<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-Q
(Mark One)
/x/QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
-------------
OR
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to_________________
COMMISSION FILE NUMBER 1-9329
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PULITZER PUBLISHING COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 430496290
(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 / /
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Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the
latest practicable date.
CLASS OUTSTANDING 7/31/98
---------------------- ----------------------
COMMON STOCK 7,076,119
CLASS B COMMON STOCK 15,385,644
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES - NET:
Advertising $ 62,086 $ 58,446 $ 119,807 $ 112,373
Circulation 21,824 21,755 44,022 44,189
Other 10,305 10,104 20,615 19,578
--------- --------- --------- ---------
Total operating revenues 94,215 90,305 184,444 176,140
--------- --------- --------- ---------
OPERATING EXPENSES:
Operations 37,212 35,511 74,526 70,044
Selling, general and administrative 34,949 33,019 68,396 64,893
General corporate expense 1,223 1,372 2,640 2,756
St. Louis Agency adjustment 5,593 5,500 10,863 10,429
Depreciation and amortization 3,444 3,387 6,823 6,736
--------- --------- --------- ---------
Total operating expenses 82,421 78,789 163,248 154,858
--------- --------- --------- ---------
Operating income 11,794 11,516 21,196 21,282
Interest income 1,114 1,051 2,156 2,501
Net other expense (886) (240) (1,176) (560)
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 12,022 12,327 22,176 23,223
PROVISION FOR INCOME TAXES 5,114 5,228 9,497 9,894
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 6,908 7,099 12,679 13,329
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX (Note 3) 15,793 12,582 23,987 18,847
--------- --------- --------- ---------
NET INCOME $ 22,701 $ 19,681 $ 36,666 $ 32,176
========= ========= ========= =========
BASIC EARNINGS PER SHARE OF STOCK:
Income from continuing operations $ 0.31 $ 0.32 $ 0.57 $ 0.60
Income from discontinued operations 0.71 0.57 1.08 0.86
--------- --------- --------- ---------
Earnings per share $ 1.02 $ 0.89 $ 1.65 $ 1.46
========= ========= ========= =========
Weighted average number of shares outstanding 22,344 22,081 22,289 22,054
========= ========= ========= =========
DILUTED EARNINGS PER SHARE OF STOCK:
Income from continuing operations $ 0.30 $ 0.32 $ 0.56 $ 0.60
Income from discontinued operations 0.70 0.56 1.06 0.84
--------- --------- --------- ---------
Earnings per share $ 1.00 $ 0.88 $ 1.62 $ 1.44
========= ========= ========= =========
Weighted average number of shares outstanding 22,756 22,413 22,685 22,396
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 3
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 101,408 $ 62,749
Trade accounts receivable (less allowance for
doubtful accounts of $1,708 and $1,626) 35,950 35,002
Inventory 2,898 5,265
Prepaid expenses and other 8,589 11,587
------------ ------------
Total current assets 148,845 114,603
------------ ------------
PROPERTIES:
Land 5,625 5,991
Buildings 41,516 39,446
Machinery and equipment 92,570 89,484
Construction in progress 7,739 4,042
------------ ------------
Total 147,450 138,963
Less accumulated depreciation 67,950 64,166
------------ ------------
Properties - net 79,500 74,797
------------ ------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization 182,488 185,124
Receivable from The Herald Company 38,136 39,733
Net assets of Broadcasting Business (Note 3) 30,538 36,069
Other 20,170 13,985
------------ ------------
Total intangible and other assets 271,332 274,911
------------ ------------
TOTAL $ 499,677 $ 464,311
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(Continued)
</TABLE>
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PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 11,047 $ 12,193
Salaries, wages and commissions 8,598 10,523
Income taxes payable 6,214 3,070
Acquisition payable 9,804 9,804
Other 6,840 3,183
--------- ---------
Total current liabilities 42,503 38,773
--------- ---------
PENSION OBLIGATIONS 21,970 21,165
--------- ---------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 89,129 89,350
--------- ---------
OTHER LONG-TERM LIABILITIES 4,204 4,246
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; issued and outstanding - none
Common stock, $.01 par value; 100,000,000 shares authorized;
issued - 7,026,173 in 1998 and 6,797,895 in 1997 70 68
Class B common stock, convertible, $.01 par value; 50,000,000
shares authorized; issued - 27,089,494 in 1998 and
27,125,247 in 1997 271 271
Additional paid-in capital 140,037 135,542
Retained earnings 389,466 362,828
--------- ---------
Total 529,844 498,709
Treasury stock - at cost; 25,519 and 24,660 shares of common
stock in 1998 and 1997, respectively, and 11,700,850 shares
of Class B common stock in 1998 and 1997 (187,973) (187,932)
--------- ---------
Total stockholders' equity 341,871 310,777
--------- ---------
TOTAL $ 499,677 $ 464,311
