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EXHIBIT 99-3
PULITZER PUBLISHING COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Statements of Consolidated Income for each of the Six-Month Periods
Ended June 30, 1998 and 1997
Statements of Consolidated Financial Position at June 30, 1998 and
December 31, 1997
Statements of Consolidated Cash Flows for each of the Six-Month Periods
Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
OPERATING REVENUES - NET: 1998 1997 1998 1997
------------- -------------- -------------- -------------
Publishing:
Advertising $62,086 $58,446 $119,807 $112,373
Circulation 21,824 21,755 44,022 44,189
Other 10,305 10,104 20,615 19,578
Broadcasting 66,603 61,093 119,773 111,264
----------- ------------ ------------- ------------
Total operating revenues 160,818 151,398 304,217 287,404
----------- ------------ ------------- ------------
OPERATING EXPENSES:
Publishing operations 37,212 35,511 74,526 70,044
Broadcasting operations 17,936 16,995 36,045 33,989
Selling, general and administrative 49,964 47,821 97,423 93,603
St. Louis Agency adjustment 5,593 5,500 10,863 10,429
Depreciation and amortization 8,944 9,237 17,874 18,420
----------- ------------ ------------- ------------
Total operating expenses 119,649 115,064 236,731 226,485
----------- ------------ ------------- ------------
Operating income 41,169 36,334 67,486 60,919
Interest income 1,114 1,051 2,156 2,501
Interest expense (3,463) (4,174) (6,925) (8,699)
Net other expense (886) (240) (1,176) (560)
----------- ------------ ------------- ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES 37,934 32,971 61,541 54,161
PROVISION FOR INCOME TAXES 15,233 13,290 24,875 21,985
----------- ------------ ------------- ------------
NET INCOME $22,701 $19,681 $36,666 $32,176
=========== ============ ============= ============
BASIC EARNINGS PER SHARE OF STOCK:
Earnings per share $1.02 $0.89 $1.65 $1.46
=========== ============ ============= ============
Weighted average number of shares outstanding 22,344 22,081 22,289 22,054
=========== ============ ============= ============
DILUTED EARNINGS PER SHARE OF STOCK:
Earnings per share $1.00 $0.88 $1.62 $1.44
=========== ============ ============= ============
Weighted average number of shares outstanding 22,756 22,413 22,685 22,396
=========== ============ ============= ============
See notes to consolidated financial statements.
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PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS)
June 30, December 31,
1998 1997
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $101,408 $ 62,749
Trade accounts receivable (less allowance for doubtful
accounts of $2,579 and $2,411) 86,813 85,882
Inventory 2,898 5,265
Prepaid expenses and other 9,894 12,847
Program rights 3,054 7,866
----------------- -----------------
Total current assets 204,067 174,609
----------------- -----------------
PROPERTIES:
Land 15,694 16,154
Buildings 86,397 84,215
Machinery and equipment 229,821 225,113
Construction in progress 13,534 7,324
----------------- -----------------
Total 345,446 332,806
Less accumulated depreciation 181,873 170,992
----------------- -----------------
Properties - net 163,573 161,814
----------------- -----------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of applicable amortization 281,158 287,617
Receivable from The Herald Company 38,136 39,733
Other 26,760 19,183
----------------- -----------------
Total intangible and other assets 346,054 346,533
----------------- -----------------
TOTAL $713,694 $682,956
================= =================
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(Continued)
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PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1998 1997
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable 15,160 $16,158
Current portion of long-term debt 12,705 12,705
Salaries, wages and commissions 12,652 15,232
Income taxes payable 6,214 3,070
Program contracts payable 2,728 7,907
Interest payable 5,640 5,677
Acquisition payable 9,804 9,804
Other 9,010 4,734
----------------- -----------------
Total current liabilities 73,913 75,287
----------------- -----------------
LONG-TERM DEBT 172,500 172,705
----------------- -----------------
PENSION OBLIGATIONS 28,211 26,709
----------------- -----------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 91,788 91,906
----------------- -----------------
OTHER LONG-TERM LIABILITIES 5,411 5,572
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; issued and outstanding - none
Common stock, $.01 par value; 100,000,000 shares authorized;
issued - 7,026,173 in 1998 and 6,797,895 in 1997 70 68
Class B common stock, convertible, $.01 par value; 50,000,000
shares authorized; issued - 27,089,494 in 1998 and 27,125,247 in 1997 271 271
Additional paid-in capital 140,037 135,542
Retained earnings 389,466 362,828
----------------- -----------------
Total 529,844 498,709
Treasury stock - at cost; 25,519 and 24,660 shares of common
stock in 1998 and 1997, respectively, and 11,700,850 shares
of Class B common stock in 1998 and 1997 (187,973) (187,932)
----------------- -----------------
Total stockholders' equity 341,871 310,777
----------------- -----------------
TOTAL $713,694 $682,956
================= =================
(Concluded)
See notes to consolidated financial statements.
