1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1999
-------------
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 1-14541
--------------------------------
PULITZER INC.
(Exact name of registrant as specified in its charter)
--------------------------------
DELAWARE 43-1819711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
900 NORTH TUCKER BOULEVARD, ST. LOUIS, MISSOURI 63101
(Address of principal executive offices)
(314) 340-8000
(Registrant's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed
since last report)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
----------------------------------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING 7/31/99
- ------------------------------------- ------------------------------------
COMMON STOCK 8,325,868
CLASS B COMMON STOCK 14,339,284
================================================================================
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Second Quarter Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- ----------- --------- ----------
OPERATING REVENUES - NET:
Advertising $65,701 $62,086 $126,781 $119,807
Circulation 21,563 21,824 43,605 44,022
Other 11,430 10,305 22,665 20,615
----------- ----------- ---------- ----------
Total operating revenues 98,694 94,215 193,051 184,444
----------- ----------- ---------- ----------
OPERATING EXPENSES:
Operations 36,803 37,212 74,760 74,526
Selling, general and administrative 36,522 34,949 71,899 68,396
General corporate expense 1,926 1,223 3,736 2,640
Stock option cash-outs and bonuses (Note 8) 26,685
St. Louis Agency adjustment 7,032 5,593 12,271 10,863
Depreciation and amortization 4,020 3,444 8,029 6,823
----------- ----------- ---------- ----------
Total operating expenses 86,303 82,421 197,380 163,248
----------- ----------- ---------- ----------
Operating income (loss) 12,391 11,794 (4,329) 21,196
Interest income 7,761 1,114 9,953 2,156
Loss from sale of marketable securities (1,043) (1,043)
Net other expense (1,519) (886) (1,673) (1,176)
----------- ----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 17,590 12,022 2,908 22,176
PROVISION FOR INCOME TAXES 7,898 5,114 1,732 9,497
----------- ----------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 9,692 6,908 1,176 12,679
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX 15,793 (21,449) 23,987
----------- ----------- ---------- ----------
NET INCOME (LOSS) $9,692 $22,701 $(20,273) $36,666
=========== =========== ========== ==========
BASIC EARNINGS PER SHARE OF STOCK:
Income from continuing operations $0.43 $0.31 $0.05 $0.57
Income (loss) from discontinued operations 0.71 (0.95) 1.08
----------- ----------- ---------- ----------
Earnings (loss) per share $0.43 $1.02 $(0.90) $1.65
=========== =========== ========== ==========
Weighted average number of shares outstanding 22,647 22,344 22,625 22,289
=========== =========== ========== ==========
DILUTED EARNINGS PER SHARE OF STOCK:
Income from continuing operations $0.43 $0.30 $0.05 $0.56
Income (loss) from discontinued operations 0.70 (0.95) 1.06
----------- ----------- ---------- ----------
Earnings (loss) per share $0.43 $1.00 $(0.90) $1.62
=========== =========== ========== ==========
Weighted average number of shares outstanding 22,667 22,756 22,635 22,685
=========== =========== ========== ==========
See notes to consolidated financial statements.
2
3
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Second Quarter Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
NET INCOME (LOSS) $9,692 $22,701 $(20,273) $36,666
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding losses on
marketable securities arising
during the period (Note 4) (2,961) (2,961)
------ ------- -------- -------
COMPREHENSIVE INCOME (LOSS) $6,731 $22,701 $(23,234) $36,666
====== ======= ======== =======
See notes to consolidated financial statements
3
4
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS)
June 30, December 31,
1999 1998
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $125,137 $110,171
Marketable securities 453,395
Trade accounts receivable (less allowance for doubtful
accounts of $1,663 and $1,722) 40,484 42,658
Inventory 6,982 2,587
Income taxes receivable 12,206
Prepaid expenses and other 8,343 12,564
-------------- --------------
Total current assets 646,547 167,980
-------------- --------------
PROPERTIES:
Land 5,478 5,536
Buildings 44,142 43,511
Machinery and equipment 106,023 98,848
Construction in progress 6,182 8,442
-------------- --------------
Total 161,825 156,337
Less accumulated depreciation 76,546 72,186
-------------- --------------
Properties - net 85,279 84,151
-------------- --------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization 189,670 197,154
Receivable from The Herald Company 33,932 38,683
Net assets of Broadcasting Business (Note 3) 35,717
Other 25,075 22,708
-------------- --------------
Total intangible and other assets 248,677 294,262
-------------- --------------
TOTAL $980,503 $546,393
============== ==============
(Continued)
4
5
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31,
1999 1998
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 9,188 $ 12,253
Salaries, wages and commissions 10,451 10,911
Income taxes payable 2,832
Acquisition payable 9,707 9,707
Dividends payable 3,395 3,374
Other 3,523 4,228
-------------- --------------
Total current liabilities 36,264 43,305
-------------- --------------
PENSION OBLIGATIONS 28,235 23,625
-------------- --------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 89,074 88,397
-------------- --------------
OTHER LONG-TERM LIABILITIES 9,684 5,709
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 6):
Preferred stock, $.01 par value; shares authorized - 100,000,000 in
1999 and 25,000,000 in 1998; issued and outstanding - none
Common stock, $.01 par value; shares authorized - 100,000,000 in
1999 and 1998; issued - 8,323,547 in 1999 and 7,242,974 in 1998 83 72
Class B common stock, convertible, $.01 par value; shares authorized
- 100,000,000 in 1999 and 50,000,000 in 1998; issued - 14,339,284
in 1999 and 27,019,880 in 1998 143 270
Additional paid-in capital 425,630 151,574
Retained earnings 395,266 422,329
Accumulated other comprehensive income (3,876) (915)
-------------- --------------
Total 817,246 573,330
Treasury stock - at cost; 25,519 shares of common stock and
11,700,850 shares of Class B common stock in 1998 (187,973)
-------------- --------------
Total stockholders' equity 817,246 385,357
-------------- --------------
TOTAL $980,503 $546,393
============== ==============
(Concluded)
See notes to consolidated financial statements.