========= =========
(Concluded)
</TABLE>
See notes to consolidated financial statements
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<PAGE> 5
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 12,679 $ 13,329
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,876 3,814
Amortization 2,947 2,922
Deferred income taxes 155 654
Changes in assets and liabilities (net of the effects of the
purchase and sale of properties) which provided (used) cash:
Trade accounts receivable (948) (286)
Inventory 2,367 (745)
Other assets 2,705 (4,330)
Trade accounts payable and other liabilities (2,229) 603
Income taxes payable 3,144 (101)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,696 15,860
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,312) (5,387)
Purchase of publishing properties (1,998)
Investment in joint ventures and limited partnerships (4,620) (675)
Sale of publishing property 2,590
Decrease in notes receivable 5 4,972
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (13,335) (1,090)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (6,676) (5,727)
Proceeds from exercise of stock options 3,841 2,033
Proceeds from employee stock purchase plan 656
Purchase of treasury stock (41) (28)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (2,220) (3,722)
--------- ---------
CASH PROVIDED BY CONTINUING OPERATIONS 9,141 11,048
--------- ---------
DISCONTINUED OPERATIONS (Note 3)
Operating activities 35,099 28,667
Investing activities (5,376) (8,889)
Financing activities (205) (26,705)
--------- ---------
CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 29,518 (6,927)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 38,659 4,121
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 62,749 73,052
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 101,408 $ 77,173
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
On May 25, 1998, Pulitzer Publishing Company (the "Company"), Pulitzer Inc., (a
newly-organized wholly-owned subsidiary of the Company ("Newco")), and
Hearst-Argyle Television, Inc. ("Hearst-Argyle") entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which Hearst-Argyle will
acquire the Company's Broadcasting Business (see Note 3) (the "Merger"). Prior
to the Spin-off (as defined below), the Company intends to borrow $700 million,
which may be secured by the assets of the Broadcasting Business. Out of the
proceeds of this new debt, the Company will pay the existing Company debt and
any costs arising as a result of the Merger and related transactions. Prior to
the Merger, the balance of the proceeds of this new debt, together with the
Company's publishing assets and liabilities, will be contributed by the Company
to Newco pursuant to a Contribution and Assumption Agreement (the
"Contribution"). Pursuant to the Merger Agreement, Hearst-Argyle will assume the
new debt following the consummation of the Spin-off and Merger.
Immediately following the Contribution, the Company will distribute to each
holder of Company Common Stock one fully-paid and nonassessable share of Newco
Common Stock for each share of Company Common Stock held and to each holder of
Company Class B Common Stock one fully-paid and nonassessable share of Newco
Class B Common Stock for each share of Company Class B Common Stock held (the
"Distribution"). The Contribution and Distribution collectively constitute the
"Spin-off."
The Company's obligation to consummate the Spin-off and the Merger is subject to
the fulfillment of various regulatory approvals and approval by the stockholders
of both the Company and Hearst-Argyle. The controlling stockholders of both
Hearst-Argyle and the Company have agreed to vote in favor of the Merger and
related transactions. The Spin-off and Merger are anticipated to be completed by
year-end 1998.
Following the consummation of the Spin-off and Merger, Newco will be engaged
primarily in the business of newspaper publishing. For financial reporting
purposes, Newco is the continuing stockholder interest and will retain the
Pulitzer name.
Results of the Company's newspaper publishing and related new media businesses
are reported as continuing operations in the statements of consolidated income.
The results of the Company's Broadcasting Business 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 Pulitzer Publishing
Company's financial position as of June 30, 1998, results of operations for the
three and six-month periods ended June 30, 1998 and 1997 and cash flows for
the six-month periods ended June 30, 1998 and 1997. These financial statements
should be read in conjunction with the audited consolidated financial
statements and related notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997, as filed with the Securities
and Exchange Commission. Results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
Fiscal Year and Fiscal Quarters - The Company's fiscal year and second fiscal
quarter end on the Sunday coincident with or prior to December 31 and June 30,
respectively. For ease of presentation, the Company has used December 31 as the
year end and June 30 as the second quarter end.
