<PAGE> 1
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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 26, 1999
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 October 31,
1999:
CLASS A COMMON STOCK 33,324,781
CLASS B COMMON STOCK 55,356,010
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[This Page Intentionally Left Blank]
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Central Newspapers, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
<S> <C>
Part I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements:
Consolidated Statement of Financial Position 4 - 5
Consolidated Statement of Income 6
Consolidated Statement of Shareholders' Equity 7
Consolidated Statement of Cash Flows 8
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Part II - OTHER INFORMATION 15 - 16
</TABLE>
3
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PART I.
Item 1. Financial Statements
CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Financial Position
<TABLE>
<CAPTION>
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September 26, December 27,
ASSETS 1999 1998
(In thousands) (Unaudited)
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $43,597 $24,774
Marketable securities 3,257 12,636
Accounts receivable (net of allowances of $3,212 and $2,602) 89,837 90,858
Inventories 10,113 11,841
Deferred income tax benefits 8,680 8,430
Other current assets 9,146 11,253
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Total current assets 164,630 159,792
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PROPERTY, PLANT AND EQUIPMENT:
Land 18,898 18,985
Buildings and improvements 136,274 135,725
Leasehold improvements 1,356 687
Machinery and equipment 424,285 407,211
Construction in progress 7,508 8,237
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588,321 570,845
Less accumulated depreciation 318,479 287,136
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269,842 283,709
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OTHER ASSETS:
Land held for development 5,229 5,229
Goodwill and other intangibles 139,226 127,349
Investment in Affiliate 9,384 9,848
Other 45,892 43,432
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199,731 185,858
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TOTAL ASSETS $634,203 $629,359
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Financial Position
<TABLE>
<CAPTION>
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September 26, December 27,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
(In thousands, except share data) (Unaudited)
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<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $26,513 $23,088
Short-term bank debt 90,000 52,072
Accrued compensation 26,176 19,305
Dividends payable 5,048 5,217
Accrued expenses and other liabilities 19,961 18,208
Deferred revenue 29,156 28,789
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Total current liabilities 196,854 146,679
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DEFERRED INCOME TAXES 27,573 26,703
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LONG-TERM DEBT 185,011 200,025
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POSTRETIREMENT AND OTHER NONCURRENT LIABILITIES 94,177 91,001
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MINORITY INTEREST IN SUBSIDIARIES 2,868
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REDEEMABLE PREFERRED STOCK ISSUED BY SUBSIDIARY 18,920 18,920
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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--33,309,114 and 34,446,180 shares 37,565 30,937
Class B common stock--without par value:
Authorized--130,000,000 shares
Issued and outstanding--55,366,010 and 62,691,000 shares 55 63
Retained earnings 75,664 112,104
Unamortized value of restricted stock (3,226) (1,407)
Accumulated other comprehensive income 1,610 1,466
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111,668 143,163
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $634,203 $629,359
======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) Thirteen Weeks Ended 39 Weeks Ended
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
OPERATING REVENUES:
Advertising $144,630 $135,390 $437,948 $411,885
Circulation 36,988 36,537 115,418 112,376
Other 13,497 9,399 36,912 30,787
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195,115 181,326 590,278 555,048
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OPERATING EXPENSES:
Compensation 64,682 60,580 193,330 181,787
Newsprint and ink 21,669 25,341 77,063 84,100
Other operating costs 53,135 47,140 158,222 145,622
Depreciation and amortization 13,049 11,839 38,401 34,613
Work force reduction cost 3,400 3,692 77
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155,935 144,900 470,708 446,199
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OPERATING INCOME 39,180 36,426 119,570 108,849