5
6
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
June 30,
--------------------------------
1999 1998
-------------- --------------
CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 1,176 $12,679
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 4,340 3,876
Amortization 3,689 2,947
Deferred income taxes (404) 155
Loss on sale of assets 2,131
Changes in assets and liabilities (net of the effects of the
purchase and sale of properties) which provided (used) cash:
Trade accounts receivable 2,174 (948)
Inventory (4,395) 2,367
Other assets 12,637 2,705
Trade accounts payable and other liabilities 5,032 (2,229)
Income taxes (15,038) 3,144
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,342 24,696
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,214) (9,312)
Purchase of publishing property, net of cash acquired (1,998)
Sale of publishing properties 3,300 2,590
Purchases of marketable securities (695,557)
Sales of marketable securities 235,746
Investment in joint ventures and limited partnerships (3,808) (4,620)
Decrease in notes receivable 51 5
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (466,482) (13,335)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (6,769) (6,676)
Proceeds from exercise of stock options 2,280 3,841
Proceeds from employee stock purchase plan 656
Purchase of treasury stock (110) (41)
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (4,599) (2,220)
-------------- --------------
CASH (USED IN) PROVIDED BY CONTINUING OPERATIONS (459,739) 9,141
-------------- --------------
DISCONTINUED OPERATIONS
Operating activities (21,820) 35,099
Investing activities:
Capital expenditures (1,488) (4,376)
Sale (purchase) of investment in limited partnership 5,000 (1,000)
Financing activities:
Proceeds from issuance of long-term debt 700,000
Repayments of long-term debt (172,705) (205)
Payment of Spin-off and Merger Transaction costs (31,272)
Payment of estimated working capital adjustment related to Merger (3,010)
-------------- --------------
CASH PROVIDED BY DISCONTINUED OPERATIONS 474,705 29,518
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,966 38,659
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 110,171 62,749
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $125,137 $101,408 (Continued)
============== ==============
6
7
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Six Months Ended
June 30,
--------------------------------
1999 1998
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest paid $ 8,429 $ 6,962
Interest received (4,070) (2,026)
Income taxes 5,433 22,374
Income tax refunds (1,190) (369)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Divestiture of broadcasting business--decrease in Net Liabilities of
Broadcasting Business and increase in Additional Paid-in Capital $494,721 $--
Spin-off and Merger Transaction costs--decrease in Other Assets
and decrease in Additional Paid-in Capital 4,253
Increase in Dividends Payable and decrease in Retained Earnings 3,395 3,358
Cancellation of treasury stock:
Decrease in Treasury Stock and Class B Common Stock 117
Decrease in Treasury Stock and Additional Paid-in Capital 187,966
(Concluded)
See notes to consolidated financial statements.
7
8
PULITZER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On March 18, 1999, the spin-off of the newspaper publishing and new media
businesses formerly operated by Pulitzer Publishing Company ("Pulitzer") was
completed with Pulitzer Inc. (the "Company") commencing operations as an
independent publicly traded publishing company (the "Spin-off"). Following the
Spin-off, Pulitzer with its remaining broadcasting business ("Broadcasting
Business") was merged with and into Hearst-Argyle Television, Inc.
("Hearst-Argyle") in exchange for the issuance to Pulitzer's stockholders of
37,096,774 shares of Hearst-Argyle's Series A common stock (the "Merger"). The
Merger and Spin-off are collectively referred to as the "Transactions."
As a result of the Transactions, the Company is the continuing entity for
financial reporting purposes. Pulitzer's historical basis in its newspaper
publishing and related new media assets and liabilities has been carried over to
the Company. The distribution of the net liabilities of the Broadcasting
Business has been recorded as a capital contribution to the Company (see Notes 5
and 6). The Transactions represent a reverse-spin transaction and, accordingly,
the Company's results of operations for periods prior to the consummation of the
Transactions are identical to the historical results previously reported by
Pulitzer. Results of the Company's newspaper publishing and related new media
businesses are reported as continuing operations in the statements of
consolidated income. The results of the Broadcasting Business prior to the
Merger are reported as discontinued operations (see Note 3).
2. ACCOUNTING POLICIES
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, 1999, results of operations for the
three-month and six-month periods ended June 30, 1999 and 1998 and cash flows
for the six-month periods ended June 30, 1999 and 1998. These financial
statements should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. 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.
Cash Equivalents - The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
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 common stock equivalents (outstanding stock options). Weighted
average shares of common and Class B common stock and common stock equivalents
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,
------------------------- -------------------------
1999 1998 1999 1998
(In thousands) (In thousands)
Weighted average shares outstanding (Basic EPS) 22,647 22,344 22,625 22,289
Stock option equivalents 20 412 10 396
----------- ----------- ----------- -----------
Weighted average shares outstanding and
Stock option equivalents (Diluted EPS) 22,667 22,756 22,635 22,685
=========== =========== =========== ===========
8
9
Stock option equivalents 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.
Segment Reporting - During 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. This statement establishes standards for the way that
public business report information about operating segments and for related
disclosures about products, services, geographic areas and major customers.
Prior to the Transactions (see Note 1), the Company's operations included both a
publishing and broadcasting segment. As a result of the Transactions, the
broadcasting segment has been presented as a discontinued operation in the
consolidated financial statements with detail segment disclosures included in
Note 3. Segment disclosures for the Company's remaining operating segment,
publishing, are presented in the consolidated financial statements as continuing
operations. See additional publishing segment disclosures included in Note 10.
Reclassifications - Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the 1999 presentation.
3. DISCONTINUED OPERATIONS
Discontinued operations represent the Broadcasting Business owned by Pulitzer
prior to the Merger, including the allocation of all long-term debt balances and
related interest expense amounts of Pulitzer prior to the Merger.