Earnings Per Share of Stock - Basic earnings per share of stock is computed
using the weighted average number of Common and Class B Common shares
outstanding during the applicable period. Diluted earnings per share of stock
is computed using the weighted average number of Common and Class B Common
shares outstanding and 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:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ----------------
1998 1997 1998 1997
(In thousands)
<S> <C> <C> <C> <C>
Weighted average shares outstanding (Basic EPS) 22,344 22,081 22,289 22,054
Stock option equivalents 412 332 396 342
------ ------ ------ ------
Weighted average shares outstanding and
stock option equivalents (Diluted EPS) 22,756 22,413 22,685 22,396
====== ====== ====== ======
</TABLE>
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
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<PAGE> 7
addition, proceeds from the assumed exercise of dilutive options along with the
related tax benefit are assumed to be used to repurchase common shares at the
average market price of such stock during the period.
Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. This statement established standards for the reporting and
display of Comprehensive Income and its components. This statement is required
to be implemented in financial statements issued for periods ending after
December 15, 1997. For the six-month periods ended June 30, 1998 and 1997, the
Company did not incur items to be reported in "Comprehensive Income" that were
not already included in the reported "net income". As a result, comprehensive
income and net income were the same for these periods.
Reclassifications - Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the 1998 presentation.
3. DISCONTINUED OPERATIONS
Discontinued operations represent the Company's Broadcasting Business as
follows: Pulitzer Broadcasting Company, a wholly-owned subsidiary of the
Company, and its wholly-owned subsidiaries, WESH Television, Inc.; WDSU
Television, Inc.; and KCCI Television, Inc.; (collectively "Broadcasting" or
"Broadcasting Business"), own and operate nine network-affiliated television
stations and five radio stations. Broadcasting's television properties
represent market sizes from Omaha, Nebraska to Orlando, Florida and include
operations in the northeast, southeast, midwest and southwest. Three of
Broadcasting's five radio stations, representing the significant portion of its
radio operations, are located in Phoenix, Arizona.
The assets and liabilities of the Broadcasting Business are classified in
the statements of consolidated financial position as "Net Assets of Broadcasting
Business" and consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In thousands)
<S> <C> <C>
Trade accounts receivable - net $ 50,863 $ 50,880
Program rights 3,054 7,866
Other current assets 1,306 1,260
-------- --------
Total current assets 55,223 60,006
Properties - net 84,072 87,017
Intangible assets 98,670 102,493
Other assets 7,904 7,172
-------- --------
Total assets of Broadcasting Business 245,869 256,688
-------- --------
Trade accounts payable and accrued expenses 10,335 10,226
Current portion of long-term debt 12,705 12,705
Interest payable 5,640 5,677
Program contracts payable 2,728 7,907
-------- --------
Total current liabilities 31,408 36,515
Long-term debt 172,500 172,705
Long term employee benefit obligations 8,901 8,100
Other long term liabilities 2,522 3,299
-------- --------
Total liabilities of Broadcasting Business 215,331 220,619
-------- --------
Net assets of Broadcasting Business $ 30,538 $ 36,069
======== ========
</TABLE>
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<PAGE> 8
The net income from operations of the Broadcasting Business, without allocation
of any general corporate expense, is reflected in the statements of
consolidated income as "Income from Discontinued Operations" and is summarized
as follows:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------ ------------ -------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Operating revenues $66,603 $61,093 $119,773 $111,264
Operating income 29,375 24,818 46,290 39,637
Interest expense 3,463 4,174 6,925 8,699
Income before provision for
income taxes 25,912 20,644 39,365 30,938
Provision for income taxes 10,119 8,062 15,378 12,091
Net income 15,793 12,582 23,987 18,847
Depreciation and amortization 5,500 5,850 11,051 11,684
</TABLE>
Pursuant to the Merger Agreement, the Company's existing long-term debt will be
repaid with new long-term borrowings prior to the Merger. In addition, the new
borrowings will be assumed by Hearst-Argyle at the time of the Merger.
Accordingly, all of the Company's 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 1).
4. DIVIDENDS
In the first quarter of 1998, two dividends of $0.15 per share were declared,
payable on February 2, 1998 and May 1, 1998. In the second quarter of 1998, a
dividend of $0.15 per share was declared, payable on August 3, 1998.
