<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) December 16, 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 Spin-off and the Merger are collectively referred to as the
"Transactions."
The Registrant's obligation to consummate the Transactions is subject,
among other things, to the receipt of various regulatory approvals, approval of
the Charter Amendment (as defined below) by the stockholders of the Registrant
and approval of the Merger by the stockholders of both the Registrant and the
Acquiror. The Registrant has received a favorable letter ruling from the
Internal Revenue Service confirming that the Spin-off will be tax-free to the
Registrant's stockholders. Early termination of the initial waiting period under
the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has also been granted.
In addition, the Federal Communications Commission (the "FCC") has published
notice of its grant of the application for the transfer of FCC licenses,
including related waiver requests, from the Registrant to the Acquiror. The
Registrant anticipates that its Special Stockholders Meeting (as defined below)
will be held in January 1999 and that the Transactions will be completed shortly
after the meeting.
The terms of the Merger are more fully described in the Agreement and
Plan of Merger filed as an exhibit to the Registrant's Report on Form 8-K filed
on June 10, 1998.
On October 22, 1998, the Registrant determined that a change in facts
had occurred concerning a stockholder vote that is required to consummate the
Spin-off and Merger. When the Registrant entered into the Merger Agreement on
May 25, 1998, the principal stockholders of the Registrant controlled, and
continue to control, that number of shares of Class B Common Stock sufficient
to approve the Merger regardless of the vote of any other holders of the
Registrant's Common Stock and Class B Common Stock. In addition, the principal
stockholders of the Registrant entered into a voting agreement with Acquiror
(the "Pulitzer Voting Agreement"), in which they agreed to direct the vote of
all their shares in favor of the Merger and the transactions contemplated by it
(including the Charter Amendment defined below). Consummation of the Merger is
also conditioned upon the passage of an amendment to the Registrant's restated
certificate of incorporation (the "Charter Amendment"), the approval of which
requires the affirmative vote of the holders of a majority of
2
<PAGE> 3
the outstanding shares of the Registrant's Common Stock and the Class B Common
Stock voting together as a single class and the vote of the holders of a
majority of the outstanding shares of the Registrant's Common Stock voting as a
separate class. On May 25, 1998, at the time of the execution and delivery of
the Merger Agreement and the Pulitzer Voting Agreement, the principal
stockholders of the Registrant had stated to the Company that they were
committed to take such actions as they deemed necessary to effectuate the
Transactions, including (i), on or before the record date for the Special
Meeting of Stockholders of the Registrant (the "Special Stockholders Meeting")
to be called for the purpose of voting upon the Merger and the Charter
Amendment, the conversion of that number of their shares of Class B Common Stock
into shares of Common Stock as would constitute a majority of the Registrant's
then issued and outstanding shares of Common Stock and (ii) to vote those shares
of Common Stock at the Special Stockholders Meeting in accordance with the
provisions of the Pulitzer Voting Agreement. Based upon the facts that existed
on May 25, 1998, and continued to exist through October 21, 1998, the Registrant
determined that it was appropriate to report the Broadcasting Business as
discontinued operations under Accounting Principles Board Opinion 30, "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"). As a result, the Registrant's financial statements
included in the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 presented the results of the Pulitzer Broadcasting Business as
discontinued operations. In addition, the Registrant's financial statements for
the years ended December 31, 1997, 1996 and 1995 and for the quarter ended March
31, 1998 were restated to reflect the Pulitzer Broadcasting Business as
discontinued operations in the Registrant's Current Report on Form 8-K filed on
September 4, 1998. On October 22, 1998, the principal stockholders advised the
Registrant that they had not converted, and did not deem it necessary to convert
on or before the record date for the Special Stockholders Meeting, that number
of shares of the Registrant's Class B Common Stock as would constitute a
majority of the then issued and outstanding shares of the Registrant's Common
Stock. Accordingly, based upon this change in facts (i.e., even though the
principal stockholders of the Registrant intend to vote all their shares in
favor of the Charter Amendment upon which the Spin-off and Merger are
conditioned, they alone will not be in a position at the Special Stockholders
Meeting to approve the Charter Amendment), the Registrant determined that it
would no longer be appropriate under APB 30 to report the Broadcasting Business
as discontinued operations in the Registrant's consolidated financial
statements. As a result, the Registrant's consolidated financial statements for
the years ended December 31, 1997, 1996 and 1995 and for the interim periods
ended March 31, 1998 and 1997 and June 30, 1998 and 1997 have been restated to
reflect the Pulitzer Broadcasting Business as a part of continuing operations.
These restated consolidated financial statements are included as exhibits to
this Current Report on Form 8-K. (See the Exhibit Index that follows.) The
Registrant's consolidated financial statements for the interim periods ended
September 30, 1998 and 1997 have also been restated and are included in the
Registrant's amended Quarterly Report on Form 10-Q/A filed with the Securities
and Exchange Commission on December 16, 1998. Such restatement results in the
reclassification of amounts related to the Broadcasting Business previously
reflected as discontinued operations in the consolidated financial statements
but does not change the Registrant's previously reported amounts for
consolidated net income, total earnings per share and stockholders' equity.
3
<PAGE> 4
In addition, the Pulitzer Broadcasting Company Financial Statements
for the years ended December 31, 1997, 1995 and 1996, originally filed on
September 4, 1998 in the Registrant's Current Report on Form 8-K, have been
updated to include additional accounting policy disclosures as requested by the
Securities and Exchange Commission in their letter dated October 29, 1998
addressed to Hearst-Argyle Television, Inc. Finally, interim unaudited financial
statements for the nine-month periods ended September 30, 1998 and 1997 for
Pulitzer Broadcasting Company have been prepared and filed for the first time in
this Form 8-K. (See the Exhibit Index which follows.)
Included with the financial statements filed as Exhibits hereto are the
related "Management's Discussion and Analysis of Financial Condition and Results
of Operations" which have been updated as necessary.
4
<PAGE> 5
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(C) Exhibits
See Exhibit Index for a list of exhibits.
All other Items of this report are inapplicable.
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: December 16, 1998 By:/s/ RONALD H. RIDGWAY
------------------------
Name: Ronald H. Ridgway
Title: Senior Vice President-
Finance
5
<PAGE> 6
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
27-3 Restated Financial Data Schedules for the Six-Month
Periods Ended June 30, 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 Publishing Company Restated Consolidated Financial
Statements for the Six-Month Periods Ended June 30, 1998 and 1997
99-4 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
99-5 Pulitzer Broadcasting Company and Subsidiaries Consolidated Financial
Statements for the Nine-Month Periods Ended September 30, 1998
and 1997
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<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> 88,293 82,586 66,533
<ALLOWANCES> 2,411 2,576 2,009
<INVENTORY> 5,265 4,976 6,190
<CURRENT-ASSETS> 174,609 172,140 186,959
<PP&E> 332,806 305,350 254,483
<DEPRECIATION> 170,992 149,418 135,296
<TOTAL-ASSETS> 682,956 683,851 495,073
<CURRENT-LIABILITIES> 75,287 76,810 58,106
<BONDS> 172,705 235,410 114,500
0 0 0
0 0 0
<COMMON> 339 337 252
<OTHER-SE> 498,370 437,456 386,355
<TOTAL-LIABILITY-AND-EQUITY> 682,956 683,851 495,073
<SALES> 584,985 534,088 472,327
<TOTAL-REVENUES> 584,985 534,088 472,327
<CGS> 214,935 205,885 190,013
<TOTAL-COSTS> 214,935 205,885 190,013
<OTHER-EXPENSES> 36,454 31,102 27,150
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 16,081 13,592 10,171
<INCOME-PRETAX> 111,085 95,772 79,368
<INCOME-TAX> 45,057 38,272 30,046
<INCOME-CONTINUING> 66,028 57,500 49,322
<DISCONTINUED> 0 0 0
<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
<MULTIPLIER> 1,000
<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> 77,736 74,637
<ALLOWANCES> 2,524 2,842
<INVENTORY> 3,670 5,328
<CURRENT-ASSETS> 181,066 190,225
<PP&E> 340,600 308,891
<DEPRECIATION> 176,500 155,220
<TOTAL-ASSETS> 689,929 691,098
<CURRENT-LIABILITIES> 72,458 75,108
<BONDS> 172,705 235,410
0 0
0 0
<COMMON> 340 338
<OTHER-SE> 507,613 445,511
<TOTAL-LIABILITY-AND-EQUITY> 689,929 691,098
<SALES> 143,399 136,006
<TOTAL-REVENUES> 143,399 136,006
<CGS> 55,423 51,527
<TOTAL-COSTS> 55,423 51,527
<OTHER-EXPENSES> 8,930 9,183
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,462 4,525
<INCOME-PRETAX> 23,607 21,190
<INCOME-TAX> 9,642 8,695
<INCOME-CONTINUING> 13,965 12,495
<DISCONTINUED> 0 0
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 101,408 77,173
<SECURITIES> 0 0
<RECEIVABLES> 89,392 83,890
<ALLOWANCES> 2,579 2,755
<INVENTORY> 2,898 5,721
<CURRENT-ASSETS> 204,067 176,425
<PP&E> 345,446 316,954
<DEPRECIATION> 181,873 161,048
<TOTAL-ASSETS> 713,694 679,656
<CURRENT-LIABILITIES> 73,913 57,307
<BONDS> 172,500 223,205
0 0
0 0
<COMMON> 341 338
<OTHER-SE> 529,503 463,059
<TOTAL-LIABILITY-AND-EQUITY> 713,694 679,656
<SALES> 304,217 287,404
<TOTAL-REVENUES> 304,217 287,404
<CGS> 110,571 104,033
<TOTAL-COSTS> 110,571 104,033
<OTHER-EXPENSES> 17,874 18,420
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,925 8,699
<INCOME-PRETAX> 61,541 54,161
<INCOME-TAX> 24,875 21,985
<INCOME-CONTINUING> 36,666 32,176
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 36,666 32,176
<EPS-PRIMARY> 1.65 1.46
<EPS-DILUTED> 1.62 1.44
</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 paragraphs
1,2,3 and 5 of Note 2 and
paragraphs 3 through 7 of
Note 13; November 25, 1998
as to paragraph 4 of Note 2;
and December 11, 1998 as
to Note 17)
<PAGE> 3
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
OPERATING REVENUES - NET: (In thousands, except per share data)
<S> <C> <C> <C>
Publishing:
Advertising $227,817 $191,939 $161,932
Circulation 87,611 81,434 76,349
Other 42,541 35,723 31,107
Broadcasting 227,016 224,992 202,939
------------ ------------ ------------
Total operating revenues 584,985 534,088 472,327
------------ ------------ ------------
OPERATING EXPENSES:
Publishing operations 145,730 139,259 125,811
Broadcasting operations 69,205 66,626 64,202
Selling, general and administrative 190,429 172,838 155,996
St. Louis Agency adjustment (Note 3) 19,450 13,972 12,502
Depreciation and amortization 36,454 31,102 27,150
------------ ------------ ------------
Total operating expenses 461,268 423,797 385,661
------------ ------------ ------------
Operating income 123,717 110,291 86,666
Interest income 4,652 4,522 5,203
Interest expense (16,081) (13,592) (10,171)
Net other expense (1,203) (5,449) (2,330)
------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 111,085 95,772 79,368
PROVISION FOR INCOME TAXES (Note 9) 45,057 38,272 30,046
------------ ------------ ------------
NET INCOME $66,028 $57,500 $49,322
============ ============ ============
BASIC EARNINGS PER SHARE OF STOCK (Note 12):
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 12):
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 $2,411 and $2,576) 85,882 80,010
Inventory 5,265 4,976
Prepaid expenses and other 12,847 5,650
Program rights 7,866 8,452
------------ -------------
Total current assets 174,609 172,140
------------ -------------
PROPERTIES:
Land 16,154 14,692
Buildings 84,215 78,733
Machinery and equipment 225,113 209,854
Construction in progress 7,324 2,071
------------ -------------
Total 332,806 305,350
Less accumulated depreciation 170,992 149,418
------------ -------------
Properties - net 161,814 155,932
------------ -------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of applicable amortization (Notes 4 and 5) 287,617 298,305
Receivable from The Herald Company (Notes 3 and 8) 39,733 39,955
Other 19,183 17,519
------------ -------------
Total intangible and other assets 346,533 355,779
------------ -------------
TOTAL $682,956 $683,851
============ =============
</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 $16,158 $13,355
Current portion of long-term debt (Note 6) 12,705 14,705
Salaries, wages and commissions 15,232 14,897
Income taxes payable 3,070 1,267
Program contracts payable 7,907 8,916
Interest payable 5,677 7,177
Pension obligations (Note 7) 348 2,123
Acquisition payable 9,804 9,804
Other 4,386 4,566
------------ -------------
Total current liabilities 75,287 76,810
------------ -------------
LONG-TERM DEBT (Note 6) 172,705 235,410
------------ -------------
PENSION OBLIGATIONS (Note 7) 26,709 23,415
------------ -------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS (Note 8) 91,906 92,252
------------ -------------
OTHER LONG-TERM LIABILITIES 5,572 6,027
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Note 10):
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 $682,956 $683,851
============ =============
</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 10) 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 10) 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
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $66,028 $57,500 $49,322
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 22,884 20,434 19,281
Amortization of intangibles 13,570 10,668 7,869
Deferred income taxes (3,367) (1,943) (1,847)
Gain on sale of assets (421)
Changes in assets and liabilities (net of the effects of the
purchase
and sale of properties) which provided (used) cash:
Trade accounts receivable (5,872) (9,737) (1,581)
Inventory (289) 3,017 (3,121)
Other assets (3,766) 7,842 1,150
Trade accounts payable and other liabilities 2,494 3,659 1,594
Income taxes payable 1,803 (239) (3,713)
------------ ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 93,485 90,780 68,954
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (28,191) (17,787) (22,934)
Purchase of publishing properties, net of cash acquired (203,306)
Purchase of broadcast assets (3,141) (5,187)
Investment in joint ventures and limited partnerships (4,792) (2,983) (3,637)
Sale of assets, net of cash sold 4,150
(Increase) decrease in notes receivable 4,979 (4,904) 1,875
------------ ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (31,145) (230,017) (24,696)
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 135,000
Repayments on long-term debt (64,705) (15,205) (14,250)
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 PROVIDED BY (USED IN) FINANCING ACTIVITIES (72,643) 111,909 (20,962)
------------ ------------- -------------
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of Pulitzer Publishing Company (the "Company" or "Pulitzer") 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.
Program Rights - Program rights represent license agreements for the right to
broadcast feature programs, program series and other syndicated programs over
limited license periods and are presented in the consolidated balance sheet at
the lower of unamortized cost or estimated net realizable value. The total gross
cost of each agreement is recorded as an asset and liability when the license
period begins and all of the following conditions have been met: (a) the cost of
the agreement is known or reasonably determinable, (b) the program material has
been accepted in accordance with the conditions of the license agreement and (c)
the program is available for broadcast. 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.
Program rights covering periods of less than one year are amortized on a
straight-line basis as the programs are broadcast. Program rights covering
periods greater than one year are generally amortized as a package or series
over the license period using an accelerated method. When a determination is
made that either the unamortized cost of a program exceeds its estimated net
realizable value or a program will not be used prior to the expiration of the
license agreement, appropriate adjustments are made to charge unamortized
amounts to operations.
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
9
<PAGE> 10
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 defined benefit 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.
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 10.
10
<PAGE> 11
Diluted earnings per share of stock is computed using the weighted average
number of common and Class B common shares outstanding and potential common
shares. (see Note 12)
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.
2. SPIN-OFF AND MERGER
On May 25, 1998, the Company, Pulitzer Inc., (a newly-organized, wholly-owned
subsidiary of the Company ("New Pulitzer")), 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
television and radio broadcasting operations (collectively, the "Broadcasting
Business"). The Broadcasting Business consists of nine network-affiliated
television stations and five radio stations owned and operated by Pulitzer
Broadcasting Company ("PBC"), a wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries. The Broadcasting Business will be acquired by
Hearst-Argyle through the merger ("Merger") of the Company into Hearst-Argyle.
Prior to the Spin-off (as defined below), the Company intends to borrow $700
million, which may be secured by the assets and/or stock of PBC and its
subsidiaries. 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 New Pulitzer 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 New
Pulitzer 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
New Pulitzer Class B Common Stock for each share of Company Class B Common Stock
held (the "Distribution"). The Contribution and Distribution are collectively
referred to as the "Spin-off." The Spin-off and the Merger are collectively
referred to as the "Transactions."
