L E E E N T E R P R I S E S 2 0 0 7 A N N U A L R E P O R T
azdailysun.com
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wiscnews.com/bdc
pantagraph.com
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wiscnews.com/bnc
thesouthern.com
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globegazette.com
auburnpub.com
trib.com
201 N. Harrison St.
Davenport, IA 52801
www.lee.net
Mary Junck
Chairman, President and Chief Executive Officer
563) 383-2100
December 31, 2007
Dear Lee Shareholder:
In terms of revenue performance and climate, 2007 was surely one of the toughest years ever for the
newspaper industry. Print advertising revenue slipped in retail and declined more sharply in classified,
and the relentless negative commentary from analysts and pundits continued. The stock market
reacted by sending our share price to levels far below the true value of our company.
Against this tough backdrop, we stayed focused on our top priorities and drove industry-leading results
in every measure of performance. We never lost faith in the immense strength of our business and the
indispensable value we provide to readers, online users, advertisers and our communities.
Here’s why we remain optimistic about our business and Lee:
• Our market reach is powerful and growing – Lee’s newspapers and online sites, as measured in
our larger markets, reach 70% or more of all adults, up from an already strong 67% a year ago.
We’re confident this reach is even higher in our smaller markets. This remarkable strength extends
across all age groups, and even within the 18-29 Millennial generation, we reach more than 60%.
No competitor comes even distantly close. In many of our markets, our online site alone provides a
larger audience for advertisers than the top-rated TV station in its best time period. While driving
larger and larger online audiences, we outperformed peer newspaper companies again this past
year in maintaining strong paid circulation, which has become only one measure of audience. From
our smallest markets to St. Louis, we led peers in both the March and September Fas-Fax reports
by the Audit Bureau of Circulations. In the latest period, 24 Lee newspapers reported gains, either
daily, Sunday or both. In total, Lee newspapers reported declines of 0.7% Sunday and 1.7% daily,
compared with an industry average decline of 3.5% Sunday and 2.6% daily.
• Lee leads the industry in revenue performance – Throughout 2007, we consistently and
dramatically outpaced peers in revenue performance. We led in retail, classified, total advertising
and total operating revenue. For the year, our same property ad revenue slipped only 0.3% versus
a Newspaper Association of America average decline of 5.6%. We credit our innovative and
aggressive sales culture, which has helped Lee weather the brunt of the real estate downturn and
its drag on retail advertising as well as classified. In fact, factoring out home improvement and
furnishings, retail had a solid year. When real estate rebounds, we expect to drive growth using the
same formula that has worked so well for us with employment. Overall, employment revenue grew
a robust 6.8% this past year, through packages that include the daily newspaper, our partnership
with Yahoo! HotJobs and our targeted classified publications. We left few stones unturned. Our
revenue initiatives captured millions of incremental revenue, helping boost our industry-leading
results. Projects included company-wide “Go Green” special sections, creative ad shapes and a
long list of promotions aimed at increasing local market share.
• Lee leads the industry in online growth – In 2007, we drove online advertising revenue at a
blistering pace, 57.5% – more than twice as fast as the industry. We launched Yahoo! HotJobs last
spring in only 60 days after signing on with the partnership, a landmark collaboration for Lee and
the industry. We have also helped lead newspaper consortium negotiations in other areas,
including real estate, private party and auto. Our newsrooms have transformed themselves into
continuous-cycle, multimedia news operations. A training program we call Lee Online University
delivered cutting-edge training to nearly 500 employees and crystallized a fundamental shift in news
(over)
and sales culture. As a result, we have significantly expanded our ability to deliver news videos,
blogs, interactive maps, slide shows and extensive databases, along with other compelling online
features ranging from comprehensive weather to TV listings, financial reports and sports packages.
In addition, we have launched an Elections 2008 Resource Center, empowering our newsrooms to
offer ongoing, customized election packages on their websites.
• St. Louis outperformed other major metros – Online retail ad revenue more than doubled in
2007. Both employment and auto advertising climbed through print and online, multi-product sales.
The Post-Dispatch posted gains in paid circulation and weighed in with the second best reach
among newspaper-online combinations in the 25 most populated markets.
• We continue to deliver strong cash flow – We reduced net debt by $135 million in 2007 and in
this past quarter increased our dividend to shareholders. More than 20 of our enterprises made
their aggressive plans, some with double-digit growth in key ad categories. Total revenue from
continuing operations declined only 0.1% to $1.128 billion and operating expenses increased only
0.7%. We reduced newsprint volume nearly 5% through web width conversions, moves to lighter
weight paper and conservation programs. We also accelerated computer-to-printing-plate
conversions, which will continue to help reduce production costs in 2008. We designed and
implemented a consumer-driven health care plan that is projected to reduce costs. Also, we
favorably settled several tax matters totaling $6.9 million. Careful cost control also means wise
spending. Capital investments in our enterprises, especially larger building projects in Carbondale
and Billings, illustrate a strong commitment to our future and the industry.
You can see more examples of outstanding work in the enclosed summary of the 2007 Lee President’s
Awards.
As we enter 2008, the advertising environment remains difficult, and our results in the current first fiscal
quarter will suffer by comparison with our exceptionally good first quarter a year ago and one fewer
publishing day from the change in our financial calendar. While we cannot predict how soon the outlook
will improve, you can count on us to stay absolutely at the forefront of emerging opportunities and to
protect our position as, by far, the premier provider of news, information and advertising in our markets.
On behalf of Lee’s board of directors and our employees, I want to thank you very much for keeping
faith in our company during this tough period.
To help reduce costs and also to recognize that most of our shareholders now prefer to receive stock
information electronically, our annual report and proxy information is being supplied primarily online this
year. You will receive a separate mailing with a notice of Lee’s annual meeting and how to vote. All
this information will be made available later at www.lee.net/proxy. If you prefer, you will still be able to
request printed copies.
With very best wishes for the new year,
Mary Junck
Chairman, President and Chief Executive Officer
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 and 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,
including the Company Annual Report on Form 10-K for the year ended September 30, 2007. 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 release. The Company does not publicly undertake to update or revise its forward-looking statements.
SEC AND NYSE CERTIFICATIONS – As required by the rules of the Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE), on November 29,
2007, the certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed by the Company with the
SEC (these certifications are exhibits to the Company’s Annual Report on Form 10-K), and on March 30, 2007, the Annual CEO Certification was filed with the NYSE.
Enterprise of the Year
THE POST-STAR in Glens Falls, NY, was honored at the annual Lee
President’s Awards in November as the 2007 Enterprise of the Year.
The citation says in part: “The Post-Star set a high standard this year for
driving revenue, delivering strong local news, accelerating online innovation
and continuing to build on its powerful audience and leadership in the region.
Publisher Rona Rahlf and her team have extended The Post-Star’s reputation
for award-winning news coverage with compelling multimedia presentations
at www.poststar.com, enabling a more than doubling of online advertising
revenue growth. At the same time, they engineered strong ad revenue growth
in all other key categories, including local, real estate, auto, employment,
preprint and niche.” The citation also noted that The Post-Star’s advertising director, Jim Murphy, was honored by Suburban News-
papers of America as ad director of the year and that reporter Maury Thompson was the winner of the 2007 Lee Spirit Award.
Other fi nalists for Enterprise of the Year were:
•
•
•
Casper Star-Tribune in Casper, WY, which received the Lee Enterprise of the Year award in 2005. The Star-Tribune was
The
also honored this year with two President’s Awards — one for excellence in news and one, along with its weekly newspaper, the
Casper Journal, for innovation. The publisher of the Star-Tribune is Nathan Bekke. Its online site is www.trib.com.
The
Sioux City Journal in Sioux City, IA, one of fi ve Lee daily newspapers in Iowa. Among many achievements, it has been a
standout in online innovation and revenue growth. The publisher is Ron Peterson. The online site is www.siouxcityjournal.com.
Herald & Review in Decatur, IL, also a previous winner of Lee’s top award. The Herald & Review received the Enterprise
The
of the Year prize in 2004. The entire staff received the Lee Spirit Award in 2000. The publisher is Todd Nelson. The online site is
www.herald-review.com.
(over)
News
Independent Record, Helena, MT — For
intense, around-the-clock, multimedia
coverage of wildfi res that swept the region
this past summer. In addition to provid-
ing readers with strong coverage in the
newspaper, the staff created an interac-
tive online fi re site called Flash Point. It
included video and photo galleries, an
interactive map, reader-submitted photos,
links to valuable resources and a function
enabling reporters and photographers to
use text messages via cell phone to up-
date the site directly from the fi re lines.
Winona Daily News, Winona, MN — For
a poignant story of love and death told in
“A Year to Live.” The series follows a
woman and her husband of 43 years as
they face the inevitable end of her colon
and liver cancer. The judges said: “This
series beautifully captures the grace with
which she chose to die — but also the
grace with which she lived, loved and
was loved.” The award is shared by Jim
Bowey, Darrell Ehrlick, Chris Hubbuch,
Keith O’Donnell and Brian Voerding.
La Crosse Tribune, Winona Daily News,
Vernon County Broadcaster, Westby
Times and Houston County News, all
part of the River Valley Newspaper Group
in southwest Wisconsin and southeast
Minnesota — For meritorious coverage of
massive regional fl ooding. The staffs of
the two dailies and three weeklies joined
forces to provide comprehensive cover-
age online and in the newspapers. On one
day alone, the group posted 60 breaking
news stories, eight slide shows and many
photos from readers.
Casper Star-Tribune, Casper, WY — For
“creative and groundbreaking multimedia
and print coverage of the College National
Finals Rodeo.” Sharing in the award are
Dan Cepeda, Matt Close, Ron Gullberg,
Peter Hockaday, Kerry Huller, Ben Hunter,
David Mayberry, Patrick Schmiedt, Eric
Schmoldt, Ryan Soderlin and Austin Ward.
Arizona Daily Star, Tucson, AZ — For
“Sealing Our Border: Why It Won’t Work,”
a print and online series examining the
entire length of the 2,000-mile U.S.-
Mexico border to determine the feasibility
of building a fence to stop illegal immi-
gration. Sharing the award are James
Gregg, Stephanie Innes, Brady McCombs,
Lindsay Miller, Kelly Presnell and Andrew
Satter. This is the Arizona Daily Star’s
third Lee President’s Award for news in
three years, all for outstanding coverage
of border issues.
Innovation
The Times and Democrat, Orangeburg,
SC — For a highly energetic approach
to a major community event, resulting in
unprecedented online traffi c, circulation
gains, community goodwill and added
revenue. When plans for the fi rst presiden-
tial debate in the 2008 campaign thrust
Orangeburg into the national spotlight, the
staff launched ambitious print and online
coverage, applying multimedia storytelling
tactics learned weeks before at Lee Online
University, with assistance from the Quad-
City Times in Davenport, IA.
Missoulian, Missoula, MT — For
missoula.com, a quarterly glossy maga-
zine with an online site dedicated to the
themes of living, working and visiting.
Audience reaction has been enthusiastic,
driving print and online advertising revenue
well beyond original projections. Shar-
ing the award are Kristin Bounds, Sherry
Devlin, Jim McGowan, Kate Murphy and
Kurt Wilson.
Casper Star-Tribune and the weekly
Casper Journal, Casper, WY — For
“Made in Wyoming, Our Legacy of Suc-
cess,” a project aimed at inspiring readers,
especially students, through 62 profi les of
Wyoming people who have been success-
ful in a broad variety of ways. The profi les,
ranging from Chief Washakie to Curt
Gowdy, appeared throughout the school
year in the newspapers and on a special
website, and later in a hard-cover book.
