<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------
FORM 8-K
--------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) September 4, 1998
-----------------
PULITZER PUBLISHING COMPANY
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9329 430496290
---------- -------- -----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation File Number) Identification No.)
900 North Tucker Boulevard, St. Louis, Missouri 63101
- ----------------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 340-8000
--------------
Not Applicable
--------------
(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 5. OTHER EVENTS.
On May 25, 1998, the Registrant entered into an agreement to combine
its broadcasting business with Hearst-Argyle Television, Inc. ("Acquiror").
Prior to this proposed merger, and subject to certain conditions, the Registrant
intends to spin off its newspaper publishing and new media businesses to its
stockholders ( the "Spin Off"). Pursuant to the Agreement and Plan of Merger,
dated as of May 25, 1998, among the Registrant, Pulitzer Inc., a wholly-owned
subsidiary of the Registrant, and Acquiror, following the Spin Off the
Registrant expects to merge with and into Acquiror (the "Merger"). In connection
with the Merger, the Registrant's stockholders will receive consideration in the
form of $1.l5 billion of Acquiror's Series A Common Stock, subject to possible
adjustment based upon the price of Acquiror's stock during a measurement period
prior to the closing. In addition, Acquiror will assume approximately $700
million of the Registrant's debt that will be incurred prior to the Spin-off
and Merger.
The transactions are subject to various conditions, including approval
of the stockholders of both companies, Hart-Scott-Rodino clearance, approval by
the Federal Communications Commission, and a favorable ruling from the Internal
Revenue Service relating to the Spin Off. Hearst Broadcasting, Inc., a
wholly-owned subsidiary of The Hearst Corporation and the principal stockholder
of Acquiror, and the principal stockholders of the Registrant, representing 65
percent of the outstanding capital stock of the Registrant, have agreed to vote
in favor of the transaction. The Spin Off and Merger are anticipated to be
completed by year-end 1998.
The terms of the Merger are more fully described in the Agreement and
Plan of Merger filed as an exhibit to the Company's Report on Form 8-K filed on
June 10, 1998.
The Registrant has restated its consolidated financial statements for
the years ended December 31, 1997, 1996 and 1995 (filed as Exhibit 99-1 hereto)
to reflect the reclassification of the broadcasting business as a discontinued
operation. In addition, the Registrant has restated its consolidated financial
statements for the three-month periods ended March 31, 1998 and 1997 (filed as
Exhibit 99-2 hereto). The Registrant has also prepared stand-alone consolidated
financial statements for its wholly-owned subsidiary Pulitzer Broadcasting
Company for the years ended December 31, 1997, 1996 and 1995 and for the
six-month periods ended June 30, 1998 and 1997 (filed as Exhibit 99-3 hereto).
Pulitzer Broadcasting Company and subsidiaries represent all of the
operations of the Registrant's broadcasting business. Included in each Exhibit
is a section for "Management's Discussion and Analysis of Financial Condition
and Results of Operations" ("MD&A") related to the appropriate consolidated
financial statements. The MD&A sections for the Registrant's consolidated
financial statements included in Exhibits 99-1 and 99-2 have been restated.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) Exhibits
See Exhibit Index for a list of exhibits.
All other Items of this report are inapplicable.
2
<PAGE> 3
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 hereunto duly authorized.
PULITZER PUBLISHING COMPANY
Date: September 4, 1998 By:/s/ RONALD H. RIDGWAY
---------------------
Name: Ronald H. Ridgway
Title: Senior Vice President-
Finance
3
<PAGE> 4
EXHIBIT INDEX
27-1 Restated Financial Data Schedules for the Years Ended
December 31, 1997, 1996 and 1995
27-2 Restated Financial Data Schedules for the Three-Month
Periods Ended March 31, 1998 and 1997
99-1 Pulitzer Publishing Company Restated Consolidated Financial
Statements for the Years Ended December 31, 1997, 1996
and 1995
99-2 Pulitzer Publishing Company Restated Consolidated Financial
Statements for the Three-Month Periods Ended March 31, 1998
and 1997
99-3 Pulitzer Broadcasting Company and Subsidiaries Consolidated
Financial Statements for the Years Ended December 31, 1997,
1996 and 1995 and for the Six-Month Periods Ended June 30,
1998 and 1997
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 62,749 73,052 100,380
<SECURITIES> 0 0 0
<RECEIVABLES> 36,628 33,895 23,640
<ALLOWANCES> 1,626 1,585 1,158
<INVENTORY> 5,265 4,976 6,190
<CURRENT-ASSETS> 114,603 114,711 134,833
<PP&E> 138,963 124,640 77,677
<DEPRECIATION> 64,166 57,602 52,309
<TOTAL-ASSETS> 464,311 427,182 333,641
<CURRENT-LIABILITIES> 38,773 35,783 21,843
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 339 337 252
<OTHER-SE> 498,370 437,456 386,355
<TOTAL-LIABILITY-AND-EQUITY> 464,311 427,182 333,641
<SALES> 357,969 309,096 269,388
<TOTAL-REVENUES> 357,969 309,096 269,388
<CGS> 145,730 139,259 125,811
<TOTAL-COSTS> 145,730 139,259 125,811
<OTHER-EXPENSES> 13,007 8,660 4,307
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 44,976 25,684 23,604
<INCOME-TAX> 19,226 10,892 9,149
<INCOME-CONTINUING> 25,750 14,792 14,455
<DISCONTINUED> 40,278 42,708 34,867
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 66,028 57,500 49,322
<EPS-PRIMARY> 2.99 2.62 2.26
<EPS-DILUTED> 2.94 2.58 2.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 84,252 99,732
<SECURITIES> 0 0
<RECEIVABLES> 35,950 32,524
<ALLOWANCES> 1,646 1,759
<INVENTORY> 3,670 5,328
<CURRENT-ASSETS> 133,275 142,457
<PP&E> 144,773 126,455
<DEPRECIATION> 66,126 59,558
<TOTAL-ASSETS> 478,452 412,346
<CURRENT-LIABILITIES> 43,429 40,957
<BONDS> 0 0
0 0
0 0
<COMMON> 340 338
<OTHER-SE> 507,613 445,511
<TOTAL-LIABILITY-AND-EQUITY> 478,452 412,346
<SALES> 90,229 85,835
<TOTAL-REVENUES> 90,229 85,835
<CGS> 37,314 34,533
<TOTAL-COSTS> 37,314 34,533
<OTHER-EXPENSES> 3,379 3,349
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 10,154 10,896
<INCOME-TAX> 4,383 4,666
<INCOME-CONTINUING> 5,771 6,230
<DISCONTINUED> 8,194 6,265
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,965 12,495
<EPS-PRIMARY> 0.63 0.57
<EPS-DILUTED> 0.62 0.56
</TABLE>
<PAGE> 1
EXHIBIT 99-1
PULITZER PUBLISHING COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Statements of Consolidated Income for each of the Three Years in the
Period Ended December 31, 1997
Statements of Consolidated Financial Position at December 31, 1997 and
1996
Statements of Consolidated Stockholders' Equity for each of the Three
Years in the Period Ended December 31, 1997
Statements of Consolidated Cash Flows for each of the Three Years in
the Period Ended December 31, 1997
Notes to Consolidated Financial Statements for the Three Years in the
Period Ended December 31, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL SCHEDULE
Independent Auditors' Report
Financial Schedule II for each of the Three Years in the Period Ended
December 31, 1997
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Pulitzer Publishing Company:
We have audited the accompanying statements of consolidated financial position
of Pulitzer Publishing Company and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
February 6, 1998
(July 17, 1998 as to
Notes 1, 4 and 14)
2
<PAGE> 3
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C>
OPERATING REVENUES - NET:
Advertising $ 227,817 $ 191,939 $ 161,932
Circulation 87,611 81,434 76,349
Other 42,541 35,723 31,107
------------ ------------ ------------
Total operating revenues 357,969 309,096 269,388
------------ ------------ ------------
OPERATING EXPENSES OPERATIONS:
Operations 145,730 139,259 125,811
Selling, general and administrative 132,238 114,628 101,375
General corporate expense 6,007 5,532 4,666
St. Louis Agency adjustment (Note 3) 19,450 13,972 12,502
Depreciation and amortization 13,007 8,660 4,307
------------ ------------ ------------
Total operating expenses 316,432 282,051 248,661
------------ ------------ ------------
Operating income 41,537 27,045 20,727
Interest income 4,642 4,509 5,196
Net other expense (1,203) (5,870) (2,319)
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 44,976 25,684 23,604
PROVISION FOR INCOME TAXES (Note 10) 19,226 10,892 9,149
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 25,750 14,792 14,455
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX (Note 4) 40,278 42,708 34,867
------------ ------------ ------------
NET INCOME $ 66,028 $ 57,500 $ 49,322
============ ============ ============
BASIC EARNINGS PER SHARE OF STOCK (Note 13):
Income from continuing operations $ 1.17 $ 0.67 $ 0.66
Income from discontinued operations 1.82 1.95 1.60
------------ ------------ ------------
Earnings per share $ 2.99 $ 2.62 $ 2.26
============ ============ ============
Weighted average number of shares outstanding 22,110 21,926 21,800
============ ============ ============
DILUTED EARNINGS PER SHARE OF STOCK (Note 13):
Income from continuing operations $ 1.15 $ 0.66 $ 0.65
Income from discontinued operations 1.79 1.92 1.58
------------ ------------ ------------
Earnings per share $ 2.94 $ 2.58 $ 2.23
============ ============ ============
Weighted average number of shares outstanding 22,452 22,273 22,097
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 62,749 $ 73,052
Trade accounts receivable (less allowance for doubtful
accounts of $1,626 and $1,585) 35,002 32,310
Inventory 5,265 4,976
Prepaid expenses and other 11,587 4,373
------------ ------------
Total current assets 114,603 114,711
------------ ------------
PROPERTIES:
Land 5,991 5,350
Buildings 39,446 34,906
Machinery and equipment 89,484 84,048
Construction in progress 4,042 336
------------ ------------
Total 138,963 124,640
Less accumulated depreciation 64,166 57,602
------------ ------------
Properties - net 74,797 67,038
------------ ------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization (Notes 5 and 6) 185,124 190,371
Receivable from The Herald Company (Notes 3 and 9) 39,733 39,955
Net assets of Broadcasting Business (Note 4) 36,069
Other 13,985 15,107
------------ ------------
Total intangible and other assets 274,911 245,433
------------ ------------
TOTAL $ 464,311 $ 427,182
============ ============
</TABLE>
(Continued)
4
<PAGE> 5
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
(In thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 12,193 $ 9,631
Salaries, wages and commissions 10,523 10,091
Income taxes payable 3,070 1,267
Pension obligations (Note 8) 348 2,123
Acquisition payable 9,804 9,804
Other 2,835 2,867
------------ ------------
Total current liabilities 38,773 35,783
------------ ------------
PENSION OBLIGATIONS (Note 8) 21,165 19,266
------------ ------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS (Note 9) 89,350 89,634
------------ ------------
NET LIABILITIES OF BROADCASTING BUSINESS (Note 4) 28,767
------------ ------------
OTHER LONG-TERM LIABILITIES 4,246 3,795
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY (Note 11):
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 - 6,797,895 in 1997 and 6,498,215 in 1996 68 65
Class B common stock, convertible, $.01 par value; 50,000,000
shares authorized; issued - 27,125,247 in 1997 and
27,214,842 in 1996 271 272
Additional paid-in capital 135,542 129,173
Retained earnings 362,828 308,283
------------ ------------
Total 498,709 437,793
Treasury stock - at cost; 24,660 and 22,811 shares of common
stock in 1997 and 1996, respectively, and 11,700,850 shares of
Class B common stock in 1997 and 1996 (187,932) (187,856)
------------ ------------
Total stockholders' equity 310,777 249,937
------------ ------------
TOTAL $ 464,311 $ 427,182
============ ============
</TABLE>
(Concluded)
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Class B Additional Stock-
Common Common Paid-in Retained Treasury holders'
Stock Stock Capital Earnings Stock Equity
---------- ---------- ---------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995 $ 44 $ 206 $ 122,070 $ 220,322 $ (187,623) $ 155,019
Issuance of common stock grants 218 218
Common stock options exercised 2 2,327 2,329
Conversion of Class B common stock
to common stock 1 (1)
Tax benefit from stock options exercised 924 924
Net income 49,322 49,322
Cash dividends declared and paid $.41 per
share of common and Class B common (8,828) (8,828)
Purchase of treasury stock (213) (213)
---------- ---------- ---------- --------- ---------- ----------
BALANCES AT DECEMBER 31, 1995 47 205 125,539 260,816 (187,836) 198,771
Issuance of common stock grants 76 76
Common stock options exercised 1 2,166 2,167
Conversion of Class B common stock
to common stock 1 (1)
Tax benefit from stock options exercised 1,476 1,476
Net income 57,500 57,500
Cash dividends declared and paid $.46 per
share of common and Class B common (10,033) (10,033)
Purchase of treasury stock (20) 20)
Four for three stock split in the form of a
33.3 percent stock dividend (Note 11) 16 68 (84)
---------- ---------- ---------- --------- ---------- ----------
BALANCES AT DECEMBER 31, 1996 65 272 129,173 308,283 (187,856) 249,937
Issuance of common stock grants 70 70
Common stock options exercised 2 3,297 3,299
Conversion of Class B common stock
to common stock 1 (1)
Common stock issued under Employee
Stock Purchase Plan 322 322
Tax benefit from stock options exercised 2,680 2,680
Net income 66,028 66,028
Cash dividends declared and paid $.52 per
share of common and Class B common (11,483) (11,483)
Purchase of treasury stock (76) (76)
---------- ---------- ---------- --------- ---------- ----------
BALANCES AT DECEMBER 31, 1997 $ 68 $ 271 $ 135,542 $ 362,828 $ (187,932) $ 310,777
========== ========== ========== ========= ========== ==========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Class B Common Stock
----------------------------- ----------------------------
Held in Held in
Issued Treasury Issued Treasury
------------ ------------ ------------ ------------
SHARE ACTIVITY:
(In thousands)
<S> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995 4,444 (11) 20,609 (8,776)
Issuance of common stock grants 6
Common stock options exercised 119
Conversion of Class B common stock
to common stock 135 (135)
Purchase of treasury stock (6)
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1995 4,704 (17) 20,474 (8,776)
Issuance of common stock grants 2
Common stock options exercised 140
Conversion of Class B common stock
to common stock 84 (84)
Four for three split in the form of a
33.3 percent stock dividend (Note 11) 1,568 (6) 6,825 (2,925)
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1996 6,498 (23) 27,215 (11,701)
Issuance of common stock grants 1
Common stock options exercised 202
Conversion of Class B common stock
to common stock 90 (90)
Common stock issued under Employee
Stock Purchase Plan 7
Purchase of treasury stock (2)
------------ ------------ ------------ ------------
BALANCES AT DECEMBER 31, 1997 6,798 (25) 27,125 (11,701)
============ ============ ============ ============
</TABLE>
(Concluded)
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
CONTINUING OPERATIONS (In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 25,750 $ 14,792 $ 14,455
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 7,175 5,623 4,090
Amortization 5,832 3,037 217
Deferred income taxes (1,328) (1,100) (341)
Changes in assets and liabilities (net of the effects of the purchase
and sale of properties) which provided (used) cash:
Trade accounts receivable (2,692) (4,079) 1,433
Inventory (289) 3,017 (3,121)
Other assets (3,652) 9,839 833
Trade accounts payable and other liabilities 3,120 (2,490) (113)
Income taxes payable 1,803 (239) (3,713)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,719 28,400 13,740
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,215) (6,433) (6,627)
Purchase of publishing properties, net of cash acquired (203,306)
Investment in joint ventures and limited partnerships (3,292) (1,233) (1,887)
Sale of assets, net of cash sold 2,152
Decrease (increase) in notes receivable 4,979 (4,904) 1,875
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (13,528) (213,724) (6,639)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (11,483) (10,033) (8,828)
Proceeds from exercise of stock options 3,299 2,167 2,329
Proceeds from employee stock purchase plan 322
Purchase of treasury stock (76) (20) (213)
------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (7,938) (7,886) (6,712)
------------ ------------ ------------
CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS 14,253 (193,210) 389
------------ ------------ ------------
DISCONTINUED OPERATIONS
Operating activities 57,766 62,379 55,214
Investing activities (17,617) (16,292) (18,057)
Financing activities (64,705) 119,795 (14,250)
------------ ------------ ------------
CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS (24,556) 165,882 22,907
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH (10,303) (27,328) 23,296
EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 73,052 100,380 77,084
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 62,749 $ 73,052 $ 100,380
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest paid $ 17,469 $ 9,716 $ 10,147
Interest received (4,574) (4,872) (4,805)
Income taxes 45,110 38,530 35,862
Income tax refunds (1,108) (195) (1,280)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITY:
Increase (decrease) in minimum pension liability and
related intangible asset $ 402 $ (1,059) $ (227)
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 4) (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 (see
Note 7) 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 4).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiary companies, all of which are
wholly-owned. All significant intercompany transactions have been eliminated
from the consolidated financial statements.