The net liability balance of the Broadcasting Business as of March 18, 1999,
including the $700 million of New Debt, was contributed to "Additional Paid-in
Capital" of the Company at the time of the Merger (see Notes 5 and 6). The net
asset balance of the Broadcasting Business as of December 31, 1998 is classified
in the statement of consolidated financial position as "Net Assets of
Broadcasting Business". The asset and liability balances of the Broadcasting
Business as of March 18, 1999 (immediately prior to the Merger) and as of
December 31, 1998 are included below.
March 18, 1999 December 31,
(Prior to Merger) 1998
------------------ ------------------
ASSETS (In thousands)
Cash $ 1,860 $--
Trade accounts receivable (less allowance for
doubtful accounts of $558 and $597) 40,759 47,244
Program rights 5,941 8,425
Other current assets 2,644 1,115
------------------ ------------------
Total current assets 51,204 56,784
Properties - net 82,843 83,514
Intangible assets - net 93,109 94,817
Other assets 2,019 8,348
------------------ ------------------
Total assets of Broadcasting Business 229,175 243,463
------------------ ------------------
LIABILITIES
Trade accounts payable and accrued expenses 7,615 9,255
Current portion of long-term debt (Note 5) 12,705
Interest payable 5,301
Program contracts payable 5,599 7,955
------------------ ------------------
Total current liabilities 13,214 35,216
Long-term debt (Note 5) 700,000 160,000
Pension obligations 3,267 6,951
Postretirement benefit obligations 1,998 2,762
Other long term liabilities 5,417 2,817
Commitments and contingencies
------------------ ------------------
Total liabilities of Broadcasting Business 723,896 207,746
------------------ ------------------
NET (LIABILITIES) ASSETS OF BROADCASTING BUSINESS $(494,721) $ 35,717
================== ==================
9
10
In connection with the Merger, a cash payment is required by either
Hearst-Argyle or the Company for the difference between $41,000,000 and the
working capital balance of the Broadcasting Business on the date of the Merger
("Working Capital Adjustment"). Based upon the March 18, 1999 asset and
liability balances included above, the Broadcasting Business had a working
capital balance of $37,990,000 resulting in a preliminary Working Capital
Adjustment of $3,010,000. This preliminary amount has been paid to Hearst-Argyle
as of March 31, 1999. The Company expects to finalize the Working Capital
Adjustment during the second half of 1999.
As of March 18, 1999, certain Broadcasting Business asset and liability
balances, including but not limited to accrued expenses, pensions,
postretirement and deferred income taxes, have been recorded based upon
preliminary estimates. As a result, the Working Capital Adjustment and the
capital contribution recorded in the Company's equity section to reflect the
Merger represent preliminary estimates. Subsequent to March 31, 1999, these
preliminary estimates will be adjusted, as necessary, based upon the final
calculation of certain Broadcasting Business asset and liability balances.
Similarly, Transaction costs recorded in the Company's consolidated financial
statements in the 1999 first quarter also include estimates which will be
adjusted as final billings are received. (see Note 6)
The net (loss) income from operations of the Broadcasting Business, without
allocation of any general corporate expense, is reflected in the statements of
consolidated income as "Income from Discontinued Operations" and is summarized
as follows:
Second Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999(a) 1998
----------- ----------- ----------- -----------
(In thousands) (In thousands)
Operating revenues $-- $66,603 $ 45,622 $119,773
----------- ----------- ----------- -----------
Operating expenses:
Operations 17,936 15,951 36,045
Selling, general and administrative 13,792 11,616 26,387
Stock option cash-outs and bonuses 25,305
Depreciation and amortization 5,500 3,881 11,051
----------- ----------- ----------- -----------
Total operating expenses 37,228 56,753 73,483
----------- ----------- ----------- -----------
Operating (loss) income 29,375 (11,131) 46,290
Interest expense 3,463 3,128 6,925
Loss on extinguishment of debt (b) 17,955
----------- ----------- ----------- -----------
(Loss) income before income taxes 25,912 (32,214) 39,365
Income tax (benefit) provision 10,119 (10,765) 15,378
----------- ----------- ----------- -----------
Net (loss) income $-- $15,793 $(21,449) $23,987
=========== =========== =========== ===========
(a) Broadcasting results for 1999 reflect operations only through March 18,
1999, the date of the Merger, and include $25.3 million of stock option
cash-outs and bonus payments to broadcasting employees in connection with
the Merger on March 18, 1999. (see Note 8)
(b) On March 18, 1999, in connection with the Spin-off and Merger, Pulitzer
prepaid its existing long-term debt and incurred a prepayment penalty of
approximately $17.2 million. This prepayment penalty, along with the
write-off of deferred financing fees of approximately $750,000, has been
included in the results of discontinued operations for the first six months
of 1999.
10
11
4. MARKETABLE SECURITIES
The Company's investments in marketable securities represent available-for-sale
securities and are recorded at fair value with net unrealized gains and losses
reported, net of tax, as a component of other comprehensive income. The basis of
cost used in determining realized gains and losses is specific identification.
The fair value of all securities is determined by quoted market prices.
Investments in available-for-sale securities at June 30, 1999 consisted of the
following:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------- -------------
(In thousands)
Debt securities issued by the U.S.
government and agencies $326,326 $- $(3,578) $322,748
Municipal securities 11,389 (266) 11,123
Corporate securities 60,776 29 (832) 59,973
Mortgage-backed securities 11,994 (126) 11,868
Other debt securities 48,283 7 (607) 47,683
------------ ------------ ------------- -------------
Total investments $458,768 $ 36 $(5,409) $453,395
============ ============ ============= =============
For the second quarter of 1999, proceeds from sales of marketable securities
were $235,746,000 resulting in gross realized gains and losses of $368,000 and
$1,411,000, respectively. In addition, a net unrealized loss of $2,961,000,
after tax, is included in other comprehensive income for the second quarter of
1999.
