<PAGE> 1
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 27, 1998
/ / 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: 1-10333
CENTRAL NEWSPAPERS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0220660
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
200 E. VAN BUREN STREET, PHOENIX, ARIZONA 85004
(Address of principal executive office)
(602) 444-8000
(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) 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.
YES /x/ NO / /
The number of shares of each class of common stock outstanding as of November 2,
1998:
CLASS A COMMON STOCK 18,707,924
CLASS B COMMON STOCK 31,345,500
<PAGE> 2
Central Newspapers, Inc.
Index to Form 10-Q
Part I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements:
Consolidated Statement of Financial Position 3-4
Consolidated Statement of Income 5
Consolidated Statement of Shareholders' Equity 6
Consolidated Statement of Cash Flows 7
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 14-20
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PART I.
Item 1. Financial Statements
CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Financial Position
<TABLE>
<CAPTION>
September 27, December 28,
ASSETS 1998 1997
(In thousands) (Unaudited)
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 32,049 $ 36,924
Marketable securities 12,830 11,524
Accounts receivable (net of allowances of
$3,694 and $2,959) 80,932 89,707
Inventories 11,640 10,320
Deferred income tax benefits 7,693 7,919
Other current assets 13,020 5,712
-------- --------
Total current assets 158,164 162,106
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 18,985 18,616
Buildings and improvements 135,595 122,409
Leasehold improvements 902 4,412
Machinery and equipment 397,499 383,626
Construction in progress 10,656 8,071
-------- --------
563,637 537,134
Less accumulated depreciation 278,736 250,451
-------- --------
284,901 286,683
-------- --------
OTHER ASSETS:
Land held for development 3,166 3,116
Goodwill and other intangibles 126,016 122,729
Investment in Affiliate 9,558 8,321
Other 36,890 31,356
-------- --------
175,630 165,522
-------- --------
TOTAL ASSETS $618,695 $614,311
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Financial Position
<TABLE>
<CAPTION>
September 27, December 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
(In thousands, except share data) (Unaudited)
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 20,366 $ 19,672
Short-term bank debt 5,000 10,000
Accrued compensation 19,011 20,061
Dividends payable 5,881 5,613
Accrued expenses and other liabilities 18,525 16,825
Federal and state income taxes 1,578
Deferred revenue 32,077 23,618
--------- ---------
Total current liabilities 100,860 97,367
--------- ---------
DEFERRED INCOME TAXES 25,374 26,882
--------- ---------
POSTRETIREMENT AND OTHER NONCURRENT LIABILITIES 90,508 86,997
--------- ---------
MINORITY INTEREST IN SUBSIDIARIES 2,809 1,866
--------- ---------
REDEEMABLE PREFERRED STOCK ISSUED BY SUBSIDIARY 18,920 18,920
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock--issuable in series:
Authorized--25,000,000 shares
Issued--none
Class A common stock--without par value:
Authorized--150,000,000 shares
Issued and outstanding--21,314,058 and 22,017,626 shares 36,543 29,934
Class B common stock--without par value:
Authorized--130,000,000 shares
Issued and outstanding--31,345,500 shares 63 63
Retained earnings 343,707 352,531
Unamortized value of restricted stock (1,419) (1,924)
Unrealized gain on available-for-sale securities 1,330 1,675
--------- ---------
380,224 382,279
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 618,695 $ 614,311
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Income
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Advertising $ 135,390 $ 129,431 $ 411,885 $ 395,790
Circulation 36,537 35,642 112,376 106,545
Other 9,399 8,834 30,787 22,293
--------- --------- --------- ---------
181,326 173,907 555,048 524,628
--------- --------- --------- ---------
OPERATING EXPENSES:
Compensation 60,580 59,068 181,787 177,434
Newsprint and ink 25,341 25,390 84,100 76,846
Other operating costs 47,140 45,426 145,622 128,422
Depreciation and amortization 11,839 10,843 34,613 32,179
Work force reduction cost 2,632 77 9,355
--------- --------- --------- ---------
144,900 143,359 446,199 424,236
--------- --------- --------- ---------
OPERATING INCOME 36,426 30,548 108,849 100,392
OTHER INCOME (principally investment income) 843 813 3,581 3,364
OTHER EXPENSES (322) (623) (773) (1,613)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 36,947 30,738 111,657 102,143
PROVISION FOR INCOME TAXES 15,315 12,752 46,231 42,304
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST AND
EQUITY IN AFFILIATE 21,632 17,986 65,426 59,839
MINORITY INTEREST IN SUBSIDIARIES (502) (688) (1,937) (1,975)
EQUITY IN NET EARNINGS (LOSS) OF AFFILIATE 327 180 803 (255)
--------- --------- --------- ---------
NET INCOME $ 21,457 $ 17,478 $ 64,292 $ 57,609
========= ========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 0.87 $ 0.69 $ 2.57 $ 2.22
Diluted 0.85 0.67 2.49 2.16
DIVIDENDS DECLARED PER CLASS A COMMON SHARE $ 0.24 $ 0.21 $ 0.66 $ 0.59
AVERAGE COMMON SHARES OUTSTANDING:
(combined Class A and equivalent Class B shares)
Basic 24,745 25,229 25,061 25,918
Diluted 25,384 26,070 25,771 26,635
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except share data)
Class A Class B
Common Stock Common Stock Retained
Shares Amount Shares Amount Earnings
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 30, 1996 23,237,711 $ 24,259 31,553,000 $ 63 $ 363,365
Net income (39 weeks) 57,609
Dividends declared:
Class A common stock (13,243)
Class B common stock (1,853)
Exercise of stock options 139,281 4,707
Repurchase of Class A common stock (1,332,267) (1,475) (65,319)
Repurchase of Class B common stock (17,500) (99)
Issuance of restricted stock 7,500 419
Amortization of restricted stock
Common stock conversion 19,000 (190,000)
Change in net unrealized gain on
available-for-sale securities
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 28, 1997 22,071,225 $ 27,910 31,345,500 $ 63 $ 340,460
Net income (13 weeks) 23,886
Dividends declared:
Class A common stock (4,623)
Class B common stock (659)
Exercise of stock options, net 35,151 1,437
Repurchase of Class A common stock (100,000) (125) (6,533)
Repurchase of Class B common stock
Issuance of restricted stock,
net of cancellations 11,250 712
Amortization of restricted stock
Common stock conversion
Change in net unrealized gain on
available-for-sale securities
----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 28, 1997 22,017,626 $ 29,934 31,345,500 $ 63 $ 352,531
Net income (39 weeks) 64,292
Dividends declared:
Class A common stock (14,409)
Class B common stock (2,069)
Exercise of stock options 188,912 7,742
Repurchase of Class A common stock (897,730) (1,477) (56,638)
Issuance of restricted stock 5,250 344
Amortization of restricted stock
Change in net unrealized gain on
available-for-sale securities
----------- ----------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 27, 1998 21,314,058 $ 36,543 31,345,500 $ 63 $ 343,707
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
(In thousands, except share data) Unrealized
Unamortized Gain on
Value of Available-
Restricted for-Sale
Stock Securities
----------- -----------
<S> <C> <C>
BALANCE AT DECEMBER 30, 1996 ($ 1,627) $ 1,490
Net income (39 weeks)
Dividends declared:
Class A common stock
Class B common stock
Exercise of stock options
Repurchase of Class A common stock
Repurchase of Class B common stock
Issuance of restricted stock (419)
Amortization of restricted stock 636
Common stock conversion
Change in net unrealized gain on
available-for-sale securities 300
----------- -----------
BALANCE AT SEPTEMBER 28, 1997 ($ 1,410) $ 1,790
Net income (13 weeks)
Dividends declared:
Class A common stock
Class B common stock
Exercise of stock options, net
Repurchase of Class A common stock
Repurchase of Class B common stock
Issuance of restricted stock, net of cancellations (712)
Amortization of restricted stock 198
Common stock conversion
Change in net unrealized gain on
available-for-sale securities (115)
----------- -----------
BALANCE AT DECEMBER 28, 1997 ($ 1,924) $ 1,675
Net income (39 weeks)
Dividends declared:
Class A common stock
Class B common stock
Exercise of stock options
Repurchase of Class A common stock
Issuance of restricted stock (344)
Amortization of restricted stock 849
Change in net unrealized gain on
available-for-sale securities (345)
----------- -----------
BALANCE AT SEPTEMBER 27, 1998 ($ 1,419) $ 1,330
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
September 27, September 28,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 64,292 $ 57,609
Items which did not use (provide) cash:
Depreciation and amortization 34,561 32,179
Postretirement and pension benefits 2,645 5,098
Loss (gain) on disposition of assets 131 (74)
Minority interest in earnings of subsidiaries 1,937 1,975
Equity loss (earnings) in Affiliate (803) 255
Deferred income taxes (637) 1,412
Amortization of restricted stock awards 849 636
Other (516) 370
Net proceeds from (purchases of) trading securities (1,578) 2,160
Net change in other current assets and liabilities 12,508 10,548
--------- ---------
Net cash provided by operating activities 113,389 112,168
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment - net (30,916) (18,144)
Net proceeds from (purchases of) available-for-sale securities (3,143) 11,409
Acquisitions (5,839) (33,219)
Other (1,244) (6,027)
--------- ---------
Net cash used by investing activities (41,142) (45,981)
--------- ---------
FINANCING ACTIVITIES:
Cash dividends paid (16,478) (14,818)
Dividends paid to minority interest (1,324) (1,159)
Proceeds from exercise of stock options 4,200 2,685
Borrowings of short-term debt 5,000 34,400
Repayments of short-term debt (10,405) (800)
Repurchase of common stock (58,115) (66,893)
--------- ---------
Net cash used by financing activities (77,122) (46,585)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,875) 19,602
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,924 36,149
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,049 $ 55,751
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Issuance by subsidiary of redeemable preferred stock
in exchange for Class A common stock of subsidiary $ 18,920
Income taxes paid $ 49,880 51,324
Interest paid 277 748
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 8
CENTRAL NEWSPAPERS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Central Newspapers, Inc. and its subsidiaries (the "Company") are primarily
engaged in the publishing and distribution of newspapers. Revenues are
principally derived from advertising and newspaper sales in the Phoenix, Arizona
and Indianapolis, Indiana metropolitan areas. The Company also has an 80%
interest in the Westech group of companies which are predominately in the jobs
fair business and a 13.5% interest in Ponderay Newsprint Company ("Affiliate"),
a partnership formed to own a newsprint mill in the State of Washington.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and revenues and expenses
as of and for the period ending with the financial reporting date. Actual
results could differ from those estimates.
