10-K 1 a10k2012-good.htm 10-K 10K 2012
 
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, 2012
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its Charter)
Delaware
42-0823980
(State of incorporation)
(I.R.S. Employer Identification No.)
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
Registrant's telephone number, including area code
Title of Each Class
Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock - $0.01 par value
New York Stock Exchange
Preferred Share Purchase Rights
New York Stock Exchange
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
Class B Common Stock - $2 par value
 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
                                     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
                                         
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller Reporting Company [ ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter. Based on the closing price of the Registrant's Common Stock on the New York Stock Exchange on March 25, 2012, such aggregate market value is approximately $57,507,000. 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 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 Registrant's classes of common stock, as of November 30, 2012. Common Stock, $0.01 par value, 52,296,241 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2013 are incorporated by reference in Part III of this Form 10-K.
 



TABLE OF CONTENTS
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
Part I
 
 
 
 
 
 
Item 1
 
 
 
 
 
Item 1A
 
 
 
 
 
Item 1B
 
 
 
 
 
Item 2
 
 
 
 
 
Item 3
 
 
 
 
 
Item 4
Mine Safety Disclosures
 
 
 
 
Part II
 
 
 
 
 
 
Item 5
 
 
 
 
 
Item 6
 
 
 
 
 
Item 7
 
 
 
 
 
Item 7A
 
 
 
 
 
Item 8
 
 
 
 
 
Item 9
 
 
 
 
 
Item 9A
 
 
 
 
 
Item 9B
 
 
 
 
Part III
 
 
 
 
 
 
Item 10
 
 
 
 
 
Item 11
 
 
 
 
 
Item 12
 
 
 
 
 
Item 13
 
 
 
 
 
Item 14
 
 
 
 
Part IV
 
 
 
 
 
 
Item 15
 
 
 
 
 
 
 
 
 
 
 
 




References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to 2012, 2011, 2010 and the like refer to the fiscal years ended the last Sunday in September.
 
FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are our ability to generate cash flows and maintain liquidity sufficient to service our debt, comply with or obtain amendments or waivers of the financial covenants contained in our credit facilities, if necessary, and to refinance our debt as it comes due.

Other risks and uncertainties include the impact and duration of continuing adverse economic conditions in certain aspects of the economy affecting our business, changes in advertising demand, potential changes in newsprint and other commodity prices, energy costs, interest rates, labor costs, legislative and regulatory rulings, difficulties in achieving planned expense reductions, maintaining employee and customer relationships, increased capital costs, maintaining our listing status on the NYSE, competition and other risks detailed from time to time in our publicly filed documents.

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believe”, “expect”, “anticipate”, “intend”, “plan”, “project”, “consider” and similar expressions) generally should be considered forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements.

PART I
 
On December 12, 2011, the Company and certain of its subsidiaries filed voluntary, prepackaged petitions in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") for relief under Chapter 11 of the U.S. Bankruptcy Code (the "U.S. Bankruptcy Code") (collectively, the "Chapter 11 Proceedings"). Our interests in TNI Partners and Madison Newspapers, Inc., as discussed more fully below, were not included in the filings. During the Chapter 11 Proceedings, we, and certain of our subsidiaries, continued to operate as "debtors in possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the U.S. Bankruptcy Code. In general, as debtors-in-possession, we were authorized under the U.S. Bankruptcy Code to continue to operate as an ongoing business, but were not to engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

On January 23, 2012, the Bankruptcy Court approved our Second Amended Joint Prepackaged Plan of Reorganization (the "Plan") under Chapter 11 of the U.S. Bankruptcy Code and on January 30, 2012 (the "Effective Date") the Company emerged from the Chapter 11 Proceedings. On the Effective Date, the Plan became effective and the transactions contemplated by the Plan were consummated. Implementation of the Plan resulted primarily in a comprehensive refinancing of our debt. The Chapter 11 Proceedings did not adversely affect employees, vendors, contractors, customers or any aspect of Company operations. Stockholders retained their interest in the Company, subject to modest dilution.

We experienced significant net losses in 2012, 2011, 2009 and 2008, due primarily to reorganization costs in 2012 and non-cash charges for impairment of goodwill and other assets in 2011, 2009 and 2008. Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at September 30, 2012. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 4 and 5 of the Notes to Consolidated Financial Statements, included herein, for additional information.
 
ITEM 1. BUSINESS
 
We are a leading provider of local news and information, and a major platform for advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception

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of St. Louis, Missouri, our 51 markets, across 23 states, are principally midsize or small. Through our print and digital platforms, we reach an overwhelming majority of adults in our markets.

Our platforms include:
51 daily and 39 Sunday newspapers with circulation totaling 1.2 million and 1.4 million, respectively, for the six months ended September 2012, read by nearly four million people in print;
Websites and mobile and tablet products in all of our markets that complement our newspapers and attracted 22.8 million unique visitors in September 2012 with 192.6 million page views; and
Nearly 300 weekly newspapers and classified and niche publications.

Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Based on data from the Bureau of Labor of Statistics as of October 2012, the unemployment rate in all of our top ten markets by revenue was lower than the national average. We believe that all of these factors have had a positive impact on advertising revenue.

We do not face significant competition from other local daily newspapers in most of our markets, although there is significant competition for readers and viewers in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition. In the balance of our markets, we have little or no local daily print competition.

Lee Enterprises, Incorporated was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange ("NYSE") in 1978. Until 2001, we also operated a number of network-affiliated and satellite television stations. We have acquired and divested a number of businesses since 2001. The acquisition of Pulitzer Inc., the most significant of these transactions, is discussed more fully below.

STRATEGIC INITIATIVES

We are focused on five broad strategic initiatives:

Build On Our Position As A Leading Source Of Local News And Information, And A Major Platform For Advertising, In Attractive, Geographically Diverse, Midsize And Small Markets

We are a leading provider of local news and information, and a major platform for advertising, in our markets and have been for many years. Our brands are well known in our markets. We believe we have more journalists than any other local news and information source in our markets and, in many cases, more than all of our local competitors combined. We believe our brand strength and the size of our news staff allow us to provide more comprehensive coverage of local news than our competitors in our markets.

We believe our longstanding commitment to our markets, leading news staffs and close relationships with advertisers in our markets serve as a platform from which to thrive in the future.

Drive Revenue

Revenue is a key imperative among our top priorities. We pursue revenue opportunities by gaining new local advertisers, introducing new products and increasing our share of advertising spending from existing clients. Our sales force is larger, and we believe of higher quality, than any local competitor, and we invest heavily in training, especially with respect to our expanding array of digital products. As a result of our focus on revenue, our advertising revenue since 2000 has outperformed the industry average in 43 of the last 47 quarters, as measured by the Newspaper Association of America ("NAA").

Expand Our Audiences

The number of customers we reach in our markets is critical to our value to advertisers. As measured in 11 of our top markets by independent, third-party research, we deliver unduplicated reach of print and digital readers and users of print products of an average of 81.5% of all adults over a seven-day period through our print and digital platforms. Our 2012 combined print and digital readership in percentage terms is comparable to 2007, the first time it was measured. Among those 18-29 years old, we reach an average of 83.7% of readers and users. We believe our non-daily print

4


publications further expand our audiences.

We continually strive to increase our reach by creatively and energetically improving our content across print and digital platforms. Increasingly, we are also using various forms of social media to enhance our audiences.

Seize Digital Opportunities

We offer advertisers a wide array of digital products, including video, digital couponing, behavioral targeting, banner ads and social networking. Digital advertising revenue increased 9.7% in 2012 and we expect that digital revenue will continue to grow.

On our digital sites, we provide news stories 24 hours a day and post continual updates of developing stories, often including video. Customers access our stories digitally on websites, mobile devices and tablets. As a result, our digital audience has grown rapidly. In September 2012, unique visitors to our digital sites increased 10.1% from September 2011 to 22.8 million.

We have developed mobile sites in all of our markets as well as separate smart phone applications in all markets, and, as a result, we have enjoyed significant audience growth, with mobile page views increasing 146% in September 2012 from September 2011. In most of our markets, our websites are the leading local digital news source. As with mobile, we have moved quickly to develop applications for tablets, including the iPad, and with our mobile audience growth and high advertiser interest we expect mobile and tablet advertising revenue to increase in the next few years. As new digital technologies emerge, we expect to move rapidly to make our content available on them.

In 2011, we began to implement charges for digital access to to our content in certain of our markets using a metered model. By December 2012, that program will be rolled out in most of our markets, and is contributing to our circulation revenue.

Aggressively Control Costs

Throughout the recent economic downturn, we have aggressively transformed our business model and carefully managed our costs to maintain our margins and profitability. Since 2007, we reduced cash costs of our continuing operations (i.e., compensation, newsprint and ink, other operating expenses and workforce adjustments) by $256 million, or 32%. We regionalized staff functions, selectively consolidated and/or outsourced printing, discontinued unprofitable niche publications, reduced newsprint volume 52%, and sharpened our focus on cost control in all areas. We have reduced personnel while protecting our strengths in news, sales and digital products.

