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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 SEPTEMBER 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
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COMMISSION FILE NUMBER 1-14541
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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 10/31/99
------------------------ -------------------------------
COMMON STOCK 8,177,472
CLASS B COMMON STOCK 14,332,444
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(UNAUDITED -- IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- --------- ---------- ----------
OPERATING REVENUES - NET:
Advertising $ 64,272 $ 58,438 $ 191,053 $ 178,245
Circulation 21,186 22,172 64,791 66,194
Other 10,849 10,153 33,514 30,768
--------- --------- --------- ---------
Total operating revenues 96,307 90,763 289,358 275,207
--------- --------- --------- ---------
OPERATING EXPENSES:
Operations 36,535 37,141 111,295 111,667
Selling, general and administrative 37,061 33,595 108,960 101,991
General corporate expense 1,882 1,319 5,618 3,959
Stock option cash-outs and bonuses (Note 8) 26,685
St. Louis Agency adjustment 6,110 5,063 18,381 15,926
Depreciation and amortization 3,950 3,415 11,979 10,238
--------- --------- --------- ---------
Total operating expenses 85,538 80,533 282,918 243,781
--------- --------- --------- ---------
Operating income 10,769 10,230 6,440 31,426
Interest income 7,062 1,385 17,015 3,541
Loss from sale of marketable securities (563) (1,606)
Capital gains on miscellaneous investments 1,742 173 1,853 544
Net other expense (582) (300) (2,366) (1,847)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 18,428 11,488 21,336 33,664
PROVISION FOR INCOME TAXES 8,275 4,891 10,007 14,388
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 10,153 6,597 11,329 19,276
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX 8,810 (21,449) 32,797
--------- --------- --------- ---------
NET INCOME (LOSS) $ 10,153 $ 15,407 $ (10,120) $ 52,073
========= ========= ========= =========
BASIC EARNINGS PER SHARE OF STOCK:
Income from continuing operations $ 0.45 $ 0.30 $ 0.50 $ 0.86
Income (loss) from discontinued operations 0.39 (0.95) 1.47
--------- --------- --------- ---------
Earnings (loss) per share $ 0.45 $ 0.69 $ (0.45) $ 2.33
========= ========= ========= =========
Weighted average number of shares outstanding 22,638 22,449 22,630 22,343
========= ========= ========= =========
DILUTED EARNINGS PER SHARE OF STOCK:
Income from continuing operations $ 0.45 $ 0.29 $ 0.50 $ 0.85
Income (loss) from discontinued operations 0.39 (0.95) 1.44
--------- --------- --------- ---------
Earnings (loss) per share $ 0.45 $ 0.68 $ (0.45) $ 2.29
========= ========= ========= =========
Weighted average number of shares outstanding 22,675 22,806 22,648 22,726
========= ========= ========= =========
See notes to consolidated financial statements.
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PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
Third Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
---------- ----------- ---------- ----------
NET INCOME (LOSS) $ 10,153 $ 15,407 $ (10,120) $ 52,073
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gains (losses) on marketable
securities arising during the period (Note 4) 1,102 (2,434)
Reclassification adjustment 310 885
---------- ----------- ---------- ----------
Net gain (loss) recognized in other comprehensive
income 1,412 (1,549)
---------- ----------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 11,565 $ 15,407 $ (11,669) $ 52,073
========== =========== ========== ==========
See notes to consolidated financial statements.