Lincoln Journal Star, Lincoln, NE — For
developing and executing an expansive
approach to driving double-digit employ-
ment revenue growth through targeted
packages that include the daily news-
paper, niche publications, online listings
and directories, Lee’s partnership with
Yahoo! HotJobs, online banners and
displays, videos, television and a job fair.
St. Louis Post-Dispatch and Suburban
Journals of Greater St. Louis — The
Post-Dispatch expanded its multi-product
strategy by adding Rides the Magazine,
a free, weekly, used car publication and
online site, www.ridesthemagazine.com.
Rides has helped the Post-Dispatch
outperform many other metro newspapers
in auto revenue. The Suburban Journals
launched an ambitious set of 34 websites
— one for each of 33 mastheads, plus a
portal, suburbanjournals.stltoday.com.
The sites instantly transformed the Jour-
nals from a group of weekly newspapers
into a daily information source for 185
communities and neighborhoods.
Spirit
The Lee Spirit Award recognizes outstand-
ing personal commitment to our company
and the people we serve.
The 2007 winner is Maury Thompson of
The Post-Star in Glens Falls, NY. Maury
is widely known as a prolifi c, enthusiastic,
creative and energetic multimedia reporter,
columnist and blogger.
He keeps remarkably close contact with
the community by walking from one end of
the city to the other on his way to meetings
and interviews. Maury walks because of
limited eyesight. He says that even if his
vision were restored, he would still walk
or take the bus because he can fi nd more
stories that way. He’s also known in the
community for his piano playing and sing-
ing at coffee houses and in church.
Maury Thompson
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
(State of incorporation)
42-0823980
(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
Securities registered pursuant to Section 12(b) of the Act:
Common Stock - $2 par value
Preferred Share Purchase Rights
Securities registered pursuant to Section 12(g) of the Act:
Class B Common Stock - $2 par value
Name of Each Exchange On Which Registered
New York Stock Exchange
New York Stock Exchange
]
] No [X]
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 [
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
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:
]
this Form 10-K or any amendment
Large accelerated filer [X]
Non-accelerated filer [
Accelerated filer [
III of
]
]
] No [X]
the Registrant
is a shell company (as defined in Rule 12b-2 of
Indicate by check mark whether
Act). Yes [
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.
the
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
PAGE
Forward-Looking Statements
Part I
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
Item 4
Submission of Matters to a Vote of Security Holders
Part II
Item 5
Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Item 9A
Controls and Procedures
Item 9B Other Information
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Part III
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13
Certain Relationships, Related Transactions and Director Independence
Item 14
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Part IV
Signatures
Exhibit Index
Consolidated Financial Statements
1
1
11
12
12
12
12
13
15
16
31
32
32
32
35
35
35
35
36
36
36
37
38
41
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:
Š Grow revenue creatively and rapidly;
Š Deliver strong local news and information;
Š Accelerate online innovation;
Š Continue expanding audiences;
Š Nurture employee development and achievement; and
Š 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%.
1
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,
these
newspapers.
the smallest of
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.
2
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
is
in cross-selling advertising into multiple publications and online. A table under the caption
successful
“Daily Newspapers and Markets” in Item 1 identifies those groups of
the Company’s newspapers
operating in clusters.
the publications. Sales penetration can improve if the sales effort
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
the Company’s daily and Sunday
mechanisms, price and advertiser results.
newspapers compete with other local daily or weekly newspapers. The Company estimates that
it
the total advertising dollars spent on print, broadcast and online
captures a substantial share of
advertising in all of its markets.
In addition, several of
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
the
categories,
publication or from publications consisting primarily of such advertising.
is revenue earned from sales of advertising space in the classified section of
Online advertising consists of display, banner, classified or other advertising on websites associated
and integrated with the Company’s print publications.
3
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
In
advertising customer base the opportunity to also post
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.
listings in Zillow.com’s national platform.
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.
4
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
Print only
Print and online
Online only
Total reach
All Adults
Age 18-34
2007
2006
2007
2006
50.2%
16.1
4.7
71.0%
49.9%
11.1
5.7
66.7%
40.3%
17.9
8.2
66.4%
37.1%
11.7
8.1
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.
5
DAILY NEWSPAPERS AND MARKETS
The Company, TNI and MNI publish the following daily newspapers and online sites:
Newspaper
Primary Website
Location
Paid Circulation (1)
Sunday
Daily
St. Louis Post-Dispatch (2)
Arizona Daily Star (2)(3)
Capital Newspapers (4)
Wisconsin State Journal
The Capital Times
Daily Citizen
Portage Daily Register
Baraboo News Republic
North County Times (6)
stltoday.com
azstarnet.com
St. Louis, MO
Tucson, AZ
265,111
100,910
420,222
151,995
madison.com
madison.com
wiscnews.com/bdc
wiscnews.com/pdr
wiscnews.com/bnr
nctimes.com
Madison, WI
Madison, WI
Beaver Dam, WI
Portage, WI
Baraboo, WI
Oceanside
87,708
16,565
9,888
4,900
4,303
86,852
141,234 (5)
-
(5)
-
-
-
90,000
and Escondido, CA
The Times (6)
nwitimes.com
Munster,
83,054
90,768
Lincoln Group
Lincoln Journal Star
Columbus Telegram
Fremont Tribune
Beatrice Daily Sun
Quad-Cities Group
Quad-City Times
Muscatine Journal
The Pantagraph (2)
Billings Gazette
Sioux City Journal (6)
The Courier (6)
Central Illinois Newspaper Group
Herald & Review
Journal Gazette (6)
Times-Courier (6)
River Valley Newspaper Group
La Crosse Tribune
Winona Daily News
The Post-Star (6)
The Daily Herald (2)
Casper Star-Tribune (6)
Missoula Group
Missoulian
Ravalli Republic
Rapid City Journal
The Journal Times
The Bismarck Tribune
The Southern Illinoisan
The Daily News (6)
Magic Valley Group
Valparaiso, and
Crown Point, IN
journalstar.com
columbustelegram.com Columbus, NE
fremonttribune.com
Fremont, NE
beatricedailysun.com Beatrice, NE
Lincoln, NE
qctimes.com
Davenport, IA
muscatinejournal.com Muscatine, IA
pantagraph.com
billingsgazette.com
siouxcityjournal.com
wcfcourier.com
Bloomington, IL
Billings, MT
Sioux City, IA
Waterloo and
Cedar Falls, IA
herald-review.com
jg-tc.com
jg-tc.com
Decatur, IL
Mattoon, IL
Charleston, IL
La Crosse, WI
lacrossetribune.com
winonadailynews.com Winona, MN
poststar.com
heraldextra.com
trib.com
Glens Falls, NY
Provo, UT
Casper, WY
76,848
8,946
8,264
7,708
49,990
7,248
46,639
45,054
40,638
39,794
32,609
9,668
6,166
31,862
11,243
31,381
31,252
29,942
missoulian.com
ravallinews.com
rapidcityjournal.com
journaltimes.com
bismarcktribune.com
thesouthern.com
tdn.com
Missoula, MT
Hamilton, MT
Rapid City, SD
Racine, WI
Bismarck, ND
Carbondale, IL
Longview, WA
29,161
5,239 (7)
28,856
28,287
26,809
25,869
21,905
82,835
9,840
-
-
68,562
-
50,486
52,217
41,919
50,405
47,309
-
-
41,105
12,827
34,650
38,811
32,336
33,154
-
33,670
30,471
30,613
36,631
21,639
The Times-News (6)
Elko Daily Free Press (8)
South Idaho Press (8)
magicvalley.com
elkodaily.com
southidahopress.com Burley, ID
Twin Falls, ID
Elko, NV
20,526
6,070 (7)
3,807 (7)
23,844
-
-
6
Newspaper
Primary Website
Location
Paid Circulation (1)
Sunday
Daily
Central Coast Newspapers
Santa Maria Times (2)
The Lompoc Record (2)
Globe Gazette
The Times and Democrat (6)
Mid-Valley News Group
Albany Democrat-Herald
Corvallis Gazette-Times
Napa Valley Register (2)
The Montana Standard
Independent Record
The Sentinel (6)
The Sentinel (2)
The World (2)
Arizona Daily Sun (2)
The Citizen (6)
The Garden Island (2)
Daily Chronicle (2)
The Ledger Independent (6)
Daily Journal (2)
The Chippewa Herald
santamariatimes.com Santa Maria, CA
lompocrecord.com
globegazette.com
thetandd.com
Lompoc, CA
Mason City, IA
Orangeburg, SC
Albany, OR
Corvallis, OR
democratherald.com
gazettetimes.com
napavalleyregister.com Napa, CA
Butte, MT
mtstandard.com
Helena, MT
helenair.com
Carlisle, PA
cumberlink.com
Hanford, CA
hanfordsentinel.com
Coos Bay, OR
theworldlink.com
Flagstaff, AZ
azdailysun.com
Auburn, NY
auburnpub.com
Lihue, HI
kauaiworld.com
daily-chronicle.com
DeKalb, IL
maysville-online.com Maysville, KY
dailyjournalonline.com Park Hills, MO
chippewa.com
Chippewa Falls, WI
19,589
5,641
18,444
17,113
17,027
11,768
16,532
14,732
14,513
13,846
13,323
12,294
11,127
10,894
9,646
9,142
8,701
7,884
6,775
19,700
5,737
22,611
17,201
17,675
11,951
16,623
14,572
15,071
14,817
12,866
-
12,110
12,967
9,779
10,724
-
8,201
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.
7
COMMERCIAL PRINTING
The Company offers commercial printing services through the following entities:
Selma Enterprises
William Street Press
Hawkeye Printing and Trico Communications
Platen Press
Farcountry Press
Journal Star Commercial Printing
Plaindealer Publishing
Triangle Press
Wingra Printing (1)
(1) Owned by MNI, which is 50% owned by the Company.
Location
Selma, California
Decatur, Illinois
Davenport, Iowa
Butte, Montana
Helena, Montana
Lincoln, Nebraska
Tekamah, Nebraska
Chippewa Falls, Wisconsin
Madison, Wisconsin
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.
8
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.
9
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.
the St. Louis Post-Dispatch executed a new
In 2007,
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
10
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”,
advertising revenue.
OPERATING EXPENSES
included herein,
for additional
information on the risks associated with
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.
11
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)
PD LLC
Suburban Journals
Owned
Leased
755,000 52,000
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.
12
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.
1st
2nd
3rd
4th
Quarter
STOCK PRICES
2007
High
Low
Closing
2006
High
Low
Closing
2005
High
Low
Closing
DIVIDENDS
2007
2006
2005
$32.13
24.55
31.06
$43.05
36.36
36.91
$48.85
44.87
46.08
$ 0.18
0.18
0.18
$35.65
29.48
30.05
$37.43
32.26
33.29
$46.06
42.70
43.40
$ 0.18
0.18
0.18
$30.92
20.50
20.86
$33.74
26.95
26.95
$43.68
39.82
40.09
$ 0.18
0.18
0.18
$21.48
14.58
15.57
$27.61
22.98
25.24
$44.32
39.90
42.48
$ 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
July
September
Total
Total Number of Shares
Purchased
Average Price
Per Share
113
847
960
$21.23
15.57
$16.24
13
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.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
$250
$200
$150
$100
$50
$0
S e p 0 2
D ec0 2
M ar0 3
Ju n 0 3
S e p 0 3
D ec0 3
M ar0 4
Ju n 0 4
S e p 0 4
D ec0 4
M ar0 5
Ju n 0 5
S e p 0 5
D ec0 5
M ar0 6
Ju n 0 6
S e p 0 6
D ec0 6
M ar0 7
Ju n 0 7
S e p 0 7
LEE ENTERPRISES, INC.