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PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
June 30,
---------------------------------
1998 1997
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES: $36,666 $32,176
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 11,033 11,631
Amortization of intangibles 6,841 6,789
Changes in assets and liabilities (net of the effects of the purchase
and sale of properties) which provided (used) cash:
Trade accounts receivable (931) (1,125)
Inventory 2,367 (745)
Other assets 2,037 (4,306)
Trade accounts payable and other liabilities (1,362) 208
Income taxes payable 3,144 (101)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,795 44,527
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,688) (10,927)
Purchase of publishing properties (1,998)
Purchase of broadcast assets (1,849)
Investment in limited partnerships (5,620) (2,175)
Sale of publishing property 2,590
Decrease in notes receivable 5 4,972
------------- -------------
NET CASH USED IN BY INVESTING ACTIVITIES (18,711) (9,979)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long-term debt (205) (26,705)
Dividends paid (6,676) (5,727)
Proceeds from exercise of stock options 3,841 2,033
Proceeds from employee stock purchase plan 656
Purchase of treasury stock (41) (28)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (2,425) (30,427)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 38,659 4,121
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 62,749 73,052
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $101,408 $77,173
============= =============
See notes to consolidated financial statements.
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PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of Pulitzer Publishing Company (the "Company" or "Pulitzer") and its
subsidiary companies, all of which are wholly-owned. All significant
intercompany transactions have been eliminated from the consolidated financial
statements.
Interim Adjustments - In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of June 30, 1998, results of operations for the three and
six-month periods ended June 30, 1998 and 1997 and cash flows for the six-month
periods ended June 30, 1998 and 1997. These financial statements should be read
in conjunction with the audited consolidated financial statements and related
notes thereto contained in Exhibit 99-1 to the Company's Current Report on Form
8-K dated December 16, 1998, as filed with the Securities and Exchange
Commission. Results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
Fiscal Year and Fiscal Quarters - The Company's fiscal year and second fiscal
quarter end on the Sunday coincident with or prior to December 31 and June 30,
respectively. For ease of presentation, the Company has used December 31 as the
year end and June 30 as the second quarter end.
Earnings Per Share of Stock - Basic earnings per share of stock is computed
using the weighted average number of common and Class B common shares
outstanding during the applicable period. Diluted earnings per share of stock is
computed using the weighted average number of common and Class B common shares
outstanding and potential common shares (outstanding stock options). Weighted
average shares of common and Class B common stock and potential common shares
used in the calculation of basic and diluted earnings per share are summarized
as follows:
Second Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
(In thousands)
Weighted average shares outstanding (Basic EPS) 22,344 22,081 22,289 22,054
Stock options 412 332 396 342
--------- -------- --------- --------
Weighted average shares outstanding and
stock options (Diluted EPS) 22,756 22,413 22,685 22,396
========= ======== ========= ========
Stock options included in the diluted earnings per share calculation
were determined using the treasury stock method. Under the treasury stock
method, outstanding stock options are dilutive when the average market price of
the Company's common stock exceeds the option price during a period. In
addition, proceeds from the assumed exercise of dilutive options along with the
related tax benefit are assumed to be used to repurchase common shares at the
average market price of such stock during the period.
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. This statement established standards for the reporting and
display of Comprehensive Income and its components. This statement is required
to be implemented in financial statements issued for periods ending after
December 15, 1997. For the six-month periods ended June 30, 1998 and 1997, the
Company did not incur items to be reported in "Comprehensive Income" that were
not already included in the reported "net income". As a result, comprehensive
income and net income were the same for these periods.
Reclassifications - Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the 1998 presentation.
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2. SPIN-OFF AND MERGER
On May 25, 1998, the Company, Pulitzer Inc., (a newly-organized, wholly-owned
subsidiary of the Company ("New Pulitzer")), and Hearst-Argyle Television, Inc.
("Hearst-Argyle") entered into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Hearst-Argyle will acquire the Company's
television and radio broadcasting operations (collectively, the "Broadcasting
Business"). The Broadcasting Business consists of nine network-affiliated
television stations and five radio stations owned and operated by Pulitzer
Broadcasting Company ("PBC"), a wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries. The Broadcasting Business will be acquired by
Hearst-Argyle through the merger ("Merger") of the Company into Hearst-Argyle.
Prior to the Spin-off (as defined below), the Company intends to borrow $700
million, which may be secured by the assets and/or stock of PBC and its
subsidiaries. Out of the proceeds of this new debt, the Company will pay the
existing Company debt and any costs arising as a result of the Merger and
related transactions. Prior to the Merger, the balance of the proceeds of this
new debt, together with the Company's publishing assets and liabilities, will be
contributed by the Company to New Pulitzer pursuant to a Contribution and
Assumption Agreement (the "Contribution"). Pursuant to the Merger Agreement,
Hearst-Argyle will assume the new debt following the consummation of the
Spin-off and Merger.
Immediately following the Contribution, the Company will distribute to each
holder of Company Common Stock one fully-paid and nonassessable share of New
Pulitzer Common Stock for each share of Company Common Stock held and to each
holder of Company Class B Common Stock one fully-paid and nonassessable share of
New Pulitzer Class B Common Stock for each share of Company Class B Common Stock
held (the "Distribution"). The Contribution and Distribution are collectively
referred to as the "Spin-off." The Spin-off and the Merger are collectively
referred to as the "Transactions."
Consummation of the Transactions is subject, among other things, to the receipt
of various regulatory approvals, Pulitzer stockholder approval of the Charter
Amendment (as defined in Note 6) and approval of the Merger by the stockholders
of both the Company and Hearst-Argyle. The Company has received a favorable
letter ruling from the Internal Revenue Service confirming that the Spin-off
will be tax-free to Pulitzer stockholders. Early termination of the initial
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has
also been granted. In addition, the Federal Communications Commission (the
"FCC") has published notice of its grant of the application for the transfer of
FCC licenses, including related waiver requests, from the Company to
Hearst-Argyle. The Company anticipates that its special stockholders meeting to
consider the Charter Amendment and the Merger will be held in January 1999 and
that the Transactions will be completed shortly after the meeting.