In the first quarter of 1997, two dividends of $0.13 per share were declared,
payable on February 3, 1997 and May 1, 1997. In the second quarter of 1997, a
dividend of $0.13 per share was declared, payable on August 1, 1997. In the
third quarter of 1997, a dividend of $0.13 per share was declared, payable on
November 1, 1997.
5. COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company and its subsidiaries had construction and
equipment commitments of approximately $9,263,000 related to continuing
operations and $2,347,000 related to discontinued operations. The Company's
commitment for broadcasting program contracts payable and license fees at June
30, 1998 was approximately $29,672,000.
The Company is an investor in two limited partnerships requiring future captial
contributions. As of June 30, 1998, the Company's unfunded capital contribution
commitment related to these investments was approximately $8,243,000.
The Company and its subsidiaries are defendants in a number of lawsuits, some of
which claim substantial amounts. While the results of litigation cannot be
predicted, management believes, after consultation with legal counsel, the
ultimate outcome of such litigation will not have a material adverse effect on
the consolidated financial statements of the Company and its subsidiaries.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance, anticipated profitability,
revenues, expenses or other financial items, together with other statements that
are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, industry cyclicality,
the seasonal nature of the business, changes in pricing or other actions by
competitors or suppliers, and general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission including this Quarterly Report on Form 10-Q.
GENERAL
The Company's operating revenues are significantly influenced by a
number of factors, including overall advertising expenditures, the appeal of
newspapers in comparison to other forms of advertising, the performance of the
Company in comparison to its competitors in specific markets, the strength of
the national economy and general economic conditions and population growth in
the markets served by the Company.
The Company's business tends to be seasonal, with peak revenues and
profits generally occurring in the fourth and, to a lesser extent, second
quarters of each year as a result of increased advertising activity during the
Christmas and spring holiday periods. The first quarter is historically the
weakest quarter for revenues and profits.
RECENT EVENTS
On May 25, 1998, Pulitzer Publishing Company (the "Company"), Pulitzer
Inc., (a newly-organized wholly-owned subsidiary of the Company ("Newco")), and
Hearst-Argyle Television, Inc. ("Hearst-Argyle") entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which Hearst-Argyle will
acquire the Company's Broadcasting Business (the "Merger"). The Company will
continue to engage in newspaper publishing and related new media businesses.
The Company's historical basis in its non-broadcasting assets and
liabilities will be carried over to Newco. The Merger, the Spin-off and the
related transactions will be recorded as a reverse-spin transaction, and,
accordingly, Newco's results of operations for periods reported prior to the
consummation of the Merger, the Spin-off and related transactions will
represent the historical results of operations previously reported by the
Company. Because the Broadcasting Business represents an entire business
segment that will be divested, its results are reported as discontinued
operations in the Company's Consolidated Financial Statements. (See Notes 1
and 3 to the Consolidated Financial Statements included in Item 1 of this
Report on Form 10-Q.)
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the second quarter and first six months of 1998
increased 4.3 percent and 4.7 percent, respectively, compared to the
corresponding periods in the prior year. The gains primarily reflected higher
advertising revenues.
Newspaper advertising revenues increased $3.6 million (6.2 percent) in
the second quarter and $7.4 million (6.6 percent) in the first six months of
1998 compared to the corresponding periods in the prior year. The current year
increases resulted from advertising gains at the St. Louis Post-Dispatch
("Post-Dispatch"), The Arizona Daily Star ("Star") and the Pulitzer Community
Newspaper group ("PCN"). Full run advertising volume (linage in inches)
increased 0.5 percent at the Post-Dispatch and 3.8 percent at Star for the
second quarter of 1998. For the first half of 1998, full run advertising volume
increased 1.4 percent at the Post-Dispatch and 3.5 percent at Star. In the
fourth quarter of 1997 and the first quarter of 1998, varying rate increases
were implemented at the Post-Dispatch, Star and most of the PCN properties.
Circulation revenues for the second quarter and first half of 1998
experienced only slight fluctuations from the corresponding periods of the prior
year, increasing 0.3 percent for the quarter and declining 0.4 percent for the
six-month period.
Other publishing revenues increased $201,000 (2 percent) in the second
quarter and $1 million (5.3 percent) in the first six months of 1998, reflecting
higher preprint revenues and Internet subscriber fees.
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<PAGE> 10
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, for the second quarter and first six
months of 1998 increased 4.8 percent and 5.5 percent, respectively, compared to
the corresponding periods in the prior year. The current year increases were
attributable to higher overall personnel costs ($1.5 million second quarter and
$3.1 million - year to date), higher newsprint costs ($833,000 - second quarter
and $2.5 million - year to date), and increases in promotion costs ($528,000 -
second quarter and $572,000 - year to date).
