Form 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

 


 

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended September 30, 2007

 

OR

 

[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-6227

 

LEE ENTERPRISES, INCORPORATED

(Exact name of Registrant as specified in its charter)

 

Delaware   42-0823980
(State of incorporation)   (I.R.S. Employer Identification No.)

 

201 N. Harrison Street, Suite 600, Davenport, Iowa 52801

(Address of principal executive offices)

 

(563) 383-2100

Registrant’s telephone number, including area code

 

Title of Each Class   Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(b) of the Act:    
Common Stock - $2 par value   New York Stock Exchange
Preferred Share Purchase Rights   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:    
Class B Common Stock - $2 par value    

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [X]  No [    ]

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [    ]  No [X]

 

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [    ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer  [X]        Accelerated filer  [    ]        Non-accelerated filer  [    ]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes [    ]  No [X]

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter. Based on the closing price of the Registrant’s Common Stock on the New York Stock Exchange on March 31, 2007: approximately $1,285,192,000. For purposes of the foregoing calculation only, as required, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock and Class B Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2007. Common Stock, $2 par value, 40,057,223 shares and Class B Common Stock, $2 par value, 6,131,857 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2008 are incorporated by reference in Part III of this Form 10-K.

 



Table of Contents

TABLE OF CONTENTS

   PAGE
    

Forward-Looking Statements

   1
    

Part I

    

Item 1

  

Business

   1

Item 1A

  

Risk Factors

   11

Item 1B

  

Unresolved Staff Comments

   12

Item 2

  

Properties

   12

Item 3

  

Legal Proceedings

   12

Item 4

  

Submission of Matters to a Vote of Security Holders

   12
    

Part II

    

Item 5

  

Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities

   13

Item 6

  

Selected Financial Data

   15

Item 7

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   16

Item 7A

  

Quantitative and Qualitative Disclosures about Market Risk

   31

Item 8

  

Financial Statements and Supplementary Data

   32

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   32

Item 9A

  

Controls and Procedures

   32

Item 9B

  

Other Information

   35
    

Part III

    

Item 10

  

Directors, Executive Officers and Corporate Governance

   35

Item 11

  

Executive Compensation

   35

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   35

Item 13

  

Certain Relationships, Related Transactions and Director Independence

   36

Item 14

  

Principal Accounting Fees and Services

   36
     Part IV     
    

Exhibits and Financial Statement Schedules

   36
    

Signatures

   37
    

Exhibit Index

   38
    

Consolidated Financial Statements

   41


Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking, that is based largely on the Company’s current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties are changes in advertising demand, newsprint prices, energy costs, interest rates, labor costs, legislative and regulatory rulings and other results of operations or financial conditions, difficulties in integration of acquired businesses or maintaining employee and customer relationships, increased capital and other costs and other risks detailed from time to time in the Company’s publicly filed documents. The words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. The Company does not undertake to publicly update or revise its forward-looking statements.

 

PART I

 

References to 2007, 2006, 2005 and the like mean the fiscal years ended September 30.

 

ITEM 1.  BUSINESS

 

Lee Enterprises, Incorporated, is a premier provider of local news, information and advertising in primarily midsize markets, with 51 daily newspapers and a joint interest in five others, rapidly growing online sites and more than 300 weekly newspapers and specialty publications in 23 states.

 

The Company is consistently focused on six key strategic priorities. They are to:

 

  ·  

Grow revenue creatively and rapidly;

  ·  

Deliver strong local news and information;

  ·  

Accelerate online innovation;

  ·  

Continue expanding audiences;

  ·  

Nurture employee development and achievement; and

  ·  

Exercise careful cost control.

 

Certain aspects of these priorities are discussed below.

 

The Company was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange in 1978. Before 2001, the Company also operated a number of network-affiliated and satellite television stations. In 2006, the Company sold the assets of its stand-alone publishing and commercial printing operations in Seattle and Spokane, Washington and Portland, Oregon.

 

HOWARD AND SIOUX CITY ACQUISITIONS

 

In 2002, the Company acquired 15 daily newspapers and a 50% interest in the Sioux City, Iowa, daily newspaper (SCN) by purchasing Howard Publications, Inc. (Howard). This acquisition was consistent with the strategy the Company announced in 2000 to buy daily newspapers with circulation of 30,000 or more. In 2002, the Company also acquired the remaining 50% of SCN. These acquisitions increased the Company’s circulation by more than 75% and increased its revenue by nearly 50%. In February 2004, two daily newspapers acquired in the Howard acquisition were exchanged for daily newspapers in Burley, Idaho, and Elko, Nevada.

 

PULITZER ACQUISITION

 

In June 2005, the Company acquired Pulitzer Inc. (Pulitzer). Pulitzer published 14 daily newspapers and more than 100 weekly newspapers and specialty publications. Pulitzer also owned a 50% interest in TNI Partners, as described more fully below. The acquisition of Pulitzer increased the Company’s circulation by more than 50% to more than 1.6 million daily and 1.9 million Sunday, and revenue by more than 60%.

 

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Pulitzer newspaper operations include St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (PD LLC), publishes the St. Louis Post-Dispatch, the only major daily newspaper serving the greater St. Louis metropolitan area. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of 31 weekly newspapers and nine niche publications that focus on separate communities within the metropolitan area. In 2007, the Suburban Journals had average unduplicated circulation of approximately 0.7 million, resulting in the delivery of approximately 1.1 million copies per week.

 

Pulitzer holds a 95% interest in the results of operations of PD LLC, and The Herald Publishing Company, LLC (Herald) holds a 5% interest.

 

Pulitzer’s wholly-owned subsidiary, Pulitzer Newspapers, Inc. (PNI), and its subsidiaries publish 12 daily newspapers and operate the related websites as well as publish more than 75 weekly newspapers, shoppers and niche publications, that serve markets in the Midwest, Southwest and West. In 2006, the Company sold the assets of The Daily News in Rhinelander, Wisconsin, the smallest of these newspapers.

 

In 2005 and 2006, the Company devoted substantial attention to the successful integration of Pulitzer into its business. The Company made significant and immediate changes to systems and other areas of operations. The Company also devoted resources and training to bring its successful selling strategies and tactics to Pulitzer. The Company believes the integration was successful, with minimal disruption to its business.

 

TNI Partners

 

As a result of the acquisition of Pulitzer, the Company owns a 50% interest in TNI Partners (TNI), the Tucson, Arizona, newspaper partnership. TNI, acting as agent for the Company’s subsidiary, Star Publishing Company (Star Publishing), and the owner of the remaining 50%, Citizen Publishing Company (Citizen), a subsidiary of Gannett Co., Inc., is responsible for printing, delivery, advertising and circulation of the Arizona Daily Star and the Tucson Citizen as well as their related online operations and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership’s operations and publication of the newspapers and other media. Each newspaper is solely responsible for its own news and editorial content. Under the amended and restated joint operating agreement between Star Publishing and Citizen (the Agency Agreement), the Arizona Daily Star remains the separate property of Star Publishing. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. Results of TNI are accounted for using the equity method.

 

The Newspaper Preservation Act of 1970 permits joint operating agreements between newspapers under certain circumstances without violation of the Federal antitrust laws. Agency agreements generally allow newspapers operating in the same market to share certain printing and other facilities and to pool certain revenue and expenses in order to decrease aggregate expenses and thereby allow the continuing operation of multiple newspapers in the same market. Newspapers in several cities operate under joint operating or agency agreements.

 

An agency agreement has governed the joint operations of the Arizona Daily Star and Tucson Citizen since 1940. The Board of Directors of TNI consists of three directors chosen by Star Publishing and three chosen by Citizen. Budgetary, key personnel and other non-news and editorial policy matters, such as advertising and circulation policies and rates or prices, are determined by the Board of Directors of TNI. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Arizona Daily Star and the Tucson Citizen benefit from increases, and can be adversely affected by decreases, in each other’s circulation. The Agency Agreement expires in 2015, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each.

 

Due to the agency relationship existing in Tucson, the Arizona Daily Star and Tucson Citizen cannot be viewed as competitors for advertising or circulation revenue. The Arizona Daily Star and Tucson Citizen compete primarily against other media, suburban, neighborhood and national newspapers, and other publications.

 

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MADISON NEWSPAPERS

 

The Company owns 50% of the capital stock of Madison Newspapers, Inc. (MNI) and 17% of the nonvoting common stock of The Capital Times Company (TCT). TCT owns the remaining 50% of the capital stock of MNI. MNI publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, as well as related online operations. MNI conducts business under the trade name Capital Newspapers. The Company has a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provides other services to MNI. The Wisconsin State Journal is classified as one of the Lee group of newspapers in the newspaper business and in the rating services. Results of MNI are accounted for using the equity method. Net income or loss of MNI (after income taxes) is allocated equally to the Company and TCT. In 2006, MNI sold the assets of its Shawano, Wisconsin, daily newspaper.

 

ADVERTISING

 

More than 77% of the Company’s 2007 revenue was derived from advertising. The Company’s strategies are to increase its share of local advertising through increased sales activities in its existing markets and, over time, to increase its print and online audiences through internal expansion into existing and contiguous markets and enhancement of online offerings, augmented by selective acquisitions. Acquisition efforts are focused on newspapers with daily circulation of 30,000 or more, as noted above and other publications and online businesses that increase the Company’s operating revenue.

 

Several of the Company’s businesses operate in geographic groups of publications, or “clusters” which provide operational efficiencies and extend sales penetration. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance or human resources, management or production of the publications. Sales penetration can improve if the sales effort is successful in cross-selling advertising into multiple publications and online. A table under the caption “Daily Newspapers and Markets” in Item 1 identifies those groups of the Company’s newspapers operating in clusters.

 

The Company’s newspapers and classified and specialty publications compete with newspapers having national or regional circulation, magazines, radio, network and cable television, other advertising media such as billboards, other classified and specialty publications, direct mail, yellow pages directories, as well as other information content providers such as online sites. Competition for advertising is based on audience size and composition, circulation levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of the Company’s daily and Sunday newspapers compete with other local daily or weekly newspapers. The Company estimates that it captures a substantial share of the total advertising dollars spent on print, broadcast and online advertising in all of its markets.

 

The number of competitors in any given market varies, and cannot be estimated with any degree of certainty. However, all of the forms of competition noted above exist to some degree in the Company’s markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1.

 

The following broadly define major categories of advertising revenue:

 

Retail advertising is revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts.

 

National advertising is revenue earned from display advertising space, or for preprinted advertising inserted in the publication, to national accounts, if there is no local retailer representing the account in the market.

 

Classified advertising, which includes employment, automotive, real estate for sale or rent, and other categories, is revenue earned from sales of advertising space in the classified section of the publication or from publications consisting primarily of such advertising.

 

Online advertising consists of display, banner, classified or other advertising on websites associated and integrated with the Company’s print publications.

 

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Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.

 

Classified publications are periodic advertising publications available in racks or delivered free, by carriers or third-class mail, to all, or selected, households in a particular geographic area. Classified publications offer advertisers a cost-effective local advertising vehicle and are particularly effective in larger markets with high media fragmentation.

 

The Company’s many geographic markets have differences in their advertising rate structures, some of which are highly complex. A single operation often has scores of rate alternatives.

 

The advertising environment is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. The Company’s enterprises are generally located in midsize and smaller markets. These markets are more stable than major metropolitan markets during the current downturn in advertising spending but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.

 

The Company’s year over year advertising results in 2007, 2006 and 2005 compare favorably to national statistics published by the Newspaper Association of America.

 

ONLINE ADVERTISING AND SERVICES

 

The Company’s online activities include websites supporting each of its daily newspapers and certain of its other publications. Internet activities of the newspapers, except for TNI and MNI, are reported and managed as a part of the Company’s publishing operations.

 

In November 2006, the Company, in conjunction with several other major publishing organizations, announced a strategic alliance with Yahoo! Inc. (Yahoo), in which the publishing consortium offers its classified employment advertising customer base the opportunity to also post job listings on Yahoo’s HotJobs national platform. In addition, the consortium and Yahoo have begun working together to provide new search, content and local applications across the newspapers’ online sites, further enhancing the value of these sites as a destination for online users. The Yahoo consortium currently includes more than 20 companies and approximately 400 daily newspapers across the United States.

 

In November 2007, the Company, along with several other major publishing organizations, announced a strategic alliance with Zillow.com in which the publishing consortium will offer its classified real estate advertising customer base the opportunity to also post listings in Zillow.com’s national platform. In November 2007, the Company also announced it was acquiring a 10% interest in Kaango, LLC, the company that operates Kaango.com, an advanced online classified advertising site.

 

The Company also owns 82.5% of an Internet service company, INN Partners, L.C. (doing business as TownNews.com), which provides online infrastructure and online publishing services for more than 1,500 daily and weekly newspapers and shoppers. In addition, the Company has a minority investment in a company which provides online editorial content and transactional and promotional opportunities.

 

Online businesses of the Company have experienced rapid growth over the last several years. Online advertising represented 7.4% of total advertising revenue in the month of September 2007, an increase from 4.7% in September 2006. Online page views increased 21.7% between September 2006 and September 2007.

 

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AUDIENCES

 

Based on independent research, the Company estimates that, in an average week, its newspapers and online sites reach approximately 71% of adults in its markets. In the St. Louis market, Scarborough Research estimates the St. Louis Post Dispatch and STLToday.com reach 60% of adults, ranking second for combined reach in the 25 most populated U.S. markets. The Company’s extensive array of suburban newspapers and other publications further increases reach in St. Louis. Readership by young adults is also significant in the Company’s markets as summarized in the table below. The Company is reaching an increasingly larger share of the market through rapid online growth, as illustrated in the table below, as well as through additional specialty and niche publications.

 

PRINT PLUS ONLINE REACH – PAST SEVEN DAYS

 

     All Adults     Age 18-34  
         2007             2006             2007             2006      

Print only

   50.2 %   49.9 %   40.3 %   37.1 %

Print and online

   16.1     11.1     17.9     11.7  

Online only

   4.7     5.7     8.2     8.1  

Total reach

   71.0 %   66.7 %   66.4 %   56.9 %

 

  Source: Lee Enterprises Tracking Survey, Wilkerson & Associates. October 2007 and 2006.
     Margin of error +/-2.8%
  Markets: St. Louis, MO, Madison, WI, Oceanside/Escondido, CA, Northwest Indiana,
     Lincoln, NE, Davenport, IA, Billings, MT, Bloomington, IL, Sioux City, IA, Waterloo, IA

 

After advertising, print circulation is the Company’s largest source of revenue. According to the Newspaper Association of America data, nationwide daily newspaper circulation unit sales have decreased 17% cumulatively through 2006 since their peak in 1984 and Sunday circulation unit sales have decreased 15% since their peak in 1990. The number of daily newspapers declined 15% from 1984 to 2006. For the six months ended September 2007, the Company’s daily circulation, which includes Pulitzer, TNI and MNI, as measured by the Audit Bureau of Circulations (ABC), or other independent organizations, declined 1.7%, and Sunday circulation declined 0.7%, significantly outperforming the industry as a whole. Since September 2001, the Company’s daily and Sunday circulation have declined cumulatively by 4.4% and 3.6%, respectively. These changes represent average annual declines of 0.7% and 0.6%, respectively. Such results are, in substantially all reporting periods, better than industry averages.

 

Growth in print and online audiences can, over time, also positively impact advertising revenue. The Company’s strategies to improve audiences include continuous improvement of content and promotional efforts. Content can include focus on local news, features, scope of coverage, headline accuracy, presentation, writing style, tone, type style and reduction of factual errors. Promotional efforts include advertising, contests and other initiatives to increase awareness of the products. Customer service can also influence print circulation. The Company’s enterprises are also focused on increasing the number of subscribers who pay for their subscriptions via automated payment mechanisms, such as credit cards or checking account withdrawals. Customers using these payment methods have historically higher retention. Other initiatives vary from location to location and are determined principally by management at the local level in collaboration with senior management of the Company. Competition for print circulation is generally based on the content, journalistic quality and price of the publication.

 

Audience competition exists in all markets, even from unpaid products, but is most significant in markets with competing daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population is sufficient to support more than one daily newspaper.

 

Changes in telemarketing regulations first effective in 2004 reduced the Company’s ability to obtain new subscribers using this channel. Other methods to attract and retain subscribers have been and remain in use. However, telemarketing has historically been the largest single source of new subscribers. Same property circulation starts obtained through the Company’s marketing efforts declined 1% in 2007 and 2% in 2006 and 2005.

