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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 29, 2003
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING 8/8/03
---------------------- -----------------------------
COMMON STOCK 9,583,093
CLASS B COMMON STOCK 11,834,592
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES /X/ NO / /
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Second Quarter Ended Six Months Ended
------------------------ -------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
----------- ---------- --------- ----------
OPERATING REVENUES:
Advertising
Retail $30,353 $28,803 $56,913 $56,899
National 7,536 5,557 14,357 11,934
Classified 31,390 33,840 60,476 64,988
----------- ---------- ---------- ---------
Subtotal 69,279 68,200 131,746 133,821
Preprints 15,803 13,702 29,535 25,658
----------- ---------- ---------- ---------
Total advertising 85,082 81,902 161,281 159,479
Circulation 20,297 19,716 40,493 40,178
Other 1,733 2,379 3,570 4,383
----------- ---------- ---------- ---------
Total operating revenues 107,112 103,997 205,344 204,040
----------- ---------- ---------- ---------
OPERATING EXPENSES:
Payroll and other personnel expenses 44,718 44,892 90,073 89,565
Newsprint expense 11,309 10,128 21,514 20,938
Depreciation 3,702 3,718 7,384 7,451
Amortization 1,105 1,107 2,210 2,217
Other expenses 26,922 28,112 52,014 54,998
----------- ---------- ---------- ---------
Total operating expenses 87,756 87,957 173,195 175,169
----------- ---------- ---------- ---------
Equity in earnings of Tucson newspaper partnership 4,222 4,749 8,368 8,998
----------- ---------- ---------- ---------
Operating income 23,578 20,789 40,517 37,869
Interest income 922 984 1,857 1,985
Interest expense (5,274) (5,105) (10,732) (10,822)
Net loss on marketable securities and investments (309) (5,152) (1,068) (5,965)
Net other income (expense) (3) 10 18 14
----------- ---------- ---------- ---------
INCOME BEFORE PROVISION FOR INCOME
TAXES 18,914 11,526 30,592 23,081
PROVISION FOR INCOME TAXES 7,003 4,222 11,328 8,676
MINORITY INTEREST IN NET EARNINGS OF
SUBSIDIARY 483 331 780 609
----------- ---------- ---------- ---------
NET INCOME $11,428 $6,973 $18,484 $13,796
=========== ========== ========== =========
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BASIC EARNINGS PER SHARE OF STOCK:
Earnings per share $0.53 $0.33 $0.87 $0.65
======== ======== ======== ========
Weighted average number of shares outstanding 21,382 21,274 21,364 21,254
======== ======== ======== ========
DILUTED EARNINGS PER SHARE OF STOCK:
Earnings per share $0.53 $0.32 $0.86 $0.64
======== ======== ======== ========
Weighted average number of shares outstanding 21,579 21,491 21,521 21,474
======== ======== ======== ========
See notes to consolidated financial statements.
(Concluded)
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PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED--- IN THOUSANDS)
Second Quarter Ended Six Months Ended
----------------------- ------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
NET INCOME $11,428 $6,973 $18,484 $13,796
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX:
Unrealized holding gains on marketable
securities arising during the period 211 139 346 139
Realized gains arising during the period (21) 0 (37) 0
--------- --------- --------- ---------
Other comprehensive income items 190 139 309 139
--------- --------- --------- ---------
COMPREHENSIVE INCOME $11,618 $7,112 $18,793 $13,935
========= ========= ========= =========
See notes to consolidated financial statements.
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PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED--- IN THOUSANDS)
June 29, Dec. 29,
2003 2002
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $84,757 $81,517
Marketable securities 116,318 112,877
Trade accounts receivable (less allowance for doubtful
accounts of $3,994 and $4,004) 50,628 53,771
Inventory 4,394 6,165
Prepaid expenses and other 12,499 11,020
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Total current assets 268,596 265,350
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PROPERTIES:
Land 9,304 9,275
Buildings 69,228 66,932
Machinery and equipment 154,163 152,727
Construction in progress 7,973 6,142
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Total 240,668 235,076
Less accumulated depreciation 123,311 117,074
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Properties - net 117,357 118,002
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INTANGIBLE AND OTHER ASSETS:
Intangible assets - net of accumulated amortization 836,583 835,929
Restricted cash and investments 47,310 39,810
Other 30,074 28,155
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Total intangible and other assets 913,967 903,894
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TOTAL $1,299,920 $1,287,246
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(Continued)
PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED--- IN THOUSANDS, EXCEPT SHARE DATA)
June 29, Dec. 29,
2003 2002
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $9,185 $9,419
Salaries, wages and commissions 12,638 15,708
Interest payable 3,855 3,893
Pension obligations 1,778 1,959
Dividends payable 3,855 0
Income taxes payable 3,852 398
Other 11,171 8,425
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Total current liabilities 46,334 39,802
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LONG-TERM DEBT 306,000 306,000
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PENSION OBLIGATIONS 26,746 36,085
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POSTRETIREMENT AND POSTEMPLOYMENT
BENEFIT OBLIGATIONS 69,929 67,992
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OTHER LONG-TERM LIABILITIES 24,729 22,149
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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 9,575,949 in 2003 and 9,498,045 in 2002 96 95
Class B common stock, convertible, $.01 par value; 100,000,000
Shares authorized; issued -- 11,834,592 in 2003 and 118 118
11,835,242 in 2002
Additional paid-in capital 378,616 374,937
Retained earnings 457,599 450,653
Accumulated other comprehensive loss (10,054) (10,363)
------------ -------------
Total 826,375 815,440
Unamortized restricted stock (167) (208)
Treasury stock -- at cost; 605 shares of common
stock in 2003 and 330 in 2002, and 0 shares of
Class B common stock in 2003 and 2002 (26) (14)
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Total stockholders' equity 826,182 815,218
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TOTAL $1,299,920 $1,287,246
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(Concluded)
See notes to consolidated financial statements.