PEER GROUP
S&P 500 INDEX
Source: Standard & Poors
Lee Enterprises, Incorporated
Peer Group Index
S&P 500 Stock Index
2002
2003
September 30
2005
2004
2006
2007
$100.00 $119.95 $146.01 $136.03 $ 82.73 $ 52.55
79.48
205.13
100.00
100.00
114.29
141.65
109.79
124.40
87.35
176.17
100.21
159.01
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.
14
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is as follows:
(Thousands, Except Per Common Share Data)
2007
2006
2005
(1)
2004
2003
OPERATING RESULTS
Operating revenue
Operating expenses, excluding
depreciation and amortization
Depreciation and amortization
Equity in earnings of associated
companies
Operating income
Financial income
Financial expense
$1,127,661 $1,128,648 $ 818,890 $ 643,277 $ 606,489
855,324
93,589
849,288
96,070
614,111
59,249
466,866
43,930
442,911
41,903
20,124
198,872
7,613
(90,341)
20,739
204,029
6,054
(95,939)
12,784
158,314
2,824
(38,038)
8,523
141,004
1,066
(12,665)
8,053
129,728
1,120
(16,535)
Income from continuing operations
Discontinued operations
Net income
$
$
80,908 $
91
80,999 $
71,136 $
(304)
70,832 $
70,862 $
6,016
76,878 $
82,973 $
3,098
86,071 $
73,022
5,019
78,041
EARNINGS (LOSS) PER COMMON SHARE
Basic:
Continuing operations
Discontinued operations
Net income
Diluted:
Continuing operations
Discontinued operations
Net income
$
$
$
$
1.77 $
-
1.77 $
1.57 $
(0.01)
1.56 $
1.57 $
0.13
1.70 $
1.85 $
0.07
1.92 $
1.77 $
-
1.77 $
1.56 $
(0.01)
1.56 $
1.56 $
0.13
1.70 $
1.84 $
0.07
1.91 $
1.65
0.11
1.76
1.64
0.11
1.75
Weighted average common shares:
Basic
Diluted
45,671
45,804
45,421
45,546
45,118
45,348
44,792
45,092
44,316
44,513
Dividends per common share
$
0.72 $
0.72 $
0.72 $
0.72 $
0.68
BALANCE SHEET INFORMATION (September 30)
Total assets
Debt, including current maturities (2)
Debt, net of cash and restricted cash
and investments (2)
Stockholders’ equity
$3,260,963 $3,329,809 $3,445,200 $1,403,844 $1,421,377
305,200
1,688,000
1,395,625
1,525,000
213,600
1,284,565
1,086,442
1,420,302
990,625
1,599,397
936,410
205,590
876,843
294,136
802,156
Includes four months of operations from the Pulitzer acquisition, which was consummated in June 2005.
(1)
(2) Principal amount, excluding fair value adjustments in 2007, 2006 and 2005.
15
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
Less depreciation and
amortization
Equity in earnings of associated
companies
Operating income
$272,337
24.2% $279,360
24.8% $204,779
25.0%
93,589
8.3
96,070
8.5
59,249
7.2
20,124
$198,872
1.8
20,739
17.6% $204,029
1.8
12,784
18.1% $158,314
1.6
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.
16
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
17
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
retained losses made by consulting actuaries. The amount of workers
the remaining liability for
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.
the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes, which is
In 2006,
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
18
anticipate that the implementation of Statement 157 will have a material impact on its financial position,
results of operation, or cash flows. Subsequently,
this
pronouncement until 2010 for non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements.
the FASB deferred the effective date of
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.
19
CONTINUING OPERATIONS
2007 vs. 2006
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands, Except Per Common Share Data)
2007
2006
Percent Change
Same
Property
Total
Advertising revenue:
Retail
National
Classified:
Daily newspapers:
Employment
Automotive
Real estate
All other
Other publications
Total classified
Online
Niche publications
Total advertising revenue
Circulation
Commercial printing
Online services and other
Total operating revenue
Compensation
Newsprint and ink
Other operating expenses
Curtailment gains
Early retirement programs
Transition costs
$ 459,132 $ 463,991
57,869
54,902
(1.0)%
(5.1)
(1.1)%
(5.1)
(9.0)
(9.0)
(7.4)
1.0
5.7
(5.1)
57.5
(1.4)
(0.3)
(0.7)
(1.9)
9.5
(0.2)
0.7
(4.7)
6.0
NM
NM
NM
1.3
(4.0)
(3.0)
82,358
55,437
59,078
39,616
48,505
284,994
56,324
16,361
871,713
204,373
16,609
34,966
1,127,661
442,494
112,483
296,116
(3,731)
7,962
-
855,324
272,337
93,589
20,124
198,872
(82,749)
116,123
34,146
1,069
80,908 $
90,508
60,953
63,802
39,217
45,868
300,348
35,769
16,591
874,568
205,718
17,265
31,097
1,128,648
435,836
120,191
280,018
(9.0)
(9.0)
(7.4)
1.0
5.7
(5.1)
57.5
(1.4)
(0.3)
(0.7)
(3.8)
12.4
(0.1)
1.5
(6.4)
5.7
NM
NM
NM
0.7
(2.5)
(2.6)
(3.0)
(2.5)
(10.0)
3.6
39,740 (14.1)
1,231 (13.2)
-
8,654
4,589
849,288
279,360
96,070
20,739
204,029
(91,922)
112,107
71,136
13.7%
1.77 $
1.77
1.57
1.56
12.7%
13.5
Operating cash flow
Depreciation and amortization
Equity in earnings of associated companies
Operating income
Non-operating expense, net
Income from continuing operations before income taxes
Income tax expense
Minority interest
Income from continuing operations
Earnings per common share:
Basic
Diluted
$
$
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.
20
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
Classified:
Employment
Automotive
Real estate
Other
Total classified revenue
$459,259 $457,149
0.5%
$117,688 $110,167
77,490
81,378
73,783
$340,993 $342,818
73,040
76,679
73,586
6.8%
(5.7)
(5.8)
(0.3)
(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)
Retail
National
Classified
2007
2006
Percent Change
13,441
678
16,208
30,327
13,723
778
16,925
31,426
(2.1)%
(12.9)
(4.2)
(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.
21
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.
the St. Louis Post-Dispatch concluded another offering of early retirement
In 2006,
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
22
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.
life of such assets resulted in recognition of additional amortization
The change in estimated useful
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%.
23
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.
(Thousands, Except Per Share Data)
Income from continuing operations, as reported
Adjustments to income from continuing operations:
Curtailment gains
Curtailment gains, TNI
Early retirement programs
Reduction in value of identified intangible assets
Transition costs
Income tax benefit of adjustments, net of impact on
minority interest
Settlement (benefit) of federal and state tax matters
Income from continuing operations, as adjusted
2007
Amount Per Share
2006
Amount
Per Share
$80,908
$ 1.77
$ 71,136
$1.56
(3,731)
(1,037)
7,962
-
-
3,194
(1,406)
1,788
(6,880)
$75,816
0.04
(0.15)
$ 1.66
-
-
8,654
5,526
4,589
18,769
(6,894)
11,875
-
$83,011
0.26
-
$1.82
24
2006 vs. 2005
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands, Except Per Common Share Data)
2006
2005
Percent Change
Same
Property
Total
Advertising revenue:
Retail
National
Classified:
Daily newspapers:
Employment
Automotive
Real estate
All other
Other publications
Total classified
Online
Niche publications
Total advertising revenue
Circulation
Commercial printing
Online services and other
Total operating revenue
Compensation
Newsprint and ink
Other operating expenses
Early retirement program
Transition costs
Operating cash flow
Depreciation and amortization
Equity in earnings of associated companies
Operating income
Non-operating expense, net
Income from continuing operations before
income taxes
Income tax expense
Minority interest
Income from continuing operations
Earnings per common share:
Basic
Diluted
$463,991
57,869
$341,977
33,031
35.7%
75.2
0.5%
(7.2)
7.1
(10.2)
1.3
1.8
6.7
1.1
43.1
8.2
1.7
(1.0)
0.3
(1.3)
1.1
1.8
8.7
5.5
NM
NM
3.9
(5.0)
(1.8)
90,508
60,953
63,802
39,217
45,868
300,348
35,769
16,591
874,568
205,718
17,265
31,097
1,128,648
435,836
120,191
280,018
8,654
4,589
849,288
279,360
96,070
20,739
204,029
(91,922)
112,107
39,740
1,231
$ 71,136
63,923
49,320
47,171
29,200
28,411
218,025
17,983
13,093
624,109
153,571
14,766
26,444
818,890
325,959
79,331
190,768
9,124
8,929
614,111
204,779
59,249
12,784
158,314
(46,834)
41.6
23.6
35.3
34.3
61.4
37.8
98.9
26.7
40.1
34.0
16.9
17.6
37.8
33.7
51.5
46.8
NM
NM
38.3
36.4
62.1
62.2
28.9
96.3
111,480
40,458
160
$ 70,862
0.6
(1.8)
NM
0.4%
$
1.57
1.56
$
1.57
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.
25
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
National
Classified
492
10,633 10,741
580
11,929 11,976
23,054 23,297
(1.0)%
(15.2)
(0.4)
(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
in 2006, and
Costs other than depreciation and amortization increased $235,177,000, or 38.3%,
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.
26
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
represents cash payments made, with the remainder due primarily to
$7,000,000 of
enhancements of pension and other postretirement benefits.
the cost
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
expense of $1,847,000 in 2006, of which $469,000 was recorded in equity in earnings of TNI.
life of such assets resulted in recognition of additional amortization
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.
27
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.
(Thousands, Except Per Share Data)
Income from continuing operations, as reported
Adjustments to income from continuing operations:
Early retirement program
Reduction in value of identified intangible assets
Transition costs
Loss on extinguishment of debt
Income tax benefit of adjustments, net of impact on
minority interest
Income from continuing operations, as adjusted
DISCONTINUED OPERATIONS
2006
2005
Amount Per Share Amount Per Share
$71,136
$1.56
$ 70,862
$1.56
8,654
5,526
4,589
-
18,769
9,124
-
8,929
11,181
29,234
(6,894)
11,875
$83,011
0.26
$1.82
(11,954)
17,280
$ 88,142
0.38
$1.94
Revenue from discontinued operations in 2007, 2006 and 2005 was $114,000 $41,104,000 and
$42,297,000,
from discontinued operations before income taxes was
$(16,000) in 2007, $7,803,000 in 2006 and $9,911,000 in 2005.
Income (loss)
respectively.
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
investing activities totaled $38,709,000 in 2007, $42,683,000 in 2006 and
Cash required for
$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.
28
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
financial
In 2006, the Company entered into an amended and restated credit agreement (Credit Agreement) with a
institutions. The Credit Agreement provides for aggregate borrowing of up to
syndicate of
$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
the covenants included in the Credit
minimum interest expense coverage ratio of 2.5:1. None of
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
the Old Credit Agreement,
$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.
the Company redeemed all of
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
29
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)
Nature of Obligation
Long-term debt (principal amount)
Operating lease obligations
Financial expense (1)
Capital expenditure commitments
Payments (or Commitments) Due by Year
Total
Less
Than 1
1-3
3-5
More
Than 5
$1,395,625 $62,250 $614,750 $718,625 $ -
20,618
43,107
4,803
3,832
24,633
4,803
5,836
18,474
-
3,641
-
-
7,309
-
-
$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
30
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
ink and energy costs. Newsprint prices, which had been declining since
and,
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
to a lesser extent,
31
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
is
instruments outstanding at September 30, 2007,
approximately $4,657,000. There is no impact on reported results from such changes in interest rates.
risk sensitive investment
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
Statements”.
to this Item is included herein under the caption “Consolidated Financial
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.