OTHER INCOME 1,863 843 5,467 3,581
OTHER EXPENSES (4,352) (322) (11,516) (773)
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INCOME BEFORE INCOME TAXES 36,691 36,947 113,521 111,657
PROVISION FOR INCOME TAXES 14,708 15,315 45,345 46,231
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INCOME BEFORE MINORITY INTEREST AND
EQUITY IN AFFILIATE 21,983 21,632 68,176 65,426
MINORITY INTEREST IN SUBSIDIARIES (319) (502) (1,248) (1,937)
EQUITY IN NET EARNINGS (LOSS) OF AFFILIATE (226) 327 (301) 803
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NET INCOME $21,438 $21,457 $66,627 $64,292
========================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $0.54 $0.43 $1.64 $1.28
Diluted 0.52 0.42 1.59 1.25
DIVIDENDS DECLARED PER CLASS A COMMON SHARE $0.13 $0.12 $0.37 $0.33
AVERAGE COMMON SHARES OUTSTANDING:
(combined Class A and equivalent Class B shares)
Basic 39,871 49,490 40,508 50,122
Diluted 41,425 50,768 41,924 51,542
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
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(In thousands, except share data)
Class A Class B
Common Stock Common Stock
Shares Amount Shares Amount
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<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 28, 1997 44,035,252 $29,934 62,691,000 $63
Net income (39 weeks)
Change in net unrealized
gain on
available-for-sale securities
Comprehensive Income
Dividends
declared:
Class A common stock
Class B common stock
Exercise of stock options 377,824 7,742
Repurchase of Class A common stock (1,795,460) (1,477)
Issuance of restricted stock 10,500 344
Amortization of restricted stock
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BALANCE AT SEPTEMBER 27, 1998 42,628,116 $36,543 62,691,000 $63
Net income (13 weeks)
Change in net unrealized
gain on
available-for-sale securities
Comprehensive Income
Dividends
declared:
Class A common stock
Class B common stock
Exercise of stock options 53,264 1,171
Repurchase of Class A common stock (8,244,200) (7,075)
Issuance of restricted stock 9,000 298
Amortization of restricted stock
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BALANCE AT DECEMBER 27, 1998 34,446,180 $30,937 62,691,000 $63
Net income (39 weeks)
Change in net unrealized gain on
available-for-sale securities
Comprehensive Income
Dividends
declared:
Class A common stock
Class B common stock
Exercise of stock options 245,435 5,558
Repurchase of Class A common stock (2,200,000) (1,994)
Common stock conversion 732,499 8 (7,324,990) (8)
Issuance of restricted
stock,
net of cancellations 85,000 3,056
Amortization of restricted stock
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BALANCE AT SEPTEMBER 26, 1999 33,309,114 $37,565 55,366,010 $55
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
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Unamortized Accumulated
Value of Other
Retained Restricted Comprehensive
Earnings Stock Income Total
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<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 28, 1997 $352,531 ($1,924) $1,675 $382,279
Net income (39 weeks) 64,292 64,292
Change in net unrealized
gain on
available-for-sale securities (345) (345)
---------
Comprehensive Income 63,947
=========
Dividends
declared:
Class A common stock (14,409) (14,409)
Class B common stock (2,069) (2,069)
Exercise of stock options 7,742
Repurchase of Class A common stock (56,638) (58,115)
Issuance of restricted stock (344)
Amortization of restricted stock 849 849
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BALANCE AT SEPTEMBER 27, 1998 $343,707 ($1,419) $1,330 $380,224
Net income (13 weeks) 24,250 24,250
Change in net unrealized
gain on
available-for-sale securities 136 136
---------
Comprehensive Income 24,386
=========
Dividends
declared:
Class A common stock (4,134) (4,134)
Class B common stock (752) (752)
Exercise of stock options 1,171
Repurchase of Class A common stock (250,967) (258,042)
Issuance of restricted stock (298)
Amortization of restricted stock 310 310
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BALANCE AT DECEMBER 27, 1998 $112,104 ($1,407) $1,466 $143,163
Net income (39 weeks) 66,627 66,627
Change in net unrealized gain on
available-for-sale securities 144 144
---------
Comprehensive Income 66,771
=========
Dividends
declared:
Class A common stock (12,725) (12,725)
Class B common stock (2,136) (2,136)
Exercise of stock options 5,558
Repurchase of Class A common stock (88,206) (90,200)
Common stock conversion
Issuance of restricted
stock,
net of cancellations (3,056)
Amortization of restricted stock 1,237 1,237
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BALANCE AT SEPTEMBER 26, 1999 $75,664 ($3,226) $1,610 $111,668
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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CENTRAL NEWSPAPERS, INC.