The maturity schedule of investments in available-for-sale securities at June
30, 1999 was as follows:
Amortized Fair
Cost Value
------------ ------------
(In thousands)
Due in one year or less $106,402 $106,064
Due after one year through five years 262,062 258,324
Due after five years through ten years 22,811 22,220
Due after ten years 55,499 54,919
Mortgage-backed securities 11,994 11,868
------------ ------------
Total investments $458,768 $453,395
============ ============
5. FINANCING ARRANGEMENTS
On March 17, 1999, Pulitzer borrowed $700 million from Chase Manhattan Bank
pursuant to a borrowing agreement (the "New Debt"). Prior to the Spin-off and
Merger, on March 18, 1999, Pulitzer used a portion of the proceeds from the New
Debt to prepay its existing long-term debt with The Prudential Insurance Company
of America ("Prudential"), pay a related prepayment penalty to Prudential and
pay certain transaction costs resulting from the Spin-off and Merger. The
balance of the proceeds of the New Debt, together with existing cash balances,
was contributed to the Company in the Spin-off, and the New Debt was assumed by
Hearst-Argyle at the time of the Merger. Accordingly, all long-term debt
balances and related interest expense are allocated to the Broadcasting Business
and reported as discontinued operations in the consolidated financial statements
(see Note 3).
As a result of the Transactions, the Company has no outstanding debt as of June
30, 1999.
11
12
6. STOCKHOLDERS' EQUITY
On March 18, 1999, all common and Class B common shares of treasury stock held
by Pulitzer were canceled. The cancellation of the treasury shares reduced the
number of shares of common and Class B common stock issued but did not change
the number of shares of common and Class B common stock outstanding. In
addition, the cancellation did not change the total balance of stockholders'
equity. Immediately following the Spin-off, on March 18, 1999, the number of
shares of common and Class B common stock of the Company outstanding was
identical to the number of shares of common and Class B common stock of Pulitzer
outstanding immediately prior to the Spin-off.
The net liability balance of the Broadcasting Business as of March 18, 1999,
including the $700 million of New Debt, was contributed to "Additional Paid-in
Capital" of the Company at the time of the Merger (see Notes 3 and 5). This
capital contribution has been recorded net of Transaction costs of approximately
$35.5 million and the estimated Working Capital Adjustment of approximately $3
million related to the Merger. Activity in the Company's stockholders' equity
accounts for the first six months of 1999 is included below:
Accumulated
Other Total
Class B Additional Compre- Stock-
Common Common Paid-in Retained hensive Treasury holders'
Stock Stock Capital Earnings Income Stock Equity
-------- --------- -------- --------- ----------- --------- ---------
(In thousands)
BALANCES AT DECEMBER 31, 1998 $72 $270 $151,574 $422,329 $(915) $(187,973) $385,357
Issuance of common stock grants 1,239 1,239
Common stock options exercised 1 2,279 2,280
Conversion of Class B common
stock to common stock 10 (10)
Tax benefit from stock options
exercised 2,318 2,318
Comprehensive income:
Net loss (20,273) (20,273)
Unrealized loss on marketable
securities, net of tax (2,961) (2,961)
--------
Comprehensive income (23,234)
--------
Cash dividends declared
$0.30 per share of common
and Class B common (6,790) (6,790)
Purchase of treasury stock (110) (110)
Cancellation of treasury stock (117) (187,966) 188,083
Divestiture of Broadcasting
Business, net of Transaction
costs and Working Capital
Adjustment 456,186 456,186
-------- --------- -------- --------- ----------- --------- --------
BALANCES AT JUNE 30, 1999 $83 $143 $425,630 $395,266 $(3,876) $-- $817,246
======== ========= ======== ========= =========== ========= ========
12
13
In the first quarter of 1999, a dividend of $0.15 per share was declared,
payable on May 3, 1999. In addition, a cash dividend of $0.15 per share which
was declared in December 1998 and paid to stockholders in January 1999
represented the acceleration of Pulitzer's dividend historically declared and
paid in the first quarter of each fiscal year. In the second quarter of 1999, a
dividend of $0.15 per share was declared, payable on August 2, 1999.
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.
On July 16, 1999, the Company's Board of Directors approved the repurchase of up
to $50 million of its common stock in the open market.
7. COMMON STOCK PLANS
On May 12, 1999, the Company's stockholders approved the adoption of the
Pulitzer Inc. 1999 Stock Option Plan (the "Option Plan"), Pulitzer Inc. Key
Employees' Restricted Stock Purchase Plan (the "Restricted Plan") and Pulitzer
Inc. 1999 Employee Stock Purchase Plan (the "Purchase Plan").
The Option Plan provides for the issuance to key employees and outside directors
of stock options to purchase up to a maximum of 3,000,000 shares of common
stock. Under the Option Plan, options to purchase 3,000 shares of common stock
will be automatically granted to each non-employee director on the day following
each annual meeting of the Company's stockholders and will vest on the date of
the next annual meeting of the Company's stockholders. Total shares available
for issue to outside directors under this automatic grant feature are limited to
a maximum of 200,000. The issuance of all other options will be administered by
a committee of the Board of Directors, subject to the Option Plan's terms and
conditions. Specifically, for incentive stock option grants, the exercise price
per share may not be less than the fair market value of a share of common stock
at the date of grant. In addition, exercise periods may not exceed ten years and
the minimum vesting period is established at six months from the date of grant.
Option awards to an individual employee may not exceed 200,000 shares in a
calendar year.
During the second quarter of 1999, options to purchase approximately 497,000
shares of common stock were granted to employees under the Option Plan. These
option grants provide for an exercise term of ten years from the date of grant
and vest in equal installments over a three-year period. In addition, options
to purchase 12,000 shares of common stock were granted to non-employee
directors under the Option Plan's automatic grant provision.