 

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DAILY NEWSPAPERS AND MARKETS

 

The Company, TNI and MNI publish the following daily newspapers and online sites:

 

    Paid Circulation (1)  
Newspaper   Primary Website   Location   Daily           Sunday      

St. Louis Post-Dispatch (2)

  stltoday.com   St. Louis, MO   265,111           420,222      

Arizona Daily Star (2)(3)

  azstarnet.com   Tucson, AZ   100,910           151,995      

Capital Newspapers (4)

                             

Wisconsin State Journal

  madison.com   Madison, WI   87,708           141,234   (5 )

The Capital Times

  madison.com   Madison, WI   16,565           -       (5 )

Daily Citizen

  wiscnews.com/bdc   Beaver Dam, WI   9,888           -          

Portage Daily Register

  wiscnews.com/pdr   Portage, WI   4,900           -          

Baraboo News Republic

  wiscnews.com/bnr   Baraboo, WI   4,303           -          

North County Times (6)

  nctimes.com   Oceanside
    and Escondido, CA
  86,852           90,000      

The Times (6)

  nwitimes.com   Munster,

    Valparaiso, and
    Crown Point, IN

  83,054           90,768      

Lincoln Group

                             

Lincoln Journal Star

  journalstar.com   Lincoln, NE   76,848           82,835      

Columbus Telegram

  columbustelegram.com   Columbus, NE   8,946           9,840      

Fremont Tribune

  fremonttribune.com   Fremont, NE   8,264           -          

Beatrice Daily Sun

  beatricedailysun.com   Beatrice, NE   7,708           -          

Quad-Cities Group

                             

Quad-City Times

  qctimes.com   Davenport, IA   49,990           68,562      

Muscatine Journal

  muscatinejournal.com   Muscatine, IA   7,248           -          

The Pantagraph (2)

  pantagraph.com   Bloomington, IL   46,639           50,486      

Billings Gazette

  billingsgazette.com   Billings, MT   45,054           52,217      

Sioux City Journal (6)

  siouxcityjournal.com   Sioux City, IA   40,638           41,919      

The Courier (6)

  wcfcourier.com   Waterloo and
    Cedar Falls, IA
  39,794           50,405      

Central Illinois Newspaper Group

                             

Herald & Review

  herald-review.com   Decatur, IL   32,609           47,309      

Journal Gazette (6)

  jg-tc.com   Mattoon, IL   9,668           -          

Times-Courier (6)

  jg-tc.com   Charleston, IL   6,166           -          

River Valley Newspaper Group

                             

La Crosse Tribune

  lacrossetribune.com   La Crosse, WI   31,862           41,105      

Winona Daily News

  winonadailynews.com   Winona, MN   11,243           12,827      

The Post-Star (6)

  poststar.com   Glens Falls, NY   31,381           34,650      

The Daily Herald (2)

  heraldextra.com   Provo, UT   31,252           38,811      

Casper Star-Tribune (6)

  trib.com   Casper, WY   29,942           32,336      

Missoula Group

                             

Missoulian

  missoulian.com   Missoula, MT   29,161           33,154      

Ravalli Republic

  ravallinews.com   Hamilton, MT   5,239     (7 )   -          

Rapid City Journal

  rapidcityjournal.com   Rapid City, SD   28,856           33,670      

The Journal Times

  journaltimes.com   Racine, WI   28,287           30,471      

The Bismarck Tribune

  bismarcktribune.com   Bismarck, ND   26,809           30,613      

The Southern Illinoisan

  thesouthern.com   Carbondale, IL   25,869           36,631      

The Daily News (6)

  tdn.com   Longview, WA   21,905           21,639      

Magic Valley Group

                             

The Times-News (6)

  magicvalley.com   Twin Falls, ID   20,526           23,844      

Elko Daily Free Press (8)

  elkodaily.com   Elko, NV   6,070     (7 )   -          

South Idaho Press (8)

  southidahopress.com   Burley, ID   3,807     (7 )   -          

 

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    Paid Circulation (1)
Newspaper   Primary Website   Location   Daily        Sunday    

Central Coast Newspapers

                        

Santa Maria Times (2)

  santamariatimes.com   Santa Maria, CA   19,589        19,700    

The Lompoc Record (2)

  lompocrecord.com   Lompoc, CA   5,641        5,737    

Globe Gazette

  globegazette.com   Mason City, IA   18,444        22,611    

The Times and Democrat (6)

  thetandd.com   Orangeburg, SC   17,113        17,201    

Mid-Valley News Group

                        

Albany Democrat-Herald

  democratherald.com   Albany, OR   17,027        17,675    

Corvallis Gazette-Times

  gazettetimes.com   Corvallis, OR   11,768        11,951    

Napa Valley Register (2)

  napavalleyregister.com   Napa, CA   16,532        16,623    

The Montana Standard

  mtstandard.com   Butte, MT   14,732        14,572    

Independent Record

  helenair.com   Helena, MT   14,513        15,071    

The Sentinel (6)

  cumberlink.com   Carlisle, PA   13,846        14,817    

The Sentinel (2)

  hanfordsentinel.com   Hanford, CA   13,323        12,866    

The World (2)

  theworldlink.com   Coos Bay, OR   12,294        -        

Arizona Daily Sun (2)

  azdailysun.com   Flagstaff, AZ   11,127        12,110    

The Citizen (6)

  auburnpub.com   Auburn, NY   10,894        12,967    

The Garden Island (2)

  kauaiworld.com   Lihue, HI   9,646        9,779    

Daily Chronicle (2)

  daily-chronicle.com   DeKalb, IL   9,142        10,724    

The Ledger Independent (6)

  maysville-online.com   Maysville, KY   8,701        -        

Daily Journal (2)

  dailyjournalonline.com   Park Hills, MO   7,884        8,201    

The Chippewa Herald

  chippewa.com   Chippewa Falls, WI   6,775        6,948    
            1,610,063        1,897,096    

 

(1) Source: ABC: Six months ended September 2007, unless otherwise noted.
(2) Acquired in 2005.
(3) Owned by Star Publishing but published through TNI.
(4) Owned by MNI.
(5) Combined edition.
(6) Acquired in 2002.
(7) Source: Company statistics.
(8) Acquired in 2004.

 

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COMMERCIAL PRINTING

 

The Company offers commercial printing services through the following entities:

 

     Location

Selma Enterprises

   Selma, California

William Street Press

   Decatur, Illinois

Hawkeye Printing and Trico Communications

   Davenport, Iowa

Platen Press

   Butte, Montana

Farcountry Press

   Helena, Montana

Journal Star Commercial Printing

   Lincoln, Nebraska

Plaindealer Publishing

   Tekamah, Nebraska

Triangle Press

   Chippewa Falls, Wisconsin

Wingra Printing (1)

   Madison, Wisconsin

 

(1) Owned by MNI, which is 50% owned by the Company.

 

Certain of the Company’s newspapers also directly provide commercial printing services. Commercial printing business is highly competitive and generally has lower operating margins than newspapers.

 

NEWSPRINT

 

The basic raw material of newspapers, and classified and specialty publications, is newsprint. The Company and its subsidiaries purchase newsprint from U.S. and Canadian producers. The Company believes it will continue to receive a supply of newsprint adequate for its needs and considers its relationships with newsprint producers to be good. Newsprint prices are volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. Between September 2006 and September 2007, the FOEX 30-pound newsprint price index declined 13.3%. Price fluctuations can have a significant effect on the results of operations. The Company has not entered into derivative contracts for newsprint. For additional information regarding supply of newsprint, see “Contractual Obligations” under Item 7, included herein. For the quantitative impacts of these fluctuations, see “Quantitative And Qualitative Disclosures About Market Risk” under Item 7A, included herein.

 

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EXECUTIVE TEAM

 

The following table lists executive team members of the Company as of November 29, 2007:

 

         
Name    Age   

Service

with the

Company

  

Named

to Current
Position

   Current Position

Mary E. Junck

   60    June 1999    January 2002    Chairman, President and Chief

    Executive Officer

Joyce L. Dehli

   49    August 1987    February 2006    Vice President – News

Paul M. Farrell

   51    May 2007    May 2007    Vice President – Sales &
    Marketing

Nancy L. Green

   65    December 2000    September 2002    Vice President – Circulation

Karen J. Guest

   54    July 2006    July 2006    Vice President – Law and Chief
    Legal Officer

Michael R. Gulledge

   47    October 1982    May 2005    Vice President – Publishing

Daniel K. Hayes

   62    September 1969    September 2005    Vice President – Corporate
    Communications

Brian E. Kardell

   44    January 1991    August 2003    Vice President – Production and
    Chief Information Officer

Vytenis P. Kuraitis

   59    August 1994    January 1997    Vice President – Human
    Resources

Kevin D. Mowbray

   45    September 1986    November 2004    Vice President – Publishing

Gregory P. Schermer

   53    February 1989    November 1997    Vice President – Interactive
    Media

Carl G. Schmidt

   51    May 2001    May 2001    Vice President, Chief Financial
    Officer and Treasurer

Greg R. Veon

   55    April 1976    November 1999    Vice President – Publishing

 

Mary E. Junck was elected Chairman, President and Chief Executive Officer in 2002. From 2001 to 2002 she served as President and Chief Executive Officer. From 2000 to 2001 she served as President and Chief Operating Officer. From 1999 to 2000 she served as Executive Vice President and Chief Operating Officer.

 

Joyce L. Dehli was appointed Vice President – News in February 2006. From April 2005 to February 2006, she served as Director of Editorial Development. From October 2004 to April 2005 she served as Editorial Training Manager. From August 2003 to October 2004 she served as Managing Editor of the Wisconsin State Journal. From 2001 to August 2003 she served as Assistant Managing Editor of the Wisconsin State Journal.

 

Paul M. Farrell was appointed Vice President – Sales & Marketing in May 2007. From July 2004 to May 2007 he served as Senior Vice President of The Providence Journal Co., a subsidiary of Belo Corp. From 1999 to July 2004 he served as Advertising Director of The Boston Globe, a division of the New York Times Company.

 

Nancy L. Green was appointed Vice President – Circulation in 2002 and named Publisher of The Courier in August 2004. From 2000 to 2002, she served as Director of Circulation Sales, Distribution and Marketing.

 

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Karen J. Guest was appointed Vice President – Law and Chief Legal Officer in July 2006. From April 2003 until July 2006, she served as General Counsel to PAJ, Inc. Prior to April 2003, she served as Vice-President/General Counsel for United Advertising Publications, Inc.

 

Michael R. Gulledge was elected a Vice President – Publishing in May 2005 and named Publisher of the Billings Gazette in October 2000. From 2002 to May 2005 he served as a Group Publisher.

 

Daniel K. Hayes was appointed Vice President – Corporate Communications in September 2005. From 1998 to September 2005 he served as Director of Communications.

 

Brian E. Kardell was appointed Vice President – Production and Chief Information Officer in August 2003. From 2001 to August 2003, he served as Vice President – Information Systems and Chief Information Officer.

 

Vytenis P. Kuraitis was elected Vice President – Human Resources in 1997.

 

Kevin D. Mowbray was elected a Vice President – Publishing in November 2004 and named Publisher of the St. Louis Post-Dispatch in May 2006. From November 2004 to May 2006 he served as Publisher of The Times. From 2002 to November 2004 he served as Vice President – Sales & Marketing.

 

Gregory P. Schermer was elected Vice President – Interactive Media in 1997. He was elected to the Board of Directors of the Company in 1999. From 1989 to July 2006, he also served as Corporate Counsel of the Company.

 

Carl G. Schmidt was elected Vice President, Chief Financial Officer and Treasurer in 2001.

 

Greg R. Veon was elected a Vice President – Publishing in 1999.

 

EMPLOYEES

 

At September 30, 2007, the Company had approximately 9,250 employees, including approximately 2,300 part-time employees, exclusive of MNI and TNI. Full-time equivalent employees at September 30, 2007, totaled approximately 8,300. The Company considers its relationships with its employees to be good.

 

Bargaining unit employees represent approximately 800, or 70%, of the total employees of the St. Louis Post-Dispatch. The St. Louis Post-Dispatch has contracts with substantially all bargaining unit employees with expiration dates through January 2011. In 2007, the St. Louis Post-Dispatch executed a new agreement expiring in 2010, with the Graphic Communications International Union (GCIU) Local No. 6-505M which represents 13 employees and is currently in negotiations with the Machinist District No. 9, which represents 12 employees. The previous GCIU contract expired in September 2002. All St. Louis Post-Dispatch labor contracts contain no-strike clauses.

 

Approximately 150 employees in eight additional locations are represented by collective bargaining units. Contracts at four of these locations have expired and negotiations are ongoing.

 

CORPORATE GOVERNANCE AND PUBLIC INFORMATION

 

The Company has a long, substantial history of progressive corporate governance practices. The Board of Directors has a lead independent director, and has had one for many years. Currently, seven of nine members of the Board of Directors are independent, as are all members of the Board’s Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by the Company’s independent registered public accounting firm and its affiliates. The Company was also among the first to voluntarily record expense related to employee stock options.

 

At www.lee.net, one may access a wide variety of information, including news releases, Securities and Exchange Commission filings, financial statistics, annual reports, presentations, governance documents, newspaper profiles and online links. The Company makes available via its website all filings made by the Company under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All

 

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such filings are available free of charge. The content of any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.

 

OTHER MATTERS

 

In the opinion of management, compliance with present statutory and regulatory requirements respecting environmental quality will not necessitate significant capital outlays, materially affect the earning power of the business of the Company, or cause material changes in the Company’s business, whether present or intended.

 

ITEM 1A. RISK FACTORS THAT COULD AFFECT OPERATING RESULTS

 

Risk exists that the Company’s past results may not be indicative of future results. A discussion of certain of the most significant of these risks follows. See also, “Forward-Looking Statements” on page 1, included herein. In addition, a number of other factors (those identified elsewhere in this document and others, both known and unknown) may cause actual results to differ materially from expectations.

 

OPERATING REVENUE

 

Advertising revenue in certain categories, or all categories, may decrease in the future. For example, print automotive classified advertising revenue declined in 2007 and 2006, primarily related to industry-wide issues affecting certain domestic auto manufacturers. Such decreases may not be offset by growth in advertising in other categories, such as online revenue, which has been rising significantly for the last several years. There can also be no assurance such online growth will continue. In addition, major retail store chains have experienced significant merger and acquisition activity over the last several years, effectively reducing the number of brand names under which the merged entities operate.

 

In 2007, print real estate classified advertising also suffered declines due to cyclical issues affecting the residential real estate market nationally. Such reductions may negatively impact future amounts of advertising revenue generated by the Company and are currently impacting certain retail advertising customers, such as furniture, electronics and home improvement retailers.

 

Circulation unit sales have been declining fractionally for several years. The possibility exists that future price increases may be delayed or reduced as a result of future declines in circulation unit sales. The Company is reaching an increasingly larger share of the market through rapid online growth, as well as through additional specialty and niche publications.

 

See Item 1, “Advertising”, included herein, for additional information on the risks associated with advertising revenue.

 

OPERATING EXPENSES

 

The results of future labor negotiations could affect the Company’s operating results. For additional information concerning the Company’s labor relations, see Item 1, “Employees”, included herein.

 

Newsprint comprises a significant amount of the Company’s operating costs. See Item 1, “Newsprint” and Item 7A, “Commodities” included herein, for additional information on the risks associated with changes in newsprint costs.

 

INTEREST EXPENSE

 

The Company has substantial debt, the majority of which is subject to changes in market interest rates. See Item 7A, “Interest Rates” included herein, for additional information on the risks associated with floating rate debt.

 

GOODWILL AND OTHER INTANGIBLE ASSETS

 

The Company has significant amounts of goodwill and identified intangible assets. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”, included herein, for additional information on the risks associated with such assets.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

The Company’s executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The lease expires in 2019.

 

All of the Company’s principal printing facilities except Madison, Wisconsin, (which is owned by MNI), Tucson, (which is jointly owned by Star Publishing and Citizen), St. Louis as described below, and leased land for the Helena, Montana and Lihue, Hawaii plants, are owned. All facilities are well maintained, in good condition, suitable for existing office and publishing operations and adequately equipped. With the exception of St. Louis, none of the Company’s facilities is individually significant to its business.

 

Information related to St. Louis facilities at September 30, 2007 is as follows:

 

(Square Feet)    Owned    Leased

PD LLC

   755,000    52,000

Suburban Journals

   121,000    48,000

 

The Baraboo News Republic, Beatrice Daily Sun, Corvallis Gazette-Times, Daily Citizen, Journal Gazette, The Lompoc Record, Muscatine Journal, Ravalli Republic, Times Courier and Winona Daily News, as well as many of the Company’s and MNI’s more than 300 other publications, are printed at other Company facilities to enhance operating efficiency.

 

The Company’s newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.

 

ITEM 3.  LEGAL PROCEEDINGS

 

The Company is involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While the Company is unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters will not have a material adverse effect on the Company’s Consolidated Financial Statements, taken as a whole.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote of security holders during the three months ended September 30, 2007.

 

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PART II

 

ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON STOCK

AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF COMMON STOCK

 

Common Stock of the Company is listed on the New York Stock Exchange. Class B Common Stock is not traded on an exchange but is readily convertible to Common Stock. Class B Common Stock was issued to stockholders of record of the Company in 1986 pursuant to a 100% stock dividend and is converted at sale, or at the option of the holder, into Common Stock. The table below includes the high and low prices of Common Stock for each quarter during the past three years, the closing price at the end of each quarter and dividends per common share.

 

     Quarter
     1st      2nd      3rd      4th

STOCK PRICES

                                 

2007

                                 

High

   $ 32.13      $ 35.65      $ 30.92      $ 21.48

Low

     24.55        29.48        20.50        14.58

Closing

     31.06        30.05        20.86        15.57

2006

                                 

High

   $ 43.05      $ 37.43      $ 33.74      $ 27.61

Low

     36.36        32.26        26.95        22.98

Closing

     36.91        33.29        26.95        25.24

2005

                                 

High

   $ 48.85      $ 46.06      $ 43.68      $ 44.32

Low

     44.87        42.70        39.82        39.90

Closing

     46.08        43.40        40.09        42.48

DIVIDENDS

                                 

2007

   $ 0.18      $ 0.18      $ 0.18      $ 0.18

2006

     0.18        0.18        0.18        0.18

2005

     0.18        0.18        0.18        0.18

 

Common Stock and Class B Common Stock have identical rights with respect to cash dividends and upon liquidation. For a more complete description of the relative rights of Common Stock and Class B Common Stock, see Note 12 of the Notes to Consolidated Financial Statements, included herein.