Consolidated Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
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(In thousands)
39 Weeks Ended
September 26, September 27,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $66,627 $64,292
Items which did not use (provide) cash:
Depreciation and
amortization 38,401 34,613
Postretirement and pension benefits 5,200 2,645
Loss (gain) on disposition of assets (1,742) 131
Minority interest in earnings of
subsidiaries 1,248 1,937
Equity loss (earnings) in Affiliate 301 (803)
Deferred income taxes (1,020) (637)
Amortization of restricted stock awards 1,237 849
Other (900) (568)
Net proceeds from (purchases of) trading securities 12,510 (1,578)
Net change in other current assets and liabilities 20,719 12,508
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Net cash provided by operating activities 142,581 113,389
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INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,280) (30,916)
Net proceeds from (purchases of) available-for sale
securities 1,942 (3,143)
Acquisitions (17,681) (5,839)
Other (5,008) (1,244)
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Net cash used by investing activities (43,027) (41,142)
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FINANCING ACTIVITIES:
Cash dividends paid (14,699) (16,478)
Dividends paid to minority interest (2,391) (1,324)
Proceeds from exercise of stock options 3,563 4,200
(Repayments) borrowings of short-term debt 38,009 (5,405)
Repayments of long-term debt (15,013)
Repurchase of common stock (90,200) (58,115)
Net cash used by financing activities (80,731) (77,122)
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INCREASE IN CASH AND CASH EQUIVALENTS 18,823 (4,875)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,774 36,924
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CASH AND CASH EQUIVALENTS, END OF PERIOD $43,597 $32,049
=============================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $43,600 $49,880
Interest paid 11,233 277
</TABLE>
See accompanying notes to consolidated financial statements.
8
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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 owns Career
Services, Inc., which is predominantly in the job 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 that 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 27, 1998. 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 27, 1998, 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, 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. 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 stock options granted under the Company's Amended and Restated
Stock Compensation Plan. On December 8, 1998, the Board of Directors declared a
two-for-one split of the Class A and Class B common stock which was distributed
on January 8, 1999 to shareholders of record as of the close of business on
December 18, 1998. All shares and per share amounts presented herein, have been
retroactively restated to reflect the impact of the split.
4. On October 31, 1999, we completed the sale of our 80% interest in Homebuyer's
Fair, Inc., its subsidiary National School Reporting Services, Inc. and FAS
Hotline to Homestore.com, Inc. The net proceeds from the sale were $51.9
million, consisting of $49.5 million in cash and receivables and 50,000 shares
of Homestore.com, Inc. stock, valued at $2.4 million at closing. The pretax and
after-tax gains on the sale were $32.7 million and $19.6 million, respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The information in this report contains material that is forward-looking in
nature. From time to time, we may provide forward-looking statements relating to
such matters as anticipated financial performance, business prospects, and
similar matters. We may identify these forward-looking statements by the use of
the words such as "anticipate," "believe," "expect," "plan," "foresee," or
derivations thereof. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for these statements. We want to ensure that these
statements are accompanied by meaningful cautionary language to comply with the
safe harbor under the Act. We assume no obligation to update any forward-looking
statements. A variety of factors could cause our actual results to differ
materially from the expectations expressed in the forward-looking statements,
including, but not limited to, the following:
- declines in circulation due to changing reader preferences and/or
new forms of information dissemination;
- economic weakness in geographic markets;
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- weakness in advertising categories due to a variety of factors
including retail consolidations, declines in the advertising
budgets of major customers, increased competition from print and
non-print products, including the internet, and new competitors
emerging in our markets;
- the negative impact of issues related to labor agreements;
- unexpected fluctuations in the price of newsprint;
- an increase in distribution and/or production costs over
anticipated levels; and
- an increase in actual interest rates over expected rates.
GENERAL
Our principal line of business is newspaper publishing. We derive revenues
primarily from advertising and newspaper sales in the Phoenix, Arizona and
Indianapolis, Indiana metropolitan areas. We also own:
- a 100% interest in Career Services, Inc., which is predominantly
in the job fair business;
- a 13.5% interest in Ponderay newsprint company, a partnership
that owns a newsprint mill in the State of Washington;
- a 100% interest in Carantin & Co. Inc., which provides direct
marketing support services to its clients.