Following the consummation of the Transactions, New Pulitzer will be engaged
primarily in the business of newspaper publishing and related new media
businesses. For financial reporting purposes, New Pulitzer is the continuing
stockholder interest and will retain the Pulitzer name.
3. DIVIDENDS
In the first quarter of 1998, two dividends of $0.15 per share were declared,
payable on February 2, 1998 and May 1, 1998. In the second quarter of 1998, a
dividend of $0.15 per share was declared, payable on August 3, 1998.
In the first quarter of 1997, two dividends of $0.13 per share were declared,
payable on February 3, 1997 and May 1, 1997. In the second quarter of 1997, a
dividend of $0.13 per share was declared, payable on August 1, 1997. In the
third quarter of 1997, a dividend of $0.13 per share was declared, payable on
November 1, 1997.
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4. BUSINESS SEGMENTS
The Company's operations are divided into two business segments, publishing and
broadcasting. The following is a summary of operating data by segment (in
thousands):
Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1998 1997 1998 1997
------------- ------------- ------------- ----------
Operating revenues: (Unaudited) (Unaudited)
Publishing $ 94,215 $ 90,305 $184,444 $176,140
Broadcasting 66,603 61,093 119,773 111,264
----------- ----------- ------------ ------------
Total $160,818 $151,398 $304,217 $287,404
=========== =========== ============ ============
Operating income (loss):
Publishing $ 13,017 $ 12,888 $ 23,836 $ 24,038
Broadcasting 29,375 24,818 46,290 39,637
Corporate (1,223) (1,372) (2,640) (2,756)
----------- ----------- ------------ ------------
Total $ 41,169 $ 36,334 $ 67,486 $ 60,919
=========== =========== ============ ============
Depreciation and amortization:
Publishing 3,444 $ 3,387 $ 6,823 $ 6,736
Broadcasting 5,500 5,850 11,051 11,684
----------- ----------- ------------ ------------
Total $ 8,944 $ 9,237 $ 17,874 $ 18,420
=========== =========== ============ ============
Operating margins
(Operating income to revenues):
Publishing (a) 19.8% 20.4% 18.8% 19.6%
Broadcasting 44.1% 40.6% 38.6% 35.6%
(a) Operating margins for publishing stated with St. Louis Agency
adjustment added back to publishing operating income.
5. COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company and its subsidiaries had construction and
equipment commitments of approximately $11,610,000. The Company's commitment for
broadcasting program contracts payable and license fees at June 30, 1998 was
approximately $29,672,000.
The Company is an investor in two limited partnerships requiring future capital
contributions. As of June 30, 1998, the Company's unfunded capital contribution
commitment related to these investments was approximately $8,243,000.
The Company and its subsidiaries are involved, from time to time, in various
claims and lawsuits incidental to the ordinary course of its business, including
such maters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of such existing litigation will not have a
material adverse effect on the consolidated financial statements of the Company
and its subsidiaries.
In connection with the September 1986 purchase of Pulitzer Class B common stock
from certain selling stockholders (the "1986 Selling Stockholders"), Pulitzer
agreed, under certain circumstances, to make an additional payment to the 1986
Selling Stockholders in the event of a Gross-Up Transaction (as defined herein).
A "Gross-Up Transaction" was defined to mean, among other transactions, (i) any
merger, in any transaction or series of related transactions, of more than 85
percent of the voting securities or equity of Pulitzer pursuant to which holders
of Pulitzer common stock receive securities other than Pulitzer common stock and
(ii) any recapitalization, dividend or distribution, or series of related
recapitalizations, dividends or distributions, in which holders of Pulitzer
common stock receive securities (other than Pulitzer common stock) having a Fair
Market Value (as defined herein) of not less than 33 1/3 percent of the Fair
Market Value of the shares of Pulitzer common stock immediately prior to such
transaction. The amount of the additional payment, if any, would equal (x) the
product of (i) the amount by which the Transaction
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Proceeds (as defined herein) exceeds the Imputed Value (as defined herein)
multiplied by (ii) the applicable percentage (i.e., 50 percent for the period
from May 13, 1996 through May 12, 2001) multiplied by (iii) the number of shares
of Pulitzer common stock issuable upon conversion of the shares of Pulitzer
Class B common stock owned by the 1986 Selling Stockholders, adjusted for, among
other things, stock dividends and stock splits; less (y) the sum of any
additional payments previously received by the 1986 Selling Stockholders;
provided, however, that in the event of any recapitalization, dividend or
distribution, the amount by which the Transaction Proceeds exceeds the Imputed
Value shall not exceed the amount paid or distributed pursuant to such
recapitalization, dividend or distribution in respect of one share of Pulitzer
common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a merger,
the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would now equal $84.11.
"Fair Market Value," in the case of any consideration other than cash received
in a Gross-Up Transaction, was defined to mean the fair market value thereof as
agreed to by a valuation firm selected by Pulitzer and a valuation firm selected
by the 1986 Selling Stockholders, or, if the two valuation firms do not agree on
the fair market value, the fair market value of such consideration as determined
by a third valuation firm selected by the two other valuation firms. Any such
agreement or determination shall be final and binding on the parties.