Operating income for the second quarter of 1998 increased to $11.8
million (2.4 percent) reflecting higher advertising revenues in the current
year. For the first half of 1998, operating income declined slightly to $21.2
million (0.4 percent) as higher newsprint and personnel costs offset advertising
revenue gains.
Interest income for the second quarter of 1998 increased $63,000 (6
percent) due to a slightly higher average balance of invested funds. For the
first six months of 1998, interest income declined $345,000 (13.8 percent) due
to a lower average balance of invested funds.
Net other expense for the second quarter and first six months of 1998
increased $646,000 and $616,000, respectively, due to a one-time charge of
$869,000 related to the sale of the Haverhill Gazette on June 1, 1998.
The effective income tax rates for the second quarter and first six
months of 1998 were 42.5 percent and 42.8 percent, respectively, compared to
42.4 percent and 42.6 percent, respectively, in the corresponding prior year
periods. The Company expects that its effective tax rate related to continuing
operations will be in the 42 to 43 percent range for the full year of 1998
(exclusive of any non-recurring items related to the Spin-off and Merger).
Income from continuing operations in the 1998 second quarter declined
2.7 percent to $6.9 million, or $0.30 per diluted share, compared with $7.1
million, or $0.32 per diluted share, in the second quarter of 1997. Income from
continuing operations for the first six months of 1998 decreased 4.9 percent to
$12.7 million, or $0.56 per diluted share, compared with $13.3 million, or $0.60
per diluted share, a year ago. The declines reflected higher personnel and
newsprint costs and the after-tax loss on the sale of the Haverhill Gazette of
$531,000 ($0.02 per diluted share).
Fluctuations in the price of newsprint significantly impact the results
of the Company's newspaper operations, where newsprint expense accounts for
approximately 20 percent of total operating costs. For the first half of 1998,
the Company's average cost for newsprint was approximately $600 per metric ton,
compared to approximately $540 per metric ton in 1997. Since the end of the
second quarter, the Company's cost of newsprint has been in the range of $575
per metric ton. The Company has been informed by some of its suppliers of a
plan to increase the price of newsprint by approximately $40 per metric ton on
September 1, 1998. In the second half of 1997, the Company's average cost of
newsprint was approximately $585 per metric ton.
DISCONTINUED OPERATIONS--BROADCASTING
Broadcasting operating revenues for the second quarter and first six
months of 1998 increased 9 percent and 7.6 percent, respectively, over the
comparable 1997 periods. Local spot advertising increased 6.7 percent and 7
percent, respectively, for the second quarter and first six months of 1998, and
national spot advertising increased 13 percent and 9.7 percent, respectively,
for the second quarter and six-month period. The current year comparisons
reflect the impact of increased political advertising of approximately $4
million and $4.2 million, respectively, in the second quarter and first six
months of 1998.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) for the second
quarter of 1998 increased to $37.2 million (2.6 percent) and for the first six
months increased to $73.5 million (2.6 percent) compared to the prior year
periods. The increases were primarily attributable to higher overall personnel
costs of $1.4 million and $2.6 million for the second quarter and first six
months of 1998, respectively.
Broadcasting operating income in the 1998 second quarter increased 18.4
percent to $29.4 million and in the first six months increased 16.8 percent to
$46.3 million. The increases for both periods resulted from higher advertising
revenues.
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<PAGE> 11
Interest expense declined $711,000 in the 1998 second quarter and $1.8
million in the first six months due to lower average debt levels. The Company's
average debt level for the second quarter and first six months of 1998 decreased
to $185.2 million and $185.3 million from $227.7 million and $239.9 million in
the respective periods of the prior year. The Company's average interest rate
for both the second quarter and first six months of 1998 increased to 7.5
percent from 7.3 percent in both prior year periods. The lower average debt
levels and higher average interest rates in the first half of 1998 reflected the
payment of variable rate credit agreement borrowings during the last three
quarters of 1997.
The effective income tax rates for the second quarter and first six
months of 1998 were 39.1 percent, unchanged from the corresponding periods in
the prior year. The Company expects that the effective tax rate related to
broadcasting operations will be approximately 39 percent for the full year of
1998.