The analysis of the third quarter and the nine month period ended September 26,
1999 compared with comparable 1998 periods should be read in conjunction with
the fiscal 1998 consolidated financial statements and the accompanying notes to
the consolidated financial statements.
Our business tends to be seasonal, with peak revenues and profits generally
occurring in the second and fourth quarters of each year.
RECENT EVENTS
On October 31, 1999, we completed the sale of our 80% interest in Homebuyer's
Fair, Inc., its subsidiary National School Reporting Services, Inc. and FAS
Hotline to Homestore.com, Inc. The net proceeds from the sale were $51.9
million, consisting of $49.5 million in cash and receivables and 50,000 shares
of Homestore.com, Inc. stock, valued at $2.4 million at closing. The pretax and
after-tax gains on the sale were $32.7 million and $19.6 million, respectively.
On October 1, 1999, we ceased publication of our afternoon newspaper, The
Indianapolis News, and realigned the news gathering structure of our morning
newspaper, The Indianapolis Star. On September 14, 1999, we announced plans to
outsource the transportation function for The Indianapolis Star. These changes
resulted in recording a one-time pretax charge to earnings of $3.4 million in
the third quarter of 1999 and are expected to result in annual pretax savings of
approximately $4.0 million. A substantial portion of the savings will be derived
from elimination of approximately 83 positions as a result of these actions.
On September 14, 1999, the Board of Directors approved relocation of our
Indianapolis presses from the Star/News headquarters to a new facility adjacent
to our Pulliam Production Center. This plan will be executed over a three to
four year period beginning in fiscal 2000, at a total cost of approximately
$70.8 million. The relocation is expected to afford The Indianapolis Star the
ability to more than double its color advertising capacity. It will also provide
increased flexibility in creating additional zoned editions of The Indianapolis
Star. The plan will result in the elimination of approximately 80 production and
transportation positions. Within five years, we expect this project to generate
estimated annual cash savings of approximately $6.1 million.
On August 12, 1999, the Board of Directors approved repurchase and retirement of
2,200,000 shares of Class A Common Stock from the Eugene S. Pulliam Revocable
Trust for a total consideration of approximately $90.2 million. This repurchase
was financed through additional borrowings of $90.0 million from the $300
million revolving credit facility established in 1998.
On April 30,1999, we purchased the remaining 20% of Career Services, Inc. that
we did not previously own for approximately $13.7 million from the minority
shareholders. This transaction is not expected to have a material impact on
future earnings.
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<PAGE> 11
In April 1999, we completed a registered secondary offering of 2,673,699 shares
of Class A common stock priced at $30.50 per share. The shares were sold by the
Nina Mason Pulliam Charitable Trust. To complete the sale, a total of 1,777,560
shares of Class B Common Stock were converted to 177,756 shares of Class A
Common Stock. No new shares were issued in this transaction and we did not
receive any proceeds from the sale.
QUARTERLY RESULTS OF OPERATIONS
Third quarter and year-to-date diluted earnings per share for 1999 were $.52 and
$1.59 for increases of 23.8% and 27.2%, respectively, over the corresponding
1998 periods. Excluding special charges, diluted earnings per share would have
been $.57 for the third quarter of 1999 and $1.64 for the 1999 nine month
period, which represented increases of 35.7% and 31.2%, respectively, versus
comparable 1998 amounts. Operating income for the third quarter and the nine
months of 1999 was $39.2 million and $119.6 million, respectively, which
represented increases of 7.6% and 9.9%, respectively, over comparable 1998
periods. Excluding special charges, operating income increased 16.9% for the
third quarter and 13.2% for the nine month period compared to 1998 periods. The
increase in operating income for the nine months between the periods was
primarily due to a 6.3% increase in advertising revenue and savings achieved
from reduced newsprint prices.
