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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1999
Commission file number 1-8572
TRIBUNE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-1880355
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
435 North Michigan Avenue, Chicago, Illinois 60611
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (312) 222-9100
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 / /
At August 6, 1999 there were 118,513,436 shares outstanding of the
Company's Common Stock (without par value).
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended First Half Ended
------------------------------- -------------------------------
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenues......................................... $ 836,911 $785,584 $1,556,770 $1,458,277
Operating Expenses.........................................
Cost of sales (exclusive of items shown below)............. 375,297 361,182 712,733 684,313
Selling, general and administrative........................ 190,785 173,325 365,007 331,566
Depreciation and amortization of
intangible assets..................................... 55,984 48,414 108,020 95,683
---------- -------- ---------- ----------
Total operating expenses................................... 622,066 582,921 1,185,760 1,111,562
---------- -------- ---------- ----------
Operating Profit........................................... 214,845 202,663 371,010 346,715
Net loss on equity investments............................. (2,891) (7,540) (17,103) (21,865)
Interest income............................................ 13,083 1,339 14,584 2,780
Interest expense........................................... (30,571) (20,890) (53,758) (42,030)
Gain on reclassification of investments.................... 1,095,976 - 1,095,976 -
Gain on change in fair value of derivatives
and related investments............................... 171,433 - 171,433 -
Gain on sales of subsidiaries and investments,
net of write-downs.................................... - 85,800 444,927 93,099
---------- -------- ---------- ----------
Income Before Income Taxes................................. 1,461,875 261,372 2,027,069 378,699
Income taxes............................................... (573,827) (113,724) (795,759) (160,974)
---------- -------- ---------- ----------
Income Before Cumulative Effect of
Change in Accounting Principle........................ 888,048 147,648 1,231,310 217,725
Cumulative effect of change in accounting
principle, net of tax (See Note 5).................... (3,060) - (3,060) -
---------- -------- ---------- ----------
Net Income................................................. 884,988 147,648 1,228,250 217,725
Preferred dividends, net of tax............................ (4,660) (4,696) (9,319) (9,391)
---------- -------- ---------- ----------
Net Income Attributable to Common Shares................... $ 880,328 $142,952 $1,218,931 $ 208,334
========== ======== ========== ==========
Earnings Per Share (See Note 2):
Basic:
Before cumulative effect of change in
accounting principle................................ $7.46 $1.17 $10.30 $1.70
Cumulative effect of accounting change, net........... (.03) - (.03) -
----- ----- ------ -----
Net income............................................ $7.43 $1.17 $10.27 $1.70
===== ===== ====== =====
Diluted:
Before cumulative effect of change in
accounting principle................................ $6.77 $1.07 $ 9.37 $1.57
Cumulative effect of accounting change, net........... (.02) - (.02) -
----- ----- ------ -----
Net income............................................ $6.75 $1.07 $ 9.35 $1.57
===== ===== ====== =====
Dividends per common share................................. $ .18 $ .17 $ .36 $ .34
===== ===== ====== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
June 27, 1999 December 27, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents...................................................... $1,092,080 $ 12,433
Investments.................................................................... 102,750 -
Accounts receivable, net....................................................... 570,077 555,229
Inventories.................................................................... 108,442 99,005
Broadcast rights............................................................... 188,884 232,394
Prepaid expenses and other..................................................... 60,319 46,068
---------- ----------
Total current assets........................................................... 2,122,552 945,129
Property, plant and equipment.................................................. 1,728,835 1,664,526
Accumulated depreciation....................................................... (1,026,441) (987,791)
---------- ----------
Net properties................................................................. 702,394 676,735
Broadcast rights............................................................... 143,081 207,757
Intangible assets, net......................................................... 3,044,845 2,703,993
America Online stock related to PHONES debt.................................... 822,000 546,500
Other investments.............................................................. 799,328 703,479
Other assets................................................................... 177,102 151,977
---------- ----------
Total assets................................................................... $7,811,302 $5,935,570
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Long-term debt due within one year............................................. $ 29,722 $ 29,905
Contracts payable for broadcast rights......................................... 217,518 260,264
Deferred income ............................................................... 84,305 55,097
Income taxes................................................................... 47,934 59,607
Accounts payable, accrued expenses and other current liabilities............... 411,039 423,257
---------- ----------
Total current liabilities...................................................... 790,518 828,130
PHONES debt related to America Online stock.................................... 907,500 -
Other long-term debt........................................................... 1,471,611 1,616,256
Deferred income taxes.......................................................... 1,119,567 701,778
Contracts payable for broadcast rights......................................... 199,399 268,099
Compensation and other obligations............................................. 184,733 164,690
---------- ----------
Total liabilities.............................................................. 4,673,328 3,578,953
Shareholders' equity
Series B convertible preferred stock........................................... 281,093 293,203
Common stock and additional paid-in capital.................................... 174,905 210,492
Retained earnings.............................................................. 3,995,396 2,819,474
Treasury stock (at cost)....................................................... (1,430,641) (1,414,661)
Treasury stock held by Tribune Stock Compensation Fund (at cost)............... (78,787) (26,602)
Unearned compensation related to ESOP.......................................... (156,495) (156,495)
Accumulated other comprehensive income......................................... 352,503 631,206
---------- ----------
Total shareholders' equity..................................................... 3,137,974 2,356,617
---------- ----------
Total liabilities and shareholders' equity..................................... $7,811,302 $5,935,570
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
TRIBUNE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
First Half Ended
-------------------------------
June 27, 1999 June 28, 1998
------------- -------------
<S> <C> <C>
Operations
Net income.................................................................... $1,228,250 $217,725
Adjustments to reconcile net income to net cash
provided by operations:
Gain on reclassification of investments................................... (1,095,976) -
Gain on change in fair value of derivatives
and related investments................................................ (171,433) -
Gain on sales of subsidiaries and investments, net of write-downs......... (444,927) (93,099)
Cumulative effect of accounting change, net............................... 3,060 -
Depreciation and amortization of intangible assets........................ 108,020 95,683
Deferred income taxes..................................................... 609,947 19,943
Other, net................................................................ (58,051) 30,024
---------- --------
Net cash provided by operations............................................... 178,890 270,276
---------- --------
Investments
Capital expenditures.......................................................... (58,046) (55,502)
Acquisitions and investments.................................................. (104,297) (110,226)
Proceeds from sales of investments............................................ 95,445 14,738
Net (increase) decrease in advances to investee............................... 52,706 (10,547)
Other, net.................................................................... 2,106 (6,681)
---------- --------
Net cash used for investments................................................. (12,086) (168,218)
---------- --------
Financing
Net proceeds from issuance of PHONES debt..................................... 1,230,880 -
Proceeds from issuance of other long-term debt................................ - 34,871
Repayments of long-term debt.................................................. (151,265) (3,183)
Sales of common stock to employees, net....................................... 36,676 22,224
Purchases of treasury stock................................................... (37,014) (131,751)
Purchases of treasury stock by Tribune Stock Compensation Fund................ (114,106) -
Dividends..................................................................... (52,328) (50,891)
---------- --------
Net cash provided by (used for) financing..................................... 912,843 (128,730)
---------- --------
Net increase (decrease) in cash and cash equivalents.......................... 1,079,647 (26,672)
Cash and cash equivalents at the beginning of year............................ 12,433 66,618
---------- --------
Cash and cash equivalents at the end of quarter............................... $1,092,080 $ 39,946
========== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
TRIBUNE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1:
- ------
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of Tribune Company and its subsidiaries (the
"Company" or "Tribune") as of June 27, 1999 and the results of their operations
for the quarters and first halves ended June 27, 1999 and June 28, 1998 and cash
flows for the first halves ended June 27, 1999 and June 28, 1998. All
adjustments reflected in the accompanying unaudited condensed consolidated
financial statements are of a normal recurring nature. Results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Certain prior year amounts have been reclassified to conform with
the 1999 presentation. The condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and the related
notes included by reference in the Company's Annual Report on Form 10-K.