32
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,
issued an
attestation report on the effectiveness of the Company’s internal control over financial reporting. Their
report appears on the following page.
the Company’s independent registered public accounting firm,
/s/ Mary E. Junck
Mary E. Junck
Chairman, President and Chief Executive Officer
November 29, 2007
/s/ Carl G. Schmidt
Carl G. Schmidt
Vice President, Chief Financial Officer
and Treasurer
November 29, 2007
33
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
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.
included obtaining an understanding of
the company’s principal executive and principal
A company’s internal control over financial reporting is a process designed by, or under the supervision
financial officers, or persons performing similar
of,
functions, and effected by the company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability 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
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.
the company; (2) provide reasonable assurance that
financial reporting and the preparation of
the assets of
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 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.
the Consolidated Financial Statements as of and for
/s/ DELOITTE & TOUCHE LLP
Davenport, Iowa
November 29, 2007
34
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”.
35
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.
36
SIGNATURES
to the requirements of Section 13 or 15(d) of
Pursuant
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.
the Securities Exchange Act of 1934,
LEE ENTERPRISES, INCORPORATED
/s/ Mary E. Junck
Mary E. Junck
Chairman, President and Chief Executive Officer
/s/ Carl G. Schmidt
Carl G. Schmidt
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
Richard R. Cole
/s/ Nancy S. Donovan
Nancy S. Donovan
/s/ Mary E. Junck
Mary E. Junck
/s/ William E. Mayer
William E. Mayer
/s/ Herbert W. Moloney III
Herbert W. Moloney III
/s/ Andrew E. Newman
Andrew E. Newman
/s/ Gordon D. Prichett
Gordon D. Prichett
/s/ Gregory P. Schermer
Gregory P. Schermer
/s/ Mark B. Vittert
Mark B. Vittert
Director
Director
Chairman, President, and
Chief Executive Officer, and Director
Director
Director
Director
Director
Vice President – Interactive Media,
and Director
Director
37
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
2.1 *
2.2 *
2.3 *
2.4 *
Description
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)
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)
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)
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 *
4 *
10.1 *
10.2 *
10.3 *
10.4 *
Amended By-Laws of Lee Enterprises, Incorporated effective May 17, 2007. (Exhibit 99.1 to
Form 8-K filed May 21, 2007)
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)
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)
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)
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)
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)
38
Number
10.5 *
10.6 *
10.7 *
10.8 *
10.9 *
Description
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)
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)
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)
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)
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 +*
10.13 +*
10.14 *
10.15 +*
10.16 +*
Lee Enterprises, Incorporated Amended and Restated 1996 Stock Plan for Non-
Employee Directors (Exhibit A to Schedule 14A Definitive Proxy Statement for 2003)
Lee Enterprises, Incorporated Supplementary Benefit Plan (Exhibit 10.4 to Form 10-K for
the Fiscal Year Ended September 30, 2002)
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)
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)
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)
39
Number
10.18 +*
21
23
24
31.1
31.2
32
Description
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)
Subsidiaries and associated companies
Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
Power of Attorney
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
40
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheets
Consolidated Statements of Income and Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
42
44
45
46
47
76
41
CONSOLIDATED BALANCE SHEETS
(Thousands, Except Per Share Data)
ASSETS
Current assets:
September 30
2007
2006
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts:
$
-
$
8,638
2007 $10,363; 2006 $11,313
Receivable from associated companies
Receivable from sales of discontinued operations
Inventories
Deferred income taxes
Assets of discontinued operations
Other
Total current assets
Investments:
Associated companies
Restricted cash and investments
Other
Total investments
Property and equipment:
Land and improvements
Buildings and improvements
Equipment
Construction in process
Less accumulated depreciation
Property and equipment, net
Goodwill
Other intangible assets
Other
Total assets
119,477
1,563
-
14,251
7,343
-
6,338
148,972
191,975
111,060
20,749
323,784
115,353
1,563
20,700
19,271
11,079
342
7,466
184,412
198,266
96,060
20,825
315,151
31,804
191,080
316,824
14,559
554,267
227,048
327,219
1,514,357
920,682
25,949
31,778
181,517
301,162
13,260
527,717
200,465
327,252
1,498,830
980,912
23,252
$3,260,963 $3,329,809
The accompanying Notes are an integral part of the Consolidated Financial Statements.
42
September 30
2007
2006
$
62,250 $
39,485
96,233
7,971
6,703
38,915
-
251,557
1,346,630
2,302
72,236
11,711
481,565
7,291
1,229
2,174,521
35,375
38,129
58,457
22,634
6,581
38,624
523
200,323
1,510,459
38,420
100,231
27,364
454,315
6,274
1,798
2,339,184
-
-
79,958
78,974
12,416
12,788
132,090
819,786
42,192
1,086,442
123,738
771,947
3,178
990,625
$3,260,963 $3,329,809
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Compensation and other accrued liabilities
Income taxes payable
Dividends payable
Unearned revenue
Liabilities of discontinued operations
Total current liabilities
Long-term debt, net of current maturities
Pension obligations
Postretirement and postemployment benefit obligations
Other retirement and compensation obligations
Deferred income taxes
Minority interest
Other
Total liabilities
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:
2007 39,979 shares;
2006 39,487 shares
Class B Common Stock, $2 par value; authorized
30,000 shares; issued and outstanding:
2007 6,208 shares;
2006 6,394 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
43
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Thousands, Except Per Common Share Data)
2007
2006
2005
Operating revenue:
Advertising
Circulation
Other
Total operating revenue
Operating expenses:
Compensation
Newsprint and ink
Other operating expenses
Depreciation
Amortization of intangible assets
Curtailment gains
Early retirement programs
Transition costs
Total operating expenses
Equity in earnings of associated companies
Operating income
Non-operating income (expense):
Financial income
Financial expense
Loss on early extinguishment of debt
Other, net
Total non-operating expense, net
Income from continuing operations before income taxes
Income tax expense
Minority interest
Income from continuing operations
Discontinued operations:
Income from discontinued operations, net of income tax effect
Gain (loss) on disposition, net of income tax effect
Net income
Other comprehensive income (loss), net
Comprehensive income
Earnings (loss) per common share:
Basic:
Continuing operations
Discontinued operations
Net income
Diluted:
Continuing operations
Discontinued operations
Net income
Dividends per common share
$ 871,713 $ 874,568 $624,109
153,571
41,210
818,890
204,373
51,575
1,127,661
205,718
48,362
1,128,648
442,494
112,483
296,116
33,341
60,248
(3,731)
7,962
-
948,913
20,124
198,872
7,613
(90,341)
-
(21)
(82,749)
116,123
34,146
1,069
80,908
435,836
120,191
280,018
33,903
62,167
-
8,654
4,589
945,358
20,739
204,029
6,054
(95,939)
-
(2,037)
(91,922)
112,107
39,740
1,231
71,136
325,959
79,331
190,768
23,754
35,495
-
9,124
8,929
673,360
12,784
158,314
2,824
(38,038)
(11,181)
(439)
(46,834)
111,480
40,458
160
70,862
-
91
80,999
(1,898)
79,101 $
4,900
(5,204)
70,832
1,674
6,016
-
76,878
1,504
72,506 $ 78,382
1.77 $
-
1.77 $
1.57 $
(0.01)
1.56 $
1.77 $
-
1.77 $
1.56 $
(0.01)
1.56 $
1.57
0.13
1.70
1.56
0.13
1.70
0.72 $
0.72 $
0.72
$
$
$
$
$
$
The accompanying Notes are an integral part of the Consolidated Financial Statements.
44
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Thousands)
Common Stock:
Balance, beginning of year
Conversion from Class B
Common Stock
Shares issued
Shares reacquired
Balance, end of year
Class B Common Stock:
Balance, beginning of year
Conversion to Common Stock
Balance, end of year
Additional paid-in capital:
Balance, beginning of year
Reclassification from unearned
compensation
Stock option expense
Amortization of restricted Common
Stock
Income tax benefit (expense) of
stock options exercised
Shares issued
Balance, end of year
Unearned compensation:
Balance, beginning of year
Reclassification to additional
paid-in-capital
Restricted Common Stock issued
Restricted Common Stock canceled
Amortization
Balance, end of year
Retained earnings:
Balance, beginning of year
Net income
Cash dividends
Balance, end of year
Accumulated other comprehensive
income:
Balance, beginning of year
Unrealized gain (loss) on interest
rate exchange agreements
Unrealized gain (loss) on
available-for-sale securities
Adoption of FASB Statement 158
for pension and postretirement
benefits
Deferred income taxes, net
Balance, end of year
Total stockholders’ equity
2007
Amount
2006
2005
2007
Shares
2006
2005
$
78,974 $ 76,818 $ 74,056
39,487 38,409 37,028
372
708
(96)
79,958
12,788
(372)
12,416
1,380
884
(108)
78,974
14,168
(1,380)
12,788
2,210
580
(28)
76,818
16,378
(2,210)
14,168
123,738
115,464
100,537
-
2,144
(5,505)
2,678
-
2,807
5,199
5,425
-
(686)
1,695
132,090
(33)
5,709
123,738
749
11,371
115,464
-
-
-
-
-
-
(5,505)
(3,913)
5,505
-
-
-
-
-
(6,215)
45
4,578
(5,505)
771,947
80,999
(33,160)
819,786
733,961
70,832
(32,846)
771,947
689,785
76,878
(32,702)
733,961
3,178
1,504
-
(3,796)
2,527
2,707
716
121
(230)
65,780
(23,686)
42,192
-
(973)
1,504
$1,086,442 $990,625 $936,410
-
(974)
3,178
186
354
(48)
1,105
290
(14)
39,979 39,487 38,409
690
442
(54)
6,394
(186)
6,208
7,084
(690)
6,394
8,189
(1,105)
7,084
46,187 45,881 45,493
The accompanying Notes are an integral part of the Consolidated Financial Statements.
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
2007
2006
2005
Cash provided by operating activities:
Net income
Results of discontinued operations
Income from continuing operations
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities of continuing operations:
Depreciation and amortization
Stock compensation expense
Accretion of debt fair value adjustment
Loss on early extinguishment of debt
Distributions less than earnings of associated companies
Increase (decrease) in deferred income taxes
Change in operating assets and liabilities, net of acquisitions:
Decrease (increase) in receivables
Decrease (increase) in inventories and other
Increase (decrease) in accounts payable, accrued
expenses and unearned revenue
Increase (decrease) in pension, postretirement and post
employment benefits
Change in income taxes receivable or payable
Other
Net cash provided by operating activities of continuing operations
Cash provided by (required for) investing activities of continuing
operations:
Purchases of marketable securities
Sales of marketable securities
Purchases of property and equipment
Acquisitions, net
Increase in restricted cash
Other
Net cash required for investing activities of continuing operations
Cash provided by (required for) financing activities of continuing
operations:
Payments on long-term debt
Proceeds from long-term debt
Financing costs
Cash dividends paid
Purchases of Common Stock
Other, primarily issuance of Common Stock
Net cash provided by (required for) financing activities of
continuing operations
Net cash provided by (required for) discontinued operations:
Operating activities
Investing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
End of year
$ 80,999 $ 70,832 $
91
80,908
(304)
71,136
76,878
6,016
70,862
93,589
7,193
(7,579)
-
(792)
(6,309)
(6,411)
5,470
96,070
7,693
(7,190)
-
(482)
(29,178)
5,547
2,859
59,249
7,879
(2,385)
11,181
(1,288)
165
(5,681)
(3,897)
18,428
(7,904)
5,519
(3,314)
(14,504)
2,233
168,912
10,178
42,060
6,372
197,161
6,939
(595)
3,738
151,686
(90,005)
78,018
(34,567)
(1,065)
(1,165)
10,075
(38,709)
(70,415)
68,043
(32,544)
(4,245)
(11,916)
8,394
(42,683)
(13,038)
67,199
(24,096)
(1,299,738)
(6,847)
4,211
(1,272,309)
(196,375)
67,000
-
(33,038)
(1,099)
2,578
(218,000)
55,000
(2,814)
(32,671)
(1,260)
7,815
(338,600)
1,507,000
(28,855)
(32,361)
(548)
5,399
(160,934)
(191,930)
1,112,035
(780)
22,873
(8,638)
5,517
33,030
1,095
8,638
-
$
7,543
8,638 $
$
8,808
(687)
(467)
8,010
7,543
The accompanying Notes are an integral part of the Consolidated Financial Statements.
