10-Q 1 lee10q2013q3.htm 10-Q Lee 10Q 2013 Q3
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
  
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
  
For The Quarterly Period Ended June 30, 2013
 
OR
  
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
   
(Exact name of Registrant as specified in its Charter)
 
 
Delaware
42-0823980
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
  
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X]     No [  ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” 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 Exchange Act).
Yes [  ]     No [X]
 
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [X]     No [  ]
                                                                                                              
As of July 31, 2013, 52,419,241 shares of Common Stock of the Registrant were outstanding.
 




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







References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated (the "Company"). References to "2013", "2012" 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 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 release. We do not undertake to publicly update or revise our forward-looking statements.



1


PART I
FINANCIAL INFORMATION
 
Item 1.       Financial Statements

LEE ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
June 30
2013

September 30
2012

 
 
 
ASSETS
 
 
 
 
 
Current assets:
 
 
Cash and cash equivalents
11,630

13,920

Accounts receivable, net
63,881

67,925

Income taxes receivable

7,887

Inventories
6,277

7,271

Deferred income taxes
789

789

Other
6,219

6,241

Assets of discontinued operations

18,305

Total current assets
88,796

122,338

Investments:
 
 
Associated companies
40,693

42,201

Other
10,405

10,033

Total investments
51,098

52,234

Property and equipment:
 
 
Land and improvements
24,558

24,519

Buildings and improvements
188,091

188,048

Equipment
296,623

298,300

Construction in process
4,541

2,369

 
513,813

513,236

Less accumulated depreciation
339,131

328,866

Property and equipment, net
174,682

184,370

Goodwill
243,729

243,729

Other intangible assets, net
418,382

447,017

Postretirement assets, net
8,516

7,551

Other
3,827

3,897

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
989,030

1,061,136


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











2









 
(Thousands of Dollars and Shares, Except Per Share Data)
June 30
2013

September 30
2012

 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
Current maturities of long-term debt
11,988

11,982

Accounts payable
18,499

22,434

Compensation and other accrued liabilities
35,647

38,509

Income taxes payable
689


Unearned revenue
33,848

34,850

Liabilities of discontinued operations

2,536

Total current liabilities
100,671

110,311

Long-term debt, net of current maturities
847,385

914,244

Pension obligations
61,122

68,636

Postretirement and postemployment benefit obligations
7,803

7,160

Deferred income taxes
61,968

60,140

Income taxes payable
6,240

6,062

Other
6,470

8,639

Total liabilities
1,091,659

1,175,192

Equity (deficit):
 
 
Stockholders' equity (deficit):
 
 
Serial convertible preferred stock, no par value; authorized 500 shares; none issued


Common Stock, $0.01 par value; authorized 120,000 shares; issued and outstanding:
524

523

June 30, 2013; 52,389 shares;
 
 
September 30, 2012; 52,291 shares
 
 
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued


Additional paid-in capital
242,303

241,039

Accumulated deficit
(332,388
)
(342,760
)
Accumulated other comprehensive loss
(13,715
)
(13,435
)
Total stockholders' deficit
(103,276
)
(114,633
)
Non-controlling interests
647

577

Total deficit
(102,629
)
(114,056
)
Total liabilities and deficit
989,030

1,061,136


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


3


LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
13 Weeks Ended
 
39 Weeks Ended
 
(Thousands of Dollars, Except Per Common Share Data)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
Operating revenue:
 
 
 
 
Advertising and marketing services
113,636

120,546

349,345

370,263

Subscription
43,583

42,098

133,609

128,909

Other
9,800

9,101

29,323

28,305

Total operating revenue
167,019

171,745

512,277

527,477

Operating expenses:
 
 
 
 
Compensation
62,340

67,975

192,505

205,738

Newsprint and ink
10,471

12,366

33,357

38,600

Other operating expenses
53,461

51,317

160,929

157,138

Depreciation
5,215

5,811

16,146

17,755

Amortization of intangible assets
9,542

10,438

28,635

31,982

Workforce adjustments
945

2,404

2,260

3,171

Total operating expenses
141,974

150,311

433,832

454,384

Equity in earnings of associated companies
1,893

1,762

6,671

6,003

Operating income
26,938

23,196

85,116

79,096

Non-operating income (expense):
 
 
 
 
Financial income
134

3

219

113

Interest expense
(21,991
)
(24,468
)
(68,390
)
(57,533
)
Debt financing costs
(468
)
(42
)
(557
)
(2,780
)
Other, net
520


7,466


Total non-operating expense, net
(21,805
)
(24,507
)
(61,262
)
(60,200
)
Income (loss) before reorganization costs and income taxes
5,133

(1,311
)
23,854

18,896

Reorganization costs

(250
)

37,617

Income (loss) before income taxes
5,133

(1,061
)
23,854

(18,721
)
Income tax expense (benefit)
3,165

(119
)
11,805

(6,002
)
Income (loss) from continuing operations
1,968

(942
)
12,049

(12,719
)
Discontinued operations, net of income taxes

(412
)
(1,247
)
(553
)
Net income (loss)
1,968

(1,354
)
10,802

(13,272
)
Net income attributable to non-controlling interests
(173
)
(119
)
(430
)
(272
)
Income (loss) attributable to Lee Enterprises, Incorporated
1,795

(1,473
)
10,372

(13,544
)
Other comprehensive income (loss), net of income taxes
(93
)
152

(280
)
456

Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
1,702

(1,321
)
10,092

(13,088
)
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
1,795

(1,061
)
11,619

(12,991
)
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
Basic:
 
 
 
 
Continuing operations
0.03

(0.02
)
0.22

(0.27
)
Discontinued operations

(0.01
)
(0.02
)
(0.01
)
 
0.03

(0.03
)
0.20

(0.28
)
 
 
 
 
 
Diluted:
 
 
 
 
Continuing operations
0.03

(0.02
)
0.22

(0.27
)
Discontinued operations

(0.01
)
(0.02
)
(0.01
)
 
0.03

(0.03
)
0.20

(0.28
)

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

4


LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
39 Weeks Ended
 
(Thousands of Dollars)
June 30
2013

June 24
2012

 
 
 
Cash provided by operating activities:
 
 
Net income (loss)
10,802

(13,272
)
Results of discontinued operations
(1,247
)
(553
)
Income (loss) from continuing operations
12,049

(12,719
)
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities of continuing operations:
 
 
Depreciation and amortization
44,781

49,737

Amortization of debt present value adjustment
3,932

2,557

Stock compensation expense
1,109

802

Distributions greater than earnings of MNI
1,342

347

Deferred income tax expense (benefit)
2,022

(16,092
)
Debt financing costs
527

2,805

Reorganization costs

37,617

Gain on sale of investments
(7,093
)

Changes in operating assets and liabilities:
 
 
Decrease in receivables
4,044

1,964

Decrease in inventories and other
409

644

Increase (decrease) in accounts payable, compensation and other accrued liabilities and unearned revenue
(6,946
)
1,444

Decrease in pension, postretirement and postemployment benefit obligations
(8,310
)
(5,164
)
Change in income taxes receivable or payable
9,423

9,930

Other, net
(1,237
)
(2,006
)
Net cash provided by operating activities of continuing operations
56,052

71,866

Cash provided by (required for) investing activities of continuing operations:
 
 
Purchases of property and equipment
(6,835
)
(4,612
)
Decrease in restricted cash

4,972

Proceeds from sales of assets
7,615

1,546

Distributions greater than earnings of TNI
166

910

Other, net
(330
)
(500
)
Net cash provided by investing activities of continuing operations
616

2,316

Cash provided by (required for) financing activities of continuing operations:
 
 
Proceeds from long-term debt
94,000

1,004,795

Payments on long-term debt
(166,350
)
(1,055,305
)
Debt financing and reorganization costs paid
(766
)
(31,334
)
Common stock transactions, net
21


Net cash required for financing activities of continuing operations
(73,095
)
(81,844
)
Net cash provided by (required for) discontinued operations
 
 
Operating activities
(552
)
27

Investing activities
14,689

3,256

Net decrease in cash and cash equivalents
(2,290
)
(4,379
)
Cash and cash equivalents:
 
 
Beginning of period
13,920

23,555

End of period
11,630

19,176


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

5


LEE ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1
BASIS OF PRESENTATION

The Consolidated Financial Statements included herein are unaudited. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of June 30, 2013 and their results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2012 Annual Report on Form 10-K.