Note 2:
- ------
The computations of basic and diluted earnings per share were as follows:
<TABLE>
<CAPTION>
Second Quarter Ended First Half Ended
------------------------------ ------------------------------
(In thousands, except per share data) June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BASIC
Net income.......................................... $884,988 $147,648 $1,228,250 $217,725
Preferred dividends, net of tax..................... (4,660) (4,696) (9,319) (9,391)
-------- -------- ---------- --------
Net income attributable to common shares............ $880,328 $142,952 $1,218,931 $208,334
-------- -------- ---------- --------
Weighted average common shares
outstanding....................................... 118,441 122,139 118,699 122,356
-------- -------- ---------- --------
Basic earnings per share............................ $ 7.43 $ 1.17 $ 10.27 $ 1.70
======== ======== ========== ========
DILUTED
Net income.......................................... $884,988 $147,648 $1,228,250 $217,725
Additional ESOP contribution required
assuming all preferred shares were
converted, net of tax............................. (3,063) (3,188) (6,125) (6,377)
-------- -------- ---------- --------
Adjusted net income................................. $881,925 $144,460 $1,222,125 $211,348
-------- -------- ---------- --------
Weighted average common shares
outstanding....................................... 118,441 122,139 118,699 122,356
Assumed conversion of preferred shares
into common shares................................ 10,261 10,715 10,261 10,715
Assumed exercise of stock options, net of
common shares assumed repurchased
with the proceeds................................. 2,025 1,834 1,700 1,845
-------- -------- ---------- --------
Adjusted weighted average common shares
outstanding....................................... 130,727 134,688 130,660 134,916
-------- -------- ---------- --------
Diluted earnings per share.......................... $ 6.75 $ 1.07 $ 9.35 $ 1.57
======== ======== ========== ========
</TABLE>
5
<PAGE>
Basic earnings per share is computed by dividing net income attributable to
common shares by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed based on the assumption that
all of the convertible preferred shares held by the Company's Employee Stock
Ownership Plan are converted into common shares.
On July 27, 1999, the Company's board of directors approved a two-for-one
stock split. One share of common stock will be distributed on September 9, 1999
for each share owned by holders of record at the close of business on August 19,
1999. As a result of the stock split, basic earnings per share will be restated
to $3.72 and $.59 for the 1999 and 1998 second quarters, respectively, and to
$5.14 and $.85 for the 1999 and 1998 first halves, respectively. Diluted
earnings per share will be restated to $3.37 and $.54 for the 1999 and 1998
second quarters, respectively, and to $4.68 and $.78 for the 1999 and 1998 first
halves, respectively.
Note 3:
- ------
Inventories consist of (in thousands):
June 27, 1999 Dec. 27, 1998
------------- -------------
Finished goods.............................. $ 80,729 $74,631
Newsprint (at LIFO)......................... 13,854 12,207
Supplies and other.......................... 13,859 12,167
-------- -------
Total inventories........................... $108,442 $99,005
======== =======
Newsprint inventories are valued under the LIFO method and were less than
current cost by approximately $7.0 million at June 27, 1999 and $9.9 million at
December 27, 1998. Finished goods primarily include books and supplemental
educational materials.
Note 4:
- ------
In April 1999, the Company issued 8.0 million of its Exchangeable
Subordinated Debentures due 2029 ("PHONES"), for an aggregate principal amount
of over $1.2 billion. The principal amount equaled the value of 8.0 million
shares of America Online ("AOL") common stock at the closing price of $157 per
share on April 7, 1999. The Company will continue to own the AOL stock. At
maturity, the PHONES will be redeemed at the greater of the then market value of
AOL common stock or $157 per PHONES. Interest on the debentures is paid
quarterly at an annual rate of 2%.
During the first quarter of 1999, the Company entered into a one-year hedge
transaction ("AOL collar") with respect to 1.0 million shares of its AOL common
stock investment. The AOL collar locked in the value of these shares within the
price range of $92 - $106 per share. Since this transaction will settle in the
first quarter of 2000, the value of these shares under the collar is classified
as a current asset in the balance sheet at June 27, 1999.
6
<PAGE>
Note 5:
- ------
The second quarters and first halves of both 1999 and 1998 included several
non-operating items. Non-operating items and the cumulative effect of the
accounting change in the 1999 second quarter resulted in a net pretax gain of
approximately $1.3 billion, or $5.87 per diluted share, in the 1999 second
quarter and approximately $1.7 billion, or $7.94 per diluted share, in the 1999
first half. Non-operating items resulted in a net pretax gain of $86 million, or
$.32 per diluted share, in the 1998 second quarter and $93 million, or $.35 per
diluted share, in the 1998 first half.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company has elected early adoption of
FAS 133 as of the beginning of the 1999 second quarter. FAS 133 requires that
all derivative instruments be recorded in the balance sheet at fair value. The
provisions of FAS 133 affected the Company's accounting for its 8.0 million
PHONES, its 4.6 million Debt Exchangeable for Common Stock securities ("DECS")
and its AOL collar for 1.0 million shares.
Prior to the adoption of FAS 133, changes in the fair value of the
Company's 8.0 million of AOL shares and 5.5 million of Mattel shares related to
the PHONES and DECS, respectively, had been recorded in the accumulated other
comprehensive income component of shareholders' equity in the Company's balance
sheet, as these securities had been classified as available-for-sale. With the
adoption of FAS 133, the 8.0 million shares of AOL common stock and the 5.5
million shares of Mattel common stock were reclassified to trading securities.
As a result of this change in classification, the Company was required, under
the provisions of FAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," to recognize pretax gains totaling approximately $1.1
billion in its second quarter 1999 statement of income, which added $5.09 to
diluted earnings per share. These gains represented the unrealized market
appreciation on these investments through the end of the 1999 first quarter.
Beginning in the second quarter of 1999, the Company is recording subsequent
changes in the fair value of these investments in the statement of income.
Under the provisions of FAS 133, the initial value of the PHONES and the
DECS were each split into a debt component and a derivative component. Changes
in the fair value of the derivative component of the PHONES and DECS are
recorded in the statement of income. Changes in the fair value of the related
AOL and Mattel shares should at least partially offset changes in the fair value
of the derivative component of the PHONES and the DECS, respectively. There may
be periods with significant non-cash increases or decreases to the Company's net
income pertaining to the PHONES, DECS and the related AOL and Mattel shares. The
1.0 million shares of AOL common stock related to the AOL collar are classified
as available-for-sale securities, with the unrealized gain or loss on these
shares reported in the accumulated other comprehensive income component of
shareholders' equity. Changes in the AOL collar's time value are recorded in the
Company's statement of income.
During the 1999 second quarter, the change in fair value of the derivative
component of the PHONES resulted in a pretax gain of $350 million, which was
partially offset by a $184 million pretax loss resulting from the change in fair
value of the related AOL trading shares. The net change in the fair values of
the derivative component of the PHONES and the related AOL shares resulted in a
non-cash pretax gain of $166 million, which increased diluted earnings per share
by $.77. During the second quarter of 1999, the total changes in the fair values
of the Company's derivatives, net of changes in the fair value of the related
shares, resulted in a net pretax gain of $171 million, which increased diluted
earnings per share by $.80.
The second quarter of 1999 also included a $3 million after-tax loss, or
$.02 per diluted share, representing the cumulative effect of adopting FAS 133
as of the beginning of the second quarter. This
7
<PAGE>
cumulative effect resulted from adjusting the DECS and the AOL collar
derivatives to their fair values as of March 28, 1999.
In August 1998, the Company reached an agreement with Meredith Corporation
to acquire the assets of television station KCPQ-Seattle in exchange for the
assets of the Company's WGNX-Atlanta television station and cash. In March 1999
and in a three-way transaction, Meredith purchased KCPQ from Kelly Television
Co. and then exchanged the station for WGNX. The divestiture of WGNX was
accounted for as a sale and the acquisition of KCPQ was recorded as a purchase.
The Company recorded the assets of KCPQ at fair market value and recognized a
pretax gain of $348 million, which increased diluted earnings per share by
$1.61. Federal Communications Commission ("FCC") regulations in effect at the
time the exchange transaction was consummated precluded the Company from owning
both KCPQ and the Company's KTWB-Seattle (formerly KTZZ) television station. As
part of the transaction, the Company transferred the assets of KTWB into a
disposition trust. Pursuant to the terms of the disposition trust, an
independent trustee is charged with finding a buyer for KTWB. However, on August
5, 1999, the FCC adopted changes to its rules that appear to permit the Company
to own both stations.
Also in March 1999, the Company sold one million shares of America Online
common stock for $95 million in cash, resulting in a pretax gain of $95 million
and increasing diluted earnings per share by $.45.
In June 1998, the Company completed the exchange of its WQCD radio station
in New York and cash for the assets of television stations KTWB-Seattle and
WXMI-Grand Rapids, Mich. The divestiture of WQCD was accounted for as a sale and
the acquisition of the television stations was recorded as a purchase. The
transaction resulted in a pretax gain of $85 million, or $.32 per diluted share.
