<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
( ) 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
--------------
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0425553
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1560 Broadway
Denver, Colorado 80202
---------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 837-0886
--------------
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether a registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and 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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of November 11, 1997:
Class B Common Stock: 173,576
Class D Common Stock: 664,450
Class G Common Stock: 371,960
Class GSI Common Stock: 1,104,130
Class N Common Stock: 230
<PAGE>
INDEX TO AFFILIATED NEWSPAPERS INVESTMENTS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Item No. Page
- -------- ----
PART I - FINANCIAL INFORMATION
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
PART II - OTHER INFORMATION
1 Legal Proceedings 3
2 Changes in Securities 3
3 Defaults Upon Senior Securities 3
4 Submissions of Matters to a Vote of Security Holders 3
5 Other Information 4
6 Exhibits and Reports on Form 8-K 4
2
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PART I
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
The information required by this item is filed as part of this Form 10-Q. See
Index to Financial Information at page 5 of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is filed as part of this Form 10-Q. See
Index to Financial Information at page 5 of this Form 10-Q.
PART II
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company's subsidiaries are involved in litigation arising in the ordinary
course of business, none of which is expected to result in material loss.
ITEM 2. CHANGES IN SECURITIES
There were no changes in the rights of security holders during the quarter
for which this report is filed.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the quarter for which
this report is filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter for which this report is filed.
3
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
27 - Financial Data Schedule.
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
Dated: November 11, 1997 By: /s/ Joseph J. Lodovic, IV
-----------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer and
Duly Authorized Officer of Registrant
4
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AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
Index to Financial Information
PAGE
----
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets . . . . . . . . . . . . . . 6
Unaudited Condensed Consolidated Statements of Operations . . . . 8
Unaudited Condensed Consolidated Statements of Cash Flows . . . . 9
Notes to Unaudited Condensed Consolidated Financial Statements. . 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation. . . . . . . . . . . . . . . . 14
5
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AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited)
September 30, June 30,
1997 1997
------------ -----------
ASSETS (In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 6,655 $ 8,944
Accounts receivable, less allowance for doubtful accounts
of $4,562 and $4,252 at September 30, 1997 and
June 30, 1997, respectively. . . . . . . . . . . . . . . . 39,200 36,185
Inventories of newsprint and supplies. . . . . . . . . . . . 5,716 6,170
Prepaid expenses and other assets. . . . . . . . . . . . . . 4,108 3,295
----------- -----------
Total Current Assets. . . . . . . . . . . . . . . . . . . 55,679 54,594
PROPERTY, PLANT AND EQUIPMENT
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,457 8,307
Buildings and improvements . . . . . . . . . . . . . . . . . 44,382 43,462
Machinery and equipment. . . . . . . . . . . . . . . . . . . 132,362 126,450
----------- -----------
Total Property, Plant and Equipment . . . . . . . . . . . 185,201 178,219
Less accumulated depreciation and amortization . . . . . . . 58,793 57,670
----------- -----------
Net Property, Plant and Equipment . . . . . . . . . . . . 126,408 120,549
OTHER ASSETS
Investment in Denver Newspapers, Inc. (Note 2) . . . . . . . 15,991 14,113
Investment in partnership. . . . . . . . . . . . . . . . . . 6,792 6,365
Subscriber accounts, less accumulated amortization of
$48,425 and $45,808 at September 30, 1997 and
June 30, 1997, respectively. . . . . . . . . . . . . . . . 77,944 69,960
Excess of cost over fair value of net assets acquired,
less accumulated amortization of $13,974 and $12,718
at September 30, 1997 and June 30, 1997, respectively. . . 182,744 154,294
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $16,683 and
$19,673 at September 30, 1997 and June 30, 1997,
respectively . . . . . . . . . . . . . . . . . . . . . . . 17,730 6,685
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,653 2,000
----------- -----------
Total Other Assets. . . . . . . . . . . . . . . . . . . . 306,854 253,417