Because of seasonal and other factors, the results of operations for the 13 weeks and 39 weeks ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year.

Certain amounts as previously reported have been reclassified to conform with the current period presentation. See Notes 2 and 4.

References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2013”, “2012” and the like refer to the fiscal years ended the last Sunday in September.

The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 50% interest in TNI Partners (“TNI”), 50% interest in Madison Newspapers, Inc. (“MNI”), and 82.5% interest in INN Partners, L.C.

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 and MNI 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 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. See Notes 5 and 12.

2DISCONTINUED OPERATIONS

In March 2013, we sold The Garden Island newspaper and digital operations in Lihue, HI for $2,000,000 in cash, plus an adjustment for working capital. The transaction resulted in a loss of $2,170,000, after income taxes, and was recorded in discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the 13 weeks ended March 31, 2013. Operating results of The Garden Island have been classified as discontinued operations for all periods presented.


6


Assets and liabilities of the The Garden Island at February 28, 2013 are summarized as follows:
 
(Thousands of Dollars)
February 28
2013

 
 
 
 
Current assets
433

 
Property and equipment, net
770

 
Goodwill
500

 
Other intangible assets, net
4,025

 
Current liabilities
(271
)
 
Assets, net
5,457


In October 2012, we sold the North County Times in Escondido, CA for $11,950,000 in cash, plus an adjustment for working capital. The transaction resulted in a gain of $1,167,000, after income taxes, and was recorded in discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the 13 weeks ended December 30, 2012. Operating results of the North County Times have been classified as discontinued operations for all periods presented.

Assets and liabilities of the North County Times at September 30, 2012 are summarized as follows:
 
(Thousands of Dollars)
September 30
2012

 
 
 
 
Current assets
2,093

 
Property and equipment, net
5,158

 
Goodwill
3,042

 
Other intangible assets, net
1,920

 
Current liabilities
(1,714
)
 
Assets, net
10,499


Results of discontinued operations consist of the following:
 
 
13 Weeks Ended

39 Weeks Ended
 
 
(Thousands of Dollars)
June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
Operating revenue
7,563

1,321

23,650

 
Costs and expenses
(8,197
)
(1,697
)
(24,501
)
 
Gain on sale of the North County Times

1,800


 
Loss on sale of The Garden Island

(3,340
)

 
 
 
 
 
 
Loss from discontinued operations, before income taxes
(634
)
(1,916
)
(851
)
 
Income tax benefit
(222
)
(669
)
(298
)
 
Net loss
(412
)
(1,247
)
(553
)

3INVESTMENTS IN ASSOCIATED COMPANIES

TNI Partners
 
In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and circulation of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspapers and other media.
 
Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.


7


Summarized results of TNI are as follows:
 
 
13 Weeks Ended
 
40 Weeks Ended

39 Weeks Ended

 
(Thousands of Dollars)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
 
Operating revenue
14,644

14,155

48,110

45,878

 
Operating expenses, excluding workforce adjustments, depreciation and amortization
12,300

11,986

39,051

37,926

 
Workforce adjustments

33


(31
)
 
Operating income
2,344

2,136

9,059

7,983

 
 
 
 
 
 
 
Company's 50% share of operating income
1,172

1,068

4,530

3,992

 
Less amortization of intangible assets
155

181

517

542

 
Equity in earnings of TNI
1,017

887

4,013

3,450


Certain assets utilized by TNI are owned by Star Publishing and Citizen. Star Publishing's 50% share of TNI depreciation and certain general and administrative expenses (income) associated with its share of the operation and administration of TNI are reported as operating expenses (benefit) in our Consolidated Statements of Operations and Comprehensive Income (Loss). These amounts totaled $(173,000) and $(128,000) in the 13 weeks ended June 30, 2013 and June 24, 2012, respectively, $(449,000) in the 40 weeks ended June 30, 2013 and $(440,000) in the 39 weeks ended June 24, 2012.

Annual amortization of intangible assets is estimated to be $418,000 in each of the 52 week periods ending June 2014, June 2015, June 2016, June 2017 and June 2018.

Madison Newspapers, Inc.

We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.

Summarized results of MNI are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
(Thousands of Dollars)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
 
Operating revenue
16,046

17,215

50,084

52,845

 
Operating expenses, excluding workforce adjustments, depreciation and amortization
12,773

13,993

40,450

43,440

 
Workforce adjustments
74

(6
)
63

22

 
Depreciation and amortization
383

424

1,147

1,271

 
Operating income
2,816

2,804

8,424

8,112

 
 
 
 
 
 
 
Net income
1,754

1,748

5,249

5,106

 
 
 
 
 
 
 
Equity in earnings of MNI
876

874

2,658

2,553

    

8


4
GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill are as follows:
 
 
39 Weeks Ended

 
(Thousands of Dollars)
June 30
2013

 
 
 
 
Goodwill, gross amount
1,536,000

 
Accumulated impairment losses
(1,288,729
)
 
Goodwill, beginning of period, as previously reported
247,271

 
Goodwill allocated to discontinued operations
(3,542
)
 
Goodwill, beginning of period, as reclassified
243,729

 
Goodwill, end of period
243,729


Identified intangible assets consist of the following:
 
(Thousands of Dollars)
June 30
2013

September 30
2012

 
 
 
 
 
Nonamortized intangible assets:
 
 
 
Mastheads
28,605

28,605

 
Amortizable intangible assets:
 
 
 
Customer and newspaper subscriber lists
855,773

855,773

 
Less accumulated amortization
466,000

437,366

 
 
389,773

418,407

 
Noncompete and consulting agreements
28,524

28,524

 
Less accumulated amortization
28,520

28,519

 
 
4

5

 
 
418,382

447,017

 
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 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 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

9


projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
We 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.
 
Annual amortization of intangible assets for the 52 week periods ending June 2014, June 2015, June 2016, June 2017 and June 2018 is estimated to be $38,000,000, $37,804,000, $36,674,000, $35,434,000 and $35,048,000, respectively.

5
DEBT

As discussed more fully below (and certain capitalized terms used below defined), in January 2012, in conjunction with the effectiveness of the Plan, we refinanced all of our debt. The Plan refinanced our then-existing credit agreement and extended the April 2012 maturity in a structure of first and second lien debt with the existing lenders ("Lenders"). We also amended the Pulitzer Notes, and extended the April 2012 maturity with the existing Noteholders. In May 2013, we again refinanced the remaining balance of the Pulitzer Notes.
    
1st Lien Agreement

In January 2012, we entered into a credit agreement (the “1st Lien Agreement”) with a syndicate of lenders (the “1st Lien Lenders”). The 1st Lien Agreement consists of a term loan of $689,510,000, and a new $40,000,000 revolving credit facility under which we have not drawn. The revolving credit facility also supports issuance of letters of credit.

Interest Payments

Debt under the 1st Lien Agreement bears interest, at our option, at either a base rate or an adjusted Eurodollar rate (“LIBOR”), plus an applicable margin. The base rate for the facility is the greater of (a) the prime lending rate of Deutsche Bank Trust Company Americas at such time; (b) 0.5% in excess of the overnight federal funds rate at such time; or (c) 30 day LIBOR plus 1.0%. LIBOR loans are subject to a minimum rate of 1.25%. The applicable margin for term loan base rate loans is 5.25%, and 6.25% for LIBOR loans. The applicable margin for revolving credit facility base rate loans is 4.5%, and is 5.5% for LIBOR loans. At June 30, 2013, all borrowing under the 1st Lien Agreement is based on LIBOR at a total rate of 7.5%.

Principal Payments

At June 30, 2013, the balance outstanding under the term loan is $618,500,000. We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1st Lien Agreement at any time, in whole or in part, without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.

We are required to repay principal amounts, on a quarterly basis until maturity, under the 1st Lien Agreement. Principal payments are required quarterly beginning in June 2012, and total $11,000,000 in 2013, $12,750,000 in 2014, $13,500,000 in 2015 and $3,375,000 in 2016, prior to the final maturity.