The Company also sold certain other investments and recorded certain investment
write-downs in the second quarter of 1998, and sold an investment in the first
quarter of 1998.
Note 6:
- ------
In February 1999, the Company acquired JDTV, Inc., a distributor of
television listings information to the cable and satellite television
industries. In March 1999, the Company acquired the assets of television station
KCPQ-Seattle, with a fair value of approximately $380 million, in exchange for
its WGNX-Atlanta television station and cash.
In June 1998, the Company acquired the assets of television stations
KTWB-Seattle and WXMI-Grand Rapids, with a fair value of approximately $179
million, in exchange for its WQCD radio station in New York and cash. In
September 1998, the Company purchased Sun-Sentinel Community News Group
(formerly South Florida Newspaper Network Inc.), a publisher of weekly
newspapers in South Florida.
The acquisitions are being accounted for by the purchase method, and
accordingly, the results of operations of the companies have been included in
the consolidated financial statements since their respective dates of
acquisition.
Note 7:
- ------
In March 1997, the Company acquired Renaissance Communications Corp., a
publicly traded company that owned six television stations. The stations
acquired included WBZL-Miami, WTIC-Hartford and WPMT-Harrisburg. The FCC order
granting the Company's application to acquire the Renaissance stations
8
<PAGE>
contained waivers of two FCC rules. First, the FCC temporarily waived its
duopoly rule relating to the overlap of WTIC's and WPMT's broadcast signals with
those of other Tribune stations. The temporary waivers were granted subject to
the outcome of pending FCC rulemaking that is likely to make such duopoly
waivers unnecessary, as on August 5, 1999, the FCC adopted changes to its rules
that appear to permit the Company to own both stations. Second, the FCC granted
a 12-month waiver of its rule prohibiting television/newspaper cross-ownership
in the same market, which relates to the Miami television station and the Fort
Lauderdale Sun-Sentinel newspaper. The FCC subsequently issued a rule review to
consider modifying its cross-ownership rule. In March 1998, the FCC granted the
Company a waiver extension to allow continued ownership of both the Miami
television station and the Sun-Sentinel newspaper until the rule review has
concluded. The Company cannot predict the outcome of the FCC cross-ownership
rule review.
Note 8:
- ------
Other comprehensive income includes foreign currency translation
adjustments and unrealized gains and losses on marketable securities classified
as available-for-sale. Approximately three million AOL shares are currently
classified as available-for-sale. Prior to the adoption of FAS 133, changes in
the fair value of the Company's 5.5 million Mattel shares, net of the change in
the current maturity value of the Company's related DECS securities, and all of
the Company's AOL shares were recorded in accumulated other comprehensive
income, as the Mattel and AOL securities had been classified as
available-for-sale. With the adoption of FAS 133 as of the beginning of the 1999
second quarter, 8.0 million of the AOL shares and all of the Mattel shares were
reclassified to trading securities. As a result of this reclassification and the
adoption of FAS 133, beginning in the 1999 second quarter, changes in the fair
value of the 8.0 million AOL shares and 5.5 million Mattel shares, net of the
changes in the fair value of the related derivative components of the PHONES and
DECS, are recorded in the Company's statement of income. The Company's
comprehensive income was as follows (in thousands):
<TABLE>
<CAPTION>
Second Quarter Ended First Half Ended
----------------------------- -----------------------------
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income.......................................... $ 884,988 $147,648 $1,228,250 $217,725
Net foreign currency translation adjustment......... 475 - 1,145 -
Unrealized holding gain (loss) on marketable
securities:
Arising during the period, before tax........... (133,672) 165,262 719,024 307,003
Less: adjustment for gain on sales of
investments included in net income........... - (4,832) (94,840) (12,131)
Less: adjustment for gain on
reclassification of investments
included in net income....................... (1,095,976) - (1,095,976) -
---------- -------- ---------- --------
Unrealized gain (loss), before tax.............. (1,229,648) 160,430 (471,792) 294,872
Income taxes.................................... 467,635 (62,929) 191,944 (115,663)
---------- -------- ---------- --------
Net unrealized gain (loss) on securities........ (762,013) 97,501 (279,848) 179,209
---------- -------- ---------- --------
Net other comprehensive income (loss)............... (761,538) 97,501 (278,703) 179,209
---------- -------- ---------- --------
Comprehensive income................................ $ 123,450 $245,149 $ 949,547 $396,934
========== ======== ========== ========
</TABLE>
9
<PAGE>
Note 9:
- ------
Financial data for each of the Company's business segments is as follows
(in thousands):
<TABLE>
<CAPTION>
Second Quarter Ended First Half Ended
------------------------------ ------------------------------
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating revenues:
Publishing.............................. $394,906 $377,311 $ 786,721 $ 749,819
Broadcasting and Entertainment.......... 348,811 322,633 612,634 562,991
Education............................... 93,194 85,640 157,415 145,467
-------- -------- ---------- ----------
Total operating revenues.................. $836,911 $785,584 $1,556,770 $1,458,277
======== ======== ========== ==========
Operating profit:
Publishing.............................. $103,845 $100,440 $ 206,638 $ 199,460
Broadcasting and Entertainment.......... 105,859 97,814 168,833 152,286
Education............................... 14,595 13,321 13,529 12,625
Corporate expenses...................... (9,454) (8,912) (17,990) (17,656)
-------- -------- ---------- ----------
Total operating profit.................... $214,845 $202,663 $ 371,010 $ 346,715
======== ======== ========== ==========
</TABLE>
June 27, 1999 Dec. 27, 1998
------------- -------------
Assets:
Publishing.............................. $ 852,196 $ 800,853
Broadcasting and Entertainment.......... 3,404,465 3,148,814
Education............................... 820,828 782,438
Corporate............................... 2,733,813 1,203,465
---------- ----------
Total assets.............................. $7,811,302 $5,935,570
========== ==========
The assets of the broadcasting and entertainment segment increased by
approximately $256 million during the first half of 1999, largely due to the
acquisition of KCPQ-Seattle in March 1999. Also, corporate assets rose by
approximately $1.5 billion in the 1999 first half, mainly due to cash proceeds
received from the issuance of the PHONES and increases in the fair market value
of the Company's investment portfolio.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-----------------------------------------------------------------------
The following discussion compares the results of operations of Tribune
Company and its subsidiaries (the "Company") for the second quarter and first
half of 1999 to the second quarter and first half of 1998.
FORWARD-LOOKING STATEMENTS
- --------------------------
This discussion, the information contained in the preceding notes to the
financial statements and the information contained in Item 3, "Quantitative and
Qualitative Disclosure About Market Risk," contain certain forward-looking
statements that are based largely on the Company's current expectations. Such
forward-looking statements include estimates and statements regarding the
Company's plans to address Year 2000 issues and associated costs and risks.
Forward-looking statements are subject to certain risks, trends and
uncertainties that could cause actual results and achievements to differ
materially from those expressed in the forward-looking statements. Such risks,
trends and uncertainties, which in some instances are beyond the Company's
control, include changes in advertising demand, newsprint prices, interest
rates, competition, regulatory rulings and other economic conditions; the effect
of professional sports team labor strikes, lock-outs and negotiations; the
effect of acquisitions, investments and divestitures on the Company's results of
operations and financial condition; and the Company's reliance on third-party
vendors for various services. The words "believe," "expect," "anticipate,"
"estimate" and similar expressions generally identify forward-looking
statements. Readers are cautioned not to place undue reliance on such
forward-looking statements, which are as of the date of this filing.
SIGNIFICANT EVENTS
- ------------------
ACQUISITIONS
In February 1999, the Company acquired JDTV, Inc., a distributor of
television listings information to the cable and satellite television
industries. In March 1999, the Company acquired the assets of television station
KCPQ-Seattle, with a fair value of approximately $380 million, in exchange for
the assets of its WGNX-Atlanta television station and cash.
In June 1998, the Company acquired the assets of television stations
KTWB-Seattle and WXMI-Grand Rapids, with a fair value of approximately $179
million, in exchange for its WQCD radio station in New York and cash. In
September 1998, the Company purchased Sun-Sentinel Community News Group
(formerly South Florida Newspaper Network Inc.), a publisher of weekly
newspapers in South Florida.
The operating results of these acquired businesses have been included in
the consolidated financial statements since their respective dates of
acquisition.
