the result of new internet advertising products launched across all of our web sites, as well as increased visitors and page views from the prior year period.
Circulation Revenue
.
Circulation revenue for the nine months ended September 30, 2007 increased by $2,000, or 0.1%. We continue to reach an increasingly larger share of the market through our online website growth and our controlled distribution strategy. Circulation represents a small percentage of our revenue, 4.2% in year-to-date 2007, due to our focus on controlled distribution products.
Commercial Printing and Other Revenue
.
Commercial printing and other revenue for the nine months ended September 30, 2007 decreased by $0.2 million, or 10.8%. The decrease was primarily due to losses of commercial printing jobs in our Columbus operation.
Operating Costs
.
Operating costs for the nine months ended September 30, 2007 decreased by $1.2 million, or 4.4%. Newsprint expense decreased $0.4 million, due to decreases in the price per short ton of newsprint in 2007, from $603 in 2006 to $543 in 2007. Other operating costs, which principally consist of labor, were down $0.3 million, or 3.4% in 2007. Salaries and employee benefits relating to operating costs were 18% percent of our total revenues for the 2007 period, as compared to 19% of our total revenues for the same period of 2006. Additional reductions include postage with a decrease of $0.1 million and correspondents and outside news services with a decrease of $0.1 million.
Selling, General and Administrative
.
Selling, general and administrative expenses for the nine months ended September 30, 2007 decreased by $0.5 million, or 2.5%. The decrease was primarily due to decreases in local display and classified advertising sales expense in the amount of $0.3 million, or 6.2% relating to the decrease in advertising revenue. Other decreases were across multiple general and administrative expense categories due to cost containment initiatives put in place by management during 2006. Salaries and employee benefits relating to selling, general and administrative expenses were 19% of our total revenues for both the 2007 period and the same period of 2006.
Depreciation and Amortization
.
Depreciation and amortization expense for the year ended December 31, 2006 increased $0.2 million, or 1.6%. The increase was primarily due to increased depreciation expense related to an increase in capital expenditures.
Interest Expense
.
Interest expense for the nine months ended September 30, 2007 decreased by $0.5 million. This decrease was due to decreases in debt levels.
Loss from Continuing Operations
.
Loss from continuing operations for the nine months ended September 30, 2007 decreased $0.4 million, or 4.5%. The decrease in loss from continuing operations is due to the factors noted above.
Net Loss
.
Net loss for the nine months ended September 30, 2007 decreased $0.4 million, or 4.5%. The decrease in net loss was due to the factors noted above.
26
Table of Contents
Liquidity and Capital Resources
Our primary cash requirements are for working capital, borrowing obligations and capital expenditures. We have no material outstanding commitments for capital expenditures. We also intend to continue to pursue our strategy of opportunistically acquiring locally focused media businesses in contiguous and new markets. Our principal sources of funds have historically been, and we expect will continue to be, cash provided by operating activities and borrowings under our Revolving Credit Facility.
As of September 30, 2007, the available amount of debt under our Revolving Credit Facility was $14.5 million.
Our Credit Facility and Subordinated Credit Facility impose upon us certain financial and operating covenants, including, among others, requirements that we satisfy certain quarterly financial tests, including a total leverage ratio, a minimum interest coverage ratio, a minimum fixed charge ratio, and restrictions on our ability to incur debt, pay dividends, take certain other corporate actions and similar items. Management believes that we have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.
Cash Flows
The following table summarizes our historical cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
Cash provided by (used in) operating activities
|
|
|
|
$
|
81,823,231
|
|
|
|
|
$
|
(335,365
|
)
|
Cash used in investing activities
|
|
|
|
$
|
(208,882,632
|
)
|
|
|
|
$
|
—
|
|
Cash provided by financing activities
|
|
|
|
$
|
128,296,181
|
|
|
|
|
$
|
—
|
|
The discussion of our cash flows that follows is based on our historical cash flows for the nine months ended September 30, 2007 and September 30, 2006. The majority of the changes are the result of the MOTV Acquisition which occurred on July 2, 2007.
Cash Flows from Operating Activities
. Net cash provided by operating activities for the nine months ended September 30, 2007 was $81.8 million, an increase of $82.2 million when compared to the $0.3 million of cash used in operating activities for the nine months ended September 30, 2006. This $82.2 million increase was the result of an increase in cash provided by (i) the release of the cash from the trust fund in connection with the funding of the MOTV Acquisition of $77.0 million, (ii) working capital of $1.9 million and (iii) an increase in non-cash charges of $4.6 million, partially offset by a decrease in net income of $2.7 million.
The $1.9 million increase in cash provided by working capital for the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006 is primarily attributable to increases in accrued interest due to higher levels of debt and decreases in accounts receivable, inventory, prepaid expenses, accounts payable, taxes payable and accrued expenses.
The $4.6 million increase in non-cash charges primarily consisted of an increase in depreciation and amortization of $3.2 million, all of which related to the MOTV Acquisition consummated on July 2, 2007, $1.3 million of non cash interest incurred in connection with the financing of the MOTV Acquisition and an increase in non-cash compensation expense of $0.1 million.
