<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 December 31, 1998
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 February 11, 1999:
<TABLE>
<S> <C>
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 DECEMBER 31, 1998
<TABLE>
<CAPTION>
Item No. Page
- -------- ----
<S> <C>
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
<PAGE>
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 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
<PAGE>
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 December 31, 1998.
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: February 11, 1999 By: /s/ Joseph J. Lodovic, IV
----------------- ---------------------------------------
Joseph J. Lodovic, IV
Executive Vice President,
Chief Financial Officer and
Duly Authorized Officer of Registrant
4
<PAGE>
AFFLIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
ASSETS December 31, June 30,
1998 1998
------------- -------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ...................................... $ -- $ 999
Accounts receivable, less allowance for doubtful accounts
of $6,637 and $6,239 at December 31, 1998 and
June 30, 1998, respectively .................................. 62,742 51,675
Inventories of newsprint and supplies .......................... 9,334 7,286
Prepaid expenses and other assets .............................. 4,603 3,475
Income taxes receivable ........................................ -- 1,687
------------- -------------
Total Current Assets 76,679 65,122
PROPERTY, PLANT AND EQUIPMENT
Land ........................................................... 16,471 16,658
Buildings and improvements ..................................... 62,380 61,060
Machinery and equipment ........................................ 184,664 179,670
------------- -------------
Total Property, Plant and Equipment ......................... 263,515 257,388
Less accumulated depreciation and amortization ................. 71,299 63,588
------------- -------------
Net Property, Plant and Equipment 192,216 193,800
OTHER ASSETS
Investment in Denver Newspapers, Inc. (Note 2) ................. 22,594 19,671
Investment in partnerships ..................................... 17,372 7,479
Subscriber accounts, less accumulated amortization of
$60,320 and $53,446 at December 31, 1998 and
June 30, 1998, respectively .................................. 99,630 98,712
Excess of cost over fair value of net assets acquired,
less accumulated amortization of $22,394 and $18,492
at December 31, 1998 and June 30, 1998, respectively ......... 288,691 251,196
Covenants not to compete and other identifiable intangible
assets, less accumulated amortization of $21,939 and
$19,846 at December 31, 1998 and June 30, 1998,
respectively ................................................. 16,548 15,810
Other .......................................................... 7,851 7,468
------------- -------------
Total Other Assets 452,686 400,336
------------- -------------
TOTAL ASSETS $ 721,581 $ 659,258
------------- -------------
------------- -------------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT December 31, June 30,
1998 1998
-------------- --------------
(In thousands, except share data)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable .......................................... $ 7,707 $ 5,684
Accrued liabilities ............................................. 44,777 49,279
Unearned income ................................................. 14,154 14,829
Income taxes .................................................... 1,111 --
Current portion of long-term debt and capital lease obligation .. 13,209 5,644
-------------- --------------
Total Current Liabilities ................................... 80,958 75,436
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION ....................... 718,678 661,945
OTHER LIABILITIES ................................................. 6,446 6,479
DEFERRED INCOME TAXES ............................................. 12,967 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 ......................................................... (101,102) (101,251)
-------------- --------------
Total Shareholders' Deficit (97,468) (97,617)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 721,581 $ 659,258
-------------- --------------
-------------- --------------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Advertising ..................................... $ 111,170 $ 79,210 $ 209,234 $ 150,845
Circulation ..................................... 27,385 20,235 53,686 39,838
Other ........................................... 4,037 3,826 7,827 7,262
------------- ------------- ------------- --------------
TOTAL OPERATING REVENUES ...................... 142,592 103,271 270,747 197,945
COST AND EXPENSES
Cost of sales ................................... 45,355 33,334 88,388 64,941
Selling, general, and administrative ............ 60,305 42,807 118,607 85,710
Depreciation and amortization ................... 10,918 8,470 21,207 16,507
Interest expense ................................ 19,227 15,500 37,390 29,186
Other, (net) .................................... 1,050 7,111 1,846 7,947
------------- ------------- ------------- --------------
TOTAL COST AND EXPENSES ....................... 136,855 107,222 267,438 204,291
GAIN ON SALE OF NEWSPAPER ......................... -- 31,829 -- 31,829
INCOME IN UNCONSOLIDATED SUBSIDIARY
(Note 2) ........................................ 2,320 2,183 2,923 4,061
------------- ------------- ------------- --------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS .......................... 8,057 30,061 6,232 29,544