Fiscal Year - The Company's fiscal year ends on the last Sunday of the
calendar year, which in 1995 resulted in a 14- week fourth quarter and a
53-week year. In 1997 and 1996, the fourth quarter was 13 weeks and the year
was 52 weeks. For ease of presentation, the Company has used December 31 as
the year-end.
Cash Equivalents - For purposes of reporting cash flows, the Company considers
all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventory Valuation - Inventory, which consists primarily of newsprint, is
stated at the lower of cost (determined primarily using the last-in, first-out
method) or market. If the first-in, first-out cost method had been used,
inventory would have been $805,000 and $874,000 higher than reported at
December 31, 1997 and 1996, respectively. Ink and other miscellaneous supplies
are expensed as purchased.
9
<PAGE> 10
Program Rights - Program rights represent license agreements for the right to
broadcast programs over license periods which generally run from one to five
years. The total cost of each agreement is recorded as an asset and liability
when the license period begins and the program is available for broadcast.
Program rights covering periods greater than one year are amortized over the
license period using an accelerated method as the programs are broadcast. In
the event that a determination is made that programs will not be used prior to
the expiration of the license agreement, unamortized amounts are then charged
to operations. Payments are made in installments as provided for in the
license agreements. Program rights expected to be amortized in the succeeding
year and payments due within one year are classified as current assets and
current liabilities, respectively (see Note 4).
Property and Depreciation - Property is recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
individual assets. Buildings are depreciated over 20 to 50 years and all other
property over lives ranging from 3 to 15 years.
Intangible Assets - Intangibles consisting of goodwill, FCC licenses and
network affiliations acquired subsequent to the effective date of Accounting
Principles Board Opinion No. 17 ("Opinion No. 17") are being amortized over
lives of either 15 or 40 years while all other intangible assets are being
amortized over lives ranging from 4 to 23 years. Intangibles in the amount of
$1,520,000, related to acquisitions prior to the effective date of Opinion No.
17, are not being amortized because, in the opinion of management, their value
is of undeterminable duration. In addition, the intangible asset relating to
the Company's additional minimum pension liability under Statement of Financial
Accounting Standards No. 87 is adjusted annually, as necessary, when a new
determination of the amount of the additional minimum pension liability is made.
Long-Lived Assets - The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March 1995.
This statement became effective for the Company's 1996 fiscal year. The
general requirements of this statement are applicable to the properties and
intangible assets of the Company and require impairment to be considered
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Management periodically evaluates the
recoverability of long-lived assets by reviewing the current and projected cash
flows of each of its properties. If a permanent impairment is deemed to exist,
any write-down would be charged to operations. For the periods presented, there
has been no impairment.
Employee Benefit Plans - The Company and its subsidiaries have several
noncontributory pension plans covering a significant portion of their employees.
Benefits under the plans are generally based on salary and years of service.
The Company's liability and related expense for benefits under the plans are
recorded over the service period of active employees based upon annual
actuarial calculations. Plan funding strategies are influenced by tax
regulations. Plan assets consist primarily of government bonds and corporate
equity securities.
The Company provides retiree medical and life insurance benefits under varying
postretirement plans at several of its operating locations. In addition, the
Company provides postemployment disability benefits to certain former employee
groups prior to retirement. The significant portion of these benefits results
from plans at the St. Louis Post- Dispatch. The Company's liability and
related expense for benefits under the postretirement plans are recorded over
the service period of active employees based upon annual actuarial
calculations. The Company accrues postemployment disability benefits when it
becomes probable that such benefits will be paid and when sufficient
information exists to make reasonable estimates of the amounts to be paid. All
of the Company's postretirement and postemployment benefits are funded on a
pay-as-you-go basis.
Income Taxes - Deferred tax assets and liabilities are recorded for the
expected future tax consequences of events that have been included in either
the financial statements or tax returns of the Company. Under this asset and
liability approach, deferred tax assets and liabilities are determined based on
temporary differences between the financial statement and tax bases of assets
and liabilities by applying enacted statutory tax rates applicable to future
years in which the differences are expected to reverse.
10
<PAGE> 11
Stock-Based Compensation Plans - Effective January 1, 1996, the Company adopted
the disclosure requirements of Statement of Financial Accounting Standards No.
123 ("SFAS 123"), Accounting for Stock-Based Compensation. The new standard
defines a fair value method of accounting for stock options and similar equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to the new
standard, companies are encouraged, but not required, to adopt the fair value
method of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees, but are required to disclose pro forma net income and, if presented,
earnings per share as if the company had applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption, whereas the
disclosure requirements apply to all awards granted subsequent to December 31,
1994. The Company continues to recognize and measure compensation for its
restricted stock and stock option plans in accordance with the existing
provisions of APB 25.
Earnings Per Share of Stock - Effective December 15, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings per Share ("SFAS
128"). This statement simplifies the standards for computing earnings per
share ("EPS"), making them comparable to international standards, and
supersedes Accounting Principles Board Opinion No. 15, Earnings Per Share
("APB 15"). SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS. The statement also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. As required by SFAS 128, diluted EPS has been
computed for all prior periods presented to conform to the provisions of the
new statement.
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,
adjusted for the stock splits described in Note 11. 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. (see Note 13)
Use of Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires that
management make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. The reported amounts of
revenues and expenses during the reporting period may also be affected by the
estimates and assumptions management is required to make. Actual results may
differ from those estimates.
Reclassifications - Certain reclassifications have been made to the 1996 and
1995 consolidated financial statements to conform with the 1997 presentation.
3. AGENCY AGREEMENTS
An agency operation between the Company and The Herald Company is conducted
under the provisions of an Agency Agreement, dated March 1, 1961, as amended.
For many years, the St. Louis Post-Dispatch (published by the Company) was the
afternoon and Sunday newspaper serving St. Louis, and the Globe-Democrat
(formerly published by The Herald Company) was the morning paper and also
published a weekend edition. Although separately owned, from 1961 through
February 1984, the publication of both the Post-Dispatch and the
Globe-Democrat was governed by the St. Louis Agency Agreement. From 1961 to
1979, the two newspapers controlled their own news, editorial, advertising,
circulation, accounting and promotion departments and Pulitzer managed the
production and printing of both newspapers. In 1979, Pulitzer assumed full
responsibility for advertising, circulation, accounting and promotion for both
newspapers. In February 1984, after a number of years of unfavorable financial
results at the St. Louis Agency, the Globe-Democrat was sold by The Herald
Company and the St. Louis Agency Agreement was revised to eliminate any
continuing relationship between the two newspapers and to permit the
repositioning of the daily Post-Dispatch as a morning newspaper. Following the
renegotiation of the St. Louis Agency Agreement at the time of the sale of the
Globe-Democrat, The Herald Company retained the contractual right to receive
one-half the profits (as defined), and the obligation to share one-half the
losses (as defined), of the operations of
11
<PAGE> 12
the St. Louis Agency, which from February 1984 forward consisted solely of the
publication of the Post-Dispatch. The St. Louis Agency Agreement also provides
for The Herald Company to share one-half the cost of, and to share in a portion
of the proceeds from the sale of, capital assets used in the production of the
Post-Dispatch. Under the St. Louis Agency Agreement, Pulitzer supervises,
manages and performs all activities relating to the day-to-day publication of
the Post-Dispatch and is solely responsible for the news and editorial policies
of the newspaper. The consolidated financial statements of the Company include
all the operating revenues and expenses of the St. Louis Agency relating to the
Post-Dispatch.
In Tucson, Arizona, a separate partnership, TNI Partners, ("TNI"), acting as
agent for the Star (a newspaper owned by the Company) and the Citizen (a
newspaper owned by Gannett Co., Inc.), is responsible for printing, delivery,
advertising, and circulation of the Star and the Citizen. TNI collects all of
the receipts and income relating to the Star and the Citizen and pays all
operating expenses incident to the partnership's operations and publication of
the newspapers. Each newspaper is solely responsible for its own news and
editorial content. Net income or net loss of TNI is generally allocated
equally to the Star and the Citizen. The Company's consolidated financial
statements include its share of TNI's revenues and expenses.
4. 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/Liabilities of
Broadcasting Business" and consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
ASSETS (In thousands)
<S> <C> <C>
Trade accounts receivable (less allowance for
doubtful accounts of $785 and $991) $ 50,880 $ 47,700
Program rights 7,866 8,452
Other current assets 1,260 1,277
------------ ------------
Total current assets 60,006 57,429
------------ ------------
Properties:
Land 10,163 9,342
Buildings 44,769 43,827
Machinery and equipment 135,629 125,806
Construction in progress 3,282 1,735
------------ ------------
Total 193,843 180,710
Less accumulated depreciation 106,826 91,816
------------ ------------
Properties - net 87,017 88,894
------------ ------------
Intangible assets:
FCC Licenses and network affiliations 114,376 112,162
Goodwill 6,960 6,960
Other intangibles 33,696 33,696
------------ ------------
Total 155,032 152,818
Less accumulated amortization 52,539 44,884
------------ ------------
Intangible assets - net 102,493 107,934
------------ ------------
Other assets 7,172 6,021
------------ ------------
Total assets of Broadcasting Business 256,688 260,278
------------ ------------
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
LIABILITIES (In thousands)
<S> <C> <C>
Trade accounts payable and accrued expenses 10,226 10,228
Current portion of long-term debt (Note 7) 12,705 14,705
Interest payable 5,677 7,177
Program contracts payable 7,907 8,916
------------ ------------
Total current liabilities 36,515 41,026
Long-term debt (Note 7) 172,705 235,410
Pension obligations (Note 8) 5,544 4,149
Postretirement benefit obligations (Note 9) 2,556 2,618
Other long term liabilities 3,299 5,842
Commitments and contingencies (Note 14)
------------ ------------
Total liabilities of Broadcasting Business 220,619 289,045
------------ ------------
NET ASSETS (LIABILITIES) OF BROADCASTING BUSINESS $ 36,069 $ (28,767)
============ ============
</TABLE>
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>
Years Ended December 31,
--------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating revenues $227,016 $224,992 $202,939
Operating income 82,180 83,246 65,939
Interest expense 16,081 13,592 10,171
Income before provision for income taxes 66,109 70,088 55,764
Provision for income taxes (Note 10) 25,831 27,380 20,897
Net income 40,278 42,708 34,867
Depreciation and amortization 23,447 22,442 22,843
</TABLE>
5. ACQUISITION OF PROPERTIES
During 1996, the Company acquired in a purchase transaction all of the stock of
Scripps League Newspapers, Inc. ("Scripps League"), a privately owned
publisher of community newspapers serving smaller markets, primarily in the
West and Midwest. The purchase price of approximately $216 million (including
acquisition costs) includes all of the operating assets of the newspapers,
working capital of approximately $6 million and intangibles. The acquisition
was financed by long-term borrowings of $135 million (the balance of which has
been allocated to Broadcasting and is included in "Net Assets/Liabilities of
Broadcasting Business" in the Company's Statements of Consolidated Financial
Position (see Note 4)) and cash of approximately $81 million (approximately $69
million net of cash acquired). The results of the operations of Scripps
League for the period subsequent to June 30, 1996 are included in the Company's
Statements of Consolidated Income.
The following supplemental unaudited pro forma information shows the results of
operations of the Company for the years ended December 31, 1996 and 1995
adjusted for the acquisition of Scripps League, assuming such transaction and
the related debt financing had been consummated at the beginning of each year
presented. The unaudited pro forma financial information is not necessarily
indicative either of results of operations that would have occurred had the
transaction occurred at the beginning of each year presented or of future
results of operations.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995
In thousands, except per share data: (Unaudited)
<S> <C> <C>
Operating revenues - net $341,923 $333,864
Operating income 30,414 27,957
Income from continuing operations 14,771 15,161
Income from discontinued operations 39,748 29,042
Net income 54,519 44,203
Basic earnings per share of stock:
Continuing operations $ 0.67 $ 0.70
Discontinued operations 1.82 1.33
-------- --------
Basic earnings per share $ 2.49 $ 2.03
======== ========
Diluted earnings per share of stock:
Continuing operations $ 0.66 $ 0.69
Discontinued operations 1.79 1.31
======== ========
Diluted earnings per share $ 2.45 $ 2.00
======== ========
</TABLE>
In December 1996, the Company acquired in a purchase transaction the assets of
an AM radio station in Phoenix, Arizona for approximately $5,187,000.
13
<PAGE> 14
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
(In thousands)
<S> <C> <C>
Goodwill $171,395 $171,366
Intangible pension asset (Note 8) 2,320 1,918
Other 30,228 30,218
-------- --------
Total 203,943 203,502
Less accumulated amortization 18,819 13,131
-------- --------
Total intangible assets - net $185,124 $190,371
======== ========
</TABLE>
7. FINANCING ARRANGEMENTS
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 Notes 1 and 4).
Long-term debt included in "Net Assets/Liabilities of Broadcasting Business" in
the statements of consolidated financial position consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
(In thousands)
<S> <C> <C>
Credit Agreement $ -- $ 50,000
Senior notes maturing in substantially
equal annual installments:
8.8% due through 1997 14,500
6.76% due 1998-2001 50,000 50,000
7.22% due 2002-2005 50,000 50,000
7.86% due 2001-2008 85,000 85,000
Other 410 615
-------- --------
Total 185,410 250,115
Less current portion 12,705 14,705
-------- --------
Total long-term debt $172,705 $235,410
======== ========
</TABLE>
The Company's fixed-rate senior note borrowings are with The Prudential
Insurance Company of America ("Prudential"). The Senior Note Agreements with
Prudential provide for the payment of certain fees, depending on current
interest rates and remaining years to maturity, in the event of repayment prior
to the notes' scheduled maturity dates (as anticipated by the Spin-off and
Merger discussed in Note 1).
The credit agreement with The First National Bank of Chicago, as Agent, for a
group of lenders ("FNBC"), provides for a $50,000,000 variable rate revolving
credit facility ("Credit Agreement"). Loans may be borrowed, repaid and
reborrowed by the Company until the Credit Agreement terminates on July 2,
2001. The Company has the option to repay any borrowings and terminate the
Credit Agreement, without penalty, prior to its scheduled maturity. As of
December 31, 1997, the Company had no borrowings under the Credit Agreement.
The Credit Agreement allows the Company to elect an interest rate with respect
to each borrowing under the facility equal to a daily floating rate or the
Eurodollar rate plus 0.225 percent. As of December 31, 1996, the interest rate
on the Credit Agreement borrowings with FNBC was 5.875 percent.
14
<PAGE> 15
The terms of the various senior note agreements contain certain covenants and
conditions including the maintenance of cash flow and various other financial
ratios, limitations on the incurrence of other debt and limitations on the
amount of restricted payments (which generally includes dividends, stock
purchases and redemptions).