Cash Flows from Investing Activities.
Net cash used in investing activities for the nine months ended September 30, 2007 was $208.9 million. During the nine months ended September 30, 2007, we used $208.8 million, net of cash acquired, for the MOTV Acquisition and $0.1 million for capital expenditures.
27
Table of Contents
Cash Flows from Financing Activities
.
Net cash provided by financing activities for the nine months ended September 30, 2007 was $128.3 million. The net cash provided by financing activities resulted from net borrowings of $110.5 million under the Credit Facility, borrowings of $30.0 million under the Subordinated Credit Facility and proceeds of $4.2 million from the issuance of preferred stock, partially offset by the conversion to cash of common stock of $12.4 million in connection with the redemption of the Conversion Shares resulting from the shareholder vote on the MOTV Acquisition and payment of $4.1 million of debt issuance costs in connection with the Credit Facility and Subordinated Credit Facility.
Changes in Financial Position
The discussion that follows highlights significant changes in our financial position and working capital from December 31, 2006 to September 30, 2007. The majority of the changes are the result of the MOTV Acquisition which occurred on July 2, 2007.
Accounts Receivable
. Accounts receivable increased $7.9 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition. Since the acquisition, accounts receivable have decreased $0.5 million through increased collections.
Inventory
. Inventory increased $0.7 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition. Since the acquisition, inventories have decreased $0.1 million primarily from an overall decline in newsprint pricing, usage and purchasing.
Property, Plant, and Equipment
. Property, plant, and equipment increased $9.7 million during the period from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition. Since the acquisition, we have incurred $0.1 million in capital expenditures offset by depreciation of $0.5 million.
Goodwill
. Goodwill increased $90.3 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition.
Intangible Assets
.
Intangible assets increased $107.9 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition. Since the acquisition, we have recorded amortization of $2.7 million.
Accounts Payable
. Accounts payable increased $1.1 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition. Since the acquisition, accounts payable have decreased $0.6 million due to the timing of vendor payments.
Accrued Expenses
.
Accrued expenses increased $2.5 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition. Since the acquisition, accrued expenses have decreased $0.2 million due principally to the payment of accrued payroll and benefits.
Accrued Interest.
Accrued interest increased $2.2 million from December 31, 2006 to September 30, 2007 primarily attributable to borrowings under the Credit Facility associated with the MOTV Acquisition.
Deferred Revenue
. Deferred revenue increased $1.4 million from December 31, 2006 to September 30, 2007, all of which was associated with the MOTV Acquisition.
Long-Term Debt
.
Long-term debt increased $141.6 million from December 31, 2006 to September 30, 2007 from net borrowings of $110.5 million under the Credit Facility and $30.0 million under the Subordinated Credit Facility, the proceeds of which were used to partially fund the MOTV Acquisition.
Deferred Income Taxes
.
Deferred income taxes increased $2.3 million from December 31, 2006 to September 30, 2007, of which was associated with the MOTV Acquisition. Since the acquisition, deferred income taxes have not increased or decreased.
28
Table of Contents
Non-GAAP Financial Measures
A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. In this prospectus, we define and use Adjusted EBITDA, a non-GAAP financial measure, as set forth below.
Adjusted EBITDA and pro forma Adjusted EBITDA
We define Adjusted EBITDA as follows:
Net income (loss)
before
:
Income tax expense (benefit)
Income (loss) from discontinued operations
Normal state (non income) taxes
Depreciation and amortization
Net interest expense
Other non recurring items; and
Non-cash stock-based compensation expense
We define pro forma Adjusted EBITDA as follows:
Net income (loss)
before
Income tax expense (benefit)
Income (loss) from discontinued operations
Normal state (non income) taxes
Depreciation and amortization
Net interest expense
Other non recurring items; and
Non-cash stock-based compensation expense
Plus/Minus:
Adjustment for acquisitions (dispositions) so that such pro forma EBITDA calculation has been presented as if any acquisitions (dispositions) that occurred in any reporting period were made as of the first day of the earliest fiscal year presented.
Management’s Use of Adjusted EBITDA and pro forma Adjusted EBITDA
Adjusted EBITDA and pro forma EBITDA are not measurements of financial performance under GAAP and should not be considered in isolation or as alternatives to income from operations, net income (loss), cash flow from continuing operating activities or any other measure of performance or liquidity derived in accordance with GAAP. We believe these non-GAAP measures, as we have defined them, are helpful in identifying trends in our day-to-day performance because the items excluded have little or no significance on our day-to-day operations and/or take into account the impact of acquisitions/dispositions to compare over various periods. These measures provide an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance. They provide indicators for management to determine if adjustments to current spending decisions are needed.
Adjusted EBITDA and pro forma Adjusted EBITDA provide us with measures of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation and interest expense associated with our capital structure. These metrics measure our financial performance based on operational factors that management can impact in the short-term, namely the cost structure or expenses of the organization. Adjusted EBITDA and pro forma Adjusted EBITDA are just two of the metrics used by senior management to review the financial performance of the business on a monthly basis.