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 488,941 $ 428,560
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
(Unaudited)
September 30, June 30,
1997 1997
------------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT (In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable . . . . . . . . . . . . . . . . $ 6,729 $ 6,286
Other accrued liabilities. . . . . . . . . . . . . . . 21,910 23,714
Unearned income. . . . . . . . . . . . . . . . . . . . 10,734 10,746
Income taxes . . . . . . . . . . . . . . . . . . . . . 850 1,308
Current portion of long-term debt and capital lease
obligation (Note 4) . . . . . . . . . . . . . . . . 34,344 6,247
----------- -----------
Total Current Liabilities. . . . . . . . . . . . . 74,567 48,301
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATION . . . . . . . . . . . . . . . . . . . . . . 510,800 476,154
OTHER LIABILITIES. . . . . . . . . . . . . . . . . . . . 5,549 5,092
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . 13,003 13,036
SHAREHOLDERS' DEFICIT
Common stock, par value $0.01 per share; authorized
5,152,602 shares; 2,314,346 shares issued
and outstanding. . . . . . . . . . . . . . . . . . . 23 23
Additional paid-in capital . . . . . . . . . . . . . . 3,611 3,611
Deficit. . . . . . . . . . . . . . . . . . . . . . . . (118,612) (117,657)
----------- -----------
Total Shareholders' Deficit. . . . . . . . . . . . (114,978) (114,023)
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT. . . . . . . $ 488,941 $ 428,560
----------- -----------
----------- -----------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended September 30,
--------------------------------
1997 1996
----------- -----------
(In thousands, except share data)
<S> <C> <C>
REVENUES
Advertising. . . . . . . . . . . . . . . . . . . $ 71,635 $ 49,595
Circulation. . . . . . . . . . . . . . . . . . . 15,091 9,401
Other. . . . . . . . . . . . . . . . . . . . . . 3,435 2,084
---------- ----------
TOTAL OPERATING REVENUES . . . . . . . . . . 90,161 61,080
COST AND EXPENSES
Cost of sales. . . . . . . . . . . . . . . . . . 31,607 23,568
Selling, general, and administrative . . . . . . 38,390 26,529
Depreciation and amortization. . . . . . . . . . 8,037 5,138
Interest expense . . . . . . . . . . . . . . . . 13,686 10,320
Other, net . . . . . . . . . . . . . . . . . . . 836 198
---------- ----------
TOTAL COST AND EXPENSES. . . . . . . . . . . 92,556 65,753
INCOME IN UNCONSOLIDATED SUBSIDIARY (Note 2) . . . 1,878 480
---------- ----------
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . (517) (4,193)
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . (437) (53)
---------- ----------
LOSS . . . . . . . . . . . . . . . . . . . . . . . $ (954) $ (4,246)
---------- ----------
---------- ----------
LOSS PER COMMON SHARE:
Loss . . . . . . . . . . . . . . . . . . . . . . . $ (.41) $ (1.83)
---------- ----------
---------- ----------
Weighted average number of shares
outstanding . . . . . . . . . . . . . . . . . . . 2,314,346 2,314,346
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
Three Months Ended September 30,
--------------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (954) $ (4,246)
Adjustments to reconcile loss to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . 7,853 4,836
Undistributed earnings from equity investments . . . (2,305) (202)
Provision for losses on accounts receivable. . . . . 923 634
Amortization of debt discount. . . . . . . . . . . . 5,191 4,460
Loss on sale of assets . . . . . . . . . . . . . . . 47 --
Deferred income tax benefit. . . . . . . . . . . . . (33) (69)
Change in operating assets and liabilities . . . . . (4,382) (3,396)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . 6,340 2,017
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of newspaper properties . . . . . . . . . . (51,931) --
Purchase of machinery and equipment, (net) . . . . . (2,226) (1,918)
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES . . . . (54,157) (1,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt. . . . . . . . . . . . . (9,341) (10,174)
Reduction of non-operating liabilities . . . . . . . (131) (1,423)
Issuance of long-term debt . . . . . . . . . . . . . 55,000 9,600
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . 45,528 (1,997)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . (2,289) (1,898)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . 8,944 4,615
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . $ 6,655 $ 2,717
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid. . . . . . . . . . . . . . . . . . . . . $ 12,753 $ 7,048
-------- --------
-------- --------
Income taxes paid. . . . . . . . . . . . . . . . . . . $ 966 $ 143
-------- --------
-------- --------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulations S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements and
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Affiliated Newspapers Investments, Inc.