NON-OPERATING ITEMS
The second quarters and first halves of both 1999 and 1998 included several
non-operating items. Non-operating items and the cumulative effect of accounting
change in the 1999 second quarter resulted in a net pretax gain of approximately
$1.3 billion, or $5.87 per diluted share, in the 1999 second quarter and
approximately $1.7 billion, or $7.94 per diluted share, in the 1999 first half.
Non-operating items resulted
11
<PAGE>
in a net pretax gain of $86 million, or $.32 per diluted share, in the 1998
second quarter and $93 million, or $.35 per diluted share, in the 1998 first
half.
In April 1999, the Company issued 8.0 million of its Exchangeable
Subordinated Debentures due 2029 ("PHONES"), for an aggregate principal amount
of over $1.2 billion. The principal amount equaled the value of 8.0 million
shares of America Online ("AOL") common stock at the closing price of $157 per
share on April 7, 1999.
The Company elected early adoption of Statement of Financial Accounting
Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as of the beginning of the 1999 second quarter. FAS 133 requires
that all derivative instruments be recorded in the balance sheet at fair value.
The provisions of FAS 133 affected the Company's accounting for its 8.0 million
PHONES, its 4.6 million Debt Exchangeable for Common Stock securities ("DECS")
and its AOL collar for 1.0 million shares.
Prior to the adoption of FAS 133, changes in the fair value of the
Company's 8.0 million of AOL shares and 5.5 million of Mattel shares related to
the PHONES and DECS, respectively, had been recorded in the accumulated other
comprehensive income component of shareholders' equity in the Company's balance
sheet, as these securities had been classified as available-for-sale. With the
adoption of FAS 133, the 8.0 million shares of AOL common stock and the 5.5
million shares of Mattel common stock were reclassified to trading securities.
As a result of this change in classification, the Company was required, under
the provisions of FAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," to recognize pretax gains totaling approximately $1.1
billion in its second quarter 1999 statement of income, which added $5.09 to
diluted earnings per share. These gains represented the unrealized market
appreciation on these investments through the end of the 1999 first quarter.
Beginning in the second quarter of 1999, the Company is recording subsequent
changes in the fair value of these investments in the statement of income.
Under the provisions of FAS 133, the initial value of the PHONES and the
DECS were each split into a debt component and a derivative component. Changes
in the fair value of the derivative component of the PHONES and DECS are
recorded in the statement of income. Changes in the fair value of the related
AOL and Mattel shares should at least partially offset changes in the fair value
of the derivative component of the PHONES and the DECS, respectively. There may
be periods with significant non-cash increases or decreases to the Company's net
income pertaining to the PHONES, DECS and the related AOL and Mattel shares. The
1.0 million shares of AOL common stock related to the AOL collar are classified
as available-for-sale securities, with the unrealized gain or loss on these
shares reported in the accumulated other comprehensive income component of
shareholders' equity. Changes in the AOL collar's time value are recorded in the
Company's statement of income.
During the 1999 second quarter, the change in fair value of the derivative
component of the PHONES resulted in a pretax gain of $350 million, which was
partially offset by a $184 million pretax loss resulting from the change in fair
value of the related AOL trading shares. The net change in the fair values of
the derivative component of the PHONES and the related AOL shares resulted in a
non-cash pretax gain of $166 million, which increased diluted earnings per share
by $.77. During the second quarter of 1999, the total changes in the fair values
of the Company's derivatives, net of changes in the fair value of the related
shares, resulted in a net pretax gain of $171 million, which increased diluted
earnings per share by $.80.
The second quarter of 1999 also included a $3 million after-tax loss, or
$.02 per diluted share, representing the cumulative effect of adopting FAS 133
as of the beginning of the second quarter. This cumulative effect resulted from
adjusting the DECS and the AOL collar derivatives to their fair values as of
March 28, 1999.
12
<PAGE>
In March 1999, the exchange of the Company's WGNX-Atlanta television
station and cash for television station KCPQ-Seattle resulted in a pretax gain
of $348 million, which increased diluted earnings per share by $1.61. Also in
March 1999, the Company sold one million shares of America Online common stock
for $95 million in cash, resulting in a pretax gain of $95 million, which
increased diluted earnings per share by $.45.
In June 1998, the Company completed the exchange of its WQCD radio station
in New York and cash for the assets of television stations KTWB-Seattle and
WXMI-Grand Rapids, Mich. The divestiture of WQCD was accounted for as a sale and
the acquisition of the television stations was recorded as a purchase. The
transaction resulted in a pretax gain of $85 million, or $.32 per diluted share.
The Company also sold certain other investments and recorded certain investment
write-downs in the second quarter of 1998, and sold an investment in the first
quarter of 1998.
RESULTS OF OPERATIONS
- ---------------------
The results of operations, when examined on a quarterly basis, reflect the
seasonality of the Company's revenues. In both publishing and broadcasting and
entertainment, second and fourth quarter advertising revenues are typically
higher than first and third quarter revenues. Results for the second quarter
usually reflect spring advertising while the fourth quarter includes advertising
related to the holiday season. In education, second and third quarter revenues
are typically higher than first and fourth quarter revenues. Results for the
second and third quarters generally reflect the timing of sales to educational
institutions for the upcoming school year, which begins in September. Results
for the 1999 and 1998 second quarters reflect these seasonal patterns.
13
<PAGE>
CONSOLIDATED
The Company's consolidated operating results for the second quarter and
first half of 1999 and 1998 and the percentage changes from 1998 were as
follows:
<TABLE>
<CAPTION>
Second Quarter First Half
(Dollars in millions, -------------------------- ---------------------------
except per share amounts) 1999 1998 Change 1999 1998 Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues................................. $ 837 $786 + 7% $1,557 $1,458 + 7%
Operating profit................................... 215 203 + 6% 371 347 + 7%
Non-operating items:
Gain on reclassification of investments.......... 1,096 - * 1,096 - *
Gain on change in fair value of derivatives
and related investments........................ 171 - * 171 - *
Gain on sales of subsidiaries and
investments, net of write-downs................ - 86 * 445 93 *
------ ----- ------ ------
Total............................................ 1,267 86 * 1,712 93 *
Net income:
Before non-operating items....................... 118 105 +13% 191 170 +12%
------ ----- ------ ------
Before accounting change......................... 888 148 * 1,231 218 *
Cumulative effect of accounting change, net...... (3) - * (3) - *
------ ----- ------ ------
Net income....................................... 885 148 * 1,228 218 *
Diluted earnings per share:
Before non-operating items....................... .88 .75 +17% 1.41 1.22 +16%
------ ----- ------ ------
Before accounting change......................... 6.77 1.07 * 9.37 1.57 *
Cumulative effect of accounting change, net...... (.02) - * (.02) - *
------ ----- ------ ------
Net income....................................... 6.75 1.07 * 9.35 1.57 *
</TABLE>
*Not meaningful
Earnings Per Share -- Diluted earnings per share for the 1999 second quarter
rose to $.88, up 17% from $.75 last year, excluding non-operating items. For the
first half of 1999, diluted earnings per share increased 16% to $1.41 from $1.22
in 1998, excluding non-operating items. The improvements were primarily due to
operating profit gains at all three business segments, reduced equity losses and
fewer shares outstanding. Including non-operating items and the cumulative
effect of the change in accounting to FAS 133, diluted earnings per share was
$6.75 in the second quarter of 1999, compared to $1.07 in the second quarter of
1998, and $9.35 in the first half of 1999, compared to $1.57 in the first half
of 1998.
14
<PAGE>
Operating Revenues and Profit -- The Company's consolidated operating revenues,
EBITDA (operating profit before depreciation, amortization, equity results and
non-operating items) and operating profit by business segment for the second
quarter and first half were as follows:
<TABLE>
<CAPTION>
Second Quarter First Half
------------------------ --------------------------
(Dollars in millions) 1999 1998 Change 1999 1998 Change
----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Publishing................................ $395 $377 + 5% $ 787 $ 750 + 5%
Broadcasting and Entertainment............ 349 323 + 8% 613 563 + 9%
Education................................. 93 86 + 9% 157 145 + 8%
---- ---- ------ ------
Total operating revenues.................... $837 $786 + 7% $1,557 $1,458 + 7%
EBITDA*
Publishing................................ $126 $120 + 5% $ 250 $ 238 + 5%
Broadcasting and Entertainment............ 132 119 +10% 219 195 +12%
Education................................. 22 20 + 9% 27 25 + 6%
Corporate expenses........................ (9) (8) - 7% (17) (16) - 2%
---- ---- ------ ------
Total EBITDA................................ $271 $251 + 8% $ 479 $ 442 + 8%
Operating profit
Publishing................................ $104 $101 + 3% $ 207 $ 200 + 4%
Broadcasting and Entertainment............ 106 98 + 8% 169 152 +11%
Education................................. 14 13 +10% 13 13 + 7%
Corporate expenses........................ (9) (9) - 6% (18) (18) - 2%
---- ---- ------ ------
Total operating profit...................... $215 $203 + 6% $ 371 $ 347 + 7%
</TABLE>
* EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, equity results and non-operating items. The Company has
presented EBITDA because it is comparable to the data provided by other
companies in the industry and is a common alternative measure of
performance. EBITDA does not represent cash provided by operating activities
as reflected in the Company's consolidated statements of cash flows, is not
a measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP.