The Restricted Plan provides that an employee may receive, at the discretion of
a committee of the Board of Directors, a grant or right to purchase at a
particular price, shares of common stock subject to restrictions on
transferability. A maximum of 500,000 shares of common stock may be granted or
purchased by employees under the Restricted Plan.
During the second quarter of 1999, 31,000 shares of common stock were issued
under the Restricted Plan. Compensation expense equal to the fair market value
of these common stock awards on the date of grant will be recognized over the
vesting period of the grants.
The Purchase Plan allows eligible employees to authorize payroll deductions for
the periodic purchase of the Company's common stock at a price generally equal
to 85 percent of the common stock's fair market value. In general, all employees
of the Company and its subsidiaries are eligible to participate in the Purchase
Plan after completing at least one year of service. Subject to appropriate
adjustment for stock splits and other capital changes, the Company may sell a
total of 300,000 shares of its common stock under the Purchase Plan. Shares sold
under the Purchase Plan may be authorized and unissued, held by the Company in
its treasury or previously issued and outstanding shares purchased by the
Company. The Purchase Plan began operations as of July 1, 1999.
8. STOCK OPTION CASH-OUTS AND BONUSES
On March 18, 1999, immediately prior to the Spin-off and Merger, Pulitzer
redeemed all outstanding stock options, whether or not vested, and terminated
the related option plans. In addition to the stock option cash-outs, bonus
payments due as a result of the Spin-off and Merger were recorded as expense in
the first quarter of 1999. Total stock option cash-out and bonus expense of
approximately $52 million has been recorded in 1999, including approximately
$26.7 million related to publishing employees recorded in
13
14
continuing operations and approximately $25.3 million related to broadcasting
employees recorded in discontinued operations.
9. COMMITMENTS AND CONTINGENCIES
At June 30, 1999, the Company and its subsidiaries had construction and
equipment commitments of approximately $7,573,000.
The Company is an investor in one limited partnership requiring future capital
contributions. As of June 30, 1999, the Company's unfunded capital contribution
commitment related to this investment was approximately $6,154,000.
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 matters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of any 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. 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 equal $84.11 at May 12,
1998.
"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 chosen by the two previously selected 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 the Company with respect to the Merger and the distribution of
Pulitzer Inc. common and Class B common
14
15
stock in the Spin-off (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 per share 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 the Company's management, the
amount of an additional payment, if any, could be material to the consolidated
financial statements of the Company.
10. NEWSPAPER PUBLISHING REVENUES
The Company's newspaper publishing revenues consist of the following:
Second Quarter Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
(In thousands) (In thousands)
St. Louis Post-Dispatch $63,795 $61,810 $124,457 $121,369
Star Publishing Company 14,087 13,637 28,520 27,262
Pulitzer Community Newspaper Group 20,251 18,419 39,032 35,164
Other publishing revenue 561 349 1,042 649
------------ ------------ ------------- -------------
Total publishing revenue $98,694 $94,215 $193,051 $184,444
============ ============ ============= =============
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Statements in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q.
GENERAL
The Company's operating revenues are significantly influenced by a
number of factors, including overall advertising expenditures, the appeal of
newspapers 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
The Company (the "Company") was organized as a corporation in 1998 and is
engaged in newspaper publishing, operating the newspaper properties operated by
Pulitzer Publishing Company ("Pulitzer") prior to the Spin-off (as defined
below). Prior to the Spin-off, the Company was a wholly-owned subsidiary of
Pulitzer.
As of May 25, 1998, Pulitzer, the Company and Hearst-Argyle Television, Inc.
("Hearst-Argyle") entered into an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") pursuant to which Hearst-Argyle agreed to
acquire Pulitzer's television and radio broadcasting operations (collectively,
the "Broadcasting Business") in exchange for the issuance to Pulitzer's
stockholders of 37,096,774 shares of Hearst-Argyle's Series A common stock. The
Broadcasting Business consisted of nine network-affiliated television stations
and five radio stations owned and operated by Pulitzer Broadcasting Company and
its wholly-owned subsidiaries. On March 18, 1999, the Broadcasting Business was
acquired by Hearst-Argyle through the merger (the "Merger") of Pulitzer into
Hearst-Argyle. Prior to the Merger, Pulitzer's newspaper publishing and related
new media businesses were contributed to the Company in a tax-free "spin-off" to
Pulitzer stockholders (the "Spin-off"). The Merger and Spin-off are collectively
referred to as the "Transactions."
Pulitzer's historical basis in its newspaper publishing and related new
media assets and liabilities has been carried over to the Company. The
Transactions represent a reverse-spin transaction and, accordingly, the
Company's results of operations for periods prior to the consummation of the
Transactions are identical to the historical results of operations previously
reported by Pulitzer. Results of the Company's newspaper publishing and related
new media businesses are reported as continuing operations, and the results of
the Broadcasting Business owned by Pulitzer prior to the Merger are reported as
discontinued operations, in the financial statements included in Item 1 of this
Quarterly Report on Form 10-Q.
16
17
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH 1998
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the second quarter of 1999 increased 4.8
percent, to $98.7 million from $94.2 million in the second quarter of 1998. The
gain primarily reflected higher advertising revenues.
Newspaper advertising revenues increased $3.6 million, or 5.8 percent,
in the second quarter of 1999. The current year increase included advertising
revenue gains of 10.2 percent at the Pulitzer Community Newspaper Group ("PCN
Group"), 5.2 percent at the St. Louis Post-Dispatch ("Post-Dispatch") and 2.7
percent at The Arizona Daily Star ("Star"). The increase at the PCN Group was
primarily in the retail and classified categories while the Post-Dispatch gain
was driven by classified and national advertising increases. At Star, classified
increases accounted for the higher second quarter advertising revenues. At the
PCN Group, volume increases at most locations, along with new advertising from
the Troy Daily News (acquired in October 1998), accounted for a significant
portion of the higher advertising revenue. Similarly, at the Star, higher second
quarter advertising revenue reflected an increase of approximately 12.6 percent
in full run advertising volume (linage in inches). At the Post-Dispatch, rate
increases in January 1999 and higher national, classified and part-run
advertising volume accounted for the current year advertising revenue increase.