Under the terms of the most restrictive borrowing covenants, in general, the
Company may pay annual dividends not to exceed the sum of $10,000,000, plus 75%
of consolidated net earnings commencing January 1, 1993, less the sum of all
dividends paid or declared and redemptions in excess of sales of Company stock
after December 31, 1992. Pursuant to this calculation, approximately
$138,938,000 is available for distribution as dividends at December 31, 1997.
Approximate annual maturities of long-term debt for the five years subsequent
to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year (In thousands):
<S> <C>
1998 $ 12,705
1999 12,705
2000 12,500
2001 23,125
2002 23,125
Thereafter 101,250
----------
Total $ 185,410
==========
</TABLE>
8. PENSION PLANS
The pension cost components for the Company's pension plans are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost for benefits earned during the year $ 3,966 $ 4,154 $ 3,834
Interest cost on projected benefit obligation 8,470 8,185 8,057
Actual return on plan assets (18,785) (12,507) (17,541)
Net amortization and deferrals 10,001 4,833 11,365
------------ ------------ ------------
Net periodic pension cost $ 3,652 $ 4,665 $ 5,715
============ ============ ============
</TABLE>
The Company's net periodic pension cost components disclosed above include
amounts related to Broadcasting employees who participate in two of the
Company's defined benefit pension plans. No detailed information regarding the
components of net periodic pension cost and funded status of the plans, as it
relates to Broadcasting is available. However, a portion of the Company's
pension cost has been allocated to Broadcasting's active employees and included
in "Discontinued Operations" in the Consolidated Statements of Income. Pension
cost allocated to Broadcasting, based on payroll costs, amounted to
approximately $1,395,000, $1,474,000 and $1,540,000 for 1997, 1996 and 1995,
respectively. Pursuant to the Merger Agreement, Broadcasting will retain the
ongoing liabilities related to its active employees. Future pension costs for
the Company and Broadcasting after the Spin-off are likely to be different when
compared to allocated historical amounts.
15
<PAGE> 16
The funded status of the Company's pension plans is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
(In thousands)
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 117,854 $ 107,637
========= =========
Accumulated benefit obligation $ 118,735 $ 108,380
========= =========
Projected benefit obligation $ 128,690 $ 118,414
Plan assets at fair value 119,353 104,046
--------- ---------
Plan assets less than projected benefit 9,337 14,368
obligation
Unrecognized transition obligation, net (1,318) (1,539)
Unrecognized net gain 16,507 10,557
Unrecognized prior service cost 211 234
Additional minimum liability 2,320 1,918
--------- ---------
Pension obligations $ 27,057 $ 25,538
========= =========
</TABLE>
The portion of the Company's pension obligations allocated to Broadcasting
employees and included in "Net Assets/Liabilities of Broadcasting Business" in
the Statements of Consolidated Financial Position amounted to $5,544,000 and
$4,149,000 as of December 31, 1997 and 1996, respectively. Pursuant to the
Merger Agreement, actuarial calculations will be performed to separate
Broadcasting active employees from the pension plans as of the date of the
Merger. The pension obligations computed for Broadcasting active employees and a
proportionate share of pension plan assets will then be transferred to
Hearst-Argyle. Future pension obligations for the Company and Broadcasting,
computed in separate actuarial calculations, are likely to be different
when compared to the allocated historical amounts.
The projected benefit obligation was determined using assumed discount rates of
7%, 7.5% and 7.25% at December 31, 1997, 1996 and 1995, respectively. The
expected long-term rate of return on plan assets was 8.5% for 1997, 1996 and
1995. For those plans that pay benefits based on final compensation levels,
the actuarial assumptions for overall annual rate of increase in future
salary levels was 4.5% for 1997 and 5% for both 1996 and 1995.
Certain of the Company's employees participate in multi-employer retirement
plans sponsored by their respective unions. Amounts charged to operations,
representing the Company's required contributions to these plans in 1997, 1996
and 1995, were approximately $844,000, $781,000, and $731,000, respectively.
The Company also sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code. This plan covers substantially all employees.
Contributions by the Company amounted to approximately $1,899,000, $1,668,000
and $1,494,000 for 1997, 1996 and 1995, respectively. Contributions related
only to Broadcasting employees amounted to approximately $698,000, $626,000 and
$509,000 for 1997, 1996 and 1995, respectively.
9. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The net periodic postretirement benefit cost components related to continuing
operations are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost (for benefits earned during the year) $ 839 $ 808 $ 805
Interest cost on accumulated postretirement
benefit obligation 4,493 4,532 5,614
Net amortization, deferrals and other components (2,464) (2,236) (1,731)
------------ ------------ ------------
Net periodic postretirement benefit cost $ 2,868 $ 3,104 $ 4,688
============ ============ ============
</TABLE>
16
<PAGE> 17
The postretirement benefit cost for broadcasting active employees is included
in "Discontinued Operations" in the Statements of Consolidated Income. The net
periodic postretirement benefit cost components related to broadcasting
discontinued operations are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost (for benefits earned during the year) $ 131 $ 118 $ 128
Interest cost on accumulated postretirement
benefit obligation 139 151 185
Net amortization, deferrals and other components (74) (72) (56)
---------- ---------- ----------
Net periodic postretirement benefit cost $ 196 $ 197 $ 257
========== ========== ==========
</TABLE>
The Company funds its postretirement benefit obligation on a pay-as-you-go
basis and, for 1997, 1996 and 1995, made payments of $4,118,000, $4,207,000 and
$4,071,000, respectively.
The status of the Company's postretirement benefit plans is as follows:
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
December 31, December 31,
---------------------------- ----------------------------
1997 1996 1997 1996
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Retirees and surviving beneficiaries $ 39,549 $ 37,734
Actives eligible to retire 13,644 12,732 $ 774 $ 784
Other actives 11,614 10,069 1,142 1,073
------------ ------------ ------------ ------------
Accumulated postretirement benefit
obligation 64,807 60,535 1,916 1,857
Unrecognized prior service gain 6,466 7,757 192 233
Unrecognized net gain 14,903 18,876 448 528
------------ ------------ ------------ ------------
Accrued postretirement benefit cost $ 86,176 $ 87,168 $ 2,556 $ 2,618
============ ============ ============ ============
</TABLE>
The preceding amounts related to continuing operations for the December 31,
1997 and 1996 accrued postretirement benefit cost and the 1997, 1996 and 1995
net periodic postretirement benefit expense have not been reduced for The
Herald Company's share of the respective amounts. However, pursuant to the St.
Louis Agency Agreement (see Note 3), the Company has recorded a receivable for
The Herald Company's share of the accrued postretirement benefit cost as of
December 31, 1997 and 1996.
The preceding accrued postretirement benefit cost related to broadcasting
active employees is included in "Net Assets/Liabilities of Broadcasting
Business" in the Statements of Consolidated Financial Position. Pursuant to
the Merger Agreement, Broadcasting will retain the postretirement obligation
and costs related to active employees as of the date of the Merger.
For 1997 and 1996 measurement purposes, health care cost trend rates of 9%, 7%
and 5% were assumed for indemnity plans, PPO plans and HMO plans, respectively.
For 1997, these rates were assumed to decrease gradually to 5% through the year
2010 and remain at that level thereafter. For 1996, the indemnity and PPO
rates were assumed to decrease gradually to 5.5% through the year 2010 and
remain at that level thereafter. For continuing operations, a 1% increase in
the health care cost trend rate assumptions would have increased the accrued
postretirement benefit cost at December 31, 1997 by approximately $1,129,000
and the 1997 annual net periodic postretirement benefit cost by approximately
$1,090,000.
Administrative costs related to indemnity plans were assumed to increase at a
constant annual rate of 6% for 1997, 1996 and 1995. The assumed discount rate
used in estimating the accumulated postretirement benefit obligation was 7%,
7.5% and 8% for 1997, 1996 and 1995, respectively.
17
<PAGE> 18
The Company's postemployment benefit obligation, representing certain
disability benefits at the St. Louis Post- Dispatch, was $3,174,000 and
$2,466,000 at December 31, 1997 and 1996, respectively.
10. INCOME TAXES
Provisions for income taxes (benefits) consist of the following:
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
Years Ended December 31, Years Ended December 31,
---------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal $ 17,840 $ 9,363 $ 8,008 $ 23,549 $ 24,102 $ 20,344
State and local 2,714 1,628 1,482 4,321 4,122 2,059
Deferred:
Federal (1,155) (84) (326) (1,723) (721) (1,315)
State and local (173) (15) (15) (316) (123) (191)
-------- -------- -------- -------- -------- --------
Total $ 19,226 $ 10,892 $ 9,149 $ 25,831 $ 27,380 $ 20,897
======== ======== ======== ======== ======== ========
</TABLE>
Factors causing effective tax rates to differ from the statutory Federal income
tax rate were:
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
Years Ended December 31, Years Ended December 31,
---------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Statutory rate 35% 35% 35% 35% 35% 35%
Favorable resolution of
prior year state tax issues (2)
Amortization of intangibles 3 3
State and local income
taxes, net of U.S. Federal
income tax benefit 4 4 4 4 4 4
Other-net 1
---- ---- ---- ---- ---- ----
Total 43% 42% 39% 39% 39% 37%
==== ==== ==== ==== ==== ====
</TABLE>
The Company's deferred tax assets and liabilities, net, which have been
included in other assets in the Statements of Consolidated Financial Position
consisted of the following:
<TABLE>
<CAPTION>
Continuing Operations Discontinued Operations
December 31, December 31,
---------------------------- -----------------------------
1997 1996 1997 1996
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Pensions and employee benefits $ 8,135 $ 7,018 $ 3,268 $ 2,557
Postretirement benefit costs 18,248 18,260 1,000 1,024
Other 1,007 1,429 554 681
------------ ------------ ------------ ------------
Total 27,390 26,707 4,822 4,262
============ ============ ============ ============
Deferred tax liabilities:
Depreciation 13,265 13,119 6,318 6,471
Amortization 7,288 8,079 477 1,803
------------ ------------ ------------ ------------
Total 20,553 21,198 6,795 8,274
------------ ------------ ------------ ------------
Net deferred tax asset (liability) $ 6,837 $ 5,509 $ (1,973) $ (4,012)
============ ============ ============ ============
</TABLE>
18
<PAGE> 19
The Company had no valuation allowance for deferred tax assets as of December
31, 1997, 1996 and 1995.
11. STOCKHOLDERS' EQUITY
Each share of the Company's common stock is entitled to one vote and each share
of Class B common stock is entitled to ten votes on all matters. As of
December 31, 1997, Holders of outstanding shares of Class B common stock
representing 95.5% of the combined voting power of the Company have deposited
their shares in a voting trust (the "Voting Trust"). Each share of the
Company's Class B common stock is convertible into one share of the Company's
common stock at the holder's option subject to the limitations imposed by the
Voting Trust on the shares of Class B common stock deposited thereunder. The
Voting Trust permits the conversion of the Class B common stock deposited in
the Voting Trust into common stock in connection with certain permitted
transfers, including, without limitation, sales which are exempt from the
registration requirements of the Securities Act of 1933, as amended, sales
which meet the volume and manner of sale requirements of Rule 144 promulgated
thereunder and sales which are made pursuant to registered public offerings.
The trustees generally hold all voting rights with respect to the shares of
Class B common stock subject to the Voting Trust; however, in connection with
certain matters, including any proposal for a merger, consolidation,
recapitalization or dissolution of the Company or disposition of all or
substantially all its assets, the calling of a special meeting of stockholders
and the removal of directors, the Trustees may not vote the shares deposited in
the Voting Trust except in accordance with written instructions from the
holders of the Voting Trust Certificates. The Voting Trust may be terminated
with the written consent of holders of two-thirds in interest of all
outstanding Voting Trust Certificates. Unless extended or terminated by the
parties thereto, the Voting Trust expires on January 16, 2001.
On September 12, 1996, the Board of Directors declared a four-for-three stock
split of the Company's common and Class B common stock payable in the form of a
33.3% stock dividend. The dividend was distributed on November 1, 1996 to
stockholders of record on October 10, 1996. The Company's capital balances and
share amounts were adjusted in 1996 to reflect the split.
On January 4, 1995, the Board of Directors declared a five-for-four stock split
of the Company's common and Class B common stock payable in the form of a 25%
stock dividend. The dividend was distributed on January 24, 1995 to
stockholders of record on January 13, 1995. Even though this stock split was
declared subsequent to December 31, 1994, the Company's capital balances and
share amounts were adjusted in 1994 to reflect the split.
12. COMMON STOCK PLANS
On May 11, 1994, the Company's stockholders adopted the Pulitzer Publishing
Company 1994 Stock Option Plan (the "1994 Plan"), replacing the Pulitzer
Publishing Company 1986 Employee Stock Option Plan (the "1986 Plan"). The 1994
Plan provides for the issuance to key employees and outside directors of
incentive stock options to purchase up to a maximum of 2,500,000 shares of
common stock. Under the 1994 Plan, options to purchase 1,667 shares of common
stock will be automatically granted to outside directors on the date following
each annual meeting of the Company's stockholders and will vest on the date of
the next annual meeting of the Company's stockholders. Total shares available
for issue to outside directors under this automatic grant feature are limited
to a maximum of 166,667. The issuance of all other options will be administered
by the Compensation Committee of the Board of Directors, subject to the 1994
Plan's terms and conditions. Specifically, the exercise price per share may
not be less than the fair market value of a share of common stock at the date
of grant. In addition, exercise periods may not exceed ten years and the
minimum vesting period is established at six months from the date of grant.
Option awards to an individual employee may not exceed 250,000 shares in a
calendar year.
Prior to 1994, the Company issued incentive stock options to key employees
under the 1986 Plan. As provided by the 1986 Plan, certain option awards were
granted with tandem stock appreciation rights which allow the employee to elect
an alternative payment equal to the appreciation of the stock value instead of
exercising the option. Outstanding options issued under the 1986 Plan have an
exercise term of ten years from the date of grant and vest in equal
installments over a three-year period.
19
<PAGE> 20
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Common Stock Options: Shares Price Range Price
------------ --------------- ---------
<S> <C> <C> <C>
Outstanding, January 1, 1995 1,198,371 $ 9.27 - $21.98 $16.69
Granted (weighted average value at
grant date of $13.99) 192,853 $30.47 - $34.41 $34.31
Canceled (39,632) $11.73 - $21.98 $16.69
Exercised (158,304) $ 9.27 - $21.98 $14.71
---------
Outstanding, December 31, 1995 1,193,288 $ 9.27 - $34.41 $19.80
Granted (weighted average value at
grant date of $16.01) 179,809 $41.91 - $46.25 $46.03
Canceled (2,146) $21.53 - $34.41 $28.77
Exercised (140,096) $ 9.27 - $21.98 $15.47
---------
Outstanding, December 31, 1996 1,230,855 $ 9.27 - $46.25 $24.11
Granted (weighted average value at
grant date of $20.23) 211,231 $45.63 - $58.81 $58.41
Canceled (14,235) $21.53 - $47.38 $38.91
Exercised (201,920) $ 9.27 - $46.25 $16.34
---------
Outstanding, December 31, 1997 1,225,931 $ 9.27 - $58.81 $31.13
=========
Exercisable at:
December 31, 1996 855,445 $ 9.27 - $34.41 $18.19
=========
December 31, 1997 849,565 $ 9.27 - $46.25 $22.21
=========
Shares Available for Grant at
December 31, 1997 1,712,004
=========
</TABLE>
Stock appreciation right transactions are summarized as follows:
<TABLE>
<CAPTION>
Shares Price
--------- ----------
<S> <C> <C>
Common Stock Appreciation Rights:
Outstanding, January 1, 1995 37,584 $14.87
Canceled (10,183) $14.87
Exercised (27,401) $14.87
--------
Outstanding, December 31, 1995, 1996
and 1997 --
========
</TABLE>
On May 11, 1994, the Company's stockholders also adopted the Pulitzer
Publishing Company 1994 Key Employees' Restricted Stock Purchase Plan (the
"1994 Stock Plan"), which replaced the Pulitzer Publishing Company 1986 Key
Employees' Restricted Stock Purchase Plan ("1986 Stock Plan"). The 1994 Stock
Plan provides that an employee may receive, at the discretion of the
Compensation Committee, a grant or right to purchase at a particular price
shares of common stock, subject to restrictions on transferability. A maximum
of 416,667 shares of common stock may be granted or purchased by employees. In
addition, no more than 83,333 shares of common stock may be issued to an
employee in any calendar year.