Consummation of the Transactions is subject, among other things, to the receipt
of various regulatory approvals, Pulitzer stockholder approval of the Charter
Amendment (as defined in Note 17) and approval of the Merger by the stockholders
of both the Company and Hearst-Argyle. The Company has received a favorable
letter ruling from the Internal Revenue Service confirming that the Spin-off
will be tax-free to Pulitzer stockholders. Early termination of the initial
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has
also been granted. In addition, the Federal Communications Commission (the
"FCC") has published notice of its grant of the application for the transfer of
FCC licenses, including related waiver requests, from the Company to
Hearst-Argyle. The Company anticipates that its special stockholders meeting to
consider the Charter Amendment and the Merger will be held in January 1999 and
that the Transactions will be completed shortly after the meeting.
Following the consummation of the Transactions, New Pulitzer will be engaged
primarily in the business of newspaper publishing and related new media
businesses. For financial reporting purposes, New Pulitzer is the continuing
stockholder interest and will retain the Pulitzer name.
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
11
<PAGE> 12
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 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. ACQUISITION AND DISPOSITION 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 (see Note 6) 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>
December 31,
----------------------------
1996 1995
In thousands, except per share data: (Unaudited)
<S> <C> <C>
Operating revenues - net $566,915 $536,803
Operating income $113,660 $93,896
Net income $54,519 $44,203
Earnings per share of stock:
Basic earnings per share $2.49 $2.03
Diluted earnings per share $2.45 $2.00
</TABLE>
12
<PAGE> 13
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.
5. INTANGIBLE ASSETS
Intangible assets consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
(In thousands)
<S> <C> <C>
FCC licenses and network affiliations $114,376 $112,161
Goodwill 178,355 178,327
Intangible pension asset (Note 7) 2,320 1,918
Other 63,924 63,914
------------- -------------
Total 358,975 356,320
Less accumulated amortization 71,358 58,015
------------- -------------
Total intangible assets - net $287,617 $298,305
============= =============
</TABLE>
6. FINANCING ARRANGEMENTS
Long-term debt consists of:
<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 2).
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.
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
13
<PAGE> 14
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>
<S> <C>
Fiscal Year (In thousands):
1998 $12,705
1999 12,705
2000 12,500
2001 23,125
2002 23,125
Thereafter 101,250
--------------
Total $185,410
==============
</TABLE>
7. PENSION PLANS
The pension cost components were 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 funded status of the Company's pension plans was 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 obligation 9,337 14,368
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>
14
<PAGE> 15
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.
8. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The net periodic postretirement benefit cost components were 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) $970 $926 $933
Interest cost on accumulated postretirement
benefit obligation 4,632 4,683 5,799
Net amortization, deferrals and other components (2,538) (2,308) (1,787)
------------- ------------ ------------
Net periodic postretirement benefit cost $3,064 $3,301 $4,945
============= ============ ============
</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 was as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
(In thousands)
<S> <C> <C>
Retirees and surviving beneficiaries $39,549 $37,734
Actives eligible to retire 14,418 13,516
Other actives 12,756 11,142
------------- -------------
Accumulated postretirement benefit obligation 66,723 62,392
Unrecognized prior service gain 6,658 7,990
Unrecognized net gain 15,351 19,404
------------- -------------
Accrued postretirement benefit cost $88,732 $89,786
============= =============
</TABLE>
The preceding amounts 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.
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. A 1% increase in the annual health care cost trend rate
assumptions would have
15
<PAGE> 16
increased the accrued postretirement benefit cost at December 31, 1997 by
approximately $1,162,000 and the 1997 annual net periodic postretirement benefit
cost by approximately $1,164,000.
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.
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.
9. INCOME TAXES
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 $41,389 $33,465 $28,352
State and local 7,035 5,750 $3,541
Deferred:
Federal (2,878) (805) (1,641)
State and local (489) (138) (206)
------------- ------------ ------------
Total $45,057 $38,272 $30,046
============= ============ ============
</TABLE>
Factors causing the effective tax rate to differ from the statutory Federal
income tax rate were:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
Favorable resolution of prior year federal and state
tax issues (1)
Amortization of intangibles 2 1
State and local income taxes, net of U.S. Federal
income tax benefit 4 4 3
Other-net 1
--------- --------- --------
Effective rate 41% 40% 38%
========= ========= ========
</TABLE>
16
<PAGE> 17
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>
December 31,
-----------------------------
1997 1996
(In thousands)
<S> <C> <C>
Deferred tax assets:
Pensions and employee benefits $11,403 $9,575
Postretirement benefit costs 19,248 19,284
Other 1,561 2,110
------------- -------------
Total 32,212 30,969
------------- -------------
Deferred tax liabilities:
Depreciation 19,583 19,590
Amortization 7,765 9,882
------------- -------------
Total 27,348 29,472
------------- -------------
Net deferred tax asset $4,864 $1,497
============= =============
</TABLE>
The Company had no valuation allowance for deferred tax assets as of December
31, 1997, 1996 and 1995.
10. 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.
17
<PAGE> 18
11. 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.
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>
18
<PAGE> 19
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.
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>
19
<PAGE> 20
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 consolidated statements of 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 net income 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>
Net income (in thousands):
As reported $66,028 $57,500 $49,322
Pro forma $64,487 $56,820 $49,288
Basic earnings per share:
As reported $2.99 $2.62 $2.26
Pro forma $2.92 $2.59 $2.26
Diluted earnings per share:
As reported $2.94 $2.58 $2.23
Pro forma $2.87 $2.55 $2.23
</TABLE>
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 ("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.
12. EARNINGS PER SHARE
Weighted average shares of common and Class B common stock and potential common
shares 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 options 342 347 297
------------ ------------- -------------
Weighted average shares outstanding and
stock options (Diluted EPS) 22,452 22,273 22,097
============ ============= =============
</TABLE>
Stock options 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.
20
<PAGE> 21
13. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company and its subsidiaries had construction and
equipment commitments of approximately $13,779,000 and commitments for program
contracts payable and license fees of 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 involved, from time to time, in various
claims and lawsuits incidental to the ordinary course of its business, including
such maters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of such existing litigation will not have a
material adverse effect on the consolidated financial statements of the Company
and its subsidiaries.
In connection with the September 1986 purchase of Pulitzer Class B common stock
from certain selling stockholders (the "1986 Selling Stockholders"), Pulitzer
agreed, under certain circumstances, to make an additional payment to the 1986
Selling Stockholders in the event of a Gross-Up Transaction (as defined herein).
A "Gross-Up Transaction" was defined to mean, among other transactions, (i) any
merger, in any transaction or series of related transactions, of more than 85
percent of the voting securities or equity of Pulitzer pursuant to which holders
of Pulitzer common stock receive securities other than Pulitzer common stock and
(ii) any recapitalization, dividend or distribution, or series of related
recapitalizations, dividends or distributions, in which holders of Pulitzer
common stock receive securities (other than Pulitzer common stock) having a Fair
Market Value (as defined herein) of not less than 33 1/3 percent of the Fair
Market Value of the shares of Pulitzer common stock immediately prior to such
transaction. The amount of the additional payment, if any, would equal (x) the
product of (i) the amount by which the Transaction Proceeds (as defined herein)
exceeds the Imputed Value (as defined herein) multiplied by (ii) the applicable
percentage (i.e., 50 percent for the period from May 13, 1996 through May 12,
2001) multiplied by (iii) the number of shares of Pulitzer common stock issuable
upon conversion of the shares of Pulitzer Class B common stock owned by the 1986
Selling Stockholders, adjusted for, among other things, stock dividends and
stock splits; less (y) the sum of any additional payments previously received by
the 1986 Selling Stockholders; provided, however, that in the event of any
recapitalization, dividend or distribution, the amount by which the Transaction
Proceeds exceeds the Imputed Value shall not exceed the amount paid or
distributed pursuant to such recapitalization, dividend or distribution in
respect of one share of Pulitzer common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a merger,
the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would 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
agreed to by a valuation firm selected by Pulitzer and a valuation firm selected
by the 1986 Selling Stockholders, or, if the two valuation firms do not agree on
the fair market value, the fair market value of such consideration as determined
by a third valuation firm selected by the two other valuation firms. Any such
agreement or determination shall be final and binding on the parties.
21
<PAGE> 22
As a result of the foregoing, the amount of additional payments, if any, that
may be payable by New Pulitzer 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 1986 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 Pulitzer's
management, the amount of an additional payment, if any, could be material to
the consolidated financial statements of Pulitzer.
14. 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.
22
<PAGE> 23
15. BUSINESS SEGMENTS
The Company's operations are divided into two business segments, publishing and
broadcasting. The following is a summary of operations, assets and other data.
<TABLE>
<CAPTION>
As of and for the Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------ ------------ ------------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES:
Publishing (a) $357,969 $309,096 $269,388
Broadcasting 227,016 224,992 202,939
------------ ------------ ------------
Total $584,985 $534,088 $472,327
============ ============ ============
OPERATING INCOME (LOSS):
Publishing (a) $47,544 $32,577 $25,393
Broadcasting 82,180 83,246 65,939
Corporate (6,007) (5,532) (4,666)
------------ ------------ ------------
Total $123,717 $110,291 $86,666
============ ============ ============
TOTAL ASSETS:
Publishing (a) $364,360 $351,685 $141,441
Broadcasting 255,847 259,114 253,252
Corporate 62,749 73,052 100,380
------------ ------------ ------------
Total $682,956 $683,851 $495,073
============ ============ ============
CAPITAL EXPENDITURES:
Publishing (a) $15,215 $6,433 $6,627
Broadcasting 12,976 11,354 16,307
------------ ------------ ------------
Total $28,191 $17,787 $22,934
============ ============ ============
DEPRECIATION & AMORTIZATION:
Publishing (a) $13,007 $8,660 $4,307
Broadcasting 23,447 22,442 22,843
------------ ------------ ------------
Total $36,454 $31,102 $27,150
============ ============ ============
OPERATING MARGINS
(Operating income to revenues):
Publishing (a) (b) 18.7% 15.1% 14.1%
Broadcasting 36.2% 37.0% 32.5%
</TABLE>
(a) Publishing information for 1997 and 1996 includes Scripps League
Newspapers, Inc. (subsequently renamed Pulitzer Community Newspapers,
Inc.), which was acquired on July 1, 1996. (see Note 4)
(b) Operating margins for publishing are stated with St. Louis Agency
adjustment (which is recorded as an operating expense in the
accompanying consolidated financial statements) added back to
publishing operating income.
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: $136,006 $151,398 $141,244 $156,337 $584,985
========== ========== =========== ========== ==========
NET INCOME $12,495 $19,681 $14,223 $19,629 $66,028
========== ========== =========== ========== ==========
BASIC EARNINGS PER SHARE OF STOCK (Note 12):
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 12):
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
========== ========== =========== ========== ==========
<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: $115,706 $127,574 $138,865 $151,943 $534,088
========== ========== =========== ========== ==========
NET INCOME $10,241 $16,185 $12,964 $18,110 $57,500
========== ========== =========== ========== ==========
BASIC EARNINGS PER SHARE OF STOCK (Note 12):
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 12):
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>
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 or $0.07 per share.
Subsequent to the second quarter of 1996, the results of operations of Scripps
League, acquired on July 1, 1996, are included in the Company's Statements of
Consolidated Income (see Note 4).
In the fourth quarter of 1995, a state tax examination was settled favorably
resulting in a reduction of income tax expense of approximately $900,000, or
$0.04 per share for the quarter.
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.
24
<PAGE> 25
17. RESTATEMENT
On October 22, 1998, the Company determined that a change in facts had occurred
concerning a stockholder vote that is required to consummate the Spin-off and
Merger (see Note 2). When the Company entered into the Merger Agreement on May
25, 1998, the principal stockholders of the Company controlled, and continue to
control, that number of shares of Class B Common Stock sufficient to approve
the Merger regardless of the vote of any other holders of the Company's Common
Stock and Class B Common Stock. In addition, the principal stockholders of the
Company entered into a voting agreement with Hearst-Argyle (the "Pulitzer
Voting Agreement"), in which they agreed to direct the vote of all their shares
in favor of the Merger and the transactions contemplated by it (including the
Charter Amendment defined below). Consummation of the Merger is also
conditioned upon the passage of an amendment to the Company's restated
certificate of incorporation (the "Charter Amendment"), the approval of which
requires the affirmative vote of the holders of a majority of the outstanding
shares of the Company's Common Stock and the Class B Common Stock voting
together as a single class and the vote of the holders of a majority of the
outstanding shares of the Company's Common Stock voting as a separate class. On
May 25, 1998, at the time of the execution and delivery of the Merger Agreement
and the Pulitzer Voting Agreement, the principal stockholders of the Company
had stated to the Company that they were committed to take such actions as they
deemed necessary to effectuate the Transactions, including (i), on or before
the record date for the Special Meeting of Stockholders of the Company (the
"Special Stockholders Meeting") to be called for the purpose of voting upon the
Merger and the Charter Amendment, the conversion of that number of their shares
of Class B Common Stock into shares of Common Stock as would constitute a
majority of the Company's then issued and outstanding shares of Common Stock
and (ii) to vote those shares of Common Stock at the Special Stockholders
Meeting in accordance with the provisions of the Pulitzer Voting Agreement.
Based upon the facts that existed on May 25, 1998, and continued to exist
through October 21, 1998, the Company determined that it was appropriate to
report the Broadcasting Business as discontinued operations under Accounting
Principles Board Opinion 30, "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" ("APB 30"). On October 22,
1998, the principal stockholders advised the Company that they had not
converted, and did not deem it necessary to convert on or before the record
date for the Special Stockholders Meeting, that number of shares of the
Company's Class B Common Stock as would constitute a majority of the then
issued and outstanding shares of the Company's Common Stock. Accordingly, based
upon this change in facts (i.e., even though the principal stockholders of the
Company intend to vote all their shares in favor of the Charter Amendment upon
which the Spin-off and Merger are conditioned, they alone will not be in a
position at the Special Stockholders Meeting to approve the Charter Amendment),
the Company determined that it would no longer be appropriate under APB 30 to
report the Broadcasting Business as discontinued operations in the Company's
consolidated financial statements. As a result, the Company's financial
statements as of December 31, 1997 and 1996 and for the years ended December
31, 1997, 1996 and 1995 have been restated from the amounts previously reported
(in Exhibit 99-1 to the Company's Current Report on Form 8-K dated September 4,
1998) to now reflect the Broadcasting Business as a part of continuing
operations of the Company. Such restatement results in the reclassification of
amounts related to the Broadcasting Business previously reflected as
discontinued operations in the consolidated financial statements but does not
change the Company's previously reported amounts for consolidated net income,
total earnings per share and stockholders' equity.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Total current assets $114,603 $174,609 $114,711 $172,140
Properties--net 74,797 161,814 67,038 155,932
Total intangibles and other assets 274,911 346,533 245,433 355,779
Total assets 464,311 682,956 427,182 683,851
Total current liabilities $38,773 $75,287 $35,783 $76,810
Long-term debt -- 172,705 -- 235,410
Pension obligations 21,165 26,709 19,266 23,415
Postretirement and postemployment
benefit obligations 89,350 91,906 89,634 92,252
Other long-term obligations 4,246 5,572 3,795 6,027
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Total operating revenues $357,969 $584,985 $309,096 $534,088
Total operating expenses 316,432 461,268 282,051 423,797
Operating income 41,537 123,717 27,045 110,291
Income from continuing operations 25,750 66,028 14,792 57,500
Income from discontinued operations 40,278 -- 42,708 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $1.17 $2.99 $0.67 $2.62
Discontinued operations 1.82 -- 1.95 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $1.15 $2.94 $0.66 $2.58
Discontinued operations 1.79 -- 1.92 --
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1995
-----------------------------
As
Previously As
Reported Restated
<S> <C> <C>
Total operating revenues $269,388 $472,327
Total operating expenses 248,661 385,661
Operating income 20,727 86,666
Income from continuing operations 14,455 49,322
Income from discontinued operations 34,867 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.66 $2.26
Discontinued operations 1.60 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.65 $2.23
Discontinued operations 1.58 --
</TABLE>
* * * * * *
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, television and radio 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" or
"Pulitzer"), Pulitzer Inc. (a newly-organized, wholly-owned subsidiary of the
Company ("New Pulitzer")), 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 television and radio
broadcasting operations (collectively, the "Broadcasting Business") through the
merger ("Merger") of the Company into Hearst-Argyle. The Merger is subject to
the satisfaction or waiver of certain closing conditions enumerated in the
Merger Agreement. The Company's newspaper publishing and related new media
businesses will continue as New Pulitzer, which will be distributed in a
tax-free "spin-off" to the Company's stockholders (the "Spin-off") prior to the
Merger.