Our cost actions allowed us to maintain significant cash flows and reduce debt, despite declining revenues. While future cost reductions will be more difficult to accomplish as a result of the significant reductions to our cost structure that we have achieved, we remain committed to maintaining strong cash flows. We expect 2013 operating expenses, excluding depreciation, amortization and unusual matters, to decrease 3.0-4.0% from their 2012 level.

PULITZER ACQUISITION
 
In 2005, we 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 (“TNI”), as discussed more fully below. The acquisition of Pulitzer increased our paid circulation by more than 50% and revenue by more than 60% at that time. The acquisition was financed primarily with debt.
 
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, and a variety of specialty publications, and supports its related digital products. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
 
Pulitzer and its subsidiaries and affiliates currently publish 12 daily newspapers and support the related digital products, as well as publish approximately 75 weekly newspapers, shoppers and niche publications that serve markets in the Midwest, Southwest and West.


5


TNI Partners
 
As a result of the acquisition of Pulitzer, we own a 50% interest in TNI, the Tucson, Arizona newspaper partnership. TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and the owner of the remaining 50%, Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co., Inc., (“Gannett”), is responsible for printing, delivery, advertising and circulation of the Arizona Daily Star and, until May 2009, the Tucson Citizen, as well as their related digital products and specialty publications. In May 2009, Citizen discontinued print publication of the Tucson Citizen.
 
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. Under the amended and restated operating agreement between Star Publishing and Citizen, the Arizona Daily Star remains the separate property of Star Publishing. Results of TNI are accounted for using the equity method. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.
 
Until the May 2009 discontinuation of print publication of the Tucson Citizen, TNI was subject to the provisions of the Newspaper Preservation Act of 1970, which 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.
 
The TNI agency agreement (“Agency Agreement”), which remains in effect, has governed the operation since 1940. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. 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. Star Publishing and Citizen also have a reciprocal right of first refusal to acquire the 50% interest in TNI owned by Citizen and Star Publishing, respectively, under certain circumstances.
 
MADISON NEWSPAPERS
 
We own 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, and supports their related digital products. MNI conducts business under the trade name Capital Newspapers. We have a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provide other services to MNI. 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.
 
ADVERTISING
 
Approximately 70% of our 2012 revenue was derived from advertising. Our strategies are to increase our share of local advertising through increased sales activities in our existing markets and, over time, to increase our print and digital audiences through internal expansion into existing and contiguous markets and enhancement of digital products. Our advertising results since 2000 have benchmarked favorably to industry averages compiled by the NAA in 43 of the last 47 quarters.
 
Several of our 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, human resources, management and/or production of the publications. Sales penetration can improve if the sales effort is successful in cross-selling advertising into multiple publications and digital products. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.
 
Our newspapers, classified and specialty publications, and digital products compete with newspapers having national or regional circulation, magazines, radio, network, cable and satellite television, other advertising media such as outdoor, mobile, and movie theater promotions, other classified and specialty publications, direct mail, yellow pages directories, as well as other information content providers such as digital sites. Competition for advertising is based on audience size and composition, circulation levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of our daily and Sunday newspapers compete with other local daily

6


or weekly newspapers. We believe we capture a substantial share of the total advertising dollars spent in each of our markets.

The number of competitors in any given market varies. However, all of the forms of competition noted above exist to some degree in our markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1, included herein.

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 or regional and national businesses with local retail operations.

Classified advertising, which includes employment, automotive, real estate for sale or rent, legal and other categories, is revenue earned from sales of advertising space in the classified section of the publication or from publications consisting primarily of such advertising. 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 higher media fragmentation.
 
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.
 
Digital advertising consists of display, banner, behavioral targeting, search, rich media, directories, classified or other advertising on websites or mobile devices associated and integrated with our print publications, other digital applications, or on third party affiliated websites, such as Yahoo! Inc. (“Yahoo!”). Digital advertising is reported in combination with print advertising in the retail, classified and national categories.

Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.
 
The advertising environment is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. Our enterprises are primarily located in midsize and small markets. Historically these markets have been more stable than major metropolitan markets during downturns in advertising spending but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.
 
DIGITAL ADVERTISING AND SERVICES
 
Our digital activities include websites supporting each of our daily newspapers and certain of our other publications. Certain of our website content is also available through output to mobile devices, including telephones and tablet devices. In addition, we also support a number of discrete mobile applications, such as for high school, college and professional sports. Digital activities of the newspapers are reported and managed as a part of our publishing operations.
 
In 2007, in conjunction with several other major publishing organizations (“Consortium”), we entered into a strategic alliance with Yahoo!, in which the Consortium offered its classified employment advertising customer base the opportunity to also post job listings and other employment products on Yahoo!'s HotJobs national platform. The HotJobs platform was acquired in 2010 by Monster Worldwide, Inc., which has assumed the relationship with the Consortium under an amended contract. In addition, the Consortium and Yahoo! have worked together to provide new behavioral targeting, search, content and local applications across the newspapers' digital products, further enhancing the value of these sites as a destination for digital users. The Consortium currently includes more than 30 companies and more than 800 local newspapers across the United States.

We also own 82.5% of an Internet service company, INN Partners, L.C. (doing business as TownNews.com), which provides digital infrastructure and digital publishing services for nearly 1,500 daily and weekly newspapers and shoppers, including those of the Company.

Our digital businesses experienced rapid growth in the second half of 2010 and again in 2011 and 2012 after recession-related declines in 2008 and 2009. Digital advertising represented 13.0% of total advertising revenue in the 14 weeks

7


ended September 30, 2012.

AUDIENCES
 
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 81.5% of adults in our larger markets. Scarborough Research from 2011 ranks the St. Louis Post-Dispatch and STLtoday.com as the market with the 5th highest combination of newspaper and web reach of the 25 most populated U.S. markets. Readership by young adults is also significant in our larger markets. We are maintaining large audiences in our markets through the combination of rapid digital audience growth and strong newspaper readership, as illustrated in the table below, as well as through additional specialty and niche publications. In 2010, for the first time, we measured use of our daily newspapers by non-readers ("print users").
   
Audience reach is summarized as follows:
 
All Adults
 
Age 18-29
(Percent, Past Seven Days)
2007
2008
2009
2010
2011
2012
 
2007
2008
2009
2010
2011
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Print only
52.0
49.6
46.6
43.8
43.4
37.8
 
36.1
38.7
41.0
32.1
33.0
31.5
Print and digital
13.2
16.9
16.4
15.9
16.4
19.6
 
13.8
19.4
16.4
15.6
13.7
18.4
Digital only
4.6
6.1
6.6
8.4
7.9
9.4
 
6.4
9.5
8.3
9.5
11.6
9.3
Total readership
69.8
72.6
69.6
68.1
67.7
66.8
 
56.3
67.6
65.7
57.2
58.3
59.2
Print users (1)
NA
NA
NA
14.9
14.5
14.7
 
NA
NA
NA
21.8
21.1
24.5
Total reach
69.8
72.6
69.6
83.0
82.2
81.5
 
56.3
67.6
65.7
79.0
79.4
83.7
 






 






Total print reach (1)
65.2
66.5
63.0
74.6
74.3
72.1
 
49.9
58.1
57.4
69.5
67.8
74.4
Total digital reach
17.8
23.0
23.0
24.3
24.3
29.0
 
20.2
28.9
24.7
25.1
25.3
27.7
(1)
Print users were not measured prior to 2010. As a result, print reach in 2010-2012 is not comparable to 2007-2009.
Source:
Lee Enterprises Audience Report, Thoroughbred Research. January-June 2007-2012.
Markets:
11 largest markets in 2008-2012. 2007 data excludes Tucson, AZ and La Crosse, WI.
Margin of Error:
Total sample +/- 1.1%, Total digital sample +/- 1.3%
  
After advertising, print circulation is our largest source of revenue. In 2011 we began to implement charges for digital access to our content in certain of our markets using a metered model. By December 2012, that program will be rolled out in most of our markets, and is contributing to our circulation revenue. According to Editor and Publisher International Yearbook data as reported by the NAA, nationwide daily newspaper circulation unit sales peaked in 1984 and Sunday circulation unit sales peaked in 1990. For the six months ended September 2012, our daily circulation units, which include TNI and MNI, as measured by the Alliance for Audited Media ("AAM"), formerly known as the Audit Bureau of Circulations, were 1.2 million and Sunday circulation units were 1.4 million.
 
Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to improve audiences include continuous improvement of content and promotional efforts. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence print circulation. The introduction in 2010, and expansion in 2011 and 2012, of new mobile and tablet applications positively impacted our digital audiences.
 