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PULITZER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED--- IN THOUSANDS)
Six Months Ended
--------------------------------
June 29, June 30,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $18,484 $ 13,796
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation 7,384 7,451
Amortization 2,210 2,217
Deferred Income Taxes 1,606 9,302
Gain on sale of assets (58) 0
Changes in current assets and liabilities (net of the effects of the
purchase and sale of properties) which provided (used) cash:
Trade accounts receivable 3,291 2,826
Inventory 1,771 851
Other assets (441) (2,240)
Trade accounts payable and accrued expenses (666) (2,304)
Current portion of pension, postretirement & other
liabilities 4,044 (3,672)
Income taxes receivable/payable 3,454 5,715
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NET CASH FROM OPERATING ACTIVITIES 41,079 33,942
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,689) (14,347)
Purchase of newspaper properties and distribution businesses,
net of cash acquired (2,991) (6,386)
Purchases of marketable securities (131,675) (46,511)
Sales of marketable securities 127,973 77
Investment in joint ventures and limited partnerships (1,534) (652)
Increase in restricted cash and investments (7,500) (7,500)
Discretionary funding of retirement obligations (10,837) (18,097)
Increase in notes receivable 0 200
-------------- -------------
NET CASH FROM INVESTING ACTIVITIES (33,253) (93,216)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (7,683) (7,433)
Proceeds from exercise of stock options 1,921 2,960
Proceeds from employee stock purchase plan 1,188 689
Purchase of treasury stock (12) (143)
-------------- -------------
NET CASH FROM FINANCING ACTIVITIES (4,586) (3,927)
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,240 (63,201)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 81,517 193,739
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $84,757 $130,538
============== =============
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest paid $10,781 $11,754
Interest received (1,529) (1,819)
Income taxes paid 6,488 4
Income tax refunds (208) (5,903)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Increase in dividends payable and decrease in retained earnings $3,855 $3,725
See notes to consolidated financial statements. (Concluded)
-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 2003, the Company's fiscal year began on December 30, 2002
and will end on December 28, 2003. For fiscal 2002, the Company's fiscal year
began on December 31, 2001 and ended on December 29, 2002.
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, ("PD LLC") and STL Distribution
Services LLC ("DS LLC"), and 50 percent interest in the results of operations of
the Tucson Newspaper Agency ("TNI"). 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
consolidated financial position as of June 29, 2003 and June 30, 2002 and the
results of operations and cash flows for the six-month periods ended June 29,
2003 and June 30, 2002. These consolidated 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 29, 2002. Consolidated 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 29, June 30, June 29, June 30,
2003 2002 2003 2002
---------- ---------- ----------- ----------
(In thousands)
Weighted average shares outstanding (Basic EPS) 21,382 21,274 21,364 21,254
Common stock equivalents 197 217 157 220
---------- ---------- ----------- ----------
Weighted average shares outstanding and
Common stock equivalents (Diluted EPS) 21,579 21,491 21,521 21,474
========== ========== =========== ==========
Common stock 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 2001 and 2002 the Company entered into interest rate
swap contracts to convert a portion of the Company's fixed interest rate cost to
a variable rate. In October 2002 the Company terminated interest rate swap
contracts totaling $75.0 million in exchange for a cash payment of $5.0 million.
The remaining $75.0 million interest rate swap is designated as a fair-value
hedge. The Company continues to employ the shortcut method on the remaining
interest rate swap. The Company initially recognized the $5.0 million cash
receipt, representing the increased fair value of the long-term debt at the date
of the swap terminations, as an increase in long-term liabilities with
subsequent, ratable amortization as a reduction of interest expense over the
remaining life of the original interest rate swap.
In August 2003 the company entered into another interest rate swap contract that
has the effect of converting the interest cost for an additional $75.0 million
of the Company's debt from a fixed rate to a variable rate. The swap contract
matures with the Company's debt on April 28, 2009. The Company will account for
the swap as a fair value hedge and will continue to employ the short cut method.
As of August 2003, approximately 49 percent of the Company's long-term interest
cost is subject to variable rates.
-9-
Stock-Based Employee Compensation - The Company accounts for its stock-based
employee compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. No stock-based employee compensation
cost is reflected in net income for stock options granted, as options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, to stock-based employee
compensation.
Second Quarter Ended Six Months Ended
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
------------ ----------- ----------- ----------
(In thousands, except earnings per share)
Net income, as reported $11,428 $6,973 $18,484 $13,796
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 1,031 1,079 2,078 2,493
------- ------ ------- -------
Net income, pro forma $10,397 $5,894 $16,406 $11,303
------- ------ ------- -------
Basic earnings per common share
As reported $0.53 $0.33 $0.87 $0.65
Pro forma $0.49 $0.28 $0.77 $0.53
Diluted earnings per common share
As reported $0.53 $0.32 $0.86 $0.64
Pro forma $0.48 $0.27 $0.76 $0.53
New Accounting Pronouncements - In November 2002 the Financial Accounting
Standards Board ("FASB") issued Financial Interpretation ("FIN") No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also provides
additional guidance on the disclosure of the guarantees. The recognition and
measurement provisions are effective for guarantees made or modified after
December 31, 2002. The disclosure provisions are effective for fiscal periods
ending after December 15, 2002, and have been implemented herein. The Company
adopted the measurement provisions of FIN 45 as required in 2003, which did not
have a material impact on the consolidated financial statements.