The Company's historical basis in its non-broadcasting assets and
liabilities will be carried over to New Pulitzer. The Merger, the Spin-off and
the related transactions will be recorded as a reverse-spin transaction, and,
accordingly, New Pulitzer'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. (See Note 2 to the Consolidated Financial Statements included in this
Exhibit 99-1 to the Company's Current Report on Form 8-K.)
As discussed in Note 17 to the Consolidated Financial Statements
included in this Exhibit 99-1 to the Company's Current Report on Form 8-K, the
Company's consolidated financial statements as of December 31, 1997 and 1996 and
for the years ended December 31, 1997, 1996 and 1995 have been restated to
reflect the Broadcasting Business as a part of continuing operations of the
Company. Such restatement results in the reclassification of amounts related to
the Broadcasting Business previously reflected as discontinued operations in the
consolidated
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financial statements but does not change the Company's previously reported
amounts for consolidated net income, total earnings per share and stockholders'
equity.
1997 COMPARED WITH 1996
CONSOLIDATED
Operating revenues for the year ended December 31, 1997 increased 9.5
percent to $585 million from $534.1 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, consolidated revenues increased 3.2 percent. The increase reflected gains
in both publishing and broadcasting revenues.
Operating expenses, excluding the St. Louis Agency adjustment, were
$441.8 million compared to $409.8 million in 1996, an increase of 7.8 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 1.4 percent. Major
increases in comparable expenses were overall personnel costs of $10.9 million,
circulation distribution expenses of $1.5 million and promotion expenses of $1.3
million. Partially offsetting these increases were declines in newsprint expense
of $6 million and purchased supplements of $3.1 million.
Operating income for fiscal 1997 increased 12.2 percent to $123.7
million from $110.3 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 5.6 percent. The 1997 increase reflected improvements in
publishing segment profits.
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 related to the July 1, 1996 acquisition of Scripps League.
The Company's average interest rate for 1997 was unchanged from the prior year
rate of 7.3 percent.
Net other expense (non-operating) decreased $4.2 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 40.6 percent from
40 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 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, the Company reported net income
of $66 million, or $2.94 per diluted share, compared with net income of $57.5
million, or $2.58 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
from 1996, 1997 net income would have increased 9.5 percent to $66 million, or
$2.94 per diluted share, from $60.3 million, or $2.71 per diluted share, for the
prior year. The gain in net income reflected increased publishing profits,
resulting primarily from higher advertising revenue and lower newsprint costs.
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PUBLISHING
Operating revenues from the Company's publishing segment for 1997
increased 15.8 percent to $358 million from $309.1 million in 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
("Star"). Full run advertising volume (linage in inches) increased 0.4 percent
at the Post-Dispatch and 3.8 percent at the Star for 1997. Varying rate
increases were implemented at the Post-Dispatch and most of the Pulitzer
Community Newspaper properties in the first quarter of 1997 while the 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 the 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 and depreciation and amortization) for the publishing segment,
excluding the St. Louis Agency adjustment, increased to $291 million in 1997
from $262.5 million in 1996, an increase of 10.8 percent. On a comparable basis,
excluding PCN from the first six months of 1997 and the non-recurring costs from
1996, operating expenses increased 0.8 percent. Major increases in comparable
expenses were overall personnel costs of $7.4 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 from the Company's publishing activities increased
45.9 percent to $47.5 million in 1997 from $32.6 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 from the publishing segment
increased 22.7 percent. The increase resulted primarily from higher advertising
revenues and lower newsprint costs.
Fluctuations in the price of newsprint significantly impact the results
of the Company's publishing segment, where newsprint expense accounts for
approximately 20 percent of the segment's total operating costs. During the
first three quarters of 1997, the publishing segment 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.
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 current year advertising revenues reflect the impact of
decreased political advertising
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of approximately $12 million in 1997. 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.
Operating income from the broadcasting segment 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.
1996 COMPARED WITH 1995
CONSOLIDATED
Operating revenues for the year ended December 31, 1996 increased 13.1
percent to $534.1 million from $472.3 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), consolidated revenues increased 7.6 percent. The
increase reflected gains in both broadcasting and publishing revenues.
Operating expenses, excluding the St. Louis Agency adjustment, were
$409.8 million compared to $373.2 million in 1995, an increase of 9.8 percent.
On a comparable basis, excluding PCN from 1996 and the extra week from 1995,
operating expenses increased 3.2 percent. Major increases in comparable expenses
were overall personnel costs of $5.2 million, promotion expenses of $1.2
million, national advertising commissions of $951,000 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 27.3 percent to $110.3
million from $86.7 million in 1995. On a comparable basis, excluding PCN from
1996 and the extra week from 1995, operating income increased 25.9 percent. The
1996 increase reflected improvements in both the broadcasting and publishing
segments, resulting from increased 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 related
to the acquisition of Scripps League 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. Interest income for the year decreased $681,000, 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 for 1996 increased to 40 percent from
37.9 percent in the prior year, due to approximately $2.1 million of
nondeductible goodwill amortization related to the Scripps League acquisition.
The prior year rate was affected by the settlement of a state tax examination
which reduced
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income tax expense by $911,000 in 1995. Excluding the non-recurring tax
settlement from the prior year, the effective income tax rate for 1995 would
have been 39 percent.
For the year ended December 31, 1996, the Company reported net income
of $57.5 million, or $2.58 per diluted share, compared with net income of $49.3
million, or $2.23 per diluted share, in the prior year. Comparability of the
earnings results was affected by the joint venture write-off in 1996,
non-recurring costs related to the Scripps League acquisition ($1.1 million
after tax) in 1996, and the positive income tax adjustment in 1995. Excluding
the non-recurring items from both years, 1996 net income would have increased to
$60.3 million, or $2.71 per diluted share, from $48.4 million, or $2.19 per
diluted share, for the prior year. The gain in net income reflected a
significant increase in the broadcasting segment's operating profits.
PUBLISHING
Operating revenues from the Company's publishing segment for 1996
increased 14.7 percent to $309.1 million from $269.4 million in 1995. On a
comparable basis, excluding PCN from 1996 and the extra week from 1995,
publishing 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 1997, varying rate increases were
implemented at the Post-Dispatch, The Arizona Daily Star ("Star") and most of
the PCN 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 the 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 and depreciation and amortization) for the publishing segment,
excluding the St. Louis Agency adjustment, increased to $262.5 million in 1996
from $231.5 million in 1995, an increase of 13.4 percent. On a comparable basis,
excluding PCN from 1996 and the extra week from 1995, operating expenses
increased 2.1 percent. Major increases in comparable expenses were promotion
expense of $1.5 million, circulation distribution expenses of $611,000 and
overall personnel costs of $574,000. Partially offsetting these increases were
declines in newsprint expense of $1.1 million and inducement costs of $798,000.
Operating income from the Company's publishing activities increased
28.3 percent to $32.6 million in 1996 from $25.4 million in 1995. On a
comparable basis, excluding PCN from 1996 and the extra week from 1995,
operating income from the publishing segment increased 12 percent. The increase
resulted from higher advertising revenues on a comparable basis.
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 current year 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.
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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.
Operating income from the broadcasting segment 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.
LIQUIDITY AND CAPITAL RESOURCES
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 Credit Agreement"). 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 (the "Prudential Senior Note
Agreements").
The Prudential Senior Note Agreements and the FNBC Credit Agreement
require the Company to maintain certain financial ratios, place restrictions on
the payment of dividends and prohibit new borrowings, except as permitted
thereunder. Borrowings pursuant to the Prudential Senior Note Agreements will be
repaid with new borrowings prior to the Merger, and the Prudential Senior Note
Agreements and FNBC Credit Agreement will be terminated. The Company's new
borrowings will be assumed by Hearst-Argyle at the time of the Merger.
Accordingly, New Pulitzer will have no long-term borrowings immediately after
the Spin-off and Merger.
As of December 31, 1997, commitments for capital expenditures were
approximately $13.8 million, relating to normal capital equipment replacements
and the cost of a building project at the Louisville broadcasting property.
Commitments for 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.
At December 31, 1997, the Company had working capital of $99.3 million
and a current ratio of 2.32 to 1. This compares to working capital of $95.3
million and a current ratio of 2.24 to 1 at December 31, 1996.
The Company from time to time considers acquisitions of 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.
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SPIN-OFF AND MERGER
Prior to the Spin-off and Merger (collectively referred to as the
"Transactions"), the Company intends to borrow $700 million which will provide
sufficient funds to pay the existing Company debt and the costs of the
Transactions discussed below. Pursuant to the Merger Agreement, Hearst-Argyle
will assume the new debt following the consummation of the Transactions. (See
Note 2 to the Company's Consolidated Financial Statements included in this
Exhibit 99-1 to the Company's Current Report on Form 8-K.)
In connection with the Transactions, the Company will incur new
borrowings, prepay existing Company debt and make several one-time payments near
the dates of the Transactions. The Company will incur a prepayment penalty
related to the prepayment of the existing borrowings under the Prudential Senior
Note Agreements. Based upon November 30, 1998 interest rates, the prepayment
penalty would be approximately $21 million. Professional fees to be incurred
related to the Transactions are estimated in the range of $37 million.
Management bonuses to be paid at the date of the Merger are estimated at
approximately $12.1 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 (946,344) and the Company's common stock market price
($81.25) as of November 30, 1998, payments to employee option holders of
approximately $44.5 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, stock 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 Transactions, a
corporate-level income tax ("Spin-off Tax") will be due. The gain is measured by
the excess, if any, of the fair market value of New Pulitzer stock distributed
by the Company to its stockholders in the Spin-off over the Company's adjusted
tax basis in such New Pulitzer stock immediately prior to the distribution. On
November 30, 1998, the fair market value of New Pulitzer stock would be
estimated as the difference between the closing price of the Company's common
stock on November 30, 1998 ($81.25) and the fair market value for the
Broadcasting Business of $51.11 per share, assuming the value ($1.15 billion)
Hearst-Argyle is exchanging for the Company's common stock (22,499,749 shares at
November 30, 1998). Using a fair market value of $30.14 (the excess of $81.25
over $51.11) per common share for the New Pulitzer stock, no gain (or tax) would
result from the Transactions because the adjusted tax basis of the New Pulitzer
stock would be approximately $34.29 per share. However, if the fair market value
of the New Pulitzer stock would exceed the adjusted tax basis of such stock at
the time of the Spin-off, the Spin-off Tax will increase by approximately $9.1
million for each $1.00 per share that the fair market value exceeds the adjusted
tax basis. The actual gain and related income tax will depend on the fair market
value and the Company's adjusted tax basis in the New Pulitzer stock at the time
of the Spin-off.
In connection with the September 1986 purchase of Pulitzer Class B
common stock from certain selling stockholders (the "1986 Selling
Stockholders"), Pulitzer agreed, under certain circumstances, to make an
additional payment to the 1986 Selling Stockholders in the event of a Gross-Up
Transaction (as defined herein). A "Gross-Up Transaction" was defined to mean,
among other transactions, (i) any merger, in any transaction or series of
related transactions, of more than 85 percent of the voting securities or equity
of Pulitzer pursuant to which holders of Pulitzer common stock receive
securities other than Pulitzer common stock and (ii) any recapitalization,
dividend or distribution, or series of related recapitalizations, dividends or
distributions, in which holders of Pulitzer common stock receive securities
(other than Pulitzer common stock) having a Fair Market Value (as defined
herein) of not less than 33 1/3 percent of the Fair Market Value of the shares
of Pulitzer common stock immediately prior to such transaction. The amount of
the additional payment, if any, would equal (x) the product of (i) the amount by
which the Transaction Proceeds (as defined herein) exceeds the Imputed Value (as
defined herein) multiplied by (ii) the applicable percentage (i.e., 50 percent
for the period from May 13, 1996 through May 12, 2001) multiplied
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by (iii) the number of shares of Pulitzer common stock issuable upon conversion
of the shares of Pulitzer Class B common stock owned by the 1986 Selling
Stockholders, adjusted for, among other things, stock dividends and stock
splits; less (y) the sum of any additional payments previously received by the
1986 Selling Stockholders; provided, however, that in the event of any
recapitalization, dividend or distribution, the amount by which the Transaction
Proceeds exceeds the Imputed Value shall not exceed the amount paid or
distributed pursuant to such recapitalization, dividend or distribution in
respect of one share of Pulitzer common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a
merger, the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would 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 agreed to by a valuation firm selected by Pulitzer and a valuation
firm selected by the 1986 Selling Stockholders, or, if the two valuation firms
do not agree on the fair market value, the fair market value of such
consideration as determined by a third valuation firm 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, that may be payable by New Pulitzer 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 1986
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
Pulitzer's management, the amount of an additional payment, if any, could be
material to the consolidated financial statements of Pulitzer.
Pursuant to the Merger Agreement, New Pulitzer will indemnify
Hearst-Argyle against losses related to: (i) on an after tax basis, certain tax
liabilities, including (A) any transfer tax liability attributable to the
Spin-off, (B) with certain exceptions, any tax liability of Pulitzer or any
subsidiary of Pulitzer attributable to any tax period (or portion thereof)
ending on or before the closing date of the Merger, including tax liabilities
resulting from the Spin-off, and (C) any tax liability of New Pulitzer or any
subsidiary of New Pulitzer; (ii) liabilities and obligations under any employee
benefit plans not assumed by Hearst-Argyle; (iii) any liabilities for payments
made pursuant to a Gross-Up Transaction; and (iv) certain other matters as set
forth in the Merger Agreement.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Issue is the result of information systems being designed
using two digits rather than four digits to define the applicable year. As the
year 2000 approaches, such information systems may be unable to accurately
process certain date-based information.
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In 1995, Pulitzer began reviewing and preparing its computer systems
for the Year 2000. Generally, at Pulitzer's newspaper publishing locations, the
following categories of computer systems were identified for assessment of Year
2000 compliance: pre-press systems, press systems, post-press systems, business
systems, network systems, desktop PC systems, telecommunication systems and
building systems. Significant sub-systems within these categories which were
identified as non-compliant during the assessment phase represented aging
hardware and software which would have required replacement in the near term
irrespective of the Year 2000 Issue. Consequently, Pulitzer adopted a Year 2000
strategy which will replace its significant non-compliant systems with new
compliant systems prior to December 31, 1999.
Pulitzer's strategy for achieving Year 2000 compliance was developed
using a five phase plan as follows: (1) educate and plan; (2) assess; (3)
replace and renovate; (4) validate/test; and (5) implement. As of December 31,
1997, Pulitzer has completed the planning and assessment phases and is in the
process of replacing, testing and implementing new compliant systems (with some
systems already implemented). Pulitzer and New Pulitzer expect to have
substantially all of the Year 2000 system changes implemented by December 31,
1998 at The Arizona Daily Star, March 31, 1999 at the St. Louis Post-Dispatch
and September 30, 1999 at the PCN properties.
Pulitzer's current estimate of capital expenditures for new hardware
and software to address Year 2000 issues, as well as to replace aging systems,
is approximately $11.6 million for its newspaper publishing locations. At
December 31, 1997, approximately $9.8 million of the total capital expenditure
estimate remains to be spent through the projected implementation dates. These
amounts do not include either the internal staff costs of Pulitzer's information
technology department or the cost of minor Year 2000 system modifications, both
of which are recorded as expense in the period incurred. Year 2000 modification
costs for minor system issues are not expected to be significant. The Year 2000
related capital expenditures have been considered in Pulitzer's normal capital
budgeting process and will be funded through operating cash flows.
In addition to addressing internal system issues, Pulitzer is
communicating with its major suppliers (including but not limited to newsprint,
ink, telecommunication services and utilities) and selected customers to obtain
assurance of their preparedness for the Year 2000. In general, questionnaires
are being used to identify potential Year 2000 issues at these third parties
which may impact Pulitzer's business operations and require a remedy.
As of December 31, 1997, Pulitzer believes that its plan for achieving
Year 2000 compliance will be fully implemented by September 30, 1999 and,
consequently, the development of contingency plans for Year 2000 issues has not
been undertaken at this time. The possible need for contingency plans will be
monitored, and if necessary such plans will be developed, as Pulitzer proceeds
with the implementation of its overall Year 2000 plan.
The preceding discussion relates to Pulitzer's publishing operations
only. Pulitzer does not expect to incur significant costs to address Year 2000
issues at its broadcasting locations prior to the Merger.
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.