Consolidated operating revenues for the 1999 second quarter rose 7% to $837
million from $786 million in 1998 and for the first half increased 7% to nearly
$1.6 billion from $1.5 billion in 1998, mainly due to recent acquisitions and
higher advertising revenues. Excluding acquisitions and divestitures ("on a
comparable basis"), revenues were up 3% in the second quarter and 4% in the
first half.
Consolidated operating profit increased 6% in the 1999 second quarter and
7% in the first half, while EBITDA increased 8% in both the second quarter and
the first half. Publishing operating profit increased 3% in the 1999 second
quarter and 4% in the first half mainly due to lower newsprint prices and
acquisitions. Broadcasting and entertainment operating profit grew 8% in the
1999 second quarter and 11% in the first half due to significant growth in
television. Education operating profit increased 10% in the second quarter and
7% in the first half. On a comparable basis, consolidated operating profit was
up 4% in the second quarter and 6% in the first half, and EBITDA increased 4% in
the second quarter and 5% in the first half.
15
<PAGE>
Operating Expenses -- Consolidated operating expenses increased 7% in both the
second quarter and first half as follows:
<TABLE>
<CAPTION>
Second Quarter First Half
---------------------- --------------------------
(Dollars in millions) 1999 1998 Change 1999 1998 Change
---- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales.............................. $375 $361 + 4% $ 713 $ 684 + 4%
Selling, general & administrative.......... 191 173 +10% 365 332 +10%
Depreciation & amortization
of intangible assets................... 56 49 +16% 108 96 +13%
---- ---- ------ ------
Total operating expenses................... $622 $583 + 7% $1,186 $1,112 + 7%
</TABLE>
Cost of sales increased 4%, or $14 million, in the 1999 second quarter and
increased 4%, or $29 million, in the first half. On a comparable basis, cost of
sales increased 1%, or $3 million, in the second quarter and was up 1%, or $8
million, in the first half. The growth in both periods was due to increased
compensation expense, higher broadcast rights amortization expense and increased
publishing and production costs at the education segment, partially offset by
lower newsprint expense. On a comparable basis, compensation expense was up 6%,
or $8 million, in the second quarter and 6%, or $13 million, in the first half.
Broadcast rights amortization increased 4%, or $3 million, in the second quarter
and was up 3%, or $5 million, in the first half. Newsprint and ink expense
decreased 18%, or $10 million, in the second quarter and fell 12%, or $14
million, in the first half.
Selling, general and administrative expenses ("SG&A") were up 10%, or $18
million, in the 1999 second quarter and increased 10%, or $33 million, in the
first half. On a comparable basis, SG&A expenses grew 8%, or $12 million, in the
second quarter and were up 7%, or $24 million, in the first half due to higher
compensation expense, increased Year 2000 compliance costs, higher development
costs and increased promotion expenses at the Company's newspapers. On a
comparable basis, compensation expense was up 11%, or $8 million, in the second
quarter and 9%, or $15 million, in the first half. Year 2000 compliance costs
grew $1 million and $5 million in the 1999 second quarter and first half,
respectively.
The increase in depreciation and amortization of intangible assets reflects
the acquisitions and capital expenditures made in 1999 and 1998.
16
<PAGE>
PUBLISHING
Operating Revenues and Profit -- The following table presents publishing
operating revenues, EBITDA and operating profit for daily newspapers and other
publications/services/development for the second quarter and first half. The
latter category includes syndication of editorial products, advertising
placement services, niche and weekly publications, direct mail operations, cable
news programming, distribution of entertainment listings and Internet/electronic
products.
<TABLE>
<CAPTION>
Second Quarter First Half
---------------------- ----------------------
(Dollars in millions) 1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
Daily newspapers.............................. $351 $354 - 1% $706 $703 -
Other publications/
services/development........................ 44 23 +87% 81 47 +73%
---- ---- ---- ----
Total operating revenues........................ $395 $377 + 5% $787 $750 + 5%
EBITDA
Daily newspapers.............................. $124 $122 + 2% $246 $241 + 2%
Other publications/
services/development........................ 2 (2) * 4 (3) *
---- ---- ---- ----
Total EBITDA.................................... $126 $120 + 5% $250 $238 + 5%
Operating profit
Daily newspapers.............................. $105 $104 + 1% $210 $207 + 1%
Other publications/
services/development........................ (1) (3) +62% (3) (7) +59%
---- ---- ---- ----
Total operating profit.......................... $104 $101 + 3% $207 $200 + 4%
</TABLE>
*Not meaningful
Publishing operating revenues for the 1999 second quarter increased 5% to
$395 million, and for the first half were up 5% to $787 million, principally due
to acquisitions and higher general advertising revenues at Chicago and Orlando.
Excluding acquisitions, publishing revenues were up 1% in both the second
quarter and the first half. Advertising revenues improved 1% in the second
quarter and 2% in the first half. Operating profit for the 1999 second quarter
grew 3% to $104 million, and for the first half was up 4% to $207 million,
mainly from lower newsprint prices and acquisitions. In the second quarter of
1999, daily newspaper operating profit margins rose to 30.0% from 29.4% in 1998
and in the first half increased to 29.7% from 29.4% in 1998.
Publishing group revenues, by classification, for the second quarter and
first half were as follows:
Second Quarter First Half
---------------------- ----------------------
(Dollars in millions) 1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
Advertising
Retail................... $115 $114 + 1% $228 $220 + 4%
General.................. 45 40 +14% 89 77 +15%
Classified............... 138 140 - 2% 279 285 - 2%
---- ---- ---- ----
Total advertising............ 298 294 + 1% 596 582 + 2%
Circulation.................. 60 61 - 1% 123 124 - 1%
Other........................ 37 22 +64% 68 44 +54%
---- ---- ---- ----
Total revenues............... $395 $377 + 5% $787 $750 + 5%
17
<PAGE>
Retail advertising revenues grew 1% in the second quarter and 4% in the
first half, due to the acquisition of Sun-Sentinel Community News Group in
September 1998, which offset declines in the hardware and general merchandise
categories in Chicago and in the health care, electronics and department store
categories in Fort Lauderdale. General advertising revenues were up 14% in the
second quarter and 15% in the first half from higher automotive advertising in
Chicago, Orlando and Fort Lauderdale, and from increased financial and high-tech
advertising in Chicago. Classified advertising decreased 2% in both the second
quarter and first half mainly due to declines in Chicago in the help wanted and
real estate advertising categories, offset in part by improved automotive
advertising.
Total advertising linage declined 1% in the second quarter while improving
1% in the first half. Full run retail advertising linage decreased 4% in the
second quarter and 2% in the first half due to declines in Fort Lauderdale and
Orlando. Full run general advertising linage improved 17% in the second quarter
and 21% in the first half primarily due to gains in Orlando and Fort Lauderdale.
Full run classified advertising linage decreased 1% in the second quarter due to
declines in Chicago and Orlando and fell 1% in the first half due to declines in
Orlando, Chicago and Fort Lauderdale. Part run advertising linage was down 1% in
the second quarter and 2% in the first half due to decreases in Chicago.