INCOME TAX EXPENSE ................................ 2,726 6,492 3,584 6,929
------------- ------------- ------------- --------------
INCOME BEFORE EXTRAORDINARY LOSS .................. 5,331 23,569 2,648 22,615
EXTRAORDINARY LOSS (NET OF TAXES $1,134) .......... -- -- (2,499) --
------------- ------------- ------------- --------------
NET INCOME ........................................ $ 5,331 $ 23,569 $ 149 $ 22,615
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
EARNINGS PER COMMON SHARE:
Income before extraordinary loss ................ $ 2.30 $ 10.18 $ 1.14 $ 9.77
Extraordinary loss .............................. -- -- (1.08) --
------------- ------------- ------------- --------------
Net income ...................................... $ 2.30 $ 10.18 $ .06 $ 9.77
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Weighted average number of shares outstanding ..... 2,314,346 2,314,346 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>
<CAPTION>
Six Months Ended December 31,
---------------------------------
1998 1997
------------ -------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................................... $ 149 $ 22,615
Adjustments to reconcile net income to net cash provided by operating
Activities:
Depreciation and amortization .............................................. 20,606 16,176
Distributions less than earnings from investment in partnerships and
unconsolidated subsidiaries ............................................. (3,483) (4,874)
Provision for losses on accounts receivable ................................ 2,879 1,921
Amortization of debt discount .............................................. 11,900 10,412
Gain on sale of newspaper properties and other assets ...................... -- (31,831)
Deferred income tax (benefit) expense ...................................... 97 (206)
Debt issuance cost and repurchase premium .................................. 3,698 6,616
Change in operating assets and liabilities ................................. (17,592) (890)
------------ -------------
NET CASH FLOWS FROM OPERATING ACTIVITIES ............................... 18,254 19,939
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of newspaper property and other assets ................................ -- 43,000
Purchase of newspaper properties ........................................... (53,986) (91,740)
Purchase of machinery and equipment, (net) ................................. (3,890) (3,794)
------------ -------------
NET CASH FLOWS FROM INVESTING ACTIVITIES ............................... (57,876) (52,534)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt ................................................ (57,991) (253,833)
Reduction of non-operating liabilities ..................................... (317) (419)
Debt issuance cost and repurchase premium ................................. (3,698) (6,616)
Issuance of long-term debt ................................................. 100,629 303,538
------------ -------------
NET CASH FLOWS FROM FINANCING ACTIVITIES ............................... 38,623 42,670
------------ -------------
CHANGE IN CASH AND CASH EQUIVALENTS (999) 10,075
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 999 8,944
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 19,019
------------ -------------
------------ -------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 25,382 $ 19,750
------------ -------------
------------ -------------
Income taxes paid $ 3 $ 2,664
------------ -------------
------------ -------------
</TABLE>
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
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 six month period ended December 31, 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 Inc.
("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 periods ended December 31, 1997, have been
reclassified to conform with the current quarterly and year to date
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
90,000 and 99,000, respectively, as of September 30, 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
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS (CONTINUED)
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.
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 paid circulation of
approximately 16,700 and 18,000, respectively, at September 30, 1998. The
acquisition was accounted for as a purchase; accordingly, the results of
operations were included since the date of acquisition. 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 estimate and are subject to change upon the final
allocation of the purchase price. The excess of cost over fair market value
of the net assets acquired and intangible assets related to subscriber lists
are being amortized on a straight line basis over 40 and 15 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 six month
period ended December 31, 1998 and 1997 (in thousands):
SUMMARIZED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Total Revenues............................. $59,804 $59,004 $117,955 $114,043
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Cost of Sales.............................. $31,014 $29,187 $60,703 $56,616
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net income................................. $4,541 $4,313 $6,222 $8,119
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Net income applicable to common stock...... $3,866 $3,638 $4,872 $6,769
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
Certain balances for the three and six month periods ended December 31,
1997, have been reclassified to conform with current presentation.