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PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS)
September 30, December 31,
1999 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 99,577 $ 110,171
Marketable securities 474,151
Trade accounts receivable (less allowance for doubtful
accounts of $2,293 and $1,722) 42,094 42,658
Inventory 4,784 2,587
Income taxes receivable 24,067
Prepaid expenses and other 3,812 12,564
---------- ----------
Total current assets 648,485 167,980
---------- ----------
PROPERTIES:
Land 5,480 5,536
Buildings 44,641 43,511
Machinery and equipment 106,759 98,848
Construction in progress 6,692 8,442
---------- ----------
Total 163,572 156,337
Less accumulated depreciation 78,784 72,186
---------- ----------
Properties - net 84,788 84,151
---------- ----------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization 188,192 197,154
Receivable from The Herald Company 33,175 38,683
Net assets of Broadcasting Business (Note 3) 35,717
Other 28,608 22,708
---------- ----------
Total intangible and other assets 249,975 294,262
---------- ----------
TOTAL $ 983,248 $ 546,393
========== ==========
(Continued)
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PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, December 31,
1999 1998
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 11,086 $ 12,253
Salaries, wages and commissions 10,939 10,911
Income taxes payable 2,832
Acquisition payable 9,707 9,707
Dividends payable 3,395 3,374
Other 3,288 4,228
--------------- ---------------
Total current liabilities 38,415 43,305
--------------- ---------------
PENSION OBLIGATIONS 28,730 23,625
--------------- ---------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 88,649 88,397
--------------- ---------------
OTHER LONG-TERM LIABILITIES 9,580 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 - 8,325,968 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 - 14,339,184
in 1999 and 27,019,880 in 1998 143 270
Additional paid-in capital 425,130 151,574
Retained earnings 402,024 422,329
Accumulated other comprehensive loss (2,464) (915)
---------------- ---------------
Total 824,916 573,330
Treasury stock - at cost; 160,000 and 25,519 shares of common
stock in 1999 and 1998, respectively, and 11,700,850 shares of
Class B common stock in 1998 (7,042) (187,973)
--------------- ---------------
Total stockholders' equity 817,874 385,357
--------------- ---------------
TOTAL $ 983,248 $ 546,393
=============== ===============
(Concluded)
See notes to consolidated financial statements.
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PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Nine Months Ended
September 30,
-------------------------------
1999 1998
------------- --------------
CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 11,329 $ 19,276
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 6,482 5,839
Amortization 5,497 4,399
Deferred income taxes (610) 124
Loss on sale of assets 2,694
Changes in assets and liabilities (net of the effects of the
purchase and sale of properties) which provided (used) cash:
Trade accounts receivable 564 (1,891)
Inventory (2,197) 2,838
Other assets 18,404 3,162
Trade accounts payable and other liabilities 7,149 (2,488)
Income taxes (26,899) (2,189)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 22,413 29,070
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,329) (12,680)
Purchase of publishing property, net of cash acquired (2,051)
Sale of publishing properties 3,300 2,590
Purchases of marketable securities (844,215)
Sales of marketable securities 364,706
Investment in joint ventures and limited partnerships (7,699) (3,788)
Decrease in notes receivable 61 111
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NET CASH USED IN INVESTING ACTIVITIES (492,176) (15,818)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (10,164) (10,029)
Proceeds from exercise of stock options 2,280 5,521
Proceeds from employee stock purchase plan 1,017
Purchase of treasury stock (7,152) (41)
------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (15,036) (3,532)
------------- --------------
CASH (USED IN) PROVIDED BY CONTINUING OPERATIONS (484,799) 9,720
------------- --------------
DISCONTINUED OPERATIONS
Operating activities (21,820) 55,211
Investing activities:
Capital expenditures (1,488) (6,684)
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) (12,705)
Payment of Spin-off and Merger Transaction costs (31,772)
Payment of estimated working capital adjustment related to Merger (3,010)
------------- --------------
CASH PROVIDED BY DISCONTINUED OPERATIONS 474,205 34,822
-------------- --------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (10,594) 44,542
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 110,171 62,749
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 99,577 $ 107,291 (Continued)
============= ==============
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PULITZER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Nine Months Ended
September 30,
------------------------------
1999 1998
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest paid $ 8,429 $ 13,844
Interest received (11,163) (3,410)
Income taxes 25,255 38,269
Income tax refunds (1,200) (373)
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 3,371
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.
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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 operations. 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 September 30, 1999, results of operations for the
three-month and nine-month periods ended September 30, 1999 and 1998 and cash
flows for the nine-month periods ended September 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 third fiscal
quarter end on the Sunday coincident with or prior to December 31 and September
30, respectively. For ease of presentation, the Company has used December 31 as
the year end and September 30 as the third 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:
Third Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
(In thousands) (In thousands)
Weighted average shares outstanding (Basic EPS) 22,638 22,449 22,630 22,343
Stock option equivalents 37 357 18 383
----------- ----------- ----------- ----------
Weighted average shares outstanding and
stock option equivalents (Diluted EPS) 22,675 22,806 22,648 22,726
=========== =========== =========== ==========
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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 businesses 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.
