<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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number
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AFFILIATED NEWSPAPERS INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0425553
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(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 10, 1998:
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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
</TABLE>
<PAGE>
INDEX TO AFFILIATED NEWSPAPERS INVESTMENTS, INC.
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
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Item No. Page
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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
</TABLE>
2
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PART I
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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
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ITEM 1. LEGAL PROCEEDINGS
The Company is 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, 1998.
SIGNATURES
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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 10, 1998 By: /s/Joseph J. Lodovic, IV
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Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer and
Duly Authorized Officer of Registrant
4
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AFFLIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
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PAGE
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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 Operations . . . . . . . . . . . . . . 14
</TABLE>
5
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AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
ASSETS 1998 1998
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(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 5,272 $ 999
Accounts receivable, less allowance for doubtful accounts
of $6,944 and $6,239 at September 30, 1998 and
June 30, 1998, respectively............................ 54,834 51,675
Inventories of newsprint and supplies.................... 7,461 7,286
Prepaid expenses and other assets........................ 3,176 3,475
Income taxes receivable.................................. 3,214 1,687
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Total Current Assets................................... 73,957 65,122
PROPERTY, PLANT AND EQUIPMENT
Land..................................................... 16,351 16,658
Buildings and improvements............................... 61,230 61,060
Machinery and equipment.................................. 181,425 179,670
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Total Property, Plant and Equipment................... 259,006 257,388
Less accumulated depreciation and amortization........... 67,432 63,588
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Net Property, Plant and Equipment..................... 191,574 193,800
OTHER ASSETS
Investment in Denver Newspapers, Inc. (Note 2)........... 20,274 19,671
Investment in partnerships............................... 16,249 7,479
Subscriber accounts, less accumulated amortization of
$56,843 and $53,446 at September 30, 1998 and
June 30, 1998, respectively............................ 99,707 98,712
Excess of cost over fair value of net assets acquired,
less accumulated amortization of $20,269 and $18,492
at September 30, 1998 and June 30, 1998, respectively.. 284,178 251,196
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $20,939 and
$19,846 at September 30, 1998 and June 30, 1998,
respectively........................................... 14,716 15,810
Other.................................................... 7,595 7,468
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Total Other Assets.................................... 442,719 400,336
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TOTAL ASSETS.............................................. $ 708,250 $ 659,258
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</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT September 30, June 30,
1998 1998
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(In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable................... $ 6,271 $ 5,684
Accrued liabilities...................... 52,120 49,279
Unearned income ......................... 14,914 14,829
Current portion of long-term debt and
capital lease obligation............... 8,609 5,644
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Total Current Liabilities............ 81,914 75,436
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION 708,190 661,945
OTHER LIABILITIES.......................... 6,379 6,479
DEFERRED INCOME TAXES...................... 14,566 13,015
SHAREHOLDERS' DEFICIT
Common stock, par value $1.00 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.................................. (106,433) (101,251)
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Total Shareholders' Deficit.......... (102,799) (97,617)
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TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 708,250 $ 659,258
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</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
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AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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<CAPTION>
Three Months Ended September 30,
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1998 1997
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(In thousands, except share data)
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REVENUES
Advertising............................ $ 98,064 $ 71,635
Circulation............................ 26,301 19,604
Other.................................. 3,790 3,435
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TOTAL OPERATING REVENUES........... 128,155 94,674
COST AND EXPENSES
Cost of sales.......................... 43,033 31,607
Selling, general, and administrative... 58,301 42,903
Depreciation and amortization.......... 10,290 8,037
Interest expense....................... 18,164 13,686
Other, net............................. 795 836
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TOTAL COST AND EXPENSES............ 130,583 97,069
INCOME IN UNCONSOLIDATED SUBSIDIARY (Note 2) 603 1,878
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LOSS BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (1,825) (517)
INCOME TAX EXPENSE....................... (858) (437)
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LOSS BEFORE EXTRAORDINARY LOSS........... (2,683) (954)
