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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to________________
COMMISSION FILE NUMBER 1-14541
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PULITZER INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 43-1819711
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
900 NORTH TUCKER BOULEVARD, ST. LOUIS, MISSOURI 63101
(Address of principal executive offices)
(314) 340-8000
(Registrant's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed
since last report)
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
--------------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING 8/5/02
- --------------------------- ----------------------
COMMON STOCK 9,409,748
CLASS B COMMON STOCK 11,890,242
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Second Quarter Ended Six Months Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------- --------- --------- ----------
OPERATING REVENUES:
Advertising
Retail $ 29,413 $ 30,672 $ 57,996 $ 57,787
National 5,557 7,743 11,934 13,801
Classified 32,749 34,753 62,903 69,345
--------- --------- --------- ---------
Subtotal 67,719 73,168 132,833 140,933
Preprints 13,827 11,762 25,783 22,389
--------- --------- --------- ---------
Total advertising 81,546 84,930 158,616 163,322
Circulation 19,716 20,236 40,178 40,556
Other 2,735 2,406 5,246 5,017
--------- --------- --------- ---------
Total operating revenues 103,997 107,572 204,040 208,895
--------- --------- --------- ---------
OPERATING EXPENSES:
Payroll and other personnel expenses 44,892 44,139 89,565 87,676
Newsprint expense 10,128 15,509 20,938 30,307
Depreciation 3,718 3,786 7,451 7,486
Amortization 1,107 6,527 2,217 12,926
Other expenses 28,112 28,723 54,998 55,143
--------- --------- --------- ---------
Total operating expenses 87,957 98,684 175,169 193,538
--------- --------- --------- ---------
Equity in earnings of Tucson newspaper partnership 4,749 4,613 8,998 9,178
--------- --------- --------- ---------
Operating income 20,789 13,501 37,869 24,535
Interest income 984 2,142 1,985 4,632
Interest expense (5,105) (6,179) (10,822) (12,356)
Net gain (loss) on marketable securities and (5,152) (2,342) (5,965) (2,080)
investments
Net other income (expense) 10 (63) 14 (100)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,526 7,059 23,081 14,631
PROVISION FOR INCOME TAXES 4,222 2,822 8,676 5,824
MINORITY INTEREST IN NET EARNINGS OF
SUBSIDIARY 331 171 609 423
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 6,973 4,066 13,796 8,384
(LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX 0 (84) 0 (2,247)
--------- --------- --------- ---------
NET INCOME $ 6,973 $ 3,982 $ 13,796 $ 6,137
========= ========= ========= =========
BASIC EARNINGS PER SHARE OF STOCK:
Income from continuing operations $ 0.33 $ 0.19 $ 0.65 $ 0.40
(Loss) from discontinued operations 0.00 0.00 0.00 (0.11)
--------- --------- --------- ---------
Earnings per share $ 0.33 $ 0.19 $ 0.65 $ 0.29
========= ========= ========= =========
Weighted average number of shares outstanding 21,274 21,186 21,254 21,177
========= ========= ========= =========
DILUTED EARNINGS PER SHARE OF STOCK:
Income from continuing operations $ 0.32 $ 0.19 $ 0.64 $ 0.39
2
(Loss) from discontinued operations 0.00 0.00 0.00 (0.10)
--------- --------- --------- ---------
Earnings per share $ 0.32 $ 0.19 $ 0.64 $ 0.29
========= ========= ========= =========
Weighted average number of shares outstanding 21,491 21,373 21,474 21,376
========= ========= ========= =========
See notes to consolidated financial statements.
3
PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED -- IN THOUSANDS)
Second Quarter Ended Six Months Ended
------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- --------- --------- --------
NET INCOME $ 6,973 $ 3,982 $ 13,796 $ 6,137
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gains on marketable
securities arising during the period 139 0 139 627
Reclassification adjustment 0 0 0 (398)
-------- -------- -------- --------
Other comprehensive income 139 0 139 229
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 7,112 $ 3,982 $ 13,935 $ 6,366
======== ======== ======== ========
See notes to consolidated financial statements.
4
PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED - - IN THOUSANDS)
June 30, December 30,
2002 2001
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 130,538 $ 193,739
Marketable securities 46,661 0
Trade accounts receivable (less allowance for doubtful
accounts of $6,346 and $6,024) 49,207 52,033
Inventory 4,273 5,124
Income taxes receivable 0 6,339
Prepaid expenses and other 14,637 15,301
---------- ----------
Total current assets 245,316 272,536
---------- ----------
PROPERTIES:
Land 8,191 7,741
Buildings 55,725 54,451
Machinery and equipment 147,539 145,461
Construction in progress 16,038 5,620
---------- ----------
Total 227,493 213,273
Less accumulated depreciation 113,417 105,973
---------- ----------
Properties - net 114,076 107,300
---------- ----------
INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of amortization 836,007 831,837
Restricted cash 32,310 24,810
Other 47,428 52,300
---------- ----------
Total intangible and other assets 915,745 908,947
---------- ----------
TOTAL $1,275,137 $1,288,783
========== ==========
(Continued)
5
PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED -- IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 30,
2002 2001
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 9,399 $ 10,761
Salaries, wages and commissions 12,246 13,825
Income taxes payable 8,678 0
Interest payable 3,819 4,399
Pension obligations 1,687 4,678
Acquisition payable 9,707 9,707
Dividends payable 3,725 0
Other 9,378 8,164
----------- -----------
Total current liabilities 58,639 51,534
----------- -----------
LONG-TERM DEBT 306,000 306,000
----------- -----------
PENSION OBLIGATIONS 21,197 28,132
----------- -----------
POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 76,135 89,656
----------- -----------
OTHER LONG-TERM LIABILITIES 9,220 16,224
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 100,000,000 shares authorized;
Issued and outstanding - none
Common stock, $.01 par value; 100,000,000 shares authorized;
Issued - 9,404,129 in 2002 and 9,679,738 in 2001 94 97
Class B common stock, convertible, $.01 par value; 100,000,000
Shares authorized; issued - 11,890,242 in 2002 and
13,059,077 in 2001 119 131
Additional paid-in capital 372,598 430,647
Retained earnings 433,478 430,840
Accumulated other comprehensive loss (2,343) (2,482)
----------- -----------
Total 803,946 859,233
Treasury stock - at cost; 529,004 shares of common
stock in 2001, and 1,000,000 shares of
Class B common stock in 2001 0 (61,996)
----------- -----------
Total stockholders' equity 803,946 797,237
----------- -----------
TOTAL $ 1,275,137 $ 1,288,783
=========== ===========
(Concluded)
See notes to consolidated financial statements.