Circulation revenues decreased 1.2 percent to $21.6 million in the
second quarter of 1999 from $21.8 million in the prior year quarter. The lower
circulation revenues primarily reflected declines in paid circulation at the
Post-Dispatch which were partially offset by new circulation revenue from
the Troy Daily News, acquired in October 1998.
Other revenues increased $1.1 million, or 10.9 percent, in the second
quarter of 1999, primarily reflecting gains in both preprint and new media
revenue.
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, increased 3.2 percent to $79.3
million for the 1999 second quarter from $76.8 million for the same period in
the prior year. The current year increase reflected higher overall personnel
costs of $3.1 million and higher depreciation and amortization expense of
$576,000, due in part to the acquisition of the Troy Daily News in October 1998.
These expense increases were partially offset by a decline in newsprint costs of
$1.7 million reflecting lower newsprint prices in the current year quarter.
Operating income for the second quarter of 1999 increased 5.1 percent
to $12.4 million from 11.8 million in the prior year quarter. The current year
increase reflected the advertising revenue gains and lower newsprint expense in
the current year quarter.
Interest income for the second quarter of 1999 increased to $7.8
million from $1.1 million in the prior year quarter. The increase reflected the
inflow of approximately $429 million of net cash in connection with the Spin-off
and Merger on March 18, 1999 (See "Liquidity and Capital Resources").
The Company incurred net realized losses of approximately $1 million
in the 1999 second quarter related to the sale of marketable debt securities.
Net other expense for the second quarter of 1999 was $1.5 million
compared with $886,000 in the prior year quarter. The 1999 second quarter
included an approximate $1.1 million loss related to the sale of the Company's
newspaper property in Hamilton, Montana on May 21, 1999 while the prior year
quarter included a loss of approximately $869,000 related to the sale of the
Company's newspaper property in Haverhill, Massachusetts on June 1, 1998.
The effective income tax rate for the second quarter of 1999 was 44.9
percent compared with a rate of 42.5 percent in the prior year quarter. The
increase in the current year quarter effective tax reflects the impact from the
sale of the Hamilton newspaper property. Even though the sale resulted in a
pre-tax loss, the Company realized a tax gain on the transaction, due to the low
tax basis in the intangibles carried over from the acquisition of Hamilton in
1996.
17
18
Income from continuing operations in the 1999 second quarter increased
40.3 percent to $9.7 million, or $0.43 per diluted share, from $6.9 million, or
$0.30 per diluted share, in the prior year quarter. The increase reflected the
advertising revenue gains, lower newsprint expense and higher interest income in
the current year quarter. Earnings per share for 1999 and 1998 reflect losses
from the sales of the Hamilton (1999) and Haverhill (1998) newspaper properties
of $0.05 and $0.02 per share, respectively.
DISCONTINUED OPERATIONS--BROADCASTING
Results for the prior year quarter included income from discontinued
broadcasting operations of $15.8 million, or $0.70 per diluted share. The 1999
second quarter includes no discontinued broadcasting operations as a result of
the Merger on March 18, 1999. (See Note 3 to the consolidated financial
statements included in Item 1.)
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH 1998
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the first six months of 1999 increased 4.7
percent, to $193.1 million from $184.4 million in the prior year six-month
period. The gain primarily reflected higher advertising revenues.
Newspaper advertising revenues increased $7 million, or 5.8 percent, in
the first half of 1999. The current year increase included advertising revenue
gains of 11.8 percent at the PCN Group, 6.4 percent at the Star and 4 percent at
the Post-Dispatch. The increases at the PCN Group and the Star were primarily in
the retail and classified categories while the Post-Dispatch gain was driven by
classified and national advertising increases. At the PCN Group, volume
increases at most locations, along with new advertising from the Troy Daily News
(acquired in October 1998), accounted for a significant portion of the higher
advertising revenue. Similarly, at the Star, higher advertising revenue
reflected an increase of approximately 13 percent in full run advertising volume
(linage in inches). At the Post-Dispatch, rate increases in January 1999 and
higher national, classified and part-run advertising volume accounted for the
current year advertising revenue increase.
Circulation revenues decreased 0.9 percent to $43.6 million in the
first six months of 1999 from $44 million in the prior year six-month period.
The lower circulation revenues primarily reflected declines in paid circulation
at the Post-Dispatch which were partially offset by new circulation revenue from
the Troy Daily News, acquired in October 1998.
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, increased to $185.1 million for the
first half of 1999 from $152.4 million for the same period in the prior year.
The significant increase resulted from $26.7 million of one-time stock option
cash-out and bonus payments to publishing employees in connection with the
Merger. Excluding the one-time Merger costs, operating expenses increased 4
percent to $158.4 million in the first six months of 1999. The increase on a
comparable basis reflected higher overall personnel costs of $5.8 million and
higher depreciation and amortization expense of $1.2 million, due in part to the
acquisition of the Troy Daily News in October 1998. These expense increases were
partially offset by a decline in newsprint costs of $2.4 million, reflecting
lower newsprint prices in the current year.
For the first half of 1999, the Company reported an operating loss of
$4.3 million compared to operating income of $21.2 million in the prior year
six-month period. The current year loss resulted from the one-time Merger costs
of $26.7 million. Excluding these one-time costs, operating income would have
increased 5.5 percent to $22.4 million. The increase on a comparable basis
reflected the advertising revenue gains and lower newsprint expense in the
current year.
Interest income for the first six months of 1999 increased to $10
million from $2.2 million in the corresponding period of the prior year. The
increase reflected the inflow of approximately $429 million of net cash in
connection with the Spin-off and Merger on March 18, 1999 (See "Liquidity and
Capital Resources").