 

At September 30, 2007, the Company had 7,270 holders of Common Stock, including participants in the Company’s employee stock purchase plans, and 1,395 holders of Class B Common Stock.

 

During the three months ended September 30, 2007, the Company purchased shares of Common Stock, as noted in the table below, in transactions with participants in its 1990 Long-Term Incentive Plan. The transactions resulted from the withholding of shares to fund the exercise price and/or taxes related to the exercise of stock options or vesting of restricted Common Stock. The Company is not currently engaged in share repurchases related to a publicly announced plan or program.

 

Month    Total Number of Shares
Purchased
   Average Price
Per Share

July

   113    $21.23

September

   847    15.57

Total

   960    $16.24

 

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On November 14, 2007, the Board of Directors declared a dividend in the amount of $0.19 per share on the issued and outstanding Common Stock and Class B Common Stock of the Company, to be paid on January 2, 2008, to stockholders of record on December 3, 2007.

 

Performance Presentation

 

The following graph compares the quarterly percentage change in the cumulative total shareholder return of the Company, the Standard & Poor’s (S&P) 500 Stock Index, and a Peer Group Index, in each case for the five years ended September 30, 2007 (with September 30, 2002 as the measurement point). Total shareholder return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer’s share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.

 

LOGO

 

Source: Standard & Poors

 

     September 30
     2002    2003    2004    2005    2006    2007

Lee Enterprises, Incorporated

   $ 100.00    $ 119.95    $ 146.01    $ 136.03    $ 82.73    $ 52.55

Peer Group Index

     100.00      109.79      114.29      100.21      87.35      79.48

S&P 500 Stock Index

     100.00      124.40      141.65      159.01      176.17      205.13

 

The S&P 500 Stock Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The Peer Group Index is comprised of 12 U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The Peer Group Index includes Belo Corp., Dow Jones & Company, Inc., Gannett Co., Inc., Sun-Times Media Group, Inc., Journal Communications, Inc., Journal Register Company, The McClatchy Company, Media General, Inc., The New York Times Company, The E.W. Scripps Company, The Tribune Company and The Washington Post Company.

 

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ITEM 6.  SELECTED FINANCIAL DATA

 

Selected financial data is as follows:

 

(Thousands, Except Per Common Share Data)    2007     2006     2005     2004     2003  
                       (1)                  

OPERATING RESULTS

                                        

Operating revenue

   $ 1,127,661     $ 1,128,648     $ 818,890     $ 643,277     $ 606,489  

Operating expenses, excluding depreciation and amortization

     855,324       849,288       614,111       466,866       442,911  

Depreciation and amortization

     93,589       96,070       59,249       43,930       41,903  

Equity in earnings of associated companies

     20,124       20,739       12,784       8,523       8,053  

Operating income

     198,872       204,029       158,314       141,004       129,728  

Financial income

     7,613       6,054       2,824       1,066       1,120  

Financial expense

     (90,341 )     (95,939 )     (38,038 )     (12,665 )     (16,535 )

Income from continuing operations

   $ 80,908     $ 71,136     $ 70,862     $ 82,973     $ 73,022  

Discontinued operations

     91       (304 )     6,016       3,098       5,019  

Net income

   $ 80,999     $ 70,832     $ 76,878     $ 86,071     $ 78,041  

EARNINGS (LOSS) PER COMMON SHARE

 

                               

Basic:

                                        

Continuing operations

   $ 1.77     $ 1.57     $ 1.57     $ 1.85     $ 1.65  

Discontinued operations

     -           (0.01 )     0.13       0.07       0.11  

Net income

   $ 1.77     $ 1.56     $ 1.70     $ 1.92     $ 1.76  

Diluted:

                                        

Continuing operations

   $ 1.77     $ 1.56     $ 1.56     $ 1.84     $ 1.64  

Discontinued operations

     -           (0.01 )     0.13       0.07       0.11  

Net income

   $ 1.77     $ 1.56     $ 1.70     $ 1.91     $ 1.75  

Weighted average common shares:

                                        

Basic

     45,671       45,421       45,118       44,792       44,316  

Diluted

     45,804       45,546       45,348       45,092       44,513  

Dividends per common share

   $ 0.72     $ 0.72     $ 0.72     $ 0.72     $ 0.68  

BALANCE SHEET INFORMATION (September 30)

 

                               

Total assets

   $ 3,260,963     $ 3,329,809     $ 3,445,200     $ 1,403,844     $ 1,421,377  

Debt, including current maturities (2)

     1,395,625       1,525,000       1,688,000       213,600       305,200  

Debt, net of cash and restricted cash and investments (2)

     1,284,565       1,420,302       1,599,397       205,590       294,136  

Stockholders’ equity

     1,086,442       990,625       936,410       876,843       802,156  

 

(1) Includes four months of operations from the Pulitzer acquisition, which was consummated in June 2005.
(2) Principal amount, excluding fair value adjustments in 2007, 2006 and 2005.

 

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion includes comments and analysis relating to the Company’s results of operations and financial condition as of, and for each of the three years ended, September 2007. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.

 

NON-GAAP FINANCIAL MEASURES

 

No non-GAAP financial measure should be considered as a substitute for any related financial measure under accounting principles generally accepted in the United States of America (GAAP). However, the Company believes the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate its financial performance, or assist in forecasting and analyzing future periods. The Company also believes such non-GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business or its ability to meet debt service requirements.

 

Operating Cash Flow and Operating Cash Flow Margin

 

Operating cash flow, which is defined as operating income before depreciation, amortization, and equity in earnings of associated companies, and operating cash flow margin (operating cash flow divided by operating revenue) are non-GAAP financial measures that are used in the analysis below. The Company believes these measures provide meaningful supplemental information because of their focus on results from operations before depreciation and amortization and earnings from equity investments.

 

Reconciliations of operating cash flow and operating cash flow margin to operating income and operating income margin, the most directly comparable measures under GAAP, are included in the table below:

 

(Thousands)    2007    Percent of
Revenue
    2006    Percent of
Revenue
    2005    Percent of
Revenue
 

Operating cash flow

   $ 272,337    24.2 %   $ 279,360    24.8 %   $ 204,779    25.0 %

Less depreciation and amortization

     93,589    8.3       96,070    8.5       59,249    7.2  

Equity in earnings of associated companies

     20,124    1.8       20,739    1.8       12,784    1.6  

Operating income

   $ 198,872    17.6 %   $ 204,029    18.1 %   $ 158,314    19.3 %

 

Adjusted Income From Continuing Operations and Adjusted Earnings Per Common Share

 

Adjusted income from continuing operations and adjusted earnings per common share, which are defined as income from continuing operations and earnings per common share adjusted to exclude matters of a substantially non-recurring nature, are non-GAAP financial measures that are used in the analysis below. The Company believes these measures provide meaningful supplemental information by identifying expenses and expense reductions that are not indicative of core business operating results and are of a substantially non-recurring nature.

 

Reconciliations of adjusted income from continuing operations and adjusted earnings per common share to income from continuing operations and earnings per common share, respectively, the most directly comparable measures under GAAP, are set forth below under the caption “Overall Results”.

 

SAME PROPERTY COMPARISONS

 

Certain information below, as noted, is presented on a same property basis, which is exclusive of acquisitions and divestitures consummated in the current or prior year. The Company believes such comparisons provide meaningful supplemental information for an understanding of changes in its revenue and operating expenses. Same property comparisons exclude TNI and MNI. The Company owns 50% of TNI and also owns 50% of the capital stock of MNI, both of which are reported using the equity method of accounting. Same property comparisons also exclude corporate office costs.

 

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CRITICAL ACCOUNTING POLICIES

 

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of the Company’s accounting policies.

 

Goodwill and Other Intangible Assets

 

In assessing the recoverability of goodwill and other nonamortized intangible assets, the Company makes a determination of the fair value of its business. Fair value is determined using a combination of an income approach, which estimates fair value based upon future cash flows discounted to their present value, and a market approach, which estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the publishing industry.

 

The valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by management. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows.

 

The Company analyzes goodwill and other nonamortized intangible assets for impairment on an annual basis or more frequently if impairment indicators are present. See Note 6 of the Notes to Consolidated Financial Statements, included herein, for a more detailed explanation of the Company’s intangible assets.

 

The Company also periodically evaluates its determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact the cash flows of the Company. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.

 

Pension, Postretirement and Postemployment Benefit Plans

 

The Company evaluates its liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating 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 the Company used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.

 

Income Taxes

 

Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

The Company files income tax returns with the Internal Revenue Service (IRS) and various state tax jurisdictions. From time to time, the Company is subject to routine audits by those agencies, and those audits may result in proposed adjustments. The Company has considered the alternative interpretations

 

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that may be assumed by the various taxing agencies, believes its positions taken regarding its filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Income and Comprehensive Income in the periods in which such matters are ultimately determined. The Company does not believe the final resolution of such matters will be material to its consolidated financial position or cash flows.

 

Revenue Recognition

 

Advertising revenue is recorded when advertisements are placed in the publication or on the related online site. Circulation revenue is recorded as newspapers are distributed over the subscription term. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for publications or advance payments for advertising.

 

Uninsured Risks

 

The Company is self-insured for health care, workers compensation and certain long-term disability costs of its employees, subject to stop loss insurance, which limits exposure to large claims. The Company accrues its estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts.

 

The Company’s reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

 

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

 

In 2006, the FASB issued Statement 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, which amends Statements 87, 88, 106 and 132(R). Statement 158 requires the recognition of the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and recognition of changes in that funded status in the year in which the changes occur as a component of comprehensive income. The Company adopted the recognition and disclosure provisions of Statement 158 as of September 30, 2007. The adoption of Statement 158 increased accumulated other comprehensive income, net of income taxes, by $40,912,000, increased pension assets by $9,591,000, and reduced pension and postretirement benefit obligations by $32,649,000 and $23,540,000, respectively.

 

Statement 158 will also require the Company to change its measurement date to the last day of the fiscal year from a date three months prior to the end of the fiscal year, beginning in 2009. The change in measurement date will require a one-time adjustment to retained earnings, the effect of which cannot be determined at this time. None of the changes required will impact the Company’s results of operations or cash flows.

 

In 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes, which is effective for the Company in 2008. Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement 109. Interpretation 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company will adopt Interpretation 48 effective in October 2007, with any cumulative effect of the adoption recorded as an adjustment to retained earnings. The Company has not completed its evaluation of the effects of Interpretation 48 on its Consolidated Financial Statements.

 

In 2006, the FASB issued Statement 157, Fair Value Measurements, which defines fair value, provides guidelines for measuring fair value and expands disclosure requirements. Statement 157 does not require any new fair value measurement but applies to the accounting pronouncements that require or permit fair value measurement. Statement 157 is effective for the Company in 2009. The Company does not

 

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anticipate that the implementation of Statement 157 will have a material impact on its financial position, results of operation, or cash flows. Subsequently, the FASB deferred the effective date of this pronouncement until 2010 for non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements.

 

In 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides the Company the option to measure many financial instruments and certain other items at fair value that are not currently required or permitted to be measured at fair value. Statement 159 is effective for the Company in 2009. The Company has not completed its evaluation on the effect of Statement 159 on its Consolidated Financial Statements.

 

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CONTINUING OPERATIONS

 

2007 vs. 2006

 

Operating results, as reported in the Consolidated Financial Statements, are summarized below:

 

      Percent Change  
(Thousands, Except Per Common Share Data)    2007     2006     Total    

Same

Property

 

Advertising revenue:

                            

Retail

   $ 459,132     $ 463,991     (1.0 )%   (1.1 )%

National

     54,902       57,869     (5.1 )   (5.1 )

Classified:

                            

Daily newspapers:

                            

Employment

     82,358       90,508     (9.0 )   (9.0 )

Automotive

     55,437       60,953     (9.0 )   (9.0 )

Real estate

     59,078       63,802     (7.4 )   (7.4 )

All other

     39,616       39,217     1.0     1.0  

Other publications

     48,505       45,868     5.7     5.7  

Total classified

     284,994       300,348     (5.1 )   (5.1 )

Online

     56,324       35,769     57.5     57.5  

Niche publications

     16,361       16,591     (1.4 )   (1.4 )

Total advertising revenue

     871,713       874,568     (0.3 )   (0.3 )

Circulation

     204,373       205,718     (0.7 )   (0.7 )

Commercial printing

     16,609       17,265     (3.8 )   (1.9 )

Online services and other

     34,966       31,097     12.4     9.5  

Total operating revenue

     1,127,661       1,128,648     (0.1 )   (0.2 )

Compensation

     442,494       435,836     1.5     0.7  

Newsprint and ink

     112,483       120,191     (6.4 )   (4.7 )

Other operating expenses

     296,116       280,018     5.7     6.0  

Curtailment gains

     (3,731 )     -         NM     NM  

Early retirement programs

     7,962       8,654     NM     NM  

Transition costs

     -           4,589     NM     NM  
       855,324       849,288     0.7     1.3  

Operating cash flow

     272,337       279,360     (2.5 )   (4.0 )

Depreciation and amortization

     93,589       96,070     (2.6 )   (3.0 )

Equity in earnings of associated companies

     20,124       20,739     (3.0 )      

Operating income

     198,872       204,029     (2.5 )      

Non-operating expense, net

     (82,749 )     (91,922 )   (10.0 )      

Income from continuing operations before income taxes

     116,123       112,107     3.6        

Income tax expense

     34,146       39,740     (14.1 )      

Minority interest

     1,069       1,231     (13.2 )      

Income from continuing operations

   $ 80,908     $ 71,136     13.7 %      

Earnings per common share:

                            

Basic

   $ 1.77     $ 1.57     12.7 %      

Diluted

     1.77       1.56     13.5        

 

Day changes can affect results in varying degrees. Sundays generate substantially more advertising and circulation revenue than any other day of the week. Enterprises owned before the Pulitzer acquisition, which account for approximately 61% of revenue in 2007, had one more Sunday of business activity in 2007 compared with 2006. The former Pulitzer operations use period accounting. As a result, their fiscal year ends on the last Sunday in September. These enterprises had 53 weeks (371 days) of business activity in 2007 compared with 52 weeks (364 days) in 2006. All other enterprises used calendar year accounting in 2007 and 2006. Beginning in 2008, all of the Company’s enterprises will use period accounting. Because of the change the Company will have 364 days of business activity in 2008.

 

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In total, acquisitions and divestitures accounted for $3,900,000 of operating revenue in 2007 and $3,007,000 of operating revenue in 2006.

 

Advertising Revenue

 

In 2007, total advertising revenue decreased $2,855,000, or 0.3%, and same property advertising revenue decreased $2,913,000, or 0.3%. On a combined basis, print and online retail advertising increased 0.5%. Same property print retail revenue decreased $4,886,000, or 1.1%, in 2007. A 2.1% decrease in daily newspaper retail advertising lineage contributed to the decrease. Same property average retail rates, excluding preprint insertions, decreased 0.4% in 2007. Retail preprint insertion revenue increased 2.6%, partially offsetting lineage and rate declines. Online retail advertising increased 53.8% resulting in the overall increase in retail advertising.

 

The table below combines print and online advertising revenue and reclassifies certain retail revenue to classified based on the primary business of the advertiser:

 

(Thousands, Same Property)    2007    2006    Percent Change  

Retail

   $ 459,259    $ 457,149    0.5 %

Classified:

                    

Employment

   $ 117,688    $ 110,167    6.8 %

Automotive

     73,040      77,490    (5.7 )

Real estate

     76,679      81,378    (5.8 )

Other

     73,586      73,783    (0.3 )

Total classified revenue

   $ 340,993    $ 342,818    (0.5 )%

 

Same property print classified advertising revenue decreased $15,382,000, or 5.1%, in 2007. On a combined basis, print and online classified revenue decreased 0.5%. Increases in online advertising more than offset print advertising declines in employment advertising and mitigated declines in other print classified categories. Higher rate print employment advertising at the daily newspapers decreased 9.0% for the year on a same property basis. The Company’s decreases in employment classified advertising compare favorably to national survey amounts. The September 2007 Help Wanted Index, as calculated by the Conference Board, decreased 17.2% from the prior year level. Same property print automotive advertising decreased 9.0% amid a continuing industry-wide decline. Same property print real estate advertising decreased 7.4% in a weakening housing market nationally, which also negatively impacted the home improvement, furniture and electronics categories of retail revenue. Other daily newspaper print classified advertising increased 1.0% on a same property basis. Same property classified advertising rates decreased 2.9%, primarily due to decreases in employment and automotive rates.

 

Advertising lineage, as reported on a same property basis for the Company’s daily newspapers only, consists of the following:

 

(Thousands of Inches)    2007    2006    Percent Change  

Retail

   13,441    13,723    (2.1 )%

National

   678    778    (12.9 )

Classified

   16,208    16,925    (4.2 )
     30,327    31,426    (3.5 )%

 

Online advertising revenue increased 57.5% on a same property basis, due to rate increases, improvements in the Company’s online sites and cross-selling with the Company’s print publications. In addition, the Company began offering online employment advertising in Yahoo! Hot Jobs in 2007. In 2007 online advertising surpassed national as a source of advertising revenue.