EXTRAORDINARY LOSS (NET OF TAXES OF $1,134) (2,499) --
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LOSS..................................... $ (5,182) $ (954)
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LOSS PER COMMON SHARE:
LOSS BEFORE EXTRAORDINARY LOSS....... $ (1.16) $ (.41)
EXTRAORDINARY LOSS................... (1.08) --
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LOSS PER COMMON SHARE.................... $ (2.24) $ (.41)
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Weighted average number of shares outstanding. 2,314,346 2,314,346
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</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>
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Three Months Ended September 30,
-------------------------------------
1998 1997
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(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $ (5,182) $ (954)
Adjustments to reconcile loss to net cash
provided by operating activities:
Depreciation and amortization 10,135 7,853
Undistributed earnings from equity investments (368) (2,305)
Provision for losses on accounts receivable 1,591 923
Amortization of debt discount 5,905 5,191
Loss on sale of assets -- 47
Deferred income tax benefit (42) (33)
Debt repurchase premium 3,633 --
Change in operating assets and liabilities (1,273) (4,382)
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NET CASH FLOWS FROM OPERATING ACTIVITIES 14,399 6,340
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of newspaper properties (48,201) (51,931)
Purchase of machinery and equipment, (net) (1,597) (2,226)
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NET CASH FLOWS FROM INVESTING ACTIVITIES (49,798) (54,157)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt (39,727) (9,341)
Reduction of non-operating liabilities (168) (131)
Debt repurchase premium (3,633) --
Issuance of long-term debt 83,200 55,000
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NET CASH FLOWS FROM FINANCING ACTIVITIES 39,672 45,528
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CHANGE IN CASH AND CASH EQUIVALENTS 4,273 (2,289)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 999 8,944
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,272 $ 6,655
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 8,289 $ 12,753
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Income taxes paid $ 3 $ 966
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</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
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AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT
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, 1998. 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, 1998, are
not necessarily indicative of the results that may be expected for the year
ended June 30, 1999.
The unaudited condensed consolidated financial statements include the
accounts of Affiliated Newspapers Investments, Inc. and its subsidiaries.
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).
RELATED PARTY TRANSACTIONS
MediaNews Group, Inc., an affiliate of certain of the Company's
shareholders, provides management services to the Company and its
subsidiaries. Related management fees are included in selling, general and
administrative expenses in the accompanying Consolidated Statements of
Operations.
RECLASSIFICATION
Certain balances for the quarter ended September 30, 1997, have been
reclassified to conform with the current quarter presentation.
INCOME TAXES
The effective income tax rate varies from the federal statutory rate
primarily because of the nondeductibility of certain expenses and the
utilization of net operating losses that were previously subject to valuation
allowances.
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 August 21, 1998 Garden State acquired a 50% interest in Charleston
Newspapers, a joint venture, which publishes the CHARLESTON GAZETTE (morning)
and Charleston DAILY MAIL (evening), six days a week and the SUNDAY
GAZETTE-MAIL, under the terms of a Joint Operating Agreement ("JOA").
Charleston Newspapers has daily and Sunday circulation of approximately
93,000 and 102,000, respectively, as of March 31, 1998. The acquisition
included rights to the masthead of the Charleston DAILY MAIL; thus Garden
State is responsible for the editorial content of the Charleston DAILY MAIL.
The acquisition price of approximately $47.0 million was funded with
borrowings under Garden State's Bank Credit Agreement.
10
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AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
The acquisition discussed above was accounted for as a purchase. The
Company accounts for its JOA operations by including its pro rata share of
revenue and expenses generated by the operation of the JOA on a line by line
basis in the Consolidated Statement of Operations. Accordingly, the pro rata
results of operations have been included since the date of acquisition since
Charleston Newspapers is a JOA. The Company's 50% interest in the joint venture
and the intangible assets acquired, have been recorded at their estimated fair
market value as of the date of acquisition. These fair market values are based
on management's preliminary estimates and are subject to change upon the final
allocation of the purchase price. The excess of cost over fair market value of
net assets acquired and intangible assets related to subscriber lists are being
amortized on a straight line basis over 40 and 8 years, respectively.
NOTE 2: INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
BASIS OF ACCOUNTING
The Company owns 60 percent of the outstanding common stock of 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 the three month
period ended September 30, 1998 and 1997 (in thousands):
SUMMARIZED STATEMENTS OF OPERATIONS
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Three Months Ended September 30,
----------------------------------
1998 1997
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Total revenues . . . . . . . . . . . . . . $ 58,152 $ 55,039
---------------- ---------------
---------------- ---------------
Cost of sales . . . . . . . . . . . . . . . $ 28,292 $ 26,095
---------------- ---------------
---------------- ---------------
Net income . . . . . . . . . . . . . . . . $ 1,681 $ 3,805
---------------- ---------------
---------------- ---------------
Net income applicable to common stock . . . $ 1,006 $ 3,130
---------------- ---------------
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</TABLE>
Certain balances for the quarter ended September 30, 1997, have been
reclassified to conform with current quarterly presentation.