In addition to the scheduled payments, we are required to make mandatory prepayments under the 1st Lien Agreement under certain other conditions, such as from the net proceeds from asset sales. The 1st Lien Agreement also requires us to accelerate future payments in the amount of our quarterly excess cash flow, as defined. The acceleration of such payments due to future asset sales or excess cash flow does not change the due dates of other 1st Lien Agreement payments prior to the December 2015 maturity.

10


2013 payments made under the 1st Lien Agreement, and required to be made for the remainder of the year, are summarized as follows:
 
 
13 Weeks Ended
 
13 Weeks Ending

 
(Thousands of Dollars)
December 30
2012

March 31
2013

June 30
2013

September 29
2013

 
 
 
 
 
 
 
Mandatory
2,500

2,500

3,000

3,000

 
Voluntary
9,750

15,350

2,260


 
Asset sales
7,750


240


 
Excess cash flow




 
 
20,000

17,850

5,500

3,000


2012 payments made under the 1st Lien Agreement are summarized as follows:
 
 
 
13 Weeks Ended
 
14 Weeks Ended

 
(Thousands of Dollars)
 
March 25
2012

June 24
2012

September 30
2012

 
 
 
 
 
 
 
Mandatory
 

2,500

2,500

 
Voluntary
 
12,600

3,850

3,000

 
Asset sales
 
2,410

150

650

 
Excess cash flow
 



 
 

15,010

6,500

6,150


There were no net principal payments made in 2012 under the previous credit agreement.

Security

The 1st Lien Agreement is fully and unconditionally guaranteed on a joint and several basis by all of our existing and future, direct and indirect subsidiaries in which we hold a direct or indirect interest of more than 50% (the “Credit Parties”); provided however, that our wholly-owned subsidiary Pulitzer Inc. (“Pulitzer”) and its subsidiaries are not Credit Parties. The 1st Lien Agreement is secured by first priority security interests in the stock and other equity interests owned by the Credit Parties in their respective subsidiaries.

The Credit Parties have also granted a first priority security interest on substantially all of their tangible and intangible assets, and granted mortgages covering certain real estate, as collateral for the payment and performance of their obligations under the 1st Lien Agreement. Assets of Pulitzer and its subsidiaries, TNI and our ownership interest in, and assets of, MNI are excluded.

The revolving credit facility has a super-priority security interest over all of the collateral securing the term loan under the 1st Lien Agreement, superior to that of the term loan lenders.

Covenants and Other Matters

The 1st Lien Agreement contains customary affirmative and negative covenants for financing of its type. These financial covenants include a maximum total leverage ratio, as defined. The total leverage ratio is designed to assess the leverage of the Company, excluding Pulitzer, and does not reflect our overall leverage position due to the lower leverage of Pulitzer. It is based primarily on the sum of the principal amount of debt under the 1st Lien Agreement, plus debt under the 2nd Lien Agreement, as discussed more fully below, which totals $793,500,000 at June 30, 2013, plus letters of credit and certain other factors, divided by a measure of trailing 12 month operating results, which includes distributions from MNI and other elements, but excludes the operating results of Pulitzer.

Our actual total leverage ratio at June 30, 2013 under the 1st Lien Agreement was 6.26:1 Our maximum total leverage ratio covenant will decrease, in stages, from 10.0:1 at June 30, 2013 to 9.1:1 in December 2015. On a consolidated basis, using the definitions in the 1st Lien Agreement, our leverage ratio is 5.25:1 at June 30, 2013.  This consolidated measure is not the subject of a covenant in any of our debt agreements.

11


The 1st Lien Agreement also includes a minimum interest expense coverage ratio, as defined, which is based on the sum of interest expense, as defined, incurred under the 1st Lien Agreement and 2nd Lien Agreement, divided by the same measure of trailing 12 month operating results discussed above. The interest expense coverage ratio is similarly designed to assess the interest coverage of the Company, excluding Pulitzer, and does not reflect our overall interest coverage position. Our actual interest expense coverage ratio at June 30, 2013 was 1.66:1. Our minimum interest expense coverage ratio covenant is 1.08:1 at June 30, 2013.

The 1st Lien Agreement requires us to suspend stockholder dividends and share repurchases through December 2015. The 1st Lien Agreement also limits capital expenditures to $20,000,000 per year, with a provision for carryover of unused amounts from the prior year. Further, the 1st Lien Agreement restricts our ability to make additional investments, acquisitions, dispositions and mergers without the consent of the 1st Lien Lenders and limits our ability to incur additional debt. Such covenants require that substantially all of our future cash flows are required to be directed toward debt reduction or accumulation of cash collateral and that the cash flows of the Credit Parties are largely segregated from those of Pulitzer.

2nd Lien Agreement

In January 2012, we entered into a second lien term loan (the “2nd Lien Agreement”) with a syndicate of lenders (the “2nd Lien Lenders”). The 2nd Lien Agreement consists of a term loan of $175,000,000.

The 2nd Lien Agreement bears interest at 15.0%, payable quarterly.

Principal Payments and Redemption

The 2nd Lien Agreement requires no principal amortization, except in March 2017 if required for income tax purposes.

From January 30, 2013 until January 30, 2014, the 2nd Lien Agreement may be redeemed at 102% of the principal amount, at 101% thereafter until January 30, 2015 and at 100% thereafter until the April 2017 final maturity. Terms of the 1st Lien Agreement also restrict principal payments under the 2nd Lien Agreement.

Security

The 2nd Lien Agreement is fully and unconditionally guaranteed on a joint and several basis by the Credit Parties and by Pulitzer and its subsidiaries, other than TNI (collectively, the "2nd Lien Credit Parties"). The 2nd Lien Agreement is secured by second priority security interests in the stock and other equity interests owned by the 2nd Lien Credit Parties.

The 2nd Lien Credit Parties have also granted a second priority security interest on substantially all of their tangible and intangible assets, and granted second lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Agreement. Assets of TNI and our ownership interest in, and assets of, MNI are excluded. However, assets of Pulitzer and its subsidiaries, excluding TNI, become subject to a first priority security interest of the 2nd Lien Lenders upon repayment in full of the Pulitzer Notes and any successor debt.

The 2nd Lien Lenders were granted a second priority security interest in our ownership interest in TNI under the New Pulitzer Notes, as discussed more fully below.
 
Covenants and Other Matters

The 2nd Lien Agreement has no affirmative financial covenants. Restrictions on capital expenditures, permitted investments, indebtedness and other provisions are similar to, but generally less restrictive than, those provisions under the 1st Lien Agreement.

2nd Lien Lenders shared in the issuance of 6,743,640 shares of our Common Stock valued at $9,576,000 based on the closing stock price of $1.42 on the date of issuance, an amount equal to 13% of outstanding shares on a pro forma basis as of January 30, 2012. 2nd Lien Lenders also received $8,750,000 in the form of non-cash fees, which were added to and included in the principal amount of the second lien term loan.


12


Pulitzer Notes

In conjunction with its formation in 2000, St. Louis Post-Dispatch LLC ("PD LLC") borrowed $306,000,000 (the “Pulitzer Notes”) from a group of institutional lenders (the “Noteholders”). The Pulitzer Notes were guaranteed by Pulitzer pursuant to a Guaranty Agreement with the Noteholders. The aggregate principal amount of the Pulitzer Notes was payable in April 2009.

In February 2009, the Pulitzer Notes and the Guaranty Agreement were amended (the “Notes Amendment”). Under the Notes Amendment, PD LLC repaid $120,000,000 of the principal amount of the debt obligation. The remaining debt balance of $186,000,000 was refinanced by the Noteholders until April 2012.

In January 2012, in connection with the Plan, we entered into an amended Note Agreement and Guaranty Agreement, which amended the Pulitzer Notes and extended the maturity with the Noteholders. After consideration of unscheduled principal payments totaling $15,145,000 ($10,145,000 in December 2011 and $5,000,000 in January 2012), offset by $3,500,000 of non-cash fees paid to the Noteholders in the form of additional Pulitzer Notes debt, the amended Pulitzer Notes had a balance of $126,355,000 in January 2012.