Our enterprises are also focused on increasing the number of subscribers who pay for their subscriptions via automated payment mechanisms, such as credit cards or bank account withdrawals. We have historically experienced higher retention of customers using these payment methods. Other initiatives vary from location to location and are determined principally by management at the local level in collaboration with our senior management. 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 local daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population may be sufficient to support more than one daily newspaper.


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Our circulation sales channels continue to evolve through an emphasis on targeted direct mail and email to acquire new subscribers and retain current subscribers.

DAILY NEWSPAPERS AND MARKETS
 
The Company, TNI and MNI publish the following daily newspapers and maintain the following primary digital sites:
 
 
 
Circulation (1)
 
 
Newspaper
Primary Website
Location
  Daily (2) 

 
Sunday

 
 
 
 
 
 
 
 
St. Louis Post-Dispatch
stltoday.com
St. Louis, MO
178,801

 
299,227

 
The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
86,841

 
91,627

 
Arizona Daily Star  (3)
azstarnet.com
Tucson, AZ
82,305

 
133,558

 
Capital Newspapers (4)



 

 
Wisconsin State Journal
madison.com
Madison, WI
81,228

 
112,677

 
Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
8,113

 

 
Portage Daily Register
wiscnews.com/pdr
Portage, WI
4,102

 

 
Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
3,576

 

 
Lincoln Group



 

 
Lincoln Journal Star
journalstar.com
Lincoln, NE
50,171

 
62,909

 
Columbus Telegram
columbustelegram.com
Columbus, NE
7,321

 
8,318

 
Fremont Tribune
fremonttribune.com
Fremont, NE
6,647

 

 
Beatrice Daily Sun
beatricedailysun.com
Beatrice, NE
4,803

 

 
Quad-Cities Group



 

 
Quad-City Times
qctimes.com
Davenport, IA
41,705

 
53,528

 
Muscatine Journal
muscatinejournal.com
Muscatine, IA
5,430

 

 
Billings Gazette
billingsgazette.com
Billings, MT
38,901

 
44,702

 
Central Illinois Newspaper Group
 
 

 

 
The Pantagraph
pantagraph.com
Bloomington, IL
33,757

 
38,795

 
Herald & Review
herald-review.com
Decatur, IL
27,510

 
42,060

 
Journal Gazette & Times-Courier
jg-tc.com
Mattoon/Charleston, IL
12,268

 

 
The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
32,247

 
42,767

 
Sioux City Journal
siouxcityjournal.com
Sioux City, IA
30,997

 
34,445

 
The Post-Star
poststar.com
Glens Falls, NY
25,651

 
29,785

 
Missoula Group
 
 

 

 
Missoulian
missoulian.com
Missoula, MT
25,331

 
30,662

 
Ravalli Republic
ravallinews.com
Hamilton, MT
2,700

(5) 
3,977

(5) 
The Southern Illinoisan
thesouthern.com
Carbondale, IL
24,920

 
31,302

 
The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
24,769

 
27,973

 
River Valley Newspaper Group
 
 


 


 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
24,601

 
34,339

 
Winona Daily News
winonadailynews.com
Winona, MN
8,798

 
10,065

 
The Chippewa Herald
chippewa.com
Chippewa Falls, WI
5,073

 
5,084

 
The Journal Times
journaltimes.com
Racine, WI
24,275

 
26,662

 
The Daily Herald
heraldextra.com
Provo, UT
23,886

 
37,257

 
Casper Star-Tribune
trib.com
Casper, WY
23,513

 
22,751

 
Rapid City Journal
rapidcityjournal.com
Rapid City, SD
23,202

 
27,743

 

9


 
Circulation (1)
 
 
Newspaper
Primary Website
Location
  Daily (2)

 
Sunday

 
 
 
 
 
 
 
 
Northwest Group
 
 
 
 
 
 
The Daily News
tdn.com
Longview, WA
21,255

 
18,931

 
Albany Democrat-Herald
democratherald.com
Albany, OR
13,799

 
14,619

 
Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
9,815

 
9,844

 
Magic Valley Group


 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
17,915

 
20,404

 
Elko Daily Free Press
elkodaily.com
Elko, NV
5,374

(5) 

 
Globe Gazette
globegazette.com
Mason City, IA
13,374

 
17,590

 
Central Coast Newspapers



 

 
Santa Maria Times
santamariatimes.com
Santa Maria, CA
12,969

 
17,943

 
The Lompoc Record
lompocrecord.com
Lompoc, CA
3,424

 
3,319

 
Napa Valley Register
napavalleyregister.com
Napa, CA
12,547

 
12,530

 
Helena/Butte Group
 
 


 


 
Independent Record
helenair.com
Helena, MT
12,399

 
12,818

 
The Montana Standard
mtstandard.com
Butte, MT
11,695

 
11,770

 
The Sentinel
cumberlink.com
Carlisle, PA
12,395

 
13,598

 
The Times and Democrat
thetandd.com
Orangeburg, SC
11,494

 
11,711

 
The Garden Island
kauaiworld.com
Lihue, HI
11,257

 
8,413

 
Arizona Daily Sun
azdailysun.com
Flagstaff, AZ
9,246

 
9,651

 
The World
theworldlink.com
Coos Bay, OR
8,891

 

 
The Sentinel
hanfordsentinel.com
Hanford, CA
8,311

 

 
The Citizen
auburnpub.com
Auburn, NY
7,702

 
9,589

 
The Ledger Independent
maysville-online.com
Maysville, KY
6,315

 

 
Daily Journal
dailyjournalonline.com
Park Hills, MO
5,636

 

 
 
 
 
1,189,255

 
1,444,943

 
(1)
Source: AAM: Six months ended September 2012, unless otherwise noted.
(2)
Not all newspapers are published Monday through Saturday
(3)
Owned by Star Publishing but published through TNI.
(4)
Owned by MNI.
(5)
Source: Company statistics.
 
NEWSPRINT
 
The basic raw material of newspapers, and classified and specialty publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. In 2012 and 2011, newsprint prices were stable after rising throughout 2010. Price fluctuations can have a significant effect on our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
 

10


EXECUTIVE TEAM
 
The following table lists our executive team members as of November 30, 2012:
Name
Age
Service
With The
Company
Named
To Current
Position
Current Position
 
 
 
 
 
Mary E. Junck
65
June 1999
January 2002
Chairman, President and Chief Executive Officer
 
 
 
 
 
Joyce L. Dehli
54
August 1987
February 2006
Vice President - News
 
 
 
 
 
Suzanna M. Frank
42
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Michael R. Gulledge
52
October 1982
September 2012
Vice President - Sales and Marketing
 
 
 
 
 
Daniel K. Hayes
67
September 1969
September 2005
Vice President - Corporate Communications
 
 
 
 
 
Michele Fennelly White
50
June 1994
June 2011
Vice President - Information Technology and Chief Information Officer
 
 
 
 
 
Vytenis P. Kuraitis
64
August 1994
January 1997
Vice President - Human Resources
 
 
 
 
 
William T. Masterson Jr.
52
September 2000
September 2012
Vice President - Publishing
 
 
 
 
 
Kevin D. Mowbray
50
September 1986
November 2004
Vice President - Publishing
 
 
 
 
 
Gregory P. Schermer
58
February 1989
October 2012
Vice President - Strategy
 
 
 
 
 
Carl G. Schmidt
56
May 2001
May 2001
Vice President, Chief Financial Officer and Treasurer
 
 
 
 
 
Greg R. Veon
60
April 1976
November 1999
Vice President - Publishing
Mary E. Junck was elected Chairman, President and Chief Executive Officer in 2002. She was elected to the Board of Directors of the Company in 1999.
 
Joyce L. Dehli was appointed Vice President - News in 2006.
 
Suzanna M. Frank was appointed Vice President - Audience in March 2008. From 2003 to March 2008 she served as Director of Research and Marketing.
 
Michael R. Gulledge was elected Vice President - Sales and Marketing in September 2012 and named Publisher of the Billings Gazette in 2000. From 2005 to September 2012 he served as a Vice President - Publishing.
 
Daniel K. Hayes was appointed Vice President - Corporate Communications in 2005.
 
Michele Fennelly White was appointed Vice President - Information Technology and Chief Information Officer in June 2011. From 1999 to June 2011, she served as Director of Technical Support.
 
Vytenis P. Kuraitis was elected Vice President - Human Resources in 1997.
 
William T. Masterson Jr. was elected a Vice President - Publishing in September 2012 and was named Publisher of The Times in Northwest Indiana in 2006. From June 2011 to September 2012, he served as a Group Publisher.
 
Kevin D. Mowbray was elected a Vice President - Publishing in 2004 and named Publisher of the St. Louis Post-Dispatch in 2006.
 

11


Gregory P. Schermer was elected Vice-President - Interactive Media in 1997, and assumed new responsibilities as Vice President - Strategy in October 2012.  He was elected to the Board of Directors of the Company in 1999. 