Preprint advertising linage declined 1% in the second quarter due to decreases
in Newport News and Chicago, while improving 5% in the first half mainly due to
gains in Chicago and Orlando. The following summary presents advertising linage
for the second quarter and the first half:
Second Quarter First Half
---------------------- -----------------------
(Inches in thousands) 1999 1998 Change 1999 1998 Change
----- ----- ------ ------ ------ ------
Full run
Retail..................... 876 915 - 4% 1,748 1,784 - 2%
General.................... 245 209 +17% 485 400 +21%
Classified................. 1,717 1,739 - 1% 3,414 3,464 - 1%
----- ----- ------ ------
Total full run............... 2,838 2,863 - 1% 5,647 5,648 -
Part run..................... 2,514 2,547 - 1% 4,938 5,051 - 2%
Preprint..................... 2,630 2,667 - 1% 4,988 4,767 + 5%
----- ----- ------ ------
Total inches................. 7,982 8,077 - 1% 15,573 15,466 + 1%
Circulation revenues decreased 1% in both the 1999 second quarter and the
first half. Total average daily circulation was down 3% to 1,230,000 copies in
the 1999 second quarter, and total average Sunday circulation declined slightly
to 1,860,000 copies. For the first half of 1999, total average daily circulation
fell 2% to 1,262,000 copies, while total average Sunday circulation was down 1%
to 1,905,000 copies. Declines in circulation copies resulted partially from
reduced discounting.
Other revenues are derived from advertising placement services; the
syndication of columns, features, information and comics to newspapers;
commercial printing operations; delivery of other publications; direct mail
operations; revenues from Internet/electronic products; cable news programming;
distribution of entertainment listings; and other publishing-related activities.
The increase in other revenues in the 1999 second quarter and first half
resulted primarily from the acquisition of JDTV in February 1999 and higher
revenues from direct mail and commercial printing operations.
Operating Expenses -- Publishing operating expenses increased 5%, or $14
million, in the second quarter and 5%, or $30 million, in the first half, mainly
due to acquisitions. On a comparable basis, expenses grew 1%, or $2 million, in
the second quarter and were up 1%, or $7 million, in the first half. On a
comparable basis, newsprint and ink expense decreased 18%, or $10 million, in
the second
18
<PAGE>
quarter of 1999, as average newsprint prices declined 15% and consumption fell
5%. For the first half, newsprint and ink expense decreased 12%, or $14 million,
as average newsprint prices declined 11% and consumption fell 3%. Other
expenses, on a comparable basis, were up 5%, or $12 million, in the 1999 second
quarter and 5%, or $22 million, in the first half, mainly due to increases in
compensation expense, development spending, promotion expenses and Year 2000
compliance costs. Compensation expense increased 5%, or $5 million, in the
second quarter and 5%, or $11 million, in the first half. Spending for
development activities grew $2 million and $3 million in the 1999 second quarter
and first half, respectively. Promotion expenses were up $2 million in both the
quarter and the first half. Year 2000 compliance expenses rose $1 million and $3
million in the second quarter and first half, respectively.
BROADCASTING AND ENTERTAINMENT
Operating Revenues and Profit -- The following table presents operating
revenues, EBITDA and operating profit for television, radio and
entertainment/other for the second quarter and first half. Entertainment/other
includes Tribune Entertainment and the Chicago Cubs.
Second Quarter First Half
-------------------- --------------------
(Dollars in millions) 1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
Operating revenues
Television.................... $290 $260 +11% $530 $470 + 13%
Radio......................... 14 15 - 3% 26 28 - 8%
Entertainment/other........... 45 48 - 7% 57 65 - 12%
---- ---- ---- ----
Total operating revenues........ $349 $323 + 8% $613 $563 + 9%
EBITDA
Television.................... $129 $113 +13% $217 $187 + 17%
Radio......................... 5 5 + 9% 8 10 - 22%
Entertainment/other........... (2) 1 * (6) (2) -330%
---- ---- ---- ----
Total EBITDA.................... $132 $119 +10% $219 $195 + 12%
Operating profit
Television.................... $104 $ 94 +11% $171 $147 + 16%
Radio......................... 5 4 +16% 7 9 - 20%
Entertainment/other........... (3) - * (9) (4) -142%
---- ---- ---- ----
Total operating profit.......... $106 $ 98 + 8% $169 $152 + 11%
*Not meaningful
Broadcasting and entertainment operating revenues increased 8% to $349
million in the 1999 second quarter and grew 9% to $613 million in the first half
due to higher television revenues. Television revenues were up 11%, or $30
million, in the second quarter, and 13%, or $60 million, in the first half due
to strong performance of the syndicated show "Friends" which debuted in Fall
1998, improvement of The WB prime time, and the acquisitions of stations in
Grand Rapids and Seattle. In addition to KCPQ-Seattle, which was acquired in
exchange for WGNX-Atlanta in March 1999, Tribune acquired KTWB-Seattle and
WXMI-Grand Rapids in June 1998 in exchange for Tribune's WQCD radio station. On
a comparable basis, television revenues increased 8% in the second quarter and
9% in the first half primarily due to improvements at WGN-Chicago, WLVI-Boston,
WPIX-New York and KTLA-Los Angeles. Radio revenues decreased 3% in the 1999
second quarter and 8% in
19
<PAGE>
the first half mainly due to the divestiture of WQCD. On a comparable basis,
radio revenues grew 9% in the quarter and 6% in the first half. Entertainment/
other revenues fell 7% in the 1999 second quarter and 12% in the first half
mainly due to lower revenues at Tribune Entertainment from the absence of "The
Geraldo Rivera Show," which ended after the 1997-1998 season.
Operating profit for broadcasting and entertainment was up 8% to $106
million in the 1999 second quarter and increased 11% to $169 million in the
first half, due to improvements in television. Television operating profit
increased 11% in the 1999 second quarter and 16% in the first half, mainly from
growth at WGN-Chicago, WPIX-New York and WLVI-Boston. On a comparable basis,
television operating profit increased 10% in the 1999 second quarter and 16% in
the first half.
Operating Expenses -- Broadcasting and entertainment operating expenses
increased 8%, or $18 million, in the second quarter of 1999 and 8%, or $33
million, in the first half. The increase was in part due to the television
station acquisitions, partially offset by the sale of WGNX-Atlanta. On a
comparable basis, broadcasting and entertainment operating expenses were up 4%,
or $9 million, in the second quarter and 4%, or $17 million, in the first half
due to increased compensation costs and higher broadcast rights amortization. On
a comparable basis, compensation costs grew 10%, or $8 million, in the second
quarter and 8%, or $10 million in the first half, partially due to higher
players' salaries at the Cubs. Broadcast rights amortization increased 4%, or $3
million, in the second quarter and 3%, or $5 million, in the first half.
EDUCATION
Operating Revenues and Profit -- The following table presents education
operating revenues, EBITDA and operating profit for the second quarter and first
half:
Second Quarter First Half
-------------------- --------------------
(Dollars in millions) 1999 1998 Change 1999 1998 Change
---- ---- ------ ---- ---- ------
Operating revenues.............. $93 $86 + 9% $157 $145 + 8%
EBITDA.......................... 22 20 + 9% 27 25 + 6%
Operating profit................ 14 13 +10% 13 13 + 7%
Education's second quarter 1999 operating revenues increased 9% to $93
million and were up 8% to $157 million in the first half. The improvement was
primarily due to solid growth in educational product sales, especially in math,
language arts and other educational materials that are sold in the school and
consumer markets.
Education operating profit rose 10% to $14 million in the 1999 second
quarter and grew 7% to $13 million in the first half.
Operating Expenses -- Education operating expenses increased 9%, or $6 million,
in the 1999 second quarter and 8%, or $11 million, in the first half, primarily
due to increased publishing and production costs due to growth in sales volume
and higher sales and marketing costs. Publishing and production costs increased
9%, or $3 million, in the 1999 second quarter and 6%, or $3 million, in the
first half. Sales and marketing costs grew 16%, or $2 million, in the 1999
second quarter and 16%, or $5 million, in the first half.
20
<PAGE>
EQUITY RESULTS
Net loss on equity investments in the second quarter of 1999 totaled $3
million, down from a loss of $8 million in 1998, and for the first half totaled
$17 million, down from a loss of $22 million in 1998, due to improved results at
several of the Company's investments.
OTHER
Interest expense for the 1999 second quarter increased 46% to $31 million
from $21 million last year, and for the first half grew 28% to $54 million from
$42 million in 1998, primarily due to the April 1999 issuance of the PHONES.
Interest income for the 1999 second quarter was $13 million compared with $1
million last year, and for the first half was $15 million compared with $3
million in 1998, due to higher cash balances from the investment of the PHONES
proceeds. The effective tax rate, excluding non-operating items, was 39.3% and
40.4% for the 1999 and 1998 second quarters, respectively, and 39.4% and 40.4%
for the 1999 and 1998 first halves, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow generated from operations is the Company's primary source of
liquidity. Net cash provided by operations in the first half was $179 million in
1999, down from $270 million in 1998 as changes in working capital more than
offset higher net income. The Company normally expects to fund dividends,
capital expenditures and other operating requirements with net cash provided by
operations. Funding required for share repurchases and acquisitions is financed
by available cash flow from operations and, if necessary, by the issuance of
debt.