2. The accompanying unaudited consolidated financial statements do not include
all of the information and disclosures which are normally included in Form 10-K
and the annual report to shareholders. These financial statements should be read
in conjunction with the Company's audited consolidated financial statements and
related notes for the year ended December 28, 1997. The accompanying
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated
statement of financial position at December 28, 1997, presented herein, has been
derived from audited financial statements. In the opinion of the Company's
management, the unaudited consolidated financial statements reflect all
adjustments which are necessary to present fairly, in all material respects, the
Company's financial position, results of operations and cash flows for the
interim periods presented. All adjustments are of a normal recurring nature.
Such statements are not necessarily indicative of the results to be expected for
the full year.
3. The Company's fiscal year ends on the last Sunday of the calendar year. The
years ending December 27, 1998 and December 28, 1997 each comprise 52 weeks.
4. Net income per common share is computed using the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share ("EPS") and diluted EPS.
The Company adopted this new standard in the fourth quarter of 1997 and has
restated EPS for all prior periods disclosed in the financial statements. Basic
EPS is computed based upon the weighted average number of common shares
outstanding in each year. The Class B common stock is included in the
computation as if converted to Class A common stock at a ratio of 10 shares of
Class B common stock to one share of Class A common stock. Diluted EPS includes
the effect of dilutive stock options granted under the Company's Amended and
Restated Stock Compensation Plan.
5. During 1997 the Company reduced its work force in response to circulation
distribution changes, technological changes and the closure of the Phoenix
afternoon newspaper. Certain employees were offered retirement benefits through
a non-qualified supplemental retirement plan. This work force reduction resulted
in an after tax charge of $5.5 million, or $.21 per diluted share for the nine
months ended September 28, 1997.
6. In December, 1997, the Board of Directors authorized the repurchase of up to
$100.0 million of the Company's Class A common stock. The shares may be
purchased within the subsequent three years on the open market or in privately
negotiated transactions. The Company has repurchased a total of 897,730 shares
under this authorization through September 27, 1998.
7. At the annual meeting of Shareholders of the Company on May 15, 1998, the
shareholders approved an increase in the number of authorized shares of Class A
common stock from 75,000,000 to 150,000,000 shares and Class B common stock from
50,000,000 to 130,000,000 shares.
8. On October 23, 1998, pursuant to a September 21, 1998 agreement, the Company
purchased 2,500,000 shares of its Class A common stock from the Nina Mason
Pulliam Charitable Trust at $60 per share plus interest from September 16, 1998,
for total consideration of $150.8 million. The Company has an exclusive option
for a period of one year to purchase up to 1.5 million shares of Class A common
stock or equivalents held by the Trust
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at $67 per share. The Company may only elect to exercise the option if the
average trading price per share is at least $67 for five consecutive trading
days during the one year option period. In such an event, the exercise must be
made within five business days or the option will expire. In order to finance
the transaction, the Company is in the process of closing a $300 million
revolving credit facility arranged by First Chicago Capital Markets, Inc., a
subsidiary of Bank One Corporation. The credit facility is expected to close
prior to November 15, 1998. In the interim, a short-term $150 million bridge
loan has been obtained. The bridge loan will mature and be repaid on the date
the credit facility closes.
9. Certain prior year amounts in the financial statements have been reclassified
to conform with the current year presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company's principal line of business is newspaper publishing. Revenues are
derived primarily from advertising and newspaper sales in the Phoenix, Arizona
and Indianapolis, Indiana metropolitan areas. The Company also has an 80%
interest in the Westech group of companies, which is predominantly in the jobs
fair business and a 13.5% interest in Ponderay Newsprint Company, a partnership
formed to own a newsprint mill in the State of Washington. The analysis of the
third quarter and nine month period ended September 27, 1998 compared with
comparable 1997 periods should be read in conjunction with the fiscal 1997
consolidated financial statements and the accompanying notes to the consolidated
financial statements.
The Company's business tends to be somewhat seasonal, with peak revenues and
profits generally occurring in the second and fourth quarters of each year.