20
<PAGE> 21
Prior to 1994, the Company granted stock awards under the 1986 Stock Plan. For
grants awarded under both the 1994 and 1986 Stock Plans, compensation expense
is recognized over the vesting period of the grants. Stock Purchase Plan
transactions are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Common Stock Grants: Shares Price Range Price
---------- ------------------ ---------
<S> <C> <C> <C>
Outstanding, January 1, 1995 4,236 $20.25 - $21.38 $20.89
Granted 8,880 $24.53 $24.53
Vested (7,460) $20.25 - $24.53 $23.93
---------
Outstanding, December 31, 1995 5,656 $20.25 - $24.53 $22.60
Granted 2,093 $36.70 $36.70
Vested (1,864) $20.25 - $24.53 $22.12
---------
Outstanding, December 31, 1996 5,885 $20.25 - $36.70 $27.78
Granted 1,468 $47.44 $47.44
Canceled (1,393) $20.25 - $47.44 $33.13
Vested (2,272) $20.25 - $36.70 $25.56
---------
Outstanding, December 31, 1997 3,688 $21.38 - $47.44 $34.95
=========
Shares Available for Grant at
December 31, 1997 400,776
=========
</TABLE>
As required by SFAS 123, the Company has estimated the fair value of its option
grants since December 31, 1994 by using the binomial options pricing model with
the following assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Expected Life (years) 7 7 7
Risk-free interest rate 5.8% 6.4% 5.7%
Volatility 23.6% 22.5% 19.6%
Dividend yield 1.1% 1.2% 1.3%
</TABLE>
As discussed in Note 1, the Company accounts for its stock option grants in
accordance with APB 25, resulting in the recognition of no compensation expense
in the Statements of Consolidated Income. Had compensation expense been
computed on the fair value of the option awards at their grant date, consistent
with the provisions of SFAS 123, the Company's income from continuing
operations and earnings per share would have been reduced to the pro forma
amounts below:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
<S> <C> <C> <C>
(In thousands except per share amounts)
Income from continuing operations:
As reported $25,750 $14,792 $14,455
Pro forma 24,897 14,422 14,428
Income from discontinued operations:
As reported 40,278 42,708 34,867
Pro forma 39,590 42,398 34,860
Net Income:
As reported 66,028 57,500 49,322
Pro forma 64,487 56,820 49,288
Basic earnings per share from continuing operations:
As reported $1.17 $0.67 $0.66
Pro forma 1.13 0.66 0.66
Basic earnings per share from discontinued operations:
As reported 1.82 1.95 1.60
Pro forma 1.79 1.93 1.60
Basic earnings per share:
As reported 2.99 2.62 2.26
Pro forma 2.92 2.59 2.26
Diluted earnings per share from continuing operations:
As reported $1.15 $0.66 $0.65
Pro forma 1.11 0.65 0.65
Diluted earnings per share from discontinued operations:
As reported 1.79 1.92 1.58
Pro forma 1.76 1.90 1.58
Diluted earnings per share:
As reported 2.94 2.58 2.23
Pro forma 2.87 2.55 2.23
</TABLE>
21
<PAGE> 22
Because the provisions of SFAS 123 have not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of compensation cost to be incurred on a pro forma basis in
future years.
On April 24, 1997, the Company's stockholders approved the adoption of the
Pulitzer Publishing Company 1997 Employee Stock Purchase Plan (the "Plan"). The
Plan allows eligible employees to authorize payroll deductions for the
quarterly purchase of the Company's common stock at a price generally equal to
85 percent of the common stock's fair market value at the end of each quarter.
The Plan began operations as of July 1, 1997. In general, other than Michael E.
Pulitzer, all employees of the Company and its subsidiaries are eligible to
participate in the Plan after completing at least one year of service. Subject
to appropriate adjustment for stock splits and other capital changes, the
Company may sell a total of 500,000 shares of its common stock under the Plan.
Shares sold under the Plan may be authorized and unissued or held by the
Company in its treasury. The Company may purchase shares for resale under the
Plan.
13. EARNINGS PER SHARE
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>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Weighted average shares outstanding (Basic EPS) 22,110 21,926 21,800
Stock option equivalents 342 347 297
------------ ------------ ------------
Weighted average shares and equivalents (Diluted EPS) 22,452 22,273 22,097
============ ============ ============
</TABLE>
Stock option equivalents included in the Diluted EPS calculation were
determined using the treasury stock method. Under the treasury stock method
and SFAS 128, outstanding stock options are dilutive when the average market
price of the Company's common stock exceeds the option price during a period.
In addition, proceeds from the assumed exercise of dilutive options along with
the related tax benefit are assumed to be used to repurchase common shares at
the average market price of such stock during the period.
14. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company and its subsidiaries had construction and
equipment commitments of approximately $9,220,000 related to continuing
operations and $4,559,000 related to discontinued operations. The Company's
commitment for broadcasting program contracts payable and license fees at
December 31, 1997 was approximately $30,025,000.
The Company is an investor in three limited partnerships requiring future
capital contributions. As of December 31, 1997, the Company's unfunded capital
contribution commitment related to these investments was approximately
$13,863,000.
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 the ultimate outcome of such litigation will
not have a material adverse effect on the consolidated financial statements of
the Company and its subsidiaries.
22
<PAGE> 23
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, (1) 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
recapitalization, dividend or distribution the amount by which the Transaction
Proceeds exceeds the Imputed Value shall not exceed the amount paid or
distributed pursuant to such recapitalization, dividend or distribution in
respect of one share of 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
recapitalization, dividend or distribution, the aggregate Fair Market Value of
the amounts paid or 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,
the result of which is $154.19 at May 12, 1998. There was no specific
provision for adjustment of the $28.82 amount, but if it were adjusted to
reflect all stock dividends and stock splits of 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.
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 a
determined by a third Valuation Firm selected by the two other Valuation Firms.
any such agreement or determination shall be final and binding on the parties.
As a result of the foregoing, the amount of additional payments, if any,
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. Accordingly,
depending on the ultimate resolution of the meaning and application of various
provisions of the Gross-up Transaction agreements, including the determination
of Imputed Value and Fair Market Value of the Transaction Proceeds, in the
opinion of management, the amount of an additional payment, if any, could be
material to the consolidated financial statements of the Company.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the following fair value amounts for its financial
instruments using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Program
Contracts Payable - The carrying amounts of these items are a reasonable
estimate of their fair value.
Long-Term Debt - Interest rates that are currently available to the Company for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value. The fair value estimates of the Company's long-term debt
as of December 31, 1997 and 1996 were $195,969,000 and $259,958,000,
respectively.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997 and 1996. Although management
is not aware of any facts that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date, and current estimates of fair
value may differ from the amounts presented herein.
23
<PAGE> 24
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Operating results for the years ended December 31, 1997 and 1996 by quarters
are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
1997 (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - NET: $ 85,835 $ 90,305 $ 87,506 $ 94,323 $ 357,969
INCOME FROM CONTINUING OPERATIONS 6,230 7,094 5,913 6,513 25,750
INCOME FROM DISCONTINUED OPERATIONS 6,265 12,587 8,310 13,116 40,278
NET INCOME 12,495 19,681 14,223 19,629 66,028
BASIC EARNINGS PER SHARE OF STOCK (Note 13):
Continuing operations $ 0.28 $ 0.32 $ 0.27 $ 0.29 $ 1.17
Discontinued operations 0.29 0.57 0.37 0.59 1.82
------------ ------------ ------------ ------------ ------------
Earnings per share $ 0.57 $ 0.89 $ 0.64 $ 0.88 $ 2.99
============ ============ ============ ============ ============
Weighted average shares outstanding 22,029 22,081 22,151 22,185 22,110
============ ============ ============ ============ ============
DILUTED EARNINGS PER SHARE OF STOCK (Note 13):
Continuing operations $ 0.28 $ 0.32 $ 0.26 $ 0.29 $ 1.15
Discontinued operations 0.28 0.56 0.37 0.58 1.79
------------ ------------ ------------ ------------ ------------
Earnings Per Share $ 0.56 $ 0.88 $ 0.63 $ 0.87 $ 2.94
============ ============ ============ ============ ============
Weighted Average Shares Outstanding 22,378 22,413 22,489 22,526 22,452
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------------ ------------ ------------ ------------ ------------
1996 (In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - NET: $ 66,189 $ 68,521 $ 84,817 $ 89,569 $ 309,096
INCOME FROM CONTINUING OPERATIONS 2,565 2,980 4,247 5,000 14,792
INCOME FROM DISCONTINUED OPERATIONS 7,676 13,205 8,717 13,110 42,708
NET INCOME 10,241 16,185 12,964 18,110 57,500
BASIC EARNINGS PER SHARE OF STOCK (Note 13):
Continuing operations $ 0.12 $ 0.14 $ 0.19 $ 0.23 $ 0.67
Discontinued operations 0.35 0.60 0.40 0.59 1.95
------------ ------------ ------------ ------------ ------------
Earnings Per Share $ 0.47 $ 0.74 $ 0.59 $ 0.82 $ 2.62
============ ============ ============ ============ ============
Weighted Average Shares Outstanding 21,864 21,912 21,949 21,978 21,926
============ ============ ============ ============ ============
DILUTED EARNINGS PER SHARE OF STOCK (Note 13):
Continuing operations $ 0.11 $ 0.14 $ 0.19 $ 0.22 $ 0.66
Discontinued operations 0.35 0.59 0.39 0.59 1.92
------------ ------------ ------------ ------------ ------------
Earnings Per Share $ 0.46 $ 0.73 $ 0.58 $ 0.81 $ 2.58
============ ============ ============ ============ ============
Weighted Average Shares Outstanding 22,191 22,271 22,291 22,291 22,273
============ ============ ============ ============ ============
</TABLE>
24
<PAGE> 25
In the fourth quarter of 1996, the Company determined that the carrying value
of one of its joint venture investments had been impaired. Accordingly, the
investment was reduced by a $2.7 million adjustment resulting in an after-tax
charge of $1.6 million.
Subsequent to the second quarter of 1996, the results of operations of Scripps
Leaque, acquired on July 1, 1996, are included in the Company's Statements of
Consolidated Income (see Note 5).
In the fourth quarter of 1995, a state tax examination was settled favorably,
resulting in a reduction of income tax expense related to discontinued
operations of approximately $900,000.
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total for the year.
* * * * * *
25
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Report on Form 8-K concerning the Company's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items, together with other statements
that are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward- looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to industry cyclicality,
the seasonal nature of the business, changes in pricing or other actions by
competitors or suppliers, and general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission including this Report on Form 8-K.
GENERAL
The Company's operating revenues are significantly influenced by a
number of factors, including overall advertising expenditures, the appeal of
newspapers 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 4 to the Consolidated Financial Statements included in this Exhibit 99-1 to
the Company's Current Report on Form 8-K.)
1997 COMPARED WITH 1996
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the year ended December 31, 1997 increased 15.8
percent to $358 million from $309.1 million in 1996. The revenue comparison
was affected by the acquisition of Scripps League Newspapers, Inc. ("Scripps
League" which was subsequently renamed Pulitzer Community Newspapers, Inc.
("PCN")) on July 1, 1996. On a comparable basis, excluding PCN from the first
six months of 1997, publishing revenues increased 4.9 percent. The comparable
increase reflected higher advertising revenues in 1997.
Newspaper advertising revenues, on a comparable basis, increased $13.8
million, or 7.2 percent, in 1997. A significant portion of the current year
increase resulted from higher classified and retail advertising revenue at both
the St. Louis Post-Dispatch ("Post-Dispatch") and The Arizona Daily Star
26
<PAGE> 27
("Star"). Full run advertising volume (linage in inches) increased 0.4 percent
at the Post-Dispatch and 3.8 percent at Star for 1997. Varying rate increases
were implemented at the Post-Dispatch and most of the PCN properties in the
first quarter of 1997 while Star increased advertising rates in the
fourth quarters of 1996 and 1997.
Circulation revenues, on a comparable basis, decreased approximately
$390,000, or 0.5 percent, in 1997. The decline reflected slight fluctuations
in paid circulation and average rates at the Post-Dispatch and Star in 1997
compared to the prior year.
Other publishing revenues, on a comparable basis, increased $1.8
million, or 5.1 percent, in 1997, resulting primarily from higher preprint
revenue at the Post-Dispatch.
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, increased to $297 million in 1997
from $268.1 million in 1996, an increase of 10.8 percent. Prior year operating
expenses included approximately $1.8 million of non- recurring costs related to
the acquisition of Scripps League. On a comparable basis, excluding PCN from
the first six months of 1997 and the non-recurring costs from 1996, operating
expenses increased 0.9 percent. Major increases in comparable expenses were
overall personnel costs of $7.7 million, promotion expense of $1.6 million, and
circulation distribution expenses of $1.5 million. Partially offsetting these
increases were declines in newsprint expense of $6 million and purchased
supplement costs of $3.1 million.
Operating income for fiscal 1997 increased 53.6 percent to $41.5
million in 1997 from $27 million in 1996. On a comparable basis, excluding PCN
from the first six months of 1997 and the non-recurring costs from 1996,
operating income increased 25.4 percent. The 1997 increase resulted primarily
from higher advertising revenues and lower newsprint costs.
Net other expense (non-operating) decreased $4.7 million in 1997
compared to 1996. The decrease resulted from a 1996 non-recurring charge of
approximately $2.7 million for the write-down in value of a joint venture
investment and lower joint venture losses in 1997.
The effective income tax rate for 1997 increased to 42.7 percent, from
42.4 percent in the prior year, due to an additional $2.1 million of
nondeductible goodwill amortization related to the Scripps League acquisition.
The Company expects its effective tax rate related to continuing operations for
1998 to be similar to its 1997 rate (exclusive of any non-recurring items
related to the Spin-off and Merger).
For the year ended December 31, 1997, income from continuing
operations was $25.8 million, or $1.15 per diluted share, compared with $14.8
million, or $0.66 per diluted share, in the prior year. Comparability of the
earnings results was affected by the joint venture write-off in 1996 ($1.6
million after-tax) and non-recurring costs related to the Scripps League
acquisition ($1.1 million after-tax) in 1996. Excluding the non-recurring
items, 1996 income from continuing operations would have been $17.6 million, or
$0.78 per diluted share. The 46.6 percent gain, on a comparable basis,
reflected higher advertising revenues and lower newsprint costs.
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 the segment's total operating costs. During
the first three quarters of 1997, the Company benefited from newsprint prices
below prior year levels. However, as a result of 1997 price increases and
declining prices in late 1996, the Company's 1997 fourth quarter newsprint
expense increased over the comparable prior year period. For the full year of
1997, the Company's newsprint cost and metric tons consumed, after giving
effect to the St. Louis Agency adjustment, were approximately $36.5 million and
64,600 tons respectively.
27
<PAGE> 28
DISCONTINUED OPERATIONS--BROADCASTING
Broadcasting operating revenues for 1997 increased 0.9 percent to $227
million from $225 million in 1996. For the year, a 1.6 percent increase in
national spot advertising and a 6.1 percent increase in network compensation
were partially offset by a 0.5 percent decline in local spot advertising. The
modest increases in 1997 advertising revenues reflected the impact of
decreased political advertising of approximately $12 million in 1997 compared
to 1996. In addition, the Company's five NBC affiliated television stations
benefited from significant Olympic related advertising in the prior year third
quarter.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) increased 2.2
percent to $144.8 million in 1997 from $141.7 million in 1996. The increase was
attributable to higher overall personnel costs of $3.2 million and higher
depreciation and amortization of $1 million. These increases were partially
offset by decreases in program rights costs of $493,000, promotion costs of
$333,000 and license fees of $246,000.