46
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 Madison
Newspapers, Inc. (MNI), and 82.5% interest in INN Partners, L.C. (INN).
in TNI Partners (TNI), 50% interest
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.
47
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:
(Thousands)
First-in, first-out
Last-in, first-out
September 30
2006
2007
4,383
$5,414 $10,099
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
for printing presses and mailroom
Property and equipment are carried at cost. Equipment, except
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:
Buildings and improvements
Printing presses and mailroom equipment
Other
Years
5 – 54
2 – 28
1 – 20
The Company capitalizes interest as a component of
September 30, 2007, capitalized interest was not significant.
the cost of constructing major facilities. At
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.
48
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:
Noncompete and consulting agreements
Customer lists
Newspaper subscriber lists
Other
Years
2 – 15
3 – 23
7 – 33
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
49
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
50
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)
Operating revenue
Income from continuing operations
Earnings per common share from continuing operations:
Basic
Diluted
2005
$1,121,081
67,345
$
1.49
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
Restricted cash and investments
Property and equipment
Long-term investments
Goodwill
Intangible and other assets
Total assets acquired
Current liabilities
Long-term debt
Pension, postretirement and postemployment benefits
Deferred income taxes
Other long-term liabilities
$ 305,432
73,560
140,532
207,937
922,396
623,827
2,273,684
55,125
337,512
118,480
274,394
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.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired intangible assets, excluding those of TNI, consist of the following:
(Thousands)
Amortizable intangible assets:
Customer lists
Newspaper subscriber lists
Nonamortized intangible assets:
Mastheads
Weighted-Average
Amortization
Period (Years)
Amount
18
9
17
$516,730
49,902
566,632
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.
52
Results of discontinued operations consist of the following:
(Thousands)
Operating revenue
Income (loss) from discontinued operations
Gain (loss) on sale of discontinued operations
Income tax expense, net
Assets and liabilities of discontinued operations consist of the following:
(Thousands)
Current assets
Property and equipment, net
Intangible and other assets
Total assets
Current liabilities
2007
2006
2005
$114
$41,104
$42,297
$ (16)
156
49
$ 91
$ 7,803
(7,854)
253
$ (304)
$ 9,911
-
3,895
$ 6,016
September 30, 2006
$ 88
113
141
$342
$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)
State income taxes, net of federal tax benefit
Other, primarily goodwill basis differences
4 INVESTMENTS IN ASSOCIATED COMPANIES
TNI Partners
(35.0)% 35.0%
35.0%
-
-
(3.9)
(457.2)
35.0% (496.1)% 39.3%
4.3
-
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
the
newspapers and other media.
to the partnership’s operations and publication of
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:
(Thousands)
ASSETS
Current assets
Investments and other assets
Total assets
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities
Members’ equity
Total liabilities and members’ equity
53
September 30
2006
2007
$12,894 $14,810
10
$12,913 $14,820
19
$ 6,327 $ 7,211
7,609
$12,913 $14,820
6,586
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
Operating expenses, excluding depreciation and amortization
Operating income
Company’s 50% share of operating income
Less amortization of intangible assets
Equity in earnings of TNI
$117,658 $121,223 $36,986
26,218
$ 36,592 $ 37,738 $10,768
83,485
81,066
$ 18,296 $ 18,869 $ 5,384
1,644
$ 11,957 $ 12,882 $ 3,740
6,339
5,987
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:
(Thousands)
ASSETS
Current assets
Investments and other assets
Property and equipment, net
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities, excluding debt
Debt, including current maturities
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
54
September 30
2006
2007
34,397
13,295
$21,869 $24,238
36,506
12,126
$69,561 $72,870
2,642
3,040
50,594
$13,285 $13,184
8,014
2,660
49,012
$69,561 $72,870
Summarized results of MNI are as follows:
(Thousands)
2007
2006
2005
Operating revenue
Operating expenses, excluding depreciation and amortization
Operating income
Net income
$111,968 $121,541 $122,021
87,429
29,504
18,088
91,572
25,129
15,714
81,793
25,871
16,334
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:
(Thousands)
Company’s share of:
Stockholders’ equity
Undistributed earnings
September 30
2006
2007
$25,297 $24,506
24,256
25,047
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:
(Thousands)
Amortized cost
Gross unrealized gains
Gross unrealized losses
Fair value
September 30
2006
2007
$89,979 $77,419
52
(161)
$90,583 $77,310
605
(1)
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)
Due in one year or less
Due after one year through five years
55
Amortized
Cost
Fair
Value
$35,118
54,861
$89,979
$35,235
55,348
$90,583
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)
Goodwill, beginning of year
Goodwill related to acquisitions
Goodwill, end of year
2007
2006
$1,498,830 $1,499,622
(792)
$1,514,357 $1,498,830
15,527
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:
(Thousands)
Nonamortized intangible assets:
Mastheads
Amortizable intangible assets:
Customer and newspaper subscriber lists
Less accumulated amortization
Noncompete and consulting agreements
Less accumulated amortization
September 30
2007
2006
$
73,746 $
73,746
1,073,142
226,274
846,868
28,658
28,590
68
1,073,125
166,240
906,885
28,678
28,397
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
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,
financial
56
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
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 overnight
federal
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.
57
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:
(Thousands)
Credit Agreement:
A Term Loan
Revolving credit facility
Pulitzer Notes:
Principal amount
Unaccreted fair value adjustment
Less current maturities
September 30
2007
2006
Interest Rate(s)
September 30
2007
$ 881,625 $ 926,000
293,000
208,000
6.10-6.26%
5.89-6.10
8.05
306,000
13,255
1,408,880
62,250
306,000
20,834
1,545,834
35,375
$1,346,630 $1,510,459
Aggregate maturities of debt
for each of
$448,500,000, $166,250,000, $261,250,000, and $457,375,000, respectively.
the five years ending September 2012 are $62,250,000,
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.
58
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)
Notional Amount
Start Date
Maturity Date
Rate(s)
September 30
2007
Fair Value
VARIABLE TO FIXED RATE SWAPS
$ 75,000
75,000
75,000
50,000
50,000
25,000
$350,000
COLLARS
$ 75,000
75,000
$150,000
9 PENSION PLANS
November 30, 2005
November 30, 2005
November 30, 2005
November 30, 2005
November 30, 2005
November 30, 2005
November 30, 2007
November 30, 2007
November 30, 2008
November 30, 2009
November 30, 2009
November 30, 2010
4.195%
4.200
4.290
4.315
4.325
4.395
November 30, 2007
November 30, 2007
November 30, 2009
November 30, 2009
3.53-5.00%
3.61-5.00
$ 174
173
356
279
269
187
$1,438
-
-
-
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.
59
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)
Service cost for benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net gain
Amortization of prior service cost
Curtailment gains
Early retirement program benefits (see Note 19)
Net periodic pension cost (benefit)
2007
2006
2005
$ 1,909
9,172
(12,827)
(1,355)
(93)
(3,865)
3,869
$ 5,532
9,191
(12,637)
-
-
(102)
4,523
$ (3,190) $ 6,507
$ 2,229
2,950
(4,212)
-
-
-
4,650
$ 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
Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Change in plan provisions
Curtailment gains
Early retirement program benefits
Benefit obligation, end of year
Fair value of plan assets, beginning of year:
Actual return on plan assets
Benefits paid
Employer contributions
Fair value of plan assets, June 30 measurement date
Funded status – benefit obligation in excess of (less than) plan assets
Contributions made after measurement date
Unrecognized net actuarial gain
Net amount recognized in the Consolidated Balance Sheets
$168,172 $186,480
5,532
9,191
(27,959)
(9,493)
-
(102)
4,523
168,172
157,285
13,972
(9,493)
-
1,909
9,172
985
(10,813)
(1,591)
(3,865)
3,869
167,838
161,764
25,383
(10,813)
845
177,179
(9,341)
(130)
-
161,764
6,408
(845)
30,526
$ (9,471) $ 36,089
Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
(Thousands)
Other non-current assets
Pension obligations
Accumulated other comprehensive income (before income tax benefit)
Amounts recognized in accumulated other comprehensive income are as follows:
(Thousands)
Unrecognized net actuarial gain
Unrecognized prior service benefit
September 30
2007
2006
$
9,591 $
120
42,240
-
36,089
-
September 30, 2007
$40,650
1,590
$42,240
60
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:
Discount rate
Rate of compensation increase
September 30
2006
2007
5.75% 5.75%
4.0
4.0
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
2007
2006
2005
5.75% 5.0%
8.0
4.0
8.5
4.0
5.0%
8.5
4.0
The assumptions related to the expected long-term return on plan assets are developed through an
analysis of historical market returns and current market conditions.
Plan Assets
The weighted-average asset allocation of the Company’s pension assets is as follows:
Asset Class
Equity securities
Debt securities
Policy Allocation
Actual Allocation
September 30
2007
2006
65 to 70%
30 to 35
71%
29
70%
30
An investment policy outlines the governance structure for decision making, sets investment objectives
and restrictions, and establishes criteria for selecting and evaluating investment managers. The use of
derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven
capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment
committee, consisting of Company executives and supported by independent consultants, is responsible
for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the
appropriate policy allocation.
The pension trust holds no Company securities, directly or through separate accounts.
Cash Flows
Based on its forecast at September 30, 2007, the Company expects to make no contributions to its
pension trust in 2008.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company anticipates future benefit payments, which reflect future service, to be paid from the
pension trust as follows:
(Thousands)
2008
2009
2010
2011
2012
2013-2017
2007 Curtailment
$10,919
10,755
10,854
11,027
11,391
64,136
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 and also recognized the
Company’s 50% share of the $2,074,000 gain recognized by TNI. See Note 4.
Other Plans
The Company is obligated under an unfunded plan to provide fixed retirement payments to certain former
employees. The plan is frozen and no additional benefits are being accrued. The accrued liability under
the plan is $2,695,000 and $2,853,000 at September 30, 2007 and 2006, respectively.
Certain of the Company’s employees participate in multi-employer retirement plans sponsored by their
respective bargaining units. The amount charged to operating expense, representing the Company’s
required contributions to these plans, is approximately $597,000 in 2007, $679,000 in 2006 and $228,000
in 2005.
10 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
The Company provides retiree medical and life insurance benefits under postretirement plans at several
of its 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. The Company’s liability and related expense for benefits
under the postretirement plans are recorded over the service period of active employees based upon
annual actuarial calculations. The Company accrues postemployment disability benefits when it becomes
probable that such benefits will be paid and when sufficient information exists to make reasonable
estimates of the amounts to be paid.