34
<PAGE> 35
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 paragraphs 1,2,3 and
5 of Note 2 and paragraphs 3 through 7 of Note 13; November 25, 1998 as to
paragraph 4 of Note 2; and December 11, 1998 as to Note 17); 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 paragraphs
1,2,3 and 5 of Note 2 and
paragraphs 3 through 7 of
Note 13; November 25, 1998
as to paragraph 4 of Note 2;
and December 11, 1998 as
to Note 17)
35
<PAGE> 36
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)
Year Ended December 31, 1997
- -------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation Accounts:
Allowance for Doubtful
Accounts $2,576 $1,468 $178 (a) $1,811 (b) $2,411
Reserves:
Accrued Medical Plan 389 4,714 0 4,060 (c) 1,043
Workers Compensation 2,126 1,199 0 1,368 1,957
Year Ended December 31, 1996
- -------------------------------------
Valuation Accounts:
Allowance for Doubtful
Accounts $2,009 $2,131 $321 (a) $1,885 (b) $2,576
Reserves:
Accrued Medical Plan 561 4,198 0 4,370 (c) 389
Workers Compensation 2,005 1,478 0 1,357 2,126
Year Ended December 31, 1995
- -------------------------------------
Valuation Accounts:
Allowance for Doubtful
Accounts $2,135 $1,538 $247 (a) $1,911 (b) $2,009
Reserves:
Accrued Medical Plan 789 4,907 0 5,135 (c) 561
Workers Compensation 2,327 1,192 0 1,514 2,005
(a) - Accounts reinstated, cash recoveries, etc.
(b) - Accounts written off
<CAPTION>
(c) - Amount represents: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Claims paid $3,596 $3,830 $4,660
Service fees 473 579 548
Cash refunds (9) (39) (73)
------ ------ ------
$4,060 $4,370 $5,135
====== ====== ======
</TABLE>
36
<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,
-----------------------
OPERATING REVENUES - NET: 1998 1997
--------- ---------
<S> <C> <C>
Publishing:
Advertising $ 57,721 $ 53,927
Circulation 22,198 22,434
Other 10,310 9,474
Broadcasting 53,170 50,171
--------- ---------
Total operating revenues 143,399 136,006
--------- ---------
OPERATING EXPENSES:
Publishing operations 37,314 34,533
Broadcasting operations 18,109 16,994
Selling, general and administrative 47,459 45,782
St. Louis Agency adjustment 5,270 4,929
Depreciation and amortization 8,930 9,183
--------- ---------
Total operating expenses 117,082 111,421
--------- ---------
Operating income 26,317 24,585
Interest income 1,042 1,450
Interest expense (3,462) (4,525)
Net other expense (290) (320)
--------- ---------
INCOME BEFORE PROVISION FOR INCOME
TAXES 23,607 21,190
PROVISION FOR INCOME TAXES 9,642 8,695
--------- ---------
NET INCOME $ 13,965 $ 12,495
========= =========
BASIC EARNINGS PER SHARE OF STOCK:
Earnings per share $ 0.63 $ 0.57
========= =========
Weighted average number of shares outstanding 22,223 22,029
========= =========
DILUTED EARNINGS PER SHARE OF STOCK:
Earnings per share $ 0.62 $ 0.56
========= =========
Weighted average number of shares outstanding 22,615 22,378
========= =========
</TABLE>
See notes to consolidated financial statements.
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 $2,524 and $2,411) 75,212 85,882
Inventory 3,670 5,265
Prepaid expenses and other 12,666 12,847
Program rights 5,266 7,866
-------- --------
Total current assets 181,066 174,609
-------- --------
PROPERTIES:
Land 16,050 16,154
Buildings 85,879 84,215
Machinery and equipment 228,572 225,113
Construction in progress 10,099 7,324
-------- --------
Total 340,600 332,806
Less accumulated depreciation 176,500 170,992
-------- --------
Properties - net 164,100 161,814
-------- --------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of applicable amortization 285,624 287,617
Receivable from The Herald Company 37,651 39,733
Other 21,488 19,183
-------- --------
Total intangible and other assets 344,763 346,533
-------- --------
TOTAL $689,929 $682,956
======== ========
(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
----------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 12,884 $ 16,158
Current portion of long-term debt 12,705 12,705
Salaries, wages and commissions 11,278 15,232
Income taxes payable 9,591 3,070
Program contracts payable 5,148 7,907
Interest payable 2,259 5,677
Pension obligations 348 348
Acquisition payable 9,804 9,804
Other 8,441 4,386
--------- ---------
Total current liabilities 72,458 75,287
--------- ---------
LONG-TERM DEBT 172,705 172,705
--------- ---------
PENSION OBLIGATIONS 27,452 26,709
--------- ---------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 91,951 91,906
--------- ---------
OTHER LONG-TERM LIABILITIES 5,383 5,572
--------- ---------
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 $ 689,929 $ 682,956
========= =========
(Concluded)
</TABLE>
See notes to consolidated financial statements.
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>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,965 $ 12,495
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 5,512 5,802
Amortization of intangibles 3,418 3,381
Changes in assets and liabilities (net of the
effects of the purchase of properties) which provided (used) cash:
Trade accounts receivable 10,670 8,215
Inventory 1,595 (352)
Other assets 896 (2,053)
Trade accounts payable and other liabilities (9,380) (6,359)
Income taxes payable 6,521 5,736
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,197 26,865
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,975) (3,554)
Purchase of publishing properties (1,998)
Investment in limited partnerships (1,342)
Decrease in notes receivable 45 4,965
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (10,270) 1,411
-------- --------
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)
-------- --------
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
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of Pulitzer Publishing Company (the "Company" or "Pulitzer") and its
subsidiary companies, all of which are wholly-owned. All significant
intercompany transactions have been eliminated from the consolidated financial
statements.
Interim Adjustments - In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of 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 audited consolidated financial
statements and related notes thereto contained in Exhibit 99-1 to the Company's
Current Report on Form 8-K dated December 16, 1998, as filed with the Securities
and Exchange Commission. Results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
Fiscal Year and Fiscal Quarters - The Company's fiscal year and 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 potential common shares (outstanding stock options). Weighted
average shares of common and Class B common stock and potential common shares
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 options 392 349
---------- -----------
Weighted average shares outstanding and
stock options (Diluted EPS) 22,615 22,378
========== ===========
</TABLE>
Stock options 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 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.
6
<PAGE> 7
2. SPIN-OFF AND MERGER
On May 25, 1998, the Company, Pulitzer Inc., (a newly-organized, wholly-owned
subsidiary of the Company ("New Pulitzer")), 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
television and radio broadcasting operations (collectively, the "Broadcasting
Business"). The Broadcasting Business consists of nine network-affiliated
television stations and five radio stations owned and operated by Pulitzer
Broadcasting Company ("PBC"), a wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries. The Broadcasting Business will be acquired by
Hearst-Argyle through the merger ("Merger") of the Company into Hearst-Argyle.
Prior to the Spin-off (as defined below), the Company intends to borrow $700
million, which may be secured by the assets and/or stock of PBC and its
subsidiaries. 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 New Pulitzer 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 New
Pulitzer 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
New Pulitzer Class B Common Stock for each share of Company Class B Common Stock
held (the "Distribution"). The Contribution and Distribution are collectively
referred to as the "Spin-off." The Spin-off and the Merger are collectively
referred to as the "Transactions."
Consummation of the Transactions is subject, among other things, to the receipt
of various regulatory approvals, Pulitzer stockholder approval of the Charter
Amendment (as defined in Note 6) and approval of the Merger by the stockholders
of both the Company and Hearst-Argyle. The Company has received a favorable
letter ruling from the Internal Revenue Service confirming that the Spin-off
will be tax-free to Pulitzer stockholders. Early termination of the initial
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has
also been granted. In addition, the Federal Communications Commission (the
"FCC") has published notice of its grant of the application for the transfer of
FCC licenses, including related waiver requests, from the Company to
Hearst-Argyle. The Company anticipates that its special stockholders meeting to
consider the Charter Amendment and the Merger will be held in January 1999 and
that the Transactions will be completed shortly after the meeting.
Following the consummation of the Transactions, New Pulitzer will be engaged
primarily in the business of newspaper publishing and related new media
businesses. For financial reporting purposes, New Pulitzer is the continuing
stockholder interest and will retain the Pulitzer name.
3. 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.
7
<PAGE> 8
4. BUSINESS SEGMENTS
The Company's operations are divided into two business segments, publishing and
broadcasting. The following is a summary of operating data by segment (in
thousands):
<TABLE>
<CAPTION>
First Quarter Ended
March 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Operating revenues:
Publishing $ 90,229 $ 85,835
Broadcasting 53,170 50,171
-------- --------
Total $143,399 $136,006
======== ========
Operating income (loss):
Publishing $ 10,819 $ 11,150
Broadcasting 16,915 14,819
Corporate (1,417) (1,384)
-------- --------
Total $ 26,317 $ 24,585
======== ========
Depreciation and amortization:
Publishing $ 3,379 $ 3,349
Broadcasting 5,551 5,834
-------- --------
Total $ 8,930 $ 9,183
======== ========
Operating margins
(Operating income to revenues):
Publishing (a) 17.8% 18.7%
Broadcasting 31.8% 29.5%
</TABLE>
(a) Operating margins for publishing stated with St. Louis Agency
adjustment added back to publishing operating income.
5. COMMITMENTS AND CONTINGENCIES
At March 31, 1998, the Company and its subsidiaries had construction and
equipment commitments of approximately $17,567,000. 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 capital
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 involved, from time to time, in various
claims and lawsuits incidental to the ordinary course of its business, including
such maters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of such existing litigation will not have a
material adverse effect on the consolidated financial statements of the Company
and its subsidiaries.
In connection with the September 1986 purchase of Pulitzer Class B common stock
from certain selling stockholders (the "1986 Selling Stockholders"), Pulitzer
agreed, under certain circumstances, to make an additional payment to the 1986
Selling Stockholders in the event of a Gross-Up Transaction (as defined herein).
A "Gross-Up Transaction" was defined to mean, among other transactions, (i) any
merger, in any transaction or series of related transactions, of more than 85
percent of the voting securities or equity of Pulitzer pursuant to which holders
of Pulitzer common stock receive securities other than Pulitzer common stock and
(ii) any recapitalization, dividend or distribution, or series of related
recapitalizations, dividends or distributions, in which holders of Pulitzer
common stock receive securities (other than Pulitzer common stock) having a Fair
Market Value (as defined herein) of not less than 33 1/3 percent of the Fair
Market Value of the shares of Pulitzer common stock immediately prior to such
transaction. The amount of the
8
<PAGE> 9
additional payment, if any, would equal (x) the product of (i) the amount by
which the Transaction Proceeds (as defined herein) exceeds the Imputed Value (as
defined herein) multiplied by (ii) the applicable percentage (i.e., 50 percent
for the period from May 13, 1996 through May 12, 2001) multiplied by (iii) the
number of shares of Pulitzer common stock issuable upon conversion of the shares
of Pulitzer Class B common stock owned by the 1986 Selling Stockholders,
adjusted for, among other things, stock dividends and stock splits; less (y) the
sum of any additional payments previously received by the 1986 Selling
Stockholders; provided, however, that in the event of any recapitalization,
dividend or distribution, the amount by which the Transaction Proceeds exceeds
the Imputed Value shall not exceed the amount paid or distributed pursuant to
such recapitalization, dividend or distribution in respect of one share of
Pulitzer common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a merger,
the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would 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
agreed to by a valuation firm selected by Pulitzer and a valuation firm selected
by the 1986 Selling Stockholders, or, if the two valuation firms do not agree on
the fair market value, the fair market value of such consideration as determined
by a third valuation firm 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, that
may be payable by New Pulitzer 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 1986 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 Pulitzer's
management, the amount of an additional payment, if any, could be material to
the consolidated financial statements of Pulitzer.
6. RESTATEMENT
On October 22, 1998, the Company determined that a change in facts had occurred
concerning a stockholder vote that is required to consummate the Spin-off and
Merger (see Note 2). When the Company entered into the Merger Agreement on May
25, 1998, the principal stockholders of the Company controlled, and continue to
control, that number of shares of Class B Common Stock sufficient to approve
the Merger regardless of the vote of any other holders of the Company's Common
Stock and Class B Common Stock. In addition, the principal stockholders of the
Company entered into a voting agreement with Hearst-Argyle (the "Pulitzer
Voting Agreement"), in which they agreed to direct the vote of all their shares
in favor of the Merger and the transactions contemplated by it (including the
Charter Amendment defined below). Consummation of the Merger is also
conditioned upon the passage of an amendment to the Company's restated
certificate of incorporation (the "Charter Amendment"), the approval of which
requires the affirmative vote of the holders of a majority of the outstanding
shares of the Company's Common Stock and the Class B Common Stock voting
together as a single class and the vote of the holders of a majority of the
outstanding shares of the Company's Common Stock voting as a
9
<PAGE> 10
separate class. On May 25, 1998, at the time of the execution and delivery of
the Merger Agreement and the Pulitzer Voting Agreement, the principal
stockholders of the Company had stated to the Company that they were committed
to take such actions as they deemed necessary to effectuate the Transactions,
including (i), on or before the record date for the Special Meeting of
Stockholders of the Company (the "Special Stockholders Meeting") to be called
for the purpose of voting upon the Merger and the Charter Amendment, the
conversion of that number of their shares of Class B Common Stock into shares of
Common Stock as would constitute a majority of the Company's then issued and
outstanding shares of Common Stock and (ii) to vote those shares of Common Stock
at the Special Stockholders Meeting in accordance with the provisions of the
Pulitzer Voting Agreement. Based upon the facts that existed on May 25, 1998,
and continued to exist through October 21, 1998, the Company determined that it
was appropriate to report the Broadcasting Business as discontinued operations
under Accounting Principles Board Opinion 30, "Reporting the Results of
Operations" Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30"). On October 22, 1998, the principal stockholders advised the Company that
they had not converted, and did not deem it necessary to convert on or before
the record date for the Special Stockholders Meeting, that number of shares of
the Company's Class B Common Stock as would constitute a majority of the then
issued and outstanding shares of the Company's Common Stock. Accordingly, based
upon this change in facts (i.e., even though the principal stockholders of the
Company intend to vote all their shares in favor of the Charter Amendment upon
which the Spin-off and Merger are conditioned, they alone will not be in a
position at the Special Stockholders Meeting to approve the Charter Amendment),
the Company determined that it would no longer be appropriate under APB 30 to
report the Broadcasting Business as discontinued operations in the Company's
consolidated financial statements. As a result, the Company's financial
statements as of March 31, 1998 and for the three-month periods ended March 31,
1998 and 1997 have been restated from the amounts previously reported in the
Company's Current Report on Form 8-K dated September 4, 1998 to now reflect the
Broadcasting Business as a part of continuing operations of the Company. Such
restatement results in the reclassification of amounts related to the
Broadcasting Business previously reflected as discontinued operations in the
consolidated financial statements but does not change the Company's previously
reported amounts for consolidated net income, total earnings per share and
stockholders' equity.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
At March 31, 1998
-----------------------------
As
Previously As
Reported Restated
<S> <C> <C>
Total current assets $133,275 $181,066
Properties--net 78,647 164,100
Total intangibles and other assets 266,530 344,763
Total assets 478,452 689,929
Total current liabilities $43,429 $72,458
Long-term debt -- 172,705
Pension obligations 21,560 27,452
Postretirement and postemployment
benefit obligations 89,343 91,951
Other long-term obligations 4,140 5,383
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Total operating revenues $90,229 $143,399 $85,835 $136,006
Total operating expenses 80,827 117,082 76,069 111,421
Operating income 9,402 26,317 9,766 24,585
Income from continuing operations 5,771 13,965 6,230 12,495
Income from discontinued operations 8,194 -- 6,265 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.26 $0.63 $0.28 $0.57
Discontinued operations 0.37 -- 0.29 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.26 $0.62 $0.28 $0.56
Discontinued operations 0.36 -- 0.28 --
</TABLE>
10
<PAGE> 11
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, television and radio 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" or
"Pulitzer"), Pulitzer Inc. (a newly-organized, wholly-owned subsidiary of the
Company ("New Pulitzer")), 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 television and radio
broadcasting operations (collectively, the "Broadcasting Business") through the
merger ("Merger") of the Company into Hearst-Argyle. The Merger is subject to
the satisfaction or waiver of certain closing conditions enumerated in the
Merger Agreement. The Company's newspaper publishing and related new media
businesses will continue as New Pulitzer, which will be distributed in a
tax-free "spin-off" to the Company's stockholders (the "Spin-off") prior to the
Merger.
The Company's historical basis in its non-broadcasting assets and
liabilities will be carried over to New Pulitzer. The Merger, the Spin-off and
the related transactions will be recorded as a reverse-spin transaction, and,
accordingly, New Pulitzer'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. (See Note 2 to the consolidated financial statements included in this
Exhibit 99-2 to the Company's Current Report on Form 8-K.)