 

National advertising decreased $2,969,000, or 5.1%, on a same property basis due to a 12.9% decline in lineage offset by a 6.1% increase in average national rate. Advertising in niche publications decreased 1.4% on a same property basis.

 

The Company’s year-over-year advertising results in 2007, 2006 and 2005 compare favorably to national statistics published by the Newspaper Association of America.

 

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Circulation and Other Revenue

 

Circulation revenue decreased $1,345,000, or 0.7% in 2007, and same property circulation revenue decreased $1,366,000, or 0.7%. The Company’s total average daily newspaper circulation units, including TNI and MNI, as measured by the ABC, or other independent organizations, declined 1.7% for the six months ended September 2007, compared to the same period in the prior year, and Sunday circulation declined 0.7%, significantly outperforming the industry as a whole. For the six months ended March 2007, total average daily circulation units including TNI and MNI, declined 0.3% and Sunday circulation decreased 1.3%, again outperforming the industry. In spite of modest declines in circulation, Company research in its larger markets indicates it is reaching an increasingly larger audience in these markets through rapid online growth, as well as through additional specialty and niche publications.

 

Same property commercial printing revenue decreased $322,000, or 1.9%, in 2007. Same property online services and other revenue increased $2,720,000, or 9.5%, in 2007.

 

Operating Expenses

 

Costs other than depreciation and amortization increased $6,036,000, or 0.7%, in 2007, and increased $10,300,000, or 1.3%, on a same property basis. In total, acquisitions and divestitures accounted for $3,782,000 of operating expenses, excluding depreciation and amortization, in 2007 and $2,720,000 in 2006.

 

Compensation expense increased $6,658,000, or 1.5%, in 2007 and same property compensation expense increased 0.7%. Normal salary adjustments and associated increases in payroll taxes and benefits account for the increase, partially offset by a decline in same property full time equivalent employees of 1.1% in 2007 from the prior year level. Such costs are expected to increase at a low single digit rate in 2008.

 

Newsprint and ink costs decreased $7,708,000, or 6.4%, in 2007 due to lower newsprint prices and decreased usage. Costs decreased 4.7% on a same property basis and volume decreased 4.7% on a same property basis, due to migration to lighter weight paper and narrower page widths. Newsprint prices, which had been increasing since the summer of 2002, declined from September 2006 until June 2007 and were stable for the remainder of 2007. Unit costs for newsprint are expected to rise in 2008. See Item 7A, “Commodities”, included herein.

 

Other operating costs, which are comprised of all operating expenses not considered to be compensation, newsprint, depreciation or amortization, increased $16,098,000, or 5.7%, in 2007 and increased 6.0% on a same property basis. Expenses to support revenue initiatives in print and online and maintain circulation contributed to the growth in other operating expenses. Such costs are expected to increase at a low single digit rate in 2008.

 

In 2007, defined pension benefits for certain of the Company’s employees were frozen at then current levels. As a result, the Company recognized a curtailment gain of $1,791,000 in 2007, and also recognized the Company’s 50% share of the $2,074,000 gain recognized by TNI.

 

In 2007, defined postretirement medical benefits for certain of the Company’s employees were modified. As a result, the Company recognized a curtailment gain of $1,940,000.

 

In 2007, the St. Louis Post-Dispatch concluded an offering of early retirement incentives that resulted in an adjustment of staffing levels. 60 employees volunteered to take advantage of the offer, which included enhanced pension and insurance benefits, and lump-sum cash payments based on continuous service. The initial cost totaled $10,704,000 before income tax benefit of which $7,962,000 was recorded as expense. The $2,742,000 remaining cost was offset against previously existing unrecognized gains in certain of the Company’s defined benefit plans. Approximately $3,700,000 of the cost represents cash payments substantially all of which are to be made in 2008, with the remainder due primarily to enhancements of pension and other postretirement benefits. The annual savings from the program is estimated to be $4,000,000, beginning in 2008.

 

In 2006, the St. Louis Post-Dispatch concluded another offering of early retirement incentives that resulted in an adjustment of staffing levels. 130 employees volunteered to take advantage of the offer, which included enhanced pension and insurance benefits and lump sum cash payments based on continuous service. The cost totaled $17,778,000 before income tax benefit, with $8,654,000 recognized

 

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in 2006, and $9,124,000 recognized in 2005. Approximately $7,000,000 of the cost represented cash payments made, with the remainder due primarily to enhancements of pension and other postretirement benefits.

 

Transition costs related to the acquisition of Pulitzer, which are not included in same property comparisons, totaled $4,589,000 in 2006. Transition costs are comprised of costs directly related to the acquisition of Pulitzer that are separately identifiable and non-recurring, but not capitalizable under GAAP.

 

Results of Operations

 

Operating cash flow decreased 2.5% to $272,337,000 in 2007 from $279,360,000 in 2006, and decreased 4.0% on a same property basis. Operating cash flow margin decreased to 24.2% from 24.8% in the prior year reflecting a decrease in operating revenue and increase in operating expenses, as well as unusual costs (and cost reductions) in both years.

 

Depreciation expense decreased $562,000, or 1.7%, and amortization expense decreased $1,919,000, or 3.1%, in 2007.

 

In 2006, the Company, based on its analysis and in conjunction with its ongoing requirement to assess the estimated useful lives of intangible assets, concluded that the period of economic benefit of certain identified intangible assets related to the Pulitzer acquisition had decreased. As a result, the weighted-average useful life of customer lists, including those of TNI, was decreased from approximately 21 years to 17 years.

 

The change in estimated useful life of such assets resulted in recognition of additional amortization expense of $1,847,000 in 2006, of which $469,000 is recorded in equity in earnings of TNI. This change in non-cash amortization expense has no impact on the Company’s cash flows or debt covenants.

 

In 2006, the Company also recorded a separate non-cash charge of $5,526,000 to reduce the value of nonamortized masthead intangible assets of Pulitzer, of which $4,939,000 is recorded in amortization expense and $587,000 is recorded in equity in earnings of TNI.

 

Equity in earnings in associated companies decreased 3.0% in 2007. TNI, which uses period accounting, had 53 weeks of business activity in 2007, compared with 52 weeks in the prior year. The Company’s 50% share of TNI’s curtailment gain increased results by $1,037,000. MNI results in 2006 were reduced by the $1,002,000 loss on the sale of its Shawano, Wisconsin daily newspaper.

 

Operating income decreased $5,157,000, or 2.5%. Operating income margin decreased to 17.6% in 2007 from 18.1% due to a decrease in operating revenue and increase in operating expenses, as well as unusual costs (and cost reductions) in both years.

 

Non-Operating Income and Expense

 

Financial expense decreased $5,598,000, or 5.8%, to $90,341,000 due to debt reduction of $129,375,000 funded by cash generated from operations and 2006 asset sales, which more than offset higher interest rates. In 2006, the Company wrote off certain other investments which resulted in a loss before income taxes of $2,037,000.

 

Overall Results

 

Income taxes were 29.4% of income from continuing operations before income taxes in 2007 and 35.4% in 2006. The favorable resolution of federal and state tax audits and other matters reduced income tax expense by $6,880,000 in 2007. The effective tax rate would have been 35.3% in 2007 without these matters. The Company believes, absent unusual tax matters, that its effective income tax rate in 2008 will be approximately 34.6%.

 

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As a result of all of the above, income from continuing operations totaled $80,908,000 in 2007, an increase of 13.7% compared to $71,136,000 in 2006. Earnings per diluted common share from continuing operations were $1.77 in 2007 and $1.56 in 2006. Excluding unusual costs (and cost reductions), as detailed in the table below, diluted earnings per common share, as adjusted, were $1.66 in 2007, compared to $1.82 in 2006.

 

     2007     2006
(Thousands, Except Per Share Data)    Amount     Per Share     Amount     Per Share

Income from continuing operations, as reported

   $ 80,908     $ 1.77     $ 71,136     $ 1.56

Adjustments to income from continuing operations:

                              

Curtailment gains

     (3,731 )             -            

Curtailment gains, TNI

     (1,037 )             -            

Early retirement programs

     7,962               8,654        

Reduction in value of identified intangible assets

     -                   5,526        

Transition costs

     -                   4,589        
       3,194               18,769        

Income tax benefit of adjustments, net of impact on minority interest

     (1,406 )             (6,894 )      
       1,788       0.04       11,875       0.26

Settlement (benefit) of federal and state tax matters

     (6,880 )     (0.15 )     -           -    

Income from continuing operations, as adjusted

   $ 75,816     $ 1.66       $83,011     $ 1.82

 

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2006 vs. 2005

 

Operating results, as reported in the Consolidated Financial Statements, are summarized below:

 

       Percent Change  
(Thousands, Except Per Common Share Data)    2006      2005      Total    

Same

Property

 

Advertising revenue:

                              

Retail

   $ 463,991      $ 341,977      35.7 %   0.5 %

National

     57,869        33,031      75.2     (7.2 )

Classified:

                              

Daily newspapers:

                              

Employment

     90,508        63,923      41.6     7.1  

Automotive

     60,953        49,320      23.6     (10.2 )

Real estate

     63,802        47,171      35.3     1.3  

All other

     39,217        29,200      34.3     1.8  

Other publications

     45,868        28,411      61.4     6.7  

Total classified

     300,348        218,025      37.8     1.1  

Online

     35,769        17,983      98.9     43.1  

Niche publications

     16,591        13,093      26.7     8.2  

Total advertising revenue

     874,568        624,109      40.1     1.7  

Circulation

     205,718        153,571      34.0     (1.0 )

Commercial printing

     17,265        14,766      16.9     0.3  

Online services and other

     31,097        26,444      17.6     (1.3 )
Total operating revenue    1,128,648      818,890      37.8     1.1     

Compensation

     435,836        325,959      33.7     1.8  

Newsprint and ink

     120,191        79,331      51.5     8.7  

Other operating expenses

     280,018        190,768      46.8     5.5  

Early retirement program

     8,654        9,124      NM     NM  

Transition costs

     4,589        8,929      NM     NM  
     849,288      614,111      38.3     3.9     

Operating cash flow

     279,360        204,779      36.4     (5.0 )

Depreciation and amortization

     96,070        59,249      62.1     (1.8 )

Equity in earnings of associated companies

     20,739        12,784      62.2        

Operating income

     204,029        158,314      28.9        

Non-operating expense, net

     (91,922 )      (46,834 )    96.3        

Income from continuing operations before
income taxes

     112,107        111,480      0.6        

Income tax expense

     39,740        40,458      (1.8 )      

Minority interest

     1,231        160      NM        

Income from continuing operations

   $ 71,136      $ 70,862      0.4 %      

Earnings per common share:

                              

Basic

   $ 1.57      $ 1.57      -     %      

Diluted

     1.56        1.56      -            

 

Sundays generate substantially more advertising and circulation revenue than any other day of the week. 2006 had the same number of Sundays as 2005.

 

In June 2005, the Company acquired Pulitzer. Pulitzer published fourteen daily newspapers (the smallest of which was sold in 2006), including the St. Louis Post-Dispatch, and more than 100 weekly newspapers and specialty publications. Pulitzer also owns a 50% interest in TNI. The acquisition of Pulitzer increased the Company’s circulation by more than 50% and revenue by more than 60%.

 

In total, acquisitions and divestitures accounted for $450,341,000 of operating revenue in 2006 and $147,643,000 of operating revenue in 2005.

 

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Advertising Revenue

 

In 2006, total advertising revenue increased $250,459,000, or 40.1%, and same property advertising revenue increased $8,559,000, or 1.7%. Same property print retail revenue increased $1,431,000, or 0.5%, in 2006. A 1.0% decrease in retail advertising lineage offset the increase. Same property average retail rates, excluding preprint insertions, increased 1.2% in 2006.

 

Same property print classified advertising revenue increased $1,907,000, or 1.1%, in 2006. Higher rate employment advertising at the daily newspapers increased 7.1% for the year on a same property basis. The Company’s increases in print employment classified advertising compare favorably to national survey amounts. The September 2006 Help Wanted Index, as calculated by the Conference Board, decreased 18.9% from the prior year level. Same property print automotive advertising decreased 10.2%, due to a 4.5% decrease in average automotive rates and a 6.0% decrease in lineage. Same property print real estate advertising increased 1.3% due to an increase in advertising of real estate for sale. Other daily newspaper print classified advertising increased 1.8% on a same property basis. Same property print classified advertising rates increased 1.0%, primarily due to an increase in employment rates offset by declines in automotive rates.

 

Advertising lineage, as reported on a same property basis for the Company’s daily newspapers only, consists of the following:

 

(Thousands of Inches)    2006    2005    Percent Change  

Retail

   10,633    10,741    (1.0 )%

National

   492    580    (15.2 )

Classified

   11,929    11,976    (0.4 )
     23,054    23,297    (1.0 )%

 

Online advertising revenue increased 43.1% on a same property basis, due to rate increases, expanded use of the Company’s online business model and cross-selling with the Company’s print publications. Online classified advertising registered particularly strong growth. Advertising in niche publications increased 8.2% on a same property basis, due to new publications in existing markets and penetration of new and existing markets, offset by the loss of one significant publication in a larger market.

 

Circulation and Other Revenue

 

Circulation revenue increased $52,147,000, or 34.0% in 2006, and same property circulation revenue decreased $1,230,000, or 1.0%. The Company’s total average daily newspaper circulation units, including Pulitzer, TNI and MNI, as measured by the ABC, or other independent organizations, declined 0.3% for the six months ended September 2006, compared to the same period in the prior year, and Sunday circulation declined 0.5%, significantly outperforming the industry as a whole. For the six months ended March 2006, total average daily circulation units, including Pulitzer, TNI and MNI, declined 0.6% and Sunday circulation decreased 1.0%, again outperforming the industry.

 

Same property commercial printing revenue increased $45,000, or 0.3%, in 2006. Same property online services and other revenue decreased $314,000, or 1.3%, in 2006.

 

Operating Expenses and Results of Operations

 

Costs other than depreciation and amortization increased $235,177,000, or 38.3%, in 2006, and increased $17,728,000, or 3.9%, on a same property basis. In total, acquisitions and divestitures accounted for $345,467,000 of operating expenses, excluding depreciation and amortization, in 2006 and $155,404,000 in 2005.

 

Compensation expense increased $109,877,000, or 33.7%, in 2006 due to costs of acquired businesses and a 1.8% increase in same property compensation expense. Normal salary adjustments and associated increases in payroll taxes and benefits account for the increase in same property costs. Same property full time equivalent employees declined 0.4% in 2006 from the prior year level.

 

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Newsprint and ink costs increased $40,860,000, or 51.5%, in 2006 due to price increases and costs of acquired businesses, and increased 8.7% on a same property basis. Volume decreased 2.0% on a same property basis, due to migration to lighter weight paper and narrower page widths. Newsprint unit costs had been rising since late 2002.

 

Other operating costs, which are comprised of all operating expenses not considered to be compensation, newsprint, depreciation or amortization, increased $89,250,000, or 46.8%, in 2006 and increased 5.5% on a same property basis. Costs associated with new niche publications and expenses to increase circulation using sources other than telemarketing also contributed to the growth in costs.

 

In 2006, the St. Louis Post-Dispatch concluded an offering of early retirement incentives that resulted in an adjustment of staffing levels. 130 employees volunteered to take advantage of the offer, which included enhanced pension and insurance benefits, and lump-sum cash payments based on continuous service. The annual pretax savings from the program, net of positions filled, was estimated to be $6,600,000 to $7,000,000, with savings of $6,575,000 in 2006. The cost totaled $17,778,000 before income tax benefit, with $8,654,000 recognized in 2006, and $9,124,000 in 2005. Approximately $7,000,000 of the cost represents cash payments made, with the remainder due primarily to enhancements of pension and other postretirement benefits.

 

Transition costs related to the acquisition of Pulitzer, which are not included in same property comparisons, totaled $4,589,000 in 2006 and $8,929,000 in 2005. Transition costs were comprised of costs directly related to the acquisition of Pulitzer that were separately identifiable and non-recurring, but not capitalizable under GAAP.

 

Operating cash flow increased 36.4% to $279,360,000 in 2006 from $204,779,000 in 2005, and decreased 5.0% on a same property basis. Operating cash flow margin decreased to 24.8% from 25.0% in the prior year reflecting the overall lower margin of the Pulitzer newspapers, transition costs related to the Pulitzer acquisition and the St. Louis Post-Dispatch early retirement program.

 

Depreciation expense increased $10,149,000, or 42.7%, and amortization expense increased $26,672,000, or 75.1%, in 2006, due primarily to the acquisition of Pulitzer.

 

In 2006, the Company, based on its most recent analysis and in conjunction with its ongoing requirement to assess the estimated useful lives of intangible assets, concluded that the period of economic benefit of certain identified intangible assets related to the Pulitzer acquisition had decreased. As a result, the weighted-average useful life of customer lists, including those of TNI, was decreased from approximately 21 years to 17 years.

 

The change in estimated useful life of such assets resulted in recognition of additional amortization expense of $1,847,000 in 2006, of which $469,000 was recorded in equity in earnings of TNI.

 

In 2006, the Company also recorded a separate non-cash charge of $5,526,000 to reduce the value of nonamortized masthead intangible assets of Pulitzer, of which $4,939,000 was recorded in amortization expense and $587,000 was recorded in equity in earnings of TNI.