11
<PAGE>
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.
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.
COMBINED SUMMARIZED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues................... $ 202,396 $ 162,275 $ 388,703 $ 311,988
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Cost of sales.................... $ 76,369 $ 62,521 $ 149,091 $ 121,558
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Minority interest in income
applicable to common stock
of Denver Newspapers, Inc....... $ (1,547) $ (1,455) $ (1,949) $ (2,708)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Income (Loss).................... $ 6,006 $ 24,244 $ 1,499 $ 23,965
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net income (loss) applicable
to common stock................. $ 5,331 $ 23,569 $ 149 $ 22,615
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
Certain balances for the three and six month periods ended December 31,
1997, have been reclassed to conform with current presentations.
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 Garden State's Bank Credit Agreement were
used to repurchase the 12.0% Senior Subordinated Secured Notes.
12
<PAGE>
AFFILIATED NEWSPAPERS INVESTMENTS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
NOTE 4: LONG TERM DEBT (CONTINUED)
The following table sets forth, after giving effect to borrowings
associated with the August 21, 1998 and October 1, 1998, acquisitions
previously discussed, and borrowings associated with the repurchase of 12.0%
Senior Subordinated Secured Notes, the approximate expected schedule
maturities of long-term debt of the Company for the fiscal years indicated,
are as follows (in thousands).
<TABLE>
<S> <C>
1999. . . . . . . . . . . . . . . . . $ 5,658
2000. . . . . . . . . . . . . . . . . 12,623
2001. . . . . . . . . . . . . . . . . 17,203
2002. . . . . . . . . . . . . . . . . 20,562
2003. . . . . . . . . . . . . . . . . 42,399
Thereafter. . . . . . . . . . . . . . 625,979
-----------
$ 724,424
-----------
-----------
</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 December 31, 1998 and
1997, the interest rate swap had a market loss of $0.3 and $0.5 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.
NOTE 5: COMMITMENTS
The Company and Denver Newspapers, through MediaNews Group, Inc., have
entered into a newsprint swap agreements covering 75,000 metric tons of
newsprint, which expires over the next seven to ten years. The Company uses
the swaps to minimize in part, the Company's exposure to the uncertainty of
future newsprint price fluctuations. Settlements are made on a monthly or
quarterly basis, and vary based on the difference between the fixed contract
price and the price as published in the Paper Trader (also know as the RISI
index). The weighted average fixed price of newsprint under the swaps is $602
per metric ton. The Company accounts for amounts received or paid under these
agreements are an adjustment to newsprint expense. The Company and Denver
Newspapers also participates in fixed price newsprint contracts, which
currently allow the Company and Denver Newspapers to purchase thirty pound
newsprint at a weighted average price of $559 per metric ton.
NOTE 6: SUBSEQUENT EVENTS
BUSINESS ACQUISITIONS
In January 1999, Garden State agreed, subject to final contract
negotiations, to form a partnership with the Donrey Newspapers LLC, to which
Garden State will contribute its Alameda Newspaper Group, comprised of six
daily newspapers published in the San Francisco Bay area; its San Gabriel
Valley Newspapers, which includes three daily newspapers published in the Los
Angeles area; the Times-Standard, a daily newspaper published in Eureka,
California; and all the weekly publications published by these daily
newspapers. Donrey Newspapers LLC will contribute its ten daily newspapers
and two non-daily newspapers located in California, most of which are located
in close proximity to Garden State's publications. The partnership will
publish twenty daily newspapers with daily circulation of 523,000 and Sunday
circulation of 487,000. The partnership will be majority owned and controlled
by Garden State. The partnership is expected to be formed in Garden State's
fiscal third quarter.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATING RESULTS
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Revenues increased $39.3 million or 38.1% in the second quarter of fiscal
year 1999 as compared to the same quarter of fiscal year 1998. The increase
in revenue was primarily attributable to, the December 16, 1997, acquisition
of the PRESS-TELEGRAM; the January 29, 1997, acquisition of the DAILY NEWS;
the August 21, 1998 acquisition of the 50% interest in the Charleston
Newspaper joint venture; and the October 1, 1998 acquisition of the DAILY
TIMES. Excluding the newspaper acquisitions and dispositions, operating
revenue at the Company's remaining newspaper operations ("existing
newspapers") also increased in the second quarter 1999. The increase in
operating revenue at existing newspapers was driven by a 3.6% increase in
advertising revenue from continued growth in classified, retail and preprint
advertising.