Carl G. Schmidt was elected Vice President, Chief Financial Officer and Treasurer in 2001. Since 2007, he has also served as a Vice President - Publishing.
 
Greg R. Veon was elected a Vice President - Publishing in 1999 and named Publisher of the Quad-City Times in June 2011.
 
Elected officers are considered to be executive officers for United States Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 30, 2012, we had approximately 6,100 employees, including approximately 1,200 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2012 totaled approximately 5,200. We consider our relationships with our employees to be good.
Bargaining unit employees represent 450, or 68%, of the total employees of the St. Louis Post-Dispatch, which has seven contracts with bargaining unit employees with expiration dates through 2015.
Approximately 49 employees in five additional locations are represented by collective bargaining units. A contract at one of these locations has expired and negotiations are ongoing.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
 
We have a long, substantial history of sound corporate governance practices. The Board of Directors has a lead independent director, and has had one for many years. Currently, nine of eleven 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 our independent registered public accounting firm and its affiliates.
 
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"), 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 such filings are available free of charge. The content of any website referred to in this Annual Report is not incorporated by reference unless expressly noted.
 
ITEM 1A. RISK FACTORS
 
Risk exists that our past results may not be indicative of future results. A discussion of our risk factors follows. See also, “Forward-Looking Statements”, included herein. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations.
 
DEBT AND LIQUIDITY
 
We May Have Insufficient Earnings Or Liquidity To Meet Our Future Debt Obligations
 
We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 5 of the Notes to Consolidated Financial Statements, included herein. In February 2009, we completed a comprehensive restructuring of our then-existing credit agreement and a refinancing of our Pulitzer Notes debt, substantially enhancing our liquidity and operating flexibility. Since February 2009, we have satisfied all interest payments and substantially all principal payments due under our debt facilities with our cash flows.
 
Substantially all of our debt was scheduled to mature in April 2012. We used a voluntary, prepackaged petition under the U. S. Bankruptcy Code to accomplish a comprehensive refinancing that extends the maturity to December 2015 for most of our debt, with the remainder maturing in April 2017. Interest expense has increased as a result of the refinancing and mandatory principal payments were reduced. Our ability to make payments on our indebtedness will

12


depend on our ability to generate future cash flows. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

At December 14, 2012, the principal amount of our outstanding debt totals $919,100,000. This amount is already less than the $938,700,000 amount projected in the Plan in September 2013. Lower cash balances and asset sales have contributed to the improvement in debt repayment compared to the Plan.

There are numerous potential consequences under the 1st Lien Agreement, 2nd Lien Agreement, and the Note and Guaranty Agreements related to the Pulitzer Notes, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the 1st Lien Lenders, 2nd Lien Lenders and/or the Noteholders, to exercise their remedies under the 1st Lien Agreement, 2nd Lien Agreement, and the Note and Guaranty Agreements, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
 
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at September 30, 2012.
 
ECONOMIC CONDITIONS
 
General Economic Conditions May Continue To Impact Our Revenue And Operating Results
 
According to the National Bureau of Economic Research, the United States economy was in a recession from December 2007 until June 2009. It is widely believed that certain elements of the economy, such as housing, auto sales and employment, were in decline before December 2007, and have still not recovered to pre-recession levels. Revenue, operating results and cash flows were significantly impacted by the recession and its aftermath. The duration and depth of an economic recession, and pace of economic recovery, in markets in which we operate may influence our future results.

OPERATING REVENUE
 
Our Revenue May Not Return To Historical Levels
 
A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic activity, both locally and nationally.

Operating revenue in most categories has decreased since 2007 and may decrease in the future. Such decreases may not be offset by growth in advertising in other categories, such as digital revenue which, until 2008, had been rising significantly and began to rise again in 2010. Historically, newspaper publishing has been viewed as a cost-effective method of delivering various forms of advertising. There can be no guarantee that this historical perception will guide future decisions on the part of advertisers. Web sites and applications for mobile devices distributing news and other content continue to gain popularity. As a result, audience attention and advertising spending are shifting and may continue to shift from traditional media to digital media. We expect that advertisers will allocate greater portions of their future budgets to digital media, which can offer more measurable returns than traditional print media through pay for performance and keyword-targeted advertising. If our efforts to adapt to evolving technological developments in the media industry are unsuccessful, or if we fail to correctly anticipate shifts in audience demand and digital media trends, we may be unable to provide the services, media and content that audiences and potential audiences in our markets prefer and we may be unable to provide the returns that our advertisers seek. To the extent that advertisers shift advertising expenditures to other media outlets, including those on the Internet, the profitability of our business may continue to be impacted.
 
The rates we charge for advertising are, in part, related to the size of the audience of our publications and digital products. There is significant competition for readers and viewers from other media. Our business may be adversely affected to the extent individuals decide to obtain news, entertainment, classified listings and local shopping information from Internet-based or other media, to the exclusion of our outlets for such information.
 

13


Retail Advertising

Many advertisers, including major retail store chains, automobile manufacturers and dealers, banks and telecommunications companies, have experienced significant merger and acquisition activity over the last several years, and some have gone out of business, effectively reducing the number of brand names under which the merged entities operate. Our retail revenue is also being impacted by the pace of the current economic recovery. For example, a decline in the housing market negatively impacts retail advertising related to home improvement, furniture and home electronics.
 
Classified Advertising
 
Classified advertising is the category that has been most significantly impacted by changing advertising trends and the current economic environment. All categories of classified advertising have generally declined since 2007. Neither the unemployment rate, nor auto sales or the housing industry have, as yet, recovered to pre-recession levels.
 
See Item 1, “Advertising”, included herein, for additional information on the risks associated with advertising revenue.
 
Circulation
 
Although our overall audience is stable and our circulation unit results have historically benchmarked favorably to national averages, as compiled by the AAM, circulation unit sales have nonetheless been declining for several years. The possibility exists that future circulation price increases may be difficult to accomplish as a result of future declines in circulation unit sales, and that price decreases may be necessary to retain or grow circulation unit volume. We are maintaining our share of audience through rapid digital audience growth and strong newspaper readership.
 
In addition, as audience attention increasingly focuses on digital media, circulation of our newspapers may be adversely affected, which may decrease circulation revenue and exacerbate declines in print advertising. If we are not successful in growing our digital businesses to offset declines in revenues from our print products, our business, financial condition and prospects will be adversely affected. 
 
See Item 1, “Audiences”, included herein, for additional information on the risks associated with circulation revenue.
 
OPERATING EXPENSES
 
We May Not Be Able To Reduce Future Expenses To Offset Potential Revenue Declines
 
We reduced cash costs of our continuing operations (i.e., compensation, newsprint and ink, other operating expenses and workforce adjustments) by $256 million, or 32%, since 2007. Such expense reductions are not expected to significantly impact our ability to deliver advertising and content to our customers.
 
As a result of the significant reductions of our cost structure we have achieved since 2007, future cost reductions will be more difficult to accomplish. Cash costs are expected to decrease 3.0-4.0% in 2013 from their 2012 level.
 
Newsprint comprises a significant amount of our operating costs. See Item 1, “Newsprint” and Item 7A, “Commodities” included herein, for additional information on the risks associated with changes in newsprint costs.

In addition, technological developments and any changes we make to our business may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. As a result, our digital business could suffer.

We May Incur Additional Non-Cash Impairment Charges

We have significant amounts of goodwill and identified intangible assets. In 2011, 2009 and 2008, we recorded substantial impairment charges to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance. See Item 7, “Critical Accounting Policies”, included herein, for additional information on the risks associated with such assets.

14


Sustained Increases In Funding Requirements Of Our Pension And Postretirement
Obligations May Reduce The Cash Available For Our Business

Our pension and postretirement plans invest in a variety of equity and debt securities, many of which were affected by the disruption in the credit and capital markets in 2008 and thereafter. Future volatility and disruption in the stock and bond markets could cause further declines in the asset values of our pension plans. In addition, a decrease in the discount rate used to determine the liability for pension obligations could result in increased future contributions. If either occurs, we may need to make additional cash contributions above what is currently estimated, which could reduce the cash available for our business. Moreover, under the Pension Protection Act of 2006, continued losses of asset values may necessitate accelerated funding of pension plans in the future to meet minimum federal statutory requirements. Legislation passed in 2012 temporarily reduced funding requirements for our pension plans, but those payments will eventually need to be restored unless discount rates and/or plan assets increase.
 