 

Equity in earnings in associated companies increased 62.2% in 2006 due to the inclusion of TNI for the full year, offset by a decrease in earnings of MNI. MNI results were reduced by the $1,002,000 loss on the sale of its Shawano, Wisconsin daily newspaper. Operating income increased $45,715,000, or 28.9%. Operating income margin decreased to 18.1% in 2006 from 19.3% due to the inclusion of Pulitzer results, early retirement and transition costs and the reduction in value of intangible assets noted above.

 

Non-Operating Income and Expense

 

Financial expense increased $57,901,000, or 152.2%, to $95,939,000 due to the full year effect of increased debt and associated financing costs as a result of the Pulitzer acquisition and higher interest rates, partially offset by debt reduction of $163,000,000 funded by cash generated from operations and sales of assets. In 2006, the Company wrote off certain other investments which resulted in a loss before income taxes of $2,037,000. In 2005, the Company refinanced its then existing debt as a result of the Pulitzer acquisition, which resulted in a one-time loss before income taxes from early extinguishment of debt of $11,181,000.

 

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Overall Results

 

Income taxes were 35.4% of income from continuing operations before income taxes in 2006 and 36.3% in 2005.

 

As a result of all of the above, income from continuing operations totaled $71,136,000 in 2006, an increase of 0.4% compared to $70,862,000 in 2005. Earnings per diluted common share from continuing operations were $1.56 in both 2006 and 2005.

 

Excluding unusual costs, as detailed in the table below, diluted earnings per common share, as adjusted, were $1.82 in 2006, compared to $1.94 in 2005.

 

     2006    2005

(Thousands, Except Per Share Data)

     Amount     Per Share      Amount     Per Share

Income from continuing operations, as reported

   $ 71,136     $1.56    $ 70,862     $1.56

Adjustments to income from continuing operations:

                         

Early retirement program

     8,654            9,124      

Reduction in value of identified intangible assets

     5,526            -          

Transition costs

     4,589            8,929      

Loss on extinguishment of debt

     -                11,181      
       18,769            29,234      

Income tax benefit of adjustments, net of impact on minority interest

     (6,894 )          (11,954 )    
     11,875       0.26    17,280       0.38

Income from continuing operations, as adjusted

   $ 83,011     $1.82    $ 88,142     $1.94

 

DISCONTINUED OPERATIONS

 

Revenue from discontinued operations in 2007, 2006 and 2005 was $114,000 $41,104,000 and $42,297,000, respectively. Income (loss) from discontinued operations before income taxes was $(16,000) in 2007, $7,803,000 in 2006 and $9,911,000 in 2005.

 

In September 2006, the Company sold several stand-alone publishing and commercial printing operations in the Pacific Northwest, a twice-weekly newspaper in Oregon, and a daily newspaper in Rhinelander, Wisconsin. The transactions resulted in an after tax loss of $5,204,000, which is recorded in discontinued operations in 2006. Proceeds from the sales totaled $53,898,000 of which $20,700,000 was received in 2007 and $33,198,000 in 2006.

 

In 2007, the Company sold a weekly newspaper in Oregon for $250,000.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Operating Activities

 

Cash provided by operating activities of continuing operations was $168,912,000 in 2007, $197,161,000 in 2006 and $151,686,000 in 2005. Increased income from continuing operations in 2007 and 2006 was accompanied by an increase in depreciation and amortization. Losses related to financing activities influenced 2005 results and changes in operating assets and liabilities and the timing of income tax payments accounted for the bulk of the remainder of the change in all years.

 

Investing Activities

 

Cash required for investing activities totaled $38,709,000 in 2007, $42,683,000 in 2006 and $1,272,309,000 in 2005. Capital spending totaled $34,567,000 in 2007 and $32,544,000 in 2006 and accounted for substantially all of the usage of funds in 2007 and 2006. Pulitzer, other acquisitions and capital expenditures accounted for substantially all of the usage of funds in 2005, offset by proceeds from sales of securities.

 

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The Company anticipates that funds necessary for capital expenditures, which are expected to total approximately $31,000,000 in 2008, and other requirements, will be available from internally generated funds, availability under its existing Credit Agreement or, if necessary, by accessing the capital markets.

 

Financing Activities

 

In 2006, the Company entered into an amended and restated credit agreement (Credit Agreement) with a syndicate of financial institutions. The Credit Agreement provides for aggregate borrowing of up to $1,435,000,000 and consists of a $950,000,000 A Term Loan, $35,000,000 B Term Loan and $450,000,000 revolving credit facility. The Credit Agreement also provides the Company with the right, with the consent of the administrative agent, to request at certain times prior to June 2012 that one or more lenders provide incremental term loan commitments of up to $500,000,000, subject to certain requirements being satisfied at the time of the request. The Credit Agreement matures in June 2012 and amends and replaces a $1,550,000,000 credit agreement (Old Credit Agreement) consummated in 2005. Interest rate margins under the Credit Agreement are generally lower than under the Old Credit Agreement. Other conditions of the Credit Agreement are substantially the same as the Old Credit Agreement.

 

The Credit Agreement contains customary affirmative and negative covenants for financing of its type. These financial covenants include a maximum total leverage ratio (5.75:1 at September 30, 2007) and minimum interest expense coverage ratio of 2.5:1. None of the covenants included in the Credit Agreement is considered by the Company to be restrictive to normal operations or historical amounts of stockholder dividends. At September 30, 2007, the Company is in compliance with such covenants.

 

The Credit Agreement requires the Company to apply the net proceeds from asset sales to repayment of the A Term Loan to the extent such proceeds exceed the amount used to purchase assets (other than inventory and working capital) within one year of the asset sales. Repayments in 2007 met required repayments related to its 2006 sales transactions.

 

In 2005, upon consummation of the Old Credit Agreement, the Company borrowed $1,462,000,000. The proceeds were used to consummate the acquisition of Pulitzer, to repay existing indebtedness of the Company, as discussed more fully below, and to pay related fees and expenses.

 

In connection with the execution of the Old Credit Agreement, the Company redeemed all of the $52,000,000 outstanding indebtedness under its then existing credit agreement and the existing senior notes of the Company under a Note Purchase Agreement, dated as of March 18, 1998 totaling $102,000,000. Refinancing of existing debt of the Company resulted in a pretax loss of $11,181,000.

 

In 2005, the Company executed interest rate swaps in the notional amount of $350,000,000 with a forward starting date of November 30, 2005. The interest rate swaps have terms of 2 to 5 years, carry interest rates from 4.2% to 4.4% (plus the applicable LIBOR margin) and effectively fix the Company’s interest rate on debt in the amount, and for the time periods, of such instruments. In November 2007, interest rate swaps in the notional amount of $150,000,000 expire.

 

In October 2007, the Company executed interest rate collars in the notional amount of $150,000,000 with a forward starting date of November 30, 2007. The collars have a two year term and limit LIBOR to an average floor of 3.57% and a cap of 5.0%. Such collars effectively limit the range of the Company’s exposure to interest rates to LIBOR greater than the floor and less than the cap (in either case plus the applicable LIBOR margin) for the time period of such instruments.

 

In 2005, the Company filed a Form S-3 shelf registration statement (Shelf) with the SEC, which has been declared effective. The Shelf gives the Company the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $500,000,000.

 

The Shelf enables the Company to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Net proceeds from the sale of any securities may be used for general

 

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corporate purposes, including repayment or refinancing of debt, working capital, capital expenditures, acquisitions or the repurchase of common stock, subject to conditions of existing debt agreements.

 

Cash required by financing activities totaled $160,934,000 in 2007, $191,930,000 in 2006, and provided $1,112,035,000 of funds in 2005. Debt reduction and dividends accounted for the majority of the usage of funds in 2007 and 2006. The annual dividend was $0.72 per share in 2007, 2006 and 2005. Borrowing to fund the Pulitzer acquisition and refinance existing debt accounted for substantially all of the funds provided in 2005.

 

Discontinued Operations and Other Matters

 

Cash provided by discontinued operations totaled $22,093,000, $38,547,000 and $8,121,000 in 2007, 2006 and 2005, respectively. Cash proceeds from the sales of discontinued operations and cash generated from operations were the primary sources of funds in 2007 and 2006. Cash generated from operations was the primary source of funds in 2005.

 

Cash and cash equivalents decreased $8,638,000 in 2007, increased $1,095,000 in 2006, and decreased $467,000 in 2005.

 

SEASONALITY

 

The Company’s largest source of publishing revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the first and third fiscal quarters. Advertising revenue is lowest in the second fiscal quarter.

 

Quarterly results of operations are summarized in Note 21 to the Consolidated Financial Statements, included herein.

 

INFLATION

 

The Company has not been significantly impacted by general inflationary pressures over the last several years. The Company anticipates that changing costs of newsprint, its basic raw material, may impact future operating costs. Fuel costs have also become more volatile. Price increases (or decreases) for the Company’s products are implemented when deemed appropriate by management. The Company continuously evaluates price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.

 

CONTRACTUAL OBLIGATIONS

 

The following table summarizes the more significant of the Company’s contractual obligations.

 

(Thousands of Dollars)    Payments (or Commitments) Due by Year
Nature of Obligation      Total     
 
Less
Than 1
     1-3      3-5     
 
More
Than 5

Long-term debt (principal amount)

   $ 1,395,625    $ 62,250    $ 614,750    $ 718,625    $ -    

Operating lease obligations

     20,618      3,832      5,836      3,641      7,309

Financial expense (1)

     43,107      24,633      18,474      -          -    

Capital expenditure commitments

     4,803      4,803      -          -          -    
     $ 1,464,153    $ 95,518    $ 639,060    $ 722,266    $ 7,309

Newsprint (metric tons)

     49,925      39,550      10,375      -          -    

 

(1) Financial expense excludes interest on floating rate debt. Based on interest rates and the principal amount of floating rate debt at September 30, 2007, including debt subject to interest rate swaps and collars described below, annual interest on floating rate debt is expected to total approximately $64,000,000 in 2008.

 

The table above excludes future cash requirements for pension, postretirement and postemployment obligations. The periods in which these obligations will be settled in cash are not readily determinable and

 

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are subject to numerous future events and assumptions. The Company’s estimate of cash requirements for these obligations in 2008 is approximately $4,610,000.

 

A substantial amount of the Company’s deferred income tax liabilities is related to acquisitions and will not result in future cash payments. See Note 14 of the Notes to Consolidated Financial Statements, included herein.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.

 

INTEREST RATES

 

Restricted Cash and Investments

 

Interest rate risk in the Company’s restricted cash and investments is managed by investing only in securities with maturities no later than May 2010, after which time all restrictions on such funds lapse. Only U.S. Government and related securities are permitted.

 

Debt

 

The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to the London Interbank Offered Rate (LIBOR). A 100 basis point increase to LIBOR would decrease income from continuing operations before income taxes on an annualized basis by approximately $7,396,000, based on $739,625,000 of floating rate debt outstanding at September 30, 2007, after consideration of the interest rate swaps described below, and excluding debt of MNI. Such interest rates may also decrease.

 

In 2005, the Company executed interest rate swaps in the notional amount of $350,000,000 with a forward starting date of November 30, 2005. The interest rate swaps have terms of 2 to 5 years, carry interest rates from 4.2% to 4.4% (plus the applicable LIBOR margin) and effectively fix the Company’s interest rate on debt in the amounts, and for the time periods, of such instruments. In November 2007, interest rate swaps in the notional amount of $150,000,000 expire.

 

In October 2007, the Company executed interest rate collars in the notional amount of $150,000,000 with a forward starting date of November 30, 2007. The collars have a two year term and limit LIBOR to an average floor of 3.57% and a cap of 5.0%. Such collars effectively limit the range of the Company’s exposure to interest rates to LIBOR greater than the floor and less than the cap (in either case plus the applicable LIBOR margin) for the time period of such instruments.

 

Certain of the Company’s interest-earning assets, including those in employee benefit plans, also function as a natural hedge against fluctuations in interest rates on debt.

 

At September 30, 2007, after consideration of the interest rate swaps described above, approximately 53% of the principal amount of the Company’s debt is subject to floating interest rates.

 

COMMODITIES

 

Certain materials used by the Company are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancelable supply contracts. The Company is also involved in continuing programs to mitigate the impact of cost increases through identification of sourcing and operating efficiencies. Primary commodity price exposures are newsprint and, to a lesser extent, ink and energy costs. Newsprint prices, which had been declining since September 2006, have been stable since June 2007. In July 2007, several major newsprint manufacturers announced a price increase of $25 per metric ton on newsprint, effective for deliveries in November 2007. In November 2007, several major newsprint manufacturers announced an additional

 

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price increase of $60 per metric ton on newsprint. The increase, as announced, is expected to be staged in equal amounts over three months commencing with deliveries in January 2008. The final extent of changes in price, if any, is subject to negotiation between such manufacturers and the Company.

 

A $10 per metric ton newsprint price increase would result in an annualized reduction in income before income taxes of approximately $1,639,000 based on anticipated consumption in 2008, excluding consumption of MNI and TNI. Such prices may also decrease.

 

In October 2007, Abitibi-Consolidated Inc. and Bowater Inc. announced consummation of a merger of the two companies. The merger significantly increases the market share of the combined company from that of the individual companies and is expected to create substantial operating efficiencies. The Company acquired newsprint and specialty paper products from both Abitibi-Consolidated Inc and Bowater Inc. At the present time, the impact on pricing of products sold to the Company as a result of the merger cannot be determined.

 

SENSITIVITY TO CHANGES IN VALUE

 

The estimate that follows is intended to measure the maximum potential impact on fair value of fixed rate debt of the Company in one year from adverse changes in market interest rates under normal market conditions. The calculation is not intended to represent the actual loss in fair value that the Company expects to incur. The estimate does not consider favorable changes in market rates. The position included in the calculation is fixed rate debt, the principal amount of which totals $306,000,000 at September 30, 2007.

 

The estimated maximum potential one-year loss in fair value from a 100 basis point movement in interest rates on market risk sensitive investment instruments outstanding at September 30, 2007, is approximately $4,657,000. There is no impact on reported results from such changes in interest rates.

 

Changes in the value of interest rate swaps and collars from movements in interest rates are not determinable, due to the number of variables involved in the pricing of such instruments. However, increases in interest rates would generally result in increases in the fair value of such instruments.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

In order to ensure that the information that must be disclosed in filings with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner, the Company has disclosure controls and procedures in place. The Company’s chief executive officer, Mary E. Junck, and chief financial officer, Carl G. Schmidt, have reviewed and evaluated disclosure controls and procedures as of September 30, 2007, and have concluded that such controls and procedures are effective.

 

There have been no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect such controls, during the year ended September 30, 2007.

 

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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Lee Enterprises, Incorporated (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of the Company’s Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America.

 

Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on the assessment and those criteria, we believe that the Company maintained effective internal control over financial reporting as of September 30, 2007.

 

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. Their report appears on the following page.

 

/s/ Mary E. Junck

      /s/ Carl G. Schmidt

Mary E. Junck

      Carl G. Schmidt

Chairman, President and Chief Executive Officer

November 29, 2007

     

Vice President, Chief Financial Officer

  and Treasurer

        November 29, 2007

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders

Lee Enterprises, Incorporated and subsidiaries

Davenport, Iowa

 

We have audited the internal control over financial reporting of Lee Enterprises, Incorporated and subsidiaries (the Company) as of September 30, 2007, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Financial Statements as of and for the year ended September 30, 2007 of the Company and our report dated November 29, 2007 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans as of September 30, 2007.

 

/s/ DELOITTE & TOUCHE LLP

 

Davenport, Iowa

November 29, 2007

 

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ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS

AND CORPORATE GOVERNANCE

 

Information with respect to this Item, except for certain information related to the Company’s Executive Officers, is included under the caption “Executive Team” in Part I of this Form 10-K, is included in the Company’s Proxy Statement to be filed in January 2008, which is incorporated herein by reference, under the captions “Proposal 1 – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. The Company’s Executive Officers are those elected officers whose names and certain information are set forth under the caption “Executive Team” in Part 1 of this Form 10-K.

 

The Company has a Code of Business Conduct and Ethics (Code) that applies to all of its employees, including its principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of the Company’s Board of Directors and is annually affirmed by its directors and executive officers. The Company maintains a corporate governance page on its website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance.” A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by the Company from, a provision of the Code will be posted on the Company’s website.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2008, which is incorporated herein by reference, under the captions, “Compensation of Directors”, “Executive Compensation” and “Compensation Discussion and Analysis”; provided, however, that the subsection entitled “Executive Compensation – Report of the Executive Compensation Committee of the Board of Directors on Executive Compensation” shall not be deemed to be incorporated by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

 

Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2008, which is incorporated herein by reference, under the caption “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information”.

 

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ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS

AND DIRECTOR INDEPENDENCE

 

Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2008, which is incorporated herein by reference, under the caption “Directors’ Meetings and Committees of the Board of Directors”.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2008, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

The following documents are filed as part of this Annual Report on Form 10-K:

 

FINANCIAL STATEMENTS

 

Consolidated Balance Sheets – September 30, 2007 and 2006

Consolidated Statements of Income and Comprehensive Income – Years ended September 30, 2007, 2006 and 2005

Consolidated Statements of Stockholders’ Equity – Years ended September 30, 2007, 2006 and 2005

Consolidated Statements of Cash Flows – Years ended September 30, 2007, 2006 and 2005

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

 

FINANCIAL STATEMENT SCHEDULES

 

All schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements.