6
PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- IN THOUSANDS)
Six Months Ended
---------------------------
June 30, July 1,
2002 2001
--------- ---------
CONTINUING OPERATIONS
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 13,796 $ 8,384
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation 7,451 7,486
Amortization 2,217 12,926
Gain on sale of assets, net 0 (602)
Changes in current assets and liabilities (net of the effects of the
purchase and sale of properties) which provided (used) cash
Trade accounts receivable 2,826 (2,782)
Inventory 851 1,241
Other assets (2,240) (8,793)
Trade accounts payable and other liabilities (24,073) (3,058)
Income taxes receivable/payable 15,017 1,244
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 15,845 16,046
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,347) (5,773)
Purchase of businesses, net of cash acquired (6,386) (24,739)
Purchases of marketable securities (46,511) (19,824)
Sales of marketable securities 77 145,968
Investment in joint ventures and limited partnerships (652) (4,419)
Increase in restricted cash (7,500) (7,500)
Decrease (Increase) in notes receivable 200 (170)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES (75,119) 83,543
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (7,433) (7,194)
Proceeds from exercise of stock options 2,960 1,611
Proceeds from employee stock purchase plan 689 418
Purchase of treasury stock (143) (39)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES (3,927) (5,204)
--------- ---------
CASH FROM CONTINUING OPERATIONS (63,201) 94,385
--------- ---------
DISCONTINUED OPERATIONS
Operating Activities
Loss from discontinued operations 0 (2,247)
Depreciation 0 184
Amortization 0 279
Loss on sale of newspaper assets 0 3,898
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 0 2,114
Investing Activities
Capital expenditures 0 (15)
Sale of properties 0 17,800
--------- ---------
NET CASH FROM INVESTING ACTIVITIES 0 17,785
--------- ---------
CASH FROM DISCONTINUED OPERATIONS 0 19,899
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (63,201) 114,284
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 193,739 67,447
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 130,538 $ 181,731
========= =========
7
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest paid $ 11,754 $ 12,381
Interest received (1,819) (6,319)
Income taxes 4 3,712
Income tax refunds (5,903) (70)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Increase in Dividends Payable and decrease in Retained Earnings $ 3,725 $ 3,609
See notes to consolidated financial statements.
8
PULITZER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pulitzer Inc. (the "Company") reports on a fiscal year ending the last Sunday in
the calendar year. In 2002, the Company's fiscal year began on December 31, 2001
and will end on December 29, 2002. For fiscal 2001, the Company's fiscal year
began on January 1, 2001 and ended on December 30, 2001.
Basis of Consolidation -- The consolidated financial statements include the
accounts of the Company and its subsidiary companies, all of which are
wholly-owned except for the Company's 95 percent interest in the results of
operations of the St. Louis Post-Dispatch LLC. All significant intercompany
transactions have been eliminated from the consolidated financial statements.
Revenue Recognition -- Advertising revenue is recognized when ads are published.
Circulation revenue is recognized when the newspaper is delivered to the
customer. Other revenue is recognized when the product or service has been
delivered.
Inventory Valuation -- In the first quarter of fiscal 2002, the Company changed
its method of determining the cost of newsprint inventories from the last-in,
first-out (LIFO) method to the first-in, first-out (FIFO) method. The Company
believes that the FIFO method better measures the current value of such
inventories and provides a more appropriate matching of revenues and expenses.
The effect of this change was immaterial to the financial results of the prior
reporting periods of the Company and therefore did not require retroactive
restatement of the results for those periods.
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, 2002 and July 1, 2001, the results of
operations for the three- and six-month periods ended June 30, 2002 and July 1,
2001 and cash flows for the six-month periods ended June 30, 2002 and July 1,
2001. These financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 30,
2001. Results of operations and cash flows for interim periods are not
necessarily indicative of the results to be expected for the full year.
Earnings Per Share of Stock -- Basic earnings per share of stock is computed
using the weighted average number of common and Class B common shares
outstanding during the applicable period. Diluted earnings per share of stock is
computed using the weighted average number of common and Class B common shares
outstanding and common stock equivalents (primarily outstanding stock options).
Weighted average shares used in the calculation of basic and diluted earnings
per share are summarized as follows:
Second Quarter Ended Six Months Ended
--------------------- ---------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands) (In thousands)
Weighted average shares outstanding (Basic EPS) 21,274 21,186 21,254 21,177
Common stock equivalents 217 187 220 199
------ ------ ------ ------
Weighted average shares outstanding and
common stock equivalents (Diluted EPS) 21,491 21,373 21,474 21,376
====== ====== ====== ======
Stock option equivalents included in the diluted earnings per share calculation
were determined using the treasury stock method. Under the treasury stock
method, outstanding stock options are dilutive when the average market price of
the Company's common stock exceeds the option exercise 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.
Financing Arrangements - In December 2001, the Company entered into an interest
rate swap to convert $50 million of its fixed rate interest cost to a variable
rate. In May 2002, the Company entered into a second interest rate swap to
convert an additional $100 million of its fixed rate interest cost to a variable
rate. Both swaps are designated as fair-value hedges, and the Company employs
the shortcut method which results in the offsetting of changes in the fair-value
of the swap and related debt.
9
Treasury Stock Retirement -- In May 2002, the Company retired 531,796 shares of
common stock and 1,000,000 shares of Class B common stock previously purchased
into the Treasury.
New Accounting Pronouncements -- In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations ("SFAS No. 141") and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that all business combinations be
accounted for under the purchase method. The statement further requires separate
recognition of intangible assets that meet certain criteria. The statement
applies to all business combinations initiated after June 30, 2001. The adoption
of SFAS No. 141 did not have a material impact on the results of operations,
financial position or liquidity of the Company.
Effective December 31, 2001, the Company adopted SFAS No. 142, which requires
that an intangible asset that is acquired shall be initially recognized and
measured based on its fair value. The statement also provides that goodwill and
other indefinite lived intangible assets should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to their carrying
amount.
SFAS No. 142, among other things, eliminates the amortization of goodwill and
certain identified intangible assets. The Company will test intangible assets,
including goodwill, that are not subject to amortization for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset might be impaired, using a two step impairment assessment. The first
step of the impairment test identifies potential impairment and compares the
fair value with its carrying amount, including goodwill. The Company evaluates
impairment at its St. Louis, PNI, and Tucson operating units, which are
aggregated to comprise one reportable segment, publishing. If the fair value
exceeds the carrying amount, goodwill is not considered impaired, and the second
step of the impairment test is not necessary. If the carrying amount exceeds its
fair value, the second step of the impairment test shall be performed to measure
the amount of impairment loss, if any. In accordance with the transition
provisions of SFAS No. 142, the Company has conducted the first step of
impairment tests as of January 1, 2002. The Company assessed the fair value by
considering its current cash flows, recent purchase price paid for entities
within its industry, and the Company's market capitalization. The Company's
discounted cash flow evaluation utilizes a discount rate that corresponds to the
Company's weighted average cost of capital. Given consideration of these
factors, the Company concluded that the fair value of the operating segments
exceeded the carrying amounts of its net assets and, accordingly, no impairment
loss was recognized. Subsequent impairments, if any, would be classified as an
operating expense. Subsequent impairment tests will be performed, at a minimum,
in the fourth quarter of each year, in conjunction with the Company's annual
planning process.
Upon adoption of SFAS No. 142, the transition provisions of SFAS No. 141 also
became effective. These transaction provisions specify criteria for determining
whether an acquired intangible asset should be recognized separately from
goodwill. Intangible assets that meet certain criteria will qualify for
recording on the balance sheet and will be amortized in the income statement.
Such intangible assets will be subject to a periodic impairment test based on
estimated fair value. On December 31, 2001, the Company reclassified the net
carrying value of certain intangible assets in the amount of $41 million to
goodwill. Refer to Note 4 for more information on the Company's goodwill and
other acquired intangible assets.
In 2001, the Company early adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. In accordance with the provisions of SFAS No.
144, the operations and related gains and losses on properties sold in 2001 have
been presented as discontinued operations in the accompanying consolidated
statements of income.
On April 30, 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS
145"), to update, clarify, and simplify certain existing pronouncements. The
adoption of SFAS 145 is not expected to have a material impact on the Company's
financial condition or results of operations.
Use of Estimates -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make 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 and reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates. Significant estimates utilized in preparing the
accompanying consolidated financial statements included the Company's allowance
for doubtful accounts.
10
Reclassifications -- Certain reclassifications have been made to the 2001
consolidated financial statements to conform with the presentation made in 2002.