Effective September 30, 2007 the Company adopted the recognition and disclosure provisions of
Statement 158. 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 a decrease in liabilities in the aggregate amount of $23,540,000, and an increase in stockholders’
equity of $13,968,000, net of the related income tax effect.
The Company uses a June 30 measurement date for all of its postretirement obligations.
62
The net periodic postretirement benefit cost components for the Company’s postretirement plans (2005
from the June 3, 2005 date of acquisition of Pulitzer) are as follows:
(Thousands)
Service cost for benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net gain
Amortization of prior service cost
Curtailment gain
Early retirement program benefits
Net periodic postretirement benefit cost
Changes in benefit obligations and plan assets are as follows:
(Thousands)
Benefit obligation, beginning of year
Service cost
Interest cost
Actuarial gain
Benefits paid, net of premiums received
Change in plan provisions
Curtailment gain
Medicare Part D subsidies
Early retirement program benefits
Benefit obligation, end of year
Fair value of plan assets, beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets, June 30 measurement date
Funded status – benefit obligation in excess of plan assets
Unrecognized net actuarial gain
Funding changes made after measurement date
Net amount recognized in the Consolidated Balance Sheets
2007
2006
2005
$ 2,099
6,932
(2,189)
(101)
(175)
(1,940)
386
$ 5,012
$ 3,377
6,588
(2,071)
-
-
-
660
$ 8,554
$1,107
2,196
(690)
-
-
-
450
$3,063
2007
2006
$127,133
2,099
6,932
(10,410)
(6,160)
(3,027)
801
524
386
118,278
45,789
1,645
3,087
(5,636)
44,885
73,393
-
(191)
$ 73,202
$134,977
3,377
6,588
(12,418)
(6,051)
-
-
-
660
127,133
44,187
1,602
6,051
(6,051)
45,789
81,344
13,665
1,123
$ 96,132
Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
(Thousands)
Current portion of benefit obligation
Postretirement benefit obligations
Accumulated other comprehensive income (before income tax benefit)
Amounts recognized in accumulated other comprehensive income are as follows:
(Thousands)
Unrecognized net actuarial gain
Unrecognized prior service benefit
63
September 30
2007
2006
$ 4,610
68,592
23,540
$
-
96,132
-
September 30, 2007
$20,688
2,852
$23,540
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company expects to recognize $233,000 and $633,000 of unrecognized prior service benefit and
unrecognized net actuarial gain, respectively, in net periodic postretirement benefit cost in 2008.
Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
Discount rate
Expected long-term return on plan assets
September 30
2006
2007
5.75%
5.0
5.75%
5.0
The assumptions related to the expected long-term return on plan assets are developed through an
analysis of historical market returns and current market conditions.
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate
Expected long-term return on plan assets
Assumed health care cost trend rates are as follows:
Health care cost trend rates
Rate to which the cost trend rate is assumed to decline (the ultimate trend
rate)
Year in which the rate reaches the ultimate trend rate
2007
2006
2005
5.75%
5.0
5.0%
5.0
5.0%
5.0
September 30
2007
2006
8.0% 9.0-9.5%
4.5-5.0% 4.5-5.0%
2011
2011
Administrative costs related to indemnity plans are assumed to increase at the health care cost trend
rates noted above.
Assumed health care cost
trend rates have a significant effect on the amounts reported for the
postretirement health care plans. A one percentage point change in assumed health care cost trend rates
would have the following annualized effects on reported amounts for 2007:
(Thousands)
Effect on net periodic postretirement benefit cost
Effect on postretirement benefit obligation
Plan Assets
One Percentage
Point
Increase Decrease
$ 1,296
13,927
$ (1,052)
(11,694)
The weighted-average asset allocation of the Company’s postretirement fund at September 30, 2007 and
2006, is as follows:
Asset Class
Debt securities
Policy Allocation Actual Allocation
100%
100%
64
An investment policy outlines the governance structure for decision making, sets investment objectives
and restrictions, and establishes criteria for selecting and evaluating investment managers. The use of
derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven
capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment
committee, consisting of Company executives and supported by independent consultants, is responsible
for monitoring compliance with the investment policy.
The postretirement fund holds no Company securities, directly or through separate accounts.
Cash Flows
Based on its forecast at September 30, 2007, the Company expects to contribute $4,610,000 to its
postretirement plans in 2008.
In December 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)
was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and
a federal subsidy to sponsors of retiree health care benefit plans (Subsidy) that provide a benefit that is at
least actuarially equivalent (as that
term is defined in the Act) to Medicare Part D. The Company
concluded that it qualifies for the Subsidy under the Act since the prescription drug benefits provided
under the Company’s postretirement health care plans generally require lower premiums from covered
retirees and have lower deductibles than the benefits provided in Medicare Part D and, accordingly, are
actuarially equivalent to or better than, the benefits provided under the Act.
The Company anticipates future benefit payments, which reflect future services, to be paid either with
future contributions to the plan or directly from plan assets, as follows:
(Thousands)
2008
2009
2010
2011
2012
2013-2017
2007 Curtailment
Less
Medicare
Part D
Subsidy
$ (580)
(610)
(630)
(650)
(680)
(4,000)
Net
Payments
$ 6,610
7,030
7,230
7,410
7,510
35,910
Gross
Payments
$ 7,190
7,640
7,860
8,060
8,190
39,910
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.
Postemployment Plan
The Company’s postemployment benefit obligation, representing certain disability benefits at the St. Louis
Post-Dispatch, is $3,644,000 and $4,099,000 at September 30, 2007 and 2006, respectively.
11 OTHER RETIREMENT PLANS
Substantially all of the Company’s employees are eligible to participate in a qualified defined contribution
retirement plan. The Company also has other retirement and compensation plans for executives and
others.
Retirement and compensation plan costs, including interest on deferred compensation costs, charged to
continuing operations are $24,716,000 in 2007, $25,112,000 in 2006, and $22,022,000 in 2005.
In conjunction with the acquisition of Pulitzer, an existing supplemental executive benefit retirement plan
(SERP) was amended and converted into an individual account plan. An account was established for
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
each participant and was credited with an amount representing the present value of the participant’s
accrued benefit under the SERP, plus adjustments for certain individuals subject to existing transition
agreements. Interest is credited to each account at an annual rate of 5.75%. The SERP, as amended, will
be liquidated on or about May 1, 2008, or earlier upon a change of control of the Company, at which time
each participant will receive a lump sum payment equal to the balance in his account. Retired participants
will continue to receive annuity payments until the liquidation of the SERP. At September 30, 2007 and
2006, the Company’s liability under the SERP totals $18,140,000 and $18,527,000, respectively.
12 COMMON STOCK, CLASS B COMMON STOCK, AND PREFERRED SHARE PURCHASE RIGHTS
Class B Common Stock has ten votes per share on all matters and generally votes as a class with
Common Stock (which has one vote per share). The transfer of Class B Common Stock is restricted.
Class B Common Stock is at all times convertible into shares of Common Stock on a share-for-share
basis. Common Stock and Class B Common Stock have identical rights with respect to cash dividends
and upon liquidation. All outstanding Class B Common Stock converts to Common Stock when the shares
of Class B Common Stock outstanding total less than 5,600,000 shares.
In 1998, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board
declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding share of
Common Stock and Class B Common Stock (collectively Common Shares) of the Company. Rights are
attached to, and automatically trade with, the Company’s Common Shares.
Rights become exercisable only in the event that any person or group of affiliated persons becomes a
holder of 20% or more of the Company’s outstanding Common Shares, or commences a tender or
exchange offer which, if consummated, would result in that person or group of affiliated persons owning
at least 20% of the Company’s outstanding Common Shares. Once the Rights become exercisable, they
entitle all other stockholders to purchase, by payment of a $150 exercise price, one one-thousandth of a
share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise
price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50%
position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights
held by the acquiring person or group of affiliated persons) to be exchanged for one share of Common
Stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a
price of $0.001 per Right at any time prior to their expiration in May 2008.
13 STOCK OWNERSHIP PLANS
Total stock compensation expense is $7,193,000, $7,693,000, and $7,879,000, in 2007, 2006, and 2005,
respectively.
Stock Options
The Company has reserved 2,087,687 shares of Common Stock for issuance to employees under an
incentive and nonstatutory stock option and restricted stock plan approved by stockholders. Options are
granted at a price equal to the fair market value on the date of the grant and are exercisable, upon
vesting, over a ten-year period.
A summary of stock option activity is as follows:
(Thousands of Shares)
Under option, beginning of year
Granted
Exercised
Canceled
Under option, end of year
Exercisable, end of year
66
2007
2006
2005
939
304
(1)
(47)
1,195
981
177
(113)
(106)
939
921
140
(76)
(4)
981
749
627
608
Weighted average prices of stock options are as follows:
Granted
Exercised
Under option, end of year
2007
2006
2005
$28.72
21.50
35.61
$39.56
32.94
37.96
$47.64
30.28
37.76
The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model.
The table below outlines the weighted average assumptions for options granted.
2007
2006
2005
Dividend yield
Volatility
Risk-free interest rate
Expected life (years)
Estimated fair value
2.5%
1.7%
18.7% 21.7%
4.4%
4.7
$8.74
4.5%
4.7
$5.16
1.5%
24.3%
3.6%
4.7
$11.00
A summary of stock options outstanding at September 30, 2007 is as follows:
Range of
Exercise
Prices
$25 to 30
30 to 35
35 to 40
40 to 45
45 to 50
Options Outstanding
Number
Outstanding
Weighted Average
Remaining Contractual
Life (Years)
Weighted
Average
Exercise Price
Options Exercisable
Number
Exercisable
Weighted
Average
Exercise Price
368,175
215,391
328,434
155,101
127,753
1,194,854
7.7
5.1
5.9
5.9
7.0
6.4
$28.52
32.51
37.31
43.22
47.63
$35.61
74,825
215,391
226,138
155,101
78,024
749,479
$27.73
32.51
36.30
43.22
47.62
$36.97
Total unrecognized compensation expense for unvested stock options at September 30, 2007 is
$1,683,000, which will be recognized over a weighted average period of 1.4 years.
The exercise of stock options in 2007, 2006 and 2005 resulted in cash proceeds of $28,000, $3,711,000,
and $2,289,000, respectively, and income tax benefits of $3,000, $215,000 and $427,000, respectively.
The intrinsic value of stock options exercised in 2007, 2006, and 2005 is $7,000, $552,000, and
$1,094,000, respectively. The aggregate intrinsic value of options outstanding and exercisable at
September 30, 2007, is zero.
Restricted Common Stock
Restricted Common Stock is subject to an agreement requiring forfeiture by the employee in the event of
termination of employment, generally within three years of the grant date for reasons other than normal
retirement, death or disability.
A summary of restricted Common Stock activity follows:
(Thousands of Shares)
Outstanding, beginning of year
Granted
Vested
Forfeited
Outstanding, end of year
67
2007
2006
2005
335
197
(106)
(10)
416
279
165
(88)
(21)
335
219
116
(54)
(2)
279
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average grant date fair values of restricted Common Stock are as follows:
Outstanding, beginning of year
Granted
Vested
Forfeited
Outstanding, end of year
2007
2006
2005
$43.91
28.73
45.24
34.94
36.60
$44.98
40.73
41.79
42.03
43.91
$38.00
47.59
35.53
39.90
44.98
The fair value of restricted Common Stock vested in 2007, 2006 and 2005 is $3,004,000, $3,466,000, and
$2,565,000, respectively.
Total unrecognized compensation expense for unvested restricted Common Stock as of September 30,
2007 is $5,867,000, which will be recognized over a weighted average period of 1.4 years.
At September 30, 2007, 892,833 shares are available for granting of stock options or issuance of
restricted Common Stock.
Stock Purchase Plans
The Company has 420,000 shares of Common Stock available for issuance pursuant to the Company’s
Employee Stock Purchase Plan (ESPP). April 30, 2008 is the exercise date for the current offering. In
2007, the purchase price provision of the ESPP was amended to 85% of the fair market value on the
exercise date, beginning with the current offering. The Company’s expense in 2007 is based on the
difference between the fair value of shares purchased and the purchase price. The weighted-average fair
values of purchase rights granted under the ESPP in 2006 and 2005, computed using the Black-Scholes
option-pricing model, are $6.53 and $8.43, respectively.
In 2007, 2006, and 2005 employees purchased 121,000, 131,000, and 89,000 shares, respectively, under
the ESPP at a price of $22.48 in 2007, $26.11 in 2006, and $35.11 in 2005. The market value on the
purchase date was $26.18 in 2007, $30.80 in 2006, and $41.51 in 2005.
The Company also has 81,000 shares of Common Stock available for issuance under the Company’s
Supplemental Employee Stock Purchase Plan (SPP). Under the SPP, an offering period is each three-
month calendar quarter, unless changed, and the last business day of each calendar quarter is the
exercise date for such quarterly offering period. The purchase price is 85% of the market price on the last
business day of each calendar quarter during the offering period.
Employees purchased 25,000, 23,000 and 5,600 shares, respectively, at a weighted average price of
$19.47 in 2007, $25.67 in 2006 and $36.11 in 2005 under the SPP. The weighted average market values
on the purchase dates in 2007, 2006 and 2005 are $22.91, $30.20, and $42.48 respectively.
14 INCOME TAXES
Income tax expense (benefit) consists of the following:
(Thousands)
Current:
Federal
State
Deferred
Continuing operations
Discontinued operations
2007
2006
2005
$36,623
3,881
(6,309)
$34,195
$34,146
49
$34,195
$ 61,270
9,175
(30,452)
$ 39,993
$ 39,740
253
$ 39,993
$35,979
5,851
2,523
$44,353
$40,458
3,895
$44,353
68
Income tax expense related to continuing operations differs from the amounts computed by applying the
U.S. federal income tax rate to income before income taxes. The reasons for these differences are as
follows:
Computed “expected” income tax expense
State income taxes, net of federal tax benefit
Net income of associated companies taxed at dividend rates
Domestic production deduction
Resolution of tax matters
Other
2007
2006
2005
35.0%
3.0
(2.0)
(0.8)
(5.9)
0.1
29.4%
35.0%
3.0
(2.0)
(0.8)
(0.3)
0.5
35.4%
35.0%
3.3
(2.3)
-
-
0.3
36.3%
Substantial deferred income tax liabilities were recorded in 2005 as a result of acquisitions. Net deferred
income tax liabilities consist of the following components:
(Thousands)
Deferred income tax liabilities:
Property and equipment
Equity in undistributed earnings of affiliates
Investment in Tucson newspaper partnership
Identified intangible assets
Deferred income tax assets:
Accrued compensation
Allowance for doubtful accounts and losses on loans
Pension and postretirement benefits
Long-term debt and interest rate exchange agreements
State operating loss carryforwards
Other
Valuation allowance
Net deferred income tax liabilities
Net deferred income tax liabilities are classified as follows:
(Thousands)
Current assets
Non-current liabilities
Net deferred income tax liabilities
September 30
2007
2006
$ (52,232)
(2,041)
(62,284)
(420,027)
$(536,584)
$ (55,504)
(2,073)
(67,593)
(412,967)
$(538,137)
$ 19,468
5,228
32,307
(397)
12,708
4,483
73,797
(11,435)
$(474,222)
$ 15,719
5,334
65,265
2,707
12,291
5,876
107,192
(12,291)
$(443,236)
September 30
2007
2006
$
7,343
(481,565)
$(474,222)
$ 11,079
(454,315)
$(443,236)
At September 30, 2007, the Company has approximately $305,042,000 of operating loss carryforwards
for state tax purposes that expire between 2008 and 2027. Such loss carryforwards result in a deferred
income tax asset of $12,708,000 at September 30, 2007, of which $11,435,000 is offset by a valuation
allowance.
15 FAIR VALUE OF FINANCIAL INSTRUMENTS
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 and cash
equivalents, accounts receivable, and accounts payable approximate fair value because of the short
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
maturity of those instruments. The carrying value of other investments, consisting of debt and equity
securities in a deferred compensation trust, is carried at fair value based upon quoted market prices.
Investments totaling $10,648,000, consisting primarily of the Company’s 17% ownership of the nonvoting
common stock of TCT and 5.0% interest in Cardinals Holdings LLC, are carried at cost. The fair value of
floating rate debt approximates the carrying amount. The fair value of the Company’s fixed rate debt
follows and is estimated based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
(Thousands)
Carrying amount
Fair value
16 EARNINGS PER COMMON SHARE
September 30
2007
2006
$319,255 $326,834
321,234
316,913
The following table sets forth the computation of basic and diluted earnings per common share:
(Thousands, Except Per Common Share Data)
2007
2006
2005
Income (loss) applicable to common stock:
Continuing operations
Discontinued operations
Net income
Weighted average Common Shares
Less non-vested restricted Common Stock
Basic average Common Shares
Dilutive stock options and restricted Common Stock
Diluted average Common Shares
Earnings (loss) per common share:
Basic:
Continuing operations
Discontinued operations
Net income
Diluted:
Continuing operations
Discontinued operations
Net income
$80,908 $71,136 $70,862
6,016
$80,999 $70,832 $76,878
(304)
91
46,088
417
45,671
133
45,804
45,763
342
45,421
125
45,546
45,394
276
45,118
230
45,348
$ 1.77 $ 1.57 $ 1.57
0.13
$ 1.77 $ 1.56 $ 1.70
(0.01)
-
$ 1.77 $ 1.56 $ 1.56
0.13
$ 1.77 $ 1.56 $ 1.70
(0.01)
-
For 2007, 2006 and 2005, the Company had 1,128,000, 842,500, and 177,500 weighted average shares,
respectively, subject to issuance under its stock option and employee stock purchase plan that have no
intrinsic value and are not considered in the computation of earnings per common share.
70
17 ALLOWANCE FOR DOUBTFUL ACCOUNTS
Valuation and qualifying account information related to the allowance for doubtful accounts receivable is
as follows:
(Thousands)
Balance, beginning of year
Additions charged to expense
Reserves of businesses acquired or sold
Deductions from reserves
Balance, end of year
18 OTHER INFORMATION
Compensation and other accrued liabilities consist of the following:
(Thousands)
Compensation
Retirement and stock purchase plans
Interest
Other
Cash payments are as follows:
(Thousands)
Interest
Income taxes, net of refunds
2007
2006
2005
$11,313
5,807
-
(6,757)
$10,363
$ 9,365
7,260
-
(5,312)
$11,313
$ 6,153
2,470
5,008
(4,266)
$ 9,365
September 30
2007
2006
$31,165
33,501
14,790
16,777
$96,233
$23,670
11,856
7,584
15,347
$58,457
2007
2006
2005
$86,767
55,693
$101,018
28,403
$28,879
42,187
19 COMMITMENTS AND CONTINGENT LIABILITIES
Newsprint
The Company has contracts for the purchase of 49,925 metric tons of newsprint, at market prices, from
three suppliers through December 2009.
Operating Leases
The Company has operating lease commitments for certain of its office, production, and distribution
facilities. Management expects that in the normal course of business, existing leases will be renewed or
replaced. Minimum lease payments during the five years ending September 2012 and thereafter are
respectively. Total
$3,832,000, $3,385,000, $2,451,000, $2,116,000, $1,525,000 and $7,309,000,
operating lease expense is $5,540,000, $5,380,000, and $3,513,000,
in 2007, 2006, and 2005,
respectively.
Capital Commitments
At September 30, 2007, the Company had construction and equipment purchase commitments totaling
approximately $4,803,000.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
St. Louis Post-Dispatch Early Retirement Programs
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 includes
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 in 2007. 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 St. Louis Post-Dispatch concluded another offering of early retirement
In 2006,
incentives that
resulted in an adjustment of staffing levels. 130 employees volunteered to take advantage of the offer,
which includes 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 $9,124,000 recognized
in 2005, and $8,654,000 recognized in 2006. Approximately $7,000,000 of the cost represents cash
payments made, with the remainder due primarily to enhancements of pension and other post retirement
benefits.
PD LLC Operating Agreement
In 2000, Pulitzer and 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 (the
Venture), known as PD LLC. Pulitzer is the managing member of PD LLC. Under the terms of the
operating agreement governing PD LLC (the Operating Agreement), Pulitzer and another subsidiary hold
a 95% interest in the results of operations of PD LLC and Herald, as successor to Herald Inc., holds a 5%
interest. Herald’s 5% interest is reported as minority interest in the Consolidated Statements of Income
and Comprehensive Income. 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 (the Initial Distribution). This distribution
was financed by the Pulitzer Notes. Pulitzer’s entry into the Venture was treated as a purchase for
accounting purposes.
During the first ten years of its term, PD LLC is restricted from making distributions (except under
specified circumstances), capital expenditures and member loan repayments unless it has set aside out
of its cash flow the Reserve, which is 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. PD LLC is not required to maintain the Reserve after
May 1, 2010. On May 1, 2010, Herald will have a one-time right to require PD LLC to redeem Herald’s
interest in PD LLC, together with Herald’s interest, if any, in DS LLC, another limited liability company in
which Pulitzer is the managing member and which is engaged in the business of delivering publications
and products in the greater St. Louis metropolitan area. The May 1, 2010 redemption price for Herald’s
interest will be determined pursuant to a formula yielding an amount which will result in the present value
to May 1, 2000 of the after tax cash flows to Herald (based on certain assumptions) from PD LLC,
including the Initial Distribution and the special distribution described below, if any, and from DS LLC,
being equal to $275,000,000.
Upon termination of PD LLC and DS LLC, which will be on May 1, 2015 (unless Herald exercises the
redemption right described above), Herald will be entitled to the liquidating value of its interests in PD LLC
and DS LLC, to be paid in cash by Pulitzer. That amount would be equal to the amount of Herald’s capital
accounts, after allocating the gain or loss that would result from a cash sale of PD LLC and DS LLC’s assets
for their fair market value at that time. Herald’s share of such gain or loss generally will be 5%, but will be
reduced (but not below 1%) to the extent that the present value to May 1, 2000 of the after tax cash flows to
Herald from PD LLC and from DS LLC, including the Initial Distribution, the special distribution described
above, if any, and the liquidation amount (based on certain assumptions), exceeds $325,000,000.
The actual amount payable to Herald either on May 1, 2010, or upon the termination of PD LLC and DS
LLC on May 1, 2015 will depend on such variables as future cash flows, the amounts of any distributions
to Herald prior to such payment, PD LLC’s and DS LLC’s rate of growth and market valuations of
72
newspaper properties. While the amount of such payment cannot be predicted with certainty,
the
Company currently estimates (assuming a 5% annual growth rate in Herald’s capital accounts, no special
distribution as described above and consistent newspaper property valuation multiples) that the amount of
such payment would not exceed $100,000,000. The redemption of Herald’s interest in PD LLC either on
May 1, 2010 or upon termination of PD LLC in 2015 is expected to generate significant tax benefits to the
Company 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.
In the event the transactions effected in connection with either the formation of the Venture and the Initial
Distribution or the organization of DS LLC are recharacterized by the Internal Revenue Service (IRS) as a
taxable sale by Herald, with the result in either case that the tax basis of PD LLC’s assets increases and
Herald is required to recognize taxable income as a result of such recharacterization, Herald generally will
be entitled to receive a special distribution from PD LLC in an amount that corresponds, approximately, to
the present value of the after tax benefit to the members of PD LLC of the tax basis increase. The
adverse financial effect of any such special distribution to Herald on PD LLC (and thus Pulitzer and the
Company) will be partially offset by the current and deferred tax benefits arising as a consequence of the
treatment of the transactions effectuated in connection with the formation of the Venture and the Initial
Distribution or the organization of DS LLC as a taxable sale by Herald. In 2005, the Company was
advised that the IRS, in the course of examining the 2000 consolidated federal income tax return in which
Herald was included,
requested certain information and documents relating to the transactions
effectuated in connection with the formation of the Venture and the Initial Distribution. The Company
participated in the formulation of Herald’s response to this IRS request for information and documents. In
the IRS concluded its examination without adjustment related to the Venture and the Initial
2006,
Distribution. The Company considers the matter closed. The related statute of limitations expires in
December 2007.
Income Taxes
The Company files income tax returns with the 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 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.
In June 2006, the Company received a notice of deficiency asserting transferee liability for federal income
taxes and penalties, excluding interest, totaling $25,200,000 related to the acquisition of assets by the
Company in 2000. In August 2006, the IRS rescinded the notice of deficiency and issued a letter, which
allowed the Company to initially pursue this matter at the IRS Appeals level. In February 2007, the IRS
informed the Company that it does not intend to pursue the claim. In 2007, the IRS completed its audit of
2003 and 2004 without any adjustment corresponding to this matter. As a result of those developments
and the resolution of certain state audits, the Company reduced income tax expense by $6,880,000 in
2007.
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.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 2006, the FASB issued Statement 158, 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
anticipate that the implementation of Statement 157 will have a material impact on its financial position,
results of operation, or cash flows. Subsequently,
this
pronouncement until 2010 for non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements.
the FASB deferred the effective date of
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.
74
21 QUARTERLY FINANCIAL DATA (UNAUDITED)
(Thousands, Except Per Common Share Data)
1st
2nd
3rd
4th
Quarter
2007
Operating revenue
Income from continuing operations
Discontinued operations
Net income
Earnings per common share:
Basic:
Income from continuing operations
Discontinued operations
Net income
Diluted:
Income from continuing operations
Discontinued operations
Net income
2006
$300,490 $261,660 $281,375 $284,136
$ 26,689 $ 11,945 $ 22,310 $ 19,964
2
$ 26,651 $ 11,891 $ 22,491 $ 19,966
(38)
(54)
181
$
$
$
$
0.59 $
-
0.58 $
0.26 $
-
0.26 $
0.49 $
-
0.49 $
0.58 $
-
0.58 $
0.26 $
-
0.26 $
0.49 $
-
0.49 $
0.44
-
0.44
0.44
-
0.44
Operating revenue
$292,245 $266,190 $290,544 $279,669
Income from continuing operations
Discontinued operations
Net income
Earnings (loss) per common share:
Basic:
Income from continuing operations
Discontinued operations
Net income
Diluted:
Income from continuing operations
Discontinued operations
Net income
$ 21,394 $ 13,438 $ 21,319 $ 14,985
(4,069)
$ 22,764 $ 14,435 $ 22,717 $ 10,916
1,370
1,398
997
$
$
$
$
0.47 $
0.03
0.50 $
0.30 $
0.02
0.32 $
0.47 $
0.03
0.50 $
0.33
(0.09)
0.24
0.47 $
0.03
0.50 $
0.30 $
0.02
0.32 $
0.47 $
0.03
0.50 $
0.33
(0.09)
0.24
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
Lee Enterprises, Incorporated and subsidiaries
Davenport, Iowa
We have audited the accompanying Consolidated Balance Sheets of Lee Enterprises, Incorporated and
subsidiaries (the “Company”) as of September 30, 2007 and 2006, and the related Consolidated
Statements of Income and Comprehensive Income, Stockholders’ Equity, and Cash Flows for each of the
three years in the period ended September 30, 2007. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with 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 the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present
the
financial position of Lee Enterprises, Incorporated and subsidiaries at September 30, 2007 and 2006, and
the results of their operations and their cash flows for each of the three years in the period ended
September 30, 2007, in conformity with accounting principles generally accepted in the United States of
America.
in all material respects,
fairly,
As discussed in Notes 9 and 10 to the Consolidated Financial Statements,
the Company adopted
Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, which changed its method of accounting for pension and other
post retirement benefits as of September 30, 2007.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company’s 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 and our report dated
November 29, 2007, expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Davenport, Iowa
November 29, 2007
76
LEE ENTERPRISES, INCORPORATED
AND SUBSIDIARIES
SUBSIDIARIES AND ASSOCIATED COMPANIES
Lee Enterprises, Incorporated
Lee Publications, Inc.
Accudata, Inc.
INN Partners, L.C. d/b/a TownNews.com
Lee Procurement Solutions Co.
Sioux City Newspapers, Inc.
Target Marketing Systems, Inc.
Journal-Star Printing Co.
K. Falls Basin Publishing, Inc.
Lee Consolidated Holdings Co.
LINT Co.
Madison Newspapers, Inc. d/b/a Capital Newspapers
Flagstaff Publishing Co.
Hanford Sentinel, Inc.
Kauai Publishing Co.
Napa Valley Publishing Co.
Northern Illinois Publishing Co.
Northern Lakes Publishing Co.
Pantagraph Publishing Co.
Pulitzer Inc.
Pulitzer Missouri Newspapers, Inc.
Pulitzer Newspapers, Inc.
Lee Foundation
Pulitzer Technologies, Inc.
Pulitzer Utah Newspapers, Inc.
Santa Maria Times, Inc.
Southwestern Oregon Publishing Co.
Star Publishing Company
Ynez Corporation
Fairgrove LLC
Homechoice, LLC
HSTAR LLC
NLPC LLC
NVPC LLC
Pulitzer Network Systems LLC
SHTP LLC
SOPC LLC
St. Louis Post-Dispatch LLC
STL Distribution Services LLC
Suburban Journals of Greater St. Louis LLC
TNI Partners
Community Distribution Partners, LLC
State of
Organization
Delaware
Delaware
Iowa
Iowa
Iowa
Iowa
Iowa
Nebraska
Oregon
South Dakota
South Dakota
Wisconsin
Washington
Washington
Delaware
Washington
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Iowa
Delaware
Delaware
Nevada
Oregon
Arizona
California
Delaware
Utah
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Arizona
Montana
EXHIBIT 21
Percentage of Voting
Securities Owned
Parent
100%
100%
82.5%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
95%
100%
100%
100%
100%
100%
100%
100%
95%
95%
100%
50%
50%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
We consent to the incorporation by reference in Registration Statements No. 333-06435,
No. 333-105219, No 333-125833, No. 333-132767, No. 333-132768 and Post-Effective Amendment No. 1
to 333-132768 on Form S-8 and Registration Statement No. 333-127213 on Form S-3 of our reports
dated November 29, 2007, relating to the consolidated financial statements of Lee Enterprises,
Incorporated and subsidiaries (which report expresses an unqualified opinion and includes an explanatory
paragraph regarding the adoption of Statement of Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans) and the effectiveness of Lee
Enterprises, Incorporated and subsidiaries’ internal control over financial reporting, appearing in this
Annual Report on Form 10-K of Lee Enterprises, Incorporated and subsidiaries for the year ended
September 30, 2007.
/S/ DELOITTE & TOUCHE LLP
Davenport, Iowa
November 29, 2007
POWER OF ATTORNEY
EXHIBIT 24
We, the undersigned directors of Lee Enterprises, Incorporated, hereby severally constitute Mary E.
Junck and Carl G. Schmidt, and each of them, our true and lawful attorneys with full power to them, and
each of them, to sign for us and in our names, in the capacities indicated below, the Annual Report on
Form 10-K of Lee Enterprises, Incorporated for the fiscal year ended September 30, 2007 to be filed
herewith and any amendments to said Annual Report, and generally do all such things in our name and
behalf in our capacities as directors to enable Lee Enterprises, Incorporated to comply with the provisions
of the Securities Exchange Act of 1934 as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys,
or either of them, to said Annual Report on Form 10-K and any and all amendments thereto.
Signature
Date
/s/ Richard R. Cole
Richard R. Cole, Director
/s/ Nancy S. Donovan
Nancy S. Donovan, Director
/s/ William E. Mayer
William E. Mayer, Director
/s/ Herbert W. Moloney III
November 14, 2007
November 14, 2007
November 14, 2007
Herbert W. Moloney III, Director
November 14, 2007
/s/ Andrew E. Newman
Andrew E. Newman, Director
/s/ Gordon D. Prichett
Gordon D. Prichett, Director
/s/ Gregory P. Schermer
Gregory P. Schermer, Director
/s/ Mark Vittert
Mark Vittert, Director
November 14, 2007
November 14, 2007
November 14, 2007
November 14, 2007
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 31.1
I, Mary E. Junck, certify that:
1.
I have reviewed this annual report on Form 10-K (Annual Report) of Lee Enterprises, Incorporated
(Registrant);
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
Annual Report;
3. Based on my knowledge, the Consolidated Financial Statements, and other financial information
included in this Annual Report, fairly present in all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the periods presented in this Annual
Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual Report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
c)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and
presented in this Annual Report our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by this Annual Report based on
such evaluation; and
d) disclosed in this Annual Report any change in the Registrant’s internal control over financial
reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of
Registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Date: November 29, 2007
/s/ Mary E. Junck
Mary E. Junck
Chairman, President and Chief Executive
Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 31.2
I, Carl G. Schmidt, certify that:
1.
I have reviewed this annual report on Form 10-K (Annual Report) of Lee Enterprises, Incorporated
(Registrant);
2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
Annual Report;
3. Based on my knowledge, the Consolidated Financial Statements, and other financial information
included in this Annual Report, fairly present in all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the periods presented in this Annual
Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the Registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the Registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this Annual Report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
c)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures and
presented in this Annual Report our conclusions about the effectiveness of the disclosure
controls and procedures as of the end of the period covered by this Annual Report based on
such evaluation; and
d) disclosed in this Annual Report any change in the Registrant’s internal control over financial
reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of
Registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the Registrant’s internal control over financial reporting.
Date: November 29, 2007
/s/ Carl G. Schmidt
Carl G. Schmidt
Vice President, Chief Financial Officer
and Treasurer
The following statement is being furnished to the Securities and Exchange Commission solely for
purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain
criminal penalties in the event of a knowing or willful misrepresentation.
EXHIBIT 32
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: Lee Enterprises, Incorporated
Ladies and Gentlemen:
In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350),
each of the undersigned hereby certifies that to our knowledge:
(i)
(ii)
this annual report on Form 10-K for the period ended September 30, 2007 (Annual Report), fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)); and
the information contained in this Annual Report fairly presents, in all material respects, the financial
condition and results of operations of Lee Enterprises, Incorporated for the periods presented in the
Annual Report.
Dated as of this 29th day of November 2007.
/s/ Mary E. Junck
Mary E. Junck
Chairman, President and
Chief Executive Officer
/s/ Carl G. Schmidt
Carl G. Schmidt
Vice President, Chief Financial Officer
and Treasurer
A signed original of this written statement required by Section 906 has been provided to Lee Enterprises,
Incorporated and will be retained by Lee Enterprises, Incorporated and furnished to the Securities and
Exchange Commission upon request.