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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
================ =================
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 fourth quarter of 1999.
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11
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. In the fourth quarter of 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 through the first three quarters of 1999 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 operations as "Income (Loss) from Discontinued Operations, Net of
Tax" and is summarized as follows:
Third Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999(a) 1998
----------- ----------- ----------- -----------
(In thousands) (In thousands)
Operating revenues $ -- $ 53,908 $ 45,622 $ 173,681
----------- ----------- ----------- -----------
Operating expenses:
Operations 18,268 15,951 54,313
Selling, general and administrative 12,383 11,616 38,770
Stock option cash-outs and bonuses 25,305
Depreciation and amortization 5,461 3,881 16,512
----------- ----------- ----------- -----------
Total operating expenses 36,112 56,753 109,595
----------- ----------- ----------- -----------
Operating income (loss) 17,796 (11,131) 64,086
Interest expense 3,330 3,128 10,255
Loss on extinguishment of debt (b) 17,955
----------- ----------- ----------- -----------
Income (loss) before income taxes 14,466 (32,214) 53,831
Income tax provision (benefit) 5,656 (10,765) 21,034
----------- ----------- ----------- -----------
Net income (loss) $ -- $ 8,810 $ (21,449) $ 32,797
=========== =========== =========== ===========
(a) Broadcasting results for 1999 reflect operations only through March 18,
1999, the date of the Merger, and include approximately $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 nine
months of 1999.
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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 September 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 $ 309,591 $ 300 $ (1,769) $ 308,122
Municipal securities 11,505 (254) 11,251
Corporate securities 77,393 79 (679) 76,793
Mortgage-backed securities 12,580 18 (65) 12,533
Other debt securities 65,893 43 (484) 65,452
----------- ----------- ------------- ------------
Total investments $ 476,962 $ 440 $ (3,251) $ 474,151
=========== =========== ============= ============
For the third quarter of 1999, proceeds from sales of marketable securities were
$128,960,000 resulting in gross realized gains and losses of $400,000 and
$963,000, respectively. In addition, a net unrealized gain of $1,412,000, after
tax, is included in other comprehensive income for the third quarter of 1999.
The maturity schedule of investments in available-for-sale securities at
September 30, 1999 was as follows:
Amortized Fair
Cost Value
------------ -----------
(In thousands)
Due in one year or less $ 110,096 $ 109,973
Due after one year through five years 281,197 279,270
Due after five years through ten years 23,124 22,659
Due after ten years 49,965 49,716
Mortgage-backed securities 12,580 12,533
----------- -----------
Total investments $ 476,962 $ 474,151
=========== ===========
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
September 30, 1999.
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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
$36 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 nine 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 Loss 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 exercise 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 loss:
Net loss (10,120) (10,125)
Unrealized loss on marketable
securities, net of tax (1,549) (1,549)
---------
Comprehensive loss (11,669)
---------
Cash dividends declared
$0.45 per share of common
and Class B common (10,185) (10,185)
Purchase of treasury stock (7,152) (7,152)
Cancellation of treasury stock (117) (187,966) 188,083
Divestiture of Broadcasting
Business, net of Transaction
costs and Working Capital
Adjustment 455,686 455,686
------ ------- ---------- -------- -------- --------- ---------
BALANCES AT SEPTEMBER 30, 1999 $ 83 $ 143 $ 425,130 $402,024 $ (2,464) $ (7,042) 817,874
====== ======= ========== ======== ======== ========= =========
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
third quarter of 1999, a dividend of $0.15 per share was declared, payable on
November 1, 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. In the
third quarter of 1998, a dividend of $0.15 per share was declared, payable on
November 2, 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. In the third quarter of
1999, 160,000 shares were repurchased for $7,042,000.
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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"), the Pulitzer Inc. Key
Employees' Restricted Stock Purchase Plan (the "Restricted Plan") and the
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.