As a result of the foregoing, the amount of additional payments, if any, that
may be payable by New Pulitzer with respect to the Merger and the Distribution
cannot be determined at this time. However, if the Distribution were determined
to be a Gross-Up Transaction and if the Fair Market Value of the Transaction
Proceeds with respect to the Merger and the Distribution were determined to
exceed the Imputed Value, then the additional payments to the 1986 Selling
Stockholders would equal approximately $5.9 million for each $1.00 by which the
Transaction Proceeds exceed the Imputed Value. Accordingly, depending on the
ultimate resolution of the meaning and application of various provisions of the
Gross-Up Transaction agreements, including the determination of Imputed Value
and Fair Market Value of the Transaction Proceeds, in the opinion of Pulitzer's
management, the amount of an additional payment, if any, could be material to
the consolidated financial statements of Pulitzer.
6. RESTATEMENT
On October 22, 1998, the Company determined that a change in facts had occurred
concerning a stockholder vote that is required to consummate the Spin-off and
Merger (see Note 2). When the Company entered into the Merger Agreement on May
25, 1998, the principal stockholders of the Company controlled, and continue to
control, that number of shares of Class B Common Stock sufficient to approve
the Merger regardless of the vote of any other holders of the Company's Common
Stock and Class B Common Stock. In addition, the principal stockholders of the
Company entered into a voting agreement with Hearst-Argyle (the "Pulitzer
Voting Agreement"), in which they agreed to direct the vote of all their shares
in favor of the Merger and the transactions contemplated by it (including the
Charter Amendment defined below). Consummation of the Merger is also
conditioned upon the passage of an amendment to the Company's restated
certificate of incorporation (the "Charter Amendment"), the approval of which
requires the affirmative vote of the holders of a majority of the outstanding
shares of the Company's Common Stock and the Class B Common Stock voting
together as a single class and the vote of the holders of a majority of the
outstanding shares of the Company's Common Stock voting as a separate class. On
May 25, 1998, at the time of the execution and delivery of the Merger Agreement
and
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the Pulitzer Voting Agreement, the principal stockholders of the Company had
stated to the Company that they were committed to take such actions as they
deemed necessary to effectuate the Transactions, including (i), on or before the
record date for the Special Meeting of Stockholders of the Company (the "Special
Stockholders Meeting") to be called for the purpose of voting upon the Merger
and the Charter Amendment, the conversion of that number of their shares of
Class B Common Stock into shares of Common Stock as would constitute a majority
of the Company's then issued and outstanding shares of Common Stock and (ii) to
vote those shares of Common Stock at the Special Stockholders Meeting in
accordance with the provisions of the Pulitzer Voting Agreement. Based upon the
facts that existed on May 25, 1998, and continued to exist through October 21,
1998, the Company determined that it was appropriate to report the Broadcasting
Business as discontinued operations under Accounting Principles Board Opinion
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"). On October 22, 1998, the principal
stockholders advised the Company that they had not converted, and did not deem
it necessary to convert on or before the record date for the Special
Stockholders Meeting, that number of shares of the Company's Class B Common
Stock as would constitute a majority of the then issued and outstanding shares
of the Company's Common Stock. Accordingly, based upon this change in facts
(i.e., even though the principal stockholders of the Company intend to vote all
their shares in favor of the Charter Amendment upon which the Spin-off and
Merger are conditioned, they alone will not be in a position at the Special
Stockholders Meeting to approve the Charter Amendment), the Company determined
that it would no longer be appropriate under APB 30 to report the Broadcasting
Business as discontinued operations in the Company's consolidated financial
statements. As a result, the Company's financial statements as of June 30, 1998
and for the three-month and six-month periods ended June 30, 1998 and 1997 have
been restated from the amounts previously reported in the Company's Quarterly
Report on Form 10-Q dated August 12, 1998 to now reflect the Broadcasting
Business as a part of continuing operations of the Company. Such restatement
results in the reclassification of amounts related to the Broadcasting Business
previously reflected as discontinued operations in the consolidated financial
statements but does not change the Company's previously reported amounts for
consolidated net income, total earnings per share and stockholders' equity.
A summary of the significant effects of the restatement is as follows:
At June 30, 1998
-----------------------------
As
Previously As
Reported Restated
Total current assets $148,845 $204,067
Properties--net 79,500 163,573
Total intangibles and other assets 271,332 346,054
Total assets 499,677 713,694
Total current liabilities $42,503 $73,913
Long-term debt -- 172,500
Pension obligations 21,970 28,211
Postretirement and postemployment
benefit obligations 89,129 91,788
Other long-term obligations 4,204 5,411
For the Three Months Ended June 30,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
Total operating revenues $94,215 $160,818 $90,305 $151,398
Total operating expenses 82,421 119,649 78,789 115,064
Operating income 11,794 41,169 11,516 36,334
Income from continuing operations 6,908 22,701 7,099 19,681
Income from discontinued operations 15,793 -- 12,582 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.31 $1.02 $0.32 $0.89
Discontinued operations 0.71 -- 0.57 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.30 $1.00 $0.32 $0.88
Discontinued operations 0.70 -- 0.56 --
For the Six Months Ended June 30,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
Total operating revenues $184,444 $304,217 $176,140 $287,404
Total operating expenses 163,248 236,731 154,858 226,485
Operating income 21,196 67,486 21,282 60,919
Income from continuing operations 12,679 36,666 13,329 32,176
Income from discontinued operations 23,987 -- 18,847 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.57 $1.65 $0.60 $1.46
Discontinued operations 1.08 -- 0.86 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.56 $1.62 $0.60 $1.44
Discontinued operations 1.06 -- 0.84 --
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Report on Form 8-K concerning the Company's business outlook
or future economic performance, anticipated profitability, revenues, expenses or
other financial items, together with other statements that are not historical
facts, are "forward-looking statements" as that term is defined under the
Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those stated in such statements. Such risks, uncertainties and
factors include, but are not limited to, industry cyclicality, the seasonal
nature of the business, changes in pricing or other actions by competitors or
suppliers, and general economic conditions, as well as other risks detailed in
the Company's filings with the Securities and Exchange Commission including this
Report on Form 8-K.