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 STATEMENT (CONTINUED)
NOTE 3: COMBINED SUMMARIZED FINANCIAL INFORMATION OF AFFILIATED NEWSPAPERS
INVESTMENTS, INC. AND DENVER NEWSPAPERS, INC. (CONTINUED)
COMBINED SUMMARIZED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------
1998 1997
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(In thousands)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . $ 186,307 $ 142,558
---------------- ---------------
---------------- ---------------
Cost of sales. . . . . . . . . . . . . . $ 72,722 $ 59,036
---------------- ---------------
---------------- ---------------
Minority interest in income applicable to
common stock of Denver Newspapers, Inc $ (403) $ (1,252)
---------------- ---------------
---------------- ---------------
Loss. . . . . . . . . . . . . . . . . . . $ (4,507) $ (279)
---------------- ---------------
---------------- ---------------
Loss applicable to common stock. . . . . . $ (5,182) $ (954)
---------------- ---------------
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</TABLE>
NOTE 4: LONG TERM DEBT
LONG-TERM DEBT
In the first quarter of fiscal year 1999, Garden State repurchased $36.0
million of its 12% Senior Subordinated Secured Notes at a premium of
approximately $3.6 million. The premium was recognized as an extraordinary
loss, net of taxes, in the first quarter of fiscal year 1999. Proceeds from
borrowings under RCC and RCB of the Company's Bank Credit Agreement were used
to repurchase the 12.0% Senior Subordinated Secured Notes.
The following table sets forth, after giving effect to borrowings
associated with the August 21, 1998, acquisition previously discussed, the
October 1998, acquisition of the DAILY TIMES (discussed below in Note 6), and
borrowings associated with the repurchase of 12.0% Senior Subordinated Secured
Notes, the approximate expected scheduled maturities of long-term debt of the
Company for the fiscal years indicated, are as follows (in thousands):
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1999 . . . . . . . . . . . . . . . . . . . $ 11,614
2000 . . . . . . . . . . . . . . . . . . . 12,734
2001 . . . . . . . . . . . . . . . . . . . 17,203
2002 . . . . . . . . . . . . . . . . . . . 20,562
2003 . . . . . . . . . . . . . . . . . . . 47,400
Thereafter . . . . . . . . . . . . . . . . 620,615
---------
$ 730,128
---------
---------
</TABLE>
INTEREST RATE SWAPS
Effective April 1, 1997, Garden State entered into a two-year interest rate
swap agreement with a notional principal amount of $50.0 million and a fixed
annual interest rate of 6.455%, plus the applicable spread. The Company uses
interest rate swaps to manage its floating rate debt to minimize, in part, the
Company's exposure to the uncertainty of floating interest rates. The Company
accounts for the differences paid or received under this agreement as an
adjustment to interest expense. As of September 30, 1998 and 1997, the interest
rate swap had a market loss of $0.4 million, respectively. The Company is
exposed to a credit loss related to the interest rate swap to the extent such
interest rate swap has a market gain and the counterparty to the agreement fails
to perform under the agreement. The Company does not anticipate that the
counterparty will fail to meet its obligation due to its high credit rating.
12
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AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 5: COMMITMENTS
The Company and Denver Newspapers, through MediaNews Group, Inc., have
entered into a newsprint swap covering 25,000 metric tons of newsprint, which
expires on May 30, 2005. The Company uses the swap to minimize in part, the
Company's exposure to the uncertainty of future newsprint price increases.
Settlements are made quarterly, and vary based on the difference between the
fixed contract price and the average contract transaction price for all East
Coast buyers. The Company accounts for amounts received or paid under this
agreement as an adjustment to newsprint expense.
NOTE 6: SUBSEQUENT EVENTS
BUSINESS ACQUISITIONS
Effective October 1, 1998, Garden State acquired substantially all of the
assets used in the publication of the DAILY TIMES, a morning newspaper published
in Farmington, New Mexico, for cash and discounted notes, with the prior owners.
The newspaper has daily and Sunday circulation of approximately 17,000 and
18,000, respectively, at March 31, 1998.
These acquisitions will be accounted for as a purchase; accordingly, the
Consolidated Financial Statements will include the operations of the acquired
newspapers from the date of acquisition.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
Revenues increased $33.5 million or 35.4% in the first quarter of fiscal
year 1999 as compared to the same quarter of fiscal year 1998. The increase
in revenue was primarily attributable to the July 31, 1997, acquisition of
THE SUN; the December 16, 1997, acquisition of the PRESS-TELEGRAM; the
January 29, 1997, acquisition of the DAILY NEWS; and the August 21, 1998
acquisition of the 50% interest in the Charleston Newspaper joint venture.