Options to purchase approximately 525,000 shares of common stock were granted to
employees under the Option Plan during the second and third quarters of 1999.
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 feature.
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.
As of the end of the third quarter of 1999, approximately 33,000 shares of
common stock had been 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 then 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 either authorized and unissued or
held by the Company in its treasury. 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 continuing operations
and approximately $25.3 million related to broadcasting employees recorded in
discontinued operations.
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9. COMMITMENTS AND CONTINGENCIES
At September 30, 1999, the Company and its subsidiaries had construction and
equipment commitments of approximately $5,813,000.
The Company is an investor in one limited partnership requiring future capital
contributions. As of September 30, 1999, the Company's unfunded capital
contribution commitment related to this investment was approximately $4,763,000.
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.
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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 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:
Third Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1999 1998 1999 1998
(In thousands) (In thousands)
St. Louis Post-Dispatch $ 62,574 $ 59,539 $187,031 $180,908
Star Publishing Company 13,526 13,069 42,046 40,331
Pulitzer Community Newspaper Group 19,699 17,809 58,731 52,973
Other publishing revenue 508 346 1,550 995
-------- -------- -------- --------
Total publishing revenue $ 96,307 $ 90,763 $289,358 $275,207
======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- - --------------------------------------------------------------------------------
Statements in this Quarterly Report on Form 10-Q concerning Pulitzer Inc.'s (the
"Company") 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 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.
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.
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RECENT EVENTS
On October 5,1999, the Company entered into an asset purchase agreement to
acquire The Pantagraph, a daily and Sunday newspaper that serves the central
Illinois cities of Bloomington and Normal, and a group of seven community
newspapers known as the Illinois Valley Press, for $180 million from The
Chronicle Publishing Company of San Francisco. The transaction is expected to
close in January 2000 and is subject to customary approvals, including review
under the Hart-Scott-Rodino Act. The Company will pay for the acquisition from
its reserves of cash and marketable securities.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH 1998
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the third quarter of 1999 increased 6.1 percent,
to $96.3 million from $90.8 million in the third quarter of 1998. The gain
primarily reflected higher advertising revenues and the contribution from the
Troy Daily News, acquired in October 1998. In addition to the acquisition of the
Troy Daily News in 1998, the Company sold its daily newspapers in Hamilton,
Montana and Haverhill, Massachusetts in May 1999 and June 1998, respectively.
Excluding the results of these properties acquired and sold from both 1999 and
1998, third quarter revenues increased 4.7 percent.
Newspaper advertising revenues increased $5.8 million, or 10 percent,
in the third quarter of 1999. The current year increase included advertising
revenue gains of 11.9 percent at the Pulitzer Community Newspaper Group ("PCN
Group"), 10.8 percent at the St. Louis Post-Dispatch ("Post-Dispatch") and 3.7
percent at The Arizona Daily Star ("Star"). The gains primarily reflected growth
in classified advertising, and higher national advertising revenue at the
Post-Dispatch. At the PCN Group, volume increases at most locations, along with
new advertising from the Troy Daily News, accounted for a significant portion of
the higher advertising revenue. Similarly, at the Star, higher third quarter
advertising revenue reflected an increase of approximately 11.3 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. The classified
volume increase at the Post-Dispatch reflected third quarter rate adjustments to
promote greater frequency of insertions. Excluding the results of properties
acquired and sold from both 1999 and 1998, third-quarter advertising revenues
increased 8.6 percent.
Circulation revenues decreased 4.4 percent to $21.2 million in the
third quarter of 1999 from $22.2 million in the prior year quarter. The lower
circulation revenues primarily reflected the impact of the demand in the third
quarter of 1998 for issues of the Post-Dispatch featuring Mark McGwire's pursuit
of the home run record.
Other revenues increased $696,000, or 6.9 percent, in the third 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 5.2 percent to $79.4
million for the 1999 third quarter from $75.5 million for the same period in the
prior year. The current year increase reflected higher overall personnel costs
of $3.5 million, increased promotion expense of $741,000 and higher depreciation
and amortization expense of $535,000, 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 $1.9 million reflecting lower newsprint prices in
the current year quarter. Excluding the results of properties acquired and sold
from both 1999 and 1998, as well as the St. Louis Agency adjustment,
third-quarter expenses increased 3.4 percent.