Broadcasting operating income in 1997 decreased 1.3 percent to $82.2
million from $83.2 million in the prior year. The 1997 decrease reflected the
modest overall revenue gain, resulting primarily from the effect of significant
political and Olympic related advertising revenue in the prior year.
Interest expense increased $2.5 million in 1997 compared to 1996 due
to higher average debt levels in 1997. The Company's average debt level for
1997 increased to $220 million from $186.9 million in the prior year due to new
long-term borrowings. The Company's average interest rate for 1997 was
unchanged from the prior year rate of 7.3 percent.
The effective income tax rate for 1997 was 39.1 percent, unchanged
from the prior year. The Company expects that the effective tax rate related
to broadcasting operations for 1998 will be similar to the 1997 rate.
For the year ended December 31, 1997, income from discontinued
operations decreased 5.7 percent to $40.3 million, or $1.79 per diluted share,
compared with $42.7 million, or $1.92 per diluted share, in 1996. The decline
reflected the lower broadcasting advertising revenues and higher interest
expense in 1997.
1996 COMPARED WITH 1995
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the year ended December 31, 1996 increased 14.7
percent to $309.1 million from $269.4 million in 1995. The revenue comparison
was affected by the acquisition of Scripps League Newspapers, Inc. ("Scripps
League" which was subsequently renamed Pulitzer Community Newspapers, Inc.
("PCN")) on July 1, 1996. In addition, the revenue comparison was affected by an
extra week of operations in 1995; fiscal 1995 contained 53 weeks versus 52
weeks in fiscal 1996. On a comparable basis, (i.e., excluding PCN from 1996 and
the extra week from 1995), operating revenues increased 3.5 percent. The
comparable increase reflected higher advertising revenues in 1996.
Newspaper advertising revenues, on a comparable basis, excluding PCN
from 1996 and the extra week from 1995, increased $9.5 million, or 6 percent, in
1996. The significant portion of the current year increase resulted from higher
classified advertising revenue at the St. Louis Post-Dispatch ("Post-Dispatch").
Increases in advertising rates for most categories and higher volume for zoned
advertising were the primary factors in the 1996 revenue increase. In the fourth
quarter of 1996 and the first quarter of
28
<PAGE> 29
1997, varying rate increases were implemented at the Post-Dispatch, The Arizona
Daily Star ("Star") and most of the Company's new community newspaper
properties.
Circulation revenues, on a comparable basis, excluding PCN from 1996
and the extra week from 1995, increased approximately $100,000, or 0.2 percent,
in 1996. The Post-Dispatch and Star experienced only slight fluctuations in
paid circulation and average rates in 1996 compared to the prior year.
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, increased to $268.1 million in 1996
from $236.2 million in 1995, an increase of 13.5 percent. On a comparable
basis, excluding PCN from 1996 and the extra week from 1995, operating expenses
increased 2.4 percent. Major increases in comparable expenses were promotion
expense of $1.5 million, overall personnel costs of $955,000 and circulation
distribution expenses of $611,000. Partially offsetting these increases were
declines in newsprint expense of $1.1 million and inducement costs of $798,000.
Operating income for fiscal 1996 increased 30.5 percent to $27 million
from $20.7 million in 1995. On a comparable basis, excluding PCN from
1996 and the extra week from 1995, operating income from the publishing segment
increased 10.1 percent. The increase resulted from higher advertising revenues
on a comparable basis.
Interest income for fiscal 1996 declined $687,000, due to both lower
average balances of invested funds and lower interest rates in 1996.
The Company's 1996 non-operating expenses included a non-recurring
charge of approximately $2.7 million ($1.6 million after-tax) for the
write-down in value of a joint venture investment.
The effective income tax rate related to continuing operations for
1996 increased to 42.4 percent from 38.8 percent in the prior year, due to
approximately $2.1 million of nondeductible goodwill amortization related to
the Scripps League acquisition.
For the year ended December 31, 1996, income from continuing
operations was $14.8 million, or $0.66 per diluted share, compared with $14.5
million, or $0.65 per diluted share, in the prior year. Comparability of the
earnings results was affected by the joint venture write-off in 1996 and the
non-recurring costs related to the Scripps League acquisition ($1.1 million
after tax) in 1996. Excluding the non-recurring items from 1996, income from
continuing operations would have been $17.6 million, or $0.78 per diluted
share. The gain, on a comparable basis, reflected the higher advertising
revenues in 1996.
DISCONTINUED OPERATIONS--BROADCASTING
Broadcasting operating revenues for 1996 increased 10.9 percent to
$225 million from $202.9 million in 1995. On a comparable basis, excluding the
extra week from 1995, operating revenues increased 12.9 percent. Local spot
advertising increased 14.2 percent and national spot advertising increased 14.7
percent. The 1996 increases reflected strong Olympic-related advertising at
the Company's five NBC affiliated stations and significant political
advertising of $13.2 million, an increase of $10.3 million.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) increased 3.5
percent to $141.7 million in 1996 from $137 million in 1995. On a comparable
basis, excluding the extra week from 1995, operating expenses increased 4.5
percent. This increase was primarily attributable to higher overall personnel
costs of $4.2 million and higher national advertising commissions of $951,000.
29
<PAGE> 30
Broadcasting operating income in 1996 increased 26.2 percent to $83.2
million from $65.9 million in the prior year. On a comparable basis, excluding
the extra week from 1995, operating income from the broadcasting segment
increased 30.9 percent. The 1996 gain resulted from the significant increases in
both local and national advertising revenues.
Interest expense increased $3.4 million in 1996 compared to 1995 due
to higher debt levels in the second half of 1996. New long-term borrowings
added approximately $4.8 million to 1996 interest expense. The Company's
average debt level for 1996 increased to $186.9 million from $133.2 million in
the prior year. The Company's average interest rate for 1996 decreased slightly
to 7.3 percent from 7.5 percent in the prior year.
The effective income tax rate related to discontinued operations for
1996 was 39.1 percent compared to 37.4 percent in the prior year. The prior
year rate was affected by the settlement of a state tax examination which
reduced income tax expense by approximately $900,000 in 1995. Excluding the
non-recurring tax settlement from the prior year, the effective income tax rate
for 1995 would have been 39.1 percent.
For the year ended December 31, 1996, income from discontinued
operations increased 22.5 percent to $42.7 million, or $1.92 per diluted share,
compared with $34.9 million, or $1.58 per diluted share, in 1995. Excluding
the positive income tax adjustment from 1995, income from discontinued
operations would have increased 25.7 percent in 1996. The 1996 gain,
on a comparable basis, reflected the significant increase in advertising
revenues which offset operating expense and interest expense increases.
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/Liabilities
of Broadcasting Business" in the Statements of Consolidated Financial Position
(see Note 4 to the Consolidated Financial Statements included in this Exhibit
99-1 to the Company's Current Report on Form 8-K). Outstanding debt, inclusive
of the short-term portion of long-term debt, as of December 31, 1997, was $185.4
million, compared with $250.1 million at December 31, 1996. The decrease in
the outstanding debt balance reflects the final repayment of $14.5 million
under the Company's 8.8 percent Senior Note Agreement which matured in 1997 and
the repayment of $50 million of credit agreement borrowings with The First
National Bank of Chicago, as Agent, for a group of lenders ("FNBC"). Although,
the FNBC credit agreement borrowings were repaid during 1997, the $50 million
line of credit remains available to the Company through June, 2001. As of
December 31, 1997, the Company's outstanding debt balance consists primarily of
fixed-rate senior notes with The Prudential Insurance Company of America
("Prudential").
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 December 31, 1997, commitments for capital expenditures were
approximately $13.8 million, relating to normal capital equipment replacements
(including the cost of Year 2000 projects in-process) and the cost of a
building project at the Louisville broadcasting property. Commitments for
broadcasting film contracts and license fees as of December 31, 1997 were
approximately $30 million. In addition, as of December 31, 1997, the Company
had unfunded capital contribution commitments of approximately $13.9 million
related to investments in three limited partnerships.
30
<PAGE> 31
At December 31, 1997, the Company had working capital of $75.8 million
and a current ratio of 2.96 to 1. This compares to working capital of $78.9
million and a current ratio of 3.21 to 1 at December 31, 1996.
The Company from time to time considers acquisitions of newspapers and
other properties when favorable investment opportunities are identified.
In the event an investment opportunity is identified, management expects that
it would be able to arrange financing on terms and conditions satisfactory
to the Company.
The Company generally expects to generate sufficient cash from
operations to cover ordinary capital expenditures, film contract and license
fees, working capital requirements, debt installments and dividend payments.
SPIN-OFF AND MERGER
Prior to the Spin-off and Merger, 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 Consolidated Financial Statements
included in this Exhibit 99-1 to the Company's Current Report on Form 8-K.)
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 Company 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
recapitalization, dividend or distribution the amount by which the Transaction
Proceeds exceeds the Imputed Value shall not exceed the amount paid or
distributed pursuant to such recapitalization, dividend or distribution in
respect of one share of 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
recapitalization, dividend or distribution, the aggregate Fair Market Value of
the amounts paid or 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, the result of
which is $154.19 at May 12, 1998. There was no specific provision for
adjustment of the $28.82 amount, but if it were adjusted to reflect all stock
dividends and stock splits of 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.
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.
As result of the foregoing, 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 resect 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.
Accordingly, depending on the ultimate resolution of the meaning and
application of various provisions of the Gross-up Transaction agreements,
including the determination of Imputed Value and Fair Market Value of the
Transaction Proceeds, in the opinion of management, the amount of an additional
payment, if any, could be material to the consolidated financial statements of
the Company.
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 twelve to fifteen months. At December
31, 1997, the remaining cost of new hardware and software to address Year 2000
issues, as well as to replace aging systems, is estimated at approximately $9.8
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.
31
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Pulitzer Publishing Company:
We have audited the consolidated financial statements of Pulitzer Publishing
Company and its subsidiaries as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 6, 1998 (July 17, 1998 as to Notes 1, 4 and 14);
such report is included elsewhere in this Current Report on Form 8-K. Our
audits also included the consolidated financial statement schedule II of
Pulitzer Publishing Company and its subsidiaries. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
February 6, 1998 (July 17, 1998 as to Notes 1, 4 and 14)
<PAGE> 33
SCHEDULE II
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS & RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 & 1995
<TABLE>
<CAPTION>
Balance At Charged to Charged to Balance
Beginning Costs & Other At End Of
Description Of Period Expenses Accounts Deductions Period
==================================================================================================================================
(In thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
====================================
Valuation Accounts:
Allowance for Doubtful Accounts:
Continuing Operations $1,585 $1,151 $1,110 (b) $1,626
Discontinued Operations 991 317 $178 (a) 701 (b) 785
Reserves:
Accrued Medical Plan - Continuing
Operations 389 4,714 4,060 (c) 1,043
Workers Compensation:
Continuing Operations 1,085 887 883 1,089
Discontinued Operations 1,041 312 485 868
Year Ended December 31, 1996
====================================
Valuation Accounts:
Allowance for Doubtful Accounts:
Continuing Operations $1,158 $1,691 $95 (a) $1,359 (b) $1,585
Discontinued Operations 851 440 226 (a) 526 (b) 991
Reserves:
Accrued Medical Plan - Continuing
Operations 561 4,198 4,370 (c) 389
Workers Compensation:
Continuing Operations 1,055 1,049 1,019 1,085
Discontinued Operations 950 429 338 1,041
Year Ended December 31, 1995
====================================
Valuation Accounts:
Allowance for Doubtful Accounts:
Continuing Operations $1,325 $844 $1,011 (b) $1,158
Discontinued Operations 810 694 $247 (a) 900 (b) 851
Reserves:
Accrued Medical Plan - Continuing
Operations 789 $4,907 5,135 (c) 561
Workers Compensation:
Continuing Operations 1,662 871 1,478 1,055
Discontinued Operations 665 321 36 950
</TABLE>
(a) - Accounts reinstated, cash recoveries, etc.
(b) - Accounts written off
(c) - Amount represents: 1997 1996 1995
---- ---- ----
Claims paid $3,596 $3,830 $4,660
Service fees 473 579 548
Cash refunds (9) (39) (73)
----- ----- -----
$4,060 $4,370 $5,135
====== ====== ======
<PAGE> 1
EXHIBIT 99-2
PULITZER PUBLISHING COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Statements of Consolidated Income for each of the Three-Month Periods
Ended March 31, 1998 and 1997
Statements of Consolidated Financial Position at March 31, 1998
and December 31, 1997
Statements of Consolidated Cash Flows for each of the Three-Month
Periods Ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<PAGE> 2
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<TABLE>
<CAPTION>
First Quarter Ended
March 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES - NET:
Advertising $57,721 $53,927
Circulation 22,198 22,434
Other 10,310 9,474
----------- ------------
Total operating revenues 90,229 85,835
----------- ------------
OPERATING EXPENSES:
Operations 37,314 34,533
Selling, general and administrative 33,447 31,874
General corporate expense 1,417 1,384
St. Louis Agency adjustment 5,270 4,929
Depreciation and amortization 3,379 3,349
----------- ------------
Total operating expenses 80,827 76,069
----------- ------------
Operating income 9,402 9,766
Interest income 1,042 1,450
Net other expense (290) (320)
----------- ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 10,154 10,896
PROVISION FOR INCOME TAXES 4,383 4,666
----------- ------------
INCOME FROM CONTINUING OPERATIONS 5,771 6,230
INCOME FROM DISCONTINUED OPERATIONS,
NET OF TAX (Note 3) 8,194 6,265
---------- ------------
NET INCOME $13,965 $12,495
========== ============
BASIC EARNINGS PER SHARE OF STOCK:
Income from continuing operations $0.26 $0.28
Income from discontinued operations 0.37 0.29
---------- ------------
Earnings per share $0.63 $0.57
========== ============
Weighted average number of shares outstanding 22,223 22,029
========== ============
DILUTED EARNINGS PER SHARE OF STOCK:
Income from continuing operations $0.26 $0.28
Income from discontinued operations 0.36 0.28
---------- ------------
Earnings per share $0.62 $0.56
========== ============
Weighted average number of shares outstanding 22,615 22,378
========== ============
See notes to consolidated financial statements.
</TABLE>
2
<PAGE> 3
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $84,252 $62,749
Trade accounts receivable (less allowance for
doubtful accounts of $1,646 and $1,626) 34,304 35,002
Inventory 3,670 5,265
Prepaid expenses and other 11,049 11,587
----------------- -----------------
Total current assets 133,275 114,603
----------------- -----------------
PROPERTIES:
Land 5,991 5,991
Buildings 41,148 39,446
Machinery and equipment 92,741 89,484
Construction in progress 4,893 4,042
----------------- -----------------
Total 144,773 138,963
Less accumulated depreciation 66,126 64,166
----------------- -----------------
Properties - net 78,647 74,797
----------------- -----------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization 185,056 185,124
Receivable from The Herald Company 37,651 39,733
Net assets of Broadcasting Business (Note 3) 29,065 36,069
Other 14,758 13,985
----------------- -----------------
Total intangible and other assets 266,530 274,911
----------------- -----------------
TOTAL $478,452 $464,311
================= =================
(Continued)
</TABLE>
3
<PAGE> 4
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $9,438 $12,193
Salaries, wages and commissions 7,488 10,523
Income taxes payable 9,591 3,070
Acquisition payable 9,804 9,804
Other 7,108 3,183
----------------- -----------------
Total current liabilities 43,429 38,773
----------------- -----------------
PENSION OBLIGATIONS 21,560 21,165
----------------- -----------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 89,343 89,350
----------------- -----------------
OTHER LONG-TERM LIABILITIES 4,140 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 - 6,891,619 in 1998 and 6,797,895 in 1997 69 68
Class B common stock, convertible, $.01 par value; 50,000,000
shares authorized; issued - 27,125,247 in 1998 and 1997 271 271
Additional paid-in capital 137,489 135,542
Retained earnings 370,124 362,828
----------------- -----------------
Total 507,953 498,709
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 319,980 310,777
----------------- -----------------
TOTAL $478,452 $464,311
================= =================
(Concluded)
See notes to consolidated financial statements.