("ANI") Annual Report on Form 10-K for the year ended June 30, 1997. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended September 30, 1997, are
not necessarily indicative of the results that may be expected for the year
ended June 30, 1998.
The unaudited condensed consolidated financial statements include the
accounts of Affiliated Newspapers Investments, Inc. and its wholly owned
subsidiary, Garden State Newspapers, Inc. ("Garden State"). All significant
intercompany accounts and transactions have been eliminated upon
consolidation. ANI accounts for its investment in Denver Newspapers using the
equity method of accounting (See Note 2).
INCOME TAXES
The effective income tax rate varies from the federal statutory rate
primarily because of the nondeductibility of certain expenses.
SEASONALITY
Newspaper companies tend to follow a distinct and recurring seasonal
pattern, with higher advertising revenues in months containing significant
events or holidays. Accordingly, the fourth calendar quarter, or the
Company's second fiscal quarter, is the Company's strongest revenue quarter
of the year. Due to generally poor weather and a lack of holidays, the first
calendar quarter, or the Company's third fiscal quarter, is the Company's
weakest revenue quarter of the year.
BUSINESS ACQUISITIONS
On July 31, 1997, Garden State acquired substantially all of the assets
used in the publication of THE SUN, an evening newspaper published in Lowell,
Massachusetts. The assets were purchased for $49.0 million in cash plus an
adjustment for working capital and a covenant not to compete with the prior
owners, with a discounted value of approximately $11.8 million. The
newspaper has daily and Sunday circulation of approximately 52,000 and
56,000, respectively.
The acquisition was accounted for as a purchase; accordingly, the
consolidated financial statements include the operations of the acquired
newspaper from August 1, 1997. The assets acquired and the liabilities
assumed have been recorded at their estimated fair market value as of the
date of acquisition. These estimates are based on management's preliminary
estimates and are subject to change upon final allocation of the purchase
price.
10
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AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2: INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
BASIS OF ACCOUNTING
The Company owns 60 percent of the outstanding common stock of Denver
Newspapers, Inc. ("Denver Newspapers"). However, because the Denver
Newspaper Shareholder Agreement provides Media General, the owner of the
remaining 40 percent interest in Denver Newspapers, with a 50 percent
representation on the board of directors, the Company accounts for its
investment in Denver Newspapers under the equity method of accounting.
The following are summarized statements of operations for Denver
Newspapers for the three-month period ended September 30, 1997 and 1996 (in
thousands):
SUMMARIZED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
--------------------------------
1997 1996
------- -------
Total revenues . . . . . . . . . . . . . . . $52,397 $44,465
------- -------
------- -------
Cost of sales. . . . . . . . . . . . . . . . $27,429 $25,691
------- -------
------- -------
Net income . . . . . . . . . . . . . . . . . $ 3,805 $ 1,475
------- -------
------- -------
Net income applicable to common stock. . . . $ 3,130 $ 800
------- -------
------- -------
NOTE 3: COMBINED SUMMARIZED FINANCIAL INFORMATION OF AFFILIATED NEWSPAPERS
INVESTMENTS, INC. AND DENVER NEWSPAPERS, INC.
The combined summarized statements of operations include the accounts of
ANI and Denver Newspapers. The companies have common ownership, management
and each have the same fiscal year end. All significant intercompany
balances and transactions have been eliminated. The summarized combined
financial information has been presented to supplement the presentation
contained in the consolidated financial statements of ANI. ANI has a
significant economic interest in Denver Newspapers and may in the future be
at least partially dependent upon dividends from Denver Newspapers to service
the debt obligations of ANI.
11
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AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: COMBINED SUMMARIZED FINANCIAL INFORMATION OF AFFILIATED NEWSPAPERS
INVESTMENTS, INC. AND DENVER NEWSPAPERS, INC.--CONTINUED
COMBINED SUMMARIZED STATEMENTS OF OPERATIONS
<TABLE>
Three Months Ended September 30,
--------------------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . . . . $142,558 $105,545
-------- --------
-------- --------
Cost of sales. . . . . . . . . . . . . . . . . . . . . . $ 59,036 $ 49,259
-------- --------
-------- --------
Minority interest in income applicable to common
stock of Denver Newspapers, Inc.. . . . . . . . . . . . $ (1,252) $ (320)
-------- --------
-------- --------
Loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (279) $ (3,571)
-------- --------
-------- --------
Loss applicable to common stock. . . . . . . . . . . . . $ (954) $ (4,246)
-------- --------
-------- --------
</TABLE>
NOTE 4: SUBSEQUENT EVENTS
LONG-TERM DEBT
On October 1, 1997, Garden State issued $250.0 million of Senior
Subordinated Notes due in 2009. Garden State used the net proceeds to reduce
bank debt at Garden State and pay off and terminate a bank credit facility of
one of Garden State's subsidiaries.