As discussed in Note 6 to the consolidated financial statements included in this
Exhibit 99-2 to the Company's Current Report on Form 8-K, the Company's
consolidated financial statements as of March 31, 1998 and for the three-month
periods ended March 31, 1998 and 1997 have been restated to reflect the
Broadcasting Business as a part of continuing operations of the Company. Such
restatement results in the reclassification of amounts related to the
Broadcasting Business previously reflected as discontinued operations in the
consolidated financial statements but does not change the Company's previously
reported amounts for consolidated net income, total earnings per share and
stockholders' equity.
CONSOLIDATED
Operating revenues for the first quarter of 1998 increased 5.4 percent,
to $143.4 million from $136 million for the first quarter of 1997. The increase
reflected gains in both publishing and broadcasting.
11
<PAGE> 12
Operating expenses, excluding the St. Louis Agency adjustment, for the
1998 first quarter increased 5 percent, to $111.8 million from $106.5 million in
the first quarter of 1997. The majority of the current year increase was
attributable to higher overall personnel costs of $2.9 million and higher
newsprint costs of $1.7 million.
Operating income in the 1998 first quarter increased 7 percent, to
$26.3 million from $24.6 million in the first quarter of 1997. The 1998 increase
reflected higher operating income from the broadcast segment, resulting from
increased advertising revenues, partially offset by a decrease in the publishing
segment's earnings.
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 1998 reflected the payment of variable rate
credit agreement borrowings during the last three quarters of 1997.
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 40.8
percent compared with a rate of 41 percent in the prior year quarter. The
Company expects its effective tax rate on an annual basis for 1998 will be in
the 40 to 41 percent range (exclusive of any non-recurring items related to the
Spin-off and Merger).
Net income in the 1998 first quarter increased 11.8 percent to $14
million, or $0.62 per diluted share, compared with $12.5 million, or $0.56 per
diluted share, in the first quarter of 1997. The gain in net income reflected
increased broadcast segment profits, primarily as a result of higher advertising
revenues.
PUBLISHING
Operating revenues from the Company's publishing segment 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, the 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 reflect declines in paid circulation at
the Post-Dispatch and the 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 and depreciation and amortization) for the publishing segment,
excluding the St. Louis Agency adjustment, increased 6.3 percent to $74.1
million for the 1998 first quarter compared to $69.8 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.
Operating income from the Company's publishing activities for the first
quarter of 1998 decreased 3 percent to $10.8 million from $11.2 million. The
decrease was due to higher operating expenses.
12
<PAGE> 13
Fluctuations in the price of newsprint significantly impact the results
of the Company's publishing segment, 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.
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.
Operating income from the broadcasting segment 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.
LIQUIDITY AND CAPITAL RESOURCES
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 (the "Prudential
Senior Note Agreements"). 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 Prudential Senior Note Agreements and the FNBC Credit Agreement
require the Company to maintain certain financial ratios, place restrictions on
the payment of dividends and prohibit new borrowings, except as permitted
thereunder. Borrowings pursuant to the Prudential Senior Note Agreements will be
repaid with new borrowings prior to the Merger, and the Prudential Senior Note
Agreements and FNBC Credit Agreement will be terminated. The Company's new
borrowings will be assumed by Hearst-Argyle at the time of the Merger.
Accordingly, New Pulitzer will have no long-term borrowings immediately after
the Spin-off and Merger.
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
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 $108.6 million
and a current ratio of 2.5 to 1. This compares to working capital of $99.3
million and a current ratio of 2.32 to 1 at December 31, 1997.
The Company from time to time considers acquisitions of 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.
13
<PAGE> 14
SPIN-OFF AND MERGER
Prior to the Spin-off and Merger (collectively referred to as the
"Transactions"), the Company intends to borrow $700 million which will provide
sufficient funds to pay the existing Company debt and the costs of the
Transactions discussed below. Pursuant to the Merger Agreement, Hearst-Argyle
will assume the new debt following the consummation of the Transactions. (See
Note 2 to the consolidated financial statements included in this Exhibit 99-2 to
the Company's Current Report on Form 8-K.)
In connection with the Transactions, the Company will incur new
borrowings, prepay existing Company debt and make several one-time payments near
the dates of the Transactions. The Company will incur a prepayment penalty
related to the prepayment of the existing borrowings under the Prudential Senior
Note Agreements. Based upon November 30, 1998 interest rates, the prepayment
penalty would be approximately $21 million. Professional fees to be incurred
related to the Transactions are estimated in the range of $37 million.
Management bonuses to be paid at the date of the Merger are estimated at
approximately $12.1 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 (946,344) and the Company's common stock market price
($81.25) as of November 30, 1998, payments to employee option holders of
approximately $44.5 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, stock 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 Transactions, a
corporate-level income tax ("Spin-off Tax") will be due. The gain is measured by
the excess, if any, of the fair market value of New Pulitzer stock distributed
by the Company to its stockholders in the Spin-off over the Company's adjusted
tax basis in such New Pulitzer stock immediately prior to the distribution. On
November 30, 1998, the fair market value of New Pulitzer stock would be
estimated as the difference between the closing price of the Company's common
stock on November 30, 1998 ($81.25) and the fair market value for the
Broadcasting Business of $51.11 per share, assuming the value ($1.15 billion)
Hearst-Argyle is exchanging for the Company's common stock (22,499,749 shares at
November 30, 1998). Using a fair market value of $30.14 (the excess of $81.25
over $51.11) per common share for the New Pulitzer stock, no gain (or tax) would
result from the Transactions because the adjusted tax basis of the New Pulitzer
stock would be approximately $34.29 per share. However, if the fair market value
of the New Pulitzer stock would exceed the adjusted tax basis of such stock at
the time of the Spin-off, the Spin-off Tax will increase by approximately $9.1
million for each $1.00 per share that the fair market value exceeds the adjusted
tax basis. The actual gain and related income tax will depend on the fair market
value and the Company's adjusted tax basis in the New Pulitzer stock at the time
of the Spin-off.
In connection with the September 1986 purchase of Pulitzer Class B
common stock from certain selling stockholders (the "1986 Selling
Stockholders"), Pulitzer agreed, under certain circumstances, to make an
additional payment to the 1986 Selling Stockholders in the event of a Gross-Up
Transaction (as defined herein). A "Gross-Up Transaction" was defined to mean,
among other transactions, (i) any merger, in any transaction or series of
related transactions, of more than 85 percent of the voting securities or equity
of Pulitzer pursuant to which holders of Pulitzer common stock receive
securities other than Pulitzer common stock and (ii) any recapitalization,
dividend or distribution, or series of related recapitalizations, dividends or
distributions, in which holders of Pulitzer common stock receive securities
(other than Pulitzer common stock) having a Fair Market Value (as defined
herein) of not less than 33 1/3 percent of the Fair Market Value of the shares
of Pulitzer common stock immediately prior to such transaction. The amount of
the additional payment, if any, would equal (x) the product of (i) the amount by
which the Transaction Proceeds (as defined herein) exceeds the Imputed Value (as
defined herein) multiplied by (ii) the applicable percentage (i.e., 50 percent
for the period from May 13, 1996 through May 12, 2001) multiplied by (iii) the
number of shares of Pulitzer common stock issuable upon conversion of the shares
of Pulitzer Class B common stock owned by the 1986 Selling Stockholders,
adjusted for, among other things, stock dividends and stock splits; less (y) the
sum of any additional payments previously received by the 1986 Selling
Stockholders; provided, however, that in the event of any recapitalization,
dividend or distribution, the amount by which the Transaction Proceeds exceeds
the Imputed Value shall not exceed the amount paid or distributed pursuant to
such recapitalization, dividend or distribution in respect of one share of
Pulitzer common stock.
14
<PAGE> 15
The term "Transaction Proceeds" was defined to mean, in the case of a
merger, the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would 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 agreed to by a valuation firm selected by Pulitzer and a valuation
firm selected by the 1986 Selling Stockholders, or, if the two valuation firms
do not agree on the fair market value, the fair market value of such
consideration as determined by a third valuation firm 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, that may be payable by New Pulitzer 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 1986
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
Pulitzer's management, the amount of an additional payment, if any, could be
material to the consolidated financial statements of Pulitzer.
Pursuant to the Merger Agreement, New Pulitzer will indemnify
Hearst-Argyle against losses related to: (i) on an after tax basis, certain tax
liabilities, including (A) any transfer tax liability attributable to the
Spin-off, (B) with certain exceptions, any tax liability of Pulitzer or any
subsidiary of Pulitzer attributable to any tax period (or portion thereof)
ending on or before the closing date of the Merger, including tax liabilities
resulting from the Spin-off, and (C) any tax liability of New Pulitzer or any
subsidiary of New Pulitzer; (ii) liabilities and obligations under any employee
benefit plans not assumed by Hearst-Argyle; (iii) any liabilities for payments
made pursuant to a Gross-Up Transaction; and (iv) certain other matters as set
forth in the Merger Agreement.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Issue is the result of information systems being designed
using two digits rather than four digits to define the applicable year. As the
year 2000 approaches, such information systems may be unable to accurately
process certain date-based information.
In 1995, Pulitzer began reviewing and preparing its computer systems
for the Year 2000. Generally, at Pulitzer's newspaper publishing locations, the
following categories of computer systems were identified for assessment of Year
2000 compliance: pre-press systems, press systems, post-press systems, business
systems, network systems, desktop PC systems, telecommunication systems and
building systems. Significant sub-systems within these categories which were
identified as non-compliant during the assessment phase represented aging
hardware and software which would have required replacement in the near term
irrespective of the Year 2000 Issue. Consequently, Pulitzer adopted a Year 2000
strategy which will replace its significant non-compliant systems with new
compliant systems prior to December 31, 1999.
Pulitzer's strategy for achieving Year 2000 compliance was developed
using a five phase plan as follows: (1) educate and plan; (2) assess; (3)
replace and renovate; (4) validate/test; and (5) implement. As of March 31,
1998, Pulitzer has completed the planning and assessment phases and is in the
process of replacing, testing and implementing new compliant systems (with some
systems already implemented). Pulitzer and New Pulitzer expect to have
substantially all of the Year 2000 system changes implemented by
15
<PAGE> 16
December 31, 1998 at The Arizona Daily Star, March 31, 1999 at the St. Louis
Post-Dispatch and September 30, 1999 at the PCN properties.
Pulitzer's current estimate of capital expenditures for new hardware
and software to address Year 2000 issues, as well as to replace aging systems,
is approximately $11.6 million for its newspaper publishing locations. At March
31, 1998, approximately $7.4 million of the total capital expenditure estimate
remains to be spent through the projected implementation dates. These amounts do
not include either the internal staff costs of Pulitzer's information technology
department or the cost of minor Year 2000 system modifications, both of which
are recorded as expense in the period incurred. Year 2000 modification costs for
minor system issues are not expected to be significant. The Year 2000 related
capital expenditures have been considered in Pulitzer's normal capital budgeting
process and will be funded through operating cash flows.
In addition to addressing internal system issues, Pulitzer is
communicating with its major suppliers (including but not limited to newsprint,
ink, telecommunication services and utilities) and selected customers to obtain
assurance of their preparedness for the Year 2000. In general, questionnaires
are being used to identify potential Year 2000 issues at these third parties
which may impact Pulitzer's business operations and require a remedy.
As of March 31, 1998, Pulitzer believes that its plan for achieving
Year 2000 compliance will be fully implemented by September 30, 1999 and,
consequently, the development of contingency plans for Year 2000 issues has not
been undertaken at this time. The possible need for contingency plans will be
monitored, and if necessary such plans will be developed, as Pulitzer proceeds
with the implementation of its overall Year 2000 plan.
The preceding discussion relates to Pulitzer's publishing operations
only. Pulitzer does not expect to incur significant costs to address Year 2000
issues at its broadcasting locations prior to the Merger.
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.
16
<PAGE> 1
EXHIBIT 99-3
PULITZER PUBLISHING COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Statements of Consolidated Income for each of the Six-Month Periods
Ended June 30, 1998 and 1997
Statements of Consolidated Financial Position at June 30, 1998 and
December 31, 1997
Statements of Consolidated Cash Flows for each of the Six-Month Periods
Ended June 30, 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>
Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
OPERATING REVENUES - NET: 1998 1997 1998 1997
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Publishing:
Advertising $62,086 $58,446 $119,807 $112,373
Circulation 21,824 21,755 44,022 44,189
Other 10,305 10,104 20,615 19,578
Broadcasting 66,603 61,093 119,773 111,264
----------- ------------ ------------- ------------
Total operating revenues 160,818 151,398 304,217 287,404
----------- ------------ ------------- ------------
OPERATING EXPENSES:
Publishing operations 37,212 35,511 74,526 70,044
Broadcasting operations 17,936 16,995 36,045 33,989
Selling, general and administrative 49,964 47,821 97,423 93,603
St. Louis Agency adjustment 5,593 5,500 10,863 10,429
Depreciation and amortization 8,944 9,237 17,874 18,420
----------- ------------ ------------- ------------
Total operating expenses 119,649 115,064 236,731 226,485
----------- ------------ ------------- ------------
Operating income 41,169 36,334 67,486 60,919
Interest income 1,114 1,051 2,156 2,501
Interest expense (3,463) (4,174) (6,925) (8,699)
Net other expense (886) (240) (1,176) (560)
----------- ------------ ------------- ------------
INCOME BEFORE PROVISION FOR INCOME
TAXES 37,934 32,971 61,541 54,161
PROVISION FOR INCOME TAXES 15,233 13,290 24,875 21,985
----------- ------------ ------------- ------------
NET INCOME $22,701 $19,681 $36,666 $32,176
=========== ============ ============= ============
BASIC EARNINGS PER SHARE OF STOCK:
Earnings per share $1.02 $0.89 $1.65 $1.46
=========== ============ ============= ============
Weighted average number of shares outstanding 22,344 22,081 22,289 22,054
=========== ============ ============= ============
DILUTED EARNINGS PER SHARE OF STOCK:
Earnings per share $1.00 $0.88 $1.62 $1.44
=========== ============ ============= ============
Weighted average number of shares outstanding 22,756 22,413 22,685 22,396
=========== ============ ============= ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $101,408 $ 62,749
Trade accounts receivable (less allowance for doubtful
accounts of $2,579 and $2,411) 86,813 85,882
Inventory 2,898 5,265
Prepaid expenses and other 9,894 12,847
Program rights 3,054 7,866
----------------- -----------------
Total current assets 204,067 174,609
----------------- -----------------
PROPERTIES:
Land 15,694 16,154
Buildings 86,397 84,215
Machinery and equipment 229,821 225,113
Construction in progress 13,534 7,324
----------------- -----------------
Total 345,446 332,806
Less accumulated depreciation 181,873 170,992
----------------- -----------------
Properties - net 163,573 161,814
----------------- -----------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of applicable amortization 281,158 287,617
Receivable from The Herald Company 38,136 39,733
Other 26,760 19,183
----------------- -----------------
Total intangible and other assets 346,054 346,533
----------------- -----------------
TOTAL $713,694 $682,956
================= =================
</TABLE>
3
(Continued)
<PAGE> 4
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable 15,160 $16,158
Current portion of long-term debt 12,705 12,705
Salaries, wages and commissions 12,652 15,232
Income taxes payable 6,214 3,070
Program contracts payable 2,728 7,907
Interest payable 5,640 5,677
Acquisition payable 9,804 9,804
Other 9,010 4,734
----------------- -----------------
Total current liabilities 73,913 75,287
----------------- -----------------
LONG-TERM DEBT 172,500 172,705
----------------- -----------------
PENSION OBLIGATIONS 28,211 26,709
----------------- -----------------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 91,788 91,906
----------------- -----------------
OTHER LONG-TERM LIABILITIES 5,411 5,572
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 25,000,000 shares
authorized; issued and outstanding - none
Common stock, $.01 par value; 100,000,000 shares authorized;
issued - 7,026,173 in 1998 and 6,797,895 in 1997 70 68
Class B common stock, convertible, $.01 par value; 50,000,000
shares authorized; issued - 27,089,494 in 1998 and 27,125,247 in 1997 271 271
Additional paid-in capital 140,037 135,542
Retained earnings 389,466 362,828
----------------- -----------------
Total 529,844 498,709
Treasury stock - at cost; 25,519 and 24,660 shares of common
stock in 1998 and 1997, respectively, and 11,700,850 shares
of Class B common stock in 1998 and 1997 (187,973) (187,932)
----------------- -----------------
Total stockholders' equity 341,871 310,777
----------------- -----------------
TOTAL $713,694 $682,956
================= =================
</TABLE>
(Concluded)
See notes to consolidated financial statements.