THIRD QUARTER AND NINE MONTH PERIOD ENDED SEPTEMBER 27, 1998 COMPARED WITH 1997
QUARTERLY RESULTS OF OPERATIONS
Third quarter and year-to-date diluted earnings per share for 1998 were $.85 and
$2.49 for increases of 26.9% and 15.3%, respectively, over the corresponding
1997 periods. The effects of work force reduction costs ("special charges")
negatively impacted earnings in the third quarter and first nine months of 1997
and, to a much lesser extent the second quarter of 1998. Excluding special
charges, diluted earnings per share would have been $.85 for the third quarter
of 1998 and $2.50 for the 1998 nine month period, which represented increases of
16.4% and 5.5%, respectively, versus comparable 1997 amounts.
Operating income for the third quarter and the nine months of 1998 was $36.4
million and $108.8 million, respectively, which represented increases of 19.2%
and 8.4%, respectively over comparable 1997 periods. Excluding special charges,
operating income increased 9.8% for the third quarter and decreased 0.7% for the
nine month period, compared to 1997 periods.
Net income for the third quarter of 1998 was $21.5 million, up 22.8% from the
same period of 1997. For the nine month period, net income for 1998 was $64.3
million, up 11.6% over the prior year. Excluding special charges, net income
increased 13.2% for the third quarter and 1.9% for the nine month period,
compared to 1997 periods. EBITDA (operating earnings before depreciation,
amortization and special charges) for the comparable periods was $48.3 million
for the third quarter of 1998 and $143.5 million year-to-date, representing
increases of 9.8% and 1.1%, respectively, versus comparable 1997 periods.
OPERATING REVENUES
The Company's third quarter and nine month revenues rose to $181.3 million and
$555.0 million for increases of 4.3% and 5.8%, respectively, when compared with
the same 1997 periods.
Total advertising revenue for the three and nine month periods ended September
27, 1998 were $135.4 million and $411.9 million for increases of 4.6% and 4.1%,
respectively over comparable 1997 periods. The increases
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<PAGE> 10
in advertising revenues for the third quarter of 1998 resulted from gains in
retail, national, and classified in Phoenix and Indianapolis. In both markets,
the most significant increases were due to gains in the classified recruitment
category.
Circulation revenues for the third quarter and year-to-date periods increased to
$36.5 million and $112.4 million, respectively, for increases of 2.5% and 5.5%
when compared to 1997. The third quarter increase is primarily due to a March
1998 increase in the home delivered price of the Phoenix paper. The year-to-date
increase related to a distribution system change in Indianapolis which resulted
in a revenue increase of $4.3 million, Phoenix circulation growth, and the home
delivered price increase in Phoenix.
Other revenues for the third quarter and year-to-date were $9.4 million and
$30.8 million, for increases of 6.4% and 38.1%, respectively over comparable
1997 periods. The increases for the third quarter of 1998 were due to gains in
online and direct marketing programs. The year-to-date increase related to
increased job fairs, online, direct marketing, and specialty publications.
The following is a summary of major market linage and circulation statistics for
the third quarter and nine month periods:
(In thousands, except circulation)
<TABLE>
<CAPTION>
Third Quarter % Year-to-date %
1998 1997 Change 1998 1997 Change
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Full Run Linage in six column inches:(1)
Retail 657.9 603.9 8.9 1,950.5 1,875.2 4.0
National 113.3 114.5 (1.1) 333.4 333.8 (0.1)
Classified 801.2 787.1 1.8 2,378.2 2,365.0 0.6
---------- ---------- ---------- ---------- ---------- ----------
Total 1,572.4 1,505.5 4.4 4,662.1 4,574.0 1.9
========== ========== ========== ========== ========== ==========
Full Run Linage by Major Markets:
Phoenix (1) 690.3 679.8 1.5 2,133.2 2,075.7 2.8
Indianapolis 882.1 825.7 6.8 2,528.9 2,498.3 1.2
---------- ---------- ---------- ---------- ---------- ----------
Total 1,572.4 1,505.5 4.4 4,661.9 4,574.0 1.9
========== ========== ========== ========== ========== ==========
Net Advertising Revenue $ 135,390 $ 129,431 4.6 $ 411,885 $ 395,790 4.1
Combined Average Daily Circulation:
Phoenix 424,978 433,862 (2.1) 466,793 456,183 2.3
Indianapolis 259,023 260,153 (0.4) 270,221 268,421 0.7
Sunday Circulation:
Phoenix 545,360 552,142 (1.2) 582,596 579,331 0.6
Indianapolis 390,449 391,894 (0.4) 390,911 392,955 (0.5)
</TABLE>
(1) For comparability, linage statistics for the 13 weeks and 39 weeks
ended September 28, 1997 excluded linage of The Phoenix Gazette, which
ceased publication in January, 1997.
OPERATING EXPENSES
Compensation costs, which include fringe benefits, increased 2.6% to $60.6
million in the third quarter and 2.5% to $181.8 million for the nine month
period. The year-over-year headcount decreased 2.7% due primarily to the closure
of The Phoenix Gazette and the impact of a conversion from a carrier-based
distribution arrangement to an agency-based distribution work force in
Indianapolis. These benefits were offset by increased employee benefits,
commissions and merit increases.