Income from discontinued operations in the 1998 second quarter
increased 25.5 percent to $15.8 million, or $0.70 per diluted share, compared
with $12.6 million, or $0.56 per diluted share, in the second quarter of 1997.
Income from discontinued operations for the first six months of 1998 increased
27.3 percent to $24 million, or $1.06 per diluted share, compared with $18.8
million, or $0.84 per diluted share, a year ago. The gains reflected increases
in broadcasting advertising revenues.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Merger Agreement, the Company's existing long-term debt
will be repaid with new long-term borrowings prior to the Merger. In addition,
the new borrowings will be assumed by Hearst-Argyle at the time of the Merger.
Accordingly, all of the Company's long-term debt balances are allocated to the
Broadcasting Business and included in "Net Assets of the Broadcasting Business"
in the consolidated statements of financial position (see Item 1 of this Report
on Form 10-Q). Outstanding debt, inclusive of the short-term portion of
long-term debt, as of June 30, 1998, was $185.2 million compared to $185.4
million at December 31, 1997. The Company's borrowings consist primarily of
fixed-rate senior notes with The Prudential Insurance Company of America
("Prudential"). Under a variable rate credit agreement with The First National
Bank of Chicago, as Agent, for a group of lenders, the Company has a $50 million
line of credit available through June, 2001 (the "FNBC Credit Agreement"). No
amount is currently borrowed under the FNBC Credit Agreement.
The Company's Senior Note Agreements with Prudential and the FNBC
Credit Agreement require it to maintain certain financial ratios, place
restrictions on the payment of dividends and prohibit new borrowings, except as
permitted thereunder.
As of June 30, 1998, commitments for capital expenditures were
approximately $11.6 million, relating to normal capital equipment replacements
(including Year 2000 projects in-process) and the cost of a building project for
the Louisville, Kentucky broadcasting property. Capital expenditures to be made
in fiscal 1998 are estimated to be in the range of $25 to $30 million.
Commitments for film contracts and license fees at broadcasting locations as of
June 30, 1998 were approximately $29.7 million. In addition, as of June 30,
1998, the Company had capital contribution commitments of approximately $8.2
million related to investments in two limited partnerships.
At June 30, 1998, the Company had working capital of $106.3 million and
a current ratio of 3.50 to 1. This compares to working capital of $75.8 million
and a current ratio of 2.96 to 1 at December 31, 1997.
The Company from time to time considers acquisitions of newspaper and
other properties when favorable investment opportunities are identified. In
the event an investment opportunity is identified, management expects that it
would be able to arrange financing on terms and conditions satisfactory to the
Company.
The Company generally expects to generate sufficient cash from
operations to cover ordinary capital expenditures, film contract and license
fees, working capital requirements, debt installments and dividend payments.
11
<PAGE> 12
SPIN-OFF AND MERGER
Prior to the Spin-off and Merger, the Company intends to borrow
$700 million which will provide sufficient funds to pay the existing Company
debt and the costs of the Spin-off and Merger discussed below. Pursuant to the
Merger Agreement, Hearst-Argyle will assume the new debt following the
consummation of the Spin-off and Merger. (See Note 1 to the Company's
Consolidated Financial Statements included in Item 1 of this Report on Form
10-Q.)
In connection with the Spin-off and Merger, the Company will incur
new long-term borrowings, prepay existing Company debt, and make several
one-time payments near the dates of the Spin-off and Merger. The Company
will incur a prepayment penalty related to the prepayment of existing Company
debt with Prudential. Based upon current interest rates, the prepayment penalty
would be approximately $15.9 million. Professional fees to be incurred related
to the Spin-off and Merger are estimated in the range of $37 million.
Management bonuses to be paid at the date of the Merger are estimated at
approximately $11.6 million. Pursuant to the Merger Agreement, the Company will
cash-out all outstanding stock options at the date of the Merger. Based upon
outstanding options and the Company's Common Stock market price as of July 31,
1998, payments to employee option holders of approximately $49.8 million would
have been required. It is anticipated that a portion of the option cash-out and
bonus payments will be deferred at the time of the Merger and paid at a future
date. The Company expects to realize tax benefits related to the long-term debt
prepayment penalty, option cash-out payments and bonus payments. The preceding
amounts represent estimates based upon current information available to
management of the Company. The final actual amounts will likely differ from
the estimates.