Net income for the third quarter of 1999 was $21.4 million, which was comparable
to the same period of 1998. For the nine month period, net income for 1999 was
$66.6 million, up 3.6% over the prior year. Excluding special charges, net
income increased 9.4% for the third quarter and 7.0% for the nine month period,
compared to 1998 periods. EBITDA (operating income before depreciation,
amortization and special charges) for the comparable periods was $55.6 million
for the third quarter of 1999 and $161.7 million year-to-date, representing
increases of 15.3% and 12.6%, respectively, versus comparable 1998 amounts.
OPERATING REVENUES
Third quarter and the nine month revenues increased to $195.1 million and $590.3
million for increases of 7.6% and 6.4%, respectively, when compared with the
same 1998 periods.
Advertising revenue for the three and nine month periods ended September 26,
1999 was $144.6 million and $437.9 million for increases of 6.8% and 6.3%,
respectively over comparable periods in 1998. The increases in advertising
revenue for the third quarter of 1999 resulted from gains in national and retail
advertising in both major markets and gains in classified advertising in the
Phoenix market.
Circulation revenue for the third quarter and year-to-date periods increased to
$37.0 million and $115.4 million, respectively, for increases of 1.2% and 2.7%
when compared to 1998. The increase is primarily due to the distribution system
conversion to delivery agents in the state of Indiana delivery area (resulting
in a revenue increase of $0.5 million for the third quarter of 1999 and $1.5
million for the nine month period of 1999) and an April 1999 Arizona Republic
home delivered price increase.
Other revenue for the third quarter and year-to-date was $13.5 million and $36.9
million, for increases of 43.6% and 19.9%, respectively, over comparable 1998
periods. The increase for the third quarter of 1999 was due to gains in online,
direct marketing and commercial printing revenue.
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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 %
1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Full Run Linage in six column inches:
Retail 707.7 686.7 3.1% 2,183.9 2,059.0 6.1
National 133.3 113.8 17.1% 400.5 336.8 18.9
Classified 878.2 819.6 7.1% 2,555.8 2,436.4 4.9
----- ----- ------ ------- ------- -----
Total 1,719.2 1,620.1 6.1% 5,140.2 4,832.2 6.4
======= ======= ====== ======= ======= =====
Full Run Linage by Major Markets:
Phoenix 771.4 728.4 5.9% 2,357.1 2,263.4 4.1
Indianapolis 947.8 891.7 6.3% 2,783.1 2,568.8 8.3
----- ----- ---- ------- ------- ---
Total 1,719.2 1,620.1 6.1% 5,140.2 4,832.2 6.4
======= ======= ====== ======= ======= =====
Net Advertising Revenue $144,630 $135,390 6.8% $437,948 $411,885 6.3
Combined Average Daily Circulation:
Phoenix 422,735 424,978 (0.5)% 464,497 466,793 (0.5)
Indianapolis a.m. 235,776 224,056 5.2% 241,566 233,882 3.3
Indianapolis p.m. 30,772 34,967 (12.0)% 31,937 36,339 (12.1)
Sunday Circulation:
Phoenix 545,452 545,360 0.0% 584,784 582,596 0.4
Indianapolis 369,475 390,449 (5.4)% 375,416 390,911 (4.0)
</TABLE>
OPERATING EXPENSES
Compensation costs, which include fringe benefits, increased 6.8% to $64.7
million in the third quarter and 6.4% to $193.3 million for the nine month
period. With headcount flat year over year, the increase in expense was
primarily attributable to merit increases, volume related commission increases
and performance based bonuses.
Newsprint and ink expense of $21.7 million decreased 14.5% in the third quarter
of 1999 and 8.4% for the nine month period. The decreases in newsprint expense
were primarily due to lower newsprint prices during both 1999 periods when
compared with 1998 offset by a volume increase of 3.8% for the third quarter and
2.8% for the nine month period over comparable 1998 periods related to increased
advertising linage and added newspaper sections.
Other operating costs increased 12.7% to $53.1 million in the third quarter and
8.7% to $158.2 million for the nine month period. Significant items contributing
to these increases in both 1999 periods versus the same 1998 periods included:
- - costs associated with new database marketing projects and online services;
- - software maintenance costs related to new systems;
- - distribution costs related to the conversion to circulation agents in the
state distribution area of Indianapolis;
- - contributions to local communities; and
- - professional fees.