The Pulitzer Notes carried an interest rate at 10.55%, which increased 0.75% to 11.3% in January 2013 and was to increase in January of each year thereafter. Due to the increasing interest rate, interest on the Pulitzer Notes was charged to expense using a calculated effective interest rate during the period.

In May 2013, we refinanced the $94,000,000 remaining balance of the Pulitzer Notes (the New Pulitzer Notes) with a subsidiary of Berkshire Hathaway Inc. (Berkshire). The New Pulitzer Notes bear interest at a fixed rate of 9.0%, payable quarterly. Pulitzer is a co-borrower under the the New Pulitzer Notes, which eliminates the former Guaranty Agreement made by Pulitzer under the Pulitzer Notes.

Principal Payments

At June 30, 2013, the balance of the New Pulitzer Notes is $80,000,000. We may voluntarily prepay principal amounts outstanding under the New Pulitzer Notes at any time, in whole or in part, without premium or penalty (except as noted below), upon proper notice, and subject to certain limitations as to minimum amounts of prepayments. The New Pulitzer Notes provide for mandatory scheduled prepayments totaling $6,400,000 annually, beginning in 2014.

In addition to the scheduled payments, we are required to make mandatory prepayments under the New Pulitzer Notes under certain other conditions, such as from the net proceeds from asset sales. The New Pulitzer Notes also require us to accelerate future payments in the amount of our quarterly excess cash flow, as defined. The acceleration of such payments due to future asset sales or excess cash flow does not change the due dates of other New Pulitzer Notes payments prior to the final maturity in April 2017.

The New Pulitzer Notes are subject to a 5% redemption premium if 100% of the remaining balance of the New Pulitzer Notes is again refinanced by lenders, the majority of which are not holders of the New Pulitzer Notes at the time of such refinancing. This redemption premium is not otherwise applicable to any of the types of payments noted above.

13


2013 payments made under the New Pulitzer Notes and Pulitzer Notes are summarized below. No payments are required to be made for the remainder of the year under the New Pulitzer Notes.
 
 
13 Weeks Ended
 
13 Weeks Ending

 
(Thousands of Dollars)
December 30
2012

March 31
2013

June 30
2013

September 29
2013

 
 
 
 
 
 
 
Mandatory
3,800

2,600



 
Voluntary

1,500

14,000


 
Asset sales
5,200

1,900



 
Excess cash flow




 
 
9,000

6,000

14,000



2012 payments made under the Pulitzer Notes are summarized as follows:
 
 
 
13 Weeks Ended
 
14 Weeks Ended

 
(Thousands of Dollars)
December 25
2011

March 25
2012

June 24
2012

September 30
2012

 
 
 
 
 
 
 
Prior to 2012 refinancing
500




 
Pursuant to the Plan, net
10,145

1,500



 
Mandatory

1,400



 
Voluntary

8,955

3,000

4,000

 
Asset sales




 
Excess cash flow




 
 
10,645

11,855

3,000

4,000


Security

Obligations under the New Pulitzer Notes are fully and unconditionally guaranteed on a joint and several basis by Pulitzer's existing and future subsidiaries other than PD LLC and TNI. The New Pulitzer Notes are also secured by first priority security interests in the stock and other equity interests owned by Pulitzer's subsidiaries including the 50% ownership interest in TNI. Also, Pulitzer, certain of its subsidiaries and PD LLC granted a first priority security interest on substantially all of its tangible and intangible assets, excluding the assets of Star Publishing leased to, or used in the operations or business of, TNI and granted deeds of trust covering certain real estate in the St. Louis area, as collateral for the payment and performance of their obligations under the New Pulitzer Notes.

Covenants and Other Matters

The New Pulitzer Notes contain certain covenants and conditions including the maintenance, by Pulitzer, of minimum trailing 12 month EBITDA (minimum of $25,200,000 beginning June 30, 2013), as defined in the New Pulitzer Notes Agreement, and limitations on capital expenditures and the incurrence of other debt.

Further, the New Pulitzer Notes have limitations or restrictions on distributions, loans, advances, investments, acquisitions, dispositions and mergers. Such covenants require that substantially all future cash flows of Pulitzer are required to be directed first toward repayment of the New Pulitzer Notes, interest due under the 2nd Lien Agreement, or accumulation of cash collateral and that cash flows of Pulitzer are largely segregated from those of the Credit Parties.

Intercreditor Agreements

The 1st Lien Agreement, 2nd Lien Agreement and New Pulitzer Notes contain cross-default provisions tied to each of the various agreements. Intercreditor agreements and an intercompany subordination agreement are also in effect.


14


Other

Cash payments to the Lenders, Noteholders and legal and professional fees related to the Plan totaled $38,628,000, of which $6,273,000 was paid in 2011, and the remainder of which was paid in 2012. $720,000 of such costs were charged to expense in 2011. In addition, previously capitalized financing costs of $4,514,000 at September 25, 2011 were charged to expense in 2012 as debt financing costs prior to consummation of the Plan, with the remainder classified as reorganization costs in the Consolidated Statements of Operations and Comprehensive Income (Loss) upon consummation of the Plan. 

Debt under the Plan was considered compromised. As a result, the 1st Lien Agreement, 2nd Lien Agreement and Pulitzer Notes were recorded at their respective present values, which resulted in a discount to the stated principal amount totaling $23,709,000. We used the effective rates of the respective debt agreements to discount the debt to its present value. In determining the effective rates, we considered all cash outflows of the respective debt agreements including: mandatory principal payments, interest payments, fees paid to lenders in connection with the refinancing as well as, in the case of the 2nd Lien Agreement, Common Stock issued. The present value is being amortized as a non-cash component of financial expense over the terms of the related debt.

The refinancing of the Pulitzer Notes with the New Pulitzer Notes resulted in the acceleration of $1,565,000 of the present value adjustment discussed above, which was partially offset by eliminating deferred interest expense of $1,189,000, and the net amount of which was recognized in the 13 weeks ended June 30, 2013. Expenses related to the issuance of the New Pulitzer Notes are capitalized as debt issuance costs and will be amortized until April 2017.

Amortization of the present value adjustment and other costs totaled $4,085,000 in 2012. Amortization of such costs is estimated to total $6,681,000 in 2013, $4,779,000 in 2014, $4,742,000 in 2015, $2,297,000 in 2016 and $1,125,000 in 2017.

As a result of the Plan, we recognized $37,765,000 of reorganization costs in the 2012 Consolidated Statements of Operations and Comprehensive Income (Loss). The components of reorganization costs are summarized as follows:
 
(Thousands of Dollars)
 
 
 
 
 
 
 
Fees paid in cash to lenders, attorneys and others
 
38,628

 
Unamortized loan fees from previous debt agreements
 
1,740

 
Fair value of stock granted to 2nd Lien Lenders
 
9,576

 
Noncash fees paid in the form of additional debt
 
12,250

 
Present value adjustment
 
(23,709
)
 
 

38,485

 
 
 
 
 
Charged to expense in 2012
 
37,765

 
Charged to expense in 2011 as other non-operating expense
 
720



15


Debt is summarized as follows:
 
 
 
 
Interest Rates (%)
 
(Thousands of Dollars)
June 30
2013

September 30
2012

June 30
2013
 
 
 
 
 
 
Revolving credit facility


6.75
 
1st Lien Agreement
618,500

661,850

7.50
 
2nd Lien Agreement
175,000

175,000

15.00
 
New Pulitzer Notes
80,000


9.00
 
Pulitzer Notes

109,000

 
Unamortized present value adjustment
(14,127
)
(19,624
)
 
 
 
859,373

926,226

 
 
Less current maturities of long-term debt
16,775

17,400

 
 
Current amount of present value adjustment
(4,787
)
(5,418
)
 
 
Total long-term debt
847,385

914,244

 
 
At June 30, 2013, our weighted average cost of debt was 9.1%.

Aggregate maturities of debt total $3,000,000 for the remainder of 2013, $19,150,000 in 2014, $19,900,000 in 2015, $595,650,000 in 2016 and $235,800,000 in 2017.