2. TUCSON NEWSPAPER PARTNERSHIP
In Tucson, Arizona, a separate partnership, TNI Partners ("TNI"), acting as
agent for the Arizona Daily Star (the "Star", a newspaper owned by the Company)
and the Tucson Citizen (the "Citizen", a newspaper owned by Gannett Co., Inc.,
"Gannett"), 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 including the
news and editorial costs of each newspaper. Each newspaper is solely responsible
for its own news and editorial content. Net pre-tax income or loss of TNI is
allocated equally to the Star and the Citizen. The Company's 50 percent share of
TNI's operating results is presented as a single component of operating income
in the accompanying consolidated statements of income.
Summarized financial information for TNI is as follows:
June 30, December 30,
2002 2001
--------- ------------
(in thousands)
Current assets $11,356 $15,188
Current liabilities $ 7,538 $ 8,917
Partners' equity $ 3,818 $ 6,271
Second Quarter Ended Six Months Ended
-------------------------- --------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- --------- ---------- ----------
(In thousands) (In thousands)
Operating revenues $25,758 $26,878 $52,096 $55,218
Operating income $ 9,498 $ 9,226 $17,996 $18,356
The Company's share of $ 4,749 $ 4,613 $ 8,998 $ 9,178
Operating income
3. ACQUISITION AND DISPOSITION OF PROPERTIES
In the second quarter and the first six-months of 2001, the Company recorded a
net loss of $0.1 million and $2.2 million, respectively, related to the
operation of its daily newspaper located in Petaluma, California, and the
operation and sale of its St. Louis Internet Access Provider (ISP) business and
its newspaper property in Troy, Ohio (the "Sale Transactions"). These amounts
are included in 2001 net income as a separate line, "Loss from Discontinued
Operations, Net of Tax."
On January 31, 2001, the Company, through Pulitzer Newspapers, Inc. ("PNI") and
its wholly owned subsidiaries, (collectively, the "PNI Group"), acquired, in an
asset purchase, The Lompoc Record, a daily newspaper located in Lompoc,
California. In addition, during the first six months of 2001, the PNI Group
acquired several weekly newspapers (in separate transactions) that complement
its daily newspapers in several markets. These acquisitions are collectively
referred to as the "PNI Acquisitions." Pro forma results for the 2001 PNI
Acquisitions and other miscellaneous acquisitions have not been provided because
the impact is not significant to the Company's consolidated operations or
financial position.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
On December 31, 2001, the Company adopted SFAS No. 142 and the transition
provisions of SFAS No. 141, as discussed in more detail in Note 1. As a result,
the Company ceased amortizing goodwill and reclassified the December 30, 2001
carrying value of certain intangible assets to goodwill. Changes in the
11
carrying amounts of goodwill and intangible assets for the Company for the six
months ended June 30, 2002 were as follows:
(In thousands)
GOODWILL INTANGIBLE ASSETS
--------- -----------------
Balance at December 30, 2001 $ 748,569 $ 83,268
Intangible assets reclassified to goodwill 41,034 (41,034)
Additions during the period 6,385 0
Amortization expense 0 (2,215)
--------- --------
Balance at June 30, 2002 $ 795,988 $ 40,019
========= ========
As required by SFAS No. 142, the results for the prior year's second quarter and
first six months have not been restated. The reconciliation of reported net
income and EPS to adjusted net income for the quarter and six months ended June
30, 2002 and July 1, 2001 was as follows:
SECOND QUARTER ENDED SIX MONTHS ENDED
(In thousands, except share data) ------------------------------- -------------------------------
JUNE 30, 2002 JULY 1, 2001 JUNE 30, 2002 JULY 1, 2001
------------- ------------ ------------- ------------
Reported net income $6,973 $3,982 $13,796 $6,137
Add back: goodwill amortization 0 3,405 0 6,798
Add back: intangible asset amortization
reclassed to goodwill 0 272 0 491
------ ------ ------- -------
Adjusted net income $6,973 $7,659 $13,796 $13,426
====== ====== ======= =======
Basic EPS:
Reported net income per share $0.33 $0.19 $0.65 $0.29
Add back: goodwill amortization 0 0.16 0 0.32
Add back: intangible asset amortization
reclassed to goodwill 0 0.01 0 0.02
------ ------ ------- -------
Adjusted net income per basic share $0.33 $0.36 $0.65 $0.63
====== ====== ======= =======
Diluted EPS:
Reported net income per share $0.32 $0.19 $0.64 $0.29
Add back: goodwill amortization 0 0.16 0 0.32
Add back: intangible asset amortization
reclassed to goodwill 0 0.01 0 0.02
------ ------ ------- -------
Adjusted net income per diluted share $0.32 $0.36 $0.64 $0.63
====== ====== ======= =======
Other intangible assets at June 30, 2002 and December 30, 2001 were as
follows:
(In thousands)
ACCUMULATED NET
COST AMORTIZATION COST
---------- ------------- --------
June 30, 2002
Other intangible assets:
Advertising base $ 31,816 $ 5,174 $ 26,642
Subscriber lists 22,024 10,075 11,949
Non-compete agreements and other 3,278 1,850 1,428
-------- -------- --------
Total other intangible assets $ 57,118 $ 17,099 $ 40,019
======== ======== ========
December 30, 2001
Other intangible assets:
Advertising base 31,816 4,416 27,400
Subscriber lists 22,024 8,762 13,262
Non-compete agreements and other 46,714 4,108 42,606
--------- -------- --------
Total other intangible assets $ 100,554 $ 17,286 $ 83,268
========= ======== ========
Pretax amortization expense of other intangible assets for the second
quarter and six months ended June 30, 2002 was $1.1 million and $2.2
million, respectively, and over the next five years is estimated to be:
$4.4 million per year from 2002 through 2004, $4.3 million for 2005, and
$4.1 million for 2006.
12
5. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS
As of June 30, 2002, the Company and its subsidiaries had construction and
equipment commitments of approximately $18.1 million.
INVESTMENT COMMITMENTS
As of June 30, 2002, the Company had an unfunded capital contribution commitment
related to a limited partnership in which it is an investor of approximately
$10.1 million.
TAX CONTINGENCY
Pursuant to an Amended and Restated Agreement and Plan of Merger, dated as of
May 25, 1998 (the "Merger Agreement"), by and among Pulitzer Publishing Company
("Old Pulitzer"), the Company and Hearst-Argyle Television, Inc.
("Hearst-Argyle") on March 18, 1999, Hearst-Argyle acquired, through the merger
(the "Merger") of Old Pulitzer with and into Hearst-Argyle, Old Pulitzer's
television and radio broadcasting operations (collectively, the "Broadcasting
Business") in exchange for the issuance to Old Pulitzer's stockholders of
37,096,774 shares of Hearst-Argyle's Series A common stock. Old Pulitzer's
Broadcasting Business consisted of nine network-affiliated television stations
and five radio stations owned and operated by Pulitzer Broadcasting Company and
its wholly-owned subsidiaries. Prior to the Merger, Old Pulitzer's newspaper
publishing and related new media businesses were contributed to the Company in a
tax-free "spin-off" to Old Pulitzer stockholders (the "Spin-off"). The Merger
and Spin-off are collectively referred to as the "Broadcast Transaction."
In October, 2001, the Internal Revenue Service ("IRS") formally proposed that
Old Pulitzer's taxable income for the tax year ended March 18, 1999 be increased
by approximately $80.4 million based on the assertion that Old Pulitzer was
required to recognize a taxable gain in that amount as a result of the Spin-off.
The Company is obligated under the Merger Agreement to indemnify Hearst-Argyle
against any tax liability attributable to the Spin-off and has the right to
control any proceedings relating to the determination of such tax liability.