18
19
The Company incurred net realized losses of approximately $1 million in
the 1999 six-month period related to the sale of marketable debt securities in
the second quarter.
The effective income tax rate for the first half of 1999 was 59.6
percent compared with a rate of 42.8 percent in the prior year. The higher rate
in 1999 reflected the impact of the tax gain related to the sale of the Hamilton
newspaper and the Company's low pre-tax income resulting from the one-time
Merger costs. The Company expects its effective tax rate related to continuing
operations will be approximately 45 percent for the full year of 1999.
For the first six months of 1999, the Company reported income from
continuing operations of $1.2 million, or $0.05 per diluted share, compared to
income of $12.7 million, or $0.56 per diluted share, in the prior year. The
decline in current year income resulted from the one-time Merger costs of $26.7
million ($15.5 million after-tax). Excluding these one-time costs, income from
continuing operations would have increased 31.4 percent to $16.7 million, or
$0.74 per diluted share. The increase on a comparable basis reflected the
advertising revenue gains, lower newsprint expense and higher interest income in
the current year.
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 six months of
1999, the Company's average cost for newsprint was approximately $545 per metric
ton, compared to approximately $600 per metric ton in the first half of the
prior year. The Company's current cost of newsprint is in the range of
approximately $470 to $480 per metric ton. However, the Company has been
informed by all of its suppliers of a plan to increase the price of newsprint by
approximately $50 per metric ton on October 1, 1999. In the second half of 1998,
the Company's average cost of newsprint was approximately $560 per metric ton.
DISCONTINUED OPERATIONS--BROADCASTING
For the first half of 1999, the Company reported a loss from
discontinued operations of $21.4 million, or $0.95 per diluted share, compared
to income of $24 million, or $1.06 per diluted share, in the prior year. The
current year loss resulted from a combination of $25.3 million of one-time stock
option cash-out and bonus payments to broadcasting employees in connection with
the Merger and a loss on extinguishment of debt of approximately $18 million
(approximately $17.2 million prepayment penalty and $750,000 write-off of
deferred financing fees). In addition, the first half of 1999 included
broadcasting operations only through the date of the Merger on March 18, 1999
compared to a full period of normal broadcasting operations in the prior year.
(See Note 3 to the consolidated financial statements included in Item 1.)
LIQUIDITY AND CAPITAL RESOURCES
On March 17, 1999, Pulitzer borrowed $700 million from Chase Manhattan Bank
pursuant to a borrowing agreement (the "New Debt"). On March 18, 1999, Pulitzer
used a portion of the proceeds from the New Debt to prepay existing long-term
debt of approximately $172.7 million and pay a related prepayment penalty of
approximately $17.2 million. Pulitzer made additional payments related to the
Transactions including $47.1 million for stock option cash-outs and bonuses (net
of deferred compensation in the amount of $4.9 million), $31.3 million for
professional fees related to the Transactions (excluding $4.2 million paid prior
to March 18, 1999) and a $3 million preliminary working capital adjustment. The
cash balance of the proceeds of the New Debt was contributed to the Company in
the Spin-off while the New Debt was assumed by Hearst-Argyle at the time of the
Merger. As a result, the Company has no outstanding debt and cash and marketable
securities of approximately $579 million as of June 30, 1999. The Company
anticipates funding future newspaper acquisitions with a portion of the
available cash and marketable securities as potential investment opportunities
are identified.
As of June 30, 1999, commitments for capital expenditures were
approximately $7.6 million, relating to normal capital equipment replacements
(including Year 2000 projects in-process). Capital expenditures to
19
20
be made by the Company in fiscal 1999 are estimated to be approximately $10
million. In addition, as of June 30, 1999, the Company had a capital
contribution commitment of approximately $6.2 million related to a limited
partnership investment.
On July 16, 1999, the Company's Board of Directors approved the repurchase
of up to $50 million of its common stock in the open market.
At June 30, 1999, the Company had working capital of $610.3 million and a
current ratio of 17.8 to 1. This compares to working capital of $124.7 million
and a current ratio of 3.9 to 1 at December 31, 1998.
The Company generally expects to generate sufficient cash from operations to
cover ordinary capital expenditures, working capital requirements and dividend
payments.
SPIN-OFF GAIN
As a result of the Transactions, Pulitzer is required to recognize taxable
gain in an amount equal to the excess of the fair market value of the Company's
common and Class B common stock ("Pulitzer Inc. Stock") distributed to
Pulitzer's stockholders in the Spin-off over Pulitzer's adjusted tax basis in
such Pulitzer Inc. Stock immediately prior to the Spin-off (the "Spin-off
Gain"). In the Merger Agreement, the Company agreed to be liable and indemnify
Hearst-Argyle and its subsidiaries, on an after-tax basis, for any unpaid tax
liabilities of Pulitzer attributable to tax periods ending on or before the date
of the Merger (other than any tax arising as a result of the Merger not
qualifying as a tax-free reorganization by reason of any action or inaction on
the part of Hearst-Argyle after the Merger), including any tax liability of
Pulitzer with respect to the realization of any Spin-off Gain. The Company's
current preliminary estimate indicates that no Spin-off Gain will be realized by
Pulitzer. However, this preliminary estimate is subject to adjustment based upon
the final determination for tax purposes of Pulitzer's adjusted tax basis in the
Pulitzer Inc. Stock immediately prior to the Spin-off.
GROSS-UP TRANSACTION
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. 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
20
21
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 equal $84.11 at May 12,
1998.
"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 chosen by the two
previously selected 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 the Company with respect to the Merger and the
distribution of Pulitzer Inc. Stock in the Spin-off (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 per share 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 the
Company's management, the amount of an additional payment, if any, could be
material to the consolidated financial statements of the Company. The additional
payment, if any, to the 1986 Selling Stockholders would be recorded directly to
additional paid-in capital as the payment of this contingent amount would be a
direct cost of the disposal of Pulitzer's Broadcasting Business.