Net cash used for investments totaled $12 million in the 1999 first half as
the Company spent $104 million for acquisitions and investments, while receiving
$95 million in gross proceeds from the sales of investments.
Net cash provided by financing activities in the 1999 first half was $913
million due to the issuance of the PHONES and sales of stock to employees,
partially offset by repayments of debt, purchases of treasury stock and payments
of dividends. In the first half of 1999, the Company repaid $151 million of
commercial paper and repurchased 2.1 million shares of its common stock for $151
million. Of this total, the Tribune Stock Compensation Fund ("TSCF") purchased
1.5 million shares from a financial institution for $114 million, or
approximately $73 per share, which is subject to a market-price adjustment
provision. The Company established the TSCF in July 1998 to purchase common
stock for the purpose of funding certain existing stock-based compensation
plans. At June 27, 1999, the Company had authorization to repurchase an
additional $458 million of its common stock. The 1999 common dividend increased
6% to $.36 per share for the first half from $.34 per share in 1998.
21
<PAGE>
YEAR 2000 COMPLIANCE
- --------------------
The Company relies on various technologies throughout its business operations
that could be affected by the date change in the Year 2000. The Company is
progressing through a comprehensive program to evaluate and address the impact
of the Year 2000 issue on its operational and financial reporting systems and
equipment with embedded technology and the Year 2000 risks associated with its
vendors and customers. The program has been assigned a high priority in relation
to other business projects. The Company has formed a Project Management Office
to provide company-wide leadership, oversight and coordination of the Year 2000
project. The Company's Chief Technology Officer and Chief Financial Officer head
the Project Management Office. These project heads receive frequent updates from
the other members of the Project Management Office team. In addition, progress
reports on the Year 2000 program are presented regularly to the Company's board
of directors and senior management.
State of Readiness
- ------------------
Both internal and external resources are being utilized throughout the Company
to implement the program, which includes the following overlapping phases:
system and equipment inventory and analysis; remediation, testing and
implementation; contingency planning; and vendors and investments. The Company's
internal operational and financial reporting systems and equipment are
substantially Year 2000 compliant. None of the Company's other significant
information technology projects has been delayed as a result of the Company's
Year 2000 compliance efforts.
System and Equipment Inventory and Analysis -- The system and equipment
inventory and analysis phase consists of compiling a detailed inventory of all
of the Company's information and non-information technology hardware, software,
systems and equipment to determine which of these items are date-sensitive and
require remediation to become Year 2000 compliant. This analysis involves both
an internal assessment and contact with the systems and equipment manufacturers.
The principal systems and equipment identified by the Company as requiring
remediation are financial systems, human resource systems and news production
systems. This phase is complete.
Remediation, Testing and Implementation -- The remediation, testing and
implementation phase consists of determining and implementing a remediation
method (upgrade, replace or discontinue) for date-sensitive items. The
remediated item is tested and returned to normal operations when compliant.
Testing for significant systems may include functional testing of remedial
measures and regression testing to validate that changes have not altered
existing functionality. A separate Year 2000 mainframe environment has been
created to test all operating system software and program product software. This
Year 2000 environment is designed to accomplish "end to end" testing of the
larger systems applications and to validate interface communications between
systems applications. The Company is also performing its own tests of mission
critical vendor-provided systems and equipment, even if vendor certification of
Year 2000 compliance has been received. The Company is working with the
manufacturers of its affected systems and other outside vendors to implement
required upgrades. The Company has also identified vendors from whom the Company
can procure new systems and equipment to replace non-compliant systems and
equipment. This phase is substantially complete, except for certain recently
acquired companies which are expected to be Year 2000 compliant by September
1999.
Contingency Planning -- Contingency planning consists of developing solutions
and options in the event that the Company experiences a failure in its
production processes or in the operations of certain of the Company's vendors.
Contingency plans and enactment dates for production processes and vendors are
being developed and will be finalized by September 30, 1999. The Company will
continue to develop,
22
<PAGE>
review, test and revise contingency plans, as more information becomes available
from internal testing and external vendor assessment.
Vendors and Investments -- Vendor management consists of assessing vendor
readiness, and if necessary, identifying alternate channels to receive critical
materials and/or supplies. The Company has initiated formal communications with
its vendors through an assessment survey. For critical vendors, including
utilities, banks, newsprint and ink suppliers and a satellite provider, site
visits have been completed. In the event that satisfactory commitments from key
suppliers are not received, the Company is forming plans for the continuing
availability of critical materials and supplies through alternate channels. In
general, the Company is comfortable with the progress made by critical vendors
to date and no critical issues have been identified, except for a general
concern with the utilities industry as alternative suppliers may not be
available. Tribune is also assessing Year 2000 compliance of the companies in
its venture investment portfolio. Tribune will continue to monitor information
provided by these companies regarding their progress toward remediation of Year
2000 issues.
Risks
- -----
The Company may discover additional Year 2000 problems, including that
remediation or contingency plans are not feasible or that the costs of such
plans exceed current expectations. In many cases, the Company is relying on
assurances from vendors that their systems, or that new or upgraded systems
acquired by the Company, will be Year 2000 compliant. The Company believes that
one of its principal Year 2000 risks is the effect the Year 2000 issue will have
on its vendors, especially the utilities industry. A substantial part of the
Company's day-to-day operations is dependent on power and telecommunications
services, for which alternative sources of service may be limited. The Company
will continue to investigate the readiness of its suppliers, including
utilities, and pursue the availability of alternatives to further analyze and
diminish the extent of any impact Year 2000 issues may have on the Company.
Although there can be no assurance that the Company will be able to complete all
of the modifications in the required timeframe and that unanticipated events
will not occur, it is management's belief that the Company is taking adequate
action to address Year 2000 issues. In the event that either the Company or the
Company's vendors fail to adequately address Year 2000 issues, the Company could
suffer business interruptions. If such interruptions cause the Company to be
unable to fulfill its obligations to third parties, the Company could be exposed
to liability to such third parties.
Costs
- -----
The Company does not currently expect that the costs of addressing the Year 2000
issue will have a material effect on the consolidated financial position or
results of operations of the Company. Year 2000 compliance costs are expensed as
incurred and are funded through operating cash flow. The Company currently
estimates total expenses will be approximately $20 million, of which $12.5
million was incurred through June 27, 1999.
23
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
---------------------------------------------------------
The following represents an update of the Company's market sensitive
financial information. This information contains forward-looking statements and
should be read in conjunction with Item 7A of the Company's 1998 Form 10-K.
EQUITY PRICE RISKS
Available-for-sale securities. The Company has common stock investments in
several publicly traded companies that are subject to market price volatility.
These investments are classified as available-for-sale securities (except for
8.0 million shares of AOL common stock and 5.5 million shares of Mattel common
stock, see discussion below) and are recorded on the balance sheet at fair value
with unrealized gains or losses, net of related tax effects, reported in the
accumulated other comprehensive income component of shareholders' equity.
The following analysis presents the hypothetical change in the fair value
of the Company's common stock investments in publicly traded companies that are
classified as available-for-sale, assuming hypothetical stock price fluctuations
of plus or minus 10%, 20% and 30% in each stock's price. This analysis excludes
one million shares of AOL common stock related to a one-year hedge transaction.
The AOL collar locked in the value of these shares within the price range of $92
- - $106 per share. See Note 4 to the Company's Condensed Consolidated Financial
Statements in this Form 10-Q for further discussion.
<TABLE>
<CAPTION>
Valuation of Investments Valuation of Investments
Assuming Indicated Decrease Assuming Indicated Increase
in Each Stock's Price in Each Stock's Price
---------------------------- June 27, 1999 ----------------------------
(In thousands) -30% -20% -10% Fair Value +10% +20% +30%
-------- -------- -------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock
investments in
public companies $296,800 $339,200 $381,600 $424,000(1) $466,400 $508,800 $551,200
</TABLE>
(1) Includes approximately two million shares of AOL common stock valued at
$204,200. Excludes 8.0 million shares of AOL common stock and 5.5 million
shares of Mattel common stock, see discussion below.
During the last 12 quarters, market price movements caused the fair value
of the Company's common stock investments in publicly traded companies to change
by 10% or more in ten of the quarters, by 20% or more in six of the quarters and
by 30% or more in five of the quarters.