The following unaudited table sets forth, after giving effect to
borrowings associated with the July 31, 1997, acquisition of THE SUN
(previously discussed), the issuance of $250.0 million of Senior Subordinated
Notes and the paydown of bank debt associated therewith, the approximate
expected scheduled maturities of long-term debt of the Garden State for the
periods indicated (in thousands).
Fiscal
------
1998 . . . . . . . . . . . . . . . . . $ 2,625
1999 . . . . . . . . . . . . . . . . . 4,673
2000 . . . . . . . . . . . . . . . . . 4,897
2001 . . . . . . . . . . . . . . . . . 4,703
2002 . . . . . . . . . . . . . . . . . 7,987
Thereafter . . . . . . . . . . . . . . 515,918
--------
$540,803
--------
--------
12
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4: SUBSEQUENT EVENTS--CONTINUED
LONG-TERM DEBT--CONTINUED
In conjunction with the issuance of the Senior Subordinated Notes, Garden
State also amended its existing Bank Credit Agreement to change Term Loan B
into a revolving credit facility ("RCC"), reduce the Company's borrowing
spreads (in most cases by 0.375%), and change the amortization of the RCA
commitment.
The following unaudited table sets forth the annual commitment reductions
for RCA, RCB and RCC, as well as annual payments under Term A Loan, giving
effect to the amended Garden State Bank Credit Agreement (in thousands).
RCA RCB RCC Term A Loan
-------- ------- ------- -----------
1998 . . . . . . . . $ 10,000 $ -- $ 4,000 $ --
1999 . . . . . . . . 31,000 -- 7,500 --
2000 . . . . . . . . 31,000 -- 7,500 --
2001 . . . . . . . . 31,000 -- 12,000 --
2002 . . . . . . . . 31,000 -- 12,000 3,750
Thereafter . . . . . 33,000 27,000 33,000 11,250
-------- ------- ------- -------
$167,000 $27,000 $76,000 $15,000
-------- ------- ------- -------
-------- ------- ------- -------
ACQUISITIONS
In November 1997, Garden State agreed to acquire substantially all the
operating and intangible assets used in the publication of the
PRESS-TELEGRAM, a daily newspaper located in Long Beach, California, for
approximately $38.2 million. This daily newspaper has daily and Sunday
circulation of approximately 109,000 and 124,000, respectively, at March 31,
1997. Garden State anticipates closing this acquisition in December 1997.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES
Revenues increased $29.1 million or 47.6% in the first quarter of fiscal
year 1998 as compared to the same quarter of fiscal year 1997. The increase in
revenue was primarily attributable to the October 31, 1996, acquisition of the
PASADENA STAR NEWS, SAN GABRIEL VALLEY TRIBUNE, WHITTIER DAILY NEWS, TIMES-
STANDARD and THE EVENING SUN; the February 28, 1997, acquisition of the SENTINEL
& ENTERPRISE, LEBANON DAILY NEWS and THE DAILY NONPAREIL; and the July 31, 1997,
acquisition of THE SUN. Combined, the acquisitions discussed above increased in
revenues approximately $28.5 million in the first quarter of fiscal year 1998.
These revenues were partially offset by a $3.1 decline in revenue resulting from
the sale of the POTOMAC NEWS on February 13, 1997. Excluding acquisition and
disposition transactions, the Company's remaining newspaper operations combined,
posted a $3.7 million increase in operating revenues for the first quarter of
fiscal year 1998. The increase in operating revenue at these newspapers was
primarily attributable to a combined 4.3% and 11.4% gain in retail and
classified revenue, respectively.