GENERAL
The Company's operating revenues are significantly influenced by a
number of factors, including overall advertising expenditures, the appeal of
newspapers, television and radio in comparison to other forms of advertising,
the performance of the Company in comparison to its competitors in specific
markets, the strength of the national economy and general economic conditions
and population growth in the markets served by the Company.
The Company's business tends to be seasonal, with peak revenues and
profits generally occurring in the fourth and, to a lesser extent, second
quarters of each year as a result of increased advertising activity during the
Christmas and spring holiday periods. The first quarter is historically the
weakest quarter for revenues and profits.
RECENT EVENTS
On May 25, 1998, Pulitzer Publishing Company (the "Company" or
"Pulitzer"), Pulitzer Inc. (a newly-organized, wholly-owned subsidiary of the
Company ("New Pulitzer")), and Hearst-Argyle Television, Inc. ("Hearst-Argyle")
entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant
to which Hearst-Argyle will acquire the Company's television and radio
broadcasting operations (collectively, the "Broadcasting Business") through the
merger ("Merger") of the Company into Hearst-Argyle. The Merger is subject to
the satisfaction or waiver of certain closing conditions enumerated in the
Merger Agreement. The Company's newspaper publishing and related new media
businesses will continue as New Pulitzer, which will be distributed in a
tax-free "spin-off" to the Company's stockholders (the "Spin-off") prior to the
Merger.
The Company's historical basis in its non-broadcasting assets and
liabilities will be carried over to New Pulitzer. The Merger, the Spin-off and
the related transactions will be recorded as a reverse-spin transaction, and,
accordingly, New Pulitzer's results of operations for periods reported prior to
the consummation of the Merger, the Spin-off and related transactions will
represent the historical results of operations previously reported by the
Company. (See Note 2 to the consolidated financial statements included in this
Exhibit 99-3 to the Company's Current Report on Form 8-K.)
As discussed in Note 6 to the consolidated financial statements included in this
Exhibit 99-3 to the Company's Current Report on Form 8-K, the Company's
consolidated financial statements as of June 30, 1998 and for the three-month
and six-month periods ended June 30, 1998 and 1997 have been restated to reflect
the Broadcasting Business as a part of continuing operations of the Company.
Such restatement results in the reclassification of amounts related to the
Broadcasting Business previously reflected as discontinued operations in the
consolidated financial statements but does not change the Company's previously
reported amounts for consolidated net income, total earnings per share and
stockholders' equity.
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CONSOLIDATED
Operating revenues for the second quarter and first six months of 1998
increased 6.2 percent and 5.8 percent, respectively, compared to the
corresponding periods in the prior year. The current year increases included
gains in both publishing and broadcasting revenues.
Operating expenses, excluding the St. Louis Agency adjustment, for the
second quarter and first six months of 1998 increased 4.1 percent and 4.5
percent, respectively, compared to the corresponding periods in the prior year.
The current year increases were primarily attributable to higher overall
personnel costs ($2.8 million - second quarter and $5.7 million - year to date)
and increases in newsprint costs ($833,000 - second quarter and $2.5 million -
year to date).
Operating income for the second quarter and first six months of 1998
increased to $41.2 million (13.3 percent) and $67.5 million (10.8 percent),
respectively. The increases reflected gains in the broadcasting segment due to
higher revenues in the current year periods.
Interest income for the second quarter of 1998 increased $63,000 (6
percent) due to a slightly higher average balance of invested funds. For the
first six months of 1998, interest income declined $345,000 (13.8 percent) due
to a lower average balance of invested funds.
Interest expense declined $711,000 in the 1998 second quarter and $1.8
million in the first six months due to lower average debt levels. The Company's
average debt level for the second quarter and first six months of 1998 decreased
to $185.2 million and $185.3 million from $227.7 million and $239.9 million in
the respective periods of the prior year. The Company's average interest rate
for both the second quarter and first six months of 1998 increased to 7.5
percent from 7.3 percent in both prior year periods. The lower average debt
levels and higher average interest rates in the first half of 1998 reflected the
payment of variable rate credit agreement borrowings during the last three
quarters of 1997.
Net other expense for the second quarter and first six months of 1998
increased $646,000 and $616,000, respectively, due to a one-time charge of
$869,000 related to the sale of the Haverhill Gazette on June 1, 1998.
The effective income tax rates for the second quarter and first six
months of 1998 were 40.2 percent and 40.4 percent, respectively, compared to
40.3 percent and 40.6 percent, respectively, in the corresponding prior year
periods. The Company expects that its effective tax will be in the 40 to 41
percent range for the full year of 1998 (exclusive of any non-recurring items
related to the Spin-off and Merger).
Net income in the 1998 second quarter increased 15.3 percent to $22.7
million, or $1.00 per diluted share, compared with $19.7 million, or $0.88 per
diluted share, in the second quarter of 1997. Net income for the first six
months of 1998 increased 14 percent to $36.7 million, or $1.62 per diluted
share, compared with $32.2 million, or $1.44 per diluted share, a year ago. The
gains reflected increased operating profits for broadcasting and lower interest
expense in the current year periods.