COST OF SALES
Cost of sales increased $12.0 million or 36.1% in the second 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 December 31, 1998. Excluding newspaper acquisitions and
dispositions, cost of sales decreased approximately 1.6%.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $17.5
million or 40.8% in the second quarter of fiscal year 1999 as compared to the
same quarter of fiscal year 1998. The aforementioned acquisitions caused the
majority of the SG&A expense increase in the second quarter of fiscal year
1999. Excluding newspaper acquisitions and dispositions, SG&A expense
increased approximately 2.7%. 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 $9.8 million or 36.2%. The majority of the increase was
due to acquisitions; however, the Company's existing newspapers realized a
7.0% increase in EBITDA, converting over 68.0% 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 $2.4 million in the second
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 $3.7 million in the second quarter of fiscal
year 1999 as compared to the same period in fiscal year 1998. Interest
expense increased as a result of a $185.8 million increase in average debt
outstanding, primarily associated with acquisitions.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING RESULTS (CONTINUED)
DENVER NEWSPAPERS - UNCONSOLIDATED SUBSIDIARY
Net income applicable to common stock of Denver Newspapers increased $0.2
million or 6.3% in the second quarter of fiscal year 1999 compared to the
same quarter of fiscal year 1998. The increase in net income applicable to
common stock at Denver Newspapers was primarily the result of a $0.8 million
or 1.3% increase in revenue offset by a $0.6 million or 1.0% increase in
total expenses and income taxes during the same period.
OTHER EXPENSE
Other expense decreased approximately $6.1 million in the second quarter
of fiscal year 1999 as compared to the same quarter of fiscal year 1998. The
decrease is primarily attributable to the Company writing off $6.6 million of
fees and other cost in fiscal year 1998 associated with Garden State's
issuance of $250.0 million of Senior Subordinated Notes in October, 1997.
NET INCOME
ANI recorded net income of approximately $5.3 million in the second
quarter of fiscal year 1999, as compared to an adjusted loss of $1.7 million
in the second quarter of 1998 after excluding the gain on sale of newspaper
and debt issuance cost discussed above. The increase in the income is
primarily attributable to a $7.4 million increase in operating profit at
Garden State, a $3.8 million decrease in tax expense, and a $0.1 million
increase in the equity pick-up from Denver Newspapers which were partially
offset by a $3.7 million increase in interest expense.
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
Revenues increased $72.8 million or 36.8% in the first six months of
fiscal year 1999 as compared to the same six month period 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; the
August 21, 1998 acquisition of the 50% interest in the Charleston Newspaper
joint venture; and the October 1, 1998 acquisition of the DAILY TIMES.
Excluding the newspaper acquisitions and dispositions, operating revenues at
the Company's existing newspapers combined also increased in the first six
months of fiscal year 1999. The increase in operating revenue at existing
newspapers was driven by a 3.3% increase in advertising revenue from
continued growth in classified, retail and preprint advertising.
COST OF SALES
Cost of sales increased $23.4 million or 36.1% in the first six months of
fiscal year 1999 compared to the same six month period of fiscal year 1998.