Newsprint and ink expense for 1998 decreased 0.2% to $25.3 million in the third
quarter and increased 9.4% to $84.1 million for the nine month period. The
decrease in newsprint expense for the third quarter was primarily due to a
volume decrease of 1.7% related to reduced circulation in Phoenix and cost
reduction measures. The year-to-date increase is primarily due to higher
newsprint prices during 1998 and a volume increase of 3.4% for the nine month
period over comparable 1997 periods. This volume increase was related to
increased
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<PAGE> 11
advertising linage and circulation gains. The Company anticipates that newsprint
expense comparisons may show modest increases during the fourth quarter of 1998.
Other operating costs rose 3.8% to $47.1 million for the third quarter and 13.4%
to $145.6 million for the nine month period. Significant items contributing to
these increases in the third quarter versus the same 1997 period included
outside printing costs from new publications and inserts, distribution costs
related to increased data marketing volume and increased job fair costs. The
year-to-date increase included costs related to the circulation delivery system
changes in Indianapolis (which did not contribute to the third quarter cost but
increased year-to-date expense by $6.3 million), costs associated with outside
printing of inserts and special publications, promotional/marketing programs in
both major markets, increased Arizona Republic delivery costs, and expenses
related to the job fair business.
Depreciation and amortization expense for the third quarter and the year-to-date
was $11.8 million and $34.6 million, compared with $10.8 million and $32.2
million in 1997. The expense increases were primarily a result of information
technology projects in Phoenix and pagination and remodeling projects in
Indianapolis.
The Company recorded work force reduction costs of $2.6 million in the third
quarter of 1997 and $9.4 million for the nine months ended September 28, 1997.
Of this amount, approximately $4.2 million resulted from closure of The Phoenix
Gazette where approximately 85 positions were eliminated. The balance of the
charge related to the composing room work force reduction of 30 individuals in
the third quarter and the conversion from the carrier-based work force to an
agent based circulation arrangement, both in Indianapolis.
NON-OPERATING ITEMS AND EQUITY IN AFFILIATE
Other non-operating income (primarily investment income) increased 3.7% in the
third quarter and 6.5% year-to-date primarily due to an increase in investable
cash. Other non-operating expenses decreased in the third quarter and
year-to-date due to a reduction in interest expense from 1997.
Equity in Affiliate recorded gains in the third quarter and the nine month
period due to an increase in newsprint selling prices being realized by Ponderay
Newsprint Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is net cash provided by operating
activities. Net cash provided by operating activities for the first nine months
of 1998 and 1997 was $113.4 million and $112.2 million, respectively. The
principal uses of cash in the first nine months of 1998 were the repurchase of
Class A common stock, capital expenditures, the payment of dividends, and
repayment of the $10 million short-term bank line of credit. The corresponding
1997 period included the $33.2 million paid for the acquisition of an 80%
interest in the Westech group of companies and $66.9 million paid to repurchase
the Company's common stock. At the end of the nine month period, the Company's
available cash and short-term investments totaled $44.9 million, a decrease of
$3.6 million from the balance at the end of 1997. Working capital (exclusive of
cash) for the same period decreased $7.6 million to $30.3 million.
Total capital expenditures for the nine months of 1998 were $30.9 million
compared to $18.1 million for the comparable 1997 period. The Company plans
approximately $34 million of capital expenditures in 1998. As of September 27,
1998, there were no significant formal commitments related to future capital
expenditures.
In December 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to $100 million of its Class A common stock on
the open market or in privately negotiated transactions over a three year time
period. During the nine months ended September 27, 1998, the Company repurchased
897,730 shares at a total cost of $58.1 million.
The Company has arranged two unsecured, uncommitted credit facilities which can
provide up to $80 million in short-term financing for general corporate
purposes. At September 27, 1998, the Company had $5 million outstanding under
such facilities.
-11-
<PAGE> 12
On October 23, 1998, pursuant to a September 21, 1998 agreement, the Company
purchased 2,500,000 shares of its Class A common stock from the Nina Mason
Pulliam Charitable Trust at $60 per share plus interest from September 16, 1998,
for total consideration of $150.8 million. The Company has an exclusive option
for a period of one year to purchase up to 1.5 million shares of Class A common
stock or equivalents held by the Trust at $67 per share. The Company may only
elect to exercise the option if the average trading price per share is at least
$67 for five consecutive trading days during the one year option period. In such
an event, the exercise must be made within five business days or the option will
expire. In order to finance the transaction, the Company is in the process of
closing a $300 million revolving credit facility arranged by First Chicago
Capital Markets, Inc., a subsidiary of Bank One Corporation. The credit facility
is expected to close prior to November 15, 1998. In the interim, a short-term
$150 million bridge loan has been obtained. The bridge loan will mature and be
repaid on the date the credit facility closes.
At the Board of Directors meeting of the Company, on September 8, 1998, the
board approved a 14% increase in its cash dividend to a new annual rate of $0.96
per share on its Class A common stock and $0.96 on its Class B common stock.
Dividends of $0.24 per share on the Class A common stock and $0.24 on the Class
B common stock were declared during the quarter and paid October 9, 1998. Total
Class A and B dividends paid during the nine month period of 1998 were $16.5
million.