PUBLISHING
Operating revenues for the second quarter and first six months of 1998
increased 4.3 percent and 4.7 percent, respectively, compared to the
corresponding periods in the prior year. The gains primarily reflected higher
advertising revenues.
Newspaper advertising revenues increased $3.6 million (6.2 percent) in
the second quarter and $7.4 million (6.6 percent) in the first six months of
1998 compared to the corresponding periods in the prior year. The current year
increases resulted from advertising gains at the St. Louis Post-Dispatch
("Post-Dispatch"), The Arizona Daily Star ("Star") and the Pulitzer Community
Newspaper group ("PCN"). Full run advertising volume (linage in inches)
increased 0.5 percent at the Post-Dispatch and 3.8 percent at the Star for the
second quarter of 1998. For the first half of 1998, full run advertising volume
increased 1.4 percent at the Post-Dispatch and 3.5 percent at the Star. In the
fourth quarter of 1997 and the first quarter of 1998, varying rate increases
were implemented at the Post-Dispatch, the Star and most of the PCN properties.
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Circulation revenues for the second quarter and first half of 1998
experienced only slight fluctuations from the corresponding periods of the prior
year, increasing 0.3 percent for the quarter and declining 0.4 percent for the
six-month period.
Other publishing revenues increased $201,000 (2 percent) in the second
quarter and $1 million (5.3 percent) in the first six months of 1998, reflecting
higher preprint revenues and Internet subscriber fees.
Operating expenses (including selling, general and administrative
expenses, and depreciation and amortization), excluding the St. Louis Agency
adjustment, for the second quarter and first six months of 1998 increased 5.1
percent and 5.7 percent, respectively, compared to the corresponding periods in
the prior year. The current year increases were attributable to higher overall
personnel costs ($1.4 million - second quarter and $3 million - year to date),
higher newsprint costs ($833,000 - second quarter and $2.5 million - year to
date), and increases in promotion costs ($528,000 - second quarter and $572,000
- - year to date).
Operating income for the second quarter of 1998 increased to $13
million (1 percent) reflecting higher advertising revenues in the current year.
For the first half of 1998, operating income declined slightly to $23.8 million
(0.8 percent) as higher newsprint and personnel costs offset advertising revenue
gains.
Fluctuations in the price of newsprint significantly impact the results
of the Company's newspaper operations, where newsprint expense accounts for
approximately 20 percent of total operating costs. For the first half of 1998,
the Company's average cost for newsprint was approximately $600 per metric ton,
compared to approximately $540 per metric ton in 1997. In the second half of
1997, the Company's average cost of newsprint was approximately $585 per metric
ton.
BROADCASTING
Broadcasting operating revenues for the second quarter and first six
months of 1998 increased 9 percent and 7.6 percent, respectively, over the
comparable 1997 periods. Local spot advertising increased 6.7 percent and 7
percent, respectively, for the second quarter and first six months of 1998, and
national spot advertising increased 13 percent and 9.7 percent, respectively,
for the second quarter and six-month period. The current year comparisons
reflect the impact of increased political advertising of approximately $4
million and $4.2 million, respectively, in the second quarter and first six
months of 1998.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) for the second
quarter of 1998 increased to $37.2 million (2.6 percent) and for the first six
months increased to $73.5 million (2.6 percent) compared to the prior year
periods. The increases were primarily attributable to higher overall personnel
costs of $1.4 million and $2.6 million for the second quarter and first six
months of 1998, respectively.
Broadcasting operating income in the 1998 second quarter increased 18.4
percent to $29.4 million and in the first six months increased 16.8 percent to
$46.3 million. The increases for both periods resulted from higher advertising
revenues.
LIQUIDITY AND CAPITAL RESOURCES
Outstanding debt, inclusive of the short-term portion of long-term debt,
as of June 30, 1998, was $185.2 million compared to $185.4 million at December
31, 1997. The Company's borrowings consist primarily of fixed-rate senior notes
with The Prudential Insurance Company of America (the "Prudential Senior Note
Agreements"). Under a variable rate credit agreement with The First National
Bank of Chicago, as Agent, for a group of lenders, the Company has a $50 million
line of credit available through June, 2001 (the "FNBC Credit Agreement"). No
amount is currently borrowed under the FNBC Credit Agreement.
The Prudential Senior Note Agreements and the FNBC Credit Agreement
require the Company to maintain certain financial ratios, place restrictions on
the payment of dividends and prohibit new borrowings, except as permitted
thereunder. Borrowings pursuant to the Prudential Senior Note
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Agreements will be repaid with new borrowings prior to the Merger, and the
Prudential Senior Note Agreements and FNBC Credit Agreement will be terminated.
The Company's new borrowings will be assumed by Hearst-Argyle at the time of the
Merger. Accordingly, New Pulitzer will have no long-term borrowings immediately
after the Spin-off and Merger.
As of June 30, 1998, commitments for capital expenditures were
approximately $11.6 million, relating to normal capital equipment replacements
(including Year 2000 projects in-process) and the cost of a building project for
the Louisville, Kentucky broadcasting property. Capital expenditures to be made
in fiscal 1998 are estimated to be in the range of $25 to $30 million.