Excluding the newspaper acquisitions and dispositions, the Company's
remaining newspaper operations ("existing newspapers") combined had a 1.8%
increase in operating revenues for the first quarter 1999. Advertising
revenues at these newspapers increased by approximately 3.7%, driven by
continued growth in classified revenue and retail and preprint revenue
growth.
COST OF SALES
Cost of sales increased $11.4 million or 36.1% in the first quarter of
fiscal year 1999 compared to the same quarter of fiscal year 1998. The
aforementioned acquisitions caused the majority of the cost of sales increase
for the quarter ended September 30, 1998. Excluding newspaper acquisitions
and dispositions, cost of sales increased approximately 1.3%, primarily
driven by increased newsprint prices and consumption cost associated with
advertising lineage and circulation increases.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $15.4
million or 35.8% in the first quarter of fiscal year 1999 as compared to the
same quarter of fiscal year 1998. The aforementioned acquisitions caused all
of the SG&A expense increase in the first quarter of fiscal year 1999.
Excluding newspaper acquisitions and dispositions, SG&A expense increased
approximately 1.0%. The increase in SG&A is associated with increases in
advertising expenditures, which were primarily related to ongoing efforts to
increase advertising lineage.
EBITDA
EBITDA increased $6.7 million or 33.2%. The majority of the increase
was due to acquisitions; however, the Company's existing newspapers realized
a 4.0% increase in EBITDA, converting over 50% of the increase in revenue to
EBITDA. EBITDA represents total revenues less cost of sales and selling,
general and administrative expense. Although EBITDA is not a measure of
performance calculated in accordance with GAAP, the Company believes that
EBITDA is an indicator and measurement of its leverage capacity and debt
service ability.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2.3 million in the first
quarter of fiscal year 1999 as compared to the same period of fiscal year
1998. The aforementioned acquisitions caused the majority of the increase in
depreciation and amortization expense.
INTEREST EXPENSE
Interest expense increased $4.5 million in the first quarter of fiscal
year 1999 as compared to the same period in fiscal year 1998. Interest
expense increased as a result of a $159.5 million increase in average debt
outstanding, primarily associated with acquisitions. This increase was
partially offset by a 5 basis point decrease in the average interest rate,
mainly associated with a reduction in the borrowing spread on bank debt,
which was offset in part by an increase associated with the replacement of
$300.0 million of bank debt with the 8.75% Senior Subordinated Notes issued
on October 1, 1997 and February 12, 1998.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS (CONTINUED)
DENVER NEWSPAPERS - UNCONSOLIDATED SUBSIDIARY
Net income applicable to common stock of Denver Newspapers decreased
$2.1 million in the first quarter of fiscal year 1998 compared to the same
quarter of fiscal year 1997. The decrease in net income applicable to common
stock at Denver Newspapers was primarily the result of a $5.5 million or
11.7% increase in operating expenses that was only partially offset by a $3.1
million or 5.6% increase in revenue during the same period. The increase in
operating expenses was primarily the result of an increase in paid
circulation, which caused circulation distribution, promotion cost and
newsprint usage to increase. The increase in newsprint usage was further
compounded by increases in newsprint prices. A new total market coverage
product, which started in the second quarter of fiscal year 1998 and the
addition of eleven new regional news bureaus in third quarter of fiscal year
1998, also caused increases in year over year operating expenses.
EXTRAORDINARY LOSS
In the first quarter of fiscal year 1999 Garden State repurchased $36.0
million of its 12% Senior Subordinated Secured Notes at a premium of
approximately $3.6 million. The premium net of income taxes was recorded as
an extraordinary loss. Based on Garden State's current bank interest rates,
the repurchase will significantly reduce the Company's total interest expense
in the future.
NET INCOME
ANI recorded an adjusted loss of approximately $2.7 million in the first
quarter of fiscal year 1999 after excluding the extraordinary loss of $2.5
million, as compared to a loss of $0.9 million in the first quarter of 1998.
The increase in the loss is primarily attributable to a $4.5 million increase
in interest expense, a $0.4 million increase in tax expense and a $1.3
million decrease in the equity pick-up from Denver Newspapers, all of which
were only partially offset by a $4.4 million increase in operating profit at
Garden State.