In January 2003 FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. FIN No. 46 provides guidance surrounding consolidation based on
controlling financial interest and provides new quantitative guidelines to
various variable interest entities as defined in the statement. The
interpretation applies immediately to variable interest entities created after
January 31, 2003, and in the first fiscal year or interim period beginning after
June 15, 2003 to variable interest entities acquired before February 1, 2003.
The Company adopted the provisions as required in 2003, which did not have a
material impact on the consolidated financial statements.
In December 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This pronouncement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, ("SFAS No. 123") to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The required disclosures are
included in this report.
In April 2003 FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under FASB SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company adopted the provisions as required
in 2003, which did not have a material impact on the consolidated financial
statements.
In May 2003 FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
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measures certain financial instruments with characteristics of both liabilities
and equity. This Statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted the
provisions as required in 2003, which did not have a material impact on the
consolidated financial statements.
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.
Reclassifications - Certain reclassifications have been made to the 2002
consolidated financial statements to conform with the presentation made in 2003.
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 29, Dec. 29,
2003 2002
---------------- ----------------
(In thousands)
Current assets $16,148 $17,102
Current liabilities $8,127 $8,58
Partners' equity $8,021 $8,520
Second Quarter Ended Six Months Ended
---------------------------- ------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
------------- -------------- ------------- ----------
(In thousands)
Operating revenues $26,360 $25,596 $53,840 $51,934
Operating income $8,444 $9,498 $16,736 $17,996
Company's share of operating income
before depreciation, amortization, and
general and administrative expense (1) $4,222 $4,749 $8,368 $8,998
(1) The Company's share of Star depreciation, amortization, and general and
administrative expenses is reported as operating expenses on the Company's
consolidated statements of income. In aggregate, these amounts totaled $601,000
and $562,000 for the second quarter of 2003 and 2002, respectively and
$1,258,000 and $1,253,000 for the first six months of 2003 and 2002,
respectively.
3. ACQUISITION OF PROPERTIES
In the second quarter of 2003 and 2002, the Company acquired businesses totaling
$2.4 million and $2.2 million, respectively. In the six months ended 2003 and
2002, the Company acquired businesses totaling $3.0 million and $6.4 million,
respectively. Pro forma results of these acquisitions were not material.
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4. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amounts of goodwill and intangible assets for the
Company for the six months ended June 29, 2003 were as follows:
(In thousands)
OTHER
INTANGIBLE
GOODWILL ASSETS
---------- ------
Balance at December 29, 2002 $ 797,719 $ 38,210
Additions during the period 2,008 856
Amortization expense 0 (2,210)
--- --------
Balance at June 29, 2003 $ 799,727 $ 36,856
========== ========
Other intangible assets at June 29, 2003 and December 29, 2002 were as follows:
(In thousands)
ACCUMULATED NET
COST AMORTIZATION COST
----- ------------ ----
June 29, 2003
Other intangible assets:
Advertising base $32,284 $6,686 $25,598
Subscriber lists 22,336 12,702 9,634
Non-compete agreements and other
long-term pension assets 6,160 4,536 1,624
----- ----- -----
Total other intangible assets $60,780 $23,924 $36,856
======= ======= =======
December 29, 2002
Other intangible assets:
Advertising base 31,816 5,928 25,888
Subscriber lists 22,024 11,387 10,637
Non-compete agreements and other
long-term pension assets 6,084 4,399 1,685
----- ----- -----
Total other intangible assets $59,924 $21,714 $38,210
======= ======= =======
Pretax amortization expense of other intangible assets for the second quarter
and six months ended June 29, 2003 was $1.1 million and $2.2 million,
respectively, and annually over the next six years is estimated to be: $4.4
million for 2003, $4.5 million for 2004, $4.4 million for 2005, $4.2 million for
2006, $2.2 million for 2007, and $1.7 million for 2008.
5. COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS
As of June 29, 2003, the Company and its subsidiaries had construction and
equipment commitments of approximately $5.6 million.
INVESTMENT COMMITMENTS
As of June 29, 2003, the Company had an unfunded capital contribution commitment
of approximately $7.6 million related to its investment in a limited partnership
not associated with or involved in the Company's operations.
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
-12-
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. Thus, the Company 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. Any indemnification payment would be
recorded as an adjustment to additional paid-in capital.
On August 30, 2002, the Company, on behalf of Old Pulitzer, filed with the IRS
amended federal corporate income tax returns for the years ended December 1997
and 1998 and March 1999 in which refunds of tax in the aggregate amount of
approximately $8.1 million, plus interest, were claimed. These refunds claims
were based on the Company's contention that Old Pulitzer was entitled to deduct
certain fees and expenses which it had not previously deducted and which Old
Pulitzer had incurred in connection with its investigation of several strategic
alternatives and potential transactions prior to its decision to proceed with
the Broadcast Transaction in March 1999. Under the Merger Agreement, the Company
is entitled to any amounts recovered from the IRS as a result of these refund
claims, although there can be no assurance that the IRS will approve all or any
portion of these refund claims. Pending IRS review, no receivable has been
recognized in connection with these refund claims. Any funds received for income
tax refunds 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 2003 and 2002. Also, under the terms of the Operating
Agreement, Herald received on May 1, 2000 a cash distribution of $306.0 million
from PD LLC. This distribution was financed by a $306.0 million borrowing by PD
LLC (the "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 $15.0 million and the number of years since May 1, 2000,
but not in excess of $150.0 million (the "Reserve"). PD LLC is not required to
maintain the Reserve after May 1, 2010. 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 DS LLC, 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. 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 $275.0 million. Should Herald exercise its option,
payment of this redemption price is expected to be made out of available cash
resources (including the Reserve) or new debt offerings. 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
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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 $325.0 million.