Commitments for film contracts and license fees at broadcasting locations as of
June 30, 1998 were approximately $29.7 million. In addition, as of June 30,
1998, the Company had capital contribution commitments of approximately $8.2
million related to investments in two limited partnerships.
At June 30, 1998, the Company had working capital of $130.2 million and
a current ratio of 2.76 to 1. This compares to working capital of $99.3 million
and a current ratio of 2.32 to 1 at December 31, 1997.
The Company from time to time considers acquisitions of newspaper and
other properties when favorable investment opportunities are identified. In the
event an investment opportunity is identified, management expects that it would
be able to arrange financing on terms and conditions satisfactory to the
Company.
The Company generally expects to generate sufficient cash from
operations to cover ordinary capital expenditures, film contract and license
fees, working capital requirements, debt installments and dividend payments.
SPIN-OFF AND MERGER
Prior to the Spin-off and Merger (collectively referred to as the
"Transactions"), the Company intends to borrow $700 million which will provide
sufficient funds to pay the existing Company debt and the costs of the
Transactions discussed below. Pursuant to the Merger Agreement, Hearst-Argyle
will assume the new debt following the consummation of the Transactions. (See
Note 2 to the consolidated financial statements included in this Exhibit 99-3 to
the Company's Current Report on Form 8-K.)
In connection with the Transactions, the Company will incur new
borrowings, prepay existing Company debt and make several one-time payments near
the dates of the Transactions. The Company will incur a prepayment penalty
related to the prepayment of the existing borrowings under the Prudential Senior
Note Agreements. Based upon November 30, 1998 interest rates, the prepayment
penalty would be approximately $21 million. Professional fees to be incurred
related to the Transactions are estimated in the range of $37 million.
Management bonuses to be paid at the date of the Merger are estimated at
approximately $12.1 million. Pursuant to the Merger Agreement, the Company will
cash-out all outstanding stock options at the date of the Merger. Based upon
outstanding options (946,344) and the Company's common stock market price
($81.25) as of November 30, 1998, payments to employee option holders of
approximately $44.5 million would have been required. It is anticipated that a
portion of the option cash-out and bonus payments will be deferred at the time
of the Merger and paid at a future date. The Company expects to realize tax
benefits related to the long-term debt prepayment penalty, stock option cash-out
payments and bonus payments. The preceding amounts represent estimates based
upon current information available to management of the Company. The final
actual amounts will likely differ from the estimates.
To the extent a gain is generated by the Transactions, a
corporate-level income tax ("Spin-off Tax") will be due. The gain is measured by
the excess, if any, of the fair market value of New Pulitzer stock distributed
by the Company to its stockholders in the Spin-off over the Company's adjusted
tax basis in such New Pulitzer stock immediately prior to the distribution. On
November 30, 1998, the fair market value of New Pulitzer stock would be
estimated as the difference between the closing price of the Company's common
stock on November 30, 1998 ($81.25) and the fair market value for the
Broadcasting Business of $51.11 per share, assuming the value ($1.15 billion)
Hearst-Argyle is exchanging for the Company's common stock (22,499,749 shares at
November 30, 1998). Using a fair market value of $30.14 (the excess of $81.25
over $51.11) per common share for the New Pulitzer stock, no gain (or tax) would
result from the Transactions because the adjusted tax basis of the New Pulitzer
stock would be
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approximately $34.29 per share. However, if the fair market value of the New
Pulitzer stock would exceed the adjusted tax basis of such stock at the time of
the Spin-off, the Spin-off Tax will increase by approximately $9.1 million for
each $1.00 per share that the fair market value exceeds the adjusted tax basis.
The actual gain and related income tax will depend on the fair market value and
the Company's adjusted tax basis in the New Pulitzer stock at the time of the
Spin-off.
In connection with the September 1986 purchase of Pulitzer Class B
common stock from certain selling stockholders (the "1986 Selling
Stockholders"), Pulitzer agreed, under certain circumstances, to make an
additional payment to the 1986 Selling Stockholders in the event of a Gross-Up
Transaction (as defined herein). A "Gross-Up Transaction" was defined to mean,
among other transactions, (i) any merger, in any transaction or series of
related transactions, of more than 85 percent of the voting securities or equity
of Pulitzer pursuant to which holders of Pulitzer common stock receive
securities other than Pulitzer common stock and (ii) any recapitalization,
dividend or distribution, or series of related recapitalizations, dividends or
distributions, in which holders of Pulitzer common stock receive securities
(other than Pulitzer common stock) having a Fair Market Value (as defined
herein) of not less than 33 1/3 percent of the Fair Market Value of the shares
of Pulitzer common stock immediately prior to such transaction. The amount of
the additional payment, if any, would equal (x) the product of (i) the amount by
which the Transaction Proceeds (as defined herein) exceeds the Imputed Value (as
defined herein) multiplied by (ii) the applicable percentage (i.e., 50 percent
for the period from May 13, 1996 through May 12, 2001) multiplied by (iii) the
number of shares of Pulitzer common stock issuable upon conversion of the shares
of Pulitzer Class B common stock owned by the 1986 Selling Stockholders,
adjusted for, among other things, stock dividends and stock splits; less (y) the
sum of any additional payments previously received by the 1986 Selling
Stockholders; provided, however, that in the event of any recapitalization,
dividend or distribution, the amount by which the Transaction Proceeds exceeds
the Imputed Value shall not exceed the amount paid or distributed pursuant to
such recapitalization, dividend or distribution in respect of one share of
Pulitzer common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a
merger, the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would now equal $84.11.