To the extent a gain is generated by the Spin-off and Merger, a
corporate-level income tax will be due. The gain is measured by the excess, if
any, of the fair market value of Newco stock distributed by the Company to its
stockholders in the Spin-off over the Company's adjusted tax basis in such
Newco stock immediately prior to the distribution. On July 31, 1998, the fair
market value of Newco stock would be estimated as the difference between the
closing price of the Company's Common Stock on July 31, 1998 ($84.81) and the
fair market value for the Broadcasting Business of $51.20 per share, as
indicated by the value ($1.15 billion) Hearst-Argyle is exchanging for the
Company's Common Stock (22,461,763 shares at July 31, 1998). Using a fair
market value of $33.61(the excess of $84.81 over $51.20) per common share for
the Newco stock, no gain (or tax) would result from the Spin-off and Merger
because the adjusted tax basis of the Newco stock would be approximately $33.79
per share. However, if the fair market value of the Newco stock was $40 per
share, for example, the estimated tax related to the gain would be
approximately $55 million. The actual gain and related income tax will depend
on the fair market value and the Company's adjusted tax basis in the Newco
stock at the time of the Spin-off.
In connection with the September 1986 purchase of the Company's Class
B Common Stock from certain selling stockholders (the "1986 Selling
Stockholders"), the Company agreed under certain circumstances to make an
additional payment to the 1986 Selling Stockholders in the event that a Gross-Up
Transaction occurred prior to May 13, 2001. 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, the Company pursuant to which holders of Common Stock receive
securities other than the Common Stock of the Company and (ii) any
recapitalization, dividend or distribution, or series of related
recapitalizations, dividends or distributions, in which holders of Common Stock
receive securities (other than Common Stock) having a Fair Market Value of not
less than 33 1/3 percent of the Fair Market Value of the shares of 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) exceeds the Imputed Value (as defined) 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 Common Stock
issuable upon conversion of the shares of Class B Common Stock owned by the
Selling Stockholders, adjusted for, among other things, stock dividends and
stock splits; less (y) the sum of any additional payments previously received by
the Selling Stockholders; provided, however, that in the event of any dividend
the amount by which the Transaction Proceeds exceeds the Imputed Value shall not
exceed the amount distributed pursuant to such dividend in respect of one share
of Common Stock.
The term "Transaction Proceeds" was defined to mean, in the case of a
merger, the aggregate Fair Market Value of the consideration received pursuant
thereto by the holder of one share of Common Stock, and, in the case of a
dividend, the aggregate Fair Market Value of the amounts distributed in respect
of one share of Common Stock plus the aggregate Fair Market Value of one share
of the Common Stock following such transaction. The "Imputed Value" for one
share of 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. 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 the Company since September 30, 1986, it would now equal $15.72, which
if compounded annually from May 12, 1986 at the rate of 15 percent per annum
would now equal $84.11. The result of compounding $28.82 annually from May 12,
1986 to May 12, 1998 at the rate of 15 percent per annum is $154.19.
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 selected by a Valuation Firm selected by the Company and a
Valuation Firm selected by the Selling Stockholders, or, if the two Valuation
Firms do not agree on the fair market value, the fair market value of such
consideration as determined by a third Valuation Firm selected by the two other
Valuation Firms. Any such agreement or determination shall be final and binding
on the parties.
Accordingly, as a result of the foregoing and other possible variables,
the amount of additional payments, if any, which may be payable by Newco with
respect to the Merger and the Distribution cannot be determined at this time.
However, if the Distribution were determined to be a Gross-Up Transaction and if
the Fair Market Value of the Transaction Proceeds with respect to the Merger and
the Distribution were determined to exceed the Imputed Value, then the
additional payments to the Selling Stockholders would equal approximately $5.9
million for each $1.00 by which the Transaction Proceeds exceed the Imputed
Value.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Issue is the result of information systems being designed
using two digits rather than four 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, the Company began reviewing and preparing its information
systems and applications for the Year 2000. For the Company, this process
involves the replacement of aging hardware and software to address most of its
Year 2000 issues. A significant portion of the Company's information systems
were scheduled to be replaced during the next few years, irrespective of the
Year 2000 Issue. The Company plans to have substantially all of the system and
application changes completed by June 30, 1999.
The Company expects to incur internal staff costs, as well as
consulting and other expenditures, to install new information systems and modify
existing systems during the next nine to twelve months. At June 30, 1998, the
remaining cost of new hardware and software to address Year 2000 issues, as well
as to replace aging systems, is estimated at approximately $5.8 million. These
capital expenditures have been considered in the Company's normal capital
budgeting process and will be funded through operating cash flows. Year 2000
related maintenance and modification costs, which will be expensed as incurred,
are not expected to be significant.