LEGAL CONTINGENCIES
In February 1998 a group of independent newspaper dealers engaged in the
business of reselling the 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 now dismissed all
six counts in the suit. The court had previously dismissed four of the six
counts. On April 4, 2003, the court granted the Company's amended motion for
summary judgment and entered a judgment in favor of the Company on the two
remaining counts in the suit. In the remaining counts, the plaintiffs had
alleged that the Company's actions 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 had requested punitive damages with
respect to the tortious interference count and statutory double damages if they
should prevail on the malicious trespass count. While the suit has now been
resolved entirely in the Company's favor by the Missouri Circuit Court, the
plaintiffs have filed a notice of appeal with the Missouri Court of Appeals.
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 this suit will have a materially adverse effect on the
Company's consolidated financial position or results of operations. However,
depending upon the period of resolution, such effect 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
complaints related to 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 position or results of operations. However, depending upon the period
of resolution, such effect could be material to the consolidated financial
results of an individual period.
6. OPERATING REVENUES
The Company's consolidated operating revenues consist of the following:
Second Quarter Ended Six Months Ended
---------------------------- ------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
----------- ------------ ----------- -----------
(In thousands)
Combined St. Louis operations $77,292 $74,129 $148,241 $146,598
Pulitzer Newspapers, Inc. 29,820 29,868 57,103 57,442
-------- -------- -------- --------
Total $107,112 $103,997 $205,344 $204,040
======== ======== ======== ========
* * * * * *
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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), outcome of labor
negotiations, 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. Accordingly, investors are
cautioned not to place undue reliance on any such "forward-looking statements,"
and the Company disclaims any obligation to update the information contained
herein or to publicly announce the result of any revisions to such
"forward-looking statements" to reflect future events or developments.
GENERAL
Pulitzer Inc. (together with its subsidiaries, the "Company") is a newspaper
publishing company with integrated Internet operations in 14 markets, the
largest of which is St. Louis, Missouri. For the second quarter and first
six-months of 2003, the Company's combined St. Louis operations contributed
approximately 64 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 with integrated 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 in Tucson, Arizona, where
the Company publishes the Arizona Daily Star (the "Star"). At the Tucson
Newspaper Agency ("TNI"), the Company shares, on an equal basis, the combined
financial results of the Star and the Tucson Citizen, published by Gannett Co.,
Inc. ("Gannett").
The Post-Dispatch had an average daily circulation for the second quarter and
the first six months of 2003 of approximately 288,000 and 287,000, respectively,
compared to an average daily circulation of approximately 293,000 and 291,000
for the second quarter and first six months of 2002, respectively. In Tucson,
the combined daily circulation of the Star and the Citizen for the second
quarter and first six months of 2003 was approximately 134,000 and 141,000,
respectively, compared to an average daily circulation of approximately 137,000
and 142,000 for the second quarter and first six months of 2002, respectively.
Pulitzer Inc.'s wholly owned subsidiary, Pulitzer Newspapers, Inc. ("PNI"), and
its subsidiaries publish 12 dailies with integrated new media operations that
serve markets in the Midwest, Southwest and West, as well as a number of weekly
and bi-weekly publications (the "PNI Group"). The PNI Group's 12 daily
newspapers had a combined average daily circulation of approximately 188,000 for
the second quarter of 2003, about the same as in the second quarter of 2002.
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.
-15-
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.
ACQUISITION AND DISPOSITION OF BUSINESSES
In the first six months of 2003 and 2002, the Company acquired businesses
totaling $3.0 million and $6.4 million, respectively. Pro forma results of these
acquisitions were not material.
CRITICAL ACCOUNTING POLICIES
The process of preparing financial statements requires management to make
estimates and judgments that affect the carrying values of the Company's assets
and liabilities as well as recognition of revenues and expenses. These estimates
and judgments are based on the Company's historical experience, actuarial
assumptions and understanding of current facts and circumstances. Certain of the
Company's accounting policies are considered critical, as these policies are
important to the presentation of the Company's financial statements and require
significant or complex judgment by management.
Management has identified the practices used to determine the allowance for
doubtful accounts associated with trade accounts receivable, the liability for
both unpaid and unreported dental, medical and workers compensation claims, and
the liability for pension and postretirement and postemployment benefit
obligations as critical accounting policies as a result of the judgment involved
in the use of estimates.
The Company evaluates its allowance for doubtful trade accounts receivable based
on customers' credit history, payment trends and other economic factors to the
extent available. It is possible that reported results could be different based
upon changes in economic conditions that could impact customers' ability to pay.
The Company evaluates its liability for unpaid and unreported dental, medical
and workers compensation claims based on historical payment trends and
administration costs. The Company uses actuarial assumptions to calculate
estimated future claim costs based on historical trends. Reported results could
be different if historical trends differ from actual payment results.
The Company evaluates its liability for pension and postretirement and
postemployment benefit plans based upon estimates and actuarial assumptions of
future plan service costs, future interest costs on projected benefit
obligations, rates of compensation increases, employee turnover rates,
anticipated mortality rates, expected investment returns on plan assets, asset
allocation assumptions of plan assets, and other factors. If management used
different estimates and assumptions regarding these plans, the funded status of
the plans could vary significantly and the Company could recognize different
amounts of expense from the amounts reported over future periods.