The aforementioned acquisitions caused the majority of the cost of sales
increase for the first six months ended December 31, 1998. Excluding
newspaper acquisitions and dispositions, cost of sales was flat.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expenses increased $32.9
million or 38.4% in the first six months of fiscal year 1999 as compared to
the same six month period of fiscal year 1998. The aforementioned
acquisitions caused the majority of the SG&A expense increase in the first
six months of fiscal year 1999. Excluding newspaper acquisitions and
dispositions, SG&A expense increased approximately 1.7%. The increase in SG&A
is associated with increases in advertising expenditures, which were
primarily related to ongoing efforts to increase advertising lineage.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING RESULTS (CONTINUED)
EBITDA
EBITDA increased $16.5 million or 34.9%. The majority of the increase was
due to acquisitions; however, the Company's existing newspapers realized a
6.1% increase in EBITDA, converting over 58.0% of the increase in revenue to
EBITDA.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $4.7 million in the first six
months 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.
OTHER EXPENSE
Other expense decreased approximately $6.1 million in the first six
months of fiscal year 1999 as compared to the same period of fiscal year
1998. The decrease is primarily attributable to the Company writing off $6.6
million of fees and other cost in fiscal year 1998 associated with Garden
State's issuance of $250.0 million of Senior Subordinated Notes in October
1997.
INTEREST EXPENSE
Interest expense increased $8.2 million in the first six months of fiscal
year 1999 as compared to the same six month period in fiscal year 1998.
Interest expense increased as a result of a $151.7 million increase in
average debt outstanding, primarily associated with acquisitions.
DENVER NEWSPAPERS - UNCONSOLIDATED SUBSIDIARY
Net income applicable to common stock of Denver Newspapers decreased $1.9
million in the first six months of fiscal year 1999 compared to the same six
month period of fiscal year 1998. The decrease in net income applicable to
common stock at Denver Newspapers was primarily the result of a combined $5.8
million or 5.5% increase in total expenses and income taxes that was only
partially offset by a $3.9 million or 3.4% increase in revenue during the
same period.
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 net income of approximately $2.6 million in the
first six months of fiscal year 1999 after excluding the extraordinary loss
of $2.5 million, as compared to an adjusted loss of $2.6 million in the same
period of fiscal year 1998, after excluding the gain on sale of newspapers
and debt issuance cost. The increase in the adjusted net income income is
primarily attributable to a $11.8 million increase in operating profit at
Garden State and a $3.3 million decrease in tax expense which were partially
offset by a $1.1 million decrease in the equity pick-up from Denver
Newspapers and a $8.2 million increase in interest expense.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY
Net cash flows from operating activities were approximately $18.2 million
and $19.9 million for the six months ended December 31, 1998 and 1997,
respectively. The $1.7 million decrease in cash flow from operating
activities was primarily the result of a $15.7 million increase in the net
change in operating assets and liabilities, primarily as a result of
increases in accounts receivable and inventory related to fiscal year 1998
acquisitions, and a $5.6 million increase in interest expense paid, which
were offset in part by a $16.5 million increase in operating profit,
excluding depreciation and amortization, a $1.4 million change in partnership
and unconsolidated subsidiary distributions and a $4.5 million reduction in
tax expense.
Net cash flows from investing activities were ($57.9) million and ($52.5)
million for the six months ended December 31, 1998 and 1997, respectively.
The ($5.4) million change was primarily the result of the Company spending
$52.7 million on acquisitions net of dispositions in the first six months of
fiscal year 1999 compared to $48.7 million for the same six month period of
fiscal year 1998.
Net cash flows from financing activities were $38.6 million and $42.7
million for the six months ended December 31, 1998 and 1997, respectively.
The change of approximately ($4.1) million was primarily attributable to the
Company borrowing a net $42.6 million in the first six months of fiscal 1999,
compared to a net borrowing of $49.7 million in fiscal 1998. The net increase
in borrowing in each year were primarily associated with the previously
discussed acquisitions. The change of approximately ($2.9) million in debt
issuance cost and repurchase premiums also contributed to the change.