</TABLE>
4
<PAGE> 5
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
First Quarter Ended
March 31,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $5,771 $6,230
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,906 1,902
Amortization 1,473 1,447
Deferred income taxes 691 700
Changes in assets and liabilities (net of the effects of the
purchase of properties) which provided (used) cash:
Trade accounts receivable 698 1,545
Inventory 1,595 (352)
Other assets 1,070 (1,996)
Trade accounts payable and other liabilities (4,913) (2,701)
Income taxes payable 6,521 5,736
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,812 12,511
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,788) (1,815)
Purchase of publishing properties (1,998)
Investment in joint ventures and limited partnerships (342)
Increase in notes receivable 45 4,965
------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (7,083) 3,150
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (3,331) (2,859)
Proceeds from exercise of stock options 1,613 1,291
Proceeds from employee stock purchase plan 335
Purchase of treasury stock (41) (28)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (1,424) (1,596)
------------ ------------
CASH PROVIDED BY CONTINUING OPERATIONS 6,305 14,065
------------ ------------
DISCONTINUED OPERATIONS
Operating activities 18,385 14,354
Investing activities (3,187) (1,739)
------------ ------------
CASH PROVIDED BY DISCONTINUED OPERATIONS 15,198 12,615
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 21,503 26,680
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 62,749 73,052
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $84,252 $99,732
============ ============
See notes to consolidated financial statements.
</TABLE>
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 March 31, 1998 and the results of operations
and cash flows for the three-month periods ended March 31, 1998 and 1997. These
financial statements should be read in conjunction with the Consolidated
Financial Statements and related notes thereto included as Exhibit 99-1 to this
Current Report on Form 8-K. 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 first fiscal
quarter end on the Sunday coincident with or prior to December 31 and March 31,
respectively. For ease of presentation, the Company has used December 31 as the
year end and March 31 as the first 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>
First Quarter Ended
March 31,
-----------------------
1998 1997
(In thousands)
<S> <C> <C>
Weighted average shares outstanding (Basic EPS) 22,223 22,029
Stock option equivalents 392 349
--------- -------
Weighted average shares outstanding and
stock option equivalents (Diluted EPS) 22,615 22,378
========= =======
</TABLE>
6
<PAGE> 7
Stock option equivalents included in the diluted earnings per share calculation
were determined using the treasury stock method. Under the treasury stock
method, outstanding stock options are dilutive when the average market price of
the Company's common stock exceeds the option price during a period. In
addition, proceeds from the assumed exercise of dilutive options along with the
related tax benefit are assumed to be used to repurchase common shares at the
average market price of such stock during the period.
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 three-month periods ended March 31, 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>
March 31, December 31,
1998 1997
(In thousands)
<S> <C> <C>
Trade accounts receivable - net $40,907 $50,880
Program rights 5,266 7,866
Other current assets 1,617 1,260
------------- --------------
Total current assets 47,790 60,006
Properties - net 85,455 87,017
Intangible assets 100,568 102,493
Other assets 8,011 7,172
------------- --------------
Total assets of Broadcasting Business 241,824 256,688
------------- --------------
Trade accounts payable and accrued expenses 8,916 10,226
Current portion of long-term debt 12,705 12,705
Interest payable 2,259 5,677
Program contracts payable 5,148 7,907
------------- --------------
Total current liabilities 29,028 36,515
Long-term debt 172,705 172,705
Long term employee benefit obligations 8,500 8,100
Other long term liabilities 2,526 3,299
------------- --------------
Total liabilities of Broadcasting Business 212,759 220,619
------------- --------------
Net assets of Broadcasting Business $29,065 $36,069
============= ==============
</TABLE>
7
<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:
First Quarter Ended
March 31,
----------------------------
1998 1997
------------- -----------
(In thousands)
Operating revenues $53,170 $50,171
Operating income 16,915 14,819
Interest expense 3,462 4,525
Income before provision for
income taxes 13,453 10,294
Provision for income taxes 5,259 4,029
Net income 8,194 6,265
Depreciation and amortization 5,551 5,834
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 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 March 31, 1998, the Company and its subsidiaries had construction and
equipment commitments of approximately $13,306,000 related to continuing
operations and $4,261,000 related to discontinued operations. The Company's
commitment for broadcasting program contracts payable and license fees at March
31, 1998 was approximately $30,455,000.
The Company is an investor in two limited partnerships requiring future
contributions. As of March 31, 1998, the Company's unfunded capital contribution
commitment related to these investments was approximately $12,522,000.
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 the ultimate outcome of such litigation will
not have a material adverse effect on the consolidated financial statements of
the Company and its subsidiaries.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Report on Form 8-K concerning the Company's business outlook
or future economic performance, anticipated profitability, revenues, expenses or
other financial items, together with other statements that are not historical
facts, are "forward-looking statements" as that term is defined under the
Federal Securities Laws. Forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from those stated in such statements. Such risks, uncertainties and
factors include, but are not limited to, industry cyclicality, the seasonal
nature of the business, changes in pricing or other actions by competitors or
suppliers, and general economic conditions, as well as other risks detailed in
the Company's filings with the Securities and Exchange Commission including this
Report on Form 8-K.
GENERAL
The Company's operating revenues are significantly influenced by a
number of factors, including overall advertising expenditures, the appeal of
newspapers 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 this Exhibit 99-2 to
the Company's Current Report on Form 8-K.)
CONTINUING OPERATIONS--PUBLISHING
Operating revenues for the first quarter of 1998 increased 5.1 percent,
to $90.2 million from $85.8 million in the first quarter of 1997. The gain
primarily reflected higher advertising revenues.
Newspaper advertising revenues, increased $3.8 million, or 7 percent,
in the first quarter of 1998. The significant portion of the current year
increase resulted from higher classified and national advertising revenue at the
St. Louis Post-Dispatch ("Post-Dispatch"). Full run advertising volume (linage
in inches) increased 2.3 percent at the Post-Dispatch for the first quarter of
1998. Advertising volume was also up at The Arizona Daily Star ("Star"),
increasing 3.1 percent. 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 Company's community newspaper properties.
Circulation revenues for the first quarter decreased 1.1 percent to
$22.2 million in the first quarter of 1998 from $22.4 million in the prior year
quarter. The lower circulation revenues reflected declines in paid circulation
at the Post-Dispatch and Star.
Other publishing revenues increased $836,000, or 8.8 percent, in the
first quarter of 1998, resulting primarily from higher preprint revenue at the
Post-Dispatch.
Operating expenses (including selling, general and administrative
expenses, general corporate expense and depreciation and amortization),
excluding the St. Louis Agency adjustment, increased 6.2 percent to $75.6
million for the 1998 first quarter compared to $71.1 million for the same period
in the prior year. The increase reflected the impact of higher newsprint prices,
which increased newsprint costs by $1.7 million, and higher overall personnel
costs of $1.6 million.
9
<PAGE> 10
Operating income for the first quarter of 1998 decreased 3.7 percent to
$9.4 million from $9.8 million. The decrease was due to higher operating
expenses in the current year quarter.
Interest income for the first quarter of 1998 decreased 28.1 percent
to $1 million from $1.5 million, due to a lower average balance of invested
funds.
The effective income tax rate for the first quarter of 1998 was 43.2
percent compared with a rate of 42.8 percent in the prior year quarter. The
Company expects 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 first quarter declined
6.8 percent to $10.2 million, or $0.26 per diluted share, compared with $10.9
million, or $0.28 per diluted share, in the first quarter of 1997. The decrease
resulted from higher operating expenses and lower interest income in the current
year quarter.
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 the segment's total operating costs. For the first
quarter of 1998, the Company's average cost for newsprint was approximately $600
per metric ton, compared to approximately $530 per metric ton in the 1997 first
quarter.
DISCONTINUED OPERATIONS--BROADCASTING
Broadcasting operating revenues for the first quarter of 1998 increased
6 percent, to $53.2 million from $50.2 million in the first quarter of 1997.
Local spot advertising increased 7.4 percent and national spot advertising
increased 5.4 percent.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) for the first quarter
of 1998 increased 2.6 percent, to $36.3 million from $35.4 million in the first
quarter of the prior year. The increase was primarily attributable to higher
overall personnel costs of approximately $1.3 million.
Broadcasting operating income in the 1998 first quarter increased 14.1
percent to $16.9 million from $14.8 million, due primarily to the current year
increase in local and national advertising revenue.
Interest expense declined to $3.5 million in the 1998 first quarter
from $4.5 million in the first quarter of 1997 due to lower average debt levels.
The Company's average debt level for the 1998 first quarter decreased to $185.4
million from $250.1 million in the first quarter of 1997. The Company's average
interest rate for the first quarter of 1998 increased slightly to 7.5 percent
from 7.2 percent in the 1997 first quarter. The lower average debt level and
higher average interest rate in the first quarter of 1998 reflected the payment
of variable rate credit agreement borrowings during the last three quarters of
1997.
The effective income tax rate for the first quarter of 1998 was 39.1
percent, unchanged from the prior year first quarter. 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 first quarter increased
30.8 percent to $8.2 million, or $0.36 per diluted share, compared with $6.3
million, or $0.28 per diluted share, in the first quarter of 1997. The gain
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 Broadcasting Business"
in the Statements of Consolidated Financial Position (see Note 3 to the
Consolidated Financial Statements included in this Exhibit 99-2 to the
Company's Current Report on Form 8-K). Outstanding debt, inclusive of the
short-term portion of long-term debt, as of March 31, 1998, was $185.4 million,
unchanged from the balance 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.
10
<PAGE> 11
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 March 31, 1998, commitments for capital expenditures were
approximately $17.6 million, relating to normal capital equipment replacements
(including Year 2000 projects in-process) and the cost of a building project at
the Louisville broadcasting property. Capital expenditures to be made in fiscal
1998 are estimated to be in the range of $25 to $30 million. Commitments for
broadcasting film contracts and license fees as of March 31, 1998 were
approximately $30.5 million. In addition, as of March 31, 1998, the Company had
capital contribution commitments of approximately $12.5 million related to
investments in two limited partnerships.
At March 31, 1998, the Company had working capital of $89.8 million and
a current ratio of 3.07 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.
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 twelve to fifteen months. At March 31, 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 $7.4 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.
11
<PAGE> 1
EXHIBIT 99-3
PULITZER BROADCASTING COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Statements of Consolidated Income for each of the Three Years in the
Period Ended December 31, 1997
Statements of Consolidated Income for each of the Six-Month Periods
Ended June 30, 1998 and 1997 (Unaudited)
Statements of Consolidated Financial Position at December 31, 1997 and
1996
Statements of Consolidated Financial Position at June 30, 1998
(Unaudited)
Statements of Consolidated Stockholder's Equity (Deficit) for each of
the Three Years in the Period Ended December 31, 1997
Statement of Consolidated Stockholder's Equity for the Six-Month Period
Ended June 30, 1998 (Unaudited)
Statements of Consolidated Cash Flows for each of the Three Years in
the Period Ended December 31, 1997
Statements of Consolidated Cash Flows for each of the Six-Month Periods
Ended June 30, 1998 and 1997 (Unaudited)
Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Pulitzer Publishing Company:
We have audited the accompanying statements of consolidated financial position
of Pulitzer Broadcasting Company, a wholly-owned subsidiary of Pulitzer
Publishing Company, and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholder's equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the companies at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
July 17, 1998
2
<PAGE> 3
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ------------------------------------
1998 1997 1997 1996 1995
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - NET $119,773 $111,264 $227,016 $224,992 $202,939
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Operations 36,045 33,989 69,205 66,626 64,202
Selling, general and administrative 28,267 27,862 55,885 56,535 53,707
Depreciation and amortization 11,051 11,684 23,447 22,442 22,843
-------- -------- -------- -------- --------
Total operating expenses 75,363 73,535 148,537 145,603 140,752
-------- -------- -------- -------- --------
Operating income 44,410 37,729 78,479 79,389 62,187
Interest expense (6,925) (8,699) (16,081) (13,592) (10,171)
Net other income (expense) 5 5 10 434 (4)
-------- -------- -------- -------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 37,490 29,035 62,408 66,231 52,012
PROVISION FOR INCOME TAXES (Note 11) 14,645 11,346 24,387 25,876 19,433
-------- -------- -------- -------- --------
NET INCOME $ 22,845 $ 17,689 $ 38,021 $ 40,355 $ 32,579
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------
1998 1997 1996
(Unaudited)
ASSETS (In thousands, except share data)
<S> <C> <C> <C>
CURRENT ASSETS:
Trade accounts receivable (less allowance for
doubtful accounts of $871, $785, and $991) $ 50,863 $ 50,880 $ 47,700
Program rights 3,054 7,866 8,452
Prepaid expenses and other 1,306 1,260 1,277
--------- --------- ---------
Total current assets 55,223 60,006 57,429
--------- --------- ---------
PROPERTIES:
Land 10,069 10,163 9,342
Buildings 44,881 44,769 43,827
Machinery and equipment 137,250 135,629 125,806
Construction in progress 5,794 3,282 1,735
--------- --------- ---------
Total 197,994 193,843 180,710
Less accumulated depreciation 113,922 106,826 91,816
--------- --------- ---------
Properties - net 84,072 87,017 88,894
--------- --------- ---------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization (Note 6) 98,670 102,493 107,934
Other 7,904 7,172 6,021
--------- --------- ---------
Total intangible and other assets 106,574 109,665 113,955
--------- --------- ---------
TOTAL $ 245,869 $ 256,688 $ 260,278
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 4,113 $ 3,966 $ 3,724
Current portion of long-term debt (Note 7) 12,705 12,705 14,705
Salaries, wages and commissions 4,053 4,709 4,806
Interest payable 5,640 5,677 7,177
Program contracts payable 2,728 7,907 8,916
Other 2,169 1,551 1,698
--------- --------- ---------
Total current liabilities 31,408 36,515 41,026
--------- --------- ---------
LONG-TERM DEBT (Note 7) 172,500 172,705 235,410
--------- --------- ---------
PENSION OBLIGATIONS (Note 8) 6,242 5,544 4,149
--------- --------- ---------
POSTRETIREMENT BENEFIT OBLIGATIONS (Note 9) 2,659 2,556 2,618
--------- --------- ---------
OTHER LONG-TERM LIABILITIES 2,522 3,299 5,842
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock, $100 par value; 1,000 shares authorized;
issued - 100 shares 10 10 10
Additional paid-in capital 11,924 11,924 11,924
Retained earnings 104,454 81,609 43,588
Intercompany balance (Note 4) (85,850) (57,474) (84,289)
--------- --------- ---------
Total stockholder's equity (deficit) 30,538 36,069 (28,767)
--------- --------- ---------
TOTAL $ 245,869 $ 256,688 $ 260,278
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,845 $ 17,689 $ 38,021 $ 40,355 $ 32,579
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,157 7,817 15,709 14,811 15,191
Amortization 3,894 3,867 7,738 7,631 7,652
Deferred income taxes (659) (654) (2,039) (844) (1,506)
Gain on sale of assets (421)
Changes in assets and liabilities which
provided (used) cash:
Trade accounts receivable 17 (839) (3,180) (5,658) (3,014)
Other assets (164) 24 (386) (597) 414
Trade accounts payable and other liabilities 867 (394) (356) 4,751 1,608
-------- -------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,957 27,510 55,507 60,028 52,924
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,376) (5,540) (12,976) (11,354) (16,307)
Purchase of broadcast assets (1,849) (3,141) (5,187)
Investment in limited partnership (1,000) (1,500) (1,500) (1,750) (1,750)
Sale of assets 1,999
-------- -------- -------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (5,376) (8,889) (17,617) (16,292) (18,057)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 135,000
Repayments of long-term debt (205) (26,705) (64,705) (15,205) (14,250)
Net transactions with Pulitzer Publishing Company (28,376) 8,084 26,815 (163,531) (20,617)
-------- -------- -------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (28,581) (18,621) (37,890) (43,736) (34,867)
-------- -------- -------- -------- --------
NET INCREASE IN CASH $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 6,872 $ 9,513 $ 17,469 $ 9,716 $ 10,147
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Shares (In thousands)
------------ -------------------------------------------------------------------------------
Additional Total
Common Common Paid-in Retained Intercompany Stockholder's
Stock Stock Capital Earnings Balance Equity (Deficit)
------------ ------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1995 100 $ 10 $ 11,924 $ 43,588 $ 26,925 $ 82,447
Net Income 32,579 32,579
Dividends declared (32,579) 32,579
Net transactions with Pulitzer
Publishing Company (20,617) (20,617)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1995 100 10 11,924 43,588 38,887 94,409
Net Income 40,355 40,355
Dividends declared (40,355) 40,355
Net transactions with Pulitzer
Publishing Company (163,531) (163,531)
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 100 10 11,924 43,588 (84,289) (28,767)
Net Income 38,021 38,021
Net transactions with Pulitzer
Publishing Company 26,815 26,815
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 100 10 11,924 81,609 (57,474) 36,069
Net Income (unaudited) 22,845 22,845
Net transactions with Pulitzer
Publishing Company (unaudited) (28,376) (28,376)
------------ ------------ ------------ ------------ ------------ ------------
Balances at June 30, 1998
(unaudited) 100 $ 10 $ 11,924 $ 104,454 $ (85,850) $ 30,538
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On May 25, 1998, Pulitzer Publishing Company (the "Company" or "Pulitzer"),
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 2) (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 (see Note 7) 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.