 

EXHIBITS

 

See Exhibit Index, included herein.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 29th day of November 2007.

 

LEE ENTERPRISES, INCORPORATED

 

/s/ Mary E. Junck

      /s/ Carl G. Schmidt

Mary E. Junck

      Carl G. Schmidt

Chairman, President and Chief Executive Officer

     

Vice President, Chief Financial Officer
and Treasurer

(Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their respective capacities on the 29th day of November 2007.

 

Signature


           

/s/ Richard R. Cole

          Director

Richard R. Cole

         

/s/ Nancy S. Donovan

          Director

Nancy S. Donovan

         

/s/ Mary E. Junck

         

Chairman, President, and
Chief Executive Officer, and Director

Mary E. Junck

         

/s/ William E. Mayer

          Director

William E. Mayer

         

/s/ Herbert W. Moloney III

          Director

Herbert W. Moloney III

         

/s/ Andrew E. Newman

          Director

Andrew E. Newman

         

/s/ Gordon D. Prichett

          Director

Gordon D. Prichett

         

/s/ Gregory P. Schermer

         

Vice President – Interactive Media,
and Director

Gregory P. Schermer

         

/s/ Mark B. Vittert

          Director

Mark B. Vittert

         

 

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EXHIBIT INDEX

 

Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by the Company with the Securities and Exchange Commission, as indicated. Exhibits marked with a plus (+) are management contracts or compensatory plan contracts or arrangements filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. All other documents listed are filed with this Annual Report on Form 10-K.

 

Number    Description
2.1 *    Agreement and Plan of Merger dated as of January 29, 2005 among Lee Enterprises, Incorporated, LP Acquisition Corp. and Pulitzer Inc. (Exhibit 2.1 to Form 8-K filed on February 3, 2005)
2.2 *    Acquisition Agreement by and among Lee Enterprises, Incorporated, Howard Publications, Inc., Howard Energy Co., Inc. and the stockholders of Howard Publications, Inc. named therein dated February 11, 2002 and First Amendment thereto dated March 29, 2002 (Exhibit 2.1 to Form 8-K filed on April 2, 2002)
2.3 *    Asset Purchase Agreement dated September 6, 2006 by and among Lee Enterprises, Incorporated, Lee Procurement Solutions Co. and Sound Publishing, Inc. (Exhibit 2.3 to Form 10-K for the Fiscal Year Ended September 30, 2006)
2.4 *    Asset Purchase Agreement dated September 5, 2006 by and among Lee Enterprises, Incorporated, Lee Procurement and Target Media Partners Operating Company, LLC (Exhibit 2.4 to Form 10-K for the Fiscal Year Ended September 30, 2006)
3.1.2a *    Restated Certificate of Incorporation of Lee Enterprises, Incorporated, as amended, as of March 3, 2005 (Exhibit 3.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005)
3.2 *    Amended By-Laws of Lee Enterprises, Incorporated effective May 17, 2007. (Exhibit 99.1 to Form 8-K filed May 21, 2007)
4 *    Rights Agreement, dated as of May 7, 1998, between Lee Enterprises, Incorporated and The First Chicago Trust Company of New York, which includes the form of Certificate of Designation of the Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C (Exhibit 1.1 to Current Report on Form 8-A dated May 26, 1998, filed on May 26, 1998)
10.1 *    Amended and Restated Credit Agreement, dated as of December 21, 2005, by and among Lee Enterprises, Incorporated, the lenders from time to time party thereto, Deutsche Bank Trust Company Americas, as Administrative Agent, Deutsche Bank Securities Inc. and SunTrust Capital Markets, Inc., as Joint Lead Arrangers, Deutsche Bank Securities Inc., as Book Running Manager, SunTrust Bank, as Syndication Agent and Bank of America, N.A., The Bank of New York and The Bank of Tokyo-Mitsubishi, Ltd., Chicago Branch, as Co-Documentation Agents (Exhibit 10 to Form 10-Q for Fiscal Quarter Ended December 31, 2005)
10.2 *    Amended and Restated Agreement and Plan of Merger by and among Pulitzer Publishing Company, Pulitzer Inc. and Hearst-Argyle Television, Inc. dated as of May 25, 1998 (Exhibit 10.1 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.3 *    Amended and Restated Joint Operating Agreement, dated December 22, 1988, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.4 *   

Partnership Agreement, dated December 22, 1988, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.3 to Form 10-Q for the Fiscal Quarter Ended

June 30, 2005)

 

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Number    Description
10.5 *    Lease Agreement between Ryan Companies US, Inc. and Lee Enterprises, Incorporated dated May 2003 (Exhibit 10.7 to Form 10-K for the Fiscal Year Ended September 30, 2003)
10.6 *    Joint Venture Agreement, dated as of May 1, 2000, among Pulitzer Inc., Pulitzer Technologies, Inc., The Herald Company, Inc. and St. Louis Post-Dispatch LLC (Exhibit 10.4 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.7 *    St. Louis Post-Dispatch LLC Note Agreement, dated as of May 1, 2000, as amended on November 23, 2004 (Exhibit 10.8 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.8 *    Pulitzer Inc. Guaranty Agreement, dated as of May 1, 2000 as amended on August 7, 2000, November 23, 2004 and June 3, 2005 (Exhibit 10.9 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.9 *    Non-Confidentiality Agreement, dated as of May 1, 2000 (Exhibit 10.10 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.10 +*    Form of Director Compensation Agreement of Lee Enterprises, Incorporated for non-employee director deferred compensation (Exhibit 10.7 to Form 10-K for the Fiscal Year Ended September 30, 2004)
10.11.1a +*    Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (effective as of October 1, 1999, as amended November 16, 2006) (Appendix B to Schedule 14A Definitive Proxy Statement for 2006)
10.11.2a +*    Forms of related Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement, Accelerated Ownership Stock Option Agreement and Restricted Stock Agreement related to Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (effective as of October 1, 1999, as amended November 16, 2005). (Exhibit 10.15.1a to Form 10-K for the Fiscal Year Ended September 30, 2005)
10.11.3a +*    Form of Key Executive Restricted Stock Agreement related to Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (Exhibit 10.2 to Form 8-K filed on November 26, 2004)
10.12 +*    Lee Enterprises, Incorporated Amended and Restated 1996 Stock Plan for Non-Employee Directors (Exhibit A to Schedule 14A Definitive Proxy Statement for 2003)
10.13 +*    Lee Enterprises, Incorporated Supplementary Benefit Plan (Exhibit 10.4 to Form 10-K for the Fiscal Year Ended September 30, 2002)
10.14 *    Amended and Restated Pulitzer Inc. Supplemental Executive Benefit Pension Plan (restated as of June 3, 2005) (Exhibit 10.15 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
10.15 +*    Form of Employment Agreement for Lee Enterprises, Incorporated Executive Officers Group (Exhibit 10 to Form 10-K for the Fiscal Year Ended September 30, 1998)
10.16 +*    Form of Indemnification Agreement for Lee Enterprises, Incorporated Directors and Executive Officers Group (Exhibit 10 to Form 10-K for the Fiscal Year Ended September 30,1998)
10.17 +*    Lee Enterprises, Incorporated 2005 Incentive Compensation Program (Appendix A to Schedule 14A Definitive Proxy Statement for 2005)

 

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Table of Contents
Number    Description
10.18 +*    Cancellation Agreement dated November 19, 2004 between Lee Enterprises, Incorporated and Mary E. Junck (Exhibit 10.1 to Form 8-K filed on November 26, 2004)
21    Subsidiaries and associated companies
23    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
24    Power of Attorney
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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CONSOLIDATED FINANCIAL STATEMENTS    PAGE

Consolidated Balance Sheets

   42

Consolidated Statements of Income and Comprehensive Income

   44

Consolidated Statements of Stockholders’ Equity

   45

Consolidated Statements of Cash Flows

   46

Notes to Consolidated Financial Statements

   47

Report of Independent Registered Public Accounting Firm

   76

 

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Table of Contents

 

CONSOLIDATED BALANCE SHEETS

 

     September 30
(Thousands, Except Per Share Data)    2007    2006

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ -         $ 8,638

Accounts receivable, less allowance for doubtful accounts:

             

2007 $10,363; 2006 $11,313

     119,477      115,353

Receivable from associated companies

     1,563      1,563

Receivable from sales of discontinued operations

             -      20,700

Inventories

     14,251      19,271

Deferred income taxes

     7,343      11,079

Assets of discontinued operations

             -      342

Other

     6,338      7,466

Total current assets

     148,972      184,412

Investments:

             

Associated companies

     191,975      198,266

Restricted cash and investments

     111,060      96,060

Other

     20,749      20,825

Total investments

     323,784      315,151

Property and equipment:

             

Land and improvements

     31,804      31,778

Buildings and improvements

     191,080      181,517

Equipment

     316,824      301,162

Construction in process

     14,559      13,260
       554,267      527,717

Less accumulated depreciation

     227,048      200,465

Property and equipment, net

     327,219      327,252

Goodwill

     1,514,357      1,498,830

Other intangible assets

     920,682      980,912

Other

     25,949      23,252

Total assets

   $ 3,260,963    $ 3,329,809

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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     September 30
     2007    2006

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Current maturities of long-term debt

   $ 62,250    $ 35,375

Accounts payable

     39,485      38,129

Compensation and other accrued liabilities

     96,233      58,457

Income taxes payable

     7,971      22,634

Dividends payable

     6,703      6,581

Unearned revenue

     38,915      38,624

Liabilities of discontinued operations

             -      523

Total current liabilities

     251,557      200,323

Long-term debt, net of current maturities

     1,346,630      1,510,459

Pension obligations

     2,302      38,420

Postretirement and postemployment benefit obligations

     72,236      100,231

Other retirement and compensation obligations

     11,711      27,364

Deferred income taxes

     481,565      454,315

Minority interest

     7,291      6,274

Other

     1,229      1,798

Total liabilities

     2,174,521      2,339,184

Stockholders’ equity:

             

Serial convertible preferred stock, no par value;
authorized 500 shares; none issued

             -              -

Common Stock, $2 par value; authorized
120,000 shares; issued and outstanding:

     79,958      78,974

2007 39,979 shares;

             

2006 39,487 shares

             

Class B Common Stock, $2 par value; authorized
30,000 shares; issued and outstanding:

     12,416      12,788

2007 6,208 shares;

             

2006 6,394 shares

             

Additional paid-in capital

     132,090      123,738

Retained earnings

     819,786      771,947

Accumulated other comprehensive income

     42,192      3,178

Total stockholders’ equity

     1,086,442      990,625

Total liabilities and stockholders’ equity

   $ 3,260,963    $ 3,329,809

 

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

(Thousands, Except Per Common Share Data)    2007     2006     2005  

Operating revenue:

                        

Advertising

   $ 871,713     $ 874,568     $ 624,109  

Circulation

     204,373       205,718       153,571  

Other

     51,575       48,362       41,210  

Total operating revenue

     1,127,661       1,128,648       818,890  

Operating expenses:

                        

Compensation

     442,494       435,836       325,959  

Newsprint and ink

     112,483       120,191       79,331  

Other operating expenses

     296,116       280,018       190,768  

Depreciation

     33,341       33,903       23,754  

Amortization of intangible assets

     60,248       62,167       35,495  

Curtailment gains

     (3,731 )             -               -    

Early retirement programs

     7,962       8,654       9,124  

Transition costs

             -       4,589       8,929  

Total operating expenses

     948,913       945,358       673,360  

Equity in earnings of associated companies

     20,124       20,739       12,784  

Operating income

     198,872       204,029       158,314  

Non-operating income (expense):

                        

Financial income

     7,613       6,054       2,824  

Financial expense

     (90,341 )     (95,939 )     (38,038 )

Loss on early extinguishment of debt

             -               -       (11,181 )

Other, net

     (21 )     (2,037 )     (439 )

Total non-operating expense, net

     (82,749 )     (91,922 )     (46,834 )

Income from continuing operations before income taxes

     116,123       112,107       111,480  

Income tax expense

     34,146       39,740       40,458  

Minority interest

     1,069       1,231       160  

Income from continuing operations

     80,908       71,136       70,862  

Discontinued operations:

                        

Income from discontinued operations, net of income tax effect

             -       4,900       6,016  

Gain (loss) on disposition, net of income tax effect

     91       (5,204 )             -    

Net income

     80,999       70,832       76,878  

Other comprehensive income (loss), net

     (1,898 )     1,674       1,504  

Comprehensive income

   $ 79,101     $ 72,506     $ 78,382  

Earnings (loss) per common share:

                        

Basic:

                        

Continuing operations

   $ 1.77     $ 1.57     $ 1.57  

Discontinued operations

             -       (0.01 )     0.13  

Net income

   $ 1.77     $ 1.56     $ 1.70  

Diluted:

                        

Continuing operations

   $ 1.77     $ 1.56     $ 1.56  

Discontinued operations

             -       (0.01 )     0.13  

Net income

   $ 1.77     $ 1.56     $ 1.70  

Dividends per common share

   $ 0.72     $ 0.72     $ 0.72  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

     Amount          Shares  
(Thousands)    2007     2006     2005          2007     2006     2005  

Common Stock:

   $ 78,974     $ 76,818     $ 74,056          39,487     38,409     37,028  

Balance, beginning of year

                                               

Conversion from Class B Common Stock

     372       1,380       2,210          186     690     1,105  

Shares issued

     708       884       580          354     442     290  

Shares reacquired

     (96 )     (108 )     (28 )        (48 )   (54 )   (14 )

Balance, end of year

     79,958       78,974       76,818          39,979     39,487     38,409  

Class B Common Stock:

                                               

Balance, beginning of year

     12,788       14,168       16,378          6,394     7,084     8,189  

Conversion to Common Stock

     (372 )     (1,380 )     (2,210 )        (186 )   (690 )   (1,105 )

Balance, end of year

     12,416       12,788       14,168          6,208     6,394     7,084  

Additional paid-in capital:

                                               

Balance, beginning of year

     123,738       115,464       100,537                         

Reclassification from unearned compensation

         -           (5,505 )         -                             

Stock option expense

     2,144       2,678       2,807                         

Amortization of restricted Common Stock

     5,199       5,425           -                             

Income tax benefit (expense) of stock options exercised

     (686 )     (33 )     749                         

Shares issued

     1,695       5,709       11,371                         

Balance, end of year

     132,090       123,738       115,464                         

Unearned compensation:

                                               

Balance, beginning of year

         -           (5,505 )     (3,913 )                       

Reclassification to additional paid-in-capital

         -           5,505           -                             

Restricted Common Stock issued

         -               -           (6,215 )                       

Restricted Common Stock canceled

         -               -           45                         

Amortization

         -               -           4,578                         

Balance, end of year

         -               -           (5,505 )                       

Retained earnings:

                                               

Balance, beginning of year

     771,947       733,961       689,785                         

Net income

     80,999       70,832       76,878                         

Cash dividends

     (33,160 )     (32,846 )     (32,702 )                       

Balance, end of year

     819,786       771,947       733,961                         

Accumulated other comprehensive income:

                                               

Balance, beginning of year

     3,178       1,504           -                             

Unrealized gain (loss) on interest rate exchange agreements

     (3,796 )     2,527       2,707                         

Unrealized gain (loss) on available-for-sale securities

     716       121       (230 )                       

Adoption of FASB Statement 158 for pension and postretirement benefits

     65,780           -               -                             

Deferred income taxes, net

     (23,686 )     (974 )     (973 )                       

Balance, end of year

     42,192       3,178       1,504                         

Total stockholders’ equity

   $ 1,086,442     $ 990,625     $ 936,410          46,187     45,881     45,493  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Thousands)    2007     2006     2005  

Cash provided by operating activities:

                        

Net income

   $ 80,999     $ 70,832     $ 76,878  

Results of discontinued operations

     91       (304 )     6,016  

Income from continuing operations

     80,908       71,136       70,862  

Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations:

                        

Depreciation and amortization

     93,589       96,070       59,249  

Stock compensation expense

     7,193       7,693       7,879  

Accretion of debt fair value adjustment

     (7,579 )     (7,190 )     (2,385 )

Loss on early extinguishment of debt

             -                   -           11,181  

Distributions less than earnings of associated companies

     (792 )     (482 )     (1,288 )

Increase (decrease) in deferred income taxes

     (6,309 )     (29,178 )     165  

Change in operating assets and liabilities, net of acquisitions:

                        

Decrease (increase) in receivables

     (6,411 )     5,547       (5,681 )

Decrease (increase) in inventories and other

     5,470       2,859       (3,897 )

Increase (decrease) in accounts payable, accrued expenses and unearned revenue

     18,428       (7,904 )     5,519  

Increase (decrease) in pension, postretirement and post employment benefits

     (3,314 )     10,178       6,939  

Change in income taxes receivable or payable

     (14,504 )     42,060       (595 )

Other

     2,233       6,372       3,738  

Net cash provided by operating activities of continuing operations

     168,912       197,161       151,686  

Cash provided by (required for) investing activities of continuing operations:

                        

Purchases of marketable securities

     (90,005 )     (70,415 )     (13,038 )

Sales of marketable securities

     78,018       68,043       67,199  

Purchases of property and equipment

     (34,567 )     (32,544 )     (24,096 )

Acquisitions, net

     (1,065 )     (4,245 )     (1,299,738 )

Increase in restricted cash

     (1,165 )     (11,916 )     (6,847 )

Other

     10,075       8,394       4,211  

Net cash required for investing activities of continuing operations

     (38,709 )     (42,683 )     (1,272,309 )

Cash provided by (required for) financing activities of continuing operations:

                        

Payments on long-term debt

     (196,375 )     (218,000 )     (338,600 )

Proceeds from long-term debt

     67,000       55,000       1,507,000  

Financing costs

             -           (2,814 )     (28,855 )

Cash dividends paid

     (33,038 )     (32,671 )     (32,361 )

Purchases of Common Stock

     (1,099 )     (1,260 )     (548 )

Other, primarily issuance of Common Stock

     2,578       7,815       5,399  

Net cash provided by (required for) financing activities of continuing operations

     (160,934 )     (191,930 )     1,112,035  

Net cash provided by (required for) discontinued operations:

                        

Operating activities

     (780 )     5,517       8,808  

Investing activities

     22,873       33,030       (687 )

Net increase (decrease) in cash and cash equivalents

     (8,638 )     1,095       (467 )

Cash and cash equivalents:

                        

Beginning of year

     8,638       7,543       8,010  

End of year

   $         -         $ 8,638     $ 7,543  

 

The accompanying Notes are an integral part of the Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Lee Enterprises, Incorporated, is a premier provider of local news, information and advertising in primarily midsize markets, with 51 daily newspapers and a joint interest in five others, rapidly growing online sites and more than 300 weekly newspapers and specialty publications in 23 states. The Company currently operates in a single operating segment.