The preceding discussion relates to the Company's continuing publishing
operations only. The Company does not expect to incur significant costs to
address Year 2000 issues at its broadcasting locations prior to the Merger,
which is anticipated to close by year-end 1998.
DIGITAL TELEVISION
The Company's Orlando television station, WESH, is required to
construct digital television facilities in order to broadcast digitally by
November 1, 1999 and comply with Federal Communications Commission ("FCC")
rules. The deadline for constructing digital facilities at the Company's other
television stations is May 1, 2002. The Company is currently considering
available options to comply with the FCC's timetable but does not expect to
incur significant capital expenditures to construct digital facilities prior to
the Merger.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) The Annual Meeting of Stockholders was held on June 3, 1998.
(b) The following directors were elected at the Annual Meeting of
Stockholders:
David E. Moore
Ken J. Elkins
Nicholas G. Penniman IV
The following directors continued their term of office after
the Annual Meeting of Stockholders:
Michael E. Pulitzer
Ronald H. Ridgway
William Bush
Emily Rauh Pulitzer
Alice B. Hayes
James M. Snowden, Jr.
(c) The following nominees for election as director received the
votes indicated:
<TABLE>
<CAPTION>
For Withheld Abstain
----------- -------- -------
<S> <C> <C> <C>
David E. Moore 160,344,506 107,257 0
Ken J. Elkins 160,353,178 118,585 0
Nicholas G. Penniman IV 160,353,621 118,142 0
The selection of Deloitte & Touche as the Company's
independent auditors was approved by the vote indicated:
For: 160,467,043
Against: 1,582
Broker non-votes: 0
Abstain: 3,138
</TABLE>
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed as part of this report:
27-1 Financial Data Schedule for 1998 Second Quarter
27-2 Restated Financial Data Schedule for 1997 Second
Quarter
The following exhibit is incorporated herein by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K filed
on June 10, 1998:
10.1 Agreement and Plan of Merger by and among Pulitzer
Publishing Company, Pulitzer Inc. and Hearst-Argyle
Television, Inc., dated May 25, 1998.
(b) Reports on Form 8-K. The Company filed a Current Report on
Form 8-K on June 10, 1998.
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 PUBLISHING COMPANY
(Registrant)
Date: August 12, 1998 /s/ Ronald H. Ridgway
---------------------------------------
(Ronald H. Ridgway)
Director; Senior Vice-President-Finance
(on behalf of the Registrant and
as principal financial officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER TITLE OR DESCRIPTION
-------------- --------------------
<S> <C>
27-1 Financial Data Schedule for 1998 Second Quarter
27-2 Restated Financial Data Schedule for 1997 Second Quarter
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 101,408
<SECURITIES> 0
<RECEIVABLES> 37,658
<ALLOWANCES> 1,708
<INVENTORY> 2,898
<CURRENT-ASSETS> 148,845
<PP&E> 147,450
<DEPRECIATION> 67,950
<TOTAL-ASSETS> 499,677
<CURRENT-LIABILITIES> 42,503
<BONDS> 0
0
0
<COMMON> 341
<OTHER-SE> 529,503
<TOTAL-LIABILITY-AND-EQUITY> 499,677
<SALES> 184,444
<TOTAL-REVENUES> 184,444
<CGS> 74,526
<TOTAL-COSTS> 74,526
<OTHER-EXPENSES> 6,823
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,176
<INCOME-TAX> 9,497
<INCOME-CONTINUING> 12,679
<DISCONTINUED> 23,987
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,666
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 77,173
<SECURITIES> 0
<RECEIVABLES> 34,255
<ALLOWANCES> 1,658
<INVENTORY> 5,721
<CURRENT-ASSETS> 124,137
<PP&E> 130,028
<DEPRECIATION> 61,513
<TOTAL-ASSETS> 430,358
<CURRENT-LIABILITIES> 37,668
<BONDS> 0
0
0
<COMMON> 338
<OTHER-SE> 463,059
<TOTAL-LIABILITY-AND-EQUITY> 430,358
<SALES> 176,140
<TOTAL-REVENUES> 176,140
<CGS> 70,044
<TOTAL-COSTS> 70,044
<OTHER-EXPENSES> 6,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,223
<INCOME-TAX> 9,894
<INCOME-CONTINUING> 13,329
<DISCONTINUED> 18,847
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,176
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.44
</TABLE>