4
<PAGE> 5
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $36,666 $32,176
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 11,033 11,631
Amortization of intangibles 6,841 6,789
Changes in assets and liabilities (net of the effects of the purchase
and sale of properties) which provided (used) cash:
Trade accounts receivable (931) (1,125)
Inventory 2,367 (745)
Other assets 2,037 (4,306)
Trade accounts payable and other liabilities (1,362) 208
Income taxes payable 3,144 (101)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 59,795 44,527
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,688) (10,927)
Purchase of publishing properties (1,998)
Purchase of broadcast assets (1,849)
Investment in limited partnerships (5,620) (2,175)
Sale of publishing property 2,590
Decrease in notes receivable 5 4,972
------------- -------------
NET CASH USED IN BY INVESTING ACTIVITIES (18,711) (9,979)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long-term debt (205) (26,705)
Dividends paid (6,676) (5,727)
Proceeds from exercise of stock options 3,841 2,033
Proceeds from employee stock purchase plan 656
Purchase of treasury stock (41) (28)
------------- -------------
NET CASH USED IN FINANCING ACTIVITIES (2,425) (30,427)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 38,659 4,121
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 62,749 73,052
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $101,408 $77,173
============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
PULITZER PUBLISHING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial statements include the
accounts of Pulitzer Publishing Company (the "Company" or "Pulitzer") and its
subsidiary companies, all of which are wholly-owned. All significant
intercompany transactions have been eliminated from the consolidated financial
statements.
Interim Adjustments - In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's
financial position as of June 30, 1998, results of operations for the three and
six-month periods ended June 30, 1998 and 1997 and cash flows for the six-month
periods ended June 30, 1998 and 1997. These financial statements should be read
in conjunction with the audited consolidated financial statements and related
notes thereto contained in Exhibit 99-1 to the Company's Current Report on Form
8-K dated December 16, 1998, as filed with the Securities and Exchange
Commission. Results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
Fiscal Year and Fiscal Quarters - The Company's fiscal year and second fiscal
quarter end on the Sunday coincident with or prior to December 31 and June 30,
respectively. For ease of presentation, the Company has used December 31 as the
year end and June 30 as the second quarter end.
Earnings Per Share of Stock - Basic earnings per share of stock is computed
using the weighted average number of common and Class B common shares
outstanding during the applicable period. Diluted earnings per share of stock is
computed using the weighted average number of common and Class B common shares
outstanding and potential common shares (outstanding stock options). Weighted
average shares of common and Class B common stock and potential common shares
used in the calculation of basic and diluted earnings per share are summarized
as follows:
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1998 1997 1998 1997
(In thousands)
<S> <C> <C> <C> <C>
Weighted average shares outstanding (Basic EPS) 22,344 22,081 22,289 22,054
Stock options 412 332 396 342
--------- -------- --------- --------
Weighted average shares outstanding and
stock options (Diluted EPS) 22,756 22,413 22,685 22,396
========= ======== ========= ========
</TABLE>
Stock options 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 six-month periods ended June 30, 1998 and 1997, the
Company did not incur items to be reported in "Comprehensive Income" that were
not already included in the reported "net income". As a result, comprehensive
income and net income were the same for these periods.
Reclassifications - Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the 1998 presentation.
6
<PAGE> 7
2. SPIN-OFF AND MERGER
On May 25, 1998, the Company, Pulitzer Inc., (a newly-organized, wholly-owned
subsidiary of the Company ("New Pulitzer")), 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
television and radio broadcasting operations (collectively, the "Broadcasting
Business"). The Broadcasting Business consists of nine network-affiliated
television stations and five radio stations owned and operated by Pulitzer
Broadcasting Company ("PBC"), a wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries. The Broadcasting Business will be acquired by
Hearst-Argyle through the merger ("Merger") of the Company into Hearst-Argyle.
Prior to the Spin-off (as defined below), the Company intends to borrow $700
million, which may be secured by the assets and/or stock of PBC and its
subsidiaries. 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 New Pulitzer 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 New
Pulitzer 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
New Pulitzer Class B Common Stock for each share of Company Class B Common Stock
held (the "Distribution"). The Contribution and Distribution are collectively
referred to as the "Spin-off." The Spin-off and the Merger are collectively
referred to as the "Transactions."
Consummation of the Transactions is subject, among other things, to the receipt
of various regulatory approvals, Pulitzer stockholder approval of the Charter
Amendment (as defined in Note 6) and approval of the Merger by the stockholders
of both the Company and Hearst-Argyle. The Company has received a favorable
letter ruling from the Internal Revenue Service confirming that the Spin-off
will be tax-free to Pulitzer stockholders. Early termination of the initial
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has
also been granted. In addition, the Federal Communications Commission (the
"FCC") has published notice of its grant of the application for the transfer of
FCC licenses, including related waiver requests, from the Company to
Hearst-Argyle. The Company anticipates that its special stockholders meeting to
consider the Charter Amendment and the Merger will be held in January 1999 and
that the Transactions will be completed shortly after the meeting.
Following the consummation of the Transactions, New Pulitzer will be engaged
primarily in the business of newspaper publishing and related new media
businesses. For financial reporting purposes, New Pulitzer is the continuing
stockholder interest and will retain the Pulitzer name.
3. DIVIDENDS
In the first quarter of 1998, two dividends of $0.15 per share were declared,
payable on February 2, 1998 and May 1, 1998. In the second quarter of 1998, a
dividend of $0.15 per share was declared, payable on August 3, 1998.
In the first quarter of 1997, two dividends of $0.13 per share were declared,
payable on February 3, 1997 and May 1, 1997. In the second quarter of 1997, a
dividend of $0.13 per share was declared, payable on August 1, 1997. In the
third quarter of 1997, a dividend of $0.13 per share was declared, payable on
November 1, 1997.
7
<PAGE> 8
4. BUSINESS SEGMENTS
The Company's operations are divided into two business segments, publishing and
broadcasting. The following is a summary of operating data by segment (in
thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1998 1997 1998 1997
------------- ------------- ------------- ----------
Operating revenues: (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Publishing $ 94,215 $ 90,305 $184,444 $176,140
Broadcasting 66,603 61,093 119,773 111,264
----------- ----------- ------------ ------------
Total $160,818 $151,398 $304,217 $287,404
=========== =========== ============ ============
Operating income (loss):
Publishing $ 13,017 $ 12,888 $ 23,836 $ 24,038
Broadcasting 29,375 24,818 46,290 39,637
Corporate (1,223) (1,372) (2,640) (2,756)
----------- ----------- ------------ ------------
Total $ 41,169 $ 36,334 $ 67,486 $ 60,919
=========== =========== ============ ============
Depreciation and amortization:
Publishing 3,444 $ 3,387 $ 6,823 $ 6,736
Broadcasting 5,500 5,850 11,051 11,684
----------- ----------- ------------ ------------
Total $ 8,944 $ 9,237 $ 17,874 $ 18,420
=========== =========== ============ ============
Operating margins
(Operating income to revenues):
Publishing (a) 19.8% 20.4% 18.8% 19.6%
Broadcasting 44.1% 40.6% 38.6% 35.6%
</TABLE>
(a) Operating margins for publishing stated with St. Louis Agency
adjustment added back to publishing operating income.
5. COMMITMENTS AND CONTINGENCIES
At June 30, 1998, the Company and its subsidiaries had construction and
equipment commitments of approximately $11,610,000. The Company's commitment for
broadcasting program contracts payable and license fees at June 30, 1998 was
approximately $29,672,000.
The Company is an investor in two limited partnerships requiring future capital
contributions. As of June 30, 1998, the Company's unfunded capital contribution
commitment related to these investments was approximately $8,243,000.
The Company and its subsidiaries are involved, from time to time, in various
claims and lawsuits incidental to the ordinary course of its business, including
such maters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of such existing litigation will not have a
material adverse effect on the consolidated financial statements of the Company
and its subsidiaries.
In connection with the September 1986 purchase of Pulitzer Class B common stock
from certain selling stockholders (the "1986 Selling Stockholders"), Pulitzer
agreed, under certain circumstances, to make an additional payment to the 1986
Selling Stockholders in the event of a Gross-Up Transaction (as defined herein).
A "Gross-Up Transaction" was defined to mean, among other transactions, (i) any
merger, in any transaction or series of related transactions, of more than 85
percent of the voting securities or equity of Pulitzer pursuant to which holders
of Pulitzer common stock receive securities other than Pulitzer common stock and
(ii) any recapitalization, dividend or distribution, or series of related
recapitalizations, dividends or distributions, in which holders of Pulitzer
common stock receive securities (other than Pulitzer common stock) having a Fair
Market Value (as defined herein) of not less than 33 1/3 percent of the Fair
Market Value of the shares of Pulitzer common stock immediately prior to such
transaction. The amount of the additional payment, if any, would equal (x) the
product of (i) the amount by which the Transaction
8
<PAGE> 9
Proceeds (as defined herein) exceeds the Imputed Value (as defined herein)
multiplied by (ii) the applicable percentage (i.e., 50 percent for the period
from May 13, 1996 through May 12, 2001) multiplied by (iii) the number of shares
of Pulitzer common stock issuable upon conversion of the shares of Pulitzer
Class B common stock owned by the 1986 Selling Stockholders, adjusted for, among
other things, stock dividends and stock splits; less (y) the sum of any
additional payments previously received by the 1986 Selling Stockholders;
provided, however, that in the event of any recapitalization, dividend or
distribution, the amount by which the Transaction Proceeds exceeds the Imputed
Value shall not exceed the amount paid or distributed pursuant to such
recapitalization, dividend or distribution in respect of one share of Pulitzer
common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a merger,
the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would 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
agreed to by a valuation firm selected by Pulitzer and a valuation firm selected
by the 1986 Selling Stockholders, or, if the two valuation firms do not agree on
the fair market value, the fair market value of such consideration as determined
by a third valuation firm 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, that
may be payable by New Pulitzer 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 1986 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 Pulitzer's
management, the amount of an additional payment, if any, could be material to
the consolidated financial statements of Pulitzer.
6. RESTATEMENT
On October 22, 1998, the Company determined that a change in facts had occurred
concerning a stockholder vote that is required to consummate the Spin-off and
Merger (see Note 2). When the Company entered into the Merger Agreement on May
25, 1998, the principal stockholders of the Company controlled, and continue to
control, that number of shares of Class B Common Stock sufficient to approve
the Merger regardless of the vote of any other holders of the Company's Common
Stock and Class B Common Stock. In addition, the principal stockholders of the
Company entered into a voting agreement with Hearst-Argyle (the "Pulitzer
Voting Agreement"), in which they agreed to direct the vote of all their shares
in favor of the Merger and the transactions contemplated by it (including the
Charter Amendment defined below). Consummation of the Merger is also
conditioned upon the passage of an amendment to the Company's restated
certificate of incorporation (the "Charter Amendment"), the approval of which
requires the affirmative vote of the holders of a majority of the outstanding
shares of the Company's Common Stock and the Class B Common Stock voting
together as a single class and the vote of the holders of a majority of the
outstanding shares of the Company's Common Stock voting as a separate class. On
May 25, 1998, at the time of the execution and delivery of the Merger Agreement
and
9
<PAGE> 10
the Pulitzer Voting Agreement, the principal stockholders of the Company had
stated to the Company that they were committed to take such actions as they
deemed necessary to effectuate the Transactions, including (i), on or before the
record date for the Special Meeting of Stockholders of the Company (the "Special
Stockholders Meeting") to be called for the purpose of voting upon the Merger
and the Charter Amendment, the conversion of that number of their shares of
Class B Common Stock into shares of Common Stock as would constitute a majority
of the Company's then issued and outstanding shares of Common Stock and (ii) to
vote those shares of Common Stock at the Special Stockholders Meeting in
accordance with the provisions of the Pulitzer Voting Agreement. Based upon the
facts that existed on May 25, 1998, and continued to exist through October 21,
1998, the Company determined that it was appropriate to report the Broadcasting
Business as discontinued operations under Accounting Principles Board Opinion
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" ("APB 30"). On October 22, 1998, the principal
stockholders advised the Company that they had not converted, and did not deem
it necessary to convert on or before the record date for the Special
Stockholders Meeting, that number of shares of the Company's Class B Common
Stock as would constitute a majority of the then issued and outstanding shares
of the Company's Common Stock. Accordingly, based upon this change in facts
(i.e., even though the principal stockholders of the Company intend to vote all
their shares in favor of the Charter Amendment upon which the Spin-off and
Merger are conditioned, they alone will not be in a position at the Special
Stockholders Meeting to approve the Charter Amendment), the Company determined
that it would no longer be appropriate under APB 30 to report the Broadcasting
Business as discontinued operations in the Company's consolidated financial
statements. As a result, the Company's financial statements as of June 30, 1998
and for the three-month and six-month periods ended June 30, 1998 and 1997 have
been restated from the amounts previously reported in the Company's Quarterly
Report on Form 10-Q dated August 12, 1998 to now reflect the Broadcasting
Business as a part of continuing operations of the Company. Such restatement
results in the reclassification of amounts related to the Broadcasting Business
previously reflected as discontinued operations in the consolidated financial
statements but does not change the Company's previously reported amounts for
consolidated net income, total earnings per share and stockholders' equity.
A summary of the significant effects of the restatement is as follows:
<TABLE>
<CAPTION>
At June 30, 1998
-----------------------------
As
Previously As
Reported Restated
<S> <C> <C>
Total current assets $148,845 $204,067
Properties--net 79,500 163,573
Total intangibles and other assets 271,332 346,054
Total assets 499,677 713,694
Total current liabilities $42,503 $73,913
Long-term debt -- 172,500
Pension obligations 21,970 28,211
Postretirement and postemployment
benefit obligations 89,129 91,788
Other long-term obligations 4,204 5,411
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Total operating revenues $94,215 $160,818 $90,305 $151,398
Total operating expenses 82,421 119,649 78,789 115,064
Operating income 11,794 41,169 11,516 36,334
Income from continuing operations 6,908 22,701 7,099 19,681
Income from discontinued operations 15,793 -- 12,582 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.31 $1.02 $0.32 $0.89
Discontinued operations 0.71 -- 0.57 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.30 $1.00 $0.32 $0.88
Discontinued operations 0.70 -- 0.56 --
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
<S> <C> <C> <C> <C>
Total operating revenues $184,444 $304,217 $176,140 $287,404
Total operating expenses 163,248 236,731 154,858 226,485
Operating income 21,196 67,486 21,282 60,919
Income from continuing operations 12,679 36,666 13,329 32,176
Income from discontinued operations 23,987 -- 18,847 --
BASIC EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.57 $1.65 $0.60 $1.46
Discontinued operations 1.08 -- 0.86 --
DILUTED EARNINGS PER SHARE
OF STOCK:
Continuing operations $0.56 $1.62 $0.60 $1.44
Discontinued operations 1.06 -- 0.84 --
</TABLE>
10
<PAGE> 11
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, television and radio 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" or
"Pulitzer"), Pulitzer Inc. (a newly-organized, wholly-owned subsidiary of the
Company ("New Pulitzer")), 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 television and radio
broadcasting operations (collectively, the "Broadcasting Business") through the
merger ("Merger") of the Company into Hearst-Argyle. The Merger is subject to
the satisfaction or waiver of certain closing conditions enumerated in the
Merger Agreement. The Company's newspaper publishing and related new media
businesses will continue as New Pulitzer, which will be distributed in a
tax-free "spin-off" to the Company's stockholders (the "Spin-off") prior to the
Merger.
The Company's historical basis in its non-broadcasting assets and
liabilities will be carried over to New Pulitzer. The Merger, the Spin-off and
the related transactions will be recorded as a reverse-spin transaction, and,
accordingly, New Pulitzer'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. (See Note 2 to the consolidated financial statements included in this
Exhibit 99-3 to the Company's Current Report on Form 8-K.)
As discussed in Note 6 to the consolidated financial statements included in this
Exhibit 99-3 to the Company's Current Report on Form 8-K, the Company's
consolidated financial statements as of June 30, 1998 and for the three-month
and six-month periods ended June 30, 1998 and 1997 have been restated to reflect
the Broadcasting Business as a part of continuing operations of the Company.
Such restatement results in the reclassification of amounts related to the
Broadcasting Business previously reflected as discontinued operations in the
consolidated financial statements but does not change the Company's previously
reported amounts for consolidated net income, total earnings per share and
stockholders' equity.