The Company does not believe that Old Pulitzer realized any taxable gain in
connection with the Spin-off and has contested the IRS' proposed increase in a
formal written protest filed with the Appeals Office of the IRS in January,
2002. While there can be no assurance that the Company will completely prevail
in its position, it believes that the IRS' position is not supported by the
facts or applicable legal authorities and intends to vigorously contest the IRS'
determination. It thus has not accrued any liability in connection with this
matter. If the IRS were completely successful in its proposed adjustment, the
Company's indemnification obligation would be approximately $29.3 million, plus
applicable interest, and any indemnification payment would be recorded as an
adjustment to additional paid-in capital.
PD LLC OPERATING AGREEMENT CONTINGENCY
On May 1, 2000, the Company and The Herald Company, Inc. ("Herald") completed
the transfer of their respective interests in the assets and operations of the
Post-Dispatch and certain related businesses to a new joint venture (the
"Venture"), known as PD LLC. The Company controls and manages PD LLC. Under the
terms of the operating agreement governing PD LLC (the "Operating Agreement"),
the Company holds a 95 percent interest in the results of operations of PD LLC
and Herald holds a 5 percent interest. Herald's 5 percent interest is reported
as "Minority Interest in Net Earnings of Subsidiary" in the consolidated
statements of income for 2002 and 2001. Also, under the terms of the Operating
Agreement, Herald received on May 1, 2000 a cash distribution of $306 million
from PD LLC. This distribution was financed by a $306 million borrowing by PD
LLC ("Loan"). The Company's entry into the Venture was treated as a purchase for
accounting purposes.
During the first ten years of its term, PD LLC is restricted from making
distributions (except under specified circumstances), capital expenditures and
member loan repayments unless it has set aside out of its cash flow a reserve
equal to the product of $15 million and the number of years since May 1, 2000,
but not in excess of $150 million. On May 1, 2010, Herald will have a one-time
right to require PD LLC to redeem
13
Herald's interest in PD LLC, together with Herald's interest, if any, in another
limited liability company in which the Company is the managing member and which
is engaged in the business of delivering publications and products in the
greater St. Louis metropolitan area ("DS LLC"). The redemption price for
Herald's interest will be determined pursuant to a formula yielding an amount
which will result in the present value to May 1, 2000 of the after-tax cash
flows to Herald (based on certain assumptions) from PD LLC, including the
initial distribution and the special distribution described below, if any, and
from DS LLC, being equal to $275 million. In the event that PD LLC has an
increase in the tax basis of its assets as a result of Herald's recognizing
taxable income from certain transactions effected under the agreement governing
the contributions of the Company and Herald to PD LLC and the Operating
Agreement or from the transactions effected in connection with the organization
of DS LLC, Herald generally will be entitled to receive a special distribution
from PD LLC in an amount that corresponds, approximately, to the present value
after-tax benefit to the members of PD LLC of the tax basis increase. Upon the
termination of PD LLC and DS LLC, which will be on May 1, 2015 (unless Herald
exercises the redemption right described above), Herald will be entitled to the
liquidation value of its interest in PD LLC and DS LLC. The Company may purchase
Herald's interest at that time for an amount equal to what Herald would be
entitled to receive on liquidation of PD LLC and DS LLC. That amount will be
equal to the amount of its capital accounts, after allocating the gain or loss
that would result from a cash sale of PD LLC's and DS LLC's assets for their
fair market value at that time. Herald's share of such gain or loss generally
will be 5 percent, but will be reduced (but not below 1 percent) to the extent
that the present value to May 1, 2000 of the after-tax cash flows to Herald from
PD LLC and from DS LLC, including the initial distribution, the special
distribution described above, if any, and the liquidation amount (based on
certain assumptions), exceeds $325 million.
LEGAL CONTINGENCIES
In February, 1998, a group of independent newspaper dealers engaged in the
business of reselling the St. Louis Post-Dispatch in vending machines and to
retail establishments filed suit against the Company in the Missouri Circuit
Court, Twenty-Second Judicial Circuit (St. Louis City). The court has dismissed
four of the six counts in the suit. In the remaining counts, the plaintiffs
allege that the Company's actions have tortiously interfered with their business
expectancy of being able to sell their branches and constituted malicious
trespass on their intangible property by, among other things, allegedly reducing
the value of their routes. The plaintiffs seek punitive damages with respect to
the tortious interference count and statutory double damages if they should
prevail on the malicious interference count. The plaintiffs cite as harmful acts
the Company's purchase of various home delivery routes and branches, the
Company's home subscription pricing compared to its single copy pricing, and
allegedly more favorable rates, fees and allowances that the Company provides to
its carriers and other branch dealers. The Company has denied any liability, is
vigorously defending the suit and believes that it has meritorious defenses.
While the ultimate outcome of litigation cannot be predicted with certainty,
management, based on its understanding of the facts, does not believe the
ultimate resolution of these matters will have a materially adverse effect on
the Company's consolidated financial condition. However, depending upon the
period of resolution, such effects could be material to the consolidated
financial results of an individual period.
The Company has been involved, from time to time, in various claims and lawsuits
incidental to the ordinary course of its business, including such matters as
libel, slander and defamation actions, complaints alleging discrimination, and
product distribution practices. While the ultimate outcome of litigation cannot
be predicted with certainty, management, based on its understanding of the
facts, does not believe the ultimate resolution of these matters will have a
materially adverse effect on the Company's consolidated financial condition or
results of operations.
6. OPERATING REVENUES
The Company's consolidated operating revenues consist of the following:
Second Quarter Ended Six Months Ended
------------------------ ------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------- -------- -------- --------
(In thousands) (in thousands)
Combined St. Louis operations $ 74,129 $ 78,173 $146,598 $152,780
Pulitzer Newspapers, Inc. 29,868 29,399 57,442 56,115
-------- -------- -------- --------
Total $103,997 $107,572 $204,040 $208,895
======== ======== ======== ========
14
* * * * * *
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Quarterly Report on Form 10-Q concerning the Company's
business outlook or future economic performance, anticipated profitability,
revenues, expenses or other financial items, together with other statements that
are not historical facts, are "forward-looking statements" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and other 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 (including newsprint), capital or similar
requirements, and general economic conditions, any of which may impact
advertising and circulation revenues and various types of expenses, as well as
other risks detailed in the Company's filings with the Securities and Exchange
Commission including this Quarterly Report on Form 10-Q. Although the Company
believes that the expectations reflected in forward-looking statements are
reasonable, it cannot guarantee future results, levels of activity, performance
or achievements.
GENERAL
Pulitzer Inc. (together with its subsidiaries, the "Company") is a newspaper
publishing company with related Internet operations in 14 markets, the largest
of which is St. Louis, Missouri. For the second quarter and first six-months of
2002, the Company's combined St. Louis operations contributed approximately 63
percent of total revenue including revenue associated with the Company's
operations in Tucson, Arizona.
Pulitzer Inc. is the successor to the company founded by the first Joseph
Pulitzer in 1878 to publish the original St. Louis Post-Dispatch (the
"Post-Dispatch"). The Company and its predecessors have operated continuously
since 1878 under the direction of the Pulitzer family. Michael E. Pulitzer, a
grandson of the founder, currently serves as Chairman of the Board of the
Company.
The Company is engaged in newspaper publishing and related "new media"
businesses. Its newspaper operations include operations in St. Louis, Missouri,
where the Company publishes the Post-Dispatch, the only major daily newspaper
serving the greater St. Louis metropolitan area, and the Suburban Journals, a
group of 37 weekly newspapers and niche publications that provide comprehensive
community-oriented local news packages to the communities that they serve, and
in Tucson, Arizona, where the Company publishes the Arizona Daily Star (the
"Star"). In Tucson, the Company shares, on an equal basis, the combined results
of the Star and the Tucson Citizen, published by Gannett Co., Inc ("Gannett").
The Company's St. Louis and Tucson newspapers have weekly "total market
coverage" publications that provide advertisers with market saturation, and both
offer alternative delivery systems that provide advertisers with either targeted
or total market coverage.