Liquidity
 
At June 30, 2013, after consideration of letters of credit, we have approximately $29,942,000 available for future use under our revolving credit facility. Including cash, our liquidity at June 30, 2013 totals $41,572,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our continuing cash flows, which will allow us to maintain an adequate level of liquidity.

At June 30, 2013, the principal amount of our outstanding debt totals $873,500,000, approximately $20 million less than the amount projected for September 2014 under the Plan. 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 New 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 Berkshire, to exercise their remedies under the 1st Lien Agreement, 2nd Lien Agreement, and the New Pulitzer Notes, 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 June 30, 2013.

In 2010, we filed a Form S-3 shelf registration statement ("Shelf") with the SEC, which has been declared effective. The Shelf gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. In July 2011, the SEC announced changes to the issuer eligibility rules which will require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Net proceeds from the sale of any securities must be used generally to reduce debt.


16


6
PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS

We have several noncontributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, all benefits are frozen and no additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of active employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations and income tax laws. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, and cash.
 
In addition, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, PD LLC provides postemployment disability benefits to certain employee groups prior to retirement. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. Plan assets may also be used to fund medical costs of certain active employees.
 
We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.
 
The net periodic cost (benefit) components of our pension and postretirement medical plans are as follows:
 
PENSION PLANS
13 Weeks Ended
 
39 Weeks Ended
 
 
(Thousands of Dollars)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
 
Service cost for benefits earned during the period
54

7

162

21

 
Interest cost on projected benefit obligation
1,882

1,994

5,646

5,982

 
Expected return on plan assets
(2,459
)
(2,223
)
(7,377
)
(6,669
)
 
Amortization of net loss
572

593

1,716

1,779

 
Amortization of prior service benefit
(34
)
(34
)
(102
)
(102
)
 
 
15

337

45

1,011

 
 
 
 
 
 
 
POSTRETIREMENT MEDICAL PLANS
13 Weeks Ended
 
39 Weeks Ended
 
 
(Thousands of Dollars)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
 
Service cost for benefits earned during the period
182

182

546

546

 
Interest cost on projected benefit obligation
281

277

843

831

 
Expected return on plan assets
(368
)
(532
)
(1,104
)
(1,596
)
 
Amortization of net gain
(331
)
(613
)
(993
)
(1,839
)
 
Amortization of prior service benefit
(365
)
(365
)
(1,095
)
(1,095
)
 
 
(601
)
(1,051
)
(1,803
)
(3,153
)

Based on our forecast at June 30, 2013, we do not expect to contribute to our pension plans for the remainder of 2013. Based on our forecast at June 30, 2013, we do not expect to make significant contributions to our postretirement plans for the remainder of 2013.

7
INCOME TAXES

The provision for income taxes includes deferred taxes and is based upon estimated annual effective tax rates in the tax jurisdictions in which we operate. Such annualization of effective tax rates can cause distortion in quarterly tax rates.


17


Income tax expense related to continuing operations differs from the amounts computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows:
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
(Percent of Income Before Income Taxes)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
 
Computed “expected” income tax expense (benefit)
35.0

(35.0
)
35.0

(35.0
)
 
State income taxes (benefit), net of federal tax effect
3.5

(3.3
)
3.4

(3.3
)
 
Dividends received deductions and credits
(8.4
)
5.9

(5.9
)
(3.0
)
 
Domestic production deduction
3.4


3.4


 
Reorganization costs

4.0


4.9

 
Valuation allowance
(1.8
)

4.2

(0.5
)
 
Resolution of tax matters
5.0

22.8

2.6

4.2

 
Deferred income tax rate adjustments
22.1

(3.0
)
4.8

(1.6
)
 
Other
2.9

(2.6
)
2.0

2.2

 
 
61.7

(11.2
)
49.5

(32.1
)
 
In connection with the refinancing of debt under the Chapter 11 Proceedings, we realized substantial cancellation of debt income (“CODI”) for income tax purposes. However, this income was not immediately taxable for U.S. income tax purposes because the CODI resulted from our reorganization under the U.S. Bankruptcy Code. For U.S. income tax reporting purposes, we are required to reduce certain tax attributes, including any net operating loss carryforwards, capital losses, tax credit carryforwards, and the tax basis in other assets in a total amount equal to the tax gain on the extinguishment of debt.  As a result, in February 2012 we began recognizing additional interest expense deductions for income tax purposes.  The reduction in the basis of certain assets also results in reduced  depreciation and amortization expense for income tax purposes, beginning in 2013. 


18


8
EARNINGS (LOSS) PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per common share:
 
 
13 Weeks Ended
 
39 Weeks Ended
 
 
(Thousands of Dollars and Shares, Except Per Share Data)
June 30
2013

June 24
2012

June 30
2013

June 24
2012

 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated:
 
 
 
 
 
Continuing operations
1,795

(1,061
)
11,619

(12,991
)
 
Discontinued operations

(412
)
(1,247
)
(553
)
 
 
1,795

(1,473
)
10,372

(13,544
)
 
 
 
 
 
 
 
Weighted average common shares
52,325

51,731

52,305

48,733

 
Less non-vested restricted Common Stock
500


500


 
Basic average common shares
51,825

51,731

51,805

48,733

 
Dilutive stock options and restricted Common Stock
213


107


 
Diluted average common shares
52,038

51,731

51,912

48,733

 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
Basic:
 
 
 
 
 
Continuing operations
0.03

(0.02
)
0.22

(0.27
)
 
Discontinued operations

(0.01
)
(0.02
)
(0.01
)
 
 
0.03

(0.03
)
0.20

(0.28
)
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
Continuing operations
0.03

(0.02
)
0.22

(0.27
)
 
Discontinued operations

(0.01
)
(0.02
)
(0.01
)
 
 
0.03

(0.03
)
0.20

(0.28
)

For the 13 weeks ended June 30, 2013 and June 24, 2012, the anti-dilutive weighted average shares not considered in the computation of diluted earnings (loss) per common share are 1,705,000 and 2,695,000, respectively. For the 39 weeks ended June 30, 2013 and June 24, 2012, the anti-dilutive weighted average shares not considered in the computation of diluted earnings per common share are 2,971,000 and 2,085,000, respectively.

9
STOCK OWNERSHIP PLANS

A summary of stock option activity during the 39 weeks ended June 30, 2013 follows:
 
(Thousands of Dollars and Shares, Except Per Share Data)
Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value

 
 
 
 
 
 
 
Outstanding, September 30, 2012
3,102

3.18

 
 
 
Granted
51

1.20

 
 
 
Exercised
(18
)
1.13

 
 
 
Cancelled
(281
)
5.67

 
 
 
Outstanding, June 30, 2013
2,854

2.91

7.6
1,211

 
 
 
 
 
 
 
Exercisable, June 30, 2013
1,487

4.18

6.8
328


Total unrecognized compensation expense for unvested stock options as of June 30, 2013 is $1,091,000, which will be recognized over a weighted average period of 1.5 years.

19



Restricted Common Stock

The table summarizes restricted Common Stock activity during the 39 weeks ended June 30, 2013.
 
(Thousands of Shares, Except Per Share Data)
Shares

Weighted
Average
Grant Date
Fair Value

 
 
 
 
 
Outstanding, September 30, 2012
500

1.31

 
Outstanding, June 30, 2013
500

1.31

Total unrecognized compensation expense for unvested restricted Common Stock at June 30, 2013 is $454,000, which will be recognized over a weighted average period of 2.1 years.
10
FAIR VALUE MEASUREMENTS

Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable which consists of the following levels:
 
Level 1 - Quoted prices for identical instruments in active markets;

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
 
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling $8,774,000, including our 17% ownership of the nonvoting common stock of TCT, are carried at cost. The fair value of floating rate debt cannot be determined as an active market for such debt does not exist. Our fixed rate debt at June 30, 2013 consists of the $175,000,000 principal amount under the 2nd Lien Agreement and $80,000,000 principal amount of New Pulitzer Notes, as discussed more fully in Note 5, which are not traded on an active market and are held by a small group of investors and Berkshire, respectively. We are unable, as of June 30, 2013, to determine the fair value of such debt. The value, if determined, may be more or less than the carrying amount. The determination of the amount of the Herald Value (as discussed more fully in Note 11) is based on an estimate of fair value using both market and income-based approaches.