11
<PAGE> 12
CONSOLIDATED
Operating revenues for the second quarter and first six months of 1998
increased 6.2 percent and 5.8 percent, respectively, compared to the
corresponding periods in the prior year. The current year increases included
gains in both publishing and broadcasting revenues.
Operating expenses, excluding the St. Louis Agency adjustment, for the
second quarter and first six months of 1998 increased 4.1 percent and 4.5
percent, respectively, compared to the corresponding periods in the prior year.
The current year increases were primarily attributable to higher overall
personnel costs ($2.8 million - second quarter and $5.7 million - year to date)
and increases in newsprint costs ($833,000 - second quarter and $2.5 million -
year to date).
Operating income for the second quarter and first six months of 1998
increased to $41.2 million (13.3 percent) and $67.5 million (10.8 percent),
respectively. The increases reflected gains in the broadcasting segment due to
higher revenues in the current year periods.
Interest income for the second quarter of 1998 increased $63,000 (6
percent) due to a slightly higher average balance of invested funds. For the
first six months of 1998, interest income declined $345,000 (13.8 percent) due
to a lower average balance of invested funds.
Interest expense declined $711,000 in the 1998 second quarter and $1.8
million in the first six months due to lower average debt levels. The Company's
average debt level for the second quarter and first six months of 1998 decreased
to $185.2 million and $185.3 million from $227.7 million and $239.9 million in
the respective periods of the prior year. The Company's average interest rate
for both the second quarter and first six months of 1998 increased to 7.5
percent from 7.3 percent in both prior year periods. The lower average debt
levels and higher average interest rates in the first half of 1998 reflected the
payment of variable rate credit agreement borrowings during the last three
quarters of 1997.
Net other expense for the second quarter and first six months of 1998
increased $646,000 and $616,000, respectively, due to a one-time charge of
$869,000 related to the sale of the Haverhill Gazette on June 1, 1998.
The effective income tax rates for the second quarter and first six
months of 1998 were 40.2 percent and 40.4 percent, respectively, compared to
40.3 percent and 40.6 percent, respectively, in the corresponding prior year
periods. The Company expects that its effective tax will be in the 40 to 41
percent range for the full year of 1998 (exclusive of any non-recurring items
related to the Spin-off and Merger).
Net income in the 1998 second quarter increased 15.3 percent to $22.7
million, or $1.00 per diluted share, compared with $19.7 million, or $0.88 per
diluted share, in the second quarter of 1997. Net income for the first six
months of 1998 increased 14 percent to $36.7 million, or $1.62 per diluted
share, compared with $32.2 million, or $1.44 per diluted share, a year ago. The
gains reflected increased operating profits for broadcasting and lower interest
expense in the current year periods.
PUBLISHING
Operating revenues for the second quarter and first six months of 1998
increased 4.3 percent and 4.7 percent, respectively, compared to the
corresponding periods in the prior year. The gains primarily reflected higher
advertising revenues.
Newspaper advertising revenues increased $3.6 million (6.2 percent) in
the second quarter and $7.4 million (6.6 percent) in the first six months of
1998 compared to the corresponding periods in the prior year. The current year
increases resulted from advertising gains at the St. Louis Post-Dispatch
("Post-Dispatch"), The Arizona Daily Star ("Star") and the Pulitzer Community
Newspaper group ("PCN"). Full run advertising volume (linage in inches)
increased 0.5 percent at the Post-Dispatch and 3.8 percent at the Star for the
second quarter of 1998. For the first half of 1998, full run advertising volume
increased 1.4 percent at the Post-Dispatch and 3.5 percent at the Star. In the
fourth quarter of 1997 and the first quarter of 1998, varying rate increases
were implemented at the Post-Dispatch, the Star and most of the PCN properties.
12
<PAGE> 13
Circulation revenues for the second quarter and first half of 1998
experienced only slight fluctuations from the corresponding periods of the prior
year, increasing 0.3 percent for the quarter and declining 0.4 percent for the
six-month period.
Other publishing revenues increased $201,000 (2 percent) in the second
quarter and $1 million (5.3 percent) in the first six months of 1998, reflecting
higher preprint revenues and Internet subscriber fees.
Operating expenses (including selling, general and administrative
expenses, and depreciation and amortization), excluding the St. Louis Agency
adjustment, for the second quarter and first six months of 1998 increased 5.1
percent and 5.7 percent, respectively, compared to the corresponding periods in
the prior year. The current year increases were attributable to higher overall
personnel costs ($1.4 million - second quarter and $3 million - year to date),
higher newsprint costs ($833,000 - second quarter and $2.5 million - year to
date), and increases in promotion costs ($528,000 - second quarter and $572,000
- - year to date).
Operating income for the second quarter of 1998 increased to $13
million (1 percent) reflecting higher advertising revenues in the current year.
For the first half of 1998, operating income declined slightly to $23.8 million
(0.8 percent) as higher newsprint and personnel costs offset advertising revenue
gains.
Fluctuations in the price of newsprint significantly impact the results
of the Company's newspaper operations, where newsprint expense accounts for
approximately 20 percent of total operating costs. For the first half of 1998,
the Company's average cost for newsprint was approximately $600 per metric ton,
compared to approximately $540 per metric ton in 1997. In the second half of
1997, the Company's average cost of newsprint was approximately $585 per metric
ton.
BROADCASTING
Broadcasting operating revenues for the second quarter and first six
months of 1998 increased 9 percent and 7.6 percent, respectively, over the
comparable 1997 periods. Local spot advertising increased 6.7 percent and 7
percent, respectively, for the second quarter and first six months of 1998, and
national spot advertising increased 13 percent and 9.7 percent, respectively,
for the second quarter and six-month period. The current year comparisons
reflect the impact of increased political advertising of approximately $4
million and $4.2 million, respectively, in the second quarter and first six
months of 1998.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) for the second
quarter of 1998 increased to $37.2 million (2.6 percent) and for the first six
months increased to $73.5 million (2.6 percent) compared to the prior year
periods. The increases were primarily attributable to higher overall personnel
costs of $1.4 million and $2.6 million for the second quarter and first six
months of 1998, respectively.
Broadcasting operating income in the 1998 second quarter increased 18.4
percent to $29.4 million and in the first six months increased 16.8 percent to
$46.3 million. The increases for both periods resulted from higher advertising
revenues.
LIQUIDITY AND CAPITAL RESOURCES
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 (the "Prudential Senior Note
Agreements"). 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 Prudential Senior Note Agreements and the FNBC Credit Agreement
require the Company to maintain certain financial ratios, place restrictions on
the payment of dividends and prohibit new borrowings, except as permitted
thereunder. Borrowings pursuant to the Prudential Senior Note
13
<PAGE> 14
Agreements will be repaid with new borrowings prior to the Merger, and the
Prudential Senior Note Agreements and FNBC Credit Agreement will be terminated.
The Company's new borrowings will be assumed by Hearst-Argyle at the time of the
Merger. Accordingly, New Pulitzer will have no long-term borrowings immediately
after the Spin-off and Merger.
As of June 30, 1998, commitments for capital expenditures were
approximately $11.6 million, relating to normal capital equipment replacements
(including Year 2000 projects in-process) and the cost of a building project for
the Louisville, Kentucky broadcasting property. Capital expenditures to be made
in fiscal 1998 are estimated to be in the range of $25 to $30 million.
Commitments for film contracts and license fees at broadcasting locations as of
June 30, 1998 were approximately $29.7 million. In addition, as of June 30,
1998, the Company had capital contribution commitments of approximately $8.2
million related to investments in two limited partnerships.
At June 30, 1998, the Company had working capital of $130.2 million and
a current ratio of 2.76 to 1. This compares to working capital of $99.3 million
and a current ratio of 2.32 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.
SPIN-OFF AND MERGER
Prior to the Spin-off and Merger (collectively referred to as the
"Transactions"), the Company intends to borrow $700 million which will provide
sufficient funds to pay the existing Company debt and the costs of the
Transactions discussed below. Pursuant to the Merger Agreement, Hearst-Argyle
will assume the new debt following the consummation of the Transactions. (See
Note 2 to the consolidated financial statements included in this Exhibit 99-3 to
the Company's Current Report on Form 8-K.)
In connection with the Transactions, the Company will incur new
borrowings, prepay existing Company debt and make several one-time payments near
the dates of the Transactions. The Company will incur a prepayment penalty
related to the prepayment of the existing borrowings under the Prudential Senior
Note Agreements. Based upon November 30, 1998 interest rates, the prepayment
penalty would be approximately $21 million. Professional fees to be incurred
related to the Transactions are estimated in the range of $37 million.
Management bonuses to be paid at the date of the Merger are estimated at
approximately $12.1 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 (946,344) and the Company's common stock market price
($81.25) as of November 30, 1998, payments to employee option holders of
approximately $44.5 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, stock 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 Transactions, a
corporate-level income tax ("Spin-off Tax") will be due. The gain is measured by
the excess, if any, of the fair market value of New Pulitzer stock distributed
by the Company to its stockholders in the Spin-off over the Company's adjusted
tax basis in such New Pulitzer stock immediately prior to the distribution. On
November 30, 1998, the fair market value of New Pulitzer stock would be
estimated as the difference between the closing price of the Company's common
stock on November 30, 1998 ($81.25) and the fair market value for the
Broadcasting Business of $51.11 per share, assuming the value ($1.15 billion)
Hearst-Argyle is exchanging for the Company's common stock (22,499,749 shares at
November 30, 1998). Using a fair market value of $30.14 (the excess of $81.25
over $51.11) per common share for the New Pulitzer stock, no gain (or tax) would
result from the Transactions because the adjusted tax basis of the New Pulitzer
stock would be
14
<PAGE> 15
approximately $34.29 per share. However, if the fair market value of the New
Pulitzer stock would exceed the adjusted tax basis of such stock at the time of
the Spin-off, the Spin-off Tax will increase by approximately $9.1 million for
each $1.00 per share that the fair market value exceeds the adjusted tax basis.
The actual gain and related income tax will depend on the fair market value and
the Company's adjusted tax basis in the New Pulitzer stock at the time of the
Spin-off.
In connection with the September 1986 purchase of Pulitzer Class B
common stock from certain selling stockholders (the "1986 Selling
Stockholders"), Pulitzer agreed, under certain circumstances, to make an
additional payment to the 1986 Selling Stockholders in the event of a Gross-Up
Transaction (as defined herein). A "Gross-Up Transaction" was defined to mean,
among other transactions, (i) any merger, in any transaction or series of
related transactions, of more than 85 percent of the voting securities or equity
of Pulitzer pursuant to which holders of Pulitzer common stock receive
securities other than Pulitzer common stock and (ii) any recapitalization,
dividend or distribution, or series of related recapitalizations, dividends or
distributions, in which holders of Pulitzer common stock receive securities
(other than Pulitzer common stock) having a Fair Market Value (as defined
herein) of not less than 33 1/3 percent of the Fair Market Value of the shares
of Pulitzer common stock immediately prior to such transaction. The amount of
the additional payment, if any, would equal (x) the product of (i) the amount by
which the Transaction Proceeds (as defined herein) exceeds the Imputed Value (as
defined herein) multiplied by (ii) the applicable percentage (i.e., 50 percent
for the period from May 13, 1996 through May 12, 2001) multiplied by (iii) the
number of shares of Pulitzer common stock issuable upon conversion of the shares
of Pulitzer Class B common stock owned by the 1986 Selling Stockholders,
adjusted for, among other things, stock dividends and stock splits; less (y) the
sum of any additional payments previously received by the 1986 Selling
Stockholders; provided, however, that in the event of any recapitalization,
dividend or distribution, the amount by which the Transaction Proceeds exceeds
the Imputed Value shall not exceed the amount paid or distributed pursuant to
such recapitalization, dividend or distribution in respect of one share of
Pulitzer common stock.
The term "Transaction Proceeds" was defined to mean, in the case of a
merger, the aggregate Fair Market Value (as defined herein) of the consideration
received pursuant thereto by the holder of one share of Pulitzer common stock,
and, in the case of a recapitalization, dividend or distribution, the aggregate
Fair Market Value of the amounts paid or distributed in respect of one share of
Pulitzer common stock plus the aggregate Fair Market Value of one share of
Pulitzer common stock following such transaction. The "Imputed Value" for one
share of Pulitzer common stock on a given date was defined to mean an amount
equal to $28.82 compounded annually from May 12, 1986 to such given date at the
rate of 15 percent per annum, the result of which is $154.19 at May 12, 1998.
There was no specific provision for adjustment of the $28.82 amount, but if it
were adjusted to reflect all stock dividends and stock splits of Pulitzer since
September 30, 1986, it would now equal $15.72, which if compounded annually from
May 12, 1986 at the rate of 15 percent per annum would 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 agreed to by a valuation firm selected by Pulitzer and a valuation
firm selected by the 1986 Selling Stockholders, or, if the two valuation firms
do not agree on the fair market value, the fair market value of such
consideration as determined by a third valuation firm 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, that may be payable by New Pulitzer 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 1986
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
Pulitzer's management, the amount of an additional payment, if any, could be
material to the consolidated financial statements of Pulitzer.
Pursuant to the Merger Agreement, New Pulitzer will indemnify
Hearst-Argyle against losses related to: (i) on an after tax basis, certain tax
liabilities, including (A) any transfer tax liability attributable to the
Spin-off, (B) with certain exceptions, any tax liability of Pulitzer or any
subsidiary of Pulitzer
15
<PAGE> 16
attributable to any tax period (or portion thereof) ending on or before the
closing date of the Merger, including tax liabilities resulting from the
Spin-off, and (C) any tax liability of New Pulitzer or any subsidiary of New
Pulitzer; (ii) liabilities and obligations under any employee benefit plans not
assumed by Hearst-Argyle; (iii) any liabilities for payments made pursuant to a
Gross-Up Transaction; and (iv) certain other matters as set forth in the Merger
Agreement.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 Issue is the result of information systems being designed
using two digits rather than four digits to define the applicable year. As the
year 2000 approaches, such information systems may be unable to accurately
process certain date-based information.
In 1995, Pulitzer began reviewing and preparing its computer systems
for the Year 2000. Generally, at Pulitzer's newspaper publishing locations, the
following categories of computer systems were identified for assessment of Year
2000 compliance: pre-press systems, press systems, post-press systems, business
systems, network systems, desktop PC systems, telecommunication systems and
building systems. Significant sub-systems within these categories which were
identified as non-compliant during the assessment phase represented aging
hardware and software which would have required replacement in the near term
irrespective of the Year 2000 Issue. Consequently, Pulitzer adopted a Year 2000
strategy which will replace its significant non-compliant systems with new
compliant systems prior to December 31, 1999.
Pulitzer's strategy for achieving Year 2000 compliance was developed
using a five phase plan as follows: (1) educate and plan; (2) assess; (3)
replace and renovate; (4) validate/test; and (5) implement. As of June 30, 1998,
Pulitzer has completed the planning and assessment phases and is in the process
of replacing, testing and implementing new compliant systems (with some systems
already implemented). Pulitzer and New Pulitzer expect to have substantially all
of the Year 2000 system changes implemented by December 31, 1998 at The Arizona
Daily Star, March 31, 1999 at the St. Louis Post-Dispatch and September 30, 1999
at the PCN properties.
Pulitzer's current estimate of capital expenditures for new hardware
and software to address Year 2000 issues, as well as to replace aging systems,
is approximately $11.6 million for its newspaper publishing locations. At June
30, 1998, approximately $5.8 million of the total capital expenditure estimate
remains to be spent through the projected implementation dates. These amounts do
not include either the internal staff costs of Pulitzer's information technology
department or the cost of minor Year 2000 system modifications, both of which
are recorded as expense in the period incurred. Year 2000 modification costs for
minor system issues are not expected to be significant. The Year 2000 related
capital expenditures have been considered in Pulitzer's normal capital budgeting
process and will be funded through operating cash flows.
In addition to addressing internal system issues, Pulitzer is
communicating with its major suppliers (including but not limited to newsprint,
ink, telecommunication services and utilities) and selected customers to obtain
assurance of their preparedness for the Year 2000. In general, questionnaires
are being used to identify potential Year 2000 issues at these third parties
which may impact Pulitzer's business operations and require a remedy.
As of June 30, 1998, Pulitzer believes that its plan for achieving Year
2000 compliance will be fully implemented by September 30, 1999 and,
consequently, the development of contingency plans for Year 2000 issues has not
been undertaken at this time. The possible need for contingency plans will be
monitored, and if necessary such plans will be developed, as Pulitzer proceeds
with the implementation of its overall Year 2000 plan.
The preceding discussion relates to Pulitzer's publishing operations
only. Pulitzer does not expect to incur significant costs to address Year 2000
issues at its broadcasting locations prior to the Merger.