Operating income for the third quarter of 1999 increased 5.3 percent to
$10.8 million from $10.2 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 third quarter of 1999 increased to $7.1 million
from $1.4 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 $563,000
in the 1999 third quarter related to the sale of marketable debt securities.
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Capital gains on miscellaneous investments increased to $1.7 million
from $173,000 in the prior year quarter, primarily reflecting the favorable
performance of two limited partnership investments.
The effective income tax rate for the third quarter of 1999 was 44.9
percent compared with a rate of 42.6 percent in the prior year quarter. The
higher effective tax rate in 1999 resulted from the sale of the Company's
newspaper property in Hamilton, Montana on May 21, 1999. The sale has a tax
effect of approximately $800,000 resulting from a tax gain on the transaction,
which is recognized by an increased effective tax rate in the second and third
quarters of 1999.
Income from continuing operations in the 1999 third quarter increased
53.9 percent to $10.2 million, or $0.45 per diluted share, from $6.6 million, or
$0.29 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.
DISCONTINUED OPERATIONS--BROADCASTING
Results for the prior year quarter included income from discontinued
broadcasting operations of $8.8 million, or $0.39 per diluted share. The 1999
third 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.)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH 1998
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the first nine months of 1999 increased 5.1
percent, to $289.4 million from $275.2 million in the prior year nine-month
period. The gain primarily reflected higher advertising revenues and the
contribution from the Troy Daily News, acquired in October 1998. In addition to
the acquisition of the Troy Daily News in 1998, the Company sold its daily
newspapers in Hamilton, Montana and Haverhill, Massachusetts in May 1999 and
June 1998, respectively. Excluding the results of these properties acquired and
sold from both 1999 and 1998, revenues for the first nine months of 1999
increased 3.9 percent.
Newspaper advertising revenues increased $12.8 million, or 7.2 percent,
in the first nine months of 1999. The current year increase included advertising
revenue gains of 11.8 percent at the PCN Group, 6.2 percent at the Post-Dispatch
and 5.6 percent at the Star. The gains primarily reflected growth in classified
advertising, and higher national advertising revenue at the Post-Dispatch. At
the PCN Group, volume increases at most locations, along with new advertising
from the Troy Daily News, accounted for a significant portion of the higher
advertising revenue. Similarly, at the Star, higher advertising revenue
reflected an increase of approximately 12.4 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. The classified volume increase
at the Post-Dispatch partially reflected third quarter rate adjustments to
promote greater frequency of insertions. Excluding the results of properties
acquired and sold from both 1999 and 1998, advertising revenues for the first
nine months of 1999 increased 6.1 percent.
Circulation revenues decreased 2.1 percent to $64.8 million in the
first nine months of 1999 from $66.2 million in the prior year nine-month
period. The lower circulation revenues primarily reflected declines in paid
circulation at the Post-Dispatch which were partially offset by new circulation
in revenue from the Troy Daily News. The decline in circulation revenues at the
Post-Dispatch was in part related to the significantly higher revenues in the
third quarter of 1998 reflecting the positive impact on circulation related to
Mark McGuire's pursuit of the home run record.
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, increased to $264.5 million for the
first nine months of 1999 from $227.9 million for the same period in the prior
year. The significant increase resulted from $26.7 million of stock option
cash-out and bonus payments to publishing employees in connection with the
Merger. Excluding these Merger costs, operating expenses increased 4.4 percent
to $237.9 million in the first nine months of 1999. The increase on a comparable
basis reflected higher overall personnel costs of $9.3 million and higher
depreciation and amortization expense of $1.7 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 $4.2 million,
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reflecting lower newsprint prices in the current year. Excluding the results of
properties acquired and sold from both 1999 and 1998, as well as the St. Louis
Agency adjustment and Merger costs, expenses for the first nine months of 1999
increased 2.9 percent.