EQUITY CAPITAL
 
A Decrease In Our Stock Price May Limit The Ability To Trade Our Stock
Or For The Company To Raise Equity Capital

As of July 1, 2011, our Common Stock traded at an average 30-day closing market price of less than $1 per share. Under the NYSE listing standards, if our Common Stock fails to maintain an adequate per share price and total market capitalization of less than $50,000,000, our Common Stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE first notified us that our Common Stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our Common Stock is allowed to continue to be listed during a cure period. In February 2012, the NYSE notified the Company that it was again in compliance with the minimum closing price standard. At September 30, 2012, our average market capitalization also exceeds the $50,000,000 minimum required by the NYSE. However, the NYSE has not yet notified us that the Company has returned to compliance with the market capitalization standard. Continued listing is subject to ongoing reassessment by the NYSE. We are currently operating under an NYSE-approved plan and expect any issues to be successfully addressed within the time frames required under the NYSE rules.

OTHER

Cybersecurity Risks Could Harm Our Ability To Operate Effectively

In 2012, 12.8% of our advertising revenue was obtained from advertising in our digital products and one of our businesses provides digital infrastructure and digital publishing services for other companies. We use computers in substantially all aspects of our business operations. Such uses give rise to cybersecurity risks, including the misappropriation of personally identifiable information that we store and manage. We have preventive systems and processes in place to protect against the risk of cyber incidents. Prolonged system outages or a cyber incident that would be undetected for an extended period could reduce our digital revenue, increase our operating costs, disrupt our operations, harm our reputation, lead to legal exposure to customers or subject us to liability under laws that protect personal data.

We maintain insurance coverage against certain of such risks.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The initial lease term expires in 2019.
 
All of our principal printing facilities are owned, 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. All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped. With the exception of St. Louis, none of our facilities is individually significant to our business.

15


Information related to St. Louis facilities at September 30, 2012 is as follows:
(Square Feet)
Owned

Leased

 
 
 
PD LLC
749,000

15,000

Suburban Journals
41,000

16,000

   
Several of our daily newspapers, as well as many of our nearly 300 other publications, are printed at other Company facilities, or such printing is outsourced, to enhance operating efficiency. We are continuing to evaluate additional insourcing and outsourcing opportunities in order to more effectively manage our operating and capital costs.
 
Our 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
 
In 2008, a group of newspaper carriers filed suit against us in the United States District Court for the Southern District of California, claiming to be our employees and not independent contractors. The plaintiffs seek relief related to alleged violations of various employment-based statutes, and request punitive damages and attorneys' fees. In July 2010, the trial court granted the plaintiffs' petition for class certification. We filed an interlocutory appeal which was denied. After concluding discovery, we filed a motion to reverse the class certification ruling. This motion is currently pending before the trial court. The Company denies the allegations of employee status, consistent with our past practices and industry standards, and will continue to vigorously contest the action, which is not covered by insurance. At this time we are unable to predict whether the ultimate economic outcome, if any, could have a material effect on our Consolidated Financial Statements, taken as a whole.

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


16


PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock is listed on the NYSE. In March 2011, in accordance with the sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. The table below includes the high and low prices of Common Stock for each calendar quarter during the past three years and the closing price at the end of each quarter.
 
Quarter Ended
 
(Dollars)
December

 
March

 
June

 
September

 
 
 
 
 
 
 
 
2012
 
 
 
 
 
 
 
High
0.91

 
1.73

 
1.99

 
1.67

Low
0.49

 
0.69

 
1.07

 
1.15

Closing
0.70

 
1.28

 
1.62

 
1.48

 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
High
2.94

 
3.41

 
3.47

 
1.15

Low
1.72

 
2.24

 
0.79

 
0.58

Closing
2.46

 
2.70

 
0.89

 
0.78

 
 
 
 
 
 
 
 
2010
 
 
 
 
 
 
 
High
4.50

 
4.77

 
4.52

 
3.15

Low
2.15

 
2.96

 
2.49

 
1.93

Closing
3.47

 
3.39

 
2.57

 
2.68

 
As of July 1, 2011, our Common Stock traded at an average 30-day closing market price of less than $1 per share. Under the NYSE listing standards, if our Common Stock fails to maintain an adequate per share price and total market capitalization of less than $50,000,000, our Common Stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE first notified us that our Common Stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our Common Stock is allowed to continue to be listed during a cure period. In February 2012, the NYSE notified the Company that it was again in compliance with the minimum closing price standard. At September 30, 2012, our average market capitalization also exceeds the $50,000,000 minimum required by the NYSE. However, the NYSE has not yet notified us that the Company has returned to compliance with the market capitalization standard. Continued listing is subject to ongoing reassessment by the NYSE. We are currently operating under an NYSE-approved plan and expect any issues to be successfully addressed within the time frames required under the NYSE rules.

At September 30, 2012, we had 7,309 holders of record of our Common Stock.
 
Our debt agreements require us to suspend stockholder dividends and share repurchases through December 2015. See Note 5 of the Notes to Consolidated Financial Statements, included herein.


17


Performance Presentation
 
The following graph compares the quarterly percentage change in the cumulative total return of the Company, the Standard & Poor's ("S&P") 500 Stock Index, and two peer group indices, in each case for the five years ended September 30, 2012 (with September 30, 2007 as the measurement point). Total 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.

Copyright©: 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
The value of $100 invested on September 30, 2007 in stock of the Company, the New Peer Group Index, the Old Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
 
September 30
 
(Dollars)
2007

 
2008

 
2009

 
2010

 
2011

 
2012

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
25.06

 
19.69

 
19.19

 
5.59

 
10.60

New Peer Group Index
100.00

 
58.37

 
45.64

 
43.67

 
34.18

 
53.21

Old Peer Group Index
100.00

 
58.13

 
45.35

 
43.49

 
33.43

 
52.31

S&P 500 Stock Index
100.00

 
78.02

 
72.63

 
80.01

 
80.93

 
105.37

 
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 New Peer Group Index is comprised of seven U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The New Peer Group Index includes A.H. Belo Corp., Gannett, Journal Communications, Inc., The McClatchy Company, The New York Times Company, The E.W. Scripps Company and The Washington Post Company. Media General, Inc., which is included in the Old Peer Group Index, has been excluded from the New Peer Group Index due to the sale of its publishing business in 2012.


18


ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2012

 
2011

 
2010

 
2009

 
2008

 
 

 
 

 
 

 
 

 
 

OPERATING RESULTS (1) (2)
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Operating revenue
710,486

 
727,319

 
748,444

 
805,908

 
982,361

Operating expenses, excluding depreciation, amortization, and impairment of goodwill and other assets
547,592

 
564,296

 
579,382

 
641,439

 
775,901

Depreciation and amortization
65,917

 
70,306

 
71,924

 
78,207

 
88,123

Impairment of goodwill and other assets (3)
1,388

 
204,439

 
899

 
244,733

 
999,846

Curtailment gains

 
16,137

 
45,012

 

 

Equity in earnings of associated companies
7,231

 
6,151

 
7,746

 
5,120

 
10,212

Reduction in investment in TNI (3)

 
11,900

 

 
19,951

 
104,478

Operating income (loss)
102,820

 
(101,334
)
 
148,997

 
(173,302
)
 
(975,775
)
Financial income
236

 
296

 
411

 
1,886

 
5,857

Financial expense
(85,901
)
 
(65,308
)
 
(71,631
)
 
(92,892
)
 
(71,472
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(13,772
)
 
(145,435
)
 
47,297

 
(180,009
)
 
(825,747
)
Discontinued operations, net of income taxes
(2,527
)
 
(1,246
)
 
(1,119
)
 
(58
)
 
(45,196
)
Net income (loss)
(16,299
)
 
(146,681
)
 
46,178

 
(180,067
)
 
(870,943
)
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
(16,698
)
 
(146,868
)
 
46,105

 
(123,191
)
 
(880,316
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
(14,171
)
 
(145,622
)
 
47,224

 
(123,133
)
 
(835,120
)
 
 
 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations
(0.29
)
 
(3.25
)
 
1.06

 
(2.77
)
 
(18.64
)
Discontinued operations
(0.05
)
 
(0.03
)
 
(0.03
)
 

 
(1.01
)
 
(0.34
)
 
(3.27
)
 
1.03

 
(2.77
)
 
(19.64
)
 
Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
(0.29
)
 
(3.25
)
 
1.05

 
(2.77
)
 
(18.64
)
Discontinued operations
(0.05
)
 
(0.03
)
 
(0.02
)
 

 
(1.01
)
 
(0.34
)
 
(3.27
)
 
1.03

 
(2.77
)
 
(19.64
)
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
49,261

 
44,847

 
44,555

 
44,442

 
44,813

Diluted
49,261

 
44,847

 
44,955

 
44,442

 
44,813

 
Dividends per common share

 

 

 

 
0.76

 
 
 
 
 
 
 
 
 
BALANCE SHEET INFORMATION (End of Year)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
1,061,136

 
1,158,248

 
1,440,116

 
1,515,612

 
2,016,367

Debt, including current maturities (4)
945,850

 
994,550

 
1,081,590

 
1,168,335

 
1,332,375

Debt, net of cash, restricted cash and investments (4)
931,930

 
966,023

 
1,052,545

 
1,151,106

 
1,182,856

Stockholders' equity (deficit)
(114,633
)
 