The Company has identified the accounting and related impairment testing of
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"), as a critical accounting policy having
material impact on the Company's financial presentation. SFAS No. 142 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. No impairment was recognized as a result of the impairment testing of
goodwill and other indefinite-lived assets conducted by the Company upon
adoption of SFAS No. 142 in January 2002. An annual impairment test was
subsequently performed and indicated that the fair value exceeded the carrying
amount of goodwill. Subsequent impairments, if any, would be classified as an
operating expense.
SECOND QUARTER ENDED JUNE 29, 2003 COMPARED WITH QUARTER ENDED JUNE 30, 2002
SUMMARY
Second quarter 2003 net income was $11.4 million, or $0.53 per diluted share,
compared to $7.0 million, or $0.32 per diluted share, in the prior year.
Second quarter 2003 operating income increased to $23.6 million from $20.8
million in the prior year. The increase in operating income was due,
principally, to increased advertising revenue, and lower distribution costs and
decreased bad debt expense, partially offset by increased newsprint costs.
-16-
REVENUE
Revenues for the quarter ended June 29, 2003 increased 3.0 percent, to $107.1
million from $104.0 million in 2002. Second quarter advertising revenues
increased 3.9 percent, to $85.1 million from $81.9 million in 2002. Retail
advertising revenue increased 5.4 percent, to $30.4 million from $28.8 million
in 2002. Second quarter advertising revenues were positively affected by the
movement, from March 2002 to April 2003, of the Easter holiday and growth in the
national and local territory retail advertising categories, particularly in St.
Louis.
Second quarter national advertising revenue increased 35.6 percent, to $7.5
million from $5.6 million in 2002, due to increased advertising in the
automotive, telecommunication, and healthcare categories offset by weakness in
entertainment. Classified revenue decreased 7.2 percent to $31.4 million from
$33.8 million due to weakness in help wanted and automotive advertising,
partially offset by growth in real estate advertising. For the quarter ended
June 29, 2003, help wanted revenue decreased 15.8 percent in St. Louis and 6.9
percent at the PNI Group, while automotive revenue decreased 7.8 percent in St.
Louis and 13.7 percent at the PNI Group. Real estate revenue increased 3.5
percent and 7.0 percent in St. Louis and at the PNI Group, respectively. Second
quarter preprint revenue increased 15.3 percent, to $15.8 million from $13.7 in
2002.
OPERATING EXPENSE
Total operating expenses decreased 0.2 percent to $87.8 million for the second
quarter of 2003 from $88.0 million in 2002. Expenses were lower principally due
to lower distribution costs resulting from the reduction of product duplication
in St. Louis during the second quarter of 2002, and reduced bad debt expense
relating to the absence of Kmart-driven reserve increases present last year and
better overall collection experience. These expense savings were partially
offset by increased newsprint expense resulting from a combination of increased
volume and a mid-single digit percent increase in the average cost per metric
tonne of newsprint. Full time equivalent ("FTE") employees decreased 0.3 percent
from the second quarter of 2002.
Equity in the earnings of TNI for the second quarter of 2003 decreased 11.1
percent to $4.2 million from $4.7 million in 2002. In Tucson, increased
advertising revenue, principally in the retail and preprint categories, was
offset by higher labor costs related to advertising staff increases, higher
benefit costs and increased direct mail and production expense incurred for
distribution of non-subscriber advertising products.
OPERATING INCOME
For the second quarter of 2003, the Company's operating income increased 13.4
percent to $23.6 million compared to $20.8 million in the prior year quarter.
The increase in 2003 second quarter operating income was due, principally, to
increased advertising revenue and lower operating expenses, as discussed in the
preceding comments.
NON-OPERATING ITEMS
Interest income for the second quarter of 2003 decreased to $0.9 million from
$1.0 million in the prior year quarter. This decline resulted from lower average
interest rates for invested funds.
The Company reported interest expense of $5.3 million in the second quarter of
2003 compared to $5.1 million for the second quarter of 2002. The 2003 expense
increase principally reflects the absence, in the second quarter of 2003, of
capitalized interest present in 2002.
The Company reported a net loss on marketable securities and investments of $0.3
million in the second quarter of 2003 compared to a net loss of $5.2 million in
2002. The second quarter losses in both years resulted from adjustments to the
carrying values of certain non-operating investments.
NET INCOME
The Company reported net income of $11.4 million, or $0.53 per diluted share for
the second quarter of 2003, compared with net income of $7.0 million, or $0.32
per diluted share in 2002. The increase in 2003 net income reflects increased
operating revenue and reductions in operating costs, principally distribution
costs and bad debt expense, as well as a reduction in the losses recognized on
certain non-operating investments.
-17-
SIX MONTHS ENDED JUNE 29, 2003 COMPARED WITH 2002
SUMMARY
Net income for the first six months of 2003 was $18.5 million, or $0.86 per
diluted share, compared to $13.8 million, or $0.64 per diluted share, in the
prior year.
Operating income for the first six months of 2003 increased to $40.5 million
from $37.9 million in the prior year. The increase in operating income was due,
principally, to increased national and preprint advertising revenue, lower
distribution costs and decreased bad debt expense, partially offset by increased
newsprint costs.
REVENUE
Revenues for the six month period ended June 29, 2003 increased 0.6 percent, to
$205.3 million from $204.0 million in 2002. Six-month advertising revenues
increased 1.1 percent, to $161.3 million from $159.5 million in 2002. Retail
advertising revenue remained flat at $56.9 million compared with the prior year
period. Retail advertising revenues for the first six months of 2003 were
negatively affected by advertiser caution, in part related to the Iraqi
conflict, declines in the major department store and furniture categories, and
the absence of 2002 Super Bowl, which took place in St. Louis, and Winter
Olympic advertising revenue. The decreases were offset by growth in local
territory advertising, particularly in St. Louis. Preprint revenue for the first
six months of 2003 increased 15.1 percent, to $29.5 million from $25.7 in 2002.
National advertising revenue for the first six months of 2003 increased 20.3
percent, to $14.4 million from $11.9 million in 2002 due to increased
advertising in the automotive, telecommunication, and healthcare categories
offset by weakness in entertainment. Classified revenue decreased 6.9 percent to
$60.5 million from $65.0 million due to weakness in help wanted and automotive
advertising, partially offset by growth in real estate advertising. For the six
month period ended June 29, 2003, help wanted revenue decreased 14.5 percent in
St. Louis and 7.4 percent at the PNI Group, while automotive revenue decreased
8.8 percent in St. Louis and 9.5 percent at the PNI Group. Real estate revenue
increased 5.7 percent and 4.6 percent in St. Louis and at the PNI Group,
respectively.
OPERATING EXPENSE
Total operating expenses decreased 1.1 percent to $173.2 million for the first
six months of 2003 from $175.2 million in 2002. Expenses were lower principally
due to lower distribution costs resulting from the reduction of product
duplication in St. Louis during the second quarter of 2002, and reduced bad debt
expense relating to the absence of Kmart-driven reserve increases present last
year and better overall collection experience. These expense savings were
partially offset by increased newsprint expense resulting from increased volume.
The average cost per metric tonne of newsprint remained flat. Full time
equivalent employees decreased 1.0 percent.
Equity in the earnings of TNI for the first six months of 2003 decreased 7.0
percent to $8.4 million from $9.0 million in 2002. In Tucson, increased
advertising revenue was offset by higher labor costs related to advertising
staff increases, higher benefit costs and increased direct mail and production
expense incurred for distribution of non-subscriber advertising products.
OPERATING INCOME
For the first six months of 2003, the Company's operating income increased 7.0
percent to $40.5 million compared to $37.9 million in the prior year quarter.
The increase in 2003 in operating income was due, principally, to increased
advertising revenue and lower operating expenses.
NON-OPERATING ITEMS
Interest income for the first six months of 2003 decreased to $1.9 million from
$2.0 million in the prior year. This decline resulted from lower average
interest rates for invested funds.
The Company reported interest expense of $10.7 million in the first six months
of 2003 compared to $10.8 million for the first six months of 2002. The 2003
expense decrease principally reflects lower LIBOR interest rates which generated
greater savings from the Company's variable interest rate swap, partially offset
by the absence, in the first six months of 2003, of capitalized interest present
in 2002.
-18-
The Company reported a net loss on marketable securities and investments of $1.1
million in the first six months of 2003 compared to a net loss of $6.0 million
in 2002. The losses in both years resulted from adjustments to the carrying
values of certain non-operating investments.
NET INCOME
The Company reported net income of $18.5 million, or $0.86 per diluted share for
the first six months of 2003, compared with net income of $13.8 million, or
$0.64 per diluted share in 2002. The increase in 2003 net income reflects
increased operating revenue and reductions in operating costs, principally
distribution costs and bad debt expense as well as a reduction in the losses
recognized on certain non-operating investments.
LIQUIDITY AND CAPITAL RESOURCES
As of June 29, 2003, the Company had an unrestricted cash and marketable
securities balance of $201.1 million compared to $194.4 million as of December
29, 2002. The increase resulted principally from an increase in operating
profit, partially offset by the discretionary funding of certain employee
benefit obligations and the purchase of capital equipment.
At both June 29, 2003 and December 29, 2002, the Company had $306.0 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 October 2002 the Company terminated previously executed swap contracts
totaling $75.0 million resulting in a net gain of $5.0 million. The $5.0 million
net gain is being amortized ratably over the remaining term of the original swap
contract which expires in April 2009. The Company maintains other interest rate
swap contracts that have the effect of converting the interest cost for $75.0
million of the Company's debt from fixed rate to variable rate. These swap
contracts mature with the Company's debt on April 28, 2009. The Company accounts
for the swap contracts as fair value hedges.
The Company continues to employ the shortcut method on the remaining interest
rate swap contracts. The Company initially recognized the $5.0 million cash
receipt, representing the increased fair value of the long-term debt at the date
of the swap terminations, as an increase in long-term liabilities with
subsequent, ratable amortization as a reduction of interest expense over the
remaining life of the original interest rate swap.
In August 2003 the company entered into another interest rate swap contract that
has the effect of converting the interest cost for an additional $75.0 million
of the Company's debt from a fixed rate to a variable rate. The swap contract
matures with the Company's debt on April 28, 2009. The Company will account for
the swap as a fair value hedge and will continue to employ the short cut method.
As of August 2003, approximately 49 percent of the Company's long-term interest
cost is subject to variable 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 $47.3 million as of June 29, 2003. The Loan Agreements and the
PDLLC Operating Agreement provide for a $3.75 million quarterly increase in the
minimum reserve balance through May 1, 2010, when the amount will total $150.0
million.
The Company expects to spend approximately $14.0 million to $16.0 million on
property, plant and equipment in 2003. As of June 29, 2003, the Company had
capital commitments for buildings and equipment replacements of approximately
$5.6 million. In addition, as of June 29, 2003, the Company had an unfunded
capital contribution commitment of approximately $7.6 million related to its
investment in a limited partnership not associated with or involved in the
Company's operations.
In order to build a stronger, more direct relationship with the readers of the
Post-Dispatch, PD LLC has purchased a number of distribution businesses from
independent carriers and dealers over the past four years, and it may continue
to purchase additional businesses from time to time in the future. As of June
29, 2003, PD LLC owned circulation routes covering approximately 72 percent of
the Post-Dispatch's home delivery and single copy distribution in the
newspaper's designated market.
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The Company's Board of Directors previously authorized the repurchase of up to
$100.0 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 29, 2003, the Company had repurchased under this authority 1,000,000 shares
of Class B common stock and 532,401 shares of common stock for a combined
purchase price of $74.0 million, leaving $26.0 million in remaining share
repurchase authority.
The Company generally expects to generate sufficient cash from operations to
cover capital expenditures, working capital requirements, stock repurchases, and
dividend payments. Cash flows from operations 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
Cash flow from operations is the Company's primary source of liquidity. Cash
provided from operating activities for the first six months of 2003 was $41.1
million compared to $33.9 million in 2002. The increase was due to increased
operating income in 2003 and improved collection efforts resulting in lower
trade receivables, lower inventory balances, principally newsprint, and reduced
contributions to health and welfare trusts.
Cash required for investing activities during the first six months of 2003 was
$33.3 million compared to $93.2 million used in 2002. The Company expended $3.7
million, net, for the purchase of marketable securities in 2003 compared to a
net expenditure of $46.4 million in 2003. In addition, the Company made
discretionary contributions of $10.8 million to fund long-term retirement
obligations during the first six months of 2003 compared to long-term
discretionary retirement obligation funding of $18.1 million in 2002. Capital
expenditures decreased by $7.7 million in 2003 to $6.7 million due, principally,
to the completion of the Company's expansion of its St. Louis production
facility in 2002. Contributions to limited partnership investments and
restricted cash made up the balance of cash required for investing activities
for the quarter.
Cash required for financing activities during the first six months of 2003 was
$4.6 million compared to $3.9 million used in 2002. The increase in cash used
was due to lower proceeds from the exercise of stock options, partially offset
by increased proceeds from purchases under employee stock purchase plans in the
first six months of 2003 versus 2002.
OTHER
Merger Agreement Indemnification
Pursuant to the Merger Agreement, the Company is obligated to indemnify
Hearst-Argyle Television, Inc. 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.
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.
Potential Income Tax Refund
On August 30, 2002, the Company, on behalf of Old Pulitzer, filed with the IRS
amended federal corporate income tax returns for the years ended December 1997
and 1998 and March 1999 in which refunds of tax in the aggregate
-20-
amount of approximately $8.1 million, plus interest. These refund claims were
based on the Company's contention that Old Pulitzer was entitled to deduct
certain fees and expenses which it had not previously deducted and which Old
Pulitzer had incurred in connection with its investigation of several strategic
alternatives and potential transactions prior to its decision to proceed with
the Broadcast Transaction in March 1999. Under the Merger Agreement, the Company
is entitled to any amounts recovered from the IRS as a result of these refund
claims, although there can be no assurance that the IRS will approve all or any
portion of these refund claims. Pending IRS review, no receivable has been
recognized in connection with these refund claims. Any funds received for income
tax refunds would be recorded as an adjustment to additional paid-in-capital.
Provision for Income Taxes
The Company has incurred capital losses that exceed capital gains available
during prescribed carry-back periods by approximately $7.3 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 $2.7 million associated with these capital losses.
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 2003 and 2002. Also, under the terms of the Operating
Agreement, Herald received on May 1, 2000 a cash distribution of $306.0 million
from PD LLC. This distribution was financed by a $306.0 million borrowing by PD
LLC (the "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 $15.0 million and the number of years since May 1, 2000,
but not in excess of $150.0 million (the "Reserve"). PD LLC is not required to
maintain the Reserve after May 1, 2010. 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 $275.0
million. Should Herald exercise its option, payment of this redemption price is
expected to be made out of available cash resources (including the Reserve) or
new debt offerings. 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 interests in PD LLC and DS LLC. The Company may purchase Herald's
interests 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 $325.0 million.
New Accounting Pronouncements
In November 2002 FASB issued Financial Interpretation ("FIN") No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN No. 45 requires a guarantor to
recognize, at the inception of the guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. It also provides additional
guidance on the disclosure of the guarantees. The recognition and
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measurement provisions are effective for guarantees made or modified after
December 31, 2002. The disclosure provisions are effective for fiscal periods
ending after December 15, 2002, and have been implemented herein. The Company
adopted the measurement provisions of FIN 45 as required in 2003, which did not
have a material impact on the consolidated financial statements.
In January 2003 FASB issued FIN No. 46, Consolidation of Variable Interest
Entities. FIN No. 46 provides guidance surrounding consolidation based on
controlling financial interest and provides new quantitative guidelines to
various variable interest entities as defined in the statement. The
interpretation applies immediately to variable interest entities created after
January 31, 2003, and in the first fiscal year or interim period beginning after
June 15, 2003 to variable interest entities acquired before February 1, 2003.
The Company adopted the provisions as required in 2003, which did not have a
material impact on the consolidated financial statements.
In December 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This pronouncement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation,("SFAS No. 123") to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The required disclosures are
included in this report in Item 1.
In April 2003 FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under FASB SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Company adopted the provisions as required
in 2003, which did not have a material impact on the consolidated financial
statements.