The Company has demonstrated a consistent ability to generate net cash flow from
operations. Management believes that existing cash and investments, net cash
flows from operations and available bank credit resources are sufficient to
enable the Company to maintain its current level of operations. Financing for
future investing opportunities is expected to come from a combination of
existing cash, new and existing debt facilities and/or the use of equity.
YEAR 2000 UPDATE
State of Readiness
The Central Newspapers, Inc. Year 2000 project is on schedule to meet its
objectives. The Company has developed a comprehensive program to identify,
evaluate, test, upgrade or replace each of its computer and non-computer based
systems in connection with Year 2000 readiness. The Company has devoted
significant resources to the program including the development of a Year 2000
project team which reports to senior management on a regular basis and the
construction of a test environment dedicated to the Year 2000 testing process.
The Chief Information Officer reports progress at every regularly scheduled
Board of Directors meeting.
The Company has been actively implementing new systems and technology since 1995
for reasons unrelated to the year 2000, and these actions have resulted in a
number of major information technology systems becoming year 2000 compliant.
The Company has completed its discovery phase of the program and has performed
several review audits to ensure that all susceptible systems have been
identified, including client server, desktop and all other systems with embedded
computer chips. All desktop systems, application software and servers have been
updated to a compliant level and all database modules are in the process of
being upgraded. All other susceptible systems are in the remediation and testing
phase and the Company anticipates that testing will have been completed or
initiated for all significant systems by the end of 1998.
The Company has requested letters of compliance from each of its vendors and,
wherever possible, works with its vendors in determining an appropriate testing
and compliance process. This process is scheduled for completion by year-end
1998. During early 1999, the Company anticipates using a third party auditor to
review the project. In addition, certain employees have attended a number of
Year 2000 training programs and outside consultants have been hired where
necessary.
-12-
<PAGE> 13
Costs
Total costs associated with the Year 2000 project are estimated at approximately
$8.5 million, of which approximately $6.5 million will be incurred through
fiscal 1998 with the remainder incurred during 1999.
Risks
Despite the efforts described above, the Company could potentially experience a
disruption in its operations as a result of potential non-compliance of certain
vendors, financial institutions, governmental agencies or other third-parties or
external systems. Such disruptions could potentially affect various aspects of
business operations including, but not limited to, the timeliness and content of
certain newspapers or online products. At this time, the Company is unable to
determine whether the consequences of any year 2000 non-compliance would have a
material impact on the Company's results of operations, liquidity or financial
condition.
Contingency Plans
In an effort to minimize any disruption, the Company is in the process of
creating a comprehensive contingency plan to address potential Year 2000
scenarios. Such plans include maintaining an inventory of critical supplies such
as newsprint, ink and other consumables for at least a 30-45 day production
cycle as well as creating a smaller product designed to maximize advertising
content.
OUTLOOK FOR THE REMAINDER OF 1998
The Company foresees continued growth in advertising revenues for the remainder
of 1998, but at a rate slightly less than that experienced during the first nine
months of 1998. Circulation revenue is also expected to increase modestly in the
fourth quarter of 1998 when compared with the similar period in 1997 due to
projected circulation gains and subscription price increases in Phoenix.
Non-newsprint operating expenses are expected to increase at a rate comparable
with revenue growth. The cost of newsprint, the second largest expense item, is
expected to increase in the fourth quarter of 1998. Nonetheless, the Company
still expects earnings per share to increase for the full year 1998.
FORWARD-LOOKING STATEMENTS
This document contains material that is forward-looking in nature. From time to
time, the Company may provide forward-looking statements relating to such
matters as anticipated financial performance, business prospects and similar
matters. All forward-looking statements are based upon information available to
the Company at the time they are made and the Company assumes no obligation to
update any forward-looking statements. The Company notes that a variety of
factors could cause the Company's actual results to differ materially from the
expectations expressed in the forward-looking statements. The risks and
uncertainties that may affect the operations, performance and results of the
Company's business include, but are not limited to:
* economic weakness in the Company's geographic markets
* weakness in retail, national and/or classified advertising revenue due
to factors including retail consolidation, declines in the advertising
budgets of major customers and increased competition from print and
non-print products
* declines in circulation due to changing reader preferences and/or new
forms of information dissemination
* fluctuations in the price of newsprint
* an increase in distribution and/or production costs over anticipated
levels
* the negative impact of issues related to labor agreements
* new competitors emerging in our markets
* an unexpected rise in interest rates affecting the company's borrowing
costs
-13-
<PAGE> 14
PART II
CENTRAL NEWSPAPERS, INC.
Item 1. Legal Proceedings -- None
Item 2. Changes in Securities -- None
Item 3. Default Upon Senior Securities -- None
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10 - a) Stock Purchase Agreement with the Nina Mason
Pulliam Charitable Trust.
b) Standstill and Option Agreement with the Nina
Mason Pulliam Charitable Trust.
Exhibit 15 - Letter from PricewaterhouseCoopers LLP with
respect to unaudited interim financial
information.