 

  1 SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

In June 2005, the Company acquired Pulitzer Inc. (Pulitzer). The acquisition has a significant impact on the Consolidated Financial Statements.

 

The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned, except for its 95% interest in St. Louis Post-Dispatch LLC (PD LLC) and STL Distribution Services LLC (DS LLC), 50% interest in TNI Partners (TNI), 50% interest in Madison Newspapers, Inc. (MNI), and 82.5% interest in INN Partners, L.C. (INN).

 

References to 2007, 2006, 2005 and the like mean the fiscal year ended September 30.

 

The former Pulitzer operations use period accounting. As a result their fiscal year ends on the last Sunday in September. These enterprises had 53 weeks (371 days) of business activity in 2007 compared to 52 weeks (364 days) in 2006. All other enterprises used calendar year accounting in 2007, 2006 and 2005. Beginning in 2008 all of the Company’s enterprises will use period accounting. Because of the change the Company will have 364 days of business activity in 2008.

 

Accounting 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 amount of assets and liabilities, revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The Consolidated Financial Statements include the accounts of the Company and its wholly-owned, or majority-owned, subsidiaries. All significant intercompany transactions have been eliminated.

 

Investments in MNI and TNI are accounted for using the equity method and are reported at cost plus the Company’s share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets.

 

Minority interest in earnings of PD LLC, DS LLC and INN is recognized in the Consolidated Financial Statements.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents. Outstanding checks in excess of funds on deposit are included in accounts payable and are classified as financing activities in the Consolidated Statements of Cash Flows.

 

Accounts Receivable

 

The Company evaluates its allowance for doubtful accounts receivable based on historical credit experience, payment trends and other economic factors. Delinquency is determined based on timing of payments in relation to billing dates. Accounts considered to be uncollectible are written off.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Inventories

 

Newsprint inventories are priced at the lower of cost or market, with cost being determined by the first-in, first-out or last-in, first-out methods. Newsprint inventories at September 30, 2007 and 2006 are less than replacement cost by $3,320,000 and $4,556,000, respectively.

 

The components of newsprint inventory by cost method are as follows:

 

     September 30

(Thousands)

     2007      2006

First-in, first-out

   $ 5,414    $ 10,099

Last-in, first-out

     4,383      5,193
     $ 9,797    $ 15,292

 

Other inventories consisting of ink, plates and film are priced at the lower of cost or market, with cost being determined by the first-in, first-out method.

 

Restricted Cash and Investments

 

Until May 1, 2010, 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 $15,000,000 and the number of years since May 1, 2000, but not in excess of $150,000,000 (the Reserve). PD LLC is not required to maintain the Reserve after May 1, 2010. Investments in the Reserve are limited to U.S. government and related securities and are recorded at fair value, with unrealized gains and losses reported, net of applicable income taxes, in accumulated other comprehensive income. The cost basis used to determine realized gains and losses is specific identification. See Note 19.

 

Other Investments

 

Other investments primarily consist of marketable securities held in trust under a deferred compensation arrangement and investments for which no established market exists. Marketable securities are classified as trading securities and carried at fair value with gains and losses reported in earnings. Non-marketable securities are carried at cost.

 

Property and Equipment

 

Property and equipment are carried at cost. Equipment, except for printing presses and mailroom equipment, is depreciated primarily by declining-balance methods. The straight-line method is used for all other assets. The estimated useful lives are as follows:

 

     Years

Buildings and improvements

   5 – 54

Printing presses and mailroom equipment

   2 – 28

Other

   1 – 20

 

The Company capitalizes interest as a component of the cost of constructing major facilities. At September 30, 2007, capitalized interest was not significant.

 

Beginning in 2006, the Company recognizes the fair value of a liability for a legal obligation to perform an asset retirement activity, when such activity is a condition of a future event, and the fair value of the liability can be estimated.

 

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Goodwill and Other Intangible Assets

 

Intangible assets include covenants not to compete, consulting agreements, customer lists, newspaper subscriber lists, mastheads and other. Intangible assets subject to amortization are being amortized as follows:

 

     Years

Noncompete and consulting agreements

   2 – 15

Customer lists

   3 – 23

Newspaper subscriber lists

   7 – 33

Other

   10

 

In assessing the recoverability of its goodwill and other nonamortized intangible assets, the Company makes a determination of the fair value of its business. Fair value is determined using a combination of an income approach, which estimates fair value based upon future cash flows discounted to their present value, and a market approach, which estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the publishing industry.

 

The valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by management. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows.

 

The Company analyzes its goodwill and other nonamortized intangible assets for impairment on an annual basis, or more frequently if impairment indicators are present.

 

The Company also periodically evaluates its determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact the cash flows of the Company. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.

 

Revenue Recognition

 

Advertising revenue is recorded when advertisements are placed in the publication or on the related online site. Circulation revenue is recorded as newspapers are distributed over the subscription term. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for publications or advance payments for advertising.

 

Advertising Costs

 

Advertising costs are expensed as incurred.

 

Pension, Postretirement and Postemployment Benefit Plans

 

The Company evaluates its liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating 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 the Company used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods. See Note 20.

 

Income Taxes

 

Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Interest Rate Exchange Agreements

 

The Company accounts for interest rate exchange agreements, which are comprised of floating-to-fixed rate interest rate swaps, or interest rate collars, as cash flow hedges. The Company expects that the fair value of these agreements will significantly offset changes in the cash flows of the associated floating rate debt. The fair value of such instruments is recorded in accumulated other comprehensive income, net of applicable income tax expense or benefit.

 

Stock Compensation

 

The Company has four stock-based compensation plans. The Company accounts for grants under those plans under the fair value expense recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation, as amended by Statement 123–Revised, Share-Based Payment. The adoption of Statement 123–Revised in 2006 resulted in a reclassification of unearned compensation to additional paid-in capital in 2006. The Company amortizes as compensation expense the value of stock options and restricted Common Stock by the straight-line method over the vesting or restriction period, which is generally one to three years.

 

Uninsured Risks

 

The Company is self-insured for health care, workers compensation and certain long-term disability costs of its employees, subject to stop loss insurance, which limits exposure to large claims. The Company accrues its estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts. Letters of credit and a self-insurer bond totaling $7,395,000 at September 30, 2007 are outstanding in support of the Company’s insurance program.

 

The Company’s reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

 

Discontinued Operations

 

In accordance with the provisions of FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operations and related losses on properties sold, or identified as held for sale, have been presented as discontinued operations in the Consolidated Statements of Income and Comprehensive Income for all years presented. Gains are recognized when realized.

 

  2 ACQUISITIONS

 

All acquisitions are accounted for as a purchase and, accordingly, the results of operations since the respective dates of acquisition are included in the Consolidated Financial Statements.

 

Acquisition of Pulitzer

 

On June 3, 2005, the Company and LP Acquisition Corp., an indirect, wholly-owned subsidiary of the Company (the Purchaser), consummated an Agreement and Plan of Merger (the Merger Agreement) dated as of January 29, 2005 with Pulitzer. The Merger Agreement provided for the Purchaser to be merged with and into Pulitzer (the Merger), with Pulitzer as the surviving corporation. Each share of Pulitzer’s Common Stock and Class B Common Stock outstanding immediately prior to the effective time of the Merger was converted into the right to receive from the Company or the Purchaser in cash, without

 

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interest, an amount equal to $64 per share. Pulitzer published fourteen daily newspapers, including the St. Louis Post-Dispatch, and more than 100 weekly newspapers and specialty publications. Pulitzer also owns a 50% interest in TNI. See Note 4. The Merger was consistent with the Company’s announced strategy to buy newspapers with circulation of 30,000 or more.

 

The Merger effected a change of control of Pulitzer. At the effective time of the Merger and as a result of the Merger, Pulitzer became an indirect, wholly-owned subsidiary of the Company.

 

The unaudited pro forma condensed consolidated income statement information for 2005, set forth below, presents the results of operations as if the acquisition of Pulitzer had occurred at the beginning of that year and is not necessarily indicative of future results or actual results that would have been achieved had the acquisition occurred as of the beginning of such year. Pro forma results for 2005 include $29,544,000 of early retirement, transition and debt extinguishment costs related to the acquisition. The amounts in the table below are adjusted for the divestitures of the Pacific Northwest Properties and the daily newspaper in Rhinelander, Wisconsin. See Note 3. Other acquisitions described below are excluded as the amounts are not significant.

 

(Thousands, Except Per Common Share Data) (Unaudited)    2005

Operating revenue

   $ 1,121,081

Income from continuing operations

     67,345

Earnings per common share from continuing operations:

      

Basic

   $ 1.49

Diluted

     1.49

 

The $1,461,585,000 purchase price of Pulitzer, all of which was paid in cash, included approximately $11,200,000 of fees and expenses, and was originally allocated as follows. The original purchase price includes assets and liabilities of the Rhinelander, Wisconsin daily newspaper. See Notes 3 and 6.

 

(Thousands)     

Current assets

   $ 305,432

Restricted cash and investments

     73,560

Property and equipment

     140,532

Long-term investments

     207,937

Goodwill

     922,396

Intangible and other assets

     623,827

Total assets acquired

     2,273,684

Current liabilities

     55,125

Long-term debt

     337,512

Pension, postretirement and postemployment benefits

     118,480

Deferred income taxes

     274,394

Other long-term liabilities

     26,588
     $ 1,461,585

 

Incremental goodwill was recorded as a result of the Company’s acquisition of Pulitzer as the purchase price exceeded the fair value of tangible and identified intangible assets acquired. Such goodwill is not deductible for income tax purposes. Future tax deductible goodwill recorded by Pulitzer as a result of prior transactions is approximately $585,500,000.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Acquired intangible assets, excluding those of TNI, consist of the following:

 

(Thousands)    Amount    Weighted-Average
Amortization
Period (Years)

Amortizable intangible assets:

         

Customer lists

   $516,730    18

Newspaper subscriber lists

   49,902    9
     566,632    17

Nonamortized intangible assets:

         

Mastheads

   53,118     
     $619,750     

 

In 2006 and 2005, the Company incurred transition costs of $4,589,000 and $8,929,000, respectively, in connection with the acquisition of Pulitzer.

 

Other Acquisitions

 

In 2005, the Company purchased two specialty publications at a cost of $309,000, made a final working capital payment of $301,000 related to a specialty publication purchased in 2004 and exchanged an internet service provider business for a weekly newspaper. In 2005, the Company also purchased eight specialty publications at a cost of $3,908,000 and received final working capital payments of $78,000 from purchased specialty publications. In 2005, INN purchased an Internet advertisement design business at a cost of $200,000.

 

In 2006, the Company purchased a web-hosting business and national advertising network at a cost of $3,800,000 from PowerOne Media, LLC (PowerOne), in which the Company and MNI owned minority interests and purchased a minority interest in INN in exchange for the forgiveness of certain notes receivable with a carrying value of $75,000. In 2006, the Company also purchased a weekly newspaper at a cost of $412,000.

 

In 2007, the Company purchased a minority interest in an online employment application from PowerOne at a cost of $118,000. In 2007, PowerOne was dissolved. In 2007, the Company purchased several newspaper distribution businesses at a cost of $1,911,000 of which $984,000 was included in accounts payable at September 30, 2007. In 2007, the Company also purchased a specialty publication at a cost of $20,000. These acquisitions did not have a material effect on the Consolidated Financial Statements.

 

  3 DISCONTINUED OPERATIONS

 

In 2006, the Company sold several stand-alone publishing and commercial printing operations in Seattle and Spokane, Washington, and Portland, Oregon, a twice weekly newspaper in Oregon (collectively the Pacific Northwest Properties), and the daily newspaper in Rhinelander, Wisconsin. The Company received $20,700,000 in 2007 and $33,198,000 in 2006. The transactions resulted in an after tax loss of $5,204,000, which is recorded in discontinued operations.

 

In 2007, the Company sold a weekly newspaper in Oregon and received $250,000.

 

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Results of discontinued operations consist of the following:

 

(Thousands)    2007      2006      2005

Operating revenue

   $114      $41,104      $42,297

Income (loss) from discontinued operations

   $ (16 )    $  7,803      $  9,911

Gain (loss) on sale of discontinued operations

   156      (7,854 )    -    

Income tax expense, net

   49      253      3,895
     $  91      $    (304 )    $  6,016

 

Assets and liabilities of discontinued operations consist of the following:

 

(Thousands)    September 30, 2006

Current assets

   $ 88

Property and equipment, net

     113

Intangible and other assets

     141

Total assets

   $ 342

Current liabilities

   $ 523

 

Income tax expense related to discontinued operations differs from the amounts computed by applying the U.S. federal income tax rate as follows:

 

     2007     2006     2005  

Computed “expected” income tax expense (benefit)

   35.0 %   (35.0 )%   35.0 %

State income taxes, net of federal tax benefit

   -         (3.9 )   4.3  

Other, primarily goodwill basis differences

   -         (457.2 )   -      
     35.0 %   (496.1 )%   39.3 %

 

  4 INVESTMENTS IN ASSOCIATED COMPANIES

 

TNI Partners

 

In Tucson, Arizona, TNI, acting as agent for the Company’s subsidiary, Star Publishing Company (Star Publishing), and Citizen Publishing Company (Citizen), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and circulation of the Arizona Daily Star and Tucson Citizen, as well as their related online operations and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership’s operations and publication of the newspapers and other media.

 

Each newspaper is solely responsible for its own news and editorial content. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.

 

Summarized financial information of TNI is as follows:

 

     September 30
(Thousands)    2007    2006

ASSETS

             

Current assets

   $ 12,894    $ 14,810

Investments and other assets

     19      10

Total assets

   $ 12,913    $ 14,820

LIABILITIES AND MEMBERS’ EQUITY

             

Current liabilities

   $ 6,327    $ 7,211

Members’ equity

     6,586      7,609

Total liabilities and members’ equity

   $ 12,913    $ 14,820

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Summarized results of TNI (2005 from the June 3, 2005 date of acquisition of Pulitzer) are as follows:

 

(Thousands)    2007    2006    2005

Operating revenue

   $ 117,658    $ 121,223    $ 36,986

Operating expenses, excluding depreciation and amortization

     81,066      83,485      26,218

Operating income

   $ 36,592    $ 37,738    $ 10,768

Company’s 50% share of operating income

   $ 18,296    $ 18,869    $ 5,384

Less amortization of intangible assets

     6,339      5,987      1,644

Equity in earnings of TNI

   $ 11,957    $ 12,882    $ 3,740

 

Star Publishing’s 50% share of TNI depreciation and certain general and administrative expenses associated with its share of the operation and administration of TNI are reported as operating expenses in the Company’s Consolidated Statements of Income and Comprehensive Income. These amounts totaled $1,434,000, $2,049,000 and $672,000 in 2007, 2006 and 2005, respectively.

 

At September 30, 2007, the carrying value of the Company’s 50% investment in TNI is $166,678,000. The difference between the Company’s carrying value and its 50% share of the members’ equity of TNI relates principally to goodwill of $85,273,000, and other identified intangible assets of $78,666,000, certain of which are being amortized over their estimated useful lives through 2020. See Note 6.

 

Annual amortization of intangible assets is estimated to be $6,339,000 in each of the five years ending September 2012.

 

In 2007, defined pension benefits for certain TNI employees were frozen at then current levels. As a result, TNI recognized a curtailment gain of $2,074,000. See Note 9.

 

Madison Newspapers, Inc.

 

The Company has a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, as well as their related online operations. Net income or loss of MNI (after income taxes) is allocated equally to the Company and The Capital Times Company (TCT). MNI conducts its business under the trade name Capital Newspapers.