2. BROADCASTING BUSINESS
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of Broadcasting. All significant intercompany transactions have been
eliminated from the consolidated financial statements.
Fiscal Year - Broadcasting's fiscal year ends on the last Sunday of the
calendar year, which in 1995 resulted in a 14-week fourth quarter and a 53-week
year. In 1997 and 1996, the fourth quarter was 13 weeks and the year was 52
weeks. Broadcasting's six-month periods ended June 30, 1998 and 1997 end on the
last Sunday coincident with or prior to June 30. For ease of presentation,
Broadcasting has used December 31 as the year-end and June 30 as the six-month
period end.
Program Rights - Program rights represent license agreements for the right to
broadcast programs over license periods which generally run from one to five
years. The total cost of each agreement is recorded as an asset and liability
when the license period begins and the program is available for broadcast.
7
<PAGE> 8
Program rights covering periods greater than one year are amortized over the
license period using an accelerated method as the programs are broadcast. In
the event that a determination is made that programs will not be used prior to
the expiration of the license agreement, unamortized amounts are then charged
to operations. Payments are made in installments as provided for in the license
agreements. Program rights expected to be amortized in the succeeding year and
payments due within one year are classified as current assets and current
liabilities, respectively.
Property and Depreciation - Property is recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
individual assets. Buildings are depreciated over 30 to 35 years and all other
property over lives ranging from 3 to 15 years.
Intangible Assets - Intangibles consisting of goodwill, FCC licenses and network
affiliations acquired subsequent to the effective date of Accounting Principles
Board Opinion No. 17 ("Opinion No. 17") are being amortized over lives of either
15 or 40 years while all other intangible assets are being amortized over lives
ranging from 8 to 21 years. Intangibles in the amount of $1,520,000, related to
acquisitions prior to the effective date of Opinion No. 17, are not being
amortized because, in the opinion of management, their value is of
undeterminable duration.
Long-Lived Assets - The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in March 1995.
This statement became effective for Broadcasting's 1996 fiscal year. The general
requirements of this statement are applicable to the properties and intangible
assets of Broadcasting and require impairment to be considered whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Management periodically evaluates the recoverability
of long-lived assets by reviewing the current and projected cash flows of each
of its properties. If a permanent impairment is deemed to exist, any write-down
would be charged to operations. For the periods presented, there has been no
impairment.
Postretirement Benefit Plans - Broadcasting provides retiree medical and life
insurance benefits under varying postretirement plans at several of its
operating locations. Broadcasting's liability and related expense for benefits
under the postretirement plans are recorded over the service period of active
employees based upon annual actuarial calculations. All of Broadcasting's
postretirement benefits are funded on a pay-as-you-go basis.
Income Taxes - Broadcasting's financial results are included in Pulitzer's
consolidated federal income tax return. The tax provisions included in the
consolidated financial statements were computed as if Broadcasting was a
separate company. Deferred tax assets and liabilities are recorded for the
expected future tax consequences of events that have been included in either
financial statements or tax returns. Under this asset and liability approach,
deferred tax assets and liabilities are determined based on temporary
differences between the financial statement and tax bases of assets and
liabilities by applying enacted statutory tax rates applicable to future years
in which the differences are expected to reverse.
Stock-Based Compensation Plans - Effective January 1, 1996, Broadcasting
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation. The
new standard defines a fair value method of accounting for stock options
and similar equity instruments. Under the fair value method, compensation cost
is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but not required, to
adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, but are required to disclose pro
forma net income and, if presented, earnings per share as if the company had
applied the new method of accounting. The accounting requirements of the new
method are effective for all employee awards granted after the beginning of the
fiscal year of adoption, whereas the disclosure requirements apply to all
awards granted subsequent to December 31, 1994. Broadcasting continues to
recognize and measure compensation for its participation in the Pulitzer
restricted stock option plans in accordance with the existing provisions of
APB 25.
Comprehensive Income - Effective January 1, 1998, Broadcasting adopted
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, with no effect on Broadcasting's financial statements for the
six-month periods ended June 30, 1998 and 1997.
Dividends - Dividends, when declared, are recorded in the "Intercompany
Balance" in the Statements of Consolidated Financial Position. The payment and
amount of future dividends remains within the discretion of the Board of
Directors. No dividends were declared for the six-month period ended June 30,
1998 or the year ended December 31, 1997.
Use of Management Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires that
management make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. The reported amounts of
revenues and expenses during the reporting period may also be affected by the
estimates and assumptions management is required to make. Actual results may
differ from those estimates.
Unaudited Interim Financial Information - In the opinion of management, the
accompanying unaudited interim financial information contains all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
Broadcasting's financial position as of June 30, 1998 and 1997. These
financial statements should be read in conjunction with Pulitzer's consolidated
financial statements and related notes thereto included as Exhibit 99-1 to this
Current Report on Form 8-K. Results of operations for interim periods are not
necessarily indicative of results to be expected for the full year.
4. TRANSACTIONS WITH PULITZER
Cash - The Statements of Consolidated Financial Position exclude all cash and
have reflected current payables for income taxes and other items, to the extent
paid by Pulitzer, in the intercompany balance.
Long-term Debt - Pulitzer's long-term debt balances and related interest expense
have been allocated to Broadcasting and are included in the consolidated
financial statements herein. This allocation to Broadcasting is consistent with
the terms of the Merger Agreement discussed in Note 1.
Intercompany Balance - Balance reflects the net transactions with Pulitzer,
which are not expected to be repaid.
8
<PAGE> 9
Pension Plans - Pulitzer sponsors various noncontributory pension plans which
cover substantially all of the Broadcasting employees. Benefits under the plans
are generally based on salary and years of service. The liability and related
expense for benefits under the plans are recorded over the service period of
active employees based upon annual actuarial calculations. Annual pension
expense for the pension plans is allocated to Broadcasting based upon payroll
expense for Broadcasting employees. Plan funding strategies are influenced by
tax regulations. Plan assets consist primarily of government bonds and corporate
equity securities.
Corporate Expenses - Broadcasting benefits from certain services provided by
Pulitzer including financial, legal, tax, employee benefit department, corporate
communications, and internal audit. These corporate costs have been allocated to
Broadcasting using a variety of factors, including revenues, property, and
payroll. Management believes that the methods of allocating costs to
Broadcasting are reasonable. Broadcasting's allocation of these costs were
$3,701,000, $3,857,000 and $3,752,000 in the years ended December 31, 1997,
1996, and 1995, respectively and $1,880,000 (unaudited) and $1,908,000
(unaudited) for the six months ended June 30, 1998 and 1997, respectively.
These costs are included within the Statements of Consolidated Income.
5. ACQUISITION OF PROPERTIES
In June 1997, Broadcasting acquired in a purchase transaction the assets of an
AM radio station in Louisville, Kentucky for approximately $1,897,000. In August
1997, Broadcasting acquired in a purchase transaction the assets of an AM radio
station in Kernersville, North Carolina for approximately $1,244,000.
In December 1996, Broadcasting acquired in a purchase transaction the assets of
an AM radio station in Phoenix, Arizona for approximately $5,187,000.
During 1995, 1996, 1997 and 1998, Broadcasting made cumulative capital
contributions of $6,000,000 for a limited partnership investment in the Major
League Baseball Franchise located in Phoenix, Arizona. The investment is
included in other non-current assets in the Statements of Consolidated Financial
Position.
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------
1998 1997 1996
(Unaudited)
(In thousands)
<S> <C> <C> <C>
FCC licenses and network affiliations $114,403 $114,376 $112,162
Goodwill 6,960 6,960 6,960
Other 33,696 33,696 33,696
-------- -------- --------
Total $155,059 155,032 152,818
Less accumulated amortization 56,389 52,539 44,884
-------- -------- --------
Total intangible assets - net $ 98,670 $102,493 $107,934
======== ======== ========
</TABLE>
9
<PAGE> 10
7. LONG-TERM DEBT
Long-term debt of Pulitzer allocated to Broadcasting consists of the following:
<TABLE>
<CAPTION>
December 31,
June 30 ----------------------------
1998 1997 1996
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Credit Agreement $ -- $ -- $ 50,000
Senior notes maturing in substantially
equal annual installments:
8.8% due through 1997 14,500
6.76% due 1998-2001 50,000 50,000 50,000
7.22% due 2002-2005 50,000 50,000 50,000
7.86% due 2001-2008 85,000 85,000 85,000
Other 205 410 615
------------ ------------ ------------
Total 185,205 185,410 250,115
Less current portion 12,705 12,705 14,705
------------ ------------ ------------
Total long-term debt $ 172,500 $ 172,705 $ 235,410
============ ============ ============
</TABLE>
Pulitzer's fixed-rate senior note borrowings are with The Prudential Insurance
Company of America ("Prudential"). The Senior Note Agreements with Prudential
provide for the payment of certain fees, depending on current interest rates and
remaining years to maturity, in the event of repayment prior to the notes'
scheduled maturity dates (as anticipated by the Spin-off and Merger discussed in
Note 1).
The credit agreement with The First National Bank of Chicago, as Agent, for a
group of lenders ("FNBC"), provides for a $50,000,000 variable rate revolving
credit facility ("Credit Agreement"). Loans may be borrowed, repaid and
reborrowed by Pulitzer until the Credit Agreement terminates on July 2, 2001.
Pulitzer has the option to repay any borrowings and terminate the Credit
Agreement, without penalty, prior to its scheduled maturity. As of
December 31, 1997 and June 30, 1998, Pulitzer had no borrowings under the
Credit Agreement.
The Credit Agreement allows Pulitzer to elect an interest rate with respect to
each borrowing under the facility equal to a daily floating rate or the
Eurodollar rate plus 0.225 percent. As of December 31, 1996, the interest rate
on the Credit Agreement borrowings with FNBC was 5.875 percent.
The terms of the various senior note agreements contain certain covenants and
conditions including the maintenance of cash flow and various other financial
ratios, limitations on the incurrence of other debt and limitations on the
amount of restricted payments (which generally includes dividends, stock
purchases and redemptions).
Under the terms of the most restrictive borrowing covenants, in general,
Pulitzer may pay annual dividends not to exceed the sum of $10,000,000, plus 75%
of consolidated net earnings commencing January 1, 1993, less the sum of all
dividends paid or declared and redemptions in excess of sales of Pulitzer stock
after December 31, 1992.
10
<PAGE> 11
Approximate annual maturities of long-term debt for the five years subsequent to
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Year (In thousands):
<S> <C>
1998 $ 12,705
1999 12,705
2000 12,500
2001 23,125
2002 23,125
Thereafter 101,250
----------
Total $ 185,410
==========
</TABLE>
8. PENSION PLANS
Pulitzer sponsors two defined benefit pension plans in which Broadcasting
employees may be eligible to participate. No detailed information regarding the
funded status of the plans and components of net periodic pension cost, as it
relates to Broadcasting is available. The pension cost components for the
pension plans are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost for benefits earned during the year $ 2,272 $ 2,215 $ 1,929
Interest cost on projected benefit obligation 3,531 3,046 2,849
Actual return on plan assets (7,210) (4,225) (5,364)
Net amortization and deferrals 4,218 1,867 3,577
------------ ------------ ------------
Net periodic pension cost $ 2,811 $ 2,903 $ 2,991
============ ============ ============
</TABLE>
The portion of net periodic pension cost allocated, based on payroll costs, to
Broadcasting's active employees and included in the Statements of Consolidated
Income amounted to approximately $1,395,000, $1,474,000 and $1,540,000 for
1997, 1996 and 1995, respectively, and for the six months ended June 30, 1998
and 1997 was approximately $698,000 (unaudited) and $735,000 (unaudited),
respectively. Pursuant to the Merger Agreement, Broadcasting will retain the
ongoing liabilities related to its active employees. Future pension costs for
Broadcasting after the Spin-off are likely to be different when compared to
allocated historical amounts.
The funded status of the Pension Plans is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Accumulated Assets Accumulated Assets
Benefits Exceed Benefits Exceed
Exceed Accumulated Exceed Accumulated
Assets Benefits Assets Benefits
(In thousands)
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 9,906 $ 39,699 $ 8,307 $ 33,472
======== ======== ======== ========
Accumulated benefit obligation $ 9,979 $ 40,341 $ 8,343 $ 33,983
======== ======== ======== ========
Projected benefit obligation $ 11,472 $ 43,826 $ 10,251 $ 37,209
Plan assets at fair value 43,495 37,349
-------- -------- -------- --------
Plan assets less than (greater than) projected
benefit obligation 11,472 331 10,251 (140)
Unrecognized transition asset (obligation), net (960) 104 (1,137) 125
Unrecognized net gain (loss) (1,237) 4,751 (812) 3,512
Unrecognized prior service cost (credits) (35) 224 (40) 252
Additional minimum liability 739 81
-------- -------- -------- --------
Pension obligations $ 9,979 $ 5,410 $ 8,343 $ 3,749
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
The portion of pension obligations allocated to Broadcasting employees and
included in the Statements of Consolidated Financial Position amounted to
$5,544,000 and $4,149,000 as of December 31, 1997 and 1996, respectively. As of
the date of the Merger, actuarial calculations will be performed to separate
Broadcasting active employees from the pension plans. Future pension obligations
for Broadcasting, computed in separate actuarial calculations, are likely to be
different when compared to the allocated historical amounts.
The projected benefit obligation was determined using assumed discount rates of
7%, and 7.5% and 7.25% at December 31, 1997, 1996 and 1995, respectively. The
expected long-term rate of return on plan assets was 8.5% for 1997, 1996 and
1995. For those plans that pay benefits based on final compensation levels,
the actuarial assumptions for overall annual rate of increase in future salary
levels was 4.5% for 1997 and 5% for both 1996 and 1995.
Pulitzer sponsors an employee savings plan under Section 401(k) of the Internal
Revenue Code which covers substantially all Broadcasting employees. Employer
contributions for Broadcasting employees amounted to approximately $698,000,
$626,000 and $509,000 for the years ended December 31, 1997, 1996 and 1995,
respectively, and $358,000 (unaudited) and $352,000 (unaudited) for the
six-month periods ended June 30, 1998 and 1997, respectively.