Depreciation and amortization expense increased 10.2% to $13.0 million in the
third quarter and 10.9% to $38.4 million year-to-date. The expense increases
were primarily a result of new information technology projects in Phoenix and
Indianapolis.
We recorded work force reduction costs of $3.4 million in the third quarter of
1999 and $3.7 million for the nine months ended September 26, 1999. Of the third
quarter amount, approximately $1.2 million resulted from closure of the
Indianapolis News and approximately $2.2 million related to outsourcing of the
Indianapolis transportation department. Approximately 83 positions were
eliminated as a result of these actions.
12
<PAGE> 13
NON-OPERATING ITEMS AND EQUITY IN AFFILIATE
Other non-operating income (primarily investment income) increased to $1.9
million from $0.8 million in the third quarter of 1999 primarily due to an
increase in investable cash from operations and income from limited partnership
gains. Other non-operating expense increased $4.0 million in the third quarter
and $10.7 million year-to-date from an increase in interest expense related to
higher debt levels associated with the purchase of Class A common stock from the
Eugene S. Pulliam Revocable Trust in the current period and the Nina Mason
Pulliam Charitable Trust in the last quarter of 1998. Income tax expense for the
nine months of 1999 and 1998 was $45.3 million and $46.2 million, respectively,
reflecting effective tax rates of 39.9% and 41.4%, respectively. The rate
decrease was largely a result of operational changes.
Equity in Affiliate recorded losses in the third quarter and the nine month
period due to an decrease in newsprint selling prices by Ponderay Newsprint
Company.
LIQUIDITY AND CAPITAL RESOURCES FOR THE QUARTER ENDED
Net cash provided by operating activities is our primary source of liquidity.
Net cash provided by operating activities, excluding the effects of net proceeds
from (or net purchases of) trading securities for the first nine months of 1999
and 1998, was $130.1 million and $115.0 million, respectively. Changes for both
years were primarily attributable to net income and working capital differences.
The principal uses of cash in the first nine months of 1999 were repurchase of
2.2 million shares of Class A common stock from the Eugene S. Pulliam Revocable
Trust, the purchase of the remaining 20% of Career Services Inc., repayment of
debt, capital expenditures and the payment of dividends. The corresponding 1998
period included the purchase of 2.5 million shares of Class A common stock from
the Nina Mason Pulliam Charitable Trust, capital expenditures, payment of
dividends, and repayment of bank debt. At the end of the nine month period, our
available cash and investments totaled $46.9 million, an increase of $9.4
million from the balance at the end of 1998. The ratio of current assets to
current liabilities was 0.8:1 at September 26, 1999 vs. 1.1:1 at the end of
1998.
Total capital expenditures for the nine months of 1999 were $22.3 million
compared to $30.9 million for the comparable 1998 period. On September 14, 1999,
the Board of Directors approved an Indianapolis press project of approximately
$70.8 million to be executed over a three to four year period beginning in
fiscal 2000. As of September 26, 1999, there were no significant formal
commitments related to future capital expenditures.
On September 14, 1999, the Board of Directors approved an 8.3% increase in our
cash dividend to a new annual rate of $0.52 per share on its Class A common
stock and $0.052 on its Class B common stock. Dividends of $0.13 per share on
the Class A common stock and $0.013 on the Class B common stock were declared
during the quarter and paid October 7, 1999. Total Class A and B dividends paid
during the nine month period of 1999 were $14.7 million.
On August 22, 1999, we repurchased 2,200,000 shares of Class A common stock at
$41 per share from the Eugene S. Pulliam Revocable Trust. The $90.2 million
transaction was funded through utilization of our $300 million credit facility.
As of September 26, 1999, $275.0 million in debt remained outstanding under this
facility.
We have 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 us to maintain our current level of operations. We expect financing for
future investing opportunities to come from a combination of existing cash, new
debt facilities and/or use of equity.