 

Summarized financial information of MNI is as follows:

 

     September 30
(Thousands)    2007    2006

ASSETS

             

Current assets

   $ 21,869    $ 24,238

Investments and other assets

     34,397      36,506

Property and equipment, net

     13,295      12,126

Total assets

   $ 69,561    $ 72,870

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities, excluding debt

   $ 13,285    $ 13,184

Debt, including current maturities

     2,642      8,014

Other liabilities

     3,040      2,660

Stockholders’ equity

     50,594      49,012

Total liabilities and stockholders’ equity

   $ 69,561    $ 72,870

 

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Summarized results of MNI are as follows:

 

(Thousands)    2007    2006    2005

Operating revenue

   $ 111,968    $ 121,541    $ 122,021

Operating expenses, excluding depreciation and amortization

     81,793      91,572      87,429

Operating income

     25,871      25,129      29,504

Net income

     16,334      15,714      18,088

Company’s 50% share of net income

   $ 8,167    $ 7,857    $ 9,044

 

Accounts receivable from associated companies consist of dividends due from MNI. Fees for editorial, marketing and information technology services provided to MNI by the Company are included in other revenue and totaled $10,636,000, $10,425,000, and $10,164,000, in 2007, 2006, and 2005, respectively.

 

In 2006, MNI sold its Shawano, Wisconsin daily newspaper and commercial printing operation. MNI recognized an after tax loss of $1,002,000 on the sale.

 

Certain other information relating to the Company’s investment in MNI is as follows:

 

     September 30
(Thousands)    2007    2006

Company’s share of:

             

Stockholders’ equity

   $ 25,297    $ 24,506

Undistributed earnings

     25,047      24,256

 

  5 MARKETABLE SECURITIES AVAILABLE-FOR-SALE

 

Marketable securities, which are comprised of debt securities issued by the U.S. government and agencies, and which include certain of the Company’s restricted cash and investments, are classified as available-for-sale securities at September 30, 2007 and 2006, and consist of the following:

 

     September 30
(Thousands)    2007    2006

Amortized cost

   $ 89,979    $ 77,419

Gross unrealized gains

     605      52

Gross unrealized losses

     (1)      (161)

Fair value

   $ 90,583    $ 77,310

 

Proceeds from the sale of such securities total $78,018,000 in 2007, and $68,043,000 in 2006, resulting in no gross realized gains or losses and $67,199,000 in 2005 resulting in gross realized gains of $84,000 and gross realized losses of $10,000.

 

The amortized cost and fair value of marketable securities as of September 30, 2007, by contractual maturity, are as follows. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

 

(Thousands)    Amortized
Cost
   Fair
Value

Due in one year or less

   $ 35,118    $ 35,235

Due after one year through five years

     54,861      55,348
     $ 89,979    $ 90,583

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  6 GOODWILL AND OTHER INTANGIBLE ASSETS

 

Changes in the carrying amount of goodwill related to continuing operations are as follows:

 

(Thousands)    2007    2006  

Goodwill, beginning of year

   $ 1,498,830    $ 1,499,622  

Goodwill related to acquisitions

     15,527      (792 )

Goodwill, end of year

   $ 1,514,357    $ 1,498,830  

 

In 2007, the Company recorded an adjustment to goodwill of $13,616,000 to reflect the resolution of tax uncertainties associated with the acquisition of Pulitzer. Also in 2007, the Company recorded $1,911,000 of goodwill associated with its acquisition of several newspaper distribution businesses.

 

Identified intangible assets related to continuing operations consist of the following:

 

     September 30
(Thousands)    2007    2006

Nonamortized intangible assets:

             

Mastheads

   $ 73,746    $ 73,746

Amortizable intangible assets:

             

Customer and newspaper subscriber lists

     1,073,142      1,073,125

Less accumulated amortization

     226,274      166,240
       846,868      906,885

Noncompete and consulting agreements

     28,658      28,678

Less accumulated amortization

     28,590      28,397
       68      281
     $ 920,682    $ 980,912

 

In 2006, the Company, based on its analysis and in conjunction with its ongoing requirement to assess the estimated useful lives of intangible assets, concluded that the period of economic benefit of certain identified intangible assets related to the Pulitzer acquisition had decreased. As a result, the weighted-average useful life of customer lists, including those of TNI, was decreased from approximately 21 years to 17 years. The change in estimated useful life of such assets resulted in recognition of additional amortization expense of $1,847,000 in 2006, of which $469,000 is recorded in equity in earnings of TNI. This change in non-cash amortization expense has no impact on the Company’s cash flows or debt covenants.

 

In 2006, the Company also recorded a separate non-cash charge of $5,526,000 to reduce the value of nonamortized masthead intangible assets of Pulitzer, of which $4,939,000 is recorded in amortization expense and $587,000 is recorded in equity in earnings of TNI. The Company uses a royalty approach to value such assets. Lower than expected revenue growth resulted in the change in value.

 

Annual amortization of intangible assets for the five years ending September 2012 is estimated to be $59,705,000, $59,179,000, $59,098,000, $58,319,000, and $57,896,000, respectively.

 

  7 DEBT

 

Credit Agreement

 

In 2006, the Company entered into an amended and restated credit agreement (Credit Agreement) with a syndicate of financial institutions. The Credit Agreement provides for aggregate borrowing of up to $1,435,000,000 and consists of a $950,000,000 A Term Loan, $35,000,000 B Term Loan and $450,000,000 revolving credit facility. The Credit Agreement also provides the Company with the right,

 

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with the consent of the administrative agent, to request at certain times prior to June 2012 that one or more lenders provide incremental term loan commitments of up to $500,000,000, subject to certain requirements being satisfied at the time of the request. The Credit Agreement matures in June 2012 and amends and replaces a $1,550,000,000 credit agreement (the Old Credit Agreement) consummated in 2005. Interest rate margins under the Credit Agreement are generally lower than under the Old Credit Agreement. Other conditions of the Credit Agreement are substantially the same as the Old Credit Agreement.

 

The Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by substantially all of the Company’s existing and future, direct and indirect subsidiaries in which the Company holds a direct or indirect interest of more than 50%; provided however, that Pulitzer and its subsidiaries will not be required to enter into such guaranty for so long as their doing so would violate the terms of the Pulitzer Notes described more fully below. The Credit Agreement is secured by first priority security interests in the stock and other equity interests owned by the Company and each guarantor in their respective subsidiaries. Both the guaranties and the collateral that secures them will be released in their entirety at such time as the Company achieves a total leverage ratio of less than 4.25:1 for two consecutive quarterly periods.

 

Debt under the A Term Loan and revolving credit facility bear interest, at the Company’s option, at either a base rate or an adjusted Eurodollar rate (LIBOR), plus an applicable margin. The base rate for the facility is the greater of the prime lending rate of Deutsche Bank Trust Company Americas at such time and 0.5% in excess of the overnight federal funds rate at such time. The margin applicable is a percentage determined according to the following: For revolving loans and A Term Loans, maintained as base rate loans: 0%, and maintained as Eurodollar loans: 0.625% to 1% (0.75% at September 30, 2007) depending, in each instance, upon the Company’s leverage ratio at such time. All loans at September 30, 2007 are Eurodollar-based.

 

The Company may voluntarily prepay principal amounts outstanding or reduce commitments under the Credit Agreement at any time, in whole or in part, without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments. The Company is required to repay principal amounts, on a quarterly basis until maturity, under the A Term Loan beginning in 2006. In addition to the scheduled payments, the Company is required to make mandatory prepayments under the A Term Loan under certain other conditions. Total A Term Loan payments in 2007 and 2006 are $44,375,000 and $24,000,000, respectively. The Company repaid the B Term Loan in full in 2006.

 

The Credit Agreement requires the Company to apply the net proceeds from asset sales to repayment of the A Term Loan to the extent such proceeds exceed the amount used to purchase assets (other than inventory and working capital) within one year of the asset sales. Repayments in 2007 met required repayments related to the Company’s 2006 sales transactions.

 

The Credit Agreement contains customary affirmative and negative covenants for financing of its type. These financial covenants include a maximum total leverage ratio (5.75:1 at September 30, 2007) and minimum interest expense coverage ratio of 2.5:1. None of the covenants included in the Credit Agreement is considered by the Company to be restrictive to normal operations or historical amounts of stockholder dividends. At September 30, 2007, the Company is in compliance with such covenants.

 

In 2005, upon consummation of the Old Credit Agreement, the Company borrowed $1,462,000,000. The proceeds were used to consummate the acquisition of Pulitzer, to repay certain existing indebtedness of the Company, as discussed more fully below, and to pay related fees and expenses.

 

In connection with the execution of the Old Credit Agreement, the Company redeemed, as of June 3, 2005, all of the $52,000,000 outstanding indebtedness under its then existing credit agreement and, as of June 6, 2005, the existing senior notes of the Company under a Note Purchase Agreement dated as of March 18, 1998 totaling $102,000,000. Refinancing of existing debt of the Company resulted in a loss before income taxes of $11,181,000.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Pulitzer Notes

 

In conjunction with its formation, PD LLC borrowed $306,000,000 (Pulitzer Notes) from a group of institutional lenders (the Lenders). The aggregate principal amount of the Pulitzer Notes is payable in April 2009 and bears interest at an annual rate of 8.05%. The Pulitzer Notes are guaranteed by Pulitzer pursuant to a Guaranty Agreement dated May 1, 2000 (Guaranty Agreement) with the Lenders. In turn, pursuant to an Indemnity Agreement dated May 1, 2000 (Indemnity Agreement) between The Herald Company, Inc. (Herald, Inc.) and Pulitzer, Herald, Inc. agreed to indemnify Pulitzer for any payments that Pulitzer may make under the Guaranty Agreement. In December 2006, Herald Inc. assigned its assets and liabilities to Herald.

 

The terms of the Pulitzer Notes, as amended, contain certain covenants and conditions including the maintenance, by Pulitzer, of EBITDA, as defined in the Guaranty Agreement, minimum net worth and limitations on the incurrence of other debt. At September 30, 2007, the Company is in compliance with such covenants. In addition, the Pulitzer Notes and the Operating Agreement with Herald (Operating Agreement) require that PD LLC maintain the Reserve, consisting of cash and investments in U.S. government securities, totaling approximately $111,060,000 at September 30, 2007. The Pulitzer Notes and the Operating Agreement provide for a $3,750,000 quarterly increase in the minimum reserve balance through May 1, 2010, when the amount will total $150,000,000. See Note 19.

 

The purchase price allocation of Pulitzer resulted in an increase in the value of the Pulitzer Notes in the amount of $31,512,000, which is recorded as debt in the Consolidated Balance Sheets. This amount will be accreted over the remaining life of the Pulitzer Notes, until April 2009, as a reduction in interest expense using the interest method. This accretion will not increase the principal amount due to, or reduce the amount of interest to be paid to, the Lenders.

 

Debt consists of the following:

 

          Interest Rate(s)  
     September 30   

September 30

 
(Thousands)    2007    2006    2007  

Credit Agreement:

                    

A Term Loan

   $ 881,625    $ 926,000    6.10-6.26 %

Revolving credit facility

     208,000      293,000    5.89-6.10  

Pulitzer Notes:

                    

Principal amount

     306,000      306,000    8.05  

Unaccreted fair value adjustment

     13,255      20,834       
       1,408,880      1,545,834       

Less current maturities

     62,250      35,375       
     $ 1,346,630    $ 1,510,459       

 

Aggregate maturities of debt for each of the five years ending September 2012 are $62,250,000, $448,500,000, $166,250,000, $261,250,000, and $457,375,000, respectively.

 

  8 INTEREST RATE EXCHANGE AGREEMENTS

 

In 2005, the Company executed interest rate swaps in the notional amount of $350,000,000 with a forward starting date of November 30, 2005. The interest rate swaps have terms of two to five years, carry interest rates from 4.2% to 4.4% (plus the applicable LIBOR margin) and effectively fix the Company’s interest rate on debt in the amounts, and for the time periods, of such instruments. At September 30, 2007 and 2006, the Company recorded an asset of $1,438,000 and $5,234,000, respectively, related to the fair value of such instruments. The change in this fair value is recorded in other comprehensive income, net of income taxes.

 

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In October 2007, the Company executed interest rate collars in the notional amount of $150,000,000 with a forward starting date of November 30, 2007. The collars have a two year term and limit LIBOR to an average floor of 3.57% and a cap of 5.0%. Such collars effectively limit the range of the Company’s exposure to interest rates to LIBOR greater than the floor and less than the cap (in either case plus the applicable LIBOR margin) for the time period of such instruments.

 

At September 30, 2007, after consideration of the interest rate swaps described above, approximately 53% of the principal amount of the Company’s debt is subject to floating interest rates.

 

In 2005, the Company terminated fixed-to-floating rate interest rate swaps with a notional amount of $150,000,000 previously executed by Pulitzer. The swaps were accounted for as fair value hedges. The Company received cash of $2,100,000 upon termination.

 

The Company’s interest rate exchange agreements consist of the following:

 

(Thousands)                           September 30
2007

Notional Amount

     Start Date      Maturity Date      Rate(s)      Fair Value

VARIABLE TO FIXED RATE SWAPS

                      

$  75,000

     November 30, 2005      November 30, 2007      4.195 %    $ 174

    75,000

     November 30, 2005      November 30, 2007      4.200        173

    75,000

     November 30, 2005      November 30, 2008      4.290        356

    50,000

     November 30, 2005      November 30, 2009      4.315        279

    50,000

     November 30, 2005      November 30, 2009      4.325        269

    25,000

     November 30, 2005      November 30, 2010      4.395        187

$350,000

                          $ 1,438

COLLARS

                             

$  75,000

     November 30, 2007      November 30, 2009      3.53-5.00 %      -    

    75,000

     November 30, 2007      November 30, 2009      3.61-5.00        -    

$150,000

                            -    

 

  9 PENSION PLANS

 

The Company and its subsidiaries have several noncontributory defined benefit pension plans that together cover a significant number of St. Louis Post-Dispatch and selected other employees. Benefits under the plans are generally based on salary and years of service. The Company’s liability and related expense for benefits under the plans are recorded over the service period of active employees based upon annual actuarial calculations. Plan funding strategies are influenced by tax regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, and cash.

 

The Company uses a June 30 measurement date for all of its pension obligations.

 

Effective September 30, 2007, the Company adopted the recognition and disclosure provisions of FASB Statement 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans. Statement 158 requires the recognition of the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and recognition of the changes in that funded status in the year in which the changes occur as a component of other comprehensive income. Adoption of the recognition and disclosure provisions of Statement 158 resulted in an increase in assets and decrease in liabilities in the aggregate amounts of $9,591,000, and $32,649,000, respectively, and an increase in stockholders’ equity of $26,944,000, net of the related income tax effect.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The cost components of the Company’s pension plans (2005 from the June 3, 2005 date of acquisition of Pulitzer) are as follows:

 

(Thousands)    2007     2006     2005  

Service cost for benefits earned during the year

   $ 1,909     $ 5,532     $ 2,229  

Interest cost on projected benefit obligation

     9,172       9,191       2,950  

Expected return on plan assets

     (12,827 )     (12,637 )     (4,212 )

Amortization of net gain

     (1,355 )     -           -      

Amortization of prior service cost

     (93 )     -           -      

Curtailment gains

     (3,865 )     (102 )     -      

Early retirement program benefits (see Note 19)

     3,869       4,523       4,650  

Net periodic pension cost (benefit)

   $ (3,190 )   $ 6,507     $ 5,617  

 

Net periodic pension cost (benefit) of $(2,136,000), $605,000, and $202,000 is allocated to TNI in 2007, 2006 and 2005, respectively.

 

Changes in benefit obligations and plan assets are as follows:

 

(Thousands)    2007     2006  

Benefit obligation, beginning of year

   $ 168,172     $ 186,480  

Service cost

     1,909       5,532  

Interest cost

     9,172       9,191  

Actuarial loss (gain)

     985       (27,959 )

Benefits paid

     (10,813 )     (9,493 )

Change in plan provisions

     (1,591 )     -      

Curtailment gains

     (3,865 )     (102 )

Early retirement program benefits

     3,869       4,523  

Benefit obligation, end of year

     167,838       168,172  

Fair value of plan assets, beginning of year:

     161,764       157,285  

Actual return on plan assets

     25,383       13,972  

Benefits paid

     (10,813 )     (9,493 )

Employer contributions

     845       -      

Fair value of plan assets, June 30 measurement date

     177,179       161,764  

Funded status – benefit obligation in excess of (less than) plan assets

     (9,341 )     6,408  

Contributions made after measurement date

     (130 )     (845 )

Unrecognized net actuarial gain

     -           30,526  

Net amount recognized in the Consolidated Balance Sheets

   $ (9,471 )   $ 36,089  

 

Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:

 

     September 30
(Thousands)    2007    2006

Other non-current assets

   $       9,591    $ -    

Pension obligations

     120        36,089

Accumulated other comprehensive income (before income tax benefit)

     42,240      -    

 

Amounts recognized in accumulated other comprehensive income are as follows:

 

(Thousands)    September 30, 2007

Unrecognized net actuarial gain

   $ 40,650

Unrecognized prior service benefit

     1,590
     $ 42,240

 

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The Company expects to recognize $133,000 and $1,697,000 of unrecognized prior service benefit and unrecognized net actuarial gain, respectively, in net periodic pension cost in 2008.

 

The accumulated benefit obligation for the plans are $161,701,000 and $156,654,000 at September 30, 2007 and 2006, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are $10,791,000, $10,791,000 and $10,620,000, respectively, at September 30, 2007.

 

Assumptions

 

Weighted-average assumptions used to determine benefit obligations are as follows:

 

     September 30  
     2007      2006  

Discount rate

   5.75 %    5.75 %

Rate of compensation increase

   4.0      4.0  

 

Weighted-average assumptions used to determine net periodic benefit cost are as follows: