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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
   
FORM 10-Q
  
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  
For The Quarterly Period Ended June 27, 2010
 
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 or other jurisdiction of
incorporation or organization)
(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)
 
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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes [  ]     No [  ]
 
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
[  ]
Accelerated filer
[  ]
 
Non-accelerated filer
[X] (Do not check if a smaller reporting company)
Smaller reporting company
[  ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [  ]     No [X]
 
As of June 27, 2010, 39,253,967 shares of Common Stock and 5,692,901 shares of Class B Common Stock of the Registrant were outstanding.
 

 
Table Of Contents
 
PAGE
 
 
 
 
 
 
 
 
PART I
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
Item 3.
 
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Item 2(c).
 
 
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the "Company").
 
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 our 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, which in some instances are beyond our control, are our ability to generate cash flows and maintain liquidity sufficient to service our debt, and comply with or obtain amendments or waivers of the financial covenants contained in our credit facilities, if necessary.
 
Other risks and uncertainties include the impact and duration of continuing adverse economic conditions, changes in advertising demand, potential changes in newsprint and other commodity prices, energy costs, interest rates and the availability of credit due to instability in the credit markets, labor costs, legislative and regulatory rulings, difficulties in achieving planned expense reductions, maintaining employee and customer relationships, increased capital costs, competition and other risks detailed from time to time in our publicly filed documents.
 
Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered 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. We do not undertake to publicly update or revise our forward-looking statements.
 

1

Table of Contents

PART I
FINANCIAL INFORMATION
 
Item 1.       Financial Statements
 
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars, Except Per Share Data)
June 27
2010
September 27
2009
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
15,177
 
 
7,905
 
 
Accounts receivable, net
78,631
 
 
79,731
 
 
Income taxes receivable
 
 
5,625
 
 
Inventories
12,436
 
 
13,854
 
 
Deferred income taxes
3,638
 
 
3,638
 
 
Other
11,290
 
 
7,354
 
 
Total current assets
121,172
 
 
118,107
 
 
Investments:
 
 
 
 
Associated companies
58,836
 
 
58,073
 
 
Restricted cash and investments
9,448
 
 
9,324
 
 
Other
9,661
 
 
9,498
 
 
Total investments
77,945
 
 
76,895
 
 
Property and equipment:
 
 
 
 
Land and improvements
28,075
 
 
30,365
 
 
Buildings and improvements
193,902
 
 
195,573
 
 
Equipment
312,045
 
 
316,364
 
 
Construction in process
4,166
 
 
1,985
 
 
 
538,188
 
 
544,287
 
 
Less accumulated depreciation
298,847
 
 
281,318
 
 
Property and equipment, net
239,341
 
 
262,969
 
 
Goodwill
433,552
 
 
433,552
 
 
Other intangible assets, net
569,413
 
 
603,348
 
 
Other
15,546
 
 
20,741
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
1,456,969
 
 
1,515,612
 
 
 
The accompanying Notes are an integral part of the Consolidated Financial Statements.

2

Table of Contents

 
 
 
 
 
 
 
 
(Thousands of Dollars and Shares, Except Per Share Data)
June 27
2010
September 27
2009
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
Current maturities of long-term debt
72,000
 
 
89,800
 
 
Accounts payable
24,687
 
 
31,377
 
 
Compensation and other accrued liabilities
37,824
 
 
42,755
 
 
Income taxes payable
4,255
 
 
 
 
Unearned revenue
37,997
 
 
37,001
 
 
Total current liabilities
176,763
 
 
200,933
 
 
Long-term debt, net of current maturities
1,030,998
 
 
1,079,993
 
 
Pension obligations
44,196
 
 
45,953
 
 
Postretirement and postemployment benefit obligations
7,293
 
 
40,687
 
 
Other retirement and compensation obligations
1,580
 
 
1,539
 
 
Deferred income taxes
112,037
 
 
93,766
 
 
Income taxes payable
13,244
 
 
12,839
 
 
Other
13,805
 
 
16,052
 
 
Total liabilities
1,399,916
 
 
1,491,762
 
 
Equity:
 
 
 
 
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:
78,508
 
 
78,278
 
 
June 27, 2010; 39,254 shares;
 
 
 
 
September 27,2009; 39,139 shares
 
 
 
 
Class B Common Stock, $2 par value; authorized 30,000 shares; issued and outstanding:
11,386
 
 
11,552
 
 
June 27, 2010; 5,693 shares;
 
 
 
 
September 27, 2009; 5,776 shares
 
 
 
 
Additional paid-in capital
139,055
 
 
137,713
 
 
Accumulated deficit
(184,384
)
 
(225,299
)
 
Accumulated other comprehensive income
12,204
 
 
21,354
 
 
Total stockholders' equity
56,769
 
 
23,598
 
 
Non-controlling interests
284
 
 
252
 
 
Total equity
57,053
 
 
23,850
 
 
Total liabilities and equity
1,456,969
 
 
1,515,612
 
 
 
The accompanying Notes are an integral part of the Consolidated Financial Statements.
 
 

3

Table of Contents

LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
13 Weeks Ended
39 Weeks Ended
(Thousands of Dollars, Except Per Common Share Data)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
Operating revenue:
 
 
 
 
 
 
 
 
Advertising
140,813
 
 
148,034
 
 
425,775
 
 
474,146
 
 
Circulation
45,072
 
 
45,320
 
 
135,205
 
 
139,962
 
 
Other
10,520
 
 
10,451
 
 
31,007
 
 
32,096
 
 
Total operating revenue
196,405
 
 
203,805
 
 
591,987
 
 
646,204
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Compensation
78,372
 
 
80,703
 
 
239,806
 
 
259,481
 
 
Newsprint and ink
13,618
 
 
15,752
 
 
39,373
 
 
61,570
 
 
Other operating expenses
57,686
 
 
61,118
 
 
178,954
 
 
193,939
 
 
Depreciation
6,844
 
 
8,055
 
 
21,378
 
 
24,759
 
 
Amortization of intangible assets
11,307
 
 
11,597
 
 
33,935
 
 
35,792
 
 
Impairment of goodwill and other assets
 
 
29,665
 
 
3,290
 
 
244,572
 
 
Workforce adjustments and transition costs
395
 
 
1,541
 
 
1,082
 
 
4,730
 
 
Total operating expenses
168,222
 
 
208,431
 
 
517,818
 
 
824,843
 
 
Curtailment gains
 
 
 
 
45,012
 
 
 
 
Equity in earnings of associated companies
1,934
 
 
838
 
 
5,401
 
 
4,250
 
 
Reduction of investment in TNI
 
 
10,000
 
 
 
 
19,951
 
 
Operating income (loss)
30,117
 
 
(13,788
)
 
124,582
 
 
(194,340
)
 
Non-operating income (expense):
 
 
 
 
 
 
 
 
Financial income
63
 
 
56
 
 
262
 
 
1,876
 
 
Financial expense
(14,354
)
 
(19,806
)
 
(49,802
)
 
(54,922
)
 
Debt financing costs
(1,997
)
 
(784
)
 
(5,964
)
 
(15,634
)
 
Other, net
 
 
 
 
 
 
1,823
 
 
Total non-operating expense, net
(16,288
)
 
(20,534
)
 
(55,504
)
 
(66,857
)
 
Income (loss) from continuing operations before income taxes
13,829
 
 
(34,322
)
 
69,078
 
 
(261,197
)
 
Income tax expense (benefit)
3,790
 
 
(9,830
)
 
28,099
 
 
(79,353
)
 
Income (loss) from continuing operations
10,039
 
 
(24,492
)
 
40,979
 
 
(181,844
)
 
Discontinued operations, net
 
 
 
 
 
 
(5
)
 
Net income (loss)
10,039
 
 
(24,492
)
 
40,979
 
 
(181,849
)
 
Net income (loss) attributable to non-controlling interests
20
 
 
20
 
 
63
 
 
152
 
 
Decrease in redeemable non-controlling interest
 
 
 
 
 
 
57,055
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
10,019
 
 
(24,512
)
 
40,916
 
 
(124,946
)
 
Other comprehensive income (loss), net
(609
)
 
(610
)
 
(9,150
)
 
10,466
 
 
Comprehensive income (loss)
9,410
 
 
(25,122
)
 
31,766
 
 
(114,480
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
10,019
 
 
(24,512
)
 
40,916
 
 
(124,941
)
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share attributable to Lee Enterprises, Incorporated:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Continuing operations
0.22
 
 
(0.55
)
 
0.92
 
 
(2.81
)
 
Discontinued operations
 
 
 
 
 
 
 
 
 
0.22
 
 
(0.55
)
 
0.92
 
 
(2.81
)
 
 
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
 
Continuing operations
0.22
 
 
(0.55
)
 
0.91
 
 
(2.81
)
 
Discontinued operations
 
 
 
 
 
 
 
 
 
0.22
 
 
(0.55
)
 
0.91
 
 
(2.81
)
 
 
The accompanying Notes are an integral part of the Consolidated Financial Statements.

4

Table of Contents

LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
39 Weeks Ended
(Thousands of Dollars)
June 27
2010
June 28
2009
 
 
 
 
 
Cash provided by (required for) operating activities:
 
 
 
 
Net income (loss)
40,979
 
 
(181,849
)
 
Results of discontinued operations
 
 
(5
)
 
Income (loss) from continuing operations
40,979
 
 
(181,844
)
 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities of continuing operations:
 
 
 
 
Depreciation and amortization
55,313
 
 
60,551
 
 
Impairment of goodwill and other assets
3,290
 
 
244,572
 
 
Curtailment gains
(45,012
)
 
 
 
Reduction of investment in TNI
 
 
19,951
 
 
Accretion of debt fair value adjustment
(465
)
 
(3,633
)
 
Stock compensation expense
1,573
 
 
2,337
 
 
Distributions greater (less) than current earnings of associated companies
(830
)
 
32
 
 
Deferred income tax expense (benefit)
18,579
 
 
(78,768
)
 
Debt financing costs
5,932
 
 
15,634
 
 
Changes in operating assets and liabilities:
 
 
 
 
Decrease in receivables
6,725
 
 
20,179
 
 
Decrease in inventories and other
1,934
 
 
8,451
 
 
Decrease in accounts payable, accrued expenses and unearned revenue
(10,573
)
 
(38,525
)
 
Decrease in pension, postretirement and post employment benefits
(1,929
)
 
(4,695
)
 
Change in income taxes receivable or payable
4,660
 
 
(6,319
)
 
Other, net
(689
)
 
1,520
 
 
Net cash provided by operating activities of continuing operations
79,487
 
 
59,443
 
 
Cash provided by (required for) investing activities of continuing operations:
 
 
 
 
Purchases of marketable securities
 
 
(47,777
)
 
Sales or maturities of marketable securities
 
 
166,109
 
 
Purchases of property and equipment
(6,695
)
 
(10,686
)
 
Decrease (increase) in restricted cash
(124
)
 
2,114
 
 
Proceeds from sales of assets
1,253
 
 
779
 
 
Other
47
 
 
2,484
 
 
Net cash provided by (required for) investing activities of continuing operations
(5,519
)
 
113,023
 
 
Cash provided by (required for) financing activities of continuing operations:
 
 
 
 
Proceeds from long-term debt
73,800
 
 
155,950
 
 
Payments on long-term debt
(140,130
)
 
(299,950
)
 
Debt financing costs paid
(200
)
 
(26,005
)
 
Cash dividends paid
 
 
(8,539
)
 
Common stock transactions, net
(166
)
 
49
 
 
Other
 
 
(2,173
)
 
Net cash required for financing activities of continuing operations
(66,696
)
 
(180,668
)
 
Net cash required for discontinued operations
 
 
(5
)
 
Net increase (decrease) in cash and cash equivalents
7,272
 
 
(8,207
)
 
Cash and cash equivalents:
 
 
 
 
Beginning of period
7,905
 
 
23,459
 
 
End of period
15,177
 
 
15,252
 
 
 
The accompanying Notes are an integral part of the Consolidated Financial Statements.

5

Table of Contents

LEE ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1    
BASIS OF PRESENTATION
 
The Consolidated Financial Statements included herein are unaudited. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of June 27, 2010 and their results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2009 Annual Report on Form 10-K.
 
Because of seasonal and other factors, the results of operations for the 13 weeks and 39 weeks ended June 27, 2010 are not necessarily indicative of the results to be expected for the full year.
 
References to “we”, “our”, “us” and the like throughout this document refer to the Company. References to “2010”, “2009” and the like refer to the fiscal year ended the last Sunday in September.
 
The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 50% interest in TNI Partners (“TNI”), 50% interest in Madison Newspapers, Inc. (“MNI”), and 82.5% interest in INN Partners, L.C. (“INN”).
 
Accounting Standards Codification
 
In 2009, the Financial Accounting Standards Board (“FASB”) issued Statement 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“ASC”), which became the source of accounting principles to be applied in the preparation of financial statements for nongovernmental entities. ASC was effective for us as of September 27, 2009. ASC did not have any impact on our Consolidated Financial Statements since it was not intended to change existing accounting principles generally accepted in the United States of America (“GAAP”), except as related to references for authoritative literature.
 
2    
INVESTMENTS IN ASSOCIATED COMPANIES
 
TNI Partners
 
In Tucson, Arizona, TNI, acting as agent for our 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, until May 2009, the Tucson Citizen, as well as their related digital 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.
 
Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.
 
In May 2009, Citizen discontinued print publication of the Tucson Citizen. The change resulted in workforce adjustments and other transition costs of approximately $1,925,000 in 2009, of which $1,093,000 was incurred directly by TNI.

6

Table of Contents

Summarized results of TNI are as follows:
 
 
13 Weeks Ended
39 Weeks Ended
 
(Thousands of Dollars)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
15,792
 
 
17,560
 
 
49,880
 
 
58,350
 
 
 
Operating expenses, excluding curtailment gain, workforce adjustments, transition costs, depreciation and amortization
13,278
 
 
15,877
 
 
42,051
 
 
51,739
 
 
 
Curtailment gain
 
 
 
 
 
 
(1,332
)
 
 
Workforce adjustments and transition costs
 
 
1,093
 
 
783
 
 
1,195
 
 
 
Operating income
2,514
 
 
590
 
 
7,046
 
 
6,748
 
 
 
 
 
 
 
 
 
 
 
 
 
Company's 50% share of operating income
1,257
 
 
295
 
 
3,523
 
 
3,374
 
 
 
Less amortization of intangible assets
304
 
 
333
 
 
852
 
 
1,092
 
 
 
Equity in earnings (loss) of TNI
953
 
 
(38
)
 
2,671
 
 
2,282
 
 
 
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 our Consolidated Statements of Operations and Comprehensive Income (Loss). These amounts totaled $219,000 and $166,000 in the 13 weeks ended June 27, 2010 and June 28, 2009, respectively, and $87,000 and $1,295,000 in the 39 weeks ended June 27, 2010 and June 28, 2009, respectively.
 
Annual amortization of intangible assets is estimated to be $1,215,000 in each of the 52 week periods ending June 2011 and June 2012, $1,189,000 in the 52 week period ending June 2013 and $911,000 in the 52 week periods ending June 2014 and June 2015.
 
Madison Newspapers, Inc.
 
We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital sites. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.
 
Summarized results of MNI are as follows:
 
 
13 Weeks Ended
39 Weeks Ended
 
(Thousands of Dollars)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
18,977
 
 
19,468
 
 
57,147
 
 
61,173
 
 
 
Operating expenses, excluding depreciation and amortization
15,203
 
 
15,957
 
 
46,556
 
 
52,647
 
 
 
Workforce adjustment and transition costs
12
 
 
 
 
63
 
 
302
 
 
 
Depreciation and amortization
598
 
 
774
 
 
1,750
 
 
2,426
 
 
 
Operating income
3,164
 
 
2,737
 
 
8,778
 
 
5,798
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
1,962
 
 
1,752
 
 
5,460
 
 
3,936
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of MNI
981
 
 
876
 
 
2,730
 
 
1,968
 
 
 

7

Table of Contents

3    
GOODWILL AND OTHER INTANGIBLE ASSETS
 
There were no changes in the carrying value of goodwill in the 39 weeks ended June 27, 2010.
 
Identified intangible assets consist of the following:
 
(Thousands of Dollars)
June 27
2010
September 27
2009
 
 
 
 
 
 
 
Nonamortized intangible assets:
 
 
 
 
 
Mastheads
44,754
 
 
44,754
 
 
 
Amortizable intangible assets:
 
 
 
 
 
Customer and newspaper subscriber lists
885,713
 
 
885,713
 
 
 
Less accumulated amortization
361,062
 
 
327,133
 
 
 
 
524,651
 
 
558,580
 
 
 
Noncompete and consulting agreements
28,658
 
 
28,658
 
 
 
Less accumulated amortization
28,650
 
 
28,644
 
 
 
 
8
 
 
14
 
 
 
 
569,413
 
 
603,348
 
 
 
In assessing the recoverability of goodwill and other nonamortized intangible assets, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach, which estimates fair value based upon future revenue, expenses and 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. A non-cash impairment charge will generally be recognized when the carrying amount of the net assets of the business exceeds its estimated fair value.
 
The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us. 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. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
We analyze goodwill and other nonamortized intangible assets for impairment on an annual basis, or more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.
 
We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recovery of these assets by comparing the estimated undiscounted cash flows associated with the asset or asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those assets.
 
We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. 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.
 
Due primarily to the continuing and (at the time) increasing difference between our stock price and the per share carrying value of our net assets, we analyzed the carrying value of our net assets as of December 28, 2008 and again as of March 29, 2009. Deterioration in our revenue and the overall recessionary operating environment for us and other publishing companies were also factors in the timing of the analyses.
 

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Table of Contents

As a result, we recorded pretax, non-cash charges to reduce the carrying value of goodwill, nonamortized and amortizable intangible assets in the 13 weeks ended December 28, 2008 and March 29, 2009. Additional pretax, non-cash charges were recorded to reduce the carrying value of TNI. We also recorded pretax, non-cash charges to reduce the carrying value of property and equipment. We recorded deferred income tax benefits related to these charges.
 
Because of the timing of the determination of impairment and complexity of the calculations required, the amounts recorded in the 13 weeks ended March 29, 2009 were preliminary. The final analysis, which was completed in the 13 weeks ended June 28, 2009, resulted in additional charges.
 
2009 impairment charges and the related income tax benefit are summarized as follows:
 
 
13 Weeks Ended
 
 
 
(Thousands of Dollars)
December 28
2008
March 29
2009
June 28
2009
September 27 2009
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
67,781
 
 
107,115
 
 
18,575
 
 
 
 
193,471
 
 
 
Mastheads
 
 
17,884
 
 
(3,829
)
 
 
 
14,055
 
 
 
Customer and newspaper subscriber lists
 
 
18,928
 
 
14,920
 
 
 
 
33,848
 
 
 
Property and equipment
2,264
 
 
935
 
 
 
 
1,380
 
 
4,579
 
 
 
 
70,045
 
 
144,862
 
 
29,666
 
 
1,380
 
 
245,953
 
 
 
Reduction in investment in TNI
 
 
9,951
 
 
10,000
 
 
 
 
19,951
 
 
 
Income tax benefit
(14,261
)
 
(39,470
)
 
(11,720
)
 
(489
)
 
(65,940
)
 
 
 
55,784
 
 
115,343
 
 
27,946
 
 
891
 
 
199,964
 
 
 
Annual amortization of intangible assets for each of the 52 week periods ending June 2011, June 2012, June 2013, June 2014 and June 2015 is estimated to be $44,806,000, $43,797,000, $39,347,000, $39,033,000 and $38,993,000, respectively.
 
4    
DEBT
 
Credit Agreement
 
In 2006, we entered into an amended and restated credit agreement (“Credit Agreement”) with a syndicate of financial institutions (the “Lenders”). The Credit Agreement provided for aggregate borrowing of up to $1,435,000,000 and replaced a $1,550,000,000 credit agreement consummated in 2005. In February 2009, we completed a comprehensive restructuring of the Credit Agreement, which supplemented amendments consummated earlier in 2009 (together, the “2009 Amendments”).
 
Security
 
The Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by substantially all of our existing and future, direct and indirect subsidiaries in which we hold a direct or indirect interest of more than 50% (the “Credit Parties”); provided however, that our wholly-owned subsidiary Pulitzer Inc. (“Pulitzer”) and its subsidiaries will not become Credit Parties for so long as their doing so would violate the terms of the Pulitzer Notes discussed more fully below. The Credit Agreement is secured by first priority security interests in the stock and other equity interests owned by the Credit Parties in their respective subsidiaries.
 
As a result of the 2009 Amendments, the Credit Parties pledged substantially all of their tangible and intangible assets, and granted mortgages covering certain real estate, as collateral for the payment and performance of their obligations under the Credit Agreement. Assets of Pulitzer and its subsidiaries, TNI, our ownership interest in, and assets of, MNI and certain employee benefit plan assets are excluded.
 

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Interest Payments
 
Debt under the A Term Loan, which has a balance of $651,080,000 at June 27, 2010, and the $375,000,000 revolving credit facility, which has a balance of $286,425,000 at June 27, 2010, bear interest, at our 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 (i) the prime lending rate of Deutsche Bank Trust Company Americas at such time; (ii) 0.5% in excess of the overnight federal funds rate at such time; or (iii) 30 day LIBOR plus 1.0%. The applicable margin is a percentage determined according to the following: for revolving loans and A Term Loans maintained as base rate loans: 1.625% to 3.5%, and maintained as Eurodollar loans: 2.625% to 4.5% depending, in each instance, upon our total leverage ratio at such time.
 
Minimum LIBOR levels of 1.25%, 2.0% and 2.5% for borrowings for one month, three month and six month periods, respectively, are also in effect. At June 27, 2010, all of our outstanding debt under the Credit Agreement is based on one month borrowing. At the June 27, 2010 leverage level, our debt under the Credit Agreement will be priced at a LIBOR margin of 287.5 basis points.
 
Under the 2009 Amendments, contingent, non-cash payment-in-kind interest expense of 1.0% to 2.0% will be accrued in a quarterly period only in the event our total leverage ratio exceeds 7.5:1 at the end of the previous quarter. At June 27, 2010, this provision is not applicable. Such non-cash charges, if any, will be added to the principal amount of debt and will be reversed, in whole or in part, in the event our total leverage ratio is below 6.0:1 in September 2011 or we refinance the Credit Agreement in advance of its April 2012 maturity.
 
Principal Payments
 
We 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. We are required to repay principal amounts, on a quarterly basis until maturity, under the A Term Loan. Total A Term Loan payments in the 13 weeks ended June 27, 2010 were $15,526,000. The 2009 Amendments reduce the amount and delay the timing of mandatory principal payments under the A Term Loan. Remaining payments in 2010 and 2011 total $15,000,000 and $65,000,000, respectively. Payments in 2012 prior to the April 2012 maturity total $70,000,000. The scheduled payment at maturity is $501,080,000, plus the balance of the revolving credit facility outstanding at that time.
 
In addition to the scheduled payments, we are required to make mandatory prepayments under the A Term Loan under certain other conditions. The Credit Agreement requires us to apply the net proceeds from asset sales to repayment of the A Term Loan. In the 13 weeks ended June 27, 2010, we made a $526,000 payment related to this provision.
 
The Credit Agreement also requires us to accelerate future payments under the A Term Loan in the amount of 75% of our annual excess cash flow, as defined. We had no excess cash flow in 2009. We had excess cash flow of approximately $62,000,000 in 2008 and, as a result, paid $46,325,000 originally due under the A Term Loan in March and June 2009. The acceleration of such payments due to future asset sales or excess cash flow does not change the due dates of other A Term Loan payments.
 
Covenants and Other Matters
 
The Credit Agreement contains customary affirmative and negative covenants for financing of its type. At June 27, 2010, we were in compliance with such covenants. These financial covenants include a maximum total leverage ratio, as defined. The total leverage ratio is based primarily on the sum of the principal amount of all our debt, which equals $1,102,005,000 at June 27, 2010, plus letters of credit and certain other factors, divided by a measure of trailing 12 month operating results, which includes several elements, including distributions from TNI and MNI and curtailment gains.
 
The 2009 Amendments amended our covenants to take into account economic conditions and the changes to amortization of debt noted above. Our total leverage ratio at June 27, 2010 was 4.95:1. Under the 2009 Amendments, our maximum total leverage ratio limit will decrease from 8.5:1 in June 2010 to 7.75:1 in September 2010, decrease to 7.5:1 in December 2010, decrease to 7.25:1 in March 2011 and decrease to 7.0:1 in June 2011. Each change in the leverage ratio limit noted above is effective on the last day of the quarter.

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The Credit Agreement also includes a minimum interest expense coverage ratio, as defined, which is based on the same measure of trailing 12 month operating results noted above. Our interest expense coverage ratio at June 27, 2010 was 2.89:1. The minimum interest expense coverage ratio is 1.45:1 in June 2010 and will increase periodically thereafter until it reaches 2.25:1 in March 2012.
 
The 2009 Amendments require us to suspend stockholder dividends and share repurchases through April 2012. The 2009 Amendments also limit capital expenditures to $20,000,000 per year, with a provision for carryover of unused amounts from the prior year. Further, the 2009 Amendments modify other covenants, including restricting our ability to make additional investments and acquisitions without the consent of the Lenders, limiting additional debt beyond that permitted under the Credit Agreement, and limiting the amount of unrestricted cash and cash equivalents the Credit Parties may hold to a maximum of $10,000,000 for a five day period. Such covenants require that substantially all of our future cash flows are required to be directed toward debt reduction. Finally, the 2009 Amendments eliminated an unused incremental term loan facility.
 
Pulitzer Notes
 
In conjunction with its formation in 2000, St. Louis Post-Dispatch LLC ("PD LLC") borrowed $306,000,000 (the “Pulitzer Notes”) from a group of institutional lenders (the “Noteholders”). The aggregate principal amount of the Pulitzer Notes was payable in April 2009.
 
In February 2009, the Pulitzer Notes and the Guaranty Agreement described below were amended (the “Notes Amendment”). Under the Notes Amendment, PD LLC repaid $120,000,000 of the principal amount of the debt obligation using substantially all of its previously restricted cash, which totaled $129,810,000 at December 28, 2008. The remaining debt balance of $186,000,000, of which $164,500,000 remains outstanding at June 27, 2010, was refinanced by the Noteholders until April 2012.
 
The Pulitzer Notes are guaranteed by Pulitzer pursuant to a Guaranty Agreement dated May 1, 2000 (the “Guaranty Agreement”) with the Noteholders. The Notes Amendment provides that the obligations under the Pulitzer Notes are fully and unconditionally guaranteed on a joint and several basis by Pulitzer's existing and future subsidiaries (excluding Star Publishing and TNI). Also, as a result of the Notes Amendment, Pulitzer and each of its subsidiaries pledged substantially all of its tangible and intangible assets, and granted mortgages covering certain real estate, as collateral for the payment and performance of their obligations under the Pulitzer Notes. Assets and stock of Star Publishing, our ownership interest in TNI and certain employee benefit plan assets are excluded.
 
The Notes Amendment increased the rate paid on the outstanding principal balance to 9.05% until April 28, 2010, at which time it increased to 9.55%. The interest rate will increase by 0.5% per year thereafter.
 
Pulitzer may voluntarily prepay principal amounts outstanding or reduce commitments under the Pulitzer Notes at any time, in whole or in part, without premium or penalty, upon proper notice and consent from the Noteholders and the Lenders, and subject to certain limitations as to minimum amounts of prepayments. The Notes Amendment provides for mandatory scheduled prepayments, including quarterly principal payments of $4,000,000 which began on June 29, 2009 and an additional principal payment from restricted cash, if any, of up to $4,500,000 in October 2010. In 2010, the $4,000,000 payments due December 28, 2009, March 29, 2010 and June 28, 2010 were made prior to the end of the previous fiscal quarters. In 2009, the $4,000,000 payments due on June 29, 2009 and September 30, 2009 were made prior to the end of the previous fiscal quarters.
 
In addition to the scheduled payments, we are required to make mandatory prepayments under the Pulitzer Notes under certain other conditions. The Notes Amendment requires us to apply the net proceeds from asset sales to repayment of the Pulitzer Notes. In the 13 weeks ended June 27, 2010, we made a $500,000 payment related to this provision.
 
The Notes Amendment establishes a reserve of restricted cash of up to $9,000,000 (reducing to $4,500,000 in October 2010) to facilitate the liquidity of the operations of Pulitzer. All other previously existing restricted cash requirements were eliminated. The Notes Amendment allocates a percentage of Pulitzer's quarterly excess cash flow (as defined) between Pulitzer and the Credit Parties and requires prepayments to the Noteholders under certain specified events. In May 2010, a principal prepayment of $1,000,000 was made under the Pulitzer Notes from excess cash flow of Pulitzer for the 13 weeks ended March 28, 2010. There was no excess cash

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flow in the 13 weeks ended December 27, 2009, 13 weeks ended June 27, 2010 or in 2009.
 
The Pulitzer Notes contain certain covenants and conditions including the maintenance, by Pulitzer, of the maximum ratio of debt to EBITDA (limit of 4.0:1 at June 27, 2010), as defined in the Guaranty Agreement, minimum net worth and limitations on the incurrence of other debt. The Notes Amendment added a requirement to maintain minimum interest coverage (limit of 2.6:1 at June 27, 2010), as defined. The Notes Amendment amended the Pulitzer Notes and the Guaranty Agreement covenants to take into account economic conditions and the changes to amortization of debt noted above. At June 27, 2010, Pulitzer was in compliance with such covenants.
 
Further, the Notes Amendment added and amended other covenants including limitations or restrictions on additional debt, distributions, loans, advances, investments, acquisitions, dispositions and mergers. Such covenants require that substantially all future cash flows of Pulitzer are required to be directed first toward repayment of the Pulitzer Notes and that cash flows of Pulitzer are largely segregated from those of the Credit Parties.
 
The Credit Agreement contains a cross-default provision tied to the terms of the Pulitzer Notes and the Pulitzer Notes have limited cross-default provisions tied to the terms of the Credit Agreement.
 
The 2005 purchase price allocation of Pulitzer resulted in an increase in the value of the Pulitzer Notes in the amount of $31,512,000, which was recorded as debt in the Consolidated Balance Sheets. At June 27, 2010, the unaccreted balance totals $993,000. This amount is being accreted over the remaining life of the Pulitzer Notes, until April 2012, as a reduction in interest expense using the interest method. This accretion will not increase the principal amount due, or reduce the amount of interest to be paid, to the Noteholders.
 
Liquidity
 
We expect to utilize a portion of our capacity under our revolving credit facility to fund a portion of future principal payments required under the Credit Agreement. At June 27, 2010, we had $286,425,000 outstanding under the revolving credit facility, and after consideration of the 2009 Amendments and letters of credit, have approximately $74,154,000 available for future use. Including cash and restricted cash, our liquidity at June 27, 2010 totals $98,779,000. This liquidity amount excludes any future cash flows. Remaining mandatory principal payments on debt in 2010 total $15,000,000. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows. We expect all remaining interest payments and substantially all principal payments due in 2010 will be satisfied by our continuing cash flows.
 
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at June 27, 2010.
 
There are numerous potential consequences under the Credit Agreement, and Guaranty Agreement and Note Agreement related to the Pulitzer Notes, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control, and the control of Pulitzer, and PD LLC, respectively. The occurrence of one or more events of default would give rise to the right of the Lenders or the Noteholders, or both of them, to exercise their remedies under the Credit Agreement and the Note and Guaranty Agreements, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
 
The 2010 Redemption, as discussed more fully in Note 10, eliminated the potential requirement for a substantial cash outflow in April 2010. This event also substantially enhanced our liquidity.
 
Other
 
We paid fees to the Lenders and Noteholders for the 2009 Amendments and Notes Amendment which, along with the related legal and financial advisory expenses, totaled $26,061,000. $15,500,000 of the fees were capitalized and are being expensed over the remaining term of the Credit Agreement and Pulitzer Notes, until April 2012. At June 27, 2010, we have total unamortized financing costs of $13,742,000.
 

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Debt is summarized as follows:
 
 
 
 
 
 
Interest Rates
 
(Thousands of Dollars)
June 27
2010
September 27
2009
June 27
2010
 
 
 
 
 
 
 
 
 
Credit Agreement:
 
 
 
 
 
 
 
A Term Loan
651,080
 
 
714,885
 
 
4.25
 
 
 
Revolving credit facility
286,425
 
 
275,450
 
 
4.25
 
 
 
Pulitzer Notes:
 
 
 
 
 
 
 
Principal amount
164,500
 
 
178,000
 
 
9.55
 
 
 
Unaccreted fair value adjustment
993
 
 
1,458
 
 
 
 
 
 
1,102,998
 
 
1,169,793
 
 
 
 
 
Less current maturities
72,000
 
 
89,800
 
 
 
 
 
 
1,030,998
 
 
1,079,993
 
 
 
 
 
At June 27, 2010, our weighted average cost of debt was 5.04%.
 
Aggregate maturities of debt in the 52 weeks ending June 2011 and 2012 are $72,000,000 and $1,030,005,000, respectively. In addition, as discussed above, an additional principal payment from restricted cash of up to $4,500,000 may be required in October 2010 under the Pulitzer Notes.
 
5    
PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS
 
We have several noncontributory defined benefit pension plans that together cover certain St. Louis Post-Dispatch and selected other employees. Benefits under the plans are generally based on salary and years of service. Our 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.
 
In addition, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, PD LLC provides postemployment disability benefits to certain employee groups prior to retirement at the St. Louis Post-Dispatch. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
 
We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.
 

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The net periodic cost (benefit) components of our pension and postretirement medical plans are as follows:
 
Pension Plans
 
 
13 Weeks Ended
39 Weeks Ended
 
(Thousands of Dollars)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
 
 
Service cost for benefits earned during the period
63
 
 
269
 
 
729
 
 
807
 
 
 
Interest cost on projected benefit obligation
2,217
 
 
2,388
 
 
6,671
 
 
7,164
 
 
 
Expected return on plan assets
(2,418
)
 
(2,917
)
 
(7,148
)
 
(8,751
)
 
 
Amortization of net (gain) loss
113
 
 
(295
)
 
339
 
 
(885
)
 
 
Amortization of prior service cost
(34
)
 
(34
)
 
(102
)
 
(102
)
 
 
 
(59
)
 
(589
)
 
489
 
 
(1,767
)
 
 
 
 
 
Postretirement Medical Plans
 
 
13 Weeks Ended
39 Weeks Ended
 
(Thousands of Dollars)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
 
 
Service cost for benefits earned during the period
41
 
 
65
 
 
368
 
 
592
 
 
 
Interest cost on projected benefit obligation
600
 
 
981
 
 
2,371
 
 
3,843
 
 
 
Expected return on plan assets
(571
)
 
(600
)
 
(1,702
)
 
(1,805
)
 
 
Amortization of net gain
(629
)
 
(979
)
 
(1,819
)
 
(2,115
)
 
 
Amortization of prior service cost
(398
)
 
(808
)
 
(1,598
)
 
(1,564
)
 
 
 
(957
)
 
(1,341
)
 
(2,380
)
 
(1,049
)
 
 
Based on our forecast at June 27, 2010, we expect to contribute $2,600,000 to our postretirement medical plans in 2010.
 
2010 Changes to Plans
 
In December 2009, we notified certain participants in our postretirement medical plans of changes to be made to the plans, including increases in participant premium cost-sharing and elimination of coverage for certain participants. The changes resulted in non-cash curtailment gains of $31,130,000, will reduce 2010 net periodic postretirement medical cost by $1,460,000 beginning in the 13 weeks ended March 28, 2010, and reduced the benefit obligation liability at December 27, 2009 by $28,750,000.
 
In March 2010, members of the St. Louis Newspaper Guild voted to approve a new 5.5 year contract, effective April 1, 2010. The new contract eliminated postretirement medical coverage for active employees and defined pension benefits were frozen. The elimination of postretirement medical coverage resulted in non-cash curtailment gains of $11,878,000, which were recognized in the 13 weeks ended March 28, 2010 and reduced the benefit obligation liability at March 28, 2010 by $6,576,000. The freeze of defined pension benefits resulted in non-cash curtailment gains of $2,004,000, which were recognized in the 13 weeks ended March 28, 2010, will reduce 2010 net periodic pension expenses by $668,000 beginning in the 13 weeks ended June 27, 2010, and reduced the benefit obligation liability at March 28, 2010 by $2,004,000.
 
Increases in employee cost sharing discussed above were treated as negative plan amendments. Curtailment treatment was utilized in situations in which coverage was eliminated. Curtailment gains were calculated by revaluation of plan liabilities after consideration of other plan changes.
 
The Patient Protection and Affordable Care Act, along with its companion reconciliation legislation (together the “Affordable Care Act”), were enacted into law in March 2010. We expect the Affordable Care Act will be supported by a substantial number of underlying regulations, many of which have not been issued. Accordingly, a complete determination of the impact of the Affordable Care Act cannot be made at this time. However, we do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability.

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Table of Contents

6    
INCOME TAXES
 
The provision for income taxes includes deferred taxes and is based upon estimated annual effective tax rates in the tax jurisdictions in which we operate.
 
Income tax expense (benefit) related to continuing operations differs from the amounts computed by applying the U.S. federal income tax rate to income (loss) before income taxes. The reasons for these differences are as follows:
 
 
 
13 Weeks Ended
39 Weeks Ended
 
(Percent of Income (Loss) from Continuing Operations Before Income Taxes)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
 
 
Computed “expected” income tax expense (benefit)
35.0
 
 
(35.0
)
 
35.0
 
 
(35.0
)
 
 
State income taxes, net of federal tax benefit
3.0
 
 
(3.0
)
 
3.0
 
 
(3.0
)
 
 
Curtailment gains
 
 
 
 
2.4
 
 
 
 
 
Affordable Care Act
 
 
 
 
2.9
 
 
 
 
 
Impairment of goodwill and other assets
 
 
9.0
 
 
 
 
12.3
 
 
 
Valuation allowance
 
 
 
 
 
 
(6.1
)
 
 
Resolution of uncertain tax positions
(2.5
)
 
(0.3
)
 
(0.1
)
 
(0.3
)
 
 
Other
(8.1
)
 
0.7
 
 
(2.5
)
 
1.7
 
 
 
 
27.4
 
 
(28.6
)
 
40.7
 
 
(30.4
)
 
 
In March 2010, as a result of the Affordable Care Act, we wrote off $2,012,000 of deferred income tax assets due to the loss of future tax deductions for providing retiree prescription drug benefits.
 
We file income tax returns with the IRS and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our 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 Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
 
We have various income tax examinations ongoing and at various stages of completion, but generally the income tax returns have been audited or closed to audit through 2005.
 

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7    
EARNINGS (LOSS) PER COMMON SHARE
 
The following table sets forth the computation of basic and diluted earnings (loss) per common share. Per share amounts may not add due to rounding.
 
 
13 Weeks Ended
39 Weeks Ended
 
(Thousands of Dollars and Shares, Except Per Share Data)
June 27
2010
June 28
2009
June 27
2010
June 28
2009
 
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated:
 
 
 
 
 
 
 
 
 
Continuing operations
10,019
 
 
(24,512
)
 
40,916
 
 
(124,941
)
 
 
Discontinued operations
 
 
 
 
 
 
(5
)
 
 
 
10,019
 
 
(24,512
)
 
40,916
 
 
(124,946
)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares
44,898
 
 
44,918
 
 
44,888
 
 
44,962
 
 
 
Less non-vested restricted Common Stock
334
 
 
465
 
 
335
 
 
527
 
 
 
Basic average common shares
44,564
 
 
44,453
 
 
44,553
 
 
44,435
 
 
 
Plus dilutive stock options and restricted Common Stock
477
 
 
 
 
306
 
 
 
 
 
Diluted average common shares
45,041
 
 
44,453
 
 
44,859
 
 
44,435
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share attributable to Lee Enterprises, Incorporated:
 
 
 
 
 
 
 
 
 
    Basic:
 
 
 
 
 
 
 
 
 
   Continuing operations
0.22
 
 
(0.55
)
 
0.92
 
 
(2.81
)
 
 
   Discontinued operations
 
 
 
 
 
 
 
 
 
 
0.22
 
 
(0.55
)
 
0.92
 
 
(2.81
)
 
 
 
 
 
 
 
 
 
 
 
 
    Diluted:
 
 
 
 
 
 
 
 
 
   Continuing operations
0.22
 
 
(0.55
)
 
0.91
 
 
(2.81
)
 
 
   Discontinued operations
 
 
 
 
 
 
 
 
 
 
0.22
 
 
(0.55
)
 
0.91
 
 
(2.81
)
 
 
For the 13 weeks ended June 27, 2010 and June 28, 2009, we have 198,000 and 229,000 weighted average shares, respectively, subject to issuance under our stock option plan that have no intrinsic value and are not considered in the computation of diluted earnings per common share. For the 39 weeks ended June 27, 2010 and June 28, 2009, the weighted average shares not considered in the computation of diluted earnings per share are 207,000 and 229,000, respectively.
 
8    
STOCK OWNERSHIP PLANS
 
Stock Options
 
A summary of activity related to our stock option plan is as follows:
 
(Thousands of Dollars and Shares, Except Per Share Data)
Shares
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
 
 
 
Outstanding, September 27, 2009
1,009
 
 
9.40
 
 
 
 
 
 
 
Cancelled
(49
)
 
21.68
 
 
 
 
 
 
 
 
960
 
 
8.77
 
 
8.2
 
 
381
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable, June 27, 2010
198
 
 
34.56
 
 
4.7
 
 
 
 
 

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Total unrecognized compensation expense for unvested stock options as of June 27, 2010 is $820,000, which will be recognized over a weighted average period of 2.1 years.
 
Restricted Common Stock
 
The following table summarizes restricted Common Stock activity during the 39 weeks ended June 27, 2010:
 
(Thousands of Shares, Except Per Share Data)
Shares
Weighted
Average Grant Date
Fair Value
 
 
 
 
 
 
 
Outstanding, September 27, 2009
453
 
 
19.35
 
 
 
Vested
(143
)
 
28.73
 
 
 
Forfeited
(7
)
 
15.02
 
 
 
Outstanding, June 27, 2010
303
 
 
15.02
 
 
 
The fair value of restricted Common Stock vested during the 39 weeks ended June 27, 2010 totals $554,000.
 
Total unrecognized compensation expense for unvested restricted Common Stock as of June 27, 2010 is $673,000, which will be recognized over a weighted average period of less than one year.
 
9    
FAIR VALUE MEASUREMENTS
 
We adopted FASB ASC Topic 820, Fair Value Measurements and Disclosures, in 2009. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable and consists of the following levels:
 
•    
Level 1 - Quoted prices for identical instruments in active markets;
•    
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and
•    
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs
are unobservable.
 
The following table summarizes the financial instruments measured at fair value in the accompanying Consolidated Financial Statements as of June 27, 2010:
 
(Thousands of Dollars)
 
Level 3
Total
 
 
 
 
 
 
 
 
Herald Value - liability (see Note 10)
 
2,300
 
 
2,300
 
 
 
There were no realized or unrealized gains or losses, purchases, sales, or transfers related to the Herald liability in the 39 weeks ended June 27, 2010.
 
In the 13 weeks ended March 28, 2010, we reduced the carrying value of equipment no longer in use by $3,290,000, based on estimates of the related fair value in the current market. In 2009, we reduced the carrying value of equipment no longer in use by $4,579,000, based on estimates of the related fair value in the current market. Based on age, condition and marketability we estimated the equipment had no value.
 
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value. The carrying amounts of cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of those instruments. Other investments, consisting of debt and equity securities in a deferred compensation trust, are carried at fair value based upon quoted market prices. Investments totaling $8,608,000, including our 17% ownership of the nonvoting common stock of TCT, are carried at cost. The fair value of floating rate debt cannot be determined as an active market for such debt does not exist. Our fixed rate debt consists of the $164,500,000 principal amount of Pulitzer Notes, as discussed more fully in Note 4, which is not traded on an active market and is held by a small group of Noteholders. Coupled with the volatility of substantially all domestic credit markets that

17

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exists, we are unable, as of June 27, 2010, to determine the fair value of such debt. The value, if determined, would likely be less than the carrying amount.
 
10    
COMMITMENTS AND CONTINGENT LIABILITIES
 
Redemption of PD LLC Minority Interest
 
In 2000, Pulitzer and The Herald Company Inc. (“Herald Inc.”) completed the transfer of their respective interests in the assets and operations of the St. Louis Post-Dispatch and certain related businesses to a new joint venture, known as PD LLC. Pulitzer is the managing member of PD LLC. Under the terms of the related Operating Agreement, Pulitzer and another subsidiary held a 95% interest in the results of operations of PD LLC and The Herald Publishing Company, LLC (“Herald”), as successor to Herald Inc., held a 5% interest. Until February 2009, Herald's 5% interest was reported as minority interest in the Consolidated Statements of Operations and Comprehensive Income (Loss) at historical cost, plus accumulated earnings since the acquisition of Pulitzer.
 
Also, under the terms of the Operating Agreement, Herald Inc. received on May 1, 2000 a cash distribution of $306,000,000 from PD LLC. This distribution was financed by the Pulitzer Notes. Pulitzer's investment in PD LLC was treated as a purchase for accounting purposes and a leveraged partnership for income tax purposes.
 
The Operating Agreement provided Herald a one-time right to require PD LLC to redeem Herald's interest in PD LLC, together with its interest, if any, in STL Distribution Services LLC ("DS LLC ") (the “2010 Redemption”). The 2010 Redemption price for Herald's interest was to be determined pursuant to a formula. We recorded the present value of the remaining amount of this potential liability in our Consolidated Balance Sheet in 2008, with the offset primarily to goodwill in the amount of $55,594,000, and the remainder recorded as a reduction of retained earnings. In 2009 and 2008, we accrued increases in the liability totaling $1,466,000 and $8,838,000, respectively, which increased loss available to common stockholders. The present value of the 2010 Redemption in February 2009 was approximately $73,602,000.
 
In February 2009, in conjunction with the Notes Amendment, PD LLC redeemed the 5% interest in PD LLC and DS LLC owned by Herald pursuant to a Redemption Agreement and adopted conforming amendments to the Operating Agreement. As a result, the value of Herald's former interest (the “Herald Value”) will be settled, at a date determined by Herald between April 2013 and April 2015, based on a calculation of 10% of the fair market value of PD LLC and DS LLC at the time of settlement, less the balance, as adjusted, of the Pulitzer Notes or the equivalent successor debt, if any. We recorded a liability of $2,300,000 in 2009 as an estimate of the amount of the Herald Value to be disbursed. The determination of the amount of the Herald Value was based on an estimate of fair value using both market and income-based approaches. The actual amount of the Herald Value at the date of settlement will depend on such variables as future cash flows and indebtedness of PD LLC and DS LLC, market valuations of newspaper properties and the timing of the request for redemption.
 
The Redemption Agreement also terminated Herald's right to exercise its rights under the 2010 Redemption. As a result, we reversed substantially all of our liability for the 2010 Redemption in 2009. The reversal reduced liabilities by $71,302,000 and increased comprehensive income by $58,521,000 and stockholders' equity by $68,824,000.
 
The redemption of Herald's interest in PD LLC and DS LLC is expected to generate significant tax benefits to us as a consequence of the resulting increase in the tax basis of the assets owned by PD LLC and DS LLC and the related depreciation and amortization deductions. The increase in basis to be amortized for income tax purposes over a 15 year period beginning in February 2009 is approximately $258,000,000.
 
Pursuant to an Indemnity Agreement dated May 1, 2000 (the “Indemnity Agreement”) between Herald Inc. and Pulitzer, Herald agreed to indemnify Pulitzer for any payments that Pulitzer may make under the Guaranty Agreement. The Indemnity Agreement and related obligations of Herald to indemnify Pulitzer were also terminated pursuant to the Redemption Agreement.
 
Legal Proceedings
 
We are 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 we are unable to predict the ultimate outcome of

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these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
 
In 2008, a group of newspaper carriers filed suit against us in the United States District Court for the Southern District of California, claiming to be employees and not independent contractors of ours. The plaintiffs seek relief related to violation of various employment-based statutes, and request punitive damages and attorneys' fees. In July 2010, the trial court judge granted the plaintiffs' petition for class certification, which we intend to appeal. During the appeal process, the trial court judge has discretion to determine which aspects of the matter will proceed. At this time we are unable to predict whether the ultimate economic outcome, if any, could have a material effect on our Consolidated Financial Statements, taken as a whole. We deny the allegations of employee status, consistent with our past practices and industry practices, and intend to vigorously contest the action, which is not covered by insurance.
 
11    
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
In 2010, we adopted FASB ASC 810, Consolidation.  FASB ASC 810 requires that noncontrolling interests be reported as a separate component of equity.  Net income (loss), including the portion attributable to our noncontrolling interests is included in net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss) and will continue to be used to determine earnings (loss) per common share.  FASB ASC 810 also requires certain prospective changes in accounting for noncontrolling interests, primarily related to increases and decreases in ownership and changes in control.  As required, the presentation and disclosure requirements were adopted through retrospective application, and prior period information has been reclassified accordingly.  The adoption did not have a material effect on our Consolidated Financial Statements.
 
In December 2008, the FASB issued FSP 132(R)-1, Disclosures about Postretirement Benefit Plan Assets, codified in ASC 715, Compensation-Retirement Benefits.  FSP 132(R)-1 requires additional disclosures relating to investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of plan assets. FSP 132(R)-1 is effective for us on September 26, 2010.  The adoption will not have a material effect on our Consolidated Financial Statements.
 

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Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 weeks and 39 weeks ended June 27, 2010. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2009 Annual Report on Form 10-K.
 
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. However, we believe the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate our financial performance, or assist in forecasting and analyzing future periods. We also believe 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 (loss) before depreciation, amortization, impairment of goodwill and other assets, curtailment gains and equity in earnings of associated companies, and operating cash flow margin (operating cash flow divided by operating revenue) represent non-GAAP financial measures that are used in the analysis below. We believe these measures provide meaningful supplemental information because of their focus on results from operations excluding such non-cash factors.
 
Reconciliations of operating cash flow and operating cash flow margin to operating income (loss) and operating income (loss) margin, the most directly comparable measures under GAAP, are included in the table below:
 
           13 Weeks Ended
(Thousands of Dollars)
June 27
2010
Percent
of
Revenue
June 28
2009
Percent
of
Revenue
 
 
 
 
 
 
 
 
 
Operating cash flow
46,334
 
 
23.6
 
 
44,691
 
 
21.9
 
 
Less depreciation and amortization
18,151
 
 
9.2
 
 
19,652
 
 
9.6
 
 
Less impairment of goodwill and other assets
 
 
 
 
29,665
 
 
   NM 
 
Plus equity in earnings of associated companies
1,934
 
 
1.0
 
 
838
 
 
0.4
 
 
Less reduction of investment in TNI
 
 
 
 
10,000
 
 
   NM
 
Operating income (loss)
30,117
 
 
15.3
 
 
(13,788
)
 
   NM
 
 
          39 Weeks Ended
(Thousands of Dollars)
June 27
2010
Percent
of
Revenue
June 28
2009
Percent
of
Revenue
 
 
 
 
 
 
 
 
 
Operating cash flow
132,772
 
 
22.4
 
 
126,484
 
 
19.6
 
 
Less depreciation and amortization
55,313
 
 
9.3
 
 
60,551
 
 
9.4
 
 
Less impairment of goodwill and other assets
3,290
 
 
    NM
 
244,572
 
 
   NM
 
Plus curtailment gains
45,012
 
 
    NM
 
 
 
 
 
Plus equity in earnings of associated companies
5,401
 
 
0.9
 
 
4,250
 
 
0.7
 
 
Less reduction of investment in TNI
 
 
 
 
19,951
 
 
   NM
 
Operating income (loss)
124,582
 
 
21.0
 
 
(194,340
)
 
   NM
 

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Adjusted Net Income and Adjusted Earnings Per Common Share
 
Adjusted net income and adjusted earnings per common share, which are defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature, are non-GAAP financial measures that are used in the analysis below. We believe these measures provide meaningful supplemental information by identifying matters that are not indicative of core business operating results or are of a substantially non-recurring nature.
 
Reconciliations of adjusted net income and adjusted earnings per common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) 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, if any, consummated in the current or prior year. We believe such comparisons provide meaningful supplemental information for an understanding of changes in our revenue and operating expenses. Same property comparisons exclude TNI and MNI. We own 50% of TNI and also own 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.
 
CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of results of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our 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.
 
Our critical accounting policies include the following:
 
Goodwill and other intangible assets;
Pension, postretirement and postemployment benefit plans;
Income taxes;
Revenue recognition; and
Uninsured risks.
 
Additional information regarding these critical accounting policies can be found under the caption Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2009 Annual Report on Form 10-K and the Notes to Consolidated Financial Statements, included herein.
 
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
 
In 2010, the Company adopted FASB ASC 810, Consolidation.  FASB ASC 810 requires that noncontrolling interests be reported as a separate component of stockholders' equity.  Net income (loss) including the portion attributable to our noncontrolling interests is included in net income (loss) in the Consolidated Statements of Operations and Comprehensive Income (Loss) and will continue to be used to determine earnings (loss) per common share.  FASB ASC 810 also requires certain prospective changes in accounting for noncontrolling interests primarily related to increases and decreases in ownership and changes in control.  As required, the presentation and disclosure requirements were adopted through retrospective application, and prior period information has been reclassified accordingly.  The adoption did not have a material effect on our Consolidated Financial Statements.
 
In December 2008, the FASB issued FSP 132(R)-1, Disclosures about Postretirement Benefit Plan Assets, codified in ASC 715, Compensation-Retirement Benefits.  FSP 132(R)-1 requires additional disclosures relating to investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation

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techniques used to measure the fair value of plan assets. FSP 132(R)-1 is effective for us on September 26, 2010.  The adoption will not have a material effect on our Consolidated Financial Statements.
 
EXECUTIVE OVERVIEW
 
We are a premier provider of local news, information and advertising in primarily midsize markets, with 49 daily newspapers and a joint interest in four others, growing digital sites and nearly 300 weekly newspapers and specialty publications in 23 states.
 
Approximately 72% of our revenue is derived from advertising. Our strategies are to increase our share of local advertising through increased sales activities in our existing markets and, over time, to increase print and digital audiences through internal expansion into existing and contiguous markets and enhancement of digital offerings.
 
ECONOMIC CONDITIONS
 
According to the National Bureau of Economic Research, the United States economy entered a recession in the three months ended December 2007 and it is widely believed that certain elements of the economy, such as housing, were in decline before that time. 2009 and 2008 revenue, operating results and cash flows were significantly impacted by the recession. United States gross domestic product increased in the twelve months ended June 2010, likely signaling the end of the current recession. Nonetheless, certain key economic indicators, such as unemployment and underemployment, most measures of housing activity and automobile sales remain at recessionary levels. The duration and depth of an economic recession in markets in which we operate may further reduce our future advertising and circulation revenue, operating results and cash flows.
 
IMPAIRMENT OF GOODWILL AND OTHER ASSETS
 
Due primarily to the continuing, and (at the time) increasing difference between our stock price and the per share carrying value of our net assets, we analyzed the carrying value of our net assets as of December 28, 2008 and again as of March 29, 2009. Deterioration in our revenue and the overall recessionary operating environment for the Company and other publishing companies were also factors in the timing of the analyses.
 
As a result, in 2009 we recorded pretax, non-cash charges to reduce the carrying value of goodwill by $193,471,000. We also recorded pretax, non-cash charges of $14,055,000 and $33,848,000 to reduce the carrying value of nonamortized and amortizable intangible assets, respectively. $19,951,000 of additional pretax charges were recorded as a reduction in the carrying value of our investment in TNI. We also recorded additional, pretax non-cash charges of $4,579,000 to reduce the carrying value of property and equipment. We recorded $65,940,000 of deferred income tax benefit related to these charges.
 
For similar reasons, in 2008 we recorded pretax, non-cash charges to reduce the carrying value of goodwill by $908,977,000. We also recorded pretax, non-cash charges of $13,027,000 and $143,785,000 to reduce the carrying value of nonamortized and amortizable intangible assets, respectively. $104,478,000 of additional pretax charges were recorded as a reduction in the carrying value of our investment in TNI. We also recorded additional, pretax non-cash charges of $5,019,000 to reduce the carrying value of property and equipment. We recorded $281,564,000 of deferred income tax benefit related to these charges.
 
In the 39 weeks ended June 27, 2010, we reduced the carrying value of equipment no longer in use by $3,290,000.
 

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DEBT AND LIQUIDITY
 
As discussed more fully in Note 4 of the Notes to Consolidated Financial Statements, included herein, in February 2009, we completed a comprehensive restructuring of our Credit Agreement and a refinancing of our Pulitzer Notes debt, substantially enhancing our liquidity and operating flexibility until April 2012. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows. We expect all remaining interest payments and substantially all principal payments due in 2010 will be satisfied by our continuing cash flows.
 
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at June 27, 2010.
 

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13 WEEKS ENDED JUNE 27, 2010
 
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
 
13 Weeks Ended
(Thousands of Dollars, Except Per Share Data)
June 27
2010
June 28
2009
Percent Change
 
 
 
 
 
 
 
Advertising revenue:
 
 
 
 
 
 
Retail
79,886
 
 
85,489
 
 
(6.6
)
 
Classified:
 
 
 
 
 
 
Daily newspapers:
 
 
 
 
 
 
Employment
5,775
 
 
5,840
 
 
(1.1
)
 
Automotive
6,494
 
 
7,607
 
 
(14.6
)
 
Real estate
5,754
 
 
7,324
 
 
(21.4
)
 
All other
12,560
 
 
12,580
 
 
(0.2
)
 
Other publications
7,267
 
 
7,384
 
 
(1.6
)
 
Total classified
37,850
 
 
40,735
 
 
(7.1
)
 
Digital
12,914
 
 
10,350
 
 
24.8
 
 
National
7,198
 
 
8,305
 
 
(13.3
)
 
Niche publications
2,965
 
 
3,155
 
 
(6.0
)
 
Total advertising revenue
140,813
 
 
148,034
 
 
(4.9
)
 
Circulation
45,072
 
 
45,320
 
 
(0.5
)
 
Commercial printing
3,275
 
 
3,497
 
 
(6.3
)
 
Digital services and other
7,245
 
 
6,954
 
 
4.2
 
 
Total operating revenue
196,405
 
 
203,805
 
 
(3.6
)
 
Compensation
78,372
 
 
80,703
 
 
(2.9
)
 
Newsprint and ink
13,618
 
 
15,752
 
 
(13.5
)
 
Other operating expenses
57,686
 
 
61,118
 
 
(5.6
)
 
Workforce adjustments and transition costs
395
 
 
1,541
 
 
(74.4
)
 
 
150,071
 
 
159,114
 
 
(5.7
)
 
Operating cash flow
46,334
 
 
44,691
 
 
3.7
 
 
Depreciation and amortization
18,151
 
 
19,652
 
 
(7.6
)
 
Impairment of goodwill and other assets
 
 
29,665
 
 
   NM
 
Curtailment gains
 
 
 
 
 
 
Equity in earnings of associated companies
1,934
 
 
838
 
 
   NM
 
Reduction of investment in TNI
 
 
10,000
 
 
   NM
 
Operating income (loss)
30,117
 
 
(13,788
)
 
   NM
 
Non-operating expense, net
(16,288
)
 
(20,534
)
 
(20.7
)
 
Income (loss) before income taxes
13,829
 
 
(34,322
)
 
   NM
 
Income tax expense (benefit)
3,790
 
 
(9,830
)
 
   NM
 
Income (loss) from continuing operations
10,039
 
 
(24,492
)
 
   NM
 
Discontinued operations, net
 
 
 
 
 
 
Net income (loss)
10,039