The Company owns and operates electronic news, information and communication Web
sites in each of its markets, including STLtoday.com, the preeminent local
Internet site in St. Louis, and, in partnership with Gannett, AZStarnet.com, one
of Tucson's leading local Internet sites.
The Company's operating revenues are significantly influenced by a number of
factors, including overall advertising expenditures, the appeal of newspapers in
comparison to other forms of advertising, the performance of the Company in
comparison to its competitors in specific markets, the strength of the national
economy and general economic conditions and population growth in the markets
served by the Company.
The Company's business tends to be seasonal, with peak revenues and profits
generally occurring in the fourth and, to a lesser extent, second quarters of
each year as a result of increased advertising activity during the Christmas and
spring holiday periods. The first quarter is historically the weakest quarter
for revenues and profits.
16
ACQUISITION AND DISPOSITION OF PROPERTIES
In the second quarter and the first six-months of 2001, the Company recorded a
net loss of $0.1 million and $2.2 million, respectively, related to the
operation of its daily newspaper located in Petaluma, California, and the
operation and sale of its St. Louis Internet Access Provider (ISP) business and
its newspaper property in Troy, Ohio (the "Sale Transactions"). These amounts
are included in 2001 net income as a separate line, "Loss from Discontinued
Operations, Net of Tax."
On January 31, 2001, the Company, through PNI, acquired, in an asset purchase,
The Lompoc Record, a daily newspaper located in Lompoc, California. In addition,
during the first six months of 2001, the PNI Group acquired several weekly
newspapers (in separate transactions) that complement its daily newspapers in
several markets. These acquisitions are collectively referred to as the "PNI
Acquisitions."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
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 and reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
Significant estimates utilized in preparing the accompanying consolidated
financial statements include the Company's allowance for uncollectible accounts
receivable relating to acquisitions made in St. Louis. Historical payment data
(prior to the acquisitions) is not available and, therefore, estimates used by
management to evaluate collectibility are based on the data available and recent
collection history. It is possible that reported results could be different
based upon changes in economic conditions which could negatively impact the
creditors ability to pay.
Effective January 1, 2002, the Company adopted SFAS No. 142, which requires that
an intangible asset that is acquired shall be initially recognized and measured
based on its fair value. The statement also provides that goodwill and other
indefinite lived intangible assets should not be amortized, but shall be tested
for impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of their fair value to their carrying amount.
SECOND QUARTER ENDED JUNE 30, 2002 COMPARED WITH 2001
SUMMARY
Second quarter 2002 net income was $7.0 million, or $0.32 per diluted share,
compared to $4.0 million, or $0.19 per diluted share, in the prior year. Second
quarter 2001 earnings included results from newspapers in Troy, Ohio and
Petaluma, California, and the St. Louis Internet service provider (ISP)
business, all of which were sold by the Company in fiscal 2001. Excluding
results of the businesses sold in 2001 and the related gain or loss from their
sale, second quarter 2001 earnings from continuing operations were $4.1 million,
or $0.19 per diluted share.
Second quarter 2002 operating income increased to $20.8 million for the second
quarter of 2002 from $13.5 million in the prior year. The increase in operating
income was due principally to the elimination of $5.4 million of amortization of
certain intangible assets in 2002, and $5.4 million from lower newsprint costs,
principally resulting from a 30.5 percent reduction in the price per metric ton
of newsprint compared to the second quarter of 2001. These expense savings were
partially offset by increased employee benefit costs and an increased provision
for uncollectible accounts receivable principally relating to Kmart and
circulation route acquisitions in St. Louis.
REVENUE
Revenues from continuing operations for the quarter ended June 30, 2002
decreased by 3.3 percent, to $104.0 million from $107.6 million in 2001. The
decrease reflects continued weakness in classified revenues, particularly in the
help wanted category. These revenue decreases were partially offset by growth in
retail results in St. Louis and at the PNI Group, particularly in the preprint
category. On a comparable basis, excluding the results of properties acquired in
2001 for comparable non-ownership periods, revenues for the second quarter of
2002 decreased 3.6 percent.
17
Second quarter advertising revenues decreased by 4.0 percent, to $81.6 million
from $84.9 million in 2001. On a comparable basis, excluding the results of
properties acquired in 2001 for comparable non-ownership periods, advertising
revenues for the second quarter declined by 4.0 percent, reflecting weakness in
classified, particularly help wanted, advertising For the second quarter of
2002, help wanted advertising revenue at the St. Louis Post-Dispatch and PNI was
down 20.2 and 11.7 percent, respectively, compared to declines of 34.7 and 18.5
percent, respectively, in the first quarter of 2002.
OPERATING EXPENSE
Total operating expenses decreased 10.9 percent to $88.0 million for the second
quarter of 2002 from $98.7 million in 2001. Expenses were lower for two
principal reasons: the absence of $5.4 million in amortization expense due to
the elimination of amortization of certain intangible assets in 2002 in accord
with SFAS No.142 and lower newsprint pricing and volume, which resulted in
newsprint expense savings of $5.4 million or 34.7 percent, largely on the
strength of a 30.5 percent reduction in price.
In addition, other operating expenses, which consist of distribution, employment
termination inducements, legal and professional fees, news and editorial
features and wire services, office and production supplies, promotion and
marketing, provisions for uncollectible accounts receivable, repairs and
maintenance, telecommunication and utility, and sundry expenses, decreased by
$0.6 million principally due to reductions in promotion spending and lower
employment termination inducement costs, partially offset by increases in the
allowance for uncollectible accounts receivable.
On a comparable basis, excluding the results of properties acquired in 2001 for
comparable non-ownership periods, amortization of certain intangible assets in
2001 not present in 2002, and employment termination inducement costs for
positions permanently eliminated, operating expenses decreased by 4.6 percent.
In the second quarter of 2002, the Company benefited from reductions in both
wage costs, which decreased 2.6 percent on a comparable basis, and lower
newsprint costs. These expense savings were partially offset by increased
employee benefit costs, which rose 14.2 percent, and a $1.3 million increase in
the provision for uncollectible accounts receivable associated with Kmart and
circulation route acquisitions. Combined Company 2002 second quarter average
employment levels, including the Company's 50% interest in TNI, declined by 1.2
percent from 2001.
Equity in the earnings of TNI for the second quarter of 2002 increased 2.9
percent to $4.7 million from $4.6 million in 2001. The increase resulted
primarily from a 7.9 percent decrease in operating expenses, driven by lower
newsprint pricing, partially offset by lower advertising revenue, particularly
in the national and classified help-wanted categories. For the second quarter of
2002, help wanted advertising revenue in Tucson was down 21.8 percent from the
prior year compared to a year-over-year decrease of 31.9 percent for the first
quarter of 2002.
OPERATING INCOME
For the second quarter of 2002, the Company reported operating income from
continuing operations of $20.8 million compared to $13.5 million in the prior
year quarter. The increase in 2002 second-quarter operating income was due
principally to the elimination of $5.4 million of amortization of certain
intangible assets in 2002, and $5.4 million from lower newsprint costs,
principally resulting from a 30.5 percent reduction in the price per metric ton
of newsprint compared to the second quarter of 2001. These expense savings were
partially offset by increased employee benefit costs and provisions for
uncollectible accounts receivable relating to Kmart and circulation routes
acquisitions in St. Louis.
On a comparable basis, excluding the results of properties acquired in 2001 for
comparable non-ownership periods, amortization of certain intangible assets in
2001 not present in 2002, and employment termination inducements for positions
permanently eliminated, operating income increased by 2.7 percent.
NON-OPERATING ITEMS
Interest income for the second quarter of 2002 decreased to $1.0 million from
$2.1 million in the prior year quarter. This decline resulted, principally, from
lower average interest rates and a $13.9 million average quarterly decrease in
funds invested.
The Company reported interest expense of $5.1 million in the second quarter of
2002 compared to $6.2 million for the second quarter of 2001. The 2002 to 2001
expense decrease reflects the benefit from fixed-to-
18
variable interest rate swaps and the capitalization of interest costs associated
with the St. Louis production facility.
The Company reported a loss on marketable securities and investments of $5.2
million in the second quarter of 2002 compared with a loss of $2.3 million in
the prior year quarter. The current quarter loss resulted from an adjustment to
the carrying value of several non-operating investments. The prior year loss was
due to a $2.0 million write-off of a non-operating investment and a $0.3 million
loss on marketable securities and a joint venture.
The effective income tax rate for the second quarter of 2002 was 37.7 percent
compared with a rate of 41.0 percent in the prior year. The lower effective tax
rate in the second quarter of 2002 resulted primarily from the receipt of state
income tax refunds and the absence of nondeductible goodwill amortization in
2002.
INCOME FROM CONTINUING OPERATIONS
The Company reported income from continuing operations of $7.0 million, or $0.32
per diluted share for the second quarter of 2002, compared with income of $4.0
million, or $0.19 per diluted share in 2001. The increase in 2002 income from
continuing operations primarily reflected decreased operating expenses from
lower newsprint costs and the absence of $5.4 million due to the elimination of
amortization of certain intangible assets in 2002. These expense savings were
partially offset by a $3.6 million decline in operating revenue, principally due
to lower national revenue and continued weakness in help wanted classified.
DISCONTINUED OPERATIONS
The Company reported no discontinued operations impact during the first quarter
of 2002 compared to a loss of $0.1 million, or ($0.00) per diluted share, in
2001. The 2001 $0.1 million loss is related to the Company's operation of its
daily newspaper located in Petaluma, California, and the sale and operation of
it newspaper in Troy, Ohio and its St. Louis Internet Access Provider (ISP)
business.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH 2001
SUMMARY
Net income for the first six months of 2002 was $13.8 million, or $0.64 per
diluted share, compared to $6.1 million, or $0.29 per diluted share, in the
prior year. Earnings for the first six months of 2001 included results from
newspapers in Troy, Ohio and Petaluma, California, and the St. Louis Internet
service provider (ISP) business, all of which were sold by the Company in fiscal
2001. Excluding these results, earnings from continuing operations for the first
six months of 2001 were $8.4 million, or $0.39 per diluted share.
Operating income for the first six months of 2002 increased to $37.9 million
from $24.5 million in the prior year. The increase in operating income was due
principally to the elimination of $10.7 million of amortization of certain
intangible assets in 2002 in accord with FAS No. 142, and a $9.4 million
reduction in newsprint costs, including a 25.9 percent reduction in the price
per metric ton of newsprint compared to the first half of 2001. These expense
savings were partially mitigated by lower operating revenues, particularly in
the national and classified help wanted categories, increased employee benefit
costs, and an increased bad debt provision, principally related to Kmart and St.
Louis circulation route acquisitions.
REVENUE
Revenues from continuing operations for the six-month period ended June 30, 2002
decreased 2.3 percent, to $204.0 million from $208.9 million in 2001. The
decrease primarily reflected continued weakness in classified revenues,
particularly in the help wanted category, and tough, April and May national
advertising comparisons in St. Louis. These revenue decreases were partially
offset by retail, including preprint, results in St. Louis and at the PNI Group.
On a comparable basis, excluding the results of properties acquired in 2001 for
comparable non-ownership periods, revenues for the first six months of 2002
decreased 2.8 percent.
Advertising revenues for the first six months of 2002 decreased by 2.9 percent,
to $158.6 million from $163.3 million in 2001. On a comparable basis, excluding
the results of properties acquired in 2001 for comparable non-ownership periods,
advertising revenues for the first six months declined by 3.2 percent,
reflecting weakness in classified, particularly help wanted, advertising.
19
Help wanted advertising revenue at the Post-Dispatch and PNI was down 20.2 and
11.7 percent, respectively, compared to declines of 34.7 and 18.5 percent,
respectively, in the first quarter of 2002.
OPERATING EXPENSE
Operating expenses decreased 9.5 percent to $175.2 million for the first six
months of 2002 from $193.5 million in 2001. Payroll and other personnel expenses
for the first six months of 2002 increased by 2.2 percent due to higher employee
benefits costs, which increased by 15.2 percent compared to 2001. These
increases were partially offset by salary and wage expense savings driven by a
2.2 percent reduction in 2002 average employment levels compared to 2001.
Newsprint expense for the first six months of 2001 decreased by $9.4 million, or
30.9 percent, principally associated with a newsprint price decrease of 25.9
percent. Amortization and depreciation expenses for the first six months of 2002
were lower due to the absence of $10.7 million in amortization expense resulting
from the elimination of amortization of certain intangible assets in 2002 in
accord with SFAS No. 142. Other operating expense decreased 0.3 percent in the
first six months of 2002 due to lower promotional spending and a decrease in
employment termination inducements in 2002, offset by increases in the provision
for uncollectible accounts receivable.
On a comparable basis, excluding the results of properties acquired in 2001 for
comparable non-ownership periods, amortization of certain intangible assets in
2001 not present in 2002, and employment termination inducement costs for
positions permanently eliminated, operating expenses decreased by 4.0 percent
from 2001. In the first six months of 2002, the Company benefited from
reductions in both compensation costs, which decreased 2.5 percent on a
comparable basis, and lower newsprint costs. These expense savings were
partially offset by increased employee benefit costs, which increased by 14.9
percent, and a higher Kmart and circulation route acquisition provision for
uncollectible receivables. Average six month employment levels, including the
Company's 50% interest in the TNI, declined by 2.2 percent, or 89 full time
equivalent employees, from the first six months of 2001.
Equity in the earnings of TNI for the first half of 2002 decreased by 2.0
percent to $9.0 million from $9.2 million in 2001. The decrease was caused by a
5.7 percent decrease in operating revenues, partially mitigated by lower
operating expense, principally newsprint, which declined by 26.3 percent due to
lower newsprint pricing.
OPERATING INCOME
For the first half of 2002, the Company reported operating income from
continuing operations of $37.9 million compared to $24.5 million in the prior
year. The increase in operating income for the first-half of 2002 resulted from
a decrease in operating expense, principally due to lower newsprint expense and
the absence of $10.7 million of amortization on certain intangible assets in
2002 in accord with FAS No. 142. These expense savings were partially offset by
a 2.3 percent decrease in operating revenue.
On a comparable basis, excluding the results of properties acquired in 2001 for
comparable non-ownership periods, amortization of certain intangible assets in
2001 not present in 2002, and employment termination inducements for positions
permanently eliminated, operating income increased by 5.2 percent from 2001.
NON-OPERATING ITEMS
Interest income for the first half of 2002 decreased to $2.0 million from $4.6
million in the prior year. This decline resulted, principally, from lower
average interest rates and a $2.6 million decrease in average funds invested.
The Company reported interest expense of $10.8 million in the first half of 2002
compared to $12.4 million in 2001. Interest expense declined due to the effects
of the two fixed-to-variable interest rate swap contracts that the Company
entered into in December 2001 and May 2002. Interest expense was further reduced
by $0.4 million due to capitalized interest cost related to the Company's St.
Louis distribution center expansion.
The Company reported a loss on marketable securities and investments of $6.0
million in the first half of 2002 compared with a net loss of $2.1 million in
the prior year. The 2002 first half loss resulted from an adjustment to the
carrying value of several non-operating investments. The prior year loss was due
to a $2.1 million write-off of two non-operating investments and a $0.6 million
loss on joint ventures, partially offset by a $0.6 million net gain on the sale
of marketable securities.
20
The effective income tax rate for the first half of 2002 was 38.6 percent
compared with a rate of 41.0 percent in the prior year. The lower effective tax
rate in the first half of 2002 resulted primarily from the receipt of state
income tax refunds during the second quarter of 2002 and the absence of
nondeductible goodwill amortization in 2002.
INCOME FROM CONTINUING OPERATIONS
The Company reported income from continuing operations of $13.8 million, or
$0.64 per diluted share for the first half of 2002, compared with income from
continuing operations of $8.4 million, or $0.39 per diluted share in 2001. The
increase in 2002 income from continuing operations primarily reflected decreased
operating expenses due to lower newsprint costs and the absence of $10.7 million
in amortization costs resulting from to the elimination of amortization of
certain intangible assets in 2002. These expense reductions were partially
offset by a $4.9 million decline in operating revenues, principally due to lower
national revenue and continued weakness in help wanted classified.
DISCONTINUED OPERATIONS
The Company reported no discontinued operations impact during the first half of
2002 compared to a net loss of $2.2 million, or ($0.10) per diluted share, in
2001. The 2001 $2.2 million loss was related to the Company's operation of its
daily newspaper located in Petaluma, California, and the operation and sale of
the Company's newspaper in Troy, Ohio, and its ISP business. These amounts are
included in 2001 net income as a separate line, "Loss on Discontinued
Operations, Net of Tax."
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had an unrestricted cash and marketable
securities balance of $177.2 million compared with a unrestricted cash balance
of $193.7 million as of December 30, 2001. The decrease resulted from,
principally, the funding of certain employee benefit obligations, capital
project spending, the largest of which was for the expanded production
facilities in St. Louis, restricted cash requirements under the Company's debt
covenants, and the purchase of businesses in St. Louis.
At both June 30, 2002 and December 30, 2001, the Company had $306 million of
outstanding debt pursuant to a loan agreement between St. Louis Post-Dispatch
LLC ("PD LLC") and a group of institutional lenders led by Prudential Capital
Group (the "Loan"). The aggregate principal amount of the Loan is payable on
April 28, 2009 and bears interest at an annual rate of 8.05 percent.
In December 2001, the Company entered into an interest rate swap contract to
convert $50 million of the Company's fixed rate cost to a variable rate. In May
2002, the Company entered into a second interest rate swap contract to convert
an additional $100 million of the Company's fixed rate cost to a variable rate.
The interest rate swaps have respective $50 million and $100 million notional
amounts. Both swap contracts mature on April 28, 2009. The floating interest
rates re-price semiannually. The combined impact of the two interest rate swaps
resulted in approximately 49 percent of the Company's long-term interest cost
being subject to variable interest rates.
The agreements with respect to the Loan (the "Loan Agreements") contain certain
covenants and conditions including the maintenance of cash flow and various
other financial ratios, minimum net worth requirements and limitations on the
incurrence of other debt. In addition, the Loan Agreements and the PD LLC
Operating Agreement require that PD LLC maintain a minimum reserve balance
consisting of cash and investments in U.S. government securities, totaling
approximately $32.3 million as of June 30, 2002. The Loan Agreements and the
Operating Agreement provide for a $3.75 million quarterly increase in the
minimum reserve balance through May 1, 2010 when the amount will total $150
million.
The Company expects to spend approximately $28 million on buildings and
equipment in 2002. As of June 30, 2002, the Company had remaining capital
commitments for buildings and equipment replacements of approximately $18.1
million, which includes an estimated $7.0 million remaining for a Post-Dispatch
plant expansion project. The total cost of the Post-Dispatch production facility
expansion project, which is expected to be completed in late 2002, is estimated
to be approximately $17.8 million, including capitalized interest. In addition,
as of June 30, 2002, the Company had a capital contribution commitment of
approximately $10.1 million related to a limited partnership investment.
21
In order to build a stronger, more direct relationship with the readers of the
Post-Dispatch, PD LLC has purchased a number of circulation routes from
independent carriers and dealers over the past two years, and it may continue to
purchase additional routes from time to time in the future. As of June 30, 2002,
PD LLC owned circulation routes covering approximately 66 percent of the
Post-Dispatch's home delivery distribution in the newspaper's designated market.
The Company's Board of Directors previously authorized the repurchase of up to
$100 million of the Company's outstanding capital stock. The Company's
repurchase program provides for the purchase of both common and Class B common
shares in either the open market or in privately negotiated transactions. As of
June 30, 2002, the Company had repurchased and retired under this authority
1,000,000 shares of Class B common stock and 531,796 shares of common stock for
a combined purchase price of $62.1 million, leaving $37.9 million in remaining
share repurchase authority.
The Company generally expects to generate sufficient cash from operations to
cover capital expenditures, working capital requirements and dividend payments.
Operating cash flows are dependent upon, among other things, the continued
acceptance of newspaper advertising at current or increased levels and the
availability of raw materials, principally newsprint.
CASH FLOWS
Continuing Operations
Cash from operations is the Company's primary source of liquidity. Cash provided
from operating activities for the first six months of 2002 was $15.8 million
compared to $16.0 million in 2001. The decrease was due to non-recurring pension
plan and health and welfare trust contributions of $9.9 and $14.0 million,
respectively, partially offset by reductions in income taxes payable and trade
accounts receivable.
Cash required for investing activities during the first six months of 2002 was
$75.1 compared to $83.5 million generated in 2001. The Company spent $46.4
million, net, to purchase marketable securities in 2002. In 2001, the Company
generated $126.1 million, net, from the sale of marketable securities. Capital
expenditures increased by $8.6 million in 2002 to $14.3 million due,
principally, due to increased expenditures related to the Company's expansion of
its St. Louis production facility. These reductions in cash flows from investing
activities were partially offset by an $18.4 million decrease in cash used for
acquisitions and reduced investments in limited partnerships in 2002 versus
2001.
Cash required for financing activities during the first six months of 2002 was
$3.9 million compared to $5.2 million used in 2001. The reduction in cash used
was due to increased proceeds from the exercise of employee stock options and
increased contributions to the Company's employee stock purchase plans.
Discontinued Operations
Cash from operating activities of discontinued operations was $2.1 million for
the first six months of 2001 reflecting the net results of the operations of the
Company's newspaper in Troy, Ohio and ISP operations, and the operations of the
Company's newspaper in Petaluma, California.
Cash from investing activities of discontinued operations was $17.8 million for
the first six months of 2001 reflecting proceeds from the sale of the of the
Company's newspaper in Troy, Ohio and the Internet Service Provider operations,
less the cash used for capital expenditures for these properties.
OTHER
Merger Agreement Indemnification
Pursuant to the Merger Agreement, the Company is obligated to indemnify
Hearst-Argyle against losses related to: (i) on an after tax basis, certain tax
liabilities, including (A) any transfer tax liability attributable to the
Spin-off, (B) with certain exceptions, any tax liability of Old Pulitzer or any
subsidiary of Old Pulitzer attributable to any tax period (or portion thereof)
ending on or before the closing date of the Merger, including tax liabilities
resulting from the Spin-off, and (C) any tax liability of the Company or any
subsidiary of the Company; (ii) liabilities and obligations under any employee
benefit plans not assumed by Hearst-Argyle, and (iii) certain other matters as
set forth in the Merger Agreement.
22
In October 2001, the IRS formally proposed that Old Pulitzer's taxable income
for the tax year ended March 18, 1999 be increased by approximately $80.4
million based on the assertion that Old Pulitzer was required to recognize a
taxable gain in that amount as a result of the Spin-off.