The following table summarizes the financial instruments measured at fair value in the accompanying Consolidated Balance Sheets:
 
(Thousands of Dollars)
June 30
2013

September 30
2012
 
 
 
 
 
Level 3 - Herald Value - liability
300

300

In December 2012, we recognized a gain of $7,093,000 from a distribution related to the partial sale of assets in a private equity investment.

11
COMMITMENTS AND CONTINGENT LIABILITIES

Redemption of PD LLC Minority Interest

In February 2009, in conjunction with the Notes Amendment, PD LLC redeemed the 5% interest in PD LLC and STL Distribution Services LLC ("DS LLC") owned by The Herald Publishing Company, LLC ("Herald") pursuant to a Redemption Agreement and adopted conforming amendments to the Operating Agreement. As

20


a result, the value of Herald's former interest (the “Herald Value”) will be settled, based on a calculation of 10% of the fair market value of PD LLC and DS LLC at the time of settlement, less the balance, as adjusted, of the Pulitzer Notes or the equivalent successor debt, if any. We recorded a liability of $2,300,000 in 2009 as an estimate of the amount of the Herald Value to be disbursed. In 2011, we reduced the liability related to the Herald Value to $300,000 based on the current estimate of fair value.

In April 2013, we received notice of Herald's intent to redeem the Herald Value. The actual amount of the Herald Value will be based on a valuation of PD LLC and DS LLC as of March 31, 2013. Cash settlement of the Herald Value is limited by the terms of the 1st Lien Agreement.

The redemption of Herald's interest in PD LLC and DS LLC may generate significant tax benefits to us as a consequence of the resulting increase in the tax basis of the assets owned by PD LLC and DS LLC and the related depreciation and amortization deductions. The increase in basis to be amortized for income tax purposes over a 15 year period beginning in February 2009 is approximately $258,000,000.

Income Taxes

We file income tax returns with the IRS and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.

We have various income tax examinations ongoing which are at different stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.

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 action ruling, which was granted in part and denied in part.  A motion to reconsider certification of the remaining class claims 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 adverse 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.

12
COMMON STOCK

Under the Plan, the par value of our Common Stock was changed from $2.00 per share to $0.01 per share effective January 30, 2012. 2nd Lien Lenders shared in the issuance of 6,743,640 shares of our Common Stock, an amount equal to 13% of outstanding shares on a pro forma basis as of January 30, 2012.

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 New York Stock Exchange ("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 was allowed to continue to be listed

21


during a cure period. In February 2012, after completing our debt refinancing, the NYSE notified us that we were again in compliance with the minimum closing price standard. In January 2013, the NYSE notified us that we had returned to full compliance with all continued listing standards.

13    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In 2012, the Financial Accounting Standards Board ("FASB") issued an amendment to an existing accounting standard, which provides entities an option to perform a qualitative assessment to determine whether further impairment testing on indefinite-lived intangible assets is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The adoption of this amendment in 2013 did not have a material impact on our Consolidated Financial Statements.

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion includes comments and analysis relating to our results of operations and financial condition as of and for the 13 weeks and 39 weeks ended June 30, 2013. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein, and our 2012 Annual Report on Form 10-K.

NON-GAAP FINANCIAL MEASURES

No non-GAAP financial measure should be considered as a substitute for any related financial measure under accounting principles generally accepted in the United States of America ("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 before, to the extent applicable, 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.


22


Reconciliations of operating cash flow and operating cash flow margin to operating income and operating income margin, the most directly comparable measures under GAAP, are included in the tables below:
 
13 Weeks Ended
 
(Thousands of Dollars)
June 30
2013

Percent of
Revenue

June 24
2012

Percent of
Revenue

 
 
 
 
 
Operating cash flow
39,802

23.8

37,683

21.9

Depreciation and amortization
(14,757
)
(8.8
)
(16,249
)
(9.5
)
Equity in earnings of associated companies
1,893

1.1

1,762

1.0

Operating income
26,938

16.1

23,196

13.5

 
39 Weeks Ended
 
(Thousands of Dollars)
June 30
2013

Percent of
Revenue

June 24
2012

Percent of
Revenue

 
 
 
 
 
Operating cash flow
123,226

24.1

122,830

23.3

Depreciation and amortization
(44,781
)
(8.7
)
(49,737
)
(9.4
)
Equity in earnings of associated companies
6,671

1.3

6,003

1.1

Operating income
85,116

16.6

79,096

15.0


Adjusted Net Income (Loss) and Adjusted Earnings (Loss) Per Common Share

Adjusted net income (loss) and adjusted earnings (loss) 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 (loss) and adjusted earnings (loss) 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 2, included herein, under the caption “Overall Results”.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of results of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies include the following:
 
Goodwill and other intangible assets;
Pension, postretirement and postemployment benefit plans;
Income taxes;
Revenue recognition; and
Uninsured risks.
 
Additional information regarding these critical accounting policies can be found under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Annual Report on Form 10-K and the Notes to Consolidated Financial Statements, included herein.


23


IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In 2012, the FASB issued an amendment to an existing accounting standard, which provides entities an option to perform a qualitative assessment to determine whether further impairment testing on indefinite-lived intangible assets is necessary. Specifically, an entity has the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The adoption of this amendment in 2013 did not have a material impact on our Consolidated Financial Statements.

EXECUTIVE OVERVIEW

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 of St. Louis, Missouri, our 50 daily newspaper markets, across 22 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:

50 daily and 38 Sunday newspapers with subscribers totaling 1.1 million and 1.4 million, respectively, for the 13 weeks ended June 30, 2013, 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 20.8 million unique visitors in June 2013, with 188.5 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 June 2013, the unemployment rate in eight 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 audience in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition.

ECONOMIC CONDITIONS

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 some elements 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.

IMPAIRMENT OF GOODWILL AND OTHER ASSETS

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 2008, 2009 and 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.
 
As a result, we recorded pretax, non-cash charges to reduce the carrying value of goodwill and nonamortized and amortizable intangible assets in 2008, 2009 and 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 2008-2012. We recorded deferred income tax benefits related to these charges.


24


DEBT AND LIQUIDITY

We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Note 1 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 extended 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. In May 2013, we again refinanced the remaining balance of the Pulitzer Notes. Our ability to make payments on our indebtedness will 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 June 30, 2013, after consideration of letters of credit, we have approximately $29,942,000 available for future use under our revolving credit facility. Including cash, our liquidity at June 30, 2013 totals $41,572,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our continuing cash flows, which will allow us to maintain an adequate level of liquidity.

At June 30, 2013, the principal amount of our outstanding debt totals $873,500,000, approximately $20 million less than the amount projected for September 2014 under the Plan. 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 New 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 Berkshire, to exercise their remedies under the 1st Lien Agreement, 2nd Lien Agreement, and the New Pulitzer Notes, 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 June 30, 2013.

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 was allowed to continue to be listed during a cure period. In February 2012, after completing our debt refinancing, the NYSE notified us that we were again in compliance with the minimum closing price standard. In January 2013, the NYSE notified us that we had returned to full compliance with all continued listing standards.

25


13 WEEKS ENDED JUNE 30, 2013

Operating results, as reported in the Consolidated Financial Statements, are summarized below. Certain prior period amounts have been reclassified to conform with the current year presentation.
 
13 Weeks Ended
 
(Thousands of Dollars, Except Per Share Data)
June 30
2013

June 24
2012

Percent
Change

 
 
 
 
Operating revenue:
 
 
 
Retail
70,944

74,049

(4.2
)
Classified:
 
 
 
Employment
8,824

9,929

(11.1
)
Automotive
8,417

9,540

(11.8
)
Real estate
4,864

4,990

(2.5
)
All other
12,491

13,320

(6.2
)
Total classified
34,596

37,779

(8.4
)
National
4,997

5,874

(14.9
)
Niche publications and other
3,099

2,844

9.0

Total advertising and marketing services revenue
113,636

120,546

(5.7
)
Subscription
43,583

42,098

3.5

Commercial printing
3,258

3,368

(3.3
)
Digital services and other
6,542

5,733

14.1

Total operating revenue
167,019

171,745

(2.8
)
Operating expenses:
 
 
 
Compensation
62,340

67,975

(8.3
)
Newsprint and ink
10,471

12,366

(15.3
)
Other operating expenses
53,461

51,317

4.2

Workforce adjustments
945

2,404

(60.7
)
 
127,217

134,062

(5.1
)
Operating cash flow
39,802

37,683

5.6

Depreciation and amortization
14,757

16,249

(9.2
)
Equity in earnings of associated companies
1,893

1,762

7.4

Operating income
26,938

23,196

16.1

Non-operating expense, net
(21,805
)
(24,507
)
(11.0
)
Income (loss) from continuing operations before reorganization costs and income taxes
5,133

(1,311
)
NM

Reorganization costs

(250
)
NM

Income (loss) from continuing operations before income taxes
5,133

(1,061
)
NM

Income tax expense (benefit)
3,165

(119
)
NM

Income (loss) from continuing operations
1,968

(942
)
NM

Discontinued operations, net of income taxes

(412
)
NM

Net income (loss)
1,968

(1,354
)
NM

Net income attributable to non-controlling interests
(173
)
(119
)
45.4

Income (loss) attributable to Lee Enterprises, Incorporated
1,795

(1,473
)
NM

Other comprehensive income (loss), net of income taxes
(93
)
152

NM

Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
1,702

(1,321
)
NM

 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
1,795

(1,061
)
NM

 
 
 
 
Income (loss) per common share:
 
 
 
Basic
0.03

(0.03
)
NM

Diluted
0.03

(0.03
)
NM


References to the "2013 Quarter" refer to the 13 weeks ended June 30, 2013. Similarly, references to the "2012 Quarter" refer to the 13 weeks ended June 24, 2012.

26


Advertising and Marketing Services Revenue

In the 2013 Quarter, combined print and digital advertising and marketing services revenue decreased $6,910,000, or 5.7%, compared to the 2012 Quarter. Retail advertising decreased 4.2%. Retail preprint insertion revenue increased 2.0%. Digital retail advertising increased 2.5%, partially offsetting print declines.

On a combined basis, print and digital classified revenue decreased 8.4% in the 2013 Quarter. Employment revenue decreased 11.1% while automotive advertising decreased 11.8%, real estate decreased 2.5% and other classified decreased 6.2%. Digital classified revenue decreased 1.9%.

National advertising decreased $877,000, or 14.9%. Advertising in niche publications and other increased 9.0%.

On a stand-alone basis, digital advertising and marketing services revenue decreased 0.2% in the 2013 Quarter, representing 14.9% of total advertising and marketing services revenue. Total digital revenue for the 2013 Quarter, including advertising, subscription and all other digital business, totaled $19.9 million, an increase of 4.9% from a year ago. Print advertising and marketing services revenue on a stand-alone basis decreased 6.7%.

Subscription and Other Revenue

Subscription revenue increased $1,485,000, or 3.5%, in the 2013 Quarter due to price increases and increases in digital subscribers, which were partially offset by decreases in print subscribers.

Our unaudited, average daily circulation, including TNI, MNI and digital subscribers, decreased 5.4% and Sunday circulation decreased 7.6% in the 2013 Quarter compared to the 2012 Quarter.

Our digital sites attracted 20.8 million unique visitors in the month of June 2013, a decrease of 2.5% from a year ago, with 188.5 million page views. The number of mobile page views grew 74.1% to 77.2 million in June 2013. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong newspaper readership.
 
Commercial printing revenue decreased $110,000, or 3.3%, in the 2013 Quarter. Digital services and other revenue increased $809,000, or 14.1%, in the 2013 Quarter.

Operating Expenses

Operating expenses other than depreciation, amortization and unusual matters decreased $5,386,000, or 4.1%, in the 2013 Quarter.

Compensation expense decreased $5,635,000, or 8.3%, in the 2013 Quarter, driven by a decline in average full-time equivalent employees of 8.4%.

Newsprint and ink costs decreased $1,895,000, or 15.3%, in the 2013 Quarter, primarily as a result of a reduction in newsprint volume of 11.9%. See Item 3, “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, increased $2,144,000, or 4.2%, in the 2013 Quarter due primarily to new products and the impact of outsourcing.

Reductions in staffing resulted in workforce adjustment costs totaling $945,000 and $2,404,000 in the 2013 Quarter and 2012 Quarter, respectively.

We are engaged in various efforts to continue to contain future growth in operating expenses. We expect 2013 operating expenses, excluding depreciation, amortization and unusual matters, to decrease 4.5-5.5% from their 2012 level.

27


Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow increased 5.6%, to $39,802,000, in the 2013 Quarter compared to $37,683,000 in the 2012 Quarter. Operating cash flow margin increased to 23.8% from 21.9% a year ago, reflecting a smaller percentage decrease in operating revenue than the decrease in operating expenses.

Depreciation expense decreased $596,000, or 10.3%, in the 2013 Quarter and amortization expense decreased $896,000, or 8.6%, in the 2013 Quarter.

Equity in earnings in associated companies increased $131,000 in the 2013 Quarter.

The factors noted above resulted in operating income of $26,938,000 in the 2013 Quarter compared to $23,196,000 in the 2012 Quarter. Operating income margin increased to 16.1% from 13.5% a year ago.

Nonoperating Income and Expense

Interest expense decreased $2,477,000, or 10.1%, to $21,991,000 in the 2013 Quarter due to lower debt balances and refinancing of the Pulitzer Notes. Our weighted average cost of debt was 9.1% at the end of the 2013 Quarter. Interest expense in the 2013 Quarter includes $1,216,000 of non-cash amortization of a present value adjustment of debt compared to $1,387,000 in the 2012 Quarter.

Absent a significant increase in LIBOR, we expect interest expense to continue to decrease in the 13 weeks ending September 29, 2013 due to lower debt balances, which decreased $19,500,000 in the 2013 Quarter and have decreased $122,365,000 since the January 2012 refinancing, and the lower interest rate on the New Pulitzer Notes.

Overall Results

We recognized income tax expense of 61.7% of income before income taxes in the 2013 Quarter and income tax benefit of 11.2% of loss before income taxes in the 2012 Quarter. Adjustments to deferred income taxes increased income tax expense approximately $1,000,000 in the 2013 Quarter, resulting in a high effective tax rate. Approximately $1,000,000 of deferred tax expense was due to rate changes in the 2013 Quarter relating to asset basis adjustments made to optimize tax loss carrybacks and future deferrals of income taxes. See Note 7 of the Notes to Consolidated Financial Statements, included herein, for a reconciliation of the expected federal income tax rate to the actual tax rates.


28


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated (which includes discontinued operations) totaled $1,795,000 in the 2013 Quarter compared to a loss of $1,473,000 in the 2012 Quarter. We recorded earnings per diluted common share of $0.03 in the 2013 Quarter and a loss per diluted common share of $0.03 in the 2012 Quarter. Excluding unusual matters, as detailed in the table below, diluted income per common share, as adjusted, was $0.06 in the 2013 Quarter, compared to $0.03 in the 2012 Quarter. Per share amounts may not add due to rounding.
 
13 Weeks Ended
 
 
June 30
2013
 
June 24
2012
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated, as reported
1,795

0.03

(1,473
)
(0.03
)
Adjustments:
 
 
 
 
Debt financing and reorganization costs
468

 
(208
)
 
Amortization of debt present value adjustment
1,216

 
1,387

 
Other, net
544

 
2,975

 
 
2,228

 
4,154

 
Income tax effect of adjustments, net
(763
)
 
(1,454
)
 
 
1,465

0.03

2,700

0.05

Unusual matters related to discontinued operations


272

0.01

Income attributable to Lee Enterprises, Incorporated, as adjusted
3,260

0.06

1,499

0.03


29


39 WEEKS ENDED JUNE 30, 2013

Operating results, as reported in the Consolidated Financial Statements, are summarized below. Certain prior period amounts have been reclassified to conform with the current year presentation.
 
39 Weeks Ended
 
(Thousands of Dollars, Except Per Share Data)
June 30
2013

June 24
2012

Percent
Change

 
 
 
 
Operating revenue:
 
 
 
Retail
221,107

229,323

(3.6
)
Classified:
 
 
 
Employment
25,165

27,309

(7.9
)
Automotive
26,039

29,047

(10.4
)
Real estate
13,941

15,215

(8.4
)
All other
35,634

37,594

(5.2
)
Total classified
100,779

109,165

(7.7
)
National
18,373

23,125

(20.5
)
Niche publications and other
9,086

8,650

5.0

Total advertising and marketing services revenue
349,345

370,263

(5.6
)
Subscription
133,609

128,909

3.6

Commercial printing
9,681

9,390

3.1

Digital services and other
19,642

18,915

3.8

Total operating revenue
512,277

527,477

(2.9
)
Operating expenses:
 
 
 
Compensation
192,505

205,738

(6.4
)
Newsprint and ink
33,357

38,600

(13.6
)
Other operating expenses
160,929

157,138

2.4

Workforce adjustments
2,260

3,171

(28.7
)
 
389,051

404,647

(3.9
)
Operating cash flow
123,226

122,830

0.3

Depreciation and amortization
44,781

49,737

(10.0
)
Equity in earnings of associated companies
6,671

6,003

11.1

Operating income
85,116

79,096

7.6

Non-operating expense, net
(61,262
)
(60,200
)
1.8

Income from continuing operations before reorganization costs and income taxes
23,854

18,896

26.2

Reorganization costs

37,617

NM

Income (loss) from continuing operations before income taxes
23,854

(18,721
)
NM

Income tax expense (benefit)
11,805

(6,002
)
NM

Income (loss) from continuing operations
12,049

(12,719
)
NM

Discontinued operations, net of income taxes
(1,247
)
(553
)
NM

Net income (loss)
10,802

(13,272
)
NM

Net income attributable to non-controlling interests
(430
)
(272
)
58.1

Income (loss) attributable to Lee Enterprises, Incorporated
10,372

(13,544
)
NM

Other comprehensive income (loss), net of income taxes
(280
)
456

NM

Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
10,092

(13,088
)
NM

 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
11,619

(12,991
)
NM

 
 
 
 
Earnings (loss) per common share:
 
 
 
Basic
0.20

(0.28
)
NM

Diluted
0.20

(0.28
)
NM


References to the "2013 Period" refer to the 39 weeks ended June 30, 2013. Similarly, references to the "2012 Period" refer to the 39 weeks ended June 24, 2012.


30


Advertising and Marketing Services Revenue

In the 2013 Period, combined print and digital advertising revenue and marketing services decreased $20,918,000, or 5.6%, compared to the 2012 Period. Retail advertising decreased 3.6%. Retail preprint insertion revenue increased 1.5%. Digital retail advertising increased 3.8%, partially offsetting print declines.

On a combined basis, print and digital classified revenue decreased 7.7% in the 2013 Period. Employment revenue decreased 7.9% while automotive advertising decreased 10.4%, real estate decreased 8.4% and other classified decreased 5.2%. Digital classified revenue increased 3.9%, partially offsetting print declines.

National advertising decreased $4,752,000, or 20.5%. Advertising in niche publications and other increased 5.0%.

On a stand-alone basis, digital advertising and marketing services revenue increased 1.9% in the 2013 Period, representing 14.1% of total advertising and marketing services revenue. Total digital revenue for the 2013 Period, including advertising, subscription and all other digital business, totaled $57.2 million, an increase of 5.9% from a year ago. Print advertising revenue on a stand-alone basis decreased 6.9%.

Subscription and Other Revenue

Subscription revenue increased $4,700,000, or 3.6%, in the 2013 Period due to price increases and increases in digital subscribers, which were partially offset by decreases in print subscribers.

Our unaudited, average daily circulation, including TNI, MNI and digital subscribers decreased 4.9% and Sunday circulation decreased 8.2% in the 2013 Period compared to the 2012 Period.

Our digital sites attracted 20.8 million unique visitors in the month of June 2013, a decrease of 2.5% from a year ago, with 188.5 million page views. The number of mobile page views grew 74.1% to 77.2 million in June 2013. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong newspaper readership.
 
Commercial printing revenue increased $291,000, or 3.1%, in the 2013 Period. Digital services and other revenue increased $727,000, or 3.8%, in the 2013 Period.

Operating Expenses

Operating expenses, other than depreciation, amortization and unusual matters, decreased $14,685,000, or 3.7%, in the 2013 Period.

Compensation expense decreased $13,233,000, or 6.4%, in the 2013 Period, driven by a decline in average full time equivalent employees of 8.4%.

Newsprint and ink costs decreased $5,243,000, or 13.6%, in the 2013 Period, primarily as a result of a reduction in newsprint volume of 11.7%. See Item 3, “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, increased $3,791,000, or 2.4%, in the 2013 Period due primarily to new products and the impact of outsourcing.

Reductions in staffing resulted in workforce adjustment costs totaling $2,260,000 and $3,171,000 in the 2013 Period and 2012 Period, respectively.

We are engaged in various efforts to continue to contain future growth in operating expenses. We expect 2013 operating expenses, excluding depreciation, amortization and unusual matters, to decrease 4.5-5.5% from their 2012 level.

31


Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow increased 0.3%, to $123,226,000, in the 2013 Period compared to $122,830,000 in the 2012 Period. Operating cash flow margin increased to 24.1% from 23.3% a year ago reflecting a larger percentage decrease in operating expenses than the decrease in operating revenue.

Depreciation expense decreased $1,609,000, or 9.1%, in the 2013 Period and amortization expense decreased $3,347,000, or 10.5%, in the 2013 Period.

Equity in earnings in associated companies increased $668,000 in the 2013 Period.

The factors noted above resulted in operating income of $85,116,000 in the 2013 Period compared to $79,096,000 in the 2012 Period. Operating income margin increased to 16.6% from 15.0% a year ago.

Nonoperating Income and Expense

Interest expense increased $10,857,000, or 18.9%, to $68,390,000 in the 2013 Period due primarily to higher interest rates, which were partially offset by lower debt balances. Our weighted average cost of debt was 9.1% at June 30, 2013. Interest expense in the 2013 Period also includes $3,932,000 of non-cash amortization of a present value adjustment of debt compared to $2,557,000 in the 2012 Period.

The increase in interest expense from the refinancing of our debt in January 2012 cycled in January 2013. Absent a significant increase in LIBOR, we expect interest expense to continue to decrease in the 13 weeks ending September 29, 2013 due to lower debt balances, which decreased $72,350,000 in the 2013 Period and have decreased $122,365,000 since the January 2012 refinancing, and the lower interest rate on the New Pulitzer Notes.

In December 2012, we recognized a gain of $7,093,000 from a distribution related to the partial sale of assets in a private equity investment.

Overall Results

We recognized $37,617,000 of reorganization costs in the 2012 Period. We recognized income tax expense of 49.5% of income from continuing operations before income taxes in the 2013 Period and income tax benefit of 32.1% in the 2012 Period. Adjustments to deferred income taxes increased income tax expense approximately $1,000,000 in the 2013 Quarter, resulting in a high effective tax rate. Approximately $1,000,000 of deferred tax expense was due to rate changes in the 2013 Period relating to asset basis adjustments made to optimize tax loss carrybacks and future deferrals of income taxes. See Note 7 of the Notes to Consolidated Financial Statements, included herein, for a reconciliation of the expected federal income tax rate to the actual tax rates.


32


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated (which includes discontinued operations) totaled $10,372,000 in the 2013 Period compared to a loss of $13,544,000 in the 2012 Period. We recorded earnings per diluted common share of $0.20 in the 2013 Period and a loss of $0.28 in the 2012 Period. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.22 in the 2013 Period, compared to $0.35 in the 2012 Period. Per share amounts may not add due to rounding.
 
39 Weeks Ended
 
 
June 30
2013
 
June 24
2012
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated, as reported
10,372

0.20

(13,544
)
(0.28
)
Adjustments:
 
 
 
 
Debt financing and reorganization costs
557

 
40,397

 
Amortization of debt present value adjustment
3,932

 
2,557

 
Gain on sale of investment, net
(6,909
)
 

 
Other, net
2,170

 
3,717