In May 2003 FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. This Statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Company adopted the
provisions as required in 2003, which did not have a material impact on the
consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
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The primary raw material used in the Company's operations is newsprint,
representing 12.2 percent to 23.6 percent of operating expenses over the last
five years. Based on the Company's current level of newspaper operations
(including its interest in TNI), expected annual newsprint consumption for 2003
is estimated to be in the range of 104,000 metric tonnes. Historically,
newsprint has been subject to significant price fluctuations from time to time,
unrelated in many cases to general economic conditions. In the last five years,
the Company's average annual cost per tonne of newsprint has varied from its low
point by approximately 27.8 percent. For the first six months of 2003, the
Company's average cost per metric tonne of newsprint remained flat. For every
one-dollar change in the Company's average annual cost per metric tonne of
newsprint, pre-tax income would change by approximately $104,000, assuming
annual newsprint consumption of 104,000 metric tonnes. 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 has not entered into derivative contracts for newsprint.
At June 29, 2003, the Company had $306.0 million of outstanding debt pursuant to
the Loan. The Loan bears interest at a fixed annual rate of 8.05 percent.
The Company is party to two interest rate swap contracts that convert a portion
of the Company's fixed rate debt to a variable rate. The interest rate swaps
have a combined $150.0 million notional amount and mature on April 28, 2009.
Under the terms of the agreements, the Company pays interest at a variable rate
based upon LIBOR plus a combined adjustment average of 3.3392 percent and
receives interest at a fixed rate of 8.05 percent. The floating interest rates
re-price semiannually. The Company accounts for the swaps as a fair value hedge
and employs the short cut method. These transactions result in approximately 49
percent of the Company's long-term interest cost being subject to variable
rates.
Changes in market interest rates may cause the Company to incur higher net
interest expense. For example, for every one percent increase in variable
interest rates, the Company would incur approximately $1.5 million in additional
annual interest expense.
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ITEM 4. CONTROLS AND PROCEDURES
- ------------------------------------------------------------------------------
As of the end of the period covered by this Quarterly Report on Form 10-Q, the
Company's management, including its President and Chief Executive Officer and
Senior Vice President-Finance, carried out an evaluation of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's
President and Chief Executive Officer and Senior Vice President-Finance
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective in alerting them to
material information, on a timely basis, required to be included in the
Company's periodic SEC filings. There have been no changes in the Company's
internal control over financial reporting during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
- -----------------------------------------------------------------------------
(a) The Annual Meeting of Stockholders was held on May 22, 2003.
(b) The following directors continued their term of office after
the Annual Meeting of Stockholders:
Emily Rauh Pulitzer
James M. Snowden, Jr.
Robert C. Woodworth
Ken J. Elkins
Alice B. Hayes
Susan T. Congalton
(c) The following nominees for election as directors received the
votes indicated:
For Withheld Abstain
--- -------- -------
William Bush (Class B) 124,756,963 2,236,156 0
Michael E. Pulitzer (Class B) 124,659,307 2,332,812 0
Ronald H. Ridgway (Class B) 126,659,976 333,143 0
Richard W. Moore (Class C) 126,799,720 193,399 0
The Pulitzer Inc. 2003 Incentive Plan was approved by the vote
indicated:
For: 122,546,125
Against: 3,406,417
Broker non-votes: 1,019,733
Abstain: 20,844
Ratification of the appointment of Deloitte & Touche LLP as
the Company's independent auditors was approved by the vote
indicated:
For: 126,823,000
Against: 151,355
Broker non-votes: 0
Abstain: 18,764
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) The following exhibits are filed as part of this report:
31.1 Certification by Robert C. Woodworth, President and Chief
Executive Officer of Pulitzer Inc., pursuant to Exchange Act
Rule 13a-14(a), in connection with Pulitzer Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 29, 2003.
31.2 Certification by Alan G. Silverglat, Senior Vice President-
Finance of Pulitzer Inc., pursuant to Exchange Act Rule
13a-14(a), in connection with Pulitzer Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 29, 2003.
32.1 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 10-Q for the quarter ended
June 29, 2003.
32.2 Certification by Alan G. Silverglat, Senior Vice
President-Finance 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 10-Q for the quarter
ended June 29, 2003.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on April 7,
2003 regarding an update of its first quarter earnings
outlook.
The Company filed a Current Report on Form 8-K on April 22,
2003 the announcement of its consolidated financial results
for the first quarter ended March 30, 2003 and the issuance of
the Company's statistical report for the period and quarter
ended March 30, 2003.
The Company filed a Current Report on Form 8-K on May 6, 2003
regarding confirmation of its 2003 earnings guidance for
full-year 2003 base earnings and confirmation of the Company's
earlier guidance.
The Company filed a Current Report on Form 8-K on May 16, 2003
the issuance of the Company's statistical report for the
period ended May 4, 2003 and confirmation of its 2003 earnings
guidance for full year 2003 base earnings.
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, 2003 /s/ Alan G. Silverglat
-----------------------
(Alan G. Silverglat)
Senior Vice President-Finance
(on behalf of the Registrant and
as principal financial officer)
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EXHIBIT INDEX
31.1 Certification by Robert C. Woodworth, President and Chief
Executive Officer of Pulitzer Inc., pursuant to Exchange Act
Rule 13a-14(a), in connection with Pulitzer Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 29, 2003.
31.2 Certification by Alan G. Silverglat, Senior Vice President-
Finance of Pulitzer Inc., pursuant to Exchange Act Rule
13a-14(a), in connection with Pulitzer
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
June 29, 2003.
32.1 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 10-Q for the quarter ended
June 29, 2003.
32.2 Certification by Alan G. Silverglat, Senior Vice President-
Finance 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 10-Q for the quarter ended June 29, 2003.
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