16
<PAGE> 17
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.
17
<PAGE> 1
EXHIBIT 99-4
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
(November 25, 1998 as
to paragraph 3 of Note 1)
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>
JUNE 30, DECEMBER 31,
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 ACTIVITES (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)
---------- ----------------------------------------------------------------------------
Total
Additional Stockholder's
Common Common Paid-in Retained Intercompany Equity
Stock Stock Capital Earnings Balance (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 ("New
Pulitzer")), 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 and/or stock of Pulitzer
Broadcasting Company and its subsidiaries. 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 New
Pulitzer 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 New
Pulitzer 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
New Pulitzer Class B Common Stock for each share of Company Class B Common Stock
held (the "Distribution"). The Contribution and Distribution are collectively
referred to as the "Spin-off." The Spin-off and the Merger are collectively
referred to as the "Transactions."
The Company's obligation to consummate the Transactions is subject, among other
things, to the receipt of various regulatory approvals, approval of an amendment
to the restated certificate of incorporation (the "Charter Amendment") of the
Company by its stockholders and approval of the Merger by the stockholders of
both the Company and Hearst-Argyle. The Company has received a favorable letter
ruling from the Internal Revenue Service confirming that the Spin-off will be
tax-free to Pulitzer stockholders. Early termination of the initial waiting
period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has also
been granted. In addition, the Federal Communications Commission (the "FCC") has
published notice of its grant of the application for the transfer of FCC
licenses, including related waiver requests, from the Company to Hearst-Argyle.
The Company anticipates that its special stockholders meeting to consider the
Charter Amendment and the Merger will be held in January 1999 and that the
Transactions will be completed shortly after the meeting.
Following the consummation of the Spin-off and Merger, New Pulitzer will be
engaged primarily in the business of newspaper publishing. For financial
reporting purposes, New Pulitzer 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.
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 the results of
operations and cash flows for the six-month periods ended June 30, 1998 and
1997.
7
<PAGE> 8
Results of operations for interim periods are not necessarily indicative
of the results to be expected for the full year.
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 feature programs, program series and other syndicated programs over
limited license periods and are presented in the consolidated balance sheet at
the lower of unamortized cost or estimated net realizable value. The total gross
cost of each agreement is recorded as an asset and liability when the license
period begins and all of the following conditions have been met: (a) the cost of
the agreement is known or reasonably determinable, (b) the program material has
been accepted in accordance with the conditions of the license agreement and (c)
the program is available for broadcast. 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.
Program rights covering periods of less than one year are amortized on a
straight-line basis as the programs are broadcast. Program rights covering
periods greater than one year are generally amortized as a package or series
over the license period using an accelerated method. When a determination is
made that either the unamortized cost of a program exceeds its estimated net
realizable value or a program will not be used prior to the expiration of the
license agreement, appropriate adjustments are made to charge unamortized
amounts to operations.
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
8
<PAGE> 9
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.
Barter Transactions - Broadcasting's barter transactions primarily represent the
exchange of commercial air time for non-network programming. Typically, the
commercials exchanged are broadcast during the program that is received in the
barter transaction. In general, an equal amount of barter revenue and expense is
recorded at the estimated fair value of commercial air time relinquished when
the commercials are broadcast. Due to the nature of Broadcasting's barter
transactions, barter receivables and payables are not significant.
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.
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.
9
<PAGE> 10
Intercompany Balance - Balance reflects the net transactions with Pulitzer,
which are not expected to be repaid.
Pension Plans - Pulitzer sponsors various noncontributory defined benefit
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>
June 30, December 31,
1998 ------------------------
(Unaudited) 1997 1996
(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>
10
<PAGE> 11
7. LONG-TERM DEBT
Long-term debt of Pulitzer allocated to Broadcasting consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 ----------------------
(Unaudited) 1997 1996
(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.
Approximate annual maturities of long-term debt for the five years subsequent to
December 31, 1997 are:
<TABLE>
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>
11
<PAGE> 12
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>
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%, 7.5% and 7.25% at December 31, 1997, 1996 and 1995, respectively. The
expected long-term rate of return on plan assets was
12
<PAGE> 13
8.5% for 1997, 1996 and 1996. 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.
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
13
<PAGE> 14
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.
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:
<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, 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:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
Net Income:
<S> <C> <C> <C>
As reported $38,021 $40,355 $32,579
Pro forma 37,333 40,045 32,572
</TABLE>
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 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.
14
<PAGE> 15
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.
Broadcasting and its subsidiaries are involved, from time to time, in various
claims and lawsuits incidental to the ordinary course of its business, including
such maters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of such existing litigation will not have a
material adverse effect on the consolidated financial statements of Broadcasting
and its subsidiaries.
15
<PAGE> 16
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>
* * * * * *
16
<PAGE> 17
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" or
"Pulitzer"), Pulitzer Inc., (a newly-organized, wholly-owned subsidiary of the
Company ("New Pulitzer")), 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") (see Notes 1 and 2 to the Consolidated Financial Statements included
in this Exhibit 99-4 to the Company's Current Report on Form 8-K).
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.
17
<PAGE> 18
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
18
<PAGE> 19
increased 14.7 percent. The 1996 increases reflected strong Olympic-related
advertising at 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 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
19
<PAGE> 20
to $10 million. Commitments for film contracts and license fees at broadcasting
locations as of June 30, 1998 were approximately $29.7 million.
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 $21
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 99-4 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.
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.
20
<PAGE> 1
EXHIBIT 99-5
PULITZER BROADCASTING COMPANY
AND SUBSIDIARIES
TABLE OF CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Statements of Consolidated Income for each of the Nine-Month Periods
Ended September 30, 1998 and 1997
Statements of Consolidated Financial Position at September 30, 1998 and
December 31, 1997
Statements of Consolidated Cash Flows for each of the Nine-Month
Periods Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<PAGE> 2
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES - NET $53,908 $53,738 $173,681 $165,002
--------- --------- ---------- ----------
OPERATING EXPENSES:
Operations 18,268 17,513 54,313 51,502
Selling, general and administrative 13,366 13,652 41,633 41,514
Depreciation and amortization 5,461 5,938 16,512 17,622
--------- --------- ---------- ----------
Total operating expenses 37,095 37,103 112,458 110,638
--------- --------- ---------- ----------
Operating income 16,813 16,635 61,223 54,364
Interest expense (3,330) (3,854) (10,255) (12,553)
Net other income (expense) 6 3 11 8
--------- --------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 13,489 12,784 50,979 41,819
PROVISION FOR INCOME TAXES 5,273 4,998 19,918 16,344
--------- --------- ---------- ----------
NET INCOME $8,216 $7,786 $31,061 $25,475
========= ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL POSITION
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Trade accounts receivable (less allowance for
doubtful accounts of $928 and $785) $41,770 $50,880
Program rights 10,283 7,866
Prepaid expenses and other 1,405 1,260
--------------- ---------------
Total current assets 53,458 60,006
--------------- ---------------
PROPERTIES:
Land 10,254 10,163
Buildings 45,040 44,769
Machinery and equipment 138,385 135,629
Construction in progress 5,761 3,282
--------------- ---------------
Total 199,440 193,843
Less accumulated depreciation 116,634 106,826
--------------- ---------------
Properties - net 82,806 87,017
--------------- ---------------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization 96,744 102,493
Other 9,100 7,172
--------------- ---------------
Total intangible and other assets 105,844 109,665
--------------- ---------------
TOTAL $242,108 $256,688
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Trade accounts payable $4,384 $3,966
Current portion of long-term debt 12,705 12,705
Salaries, wages and commissions 4,590 4,709
Interest payable 2,088 5,677
Program contracts payable 9,846 7,907
Other 1,263 1,551
--------------- ---------------
Total current liabilities 34,876 36,515
--------------- ---------------
LONG-TERM DEBT 160,000 172,705
--------------- ---------------
PENSION OBLIGATIONS 6,590 5,544
--------------- ---------------
POSTRETIREMENT BENEFIT OBLIGATIONS 2,711 2,556
--------------- ---------------
OTHER LONG-TERM LIABILITIES 3,888 3,299
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value; 1,000 shares authorized;
issued - 100 shares 10 10
Additional paid-in capital 11,924 11,924
Retained earnings 112,670 81,609
Intercompany balance (90,561) (57,474)
--------------- ---------------
Total stockholder's equity 34,043 36,069
--------------- ---------------
TOTAL $242,108 $256,688
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $31,061 $25,475
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 10,669 11,827
Amortization 5,843 5,795
Deferred income taxes (629) (640)
Changes in assets and liabilities which
provided (used) cash:
Trade accounts receivable 9,110 2,917
Other assets (194) (974)
Trade accounts payable and other liabilities (2,386) (2,997)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 53,474 41,403
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,684) (9,551)
Purchase of broadcast assets (2,936)
Investment in limited partnership (1,000) (1,500)
---------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,684) (13,987)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (12,705) (50,705)
Net transactions with Pulitzer Publishing Company (33,085) 23,289
---------- ---------
NET CASH USED IN FINANCING ACTIVITES (45,790) (27,416)
---------- ---------
NET INCREASE IN CASH $- $-
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PULITZER BROADCASTING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 Broadcasting
Company's financial position as of September 30, 1998, results of operations for
the three-month and nine-month periods ended September 30, 1998 and 1997 and
cash flows for the nine-month periods ended September 30, 1998 and 1997. These
financial statements should be read in conjunction with the audited consolidated
financial statements of Pulitzer Broadcasting Company ("Broadcasting") and
related notes thereto contained in Exhibit 99-4 to this Pulitzer Publishing
Company (the "Company" or "Pulitzer") 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 - Broadcasting's fiscal year and third fiscal
quarter end on the Sunday coincident with or prior to December 31 and September
30, respectively. For ease of presentation, Broadcasting has used December 31 as
the year end and September 30 as the third quarter end.
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 nine-month periods ended September 30, 1998 and 1997,
Broadcasting did not incur items to be reported in "Comprehensive Income" that
were not already included in reported "net income". As a result, comprehensive
income and net income were the same for these periods.
2. 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 3.
Intercompany Balance - Balance reflects the net transactions with Pulitzer,
which are not expected to be repaid.
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
$2,863,000 and $2,767,000 for the nine months ended September 30, 1998 and 1997,
respectively. These costs are included within the Statements of Consolidated
Income.
5
<PAGE> 6
3. SPIN-OFF AND MERGER
On May 25, 1998, Pulitzer, Pulitzer Inc., (a newly-organized, wholly-owned
subsidiary of the Company ("New Pulitzer")), 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
television and radio broadcasting operations (collectively, the "Broadcasting
Business"). The Broadcasting Business consists of nine network-affiliated
television stations and five radio stations owned and operated by Pulitzer
Broadcasting Company, a wholly-owned subsidiary of the Company, and its
wholly-owned subsidiaries. The Broadcasting Business will be acquired by
Hearst-Argyle through the merger ("Merger") of the Company into Hearst-Argyle.
Prior to the Spin-off (as defined below), the Company intends to borrow $700
million, which may be secured by the assets and/or stock of Pulitzer
Broadcasting Company and its subsidiaries. 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 New Pulitzer 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 New
Pulitzer 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
New Pulitzer Class B Common Stock for each share of Company Class B Common Stock
held (the "Distribution"). The Contribution and Distribution are collectively
referred to as the "Spin-off." The Spin-off and the Merger are collectively
referred to as the "Transactions."
The Company's obligation to consummate the Transactions is subject, among other
things, to the receipt of various regulatory approvals, approval of an amendment
to the restated certificate of incorporation (the "Charter Amendment") of the
Company by its stockholders and approval of the Merger by the stockholders of
both the Company and Hearst-Argyle. The Company has received a favorable letter
ruling from the Internal Revenue Service confirming that the Spin-off will be
tax-free to Pulitzer stockholders. Early termination of the initial waiting
period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 has also
been granted. In addition, the Federal Communications Commission (the "FCC") has
published notice of its grant of the application for the transfer of FCC
licenses, including related waiver requests, from the Company to Hearst-Argyle.
The Company anticipates that its special stockholders meeting to consider the
Charter Amendment and the Merger will be held in January 1999 and that the
Transactions will be completed shortly after the Meeting.
4. COMMITMENTS AND CONTINGENCIES
At September 30, 1998, Broadcasting and its subsidiaries had construction and
equipment commitments of approximately $2,024,000. Broadcasting's commitment for
broadcasting program contracts payable and license fees at September 30, 1998
was approximately $17,908,000.
Broadcasting and its subsidiaries are involved, from time to time, in various
claims and lawsuits incidental to the ordinary course of its business, including
such maters as libel, slander and defamation actions and complaints alleging
discrimination. While the results of litigation cannot be predicted, management
believes the ultimate outcome of such existing litigation will not have a
material adverse effect on the consolidated financial statements of Broadcasting
and its subsidiaries.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this Report on Form 8-K concerning the 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 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 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" or "Pulitzer"),
Pulitzer Inc. (a newly-organized, wholly-owned subsidiary of the Company ("New
Pulitzer")), 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 television and radio broadcasting
operations (collectively, the "Broadcasting Business") through the merger
("Merger") of the Company into Hearst-Argyle. (See Note 3 to the consolidated
financial statements included in this Exhibit 99-5 to the Company's Current
Report on Form 8-K.)
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998
COMPARED WITH 1997
Broadcasting operating revenues for the third quarter and first nine
months of 1998 increased 0.3 percent and 5.3 percent, respectively, over the
comparable 1997 periods. Local spot advertising increased 2.7 percent and 5.6
percent, respectively, for the third quarter and first nine months of 1998,
while national spot advertising declined 2.1 percent for the third quarter and
increased 5.8 percent for the nine-month period. The current year comparisons
reflect the impact of increased political advertising of approximately $2.4
million and $6.6 million, respectively, in the third quarter and first nine
months of 1998.
Broadcasting operating expenses (including selling, general and
administrative expenses and depreciation and amortization) for the third quarter
of 1998 were unchanged from the prior year at $37.1 million and for the first
nine months increased 1.6 percent to $112.5 million compared to the prior year
period. The increase for the nine-month period was primarily attributable to
higher overall personnel costs
7
<PAGE> 8
of $2.9 million which were partially offset by declines in depreciation and
amortization expense of $1.1 million and promotion costs of $436,000.
Broadcasting operating income in the 1998 third quarter increased 1.1
percent to $16.8 million and in the first nine months increased 12.6 percent to
$61.2 million. The current year increases reflected higher advertising revenues
and declines in depreciation and amortization expense.
Interest expense declined $524,000 in the 1998 third quarter and $2.3
million in the first nine months due to lower average debt levels. The Company's
average debt level for the third quarter and first nine months of 1998 decreased
to $177.2 million and $182.6 million from $210.9 million and $229.6 million in
the respective periods of the prior year. The Company's average interest rate
for both the third quarter and first nine months of 1998 increased to 7.5
percent from 7.3 percent in both prior year periods. The lower average debt
levels and higher average interest rates in 1998 reflected the payment of
variable rate credit agreement borrowings during the last three quarters of
1997.
Broadcasting's effective income tax rates for the third quarter and
first nine months of 1998 were 39.1 percent, unchanged from the corresponding
periods in the prior year. The Company expects that the effective tax rate
related to broadcasting operations will be approximately 39 percent for the full
year of 1998.
Net income for the 1998 third quarter increased 5.5 percent to $8.2
million from $7.8 million in the prior year. Net income for the first nine
months of 1998 increased 21.9 percent to $31.1 million from $25.5 million a year
ago. The gains reflected a combination of revenue increases, declines in
depreciation and amortization expense and lower interest expense in the current
year periods.
LIQUIDITY AND CAPITAL RESOURCES
Pursuant to the Merger Agreement, the Company's existing long-term debt
will be repaid with new 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
September 30, 1998, was $172.7 million compared to $185.4 million at December
31, 1997. The decrease since the prior year end reflects a scheduled repayment
of $12.5 million in the third quarter of 1998. 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 September 30, 1998, Broadcasting's commitments for capital
expenditures were approximately $2 million, relating to normal capital equipment
replacements. Capital expenditures to be made in fiscal 1998 are estimated to be
in the range of $8 to $10 million. Commitments for film contracts and license
fees at broadcasting locations as of September 30, 1998 were approximately $17.9
million.
At September 30, 1998, Broadcasting had working capital of $18.6
million and a current ratio of 1.53 to 1. This compares to working capital of
$23.5 million and a current ratio of 1.64 to 1 at December 31, 1997.
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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 $21
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 3 to the Consolidated Financial Statements included in this Exhibit 99-5 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.
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.
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