13
<PAGE> 14
YEAR 2000
Our Year 2000 project is on schedule to meet its objectives. In 1998, we
developed a comprehensive program to identify, evaluate, test, upgrade, or
replace each of our computer and non-computer based systems in connection with
Year 2000 readiness. We have 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 we constructed a test environment dedicated
to the Year 2000 testing process. The Chief Information Officer reports progress
at every regularly scheduled Board of Directors meeting and on a weekly basis to
our Operating Committee.
We have been actively implementing new systems and technology since 1995 for
reasons unrelated to Year 2000, and these actions have resulted in a number of
our major information technology systems becoming Year 2000 compliant.
The discovery phase of our program was completed in 1998. We performed several
review audits that ensured that all susceptible systems had been identified,
including client server, desktop, and all systems with embedded computer chips.
All desktop systems, application software, and servers were updated to a
compliant level in 1998. All database modules are in the process of being
upgraded. We completed the remediation and testing phase for the embedded
computer chip systems in December 1998. We have completed testing of all mission
critical systems and the remediation and testing phase of all remaining systems.
We will continue to retest systems throughout the remainder of 1999 to ensure
continued compliance.
In 1998, we requested letters of compliance from each of our vendors and,
wherever possible, we worked with our vendors to determine an appropriate
testing and compliance process. We continue to receive upgrades and patches from
our system, database and telecommunications vendors and we install and test
these as they are received. In addition, certain employees have attended a
number of Year 2000 training programs and outside consultants have been hired
when necessary. We have published company wide employee Year 2000 awareness
bulletins.
Total costs associated with our Year 2000 project are being funded with
operating cash flows and are estimated to be approximately $8.5 million, of
which approximately $6.5 million was incurred in 1998 with the remainder to be
incurred this year.
Despite the efforts described above, we could potentially experience a
disruption in our operations as a result of potential non-compliance of certain
vendors, financial institutions, governmental agencies or other third parties or
external systems. This disruption could potentially affect various aspects of
our business operations including the timeliness and content of certain
newspapers or online products. At this time, we are unable to determine whether
the consequences of Year 2000 failures would have a material impact on our
results of operations, liquidity or financial condition.
In an effort to minimize any disruption, we have created a comprehensive
contingency plan for all sites to address potential Year 2000 scenarios. The
contingency plans outline alternative solutions in the event they are required.
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 newspaper product designed to maximize advertising
content.
OUTLOOK FOR THE REMAINDER OF 1999
We anticipate growth in revenues for the remainder of 1999 at a rate that
approximates four to six percent compared with the same period in 1998.
Compensation expense is expected to be higher than the third quarter due to an
increase in performance based incentives for non-contract employees resulting
from performance that is projected to be higher than our original operating plan
for the year. We expect newsprint expense, our second largest expense item, to
continue to be down from the prior year due to reduced newsprint prices. As a
result, we expect an increase in net income for the year and we expect a greater
increase in diluted earnings per share due to fewer outstanding shares. We plan
to continue to use our substantial free cash flow to pursue a combination of
debt reduction, additional share repurchases and other investment opportunities.
14
<PAGE> 15
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
Exhibit 15 -- Independent Accountant's Report
Exhibit 27 -- Selected financial data
No reports on Form 8-K were filed during the quarter
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 3, 1999 By: /s/ Louis A. Weil, III
___________________________
Louis A. Weil, III
Chairman, President and
Chief Executive Officer
By: /s/ Thomas K. MacGillivray
______________________________
Thomas K. MacGillivray
Senior Vice President and
Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
Exhibit Number Description
Exhibit 15 Independent Accountant's Report
Exhibit 27 Selected financial data
<PAGE> 1
EXHIBIT 15
REPORT OF INDEPENDENT ACCOUNTANTS
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 26, 1999, and
the related consolidated statement of income, for each of the three-month and
nine-month periods ended September 26, 1999 and September 27, 1998 and the
consolidated statements of shareholders' equity and cash flows for the
nine-month periods ended September 26, 1999 and September 27, 1998. 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 accompanying 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 27, 1998, 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
January 29, 1999 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,
1998, is fairly stated in all material respects in relation to the consolidated
statement of financial position from which it has been derived.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Phoenix, Arizona
October 18, 1999
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