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $14.4
million and $6.3 million for the three months ended September 30, 1998 and
1997, respectively. The $8.1 million increase in cash flow from operating
activities was primarily the result of a $6.7 million increase in operating
profit, excluding depreciation, for the three months ended September 30,
1998, compared to the same period of the prior year, a $3.7 million reduction
in the change in operating assets and liabilities, a $0.7 million decrease in
cash tax expense (including the tax benefit from the extraordinary loss), and
a $0.7 million improvement in partnership distributions, all of which were
offset by a $3.8 million increase in cash interest expense.
Net cash flows from investing activities were ($49.8) million and
($54.2) million for the three months ended September 30, 1998 and 1997,
respectively. The ($4.4) million change was primarily the result of the
Company spending a net $48.2 million on acquisitions in the first quarter of
fiscal year 1999 compared to $51.9 million in the first quarter of fiscal
year 1998.
Net cash flows from financing activities were $39.7 million and $45.5
million for the three months ended September 30, 1998 and 1997, respectively.
The change of approximately $5.9 million was primarily attributable to the
Company borrowing a net $43.5 million in the first three months of fiscal
1999, compared to a net borrowing of $45.7 million in fiscal 1998, the
majority of which was issued in conjunction with previously discussed
acquisitions in each fiscal year. The $3.6 million of debt repurchase
premiums also contributed to the increase.
LIQUIDITY
After giving effect to the repurchase of $36.0 million of Senior
Subordinated Secured Notes and the recent acquisitions, as of the date of this
report Garden State has $138.7 million available for future borrowings under the
Bank Credit Agreement, net of approximately $4.5 million in outstanding letters
of credit. Approximately $119.1 million of the availability under the Bank
Credit Agreement is available solely for future business acquisitions.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
LIQUIDITY (CONTINUED)
The purchase of Garden State's Class A common stock and the Series A and
C preferred stock by ANI 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 ability to pay dividends to
ANI. Garden State's debt agreements discussed above prohibit the payment of
dividends to ANI prior to June 30, 1999. ANI 's Senior Discounted Debentures
and the remaining Garden State Senior Subordinated Secured Notes can be
called beginning on July 1, 1999 at 106.75% and 107.5%, respectively. Based
on the current interest rate environment, ANI and Garden State expects to
call the Senior Discount Debentures and the remaining Garden State Senior
Subordinated Secured Notes on July 1, 1999. Cash flow from Garden State will
be required to service ANI's current and/or future debt obligations.
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. However, as discussed above, the Company expects to call certain bonds
on July 1, 1999, which combined with the bonds already repurchased, is
expected to reduce annual interest expense in excess of $14.0 million. 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. 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 July 1, 1999. Denver Newspapers' preferred stock is
mandatorily redeemable on the earlier of (a) July 1, 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,
(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. At September 30, 1998, Denver Newspapers had
$18.3 million available under its revolving credit facility, net of $1.6
million in outstanding letters of credit.
NEAR TERM OUTLOOK
The majority of the large newsprint suppliers increased the price of
standard 30 pound newsprint, by $40 per metric ton, beginning on September 1,
1998. However, the transaction price for large buyers of newsprint has
stayed the same for the month of September. However, it appears that the
increase, or a portion thereof, will stick for most buyers in October.
Upward pressure in newsprint pricing continues to be fueled by the Abitibi
Consolidated (the largest newsprint vendor in North America) strike at seven
newsprint mills, which began on June 15, 1998 and remains unsettled, with the
union's recent rejection of a new contract. If the September price increase
is fully implemented, the increase is not expected to have a significant
impact on the Company's cash flows from operations as the Company and Denver
Newspapers expect to purchase approximately 49% of its fiscal 1999 newsprint
requirements under fixed price contracts, entered into by MediaNews Group,
expiring over the next 18 months to 30 months. The weighted average rate for
contracted newsprint which the Company and Denver Newspapers anticipates
receiving in fiscal year 1999, will be approximately $556 per metric ton. In
addition, the Company participates in a contract that allows it to purchase
36,000 metric tons per year at a price equal to the lowest price which
newsprint is sold to large North America newsprint purchases, subject to
quarterly adjustment. While there is no assurance that the Company and
Denver newspapers will receive newsprint allocation as described above, based
on current operations, management does not anticipate material changes in the
allocation during fiscal year 1999.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NEAR TERM OUTLOOK (CONTINUED)
Based upon current and expected future operating results management
believes that the Company will have sufficient cash flows from operations to
fund scheduled payment of principal and interest and to meet anticipated capital
expenditure and working capital requirements for at least the next twelve
months. In addition to cash flows from operations, Garden State has
approximately $19.6 million available under a working capital facility as of the
date of this report, which should be more than sufficient to fund unanticipated
needs.
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.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1998 FORM 10 Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
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