LIQUIDITY
After giving effect to the repurchase of $36.0 million of Senior
Subordinated Secured Notes, the recent acquisitions, and a $75.0 million
voluntary commitment reduction in February 1999, Garden State has $74.3
million available for future borrowings under its Bank Credit Agreement, net
of approximately $3.5 million in outstanding letters of credit. Approximately
$60.1 million of the availability under the Bank Credit Agreement 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 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 repurchase the remaining Senior Discount Debentures and the
remaining Garden State Senior Subordinated Secured Notes on or before July 1,
1999.
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 or repurchase
certain bonds on or before 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
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION AND LIQUIDITY (CONTINUED)
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. In accordance with Denver Newspapers second amended and restated
certificate of incorporation, 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. The Denver Post previously extended the maturity
of its Bank Credit Agreement to July 1, 2000, which prohibits the redemption
of the 9% preferred stock prior to its expiration. In conjunction with such
extension, the holder of the 9% preferred stock waived its right to have its
preferred stock redeemed prior to July 1, 2000. Accordingly, Denver
newspapers is not obligated to redeem the 9% preferred stock until the
earlier of a) the retirement of the Denver Post Bank Credit Agreement or b)
July 1, 2000. At December 31, 1998, Denver Newspapers had $19.4 million
available under its revolving credit facility, net of $1.6 million in
outstanding letters of credit.
NEAR TERM OUTLOOK
The September 1998 price increase, which would have increased 30 pound
newsprint to $640 per metric ton, failed to take hold. Instead newsprint
prices have been declining and in January 1999, average $570 per metric ton
for North American newsprint. Contributing to the decline in prices was the
settlement of the Abitibi-Consolidated (largest newsprint vendor in North
America) strike in December, 1998, and the continued flow of imported
newsprint from Asia. Prices may continue to decline as newsprint producer's
inventories are expected to grow in the near term and Asian suppliers
continue to sell newsprint at prices well below $570 per metric ton. To
minimize the influence of newsprint price fluctuations the Company and
MediaNews Group entered into fixed price newsprint contracts and newsprint
swap agreements, covering the Company and Denver Newspapers. These contracts
expire over the next twelve months to ten years. The weighted average rate
for newsprint under both the fixed price contracts and the newsprint swap is
$570 per metric ton. In addition to the fixed price contracts, the Company
also 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.
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.
IMPACT OF YEAR 2000
The year 2000 issue results from computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure, disruption
of operations, and/or a temporary inability to conduct normal business
activities. Based on a recent assessment, the Company currently believes that
with modifications to existing software and conversions to new software
already scheduled to occur, the year 2000 issue will not pose significant
operational problems. If such modifications and conversions are not made, or
are not completed in a timely manner, the year 2000 issue could have a
material impact on operations.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF YEAR 2000 (CONTINUED)
The Company's newspapers have completed the process of identifying
computer systems that require modification or replacement and have begun the
systematic replacement or modification of all its computer systems which are
not year 2000 compliant. In addition, the Company has initiated
communications with its significant suppliers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to resolve their own year 2000 issues. The Company believes the
necessary modifications and replacement of computer systems will be completed
by the end of the first quarter of its fiscal year 2000, and thus no
contingency plan has been developed.
The Company estimates that the remaining cost of modifying or replacing
its computer systems, which are not year 2000 compliant, will be
approximately $4.0 million. The year 2000 compliance cost is based on
management's best estimate and actual results could differ from those
anticipated.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
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<RECEIVABLES> 62,742
<ALLOWANCES> 6,637
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<PP&E> 263,515
<DEPRECIATION> 71,299
<TOTAL-ASSETS> 721,581
<CURRENT-LIABILITIES> 80,958
<BONDS> 718,678
0
0
<COMMON> 23
<OTHER-SE> (97,468)
<TOTAL-LIABILITY-AND-EQUITY> 721,581
<SALES> 270,747
<TOTAL-REVENUES> 270,747
<CGS> 88,388
<TOTAL-COSTS> 228,202
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<INTEREST-EXPENSE> 37,390
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</TABLE>