For the first nine months of 1999, the Company reported operating
income of $6.4 million compared to operating income of $31.4 million in the
prior year nine-month period. The decrease in current year income resulted from
the Merger costs of $26.7 million. Excluding these Merger costs, operating
income would have increased 5.4 percent to $33.1 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 nine months of 1999 increased to $17
million from $3.5 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").
The Company incurred net realized losses of approximately $1.6 million
in the 1999 nine-month period related to the sale of marketable debt securities.
Capital gains on miscellaneous investments increased to $1.9 million in
the first nine months of 1999 from $544,000 in the prior year nine-month period,
primarily reflecting the favorable performance of two limited partnership
investments.
Net other expense for the first nine months of 1999 was $2.4 million
compared with $1.8 million in the prior year. The 1999 expense 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 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 first nine months of 1999 was
46.9 percent compared with a rate of 42.7 percent in the prior year. The higher
rate in 1999 primarily reflected the impact of the Hamilton newspaper sale. 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 nine months of 1999, the Company reported income from
continuing operations of $11.3 million, or $0.50 per diluted share, compared to
income of $19.3 million, or $0.85 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 39.1 percent to $26.8 million, or
$1.18 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. Earnings per share for 1999 and 1998 reflect losses from the
sales of the Hamilton (1999) and Haverhill (1998) newspaper properties of $0.08
and $0.02 per share, respectively.
Fluctuations in the price of newsprint significantly impact the
Company's operating results, where newsprint expense accounts for approximately
20 percent of total operating costs. For the first nine months of 1999, the
Company's average cost for newsprint was approximately $530 per metric ton,
compared to approximately $590 per metric ton in the first nine months of the
prior year. The Company's current cost of newsprint is in the range of
approximately $495 to $520 per metric ton. In the fourth quarter of 1998, the
Company's average cost of newsprint was approximately $540 per metric ton.
DISCONTINUED OPERATIONS--BROADCASTING
For the first nine months of 1999, the Company reported a loss from
discontinued operations of $21.4 million, or $0.95 per diluted share, compared
to income of $32.8 million, or $1.44 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 nine months of 1999 included
broadcasting operations only through the date of the Merger on March 18, 1999
compared to a full period
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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 $574 million as of September 30, 1999. The Company
anticipates funding its pending $180 million acquisition of The Pantagraph, as
well as future newspaper acquisitions, with a portion of the available cash and
marketable securities as potential investment opportunities are identified.
As of September 30, 1999, commitments for capital expenditures were
approximately $5.8 million, relating to normal capital equipment replacements
(including Year 2000 projects in-process). Capital expenditures to be made by
the Company in fiscal 1999 are estimated to be approximately $10 million. In
addition, as of September 30, 1999, the Company had a capital contribution
commitment of approximately $4.8 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. In the third
quarter of 1999, 160,000 shares were repurchased for approximately $7 million.
At September 30, 1999, the Company had working capital of $610.1 million and
a current ratio of 16.9 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
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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. 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
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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 that 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 of September 30, 1999, the Company has implemented
substantially all of its Year 2000 system changes at the Star and the
Post-Dispatch. The Company expects to have substantially all of the Year 2000
system changes implemented by November 15, 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 September 30, 1999, approximately $730,000 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.
For the remainder of 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 substantially implemented by November 15, 1999. However, as it is not
possible to anticipate all future outcomes, especially where third parties are
involved, the Company will continue to develop Year 2000 contingency plans for
mission critical business and production systems for the remainder of 1999.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
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The primary raw material used in the Company's operations is newsprint,
representing approximately 20 percent of 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 nine
months of 1999, the Company's average cost of newsprint was approximately $530
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 $574
million as of September 30, 1999. Over time, the Company anticipates funding
potential newspaper acquisitions, including its pending $180 million acquisition
of The Pantagraph, 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 lower than the original cost of
such investments at the time of purchase.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(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: November 10, 1999 /s/ Ronald H. Ridgway
------------------------------------------
(Ronald H. Ridgway)
Director; Senior Vice-President-Finance
(on behalf of the Registrant and
as principal financial officer)
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EXHIBIT INDEX
EXHIBIT NUMBER TITLE OR DESCRIPTION
27-1 Financial Data Schedule
27-2 Restated Financial Data Schedule
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