Derivatives and related trading securities. The Company has issued 8.0 million
PHONES related to its investment in 8.0 million shares of AOL common stock and
4.6 million DECS related to its investment in 5.5 million shares of Mattel
common stock. See Note 4 to the Company's Condensed Consolidated Financial
Statements in this Form 10-Q for further discussion of the PHONES and Note 6 to
the Company's Consolidated Financial Statements in the 1998 Annual Report for
further discussion of the DECS. Beginning in the second quarter of 1999, these
investments in AOL and Mattel stock are classified as trading securities, and
changes in their fair value, net of the changes in the fair value of the related
derivative components of the PHONES and the DECS, are recorded in the statement
of income.
24
<PAGE>
At maturity, the PHONES will be redeemed at the greater of the then market
value of AOL common stock or $157 per PHONES. At June 27, 1999, the PHONES fair
value was $908 million. Because the Company issued the PHONES in April 1999, the
relationship between the fair value of the PHONES and the related AOL shares
remains unclear. There may be periods with significant non-cash increases or
decreases to the Company's net income pertaining to the PHONES and the related
AOL shares.
At maturity, the DECS will be repaid using shares of Mattel common stock
or, at the Company's option, the cash equivalent thereof. The number of Mattel
shares due at maturity, or the cash equivalent thereof, is based on the fair
market value of the Mattel common stock, adjusted using a predetermined formula
that allocates a portion of the appreciation, if any, to the Company. Holders of
the DECS bear the full risk of a decline in the value of Mattel common stock.
The fair value of the DECS was $125 million at June 27, 1999. Since the issuance
of the DECS in August 1998, changes in the fair value of the DECS have partially
offset changes in the fair value of the related Mattel shares. There may be
periods with significant non-cash increases or decreases to the Company's net
income pertaining to the DECS and the related Mattel shares.
The following analysis presents the hypothetical change in the fair value
of the Company's 8.0 million shares of AOL common stock related to the PHONES
and 5.5 million shares of Mattel common stock related to the DECS assuming
hypothetical stock price fluctuations of plus or minus 10%, 20% and 30% in each
stock's price.
<TABLE>
<CAPTION>
Valuation of Investments Valuation of Investments
Assuming Indicated Decrease Assuming Indicated Increase
In Each Stock's Price in Each Stock's Price
---------------------------- June 27, 1999 ------------------------------
(In thousands) -30% -20% -10% Fair Value +10% +20% +30%
-------- -------- -------- ------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
AOL common stock $575,400 $657,600 $739,800 $822,000 $904,200 $986,400 $1,068,600
Mattel common stock 95,200 108,800 122,400 136,000 149,600 163,200 176,800
</TABLE>
During the last 12 quarters, market price movements have caused the fair
value of the Company's 8.0 million shares in AOL common stock to change by 10%
or more in ten of the quarters, by 20% or more in nine of the quarters and by
30% or more in five of the quarters. For the Company's 5.5 million shares in
Mattel common stock, market price movements have caused the fair value to change
by 10% or more in nine of the quarters, by 20% or more in five of the quarters
and by 30% or more in three of the quarters.
25
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
-----------------
The computation of the ratios of earnings to fixed charges, filed herewith
as Exhibit 12, is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits.
12 - Computation of ratios of earnings to fixed charges.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the quarter for
which this report is filed.
o The Company filed a Form 8-K Current Report dated April 5, 1999,
which reported under Item 5 the Registration on Form S-3 of $1.5
billion of Debt Securities and Warrants to Purchase Debt
Securities and the offering of 30-year debentures in the form of
Exchangeable Subordinated Debentures due 2029 ("PHONES"). The
Securities and Exchange Commission declared the registration
statement effective on March 31, 1999.
o The Company filed a Form 8-K Current Report dated April 13,
1999, which reported under Item 5 the filing of the final
prospectus supplement and the execution of the form of Debenture
for the PHONES.
26
<PAGE>
SIGNATURE
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.
TRIBUNE COMPANY
(Registrant)
Date: August 10, 1999 /s/ R. Mark Mallory
-------------------
R. Mark Mallory
Vice President and Controller
(on behalf of the Registrant
and as Chief Accounting Officer)
27
EXHIBIT 12
TRIBUNE COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(In thousands, except ratios)
<TABLE>
<CAPTION>
First Half Fiscal Year Ended December
Ended ----------------------------------------------------
6/27/99 1998 1997 1996 1995 1994
---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations, before
cumulative effect of accounting change (A) $1,231,310 $414,272 $393,625 $282,750 $245,458 $233,149
Add:
Income tax expense 795,759 290,817 265,375 191,663 167,076 158,698
Losses on equity investments 17,103 33,980 34,696 13,281 13,209 9,739
---------- -------- -------- -------- -------- --------
Subtotal 2,044,172 739,069 693,696 487,694 425,743 401,586
---------- -------- -------- -------- -------- --------
Fixed charge adjustments
Add:
Interest expense 53,758 88,451 86,502 47,779 21,814 20,585
Amortization of capitalized interest 1,032 2,068 2,076 2,108 2,253 2,362
Interest component of rental expense (B) 5,651 10,671 10,416 9,362 8,200 8,236
---------- -------- -------- -------- -------- --------
Earnings, as adjusted $2,104,613 $840,259 $792,690 $546,943 $458,010 $432,769
========== ======== ======== ======== ======== ========
Fixed charges:
Interest expense $ 53,758 $ 88,451 $ 86,502 $ 47,779 $ 21,814 $ 20,585
Interest capitalized 663 1,897 224 168 610 -
Interest component of rental expense (B) 5,651 10,671 10,416 9,362 8,200 8,236
Interest related to guaranteed ESOP debt (C) 6,573 15,578 17,901 20,134 22,057 24,017
---------- -------- -------- -------- -------- --------
Total fixed charges $ 66,645 $116,597 $115,043 $ 77,443 $ 52,681 $ 52,838
========== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges (A) 31.6 7.2 6.9 7.1 8.7 8.2
========== ======== ======== ======== ======== ========
</TABLE>
(A) Income from continuing operations, before cumulative effect of accounting
change included non-operating net gains of $1,040.6 million in the 1999
first half, $63.5 million in fiscal year 1998, $68.9 million in 1997, $6.0
million in 1996 and $8.7 million in 1995. Excluding these non-operating
items, the ratio of earnings to fixed charges was 5.9 in the 1999 first
half, 6.2 in fiscal year 1998, 5.9 in 1997, 7.1 in 1996 and 8.4 in 1995.
See Note 5 to the Company's Condensed Consolidated Financial Statements in
this Form 10-Q and the Eleven Year Financial Summary in the Company's 1998
Annual Report to Shareholders for further discussion of these non-operating
items.
(B) Represents a reasonable approximation of the interest cost component of
rental expense incurred by the Company.
(C) Tribune Company guarantees the debt of its Employee Stock Ownership Plan
(ESOP).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
June 27, 1999 condensed consolidated statement of income and condensed
consolidated balance sheet and is qualified in its entirety by references to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 19,590
<SECURITIES> 1,072,490
<RECEIVABLES> 618,098
<ALLOWANCES> 48,021
<INVENTORY> 108,442
<CURRENT-ASSETS> 2,122,552
<PP&E> 1,728,835
<DEPRECIATION> 1,026,441
<TOTAL-ASSETS> 7,811,302
<CURRENT-LIABILITIES> 790,518
<BONDS> 0
0
281,093
<COMMON> 1,018
<OTHER-SE> 2,855,863
<TOTAL-LIABILITY-AND-EQUITY> 7,811,302
<SALES> 0
<TOTAL-REVENUES> 1,556,770
<CGS> 0
<TOTAL-COSTS> 712,733
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,758
<INCOME-PRETAX> 2,027,069
<INCOME-TAX> 795,759
<INCOME-CONTINUING> 1,231,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,060)
<NET-INCOME> 1,228,250
<EPS-BASIC> 10.27
<EPS-DILUTED> 9.35
<FN>
The information reported above under "EPS-PRIMARY" represents basic earnings
per share for the first half ended June 27, 1999.
Excluding non-operating items, basic earnings per share was $1.53 and diluted
earnings per share was $1.41 for the first half ended June 27, 1999.
On July 27, 1999, the Company's board of directors approved a two-for-one
stock split. One share of common stock will be distributed on September 9, 1999
for each share owned by holders of record at the close of business on
August 19, 1999. As a result of the stock split, basic earnings per share will
be restated to $5.14 and diluted earnings per share will be restated to $4.68
for the first half ended June 27, 1999.
</FN>
</TABLE>