"Fair Market Value," in the case of any consideration other than cash
received in a Gross-Up Transaction, was defined to mean the fair market value
thereof as agreed to by a valuation firm selected by Pulitzer and a valuation
firm selected by the 1986 Selling Stockholders, or, if the two valuation firms
do not agree on the fair market value, the fair market value of such
consideration as determined by a third valuation firm selected by the two other
valuation firms. Any such agreement or determination shall be final and binding
on the parties.
As a result of the foregoing, the amount of additional payments, if
any, that may be payable by New Pulitzer with respect to the Merger and the
Distribution cannot be determined at this time. However, if the Distribution
were determined to be a Gross-Up Transaction and if the Fair Market Value of the
Transaction Proceeds with respect to the Merger and the Distribution were
determined to exceed the Imputed Value, then the additional payments to the 1986
Selling Stockholders would equal approximately $5.9 million for each $1.00 by
which the Transaction Proceeds exceed the Imputed Value. Accordingly, depending
on the ultimate resolution of the meaning and application of various provisions
of the Gross-Up Transaction agreements, including the determination of Imputed
Value and Fair Market Value of the Transaction Proceeds, in the opinion of
Pulitzer's management, the amount of an additional payment, if any, could be
material to the consolidated financial statements of Pulitzer.
Pursuant to the Merger Agreement, New Pulitzer will indemnify
Hearst-Argyle against losses related to: (i) on an after tax basis, certain tax
liabilities, including (A) any transfer tax liability attributable to the
Spin-off, (B) with certain exceptions, any tax liability of Pulitzer or any
subsidiary of Pulitzer
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attributable to any tax period (or portion thereof) ending on or before the
closing date of the Merger, including tax liabilities resulting from the
Spin-off, and (C) any tax liability of New Pulitzer or any subsidiary of New
Pulitzer; (ii) liabilities and obligations under any employee benefit plans not
assumed by Hearst-Argyle; (iii) any liabilities for payments made pursuant to a
Gross-Up Transaction; and (iv) certain other matters as set forth in the Merger
Agreement.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Issue is the result of information systems being designed
using two digits rather than four digits to define the applicable year. As the
year 2000 approaches, such information systems may be unable to accurately
process certain date-based information.
In 1995, Pulitzer began reviewing and preparing its computer systems
for the Year 2000. Generally, at Pulitzer's newspaper publishing locations, the
following categories of computer systems were identified for assessment of Year
2000 compliance: pre-press systems, press systems, post-press systems, business
systems, network systems, desktop PC systems, telecommunication systems and
building systems. Significant sub-systems within these categories which were
identified as non-compliant during the assessment phase represented aging
hardware and software which would have required replacement in the near term
irrespective of the Year 2000 Issue. Consequently, Pulitzer adopted a Year 2000
strategy which will replace its significant non-compliant systems with new
compliant systems prior to December 31, 1999.
Pulitzer's strategy for achieving Year 2000 compliance was developed
using a five phase plan as follows: (1) educate and plan; (2) assess; (3)
replace and renovate; (4) validate/test; and (5) implement. As of June 30, 1998,
Pulitzer has completed the planning and assessment phases and is in the process
of replacing, testing and implementing new compliant systems (with some systems
already implemented). Pulitzer and New Pulitzer expect to have substantially all
of the Year 2000 system changes implemented by December 31, 1998 at The Arizona
Daily Star, March 31, 1999 at the St. Louis Post-Dispatch and September 30, 1999
at the PCN properties.
Pulitzer's current estimate of capital expenditures for new hardware
and software to address Year 2000 issues, as well as to replace aging systems,
is approximately $11.6 million for its newspaper publishing locations. At June
30, 1998, approximately $5.8 million of the total capital expenditure estimate
remains to be spent through the projected implementation dates. These amounts do
not include either the internal staff costs of Pulitzer's information technology
department or the cost of minor Year 2000 system modifications, both of which
are recorded as expense in the period incurred. Year 2000 modification costs for
minor system issues are not expected to be significant. The Year 2000 related
capital expenditures have been considered in Pulitzer's normal capital budgeting
process and will be funded through operating cash flows.
In addition to addressing internal system issues, Pulitzer is
communicating with its major suppliers (including but not limited to newsprint,
ink, telecommunication services and utilities) and selected customers to obtain
assurance of their preparedness for the Year 2000. In general, questionnaires
are being used to identify potential Year 2000 issues at these third parties
which may impact Pulitzer's business operations and require a remedy.
As of June 30, 1998, Pulitzer believes that its plan for achieving Year
2000 compliance will be fully implemented by September 30, 1999 and,
consequently, the development of contingency plans for Year 2000 issues has not
been undertaken at this time. The possible need for contingency plans will be
monitored, and if necessary such plans will be developed, as Pulitzer proceeds
with the implementation of its overall Year 2000 plan.
The preceding discussion relates to Pulitzer's publishing operations
only. Pulitzer does not expect to incur significant costs to address Year 2000
issues at its broadcasting locations prior to the Merger.
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DIGITAL TELEVISION
The Company's Orlando television station, WESH, is required to
construct digital television facilities in order to broadcast digitally by
November 1, 1999 and comply with Federal Communications Commission ("FCC")
rules. The deadline for constructing digital facilities at the Company's other
television stations is May 1, 2002. The Company is currently considering
available options to comply with the FCC's timetable but does not expect to
incur significant capital expenditures to construct digital facilities prior to
the Merger.
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