COST OF SALES
Cost of sales increased $8.0 million or 34.1% in first quarter of fiscal
year 1998 compared to the same quarter of fiscal year 1997. The aforementioned
acquisitions caused cost of sales to increase approximately $9.0 million for the
quarter ended September 30, 1997. However, this increase was offset in part by a
$1.1 million decrease in cost of sales resulting from the sale of the POTOMAC
NEWS. Excluding acquisition and disposition transactions, cost of sales
increased approximately $0.1 million. Excluding the impact of newsprint, cost of
sales on a same newspaper basis increased $1.1 million in the first quarter of
fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $11.9
million or 44.7% in the first quarter of fiscal year 1998 as compared to the
same quarter of fiscal year 1997. The aforementioned acquisitions resulted in
SG&A expense increases of approximately $11.8 million; however, this was in part
offset by a $1.1 million reduction in SG&A expense associated with the sale of
the POTOMAC NEWS. Excluding the acquisition and disposition transactions, SG&A
expense increased $1.2 million. The overall increase in SG&A expense on a same
newspaper basis is associated with increases in advertising and circulation
expenditures which were primarily related to ongoing efforts to increase
advertising linage and circulation volumes.
DEPRECIATION AND INTEREST EXPENSE
Depreciation and amortization increased $2.9 million in the first quarter
of fiscal year 1998 as compared to the same quarter of fiscal year 1997. The
aforementioned acquisitions caused the majority of the increase in depreciation
and amortization expense; however, the increase was offset in part by a $0.4
million reduction in depreciation and amortization expense associated with the
sale of the POTOMAC NEWS.
Interest expense increased $2.8 million in the first quarter of fiscal year
1998 as compared to the same quarter of fiscal year 1997. Interest expense
increased primarily as a result of a $193.3 million increase in average debt
outstanding associated with acquisitions. This increase was partially offset by
a 190 basis point decrease in the average interest rate, mainly associated with
the refinancing of Garden State's 10.89% senior notes with bank debt.
14
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DENVER NEWSPAPERS - UNCONSOLIDATED SUBSIDIARY
Net income applicable to common stock of Denver Newspapers increased $2.3
million in the first quarter of fiscal year 1998 compared to the same quarter of
fiscal year 1997. The current quarter increase in net income applicable to
common stock at Denver Newspapers was primarily the result of a 17.8% increase
in operating revenues and a 21.0% increase in operating profit, as compared to
the same quarter of the prior year. The increase in revenue and operating
profit is primarily attributable to 22.7% growth in advertising lineage at THE
DENVER POST, which is attributable to an increase in the market size as well as
market share growth. A 14.0% decrease in the average cost of newsprint
consumed, partially offset by increased consumption, also contributed to the
improvement in Denver Newspapers' operating profit.
NET INCOME
ANI recorded a loss of approximately $0.9 million in the first quarter of
fiscal year 1998 compared to a loss of $4.2 million in the first quarter of
fiscal year 1997. The decrease in the loss is primarily attributable to Garden
State, which had a $6.3 million increase in operating profit offset by a $3.4
million increase in interest expense primarily as a result of acquisitions and a
$0.4 million increase in tax expense resulting from improved operating results.
A $1.4 million increase in the equity pick-up from Denver Newspapers also
contributed to the reduction in the loss.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $6.3 million
and $2.0 million for the three months ended September 30, 1997 and 1996,
respectively. The $4.3 million increase in cash flow from operating activities
was primarily the result of a $9.2 million increase in operating profit,
excluding depreciation and amortization, for the three months ended September
30, 1997, compared to the same period ending September 30, 1996, offset by a
$1.0 million increase in the change in operating assets and liabilities and a
$3.7 million combined increase in cash interest expense, taxes and other
expenses.
Net cash flows from investing activities were $(54.1) million and $(1.9)
million for the three months ended September 30, 1997 and 1996, respectively.
The $52.2 million change was primarily the result of Garden State spending
approximately $51.9 million related to the acquisition of THE SUN in the first
quarter of fiscal year 1998.
Net cash flows from financing activities were $45.5 million and $(2.0)
million for the three months ended September 30, 1997 and 1996, respectively.
The change of approximately $47.5 million was primarily attributable to Garden
State borrowing a net $45.7 million in the first quarter of fiscal 1998, the
majority of which was in conjunction with the previously discussed July 31,
1997, acquisitions.