Because the Company disagrees with the IRS' position and, in fact, believes that
Old Pulitzer did not realize any taxable gain in connection with the Spin-off,
the Company has contested the IRS' proposed increase in a formal written protest
filed with the Appeals Office of the IRS in January 2002. While there can be no
assurance that the Company will completely prevail in its position, it believes
that the IRS' position is not supported by the facts or applicable legal
authorities and intends to vigorously contest the IRS' determination. It thus
has not accrued any liability in connection with this matter. If the IRS were
completely successful in its proposed adjustment, the Company's indemnification
obligation would be approximately $29.3 million, plus applicable interest, and
any indemnification payment would be recorded as an adjustment to additional
paid-in capital.
PD LLC Operating Agreement
On May 1, 2000, the Company and The Herald Company, Inc. ("Herald") completed
the transfer of their respective interests in the assets and operations of the
Post-Dispatch and certain related businesses to a new joint venture (the
"Venture"), known as PD LLC. The Company controls and manages PD LLC. Under the
terms of the operating agreement governing PD LLC (the "Operating Agreement"),
the Company holds a 95 percent interest in the results of operations of PD LLC
and Herald holds a 5 percent interest. Herald's 5 percent interest is reported
as "Minority Interest in Net Earnings of Subsidiary" in the consolidated
statements of income for 2002 and 2001. Also, under the terms of the Operating
Agreement, Herald received on May 1, 2000 a cash distribution of $306 million
from PD LLC. This distribution was financed by a $306 million borrowing by PD
LLC ("Loan"). The Company's entry into the Venture was treated as a purchase for
accounting purposes.
During the first ten years of its term, PD LLC is restricted from making
distributions (except under specified circumstances), capital expenditures and
member loan repayments unless it has set aside out of its cash flow a reserve
equal to the product of $15 million and the number of years since May 1, 2000,
but not in excess of $150 million. On May 1, 2010, Herald will have a one-time
right to require PD LLC to redeem Herald's interest in PD LLC, together with
Herald's interest, if any, in another limited liability company in which the
Company is the managing member and which is engaged in the business of
delivering publications and products in the greater St. Louis metropolitan area
("DS LLC"). The redemption price for Herald's interest will be determined
pursuant to a formula yielding an amount which will result in the present value
to May 1, 2000 of the after-tax cash flows to Herald (based on certain
assumptions) from PD LLC, including the initial distribution and the special
distribution described below, if any, and from DS LLC, being equal to $275
million. In the event that PD LLC has an increase in the tax basis of its assets
as a result of Herald's recognizing taxable income from certain transactions
effected under the agreement governing the contributions of the Company and
Herald to PD LLC and the Operating Agreement or from the transactions effected
in connection with the organization of DS LLC, Herald generally will be entitled
to receive a special distribution from PD LLC in an amount that corresponds,
approximately, to the present value after-tax benefit to the members of PD LLC
of the tax basis increase. Upon the termination of PD LLC and DS LLC, which will
be on May 1, 2015 (unless Herald exercises the redemption right described
above), Herald will be entitled to the liquidation value of its interest in PD
LLC and DS LLC. The Company may purchase Herald's interest at that time for an
amount equal to what Herald would be entitled to receive on liquidation of PD
LLC and DS LLC. That amount will be equal to the amount of its capital accounts,
after allocating the gain or loss that would result from a cash sale of PD LLC's
and DS LLC's assets for their fair market value at that time. Herald's share of
such gain or loss generally will be 5 percent, but will be reduced (but not
below 1 percent) to the extent that the present value to May 1, 2000 of the
after-tax cash flows to Herald from PD LLC and from DS LLC, including the
initial distribution, the special distribution described above, if any, and the
liquidation amount (based on certain assumptions), exceeds $325 million.
Provision for Income Taxes
The Company has incurred and provided for capital losses that exceed capital
gains available during prescribed carry-back periods by approximately $7.9
million. The Company expects to generate capital gains of at least this amount
during prescribed carry-forward periods. Accordingly, the Company has recognized
the tax benefit of approximately $3.1 million associated with these capital
losses.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary raw material used in the Company's operations is newsprint,
representing 11.9 to 18.9 percent of operating expenses over the last five
years. For the second quarter and first six months of 2002, the Company's
newsprint cost, including its 50 percent share related to the operations of TNI
Partners, was approximately $11.3 and $23.6 million, respectively. Based on the
Company's current level of newspaper operations, expected annual newsprint
consumption for 2002 is estimated to be in the range of 110,000 metric tons.
Historically, newsprint has been subject to significant price fluctuations from
year to year, unrelated in many cases to general economic conditions. In the
last five years, the Company's average annual cost per ton of newsprint has
varied from its peak price by approximately 20 percent. For the second quarter
and first six months of 2002, the Company's average cost per metric ton of
newsprint decreased by 30.5 and 25.9 percent, respectively, versus 2001. For
every one-dollar change in the Company's average annual cost per metric ton of
newsprint, pre-tax income would change by approximately $0.1 million, assuming
annual newsprint consumption of 110,000 metric tons. The Company attempts to
obtain the best price available by combining newsprint purchases for its
different newspaper locations with those of other newspaper companies. The
Company considers its relationship with newsprint producers to be good. The
Company does not enter into derivative contracts for newsprint.
At June 30, 2002, the Company had $306 million of outstanding debt pursuant to
the Loan. The Loan bears interest at a fixed annual rate of 8.05 percent.
In December 2001, the Company entered into an interest rate swap contract to
convert $50 million of the Company's fixed rate interest cost to a variable
rate. In May 2002, the Company entered into a second interest rate swap contract
to convert an additional $100 million of the Company's fixed rate interest cost
to a variable rate. The interest rate swaps have respective $50 million and $100
million notional amounts. Both swap contracts mature on April 28, 2009. The
floating interest rates re-price semiannually. The combined impact of the two
interest rate swaps resulted in approximately 49 percent of the Company's
long-term interest costs being subject to variable interest rates.
Changes in market interest rates may cause the Company to incur higher net
interest expense. For example, for every 1 percent increase in variable interest
rates, the Company would incur approximately $1.5 million in additional annual
interest expense.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see Note 5 "Commitments and Contingencies" to the consolidated
financial statements included in Part I., Item 1. of this Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
10.43 Amendment 2002-1, dated as of July 23, 2002, to Pulitzer Inc.
Pension Plan.
99.1 Certification by Robert C. Woodworth, President and Chief
Executive Officer of Pulitzer Inc., pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, in connection with Pulitzer Inc.'s
Quarterly Report on Form 10Q for the quarter ended June 30,
2002.
99.2 Certification by Alan G. Silverglat, Chief Financial Officer of
Pulitzer Inc., pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in
connection with Pulitzer Inc.'s Quarterly Report on Form 10Q for
the quarter ended June 30, 2002.
(b) Reports on Form 8-K.
The Company did not file any Reports of Form 8-K during the
quarter for which this report is filed.
All other items of this report are not applicable for the current quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PULITZER INC.
(Registrant)
Date: August 13, 2002 /s/ Alan G. Silverglat
--------------------------------
(Alan G. Silverglat)
Senior Vice-President-Finance
(on behalf of the Registrant and
as principal financial officer)
25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.43 Amendment 2002-1, dated as of July 23, 2002, to Pulitzer Inc. Pension Plan.
99.1 Certification by Robert C. Woodworth, President and Chief Executive Officer of Pulitzer
Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, in connection with Pulitzer Inc.'s Quarterly Report on
Form 10Q for the quarter ended June 30, 2002.
99.2 Certification by Alan G. Silverglat, Chief Financial Officer of Pulitzer Inc., pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, in connection with Pulitzer Inc.'s Quarterly Report on Form 10Q for the quarter
ended June 30, 2002.
26