29
Table of Contents
Limitations of Adjusted EBITDA and pro forma Adjusted EBITDA
Adjusted EBITDA and pro forma Adjusted EBITDA have limitations as analytical tools. They should not be viewed in isolation or as substitutes for GAAP measures of earnings or cash flows. Material limitations in making the adjustments to our earnings to calculate Adjusted EBITDA and pro forma Adjusted EBITDA and using these non-GAAP financial measures as compared to GAAP net income (loss), include: the cash portion of interest expense, income tax (benefit) provision and non-recurring charges related to gain (loss) on sale of facilities and extinguishment of debt activities generally represent charges (gains), which may significantly affect our financial results.
An investor or potential investor may find these items important in evaluating our performance, results of operations and financial position. We use non-GAAP financial measures to supplement its GAAP results in order to provide a more complete understanding of the factors and trends affecting its business.
Adjusted EBITDA and pro forma Adjusted EBITDA are not alternatives to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with GAAP. You should not rely on Adjusted EBITDA or pro forma Adjusted EBITDA as substitutes for any such GAAP financial measure. We strongly encourage you to review the reconciliation of net income (loss) to Adjusted EBITDA and reconciliation of net income (loss) to pro forma Adjusted EBITDA, along with our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and our Definitive Proxy Statement dated June 15, 2007. We also strongly encourage you to not rely on any single financial measure to evaluate our business. In addition, because Adjusted EBITDA and pro forma Adjusted EBITDA are not measures of financial performance under GAAP and are susceptible to varying calculations, the Adjusted EBITDA and pro forma Adjusted EBITDA measures, as presented in this proxy statement, may differ from and may not be comparable to similarly titled measures used by other companies.
The table below shows the reconciliation of net income (loss) to Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Net income (loss)
|
|
|
|
$
|
(2,332,227
|
)
|
|
|
|
$
|
330,701
|
|
|
|
|
$
|
(1,815,949
|
)
|
|
|
|
$
|
899,069
|
|
Income tax expense (benefit)
|
|
|
|
|
(106,084
|
)
|
|
|
|
|
106,000
|
|
|
|
|
|
137,916
|
|
|
|
|
|
303,000
|
|
Non-cash stock based compensation expense
|
|
|
|
|
147,493
|
|
|
|
|
|
—
|
|
|
|
|
|
147,493
|
|
|
|
|
|
—
|
|
Interest expense, net
|
|
|
|
|
3,483,862
|
|
|
|
|
|
(524,397
|
)
|
|
|
|
|
2,464,725
|
|
|
|
|
|
(1,464,757
|
)
|
Depreciation and amortization
|
|
|
|
|
3,201,036
|
|
|
|
|
|
—
|
|
|
|
|
|
3,201,036
|
|
|
|
|
|
—
|
|
Adjusted EBITDA
|
|
|
|
$
|
4,394,080
|
|
|
|
|
$
|
(87,696
|
)
|
|
|
|
$
|
4,135,221
|
|
|
|
|
$
|
(262,688
|
)
|
30
Table of Contents
The table below shows the reconciliation of net income (loss) to pro forma Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Net income (loss)
|
|
|
|
$
|
(2,332,227
|
)
|
|
|
|
$
|
330,701
|
|
|
|
|
$
|
(1,815,949
|
)
|
|
|
|
$
|
899,069
|
|
Income tax expense (benefit)
|
|
|
|
|
(106,084
|
)
|
|
|
|
|
106,000
|
|
|
|
|
|
137,916
|
|
|
|
|
|
303,000
|
|
Non-cash stock based compensation expense
|
|
|
|
|
147,493
|
|
|
|
|
|
—
|
|
|
|
|
|
147,493
|
|
|
|
|
|
—
|
|
Interest expense, net
|
|
|
|
|
3,483,862
|
|
|
|
|
|
(524,397
|
)
|
|
|
|
|
2,464,722
|
|
|
|
|
|
(1,464,757
|
)
|
Depreciation and amortization
|
|
|
|
|
3,201,036
|
|
|
|
|
|
—
|
|
|
|
|
|
3,201,036
|
|
|
|
|
|
—
|
|
Other non-recurring items
|
|
|
|
|
—
|
|
|
|
|
|
87,696
|
|
|
|
|
|
258,859
|
|
|
|
|
|
262,688
|
|
Adjustment for acquisitions
|
|
|
|
|
—
|
|
|
|
|
|
4,782,716
|
|
|
|
|
|
8,831,108
|
|
|
|
|
|
13,257,772
|
|
Pro Forma Adjusted EBITDA
|
|
|
|
$
|
4,394,080
|
|
|
|
|
$
|
4,782,716
|
|
|
|
|
$
|
13,225,185
|
|
|
|
|
$
|
13,257,772
|
|
Off-Balance Sheet Arrangements
Options and warrants issued in conjunction with our IPO are equity-linked derivatives and accordingly represent off-balance sheet arrangements. The options and warrants meet the scope exception in paragraph 11(a) of Financial Accounting Standard (FAS) 133 and are accordingly not accounted for as derivatives for purposes of FAS 133 but instead are accounted for as equity. See Note 3 of the notes to our financial statements for more information.