LIQUIDITY
Giving effect to the issuance of the Senior Subordinated Notes and the
corresponding paydown of bank debt, Garden State and subsidiaries had a combined
$249.0 million available for future borrowings, net of approximately $5.0
million in outstanding letters of credit at September 30, 1997. Approximately
$151.0 million of the availability under the bank credit facility is available
solely for future business acquisitions.
The purchase of Garden State's Class A common stock and the Series A and C
preferred stock by ANI in May 1994 was financed with debt issued by ANI. The
repayment of ANI's debt, which does not have scheduled interest payments until
January 1, 2000, is in part dependent upon Garden State's and/or Denver
Newspapers' ability to pay dividends to ANI. Garden State's and Denver
Newspapers' debt agreements prohibit the payment of dividends to ANI prior to
June 30, 1999. The ANI Senior Discount Debentures restrict the Company's ability
to incur additional debt and pay dividends.
15
<PAGE>
The Company currently generates sufficient cash flow to meet its capital
expenditure and debt service requirements. Such debt service requirements
increase substantially in fiscal year 2000 as a result of interest on its Senior
Discount Debentures becoming current and payable on a semi-annual basis. While
there can be no assurance, the Company currently expects to have sufficient
internally generated funds to service interest when due; however, a portion of
the face amount may be required to be refinanced at maturity. There can be no
assurance that the Company will be able to refinance its debt when due. However,
based on current and projected cash flows and debt levels, the Company believes
there is minimal refinance risk.
DENVER NEWSPAPERS - UNCONSOLIDATED SUBSIDIARY
Denver Newspapers is well capitalized and currently produces cash flows
significantly in excess of its capital expenditure and debt service
requirements; accordingly, management does not anticipate making any additional
capital contributions to Denver Newspapers. At September 30, 1997, Denver
Newspapers had $12.5 million available under its revolving credit facility and
$1.6 million in letters of credit outstanding. In addition, at September 30,
1997, Denver Newspapers had working capital of approximately $1.6 million.
Denver Newspapers' revolving credit facility and shareholder agreement
prohibit the payment of common stock dividends to ANI until the revolving credit
facility and the 9% preferred stock have been prepaid in full. Denver
Newspapers' revolving credit facility expires June 30, 2000. Denver Newspapers'
preferred stock is mandatorily redeemable on the earlier of (a) June 30, 1999,
(b) the date on which such redemption is permissible under Denver Newspapers'
credit agreement, (c) the date on which Denver Newspapers ceases to own directly
at least 51% of all the outstanding capital stock of the Denver Post Company, or
(d) the date on which Denver Newspapers, directly or indirectly, causes or
permits the Denver Post Company to dispose of substantially all of the assets of
the Denver Post Company. Denver Newspapers declared and paid a preferred stock
dividend of $2.7 million in January 1997.
NEAR TERM OUTLOOK
Because of an industry wide year-over-year increase in newsprint
consumption, combined with a strike at Fletcher Challenge (a major West Coast
newsprint manufacturer), several suppliers have announced a $35 to $40 per ton
increase as of November 1, 1997 (previously October 1, 1997), which would bring
average transaction prices to approximately $600 per metric ton on the East
Coast and $610 per metric ton on the West Coast. If the price increase is
successful, it is not expected to have a significant impact on the Company's
cash flows from operations as the Company expects to purchase approximately two-
thirds of its fiscal 1998 newsprint requirements under fixed price contracts at
a weighted average price of approximately $532 per metric ton. MediaNEWS Group
has entered into fixed price contracts expiring over the next two and one-half
to three years on behalf of the Company and its affiliates. Such contracts cover
the purchase of approximately 86,000 metric tons per year, of which 60,000
metric tons is expected to be allocated to Garden State each year, with the
remainder allocated to Denver Newspapers.
Based upon current operations, management believes that the Company will
have sufficient cash flows from operations which, combined with the Garden State
Credit Facility and other resources available to the Company, will be more than
adequate to fund scheduled payments of principal and interest and to meet
anticipated capital expenditure and working capital requirements for at least
the next twelve months.
The Company and its subsidiaries may, from time to time, consider strategic
or targeted newspaper acquisitions and dispositions. In the event an acquisition
opportunity is identified, management expects that it would be able to arrange
financing on terms and conditions satisfactory to the Company to the extent
current resources are insufficient.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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