(101,346
)
 
56,823

 
23,598

 
155,518


19


(1
)
Results of discontinued operations have been restated for all periods presented.
(2
)
2012 includes 53 weeks of business operations. All other years include 52 weeks.
(3
)
The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows:
(Thousands of Dollars)
2012

 
2011

 
2010

 
2009

 
2008

 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
Goodwill

 
186,281

 

 
193,471

 
886,755

Nonamortized intangible assets

 
13,259

 

 
12,835

 
10,444

Amortizable intangible assets

 
4,199

 

 
33,848

 
97,628

Property and equipment
1,388

 
700

 
899

 
4,579

 
5,019

 
1,388

 
204,439

 
899

 
244,733

 
999,846

Reduction in investment in TNI

 
11,900

 

 
19,951

 
104,478

 
1,388

 
216,339

 
899

 
264,684

 
1,104,324

 
 
 
 
 
 
 
 
 
 
Discontinued operations
3,606

 
700

 
2,391

 
1,220

 
70,963

(4
)
Principal amount of debt, excluding fair value adjustments. See Note 5 of the Notes to Consolidated Financial Statements, included herein.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion includes comments and analysis relating to our results of operations and financial condition as of, and for each of the three years ended, September 30, 2012. 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, we believe the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate our financial performance, or assist in forecasting and analyzing future periods. We also believe such non-GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business or its ability to meet debt service requirements.
 
Operating Cash Flow and Operating Cash Flow Margin
 
Operating cash flow is defined as operating income (loss) before depreciation, amortization, impairment of goodwill and other assets, curtailment gains and equity in earnings of associated companies. Operating cash flow margin is defined as operating cash flow divided by operating revenue. Both represent non-GAAP financial measures that are used in the analysis below. We believe these measures provide meaningful supplemental information because of their focus on results from operations excluding such non-cash factors.
 

20


Reconciliations of operating cash flow and operating cash flow margin to operating income (loss) and operating income (loss) margin, the most directly comparable measures under GAAP, are included in the table below:
(Thousands of Dollars)
2012

Percent of
Revenue

 
2011

Percent of
Revenue

 
2010

Percent of
Revenue

 
 
 
 
 
 
 
 
 
Operating cash flow
162,894

22.9

 
163,023

22.4

 
169,062

22.6

Depreciation and amortization
(65,917
)
(9.3
)
 
(70,306
)
(9.7
)
 
(71,924
)
(9.6
)
Impairment of goodwill and other assets
(1,388
)
(0.2
)
 
(204,439
)
(28.1
)
 
(899
)
(0.1
)
Curtailment gains


 
16,137

2.2

 
45,012

6.0

Equity in earnings of associated companies
7,231

1.0

 
6,151

0.8

 
7,746

1.0

Reduction in investment in TNI


 
(11,900
)
(1.6
)
 


Operating income (loss)
102,820

14.5

 
(101,334
)
NM

 
148,997

19.9

 
Adjusted Net Income and Adjusted Earnings Per Common Share
 
Adjusted net income and adjusted earnings per common share, which are defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature, are non-GAAP financial measures that are used in the analysis below. We believe these measures provide meaningful supplemental information by identifying matters that are not indicative of core business operating results or are of a substantially non-recurring nature.

Reconciliations of adjusted net income and adjusted earnings per common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 7, included herein, under the caption “Overall Results”.
 
SAME PROPERTY COMPARISONS

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

CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of our accounting policies.
 
Goodwill and Other Intangible Assets
 
In assessing the recoverability of goodwill and other nonamortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business such as cash flow projections, stock price and other industry or market considerations. This assessment is normally made in the last fiscal quarter of each year.

We analyze goodwill and other nonamortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating

21


or cash flow losses related to such assets.

Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach, which estimates fair value based upon future revenue, expenses and cash flows discounted to their present value, and a market approach, which estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the publishing industry. A non-cash impairment charge will generally be recognized when the carrying amount of the net assets of the business exceeds its estimated fair value.

Should we determine that a nonamortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.
 
The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
Due primarily to the difference between our stock price and the per share carrying value of our net assets, we analyzed the carrying value of our net assets in 2011. Continued deterioration in our revenue and the weak economic environment were also factors in the timing of the analyses. We concluded the fair value of our business did not exceed the carrying value of our net assets in 2011.
 
As a result, we recorded pretax, non-cash charges to reduce the carrying value of goodwill, nonamortized and amortizable intangible assets in 2011. Additional pretax, non-cash charges were recorded to reduce the carrying value of TNI. We also recorded pretax, non-cash charges to reduce the carrying value of property and equipment in 2010, 2011 and 2012. We recorded deferred income tax benefits related to these charges.
 
A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2012

 
2011

 
2010

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Goodwill

 
186,281

 

Nonamortized intangible assets

 
13,259

 

Amortizable intangible assets

 
4,199

 

Property and equipment
1,388

 
700

 
899

 
1,388

 
204,439

 
899

Reduction in investment in TNI

 
11,900

 

 
1,388

 
216,339

 
899

 
 
 
 
 
 
Discontinued operations
3,606

 
700

 
2,391


We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset or asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those assets.
 
We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.
 
Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.

22


 Pension, Postretirement and Postemployment Benefit Plans
 
We evaluate our 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 we 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.
 
Increases in market interest rates, which may impact plan assumptions, generally result in lower service costs for current employees, higher interest expense and lower liabilities. Actual returns on plan assets that are lower than the plan assumptions will generally result in decreases in a plan's funded status and may necessitate additional contributions.
 
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 our opinion, it is more likely than not 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. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
 
We file income tax returns with the Internal Revenue Service (“IRS”) and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
 
 Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital product. Circulation revenue is recorded over the print or digital product subscription term or as such newspapers are individually sold. 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 print or digital products or advance payments for advertising.
 
Uninsured Risks
 
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits exposure to large claims. We accrue our 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.
 
Our accrued 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.
 
An increasing frequency of large claims, deterioration in overall claim experience or changes in federal or state laws affecting our liability for such claims could increase the volatility of expenses for such self-insured risks.

23


CONTINUING OPERATIONS

2012 vs. 2011
 
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2012

 
2011

 
Percent Change

 
 
 
 
 
 
Advertising revenue:
 
 
 
 
 
Retail
306,085

 
315,072

 
(2.9
)
Classified:
 
 
 
 
 
Employment
37,079

 
37,286

 
(0.6
)
Automotive
39,062

 
40,169

 
(2.8
)
Real estate
20,942

 
23,794

 
(12.0
)
All other
52,301

 
56,974

 
(8.2
)
Total classified
149,384

 
158,223

 
(5.6
)
National
29,173

 
31,639

 
(7.8
)
Niche publications
11,230

 
12,414

 
(9.5
)
Total advertising revenue
495,872

 
517,348

 
(4.2
)
Circulation
174,747

 
172,245

 
1.5

Commercial printing
12,768

 
11,303

 
13.0

Other
27,099

 
26,423

 
2.6

Total operating revenue
710,486

 
727,319

 
(2.3
)
Compensation
276,379

 
283,527

 
(2.5
)
Newsprint and ink
52,003

 
56,191

 
(7.5
)
Other operating expenses
214,570

 
220,656

 
(2.8
)
Workforce adjustments
4,640

 
3,922

 
18.3

 
547,592

 
564,296

 
(3.0
)
Operating cash flow
162,894

 
163,023

 
(0.1
)
Depreciation
23,620

 
25,833

 
(8.6
)
Amortization
42,297

 
44,473

 
(4.9
)
Impairment of goodwill and other assets
1,388

 
204,439

 
(99.3
)
Curtailment gains

 
16,137

 
NM

Equity in earnings of associated companies
7,231

 
6,151

 
17.6

Reduction of investment in TNI Partners

 
11,900

 
NM

Operating income (loss)
102,820

 
(101,334
)
 
NM

Non-operating expense, net
(88,198
)
 
(64,417
)
 
36.9

Income (loss) from continuing operations before reorganization costs and income taxes
14,622

 
(165,751
)
 
NM

Reorganization costs
37,765

 

 
NM

Loss from continuing operations before income taxes
(23,143
)
 
(165,751
)
 
(86.0
)
Income tax benefit
(9,371
)
 
(20,316
)
 
(53.9
)
Net loss from continuing operations
(13,772
)
 
(145,435
)
 
(90.5
)
Discontinued operations, net of income taxes
(2,527
)
 
(1,246
)
 
NM

Net loss
(16,299
)
 
(146,681
)
 
(88.9
)
Net income attributable to non-controlling interests
(399
)
 
(187
)
 
NM

Loss attributable to Lee Enterprises, Incorporated
(16,698
)
 
(146,868
)
 
(88.6
)
Other comprehensive loss, net
(7,348
)
 
(12,737
)
 
NM

Comprehensive loss
(24,046
)
 
(159,605
)
 
(84.9
)
 
 
 
 
 
 
Loss from continuing operations attributable to Lee Enterprises, Incorporated
(14,171
)
 
(145,622
)
 
(90.3
)
 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
Basic
(0.34
)
 
(3.27
)
 
(89.6
)
Diluted
(0.34
)
 
(3.27
)
 
(89.6
)

24


Due to our fiscal calendar, 2012 includes 53 weeks of business operations. 2011 includes 52 weeks. The analysis below includes only continuing operations, unless otherwise noted.