9. POSTRETIREMENT BENEFITS
Broadcasting will retain the postretirement obligation and costs related to its
active employees immediately following the Merger. The net periodic
postretirement benefit cost components for Broadcasting active employees are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Service cost (for benefits earned during the year) $ 131 $ 118 $ 128
Interest cost on accumulated postretirement
benefit obligation 139 151 185
Net amortization, deferrals and other components (74) (72) (56)
-------- -------- --------
Net periodic postretirement benefit cost $ 196 $ 197 $ 257
======== ======== ========
</TABLE>
The status of Broadcasting's postretirement benefit plans related to active
employees is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
(In thousands)
<S> <C> <C>
Actives eligible to retire $ 774 $ 784
Other actives 1,142 1,073
------ ------
Accumulated postretirement benefit obligation 1,916 1,857
Unrecognized prior service gain 192 233
Unrecognized net gain 448 528
------ ------
Accrued postretirement benefit cost $2,556 $2,618
====== ======
</TABLE>
For 1997 and 1996 measurement purposes, health care cost trend rates of 9%, 7%
and 5% were assumed for indemnity plans, PPO plans and HMO plans, respectively.
For 1997, these rates were assumed to decrease gradually to 5% through the year
2010 and remain at that level thereafter. For 1996, the indemnity and PPO rates
were assumed to decrease gradually to 5.5% through the year 2010 and remain at
that level thereafter.
12
<PAGE> 13
Administrative costs related to indemnity plans were assumed to increase at a
constant annual rate of 6% for 1997, 1996 and 1995. The assumed discount rate
used in estimating the accumulated postretirement benefit obligation was 7%,
7.5% and 8% for 1997, 1996 and 1995, respectively.
10. COMMON STOCK PLANS
Broadcasting participates in the Company's stock-based compensation plans which
are summarized as follows: The Pulitzer Publishing Company 1994 Stock Option
Plan, adopted May 11, 1994, (the "1994 Plan"), replaced the Pulitzer Publishing
Company 1986 Employee Stock Option Plan (the "1986 Plan"). The 1994 Plan
provides for the issuance to key employees and outside directors of incentive
stock options to purchase up to a maximum of 2,500,000 shares of common stock.
The issuance of all other options will be administered by the Compensation
Committee of the Board of Directors, subject to the 1994 Plan's terms and
conditions. Specifically, the exercise price per share may not be less than
the fair market value of a share of common stock at the date of grant. In
addition, exercise periods my not exceed ten years and the minimum vesting
period is established at six months from the date of grant. Option awards to
an individual employee may not exceed 250,000 shares in a calendar year.
Prior to 1994, the Company issued incentive stock options to key employees
under the 1986 Plan. As provided by the 1986 Plan, certain option awards were
granted with tandem stock appreciation rights which allow the employee to elect
an alternative payment equal to the appreciation of the stock value instead of
exercising the option. Outstanding options issued under the 1986 Plan have an
exercise term of ten years from the date of grant and vest in equal
installments over a three-year period.
As required by SFAS 123, Broadcasting has estimated the fair value of its
option grants since December 31, 1994 by using the binomial options pricing
model with the following assumptions:
Years Ended December 31,
-----------------------------
1997 1996 1995
Expected Life (years) 7 7 7
Risk-free interest rate 5.8% 6.4% 5.7%
Volatility 23.6% 22.5% 19.6%
Dividend yield 1.1% 1.2% 1.3%
As discussed in Note 1, Broadcasting accounts for stock option grants in
accordance with APB 25, resulting in the recognition of no compensation expense
in the Statements of Consolidated Income. Had compensation expense been computed
on the fair value of the option awards at their grant date, consistent with the
provisions of SFAS 123, Broadcasting's net income would have been reduced to the
pro forma amounts below:
Years Ended December 31,
-----------------------------
1997 1996 1995
Net Income:
As reported $38,021 $40,355 $32,579
Pro forma 37,333 40,045 32,572
Because the provisions of SFAS 123 have not been applied to options granted
prior to January 1, 1995, the pro forma compensation cost may not be
representative of compensation cost to be incurred on a pro forma basis in
future years.
Broadcasting also participates in the Pulitzer Publishing Company 1997 Employee
Stock Purchase Plan, adopted April 24, 1997 (the "Plan"). The Plan allows
eligible employees to authorize payroll deductions for the quarterly purchase
of the Company's common stock at a price generally equal to 85 percent of the
common stock's fair market value at the end of each quarter. The Plan began
operations as of July 1, 1997. In general, other than Michael E. Pulitzer, all
employees of the Company and its subsidiaries are eligible to participate in
the Plan after completing at least one year of service. Subject to appropiate
adjustment for stock splits and other capital changes, the Company may sell a
total of 500,000 shares of its common stock under the Plan. Shares sold under
the Plan may be authorized and unissued or held by the Company in its treasury.
The Company may purchase shares for resale under the Plan.
<PAGE> 14
11. INCOME TAXES
During 1995, a state tax examination was settled favorably resulting in a
reduction of income tax expense of approximately $900,000. Provisions for income
taxes (benefits) consist of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 22,329 $ 22,818 $ 19,066
State and local 4,097 3,902 1,873
Deferred:
Federal (1,723) (721) (1,315)
State and local (316) (123) (191)
-------- -------- --------
Total $ 24,387 $ 25,876 $ 19,433
======== ======== ========
</TABLE>
Factors causing the effective tax rate to differ from the statutory Federal
income tax rate are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1997 1996 1995
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Favorable resolution of prior year state tax issue (2)
State and local income taxes, net of U.S. Federal
income tax benefit 4 4 4
---- ---- ----
Effective rate 39% 39% 37%
==== ==== ====
</TABLE>
Broadcasting's deferred tax assets and liabilities, net, are included in "Other
Long-Term Liabilities" in the Statements of Consolidated Financial Position and
consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
(In thousands)
<S> <C> <C>
Deferred tax assets:
Pensions and employee benefits $3,268 $2,557
Postretirement benefit costs 1,000 1,024
Other 554 681
------ ------
Total 4,822 4,262
------ ------
Deferred tax liabilities:
Depreciation 6,318 6,471
Amortization 477 1,803
------ ------
Total 6,795 8,274
------ ------
Net deferred tax liability $1,973 $4,012
====== ======
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
At June 30, 1998 and December 31, 1997, Broadcasting and its subsidiaries had
construction and equipment commitments of approximately $2,347,000 (unaudited)
and $4,559,000, respectively, and commitments for program contracts payable and
license fees of approximately $29,672,000 (unaudited) and $30,025,000,
respectively.
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<PAGE> 15
Broadcasting 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 the ultimate outcome of such litigation will
not have a material adverse effect on the consolidated financial statements of
Broadcasting and its subsidiaries.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Broadcasting has estimated the following fair value amounts for its financial
instruments using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that Broadcasting
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Accounts Receivable, Accounts Payable and Program Contracts Payable - The
carrying amounts of these items are a reasonable estimate of their fair value.
Long-Term Debt - Interest rates that are currently available to Pulitzer for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value. The fair value estimates of long-term debt as of June 30,
1998, December 31, 1997 and December 31, 1996 were $200,378,000 (unaudited),
$195,969,000 and $259,958,000, respectively.
The fair value estimates presented herein are based on pertinent information
available to management as of June 30, 1998, December 31, 1997 and December 31,
1996. Although management is not aware of any facts that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date, and current estimates of fair value may differ from the amounts presented
herein.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Broadcasting's operating results for the six months ended June 30, 1998 and for
the years ended December 31, 1997 and 1996 by quarters are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES - NET:
1998 $53,170 $66,603 $ -- $ -- $119,773
1997 50,171 61,093 53,738 62,014 227,016
1996 49,517 59,053 54,048 62,374 224,992
NET INCOME:
1998 7,594 15,251 22,845
1997 5,688 12,001 7,778 12,554 38,021
1996 7,166 12,758 8,267 12,164 40,355
</TABLE>
* * * * * *
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Report on Form 8-K concerning Broadcasting's
business outlook or future economic performance; anticipated profitability,
revenues, expenses or other financial items, together with other statements that
are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to industry cyclicality,
the seasonal nature of the business, changes in pricing or other actions by
competitors or suppliers, and general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission including this Report on Form 8-K.
GENERAL
Broadcasting's operating revenues are significantly influenced by a
number of factors, including overall advertising expenditures, the appeal of
television and radio in comparison to other forms of advertising, the
performance of the Broadcasting 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 Broadcasting.
Broadcasting's business tends to be seasonal, with peak revenues and
profits generally occurring in the fourth quarter of each year as a result of
increased advertising activity during the Christmas holiday period and during
fall election year campaigns. 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 (see Notes 1 and 2 to the
Consolidated Financial Statements included in this Exhibit 99-3 to the Company's
Current Report on Form 8-K) (the "Merger").
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH 1997
Broadcasting operating revenues for the first six months of 1998
increased 7.6 percent to $119.8 million from $111.3 million in 1997. Local and
national spot advertising increased 7 percent and 9.7 percent, respectively, for
the first half of 1998. The current year comparison reflects the impact of
increased political advertising of approximately $4.2 million in first six
months of 1998.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) for the first six
months of 1998 increased 2.5 percent to $75.4 million from $73.5 million in the
prior year six-month period. The increase was primarily attributable to higher
overall personnel costs of $2.6 million for the first six months of 1998.
Broadcasting operating income in the first six months of 1998 increased
17.7 percent to $44.4 million from $37.7, reflecting higher advertising revenues
in the current year.
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<PAGE> 17
Interest expense declined $1.8 million in the first six months of 1998
due to a lower average debt level. The Company's average debt level for the
first six months of 1998 decreased to $185.3 million from $239.9 million in the
prior year six-month period. The Company's average interest rate for the first
six months of 1998 increased to 7.5 percent from 7.3 percent. The lower average
debt level and higher average interest rate in the first half of 1998
reflected the payment of variable rate credit agreement borrowings during the
last three quarters of 1997.
Broadcasting's effective income tax rate for the first six months of
1998 was 39.1 percent, unchanged from the prior year six-month period. The
Company expects that the effective tax rate related to broadcasting operations
will be approximately 39 percent for the full year of 1998.
Net income for the first six months of 1998 increased 29.1 percent to
$22.8 million from $17.7 million a year ago. The gain reflected increases in
broadcasting advertising revenues.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH 1996
Broadcasting operating revenues for 1997 increased 0.9 percent to $227
million from $225 million in 1996. For the year, a 1.6 percent increase in
national spot advertising and a 6.1 percent increase in network compensation
were partially offset by a 0.5 percent decline in local spot advertising. The
modest increases in 1997 advertising revenues reflected the impact of decreased
political advertising of approximately $12 million in 1997 compared to 1996. In
addition, the Company's five NBC affiliated television stations benefited from
significant Olympic related advertising in the prior year third quarter.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) increased 2 percent
to $148.5 million in 1997 from $145.6 million in 1996. The increase was
attributable to higher overall personnel costs of $3.2 million and higher
depreciation and amortization of $1 million. These increases were partially
offset by decreases in program rights costs of $493,000, promotion costs of
$333,000 and license fees of $246,000.
Broadcasting operating income in 1997 decreased 1.1 percent to $78.5
million from $79.4 million in the prior year. The 1997 decrease reflected the
modest overall revenue gain, resulting primarily from the effect of significant
political and Olympic related advertising revenue in the prior year.
Interest expense increased $2.5 million in 1997 compared to 1996 due to
higher average debt levels in 1997. The Company's average debt level for 1997
increased to $220 million from $186.9 million in the prior year due to new
long-term borrowings on July 1, 1996. The Company's average interest rate for
1997 was unchanged from the prior year rate of 7.3 percent.
Broadcasting's effective income tax rate for 1997 was 39.1 percent,
unchanged from the prior year.
For the year ended December 31, 1997, net income decreased 5.8 percent
to $38 million from $40.4 million in 1996. The decline reflected the lower
broadcasting advertising revenues and higher interest expense in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH 1995
Broadcasting operating revenues for 1996 increased 10.9 percent to $225
million from $202.9 million in 1995. On a comparable basis, excluding the extra
week from 1995, operating revenues increased 12.9 percent. Local spot
advertising increased 14.2 percent and national spot advertising increased 14.7
percent. The 1996 increases reflected strong Olympic-related advertising at
16
<PAGE> 18
Broadcasting's five NBC affiliated stations and significant political
advertising of $13.2 million, an increase of $10.3 million.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) increased 3.4 percent
to $145.6 million in 1996 from $140.8 million in 1995. On a comparable basis,
excluding the extra week from 1995, operating expenses increased 4.5 percent.
This increase was primarily attributable to higher overall personnel costs of
$4.2 million and higher national advertising commissions of $951,000.
Broadcasting operating income in 1996 increased 27.7 percent to $79.4
million from $62.2 million in the prior year. On a comparable basis, excluding
the extra week from 1995, operating income from the broadcasting segment
increased 32.7 percent. The 1996 gain resulted from the significant increases in
both local and national advertising revenues.
Interest expense increased $3.4 million in 1996 compared to 1995 due to
higher debt levels in the second half of 1996. New long-term borrowings on July
1, 1996 added approximately $4.8 million to 1996 interest expense. The Company's
average debt level for 1996 increased to $186.9 million from $133.2 million in
the prior year. The Company's average interest rate for 1996 decreased slightly
to 7.3 percent from 7.5 percent in the prior year.
Broadcasting's effective income tax rate for 1996 was 39.1 percent
compared to 37.4 percent in the prior year. The prior year rate was affected by
the settlement of a state tax examination which reduced income tax expense by
approximately $900,000 in 1995. Excluding the non-recurring tax settlement from
the prior year, the effective income tax rate for 1995 would have been 39.1
percent.
For the year ended December 31, 1996, net income increased 23.9 percent
to $40.4 million from $32.6 million in 1995. Excluding the positive income tax
adjustment from 1995, net would have increased 27.4 percent in 1996. The 1996
gain, on a comparable basis, reflected the significant increase in advertising
revenues which offset operating expense and interest expense increases.
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 in the Statements of Consolidated Financial Position.
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, Broadcasting's commitments for capital
expenditures were approximately $2.3 million, relating to normal capital
equipment replacements and the cost of a building project in Louisville,
Kentucky. Capital expenditures to be made in fiscal 1998 are estimated to be in
the range of $7 to $10 million. Commitments for film contracts and license fees
at broadcasting locations as of June 30, 1998 were approximately $29.7 million.
17
<PAGE> 19
At June 30, 1998, Broadcasting had working capital of $23.8 million and
a current ratio of 1.76 to 1. This compares to working capital of $23.5 million
and a current ratio of 1.64 to 1 at December 31, 1997.
Broadcasting generally expects to generate sufficient cash from
operations to cover ordinary capital expenditures, film contract and license
fees, working capital requirements and debt installments.
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
(which has been allocated to the Broadcasting Business in the Consolidated
Financial Statements). In addition, 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. Pursuant to the Merger Agreement, Hearst-Argyle
will assume the new debt ($700 million) following the consummation of the
Spin-off and Merger. (See Note 1 to the Consolidated Financial Statements
included in this Exhibit 99-3 to the Company's Current Report on Form 8-K.)
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. Broadcasting's Year 2000 issues
relate primarily to its aging news gathering and archival systems, but also
include some broadcasting and building maintenance systems. The Company does not
believe that a significant lead-time is required to address Broadcasting's
issues. However, alternative solutions exist with varying expense and capital
expenditure requirements. As a result, Broadcasting's plans to address Year 2000
issues are expected to be finalized subsequent to the Merger.
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
Broadcasting'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 Broadcasting's other
television stations is May 1, 2002. Broadcasting is currently considering
available options to comply with the FCC's timetable. However, it is expected
that Broadcasting's digital conversion strategy will be finalized subsequent to
the Merger. The Company does not expect to incur significant capital
expenditures to construct digital facilities prior to the Merger.
18