In the opinion of the Company's management, the amount of additional
payment, if any, is not likely to have a material adverse effect on the
Company's existing day-to-day newspaper publishing and related new media
properties. The amount of additional payment, if any, will reduce, however, the
amount of cash available to the Company to finance potential acquisition
opportunities in the future.
MERGER AGREEMENT INDEMNIFICATION
Pursuant to the Merger Agreement, the Company is obligated to 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 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 the Company or any
subsidiary of the Company; (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 that would have required replacement in the near term
irrespective of the Year 2000 issue. Consequently, Pulitzer and the Company
adopted a Year 2000 strategy that will replace the Company's significant
non-compliant systems with new compliant systems prior to December 31, 1999.
Pulitzer and the Company'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. The Company 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). As
21
22
of June 30, 1999, the Company has implemented substantially all of its Year 2000
system changes at the Star. The Company expects to have substantially all of the
Year 2000 system changes implemented by September 30, 1999 at the Post-Dispatch
and by October 31, 1999 at the PCN Group properties.
The Company'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 $11.5 million. At June 30, 1999, approximately $1.5 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 the Company'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 the Company's normal capital budgeting process and will be funded
through operating cash flows.
In addition to addressing internal system issues, the Company 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 the Company's business operations and require a remedy. In a
significant portion of the responses received to date, material third parties
have indicated that they are aware of the Year 2000 issue and have developed and
are currently implementing their respective plans to address Year 2000 issues.
Throughout 1999, the Company, where appropriate, will follow-up and make more
detailed inquiries of these material third parties as to the status of their
respective Year 2000 plans.
The Company believes that its plan for achieving Year 2000 compliance will
be fully implemented by October 31, 1999. However, as it is not possible to
anticipate all future outcomes, especially where third parties are involved, the
Company is in the process of developing Year 2000 contingency plans for mission
critical business and production systems.
In the event that either the Company or the Company's suppliers and
customers do not successfully implement their Year 2000 plans on a timely basis,
the Company could experience business losses. In the most extreme case,
publication of the Company's newspapers and on-line products, as well as the
sale of advertising, could be interrupted and/or delayed. The extent of losses
under such a scenario have not been estimated by the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
- --------------------------------------------------------------------------------
The primary raw material used in the Company's newspaper publishing
operations is newsprint, representing approximately 20 percent of newspaper
operating expenses. For the full year of 1998, the Company consumed
approximately 100,000 metric tons of newsprint at an average cost of
approximately $577 per metric ton. Historically, newsprint has been subject to
significant price fluctuations from year to year, unrelated in many cases to
general economic conditions. In the last five years, the Company's average cost
per ton of newsprint has varied from a low of $452 per metric ton in 1994 to a
high of $675 per metric ton in 1995. For the first half of 1999, the Company's
average cost of newsprint was approximately $545 per metric ton. The Company
attempts to obtain the best price available by combining newsprint purchases for
its different newspaper locations but does not enter into derivative contracts
in an attempt to reduce the impact of year to year price fluctuations on its
consolidated newsprint expense.
As a result of the Transactions, the Company has no outstanding debt
and a combined balance of cash and marketable securities of approximately $579
million as of June 30, 1999. Over time, the Company anticipates funding
potential newspaper acquisitions with a portion of the cash and marketable
securities. In the interim, the Company's investments in marketable securities
primarily include a mixture of short to mid-term government and corporate debt
obligations. These investments expose the Company to market risks that have
caused and may in the future cause the value of such investments to be different
than the original cost of such investments at the time of purchase.
22
23
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
- --------------------------------------------------------------------------------
(a) The Annual Meeting of Stockholders was held on May 12, 1999.
(b) The following directors continued their term of office after
the Annual Meeting of Stockholders:
William Bush
Michael E. Pulitzer
Ronald H. Ridgway
Ken J. Elkins
Alice B. Hayes
David E. Moore
(c) The following nominees for election as director received the
votes indicated:
For Withheld Abstain
--- -------- -------
Emily Rauh Pulitzer 150,930,297 167,527 0
James M. Snowden, Jr. 150,931,862 165,862 0
Robert C. Woodworth 150,931,254 166,470 0
The proposal to adopt the Pulitzer Inc. 1999 Key Employee's
Restricted Stock Purchase Plan was approved by the vote
indicated:
For: 147,165,630
Against: 1,315,931
Broker non-votes: 2,606,406
Abstain: 10,090
The proposal to adopt the Pulitzer Inc. 1999 Stock Option Plan
was approved by the vote indicated:
For: 146,046,119
Against: 2,434,063
Broker non-votes: 2,606,406
Abstain: 11,469
The proposal to adopt the Pulitzer Inc. 1999 Employee Stock
Purchase Plan was approved by the vote indicated:
For: 148,397,418
Against: 88,640
Broker non-votes: 2,606,406
Abstain: 5,593
The selection of Deloitte & Touche as the Company's
independent auditors was approved by the vote indicated:
For: 151,082,077
Against: 4,992
Broker non-votes: 333
Abstain: 10,655
23
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) The following exhibits are filed as part of this report:
27-1 Financial Data Schedule
27-2 Restated Financial Data Schedule
(b) Reports on Form 8-K. The Company did not file any reports on Form
8-K during the quarter for which this report was filed.
All other items of this report are not applicable for the current quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PULITZER INC.
(Registrant)
Date: August 11, 1999 /s/ Ronald H. Ridgway
---------------------------------------
(Ronald H. Ridgway)
Director; Senior Vice-President-Finance
(on behalf of the Registrant and
as principal financial officer)
24
25
EXHIBIT INDEX
EXHIBIT NUMBER TITLE OR DESCRIPTION
27-1 Financial Data Schedule
27-2 Restated Financial Data Schedule
25