2012 total operating revenue decreased 2.3% compared to the prior year. Excluding the additional week of operations in 2012, total revenue decreased approximately 4.0%. We expect year over year revenue comparisons to improve as economic conditions in our markets also improve.

Advertising Revenue

In 2012, combined print and digital advertising revenue decreased $21,476,000, or 4.2%, compared to 2011. Retail advertising decreased 2.9%. Retail preprint insertion revenue decreased 2.5%. Digital retail advertising increased 15.9%, partially offsetting print declines.

On a combined basis, print and digital classified revenue decreased 5.6% in 2012. Employment revenue decreased 0.6% while automotive advertising decreased 2.8%, real estate decreased 12.0% and other classified decreased 8.2%. Digital classified revenue increased 3.8%, partially offsetting print declines.

National advertising decreased $2,466,000, or 7.8%. Digital national advertising decreased 8.9%. Advertising in niche publications decreased 9.5%.

On a stand-alone basis, digital advertising revenue increased 9.7% in 2012, representing 12.8% of total advertising revenue. Year-over-year total digital advertising has been rising steadily since December 2009. Print advertising revenue on a stand-alone basis decreased 5.9% in 2012.

Our total advertising results since 2000 have benchmarked favorably to industry averages reported by the NAA in 43 of the last 47 quarters.

Circulation and Other Revenue

Circulation revenue increased $2,502,000, or 1.5%, in 2012, resulting primarily from price increases, which were partially offset by unit declines.

Our average daily newspaper circulation units, including TNI and MNI, as measured by the AAM, decreased 5.8% and Sunday circulation decreased 7.3% in 2012 compared to 2011.

Our digital sites, including TNI and MNI, attracted 22.8 million unique visitors in the month of September 2012, an increase of 10.1% from a year ago, with 192.6 million page views. The number of mobile page views grew 146.0% to 53.6 million in September 2012. Research in our larger markets indicates we are maintaining our share of audience through the combination of rapid digital audience growth and strong newspaper readership.
 
Commercial printing revenue increased $1,465,000, or 13.0%, in 2012. Other revenue increased $676,000, or 2.6%, in 2012.

Operating Expenses

Costs other than depreciation, amortization and unusual matters decreased $17,422,000, or 3.1%, in 2012. Excluding the additional week of operations in 2012, costs excluding depreciation, amortization and unusual matters decreased approximately 4.6%.

Compensation expense decreased $7,148,000, or 2.5%, in 2012, driven by a decline in average full time equivalent employees of 7.2%.

Newsprint and ink costs decreased $4,188,000, or 7.5%, in 2012 as a result of a reduction in newsprint volume of 6.3%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters, decreased $6,086,000, or 2.8%, in 2012.


25


Reductions in staffing resulted in workforce adjustment costs, primarily severance, totaling $4,640,000 and $3,922,000 in 2012 and 2011, respectively.

We are engaged in various efforts to contain future growth in our operating expenses. We expect 2013 operating expenses, excluding depreciation, amortization and unusual matters, to decrease 3.0-4.0% from their 2012 level.

Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow decreased 0.1%, to $162,894,000, in 2012 compared to $163,023,000 in 2011. Operating cash flow margin increased to 22.9% in 2012 from 22.4% in 2011, reflecting a larger percentage decrease in operating expenses than the decrease in operating revenue.

Depreciation expense decreased $2,213,000, or 8.6%, in 2012 and amortization expense decreased $2,176,000, or 4.9%, in 2012.

Due primarily to the difference between our stock price and the per share carrying value of our net assets, we analyzed the carrying value of our net assets in 2011. Continued deterioration in our revenue and the weak economic environment were also factors in the timing of the analysis. We concluded the fair value of our business did not exceed the carrying value of our net assets.

As a result, we recorded pretax, non-cash charges to reduce the carrying value of goodwill and nonamortized and amortizable intangible assets in 2011. Additional pretax, non-cash charges were recorded to reduce the carrying value of TNI. We also recorded pretax, non-cash charges to reduce the carrying value of property and equipment in 2012 and 2011. We recorded deferred income tax benefits related to these charges.
 
A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2012

2011

 
 
 
Continuing operations:
 
 
Goodwill

186,281

Nonamortized intangible assets

13,259

Amortizable intangible assets

4,199

Property and equipment
1,388

700

 
1,388

204,439

Reduction in investment in TNI

11,900

 
1,388

216,339

 
 
 
Discontinued operations
3,606

700


In May 2011, a new bargaining unit contract eliminated postretirement medical coverage for affected active employees and froze defined pension benefits. The elimination of postretirement medical coverage resulted in a non-cash curtailment gain of $3,974,000 which was recognized in the 13 weeks ended June 26, 2011, reduced 2011 net periodic postretirement medical expense by $82,000 beginning in the 13 weeks ended June 26, 2011 and reduced the benefit obligation liability at June 26, 2011 by $3,371,000. The freeze of defined pension benefits reduced 2011 net periodic pension expenses by $188,000 beginning in the 13 weeks ended June 26, 2011 and reduced the benefit obligation liability at June 26, 2011 by $592,000.

In March 2011, we notified certain participants in our postretirement medical plans of changes to be made to the plans, including increases in participant premium cost-sharing and elimination of coverage for certain participants. The changes resulted in a non-cash curtailment gain of $1,991,000 which was recognized in the 13 weeks ended March 27, 2011 and reduced the benefit obligation liability at March 27, 2011 by $3,030,000.

In November 2010, we notified certain participants in our postretirement medical plans of changes to be made to the plans, including increases in participant premium cost-sharing and elimination of coverage for certain participants. The changes resulted in a non-cash curtailment gain of $10,172,000 which was recognized in the 13 weeks ended December 26, 2010, reduced 2011 net periodic postretirement medical cost by $769,000 beginning in the 13 weeks ended December 26, 2010, and reduced the benefit obligation liability at December 26, 2010 by $15,065,000.

26


Increases in participant premium cost-sharing discussed more fully above were treated as negative plan amendments. Curtailment treatment was utilized in situations in which coverage was eliminated. Curtailment gains were calculated by revaluation of plan liabilities after consideration of other plan changes.

The Patient Protection and Affordable Care Act, along with its companion reconciliation legislation (together the “Affordable Care Act”), were enacted into law in 2010. The Affordable Care Act will be supported by a substantial number of underlying regulations, some of which have not been issued. Accordingly, a complete determination of the impact of the Affordable Care Act cannot be made at this time. However, we expect our future health care costs to increase more rapidly based on analysis published by the United States Department of Health and Human Services, input from independent advisors and our understanding of various provisions of the Affordable Care Act that differ from our current medical plans. We may be able to mitigate certain of these future cost increases through changes in plan design. We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability. 

Equity in earnings in associated companies increased $1,080,000 in 2012.

The factors noted above resulted in operating income of $102,820,000 in 2012 compared to an operating loss of $101,334,000 in 2011.

Nonoperating Income and Expense

Financial expense increased $20,593,000, or 31.5%, to $85,901,000 in 2012 due primarily to higher interest rates on our debt. Our weighted average cost of debt was 9.2% at September 30, 2012, compared to 5.1% at September 25, 2011. Financial expense in 2012 includes $4,085,000 of non-cash amortization of a present value adjustment of debt.

The increase in financial expense from the refinancing of our debt in January 2012 will cycle in January 2013. Absent a significant increase in LIBOR, we expect financial expense to begin to decline after January 2013 due to lower debt balances, which decreased $48,410,000 in 2012 and have decreased an additional $26,750,000 since September 30, 2012.

Several of the plan changes noted above were the subject of litigation, or arbitration claims, under the terms of the respective collective bargaining agreements. In 2012, we settled all such claims with payments to plan participants totaling $2,802,000. These payments are classified as other, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Overall Results

We recognized $37,765,000 of reorganization costs in 2012. We recognized income tax benefit of 40.5% of loss from continuing operations before income taxes in 2012 and income tax benefit of 12.3% of loss from continuing operations before income taxes in 2011. See Note 11 of the Notes to Consolidated Financial Statements, included herein, for a reconciliation of the expected federal income tax rate to the actual tax rates.