Exhibit 27 - Selected financial data.
b) The Company filed a report on Form 8-K on October 9, 1998 related to
the purchase of 2,500,000 shares of its Class A common stock from
the Nina Mason Pulliam Charitable Trust.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CENTRAL NEWSPAPERS, INC.
Dated: November 2, 1998 By: /s/ Louis A. Weil, III
------------------------------------------------
Louis A. Weil, III
President and Chief Executive Officer
By: /s/ Thomas K. MacGillivray
------------------------------------------------
Thomas K. MacGillivray
Vice President and Chief Financial Officer
-14-
<PAGE> 1
EXHIBIT 10a
STOCK PURCHASE AGREEMENT
This Agreement is made as of this 21st day of September, 1998, by and
between the NINA MASON PULLIAM CHARITABLE TRUST, an Indiana trust (the "Trust"),
and CENTRAL NEWSPAPERS, INC., an Indiana corporation (the "Company").
RECITALS
A. The Trust holds shares of the Class A common stock of the Company (the
"Shares").
B. The Company desires to purchase from the Trust and the Trust desires to
sell to the Company Two Million Five Hundred Thousand (2,500,000) of
the Shares (the "Redeemed Shares").
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein and subject to and upon the terms and conditions hereinafter
set forth, it is hereby agreed as follows:
ARTICLE I
PURCHASE OF REDEEMED SHARES
1.1 On the date agreed upon by the Trust and the Company as the closing
date of this transaction (the "Closing Date"), the Trust will deliver to the
Company, at the Company's offices in Phoenix, Arizona, the certificate or
certificates representing the Redeemed Shares, a stock power duly executed in
blank and such other instruments as the Company shall deem necessary to transfer
ownership of the Redeemed Shares to the Company. The Company will deliver to the
Trust a certified or cashiers check or wire funds transfer in an amount equal to
One Hundred Fifty Million Dollars ($150,000,000) or $60 per Redeemed Share (the
"Purchase Price") plus interest at the rate of five percent (5%) per annum from
September 16, 1998 through the Closing Date, calculated on the basis of a 365
day year.
1.2 The Company represents and warrants as follows:
(a) This Agreement is the valid and binding obligation of
the Company, enforceable in accordance with its
terms, and the execution and performance of this
Agreement by the Company will not result in any
violation of or be in conflict with or constitute a
default under any contract, agreement, instrument,
judgment, decree or other indenture to which the
Company is a party or by which the Company otherwise
is bound; and
(b) No person, corporation or other entity has, nor as a
result of the transactions contemplated hereby will
have, any right, interest, or valid claim against the
Trust, the Company or any other person, for any
commission, fee or other compensation as a finder or
broker or in any similar capacity arising out of any
action taken by the Company.
ARTICLE II
REPRESENTATIONS AND COVENANTS OF THE TRUST
The Trust hereby represents and warrants as follows:
(a) As of the Closing Date, the Trust will be the sole
owner of the Redeemed Shares, and that each of the
Redeemed Shares will be free and clear of liens,
encumbrances, claims of others and transfer
restrictions of any kind with the exception of any
restrictive legend placed on the certificate(s);
<PAGE> 2
(b) The Trust has full power and authority to sell the
Redeemed Shares to the Company in accordance with the
provision hereof;
(c) This Agreement is the valid and binding obligation of
the Trust enforceable in accordance with its terms,
and the execution and performance of this Agreement
by the Trust will not result in any violation of or
be in conflict with or constitute a default under any
contract, agreement, instrument, judgment, decree or
other indenture to which the Trust is a party or by
which the Trust otherwise is bound;
(d) No person, corporation or other entity has, nor as a
result of the transactions contemplated hereby will
have, any right, interest, or valid claim against the
Trust, the Company or any other person, for any
commission, fee or other compensation as a finder or
broker or in any similar capacity arising out of any
action taken by the Trust; and
(e) The Trust has had access to all information it
desires concerning the Company and its subsidiaries
and operations, and has had the opportunity to ask
such questions of officers of the Company as the
Trust has deemed necessary or appropriate in order to
enable the Trust to determine whether to authorize
the sale of the Redeemed Shares on the terms herein
specified. The Trust has reviewed all information it
deems material to making its decision to sell the
Redeemed Shares hereunder.
ARTICLE III
REGISTRATION
The Company has agreed to register 1,336,850 shares of its Class A
Common Stock in a registered secondary offering pursuant to a prospectus. The
Trust will pay its own legal and accounting fees, fees for the fairness opinion
received by the Trust, the underwriter's discount and all NASD, SEC and Blue Sky
filing fees related to the secondary offering. The Company will pay all other
fees related to the secondary offering. Any over-allotment shares requested by
the underwriter shall be included in the shares registered by the Company.
ARTICLE IV
CONDITIONS PRECEDENT
All obligations of the parties under this Agreement are subject to the
fulfillment or satisfaction, prior to or as of the Closing Date, of each of the
following conditions precedent:
(a) the arrangement of financing for the transaction on
terms and conditions acceptable to the Company;
(b) the receipt of probate court approval for the
transaction by the Trust; and
(c) the receipt of fairness opinions for the transaction
acceptable to each of the Company and the Trust.