27


As a result of the factors noted above, loss attributable to Lee Enterprises, Incorporated (which includes discontinued operations) totaled $16,698,000 in 2012 compared to a loss of $146,868,000 in 2011. We recorded loss per diluted common share of $0.34 in 2012 and $3.27 in 2011. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.42 in 2012, compared to $0.71 in 2011. Per share amounts may not add due to rounding.
 
2012
 
 
2011
 
(Thousands of Dollars, Except Per Share Data)
Amount

 
Per Share

 
Amount

 
Per Share

 
 
 
 
 
 
 
 
Loss attributable to Lee Enterprises, Incorporated, as reported
(16,698
)
 
(0.34
)
 
(146,868
)
 
(3.27
)
Adjustments:
 
 
 
 
 
 
 
Curtailment gains

 
 
 
(16,137
)
 
 
Impairment of goodwill and other assets, including TNI Partners
1,388

 
 
 
216,339

 
 
Debt financing and reorganization costs
45,378

 
 
 
12,612

 
 
Litigation settlement
2,802

 
 
 

 
 
Unusual matters related to discontinued operations
4,145

 
 
 
1,011

 
 
Other, net
4,789

 
 
 
5,502

 
 
 
58,502

 
 
 
219,327

 
 
Income tax effect of adjustments, net, and other unusual tax matters
(20,940
)
 
 
 
(40,779
)
 
 
 
37,562

 
0.76

 
178,548

 
3.98

Income attributable to Lee Enterprises, Incorporated, as adjusted
20,864

 
0.42

 
31,680

 
0.71


DISCONTINUED OPERATIONS

In October 2012, we sold the North County Times in Escondido, CA for $11,950,000, before income taxes. The transaction resulted in a gain of approximately $2,000,000, after income taxes, which was recorded in October 2012. Operating results of the North County Times have been classified as discontinued operations for all periods presented.

Results of discontinued operations consist of the following:
(Thousands of Dollars)
2012

 
2011

 
 
 
 
Operating revenue
27,852

 
28,785

 
 
 
 
Loss from discontinued operations, before income taxes
(4,076
)
 
(2,011
)
Income tax benefit
(1,549
)
 
(765
)
Net loss
(2,527
)
 
(1,246
)



28


CONTINUING OPERATIONS
 
2011 vs. 2010
 
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2011

 
2010

 
Percent Change

 
 
 
 
 
 
Advertising revenue:
 
 
 
 
 
Retail
315,072

 
325,929

 
(3.3
)
Classified:
 
 
 
 
 
Employment
37,286

 
34,895

 
6.9

Automotive
40,169

 
40,443

 
(0.7
)
Real estate
23,794

 
30,159

 
(21.1
)
All other
56,974

 
59,303

 
(3.9
)
Total classified
158,223

 
164,800

 
(4.0
)
National
31,639

 
34,234

 
(7.6
)
Niche publications
12,414

 
12,260

 
1.3

Total advertising revenue
517,348

 
537,223

 
(3.7
)
Circulation
172,245

 
171,155

 
0.6

Commercial printing
11,303

 
11,485

 
(1.6
)
Other
26,423

 
28,581

 
(7.6
)
Total operating revenue
727,319

 
748,444

 
(2.8
)
Compensation
283,527

 
298,873

 
(5.1
)
Newsprint and ink
56,191

 
51,707

 
8.7

Other operating expenses
220,656

 
227,603

 
(3.1
)
Workforce adjustments
3,922

 
1,199

 
NM

 
564,296

 
579,382

 
(2.6
)
Operating cash flow
163,023

 
169,062

 
(3.6
)
Depreciation
25,833

 
26,716

 
(3.3
)
Amortization
44,473

 
45,208

 
(1.6
)
Impairment of goodwill and other assets
204,439

 
899

 
NM

Curtailment gains
16,137

 
45,012

 
(64.1
)
Equity in earnings of associated companies
6,151

 
7,746

 
(20.6
)
Reduction of investment in TNI Partners
11,900

 

 
NM

Operating income (loss)
(101,334
)
 
148,997

 
NM

Non-operating expense, net
(64,417
)
 
(72,392
)
 
(11.0
)
Income (loss) from continuing operations before income taxes
(165,751
)
 
76,605

 
NM

Income tax expense (benefit)
(20,316
)
 
29,308

 
NM

Net income (loss) from continuing operations
(145,435
)
 
47,297

 
NM

Discontinued operations, net of income taxes
(1,246
)
 
(1,119
)
 
11.3

Net income (loss)
(146,681
)
 
46,178

 
NM

Net income attributable to non-controlling interests
(187
)
 
(73
)
 
NM

Income (loss) attributable to Lee Enterprises, Incorporated
(146,868
)
 
46,105

 
NM

Other comprehensive loss, net
(12,737
)
 
(14,704
)
 
(13.4
)
Comprehensive income (loss)
(159,605
)
 
31,401

 
NM

 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
(145,622
)
 
47,224

 
NM

 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
Basic
(3.27
)
 
1.03

 
NM

Diluted
(3.27
)
 
1.03

 
NM





29


2011 total operating revenue decreased 2.8% compared to the prior year. The analysis below includes only continuing operations, unless otherwise noted.

Advertising Revenue

In 2011, combined print and digital advertising revenue decreased $19,875,000, or 3.7%, compared to 2010. Retail advertising decreased 3.3%. Retail preprint insertion revenue decreased 3.7%. Digital retail advertising increased 43.9%, partially offsetting print declines.

On a combined basis, print and digital classified revenue decreased 4.0% in 2011. Employment revenue increased 6.9% while automotive advertising decreased 0.7%, real estate decreased 21.1% and other classified decreased 3.9%. Digital classified revenue decreased 0.2%.

National advertising decreased $2,595,000, or 7.6%. Digital national advertising increased 162.6%. Advertising in niche publications increased 1.3%.

On a stand-alone basis, digital advertising revenue increased 27.5% in 2011, representing 11.2% of total advertising revenue. Year-over-year total digital advertising has been rising steadily since December 2009. Print advertising revenue on a stand-alone basis decreased 6.6% in 2011.

Circulation and Other Revenue

Circulation revenue increased $1,090,000, or 0.6%, in 2011.

Our average daily newspaper circulation units, including TNI and MNI, as measured by the AAM, were 1.3 million daily and 1.6 million Sunday for the six months ended September 2011. Comparable amounts for 2010 are not available due to extensive changes made by the AAM to the measurement of circulation units.

Our digital sites, including TNI and MNI, attracted 20.7 million unique visitors in the month of September 2011, an increase of 12.1% from a year ago, with 187.6 million page views. The number of mobile page views grew 228.7% to 21.8 million in September 2011. Research in our larger markets indicates we are maintaining our share of audience through the combination of rapid digital audience growth and strong newspaper readership.
 
Commercial printing revenue decreased $182,000, or 1.6%, in 2011. Other revenue decreased $2,158,000, or 7.6%, in 2011.

Operating Expenses

Costs other than depreciation, amortization and unusual matters decreased $17,809,000, or 3.1%, in 2011.

Compensation expense decreased $15,346,000, or 5.1%, in 2011, driven by a decline in average full time equivalent employees of 4.6%.

Newsprint and ink costs increased $4,484,000, or 8.7%, in 2011 as a result of higher average unit prices partially offset by a 4.5% reduction in newsprint volume. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters, decreased $6,947,000, or 3.1%, in 2011.

Reductions in staffing resulted in workforce adjustment costs totaling $3,922,000 and $1,199,000 in 2011 and 2010, respectively.

Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow decreased 3.6%, to $163,023,000, in 2011 compared to $169,062,000 in 2010. Operating cash flow margin decreased to 22.4% in 2011 from 22.6% in 2010, reflecting a larger percentage decrease in operating revenue than the decrease in operating expenses.


30


Depreciation expense decreased $883,000, or 3.3%, in 2011 and amortization expense decreased $735,000, or 1.6%, in 2011.

Due primarily to the difference between our stock price and the per share carrying value of our net assets, we analyzed the carrying value of our net assets in 2011. Continued deterioration in our revenue and the weak economic environment were also factors in the timing of the analysis. We concluded the fair value of our business did not exceed the carrying value of our net assets.

As a result, we recorded pretax, non-cash charges to reduce the carrying value of goodwill and nonamortized and amortizable intangible assets in 2011. Additional pretax, non-cash charges were recorded to reduce the carrying value of TNI. We also recorded pretax, non-cash charges to reduce the carrying value of property and equipment in 2011 and 2010. We recorded deferred income tax benefits related to these charges.
 
A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2011

2010

 
 
 
Continuing operations:
 
 
Goodwill
186,281


Nonamortized intangible assets
13,259


Amortizable intangible assets
4,199


Property and equipment
700

899

 
204,439

899

Reduction in investment in TNI
11,900


 
216,339

899