ARTICLE V
GENERAL
5.1 This Agreement constitutes the entire Agreement between the parties
with respect to the subject matter hereof and supersedes and merges all prior
understandings and agreements concerning the subject matter hereof. This
Agreement may only be modified or amended in writing.
5.2 This Agreement shall be governed and construed in all respects
under the laws of the State of Indiana.
<PAGE> 3
5.3 This Agreement may be executed in counterparts, each one of which
shall constitute one and the same Agreement and each one of which shall be
deemed an original.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
CENTRAL NEWSPAPERS, INC.
By:_______________________________________
Thomas K. MacGillivray
Vice President and Chief Financial Officer
THE NINA MASON PULLIAM CHARITABLE TRUST
By:_______________________________________
Printed: Frank Russell
Title: Trustee
<PAGE> 1
Exhibit 10b
STANDSTILL AND OPTION AGREEMENT
This Agreement is made as of the 21st day of September, 1998, by and
between the NINA MASON PULLIAM CHARITABLE TRUST, an Indiana trust (the "Trust"),
and CENTRAL NEWSPAPERS, INC., an Indiana corporation ("the Company").
RECITALS
A. The Trust holds shares of the Class A common stock of the Company
(the "Shares").
B. The Company has agreed to purchase from the Trust and the Trust has
agreed to sell to the Company Two Million Five Hundred Thousand (2,500,000) of
the Shares (the "Redeemed Shares").
C. The Trust intends to sell One Million Three Hundred Thirty-Six
Thousand Eight Hundred Fifty (1,336,850) of the Shares in a registered public
offering pursuant to a prospectus.
AGREEMENT
NOW, THEREFORE, in consideration of the Company agreeing to purchase
the Redeemed Shares and in consideration of the mutual promises and covenants
contained herein and subject to and upon the terms and conditions hereinafter
set forth, it is hereby agreed as follows:
STANDSTILL
Except as set forth in Recitals B. and C. above, the Trust hereby
agrees that, without the prior written consent of the Company, it will not,
during the period commencing on the date hereof through the one year anniversary
date of the date hereof, (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of Class A Common Stock of the Company held
by the Trust or any securities convertible into or exercisable or exchangeable
for Class A Common Stock, or (2) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic consequences of
ownership of the Class A Common Stock of the Company held by the Trust whether
any such transaction described in clause (1) or (2) above is to be settled by
delivery of Class A Common Stock of the Company or such other securities, in
cash or otherwise.
OPTION
The Trust hereby grants the Company the option to purchase up to 1.5
million shares of the Company's Class A Common Stock or equivalents held by the
Trust for a purchase price of $67 per share (the "Option"). The Option can only
be exercised in 500,000 share increments. In the event the average trading price
per share for the Company's Class A Common Stock is at least $67 per share for
five consecutive trading days during the term of the Option, the Company shall
have five business days to give the Trust written notice that it is exercising
the Option. If the Company exercises the Option, then it shall pay the Trust,
within thirty days of the exercise notice, the Option price for the shares being
purchased plus interest at the rate of 5% from the date of exercise through the
payment date. Upon receipt of such amounts, the Trust shall deliver to the
Company appropriate stock certificates for the shares being purchased,
appropriate endorsements and stock powers to complete the transfer free and
clear of any lines of restrictions and any other documentation that the Company
may reasonably require to complete the transfer. The Option shall remain in
force from the date hereof through the anniversary date of the date hereof
unless the Option becomes exercisable and is not timely exercised by the
Company, in which case the Option shall immediately expire.
<PAGE> 2
GENERAL
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and supersedes and merges all prior
understandings and agreements concerning the subject mater hereof. This
Agreement may only be modified or amended in writing.
This Agreement should be governed and construed in all respects under
the laws of the State of Indiana.
This Agreement may be executed in counter-parts, each of which will constitute
one in the same Agreement and each one of which will be deemed an original.
<PAGE> 1
EXHIBIT 15
PRICEWATERHOUSECOOPERS
PricewaterhouseCoopers LLP
1850 North Central Avenue
Suite 700
Phoenix, AZ 85004-4563
Telephone (602) 379-5500
Facsimile (602) 379-5639
Report of Independent Accountants
October 19, 1998
To the Board of Directors and Shareholders of
Central Newspapers, Inc.
We have reviewed the accompanying consolidated statement of financial position
of Central Newspapers, Inc. and its subsidiaries as of September 27, 1998, and
the consolidated statements of income, shareholders' equity and the cash flows
for the three-month and nine-month periods ended September 27, 1998 and
September 28, 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards,
the consolidated statement of financial position as of December 28, 1997, and
the related consolidated statements of income, shareholders' equity and of cash
flows for the year then ended (not presented herein), and in our report dated
February 2, 1998 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated statement of financial position as of December 28,
1997, is fairly stated in all material respects in relation to the consolidated
statement of financial position from which it has been derived.
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