10-K 1 a10k20139-29x13.htm 10-K 10K 2013 9-29-13

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 29, 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 of incorporation)
(I.R.S. Employer Identification No.)
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
Registrant's telephone number, including area code
Title of Each Class
Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock - $0.01 par value
New York Stock Exchange
Preferred Share Purchase Rights
New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
                                     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
                                         
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller Reporting Company [ ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
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 [  ]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter. Based on the closing price of the Registrant's Common Stock on the New York Stock Exchange on March 25, 2013, such aggregate market value is approximately $62,832,000. For purposes of the foregoing calculation only, as required, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.
 
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of November 30, 2013. Common Stock, $0.01 par value, 53,444,441 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2014 are incorporated by reference in Part III of this Form 10-K.
 



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




References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2013", "2012", "2011" 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 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 report. We do not undertake to publicly update or revise our forward-looking statements.

PART I
 
On December 12, 2011, the Company and certain of its subsidiaries filed voluntary, prepackaged petitions in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") for relief under Chapter 11 of the U.S. Bankruptcy Code (the "U.S. Bankruptcy Code") (collectively, the "Chapter 11 Proceedings"). Our interests in TNI Partners ("TNI") and Madison Newspapers, Inc. ("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.

We experienced significant net losses in all but one year since 2007 due primarily to non-cash charges for impairment of goodwill and other assets in 2013, 2011, 2009 and 2008 and reorganization costs in 2012 . Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at September 29, 2013. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 4 and 5 of the Notes to Consolidated Financial Statements, included herein, for additional information.
 
ITEM 1. BUSINESS
 
We are a leading provider of local news and information, and a major platform for advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 50 daily newspaper markets, across 22 states, are principally midsize or small. Through our paid and unpaid print and digital platforms, we reach an overwhelming majority of adults in our markets.

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Our platforms include:

50 daily and 38 Sunday newspapers with subscribers totaling 1.1 million and 1.5 million, respectively, for the six months ended September 29, 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 23.2 million unique visitors in September 2013, with 209.1 million page views; and
Nearly 300 weekly newspapers and classified and niche publications.

Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Based on data from the Bureau of Labor of Statistics as of October 2013, the unemployment rate in eight of our top ten markets by revenue was lower than the national average. Eight of our top ten markets also ranked among the top 25 markets nationwide with the lowest unemployment rates. 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.

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

STRATEGIC INITIATIVES

We are focused on five broad strategic initiatives:

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

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

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

Drive Revenue

Revenue is a key imperative among our top priorities. We pursue revenue opportunities by gaining new local advertisers, introducing new products and increasing our share of advertising and marketing services spending from existing clients. Our sales force is larger, and we believe of higher quality, than any local competitor, and we invest heavily in training, especially with respect to our expanding array of digital products.

Expand Our Audiences

The number of customers we reach in our markets is critical to our value to advertisers. As measured in 11 of our top markets by independent, third-party research, we deliver unduplicated reach of print and digital readers and users of print products of an average of 79.1% of all adults over a seven-day period through our print and digital platforms. Among those 18-29 years old, we reach an average of 78.8% of readers and users. We believe our non-daily print publications further expand our audiences.

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


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Seize Digital Opportunities

We offer advertisers a wide array of digital products, including video, digital couponing, behavioral targeting, banner ads and social networking. Total digital revenue increased 5.5% in 2013 and we expect that digital revenue will continue to grow.

On our digital sites, we provide news stories 24 hours a day and post continual updates of developing stories, often including video. Customers access our stories digitally on websites, mobile devices and tablets. As a result, our digital audience has grown rapidly. In September 2013, unique visitors to our digital sites increased 2.7% from September 2012 to 23.2 million.

We have developed mobile sites in all of our markets as well as separate smart phone applications in all markets, and, as a result, we have enjoyed significant audience growth, with mobile, tablet, desktop and app page views increasing 9.4% in September 2013 from September 2012. In most of our markets, our websites are the leading local digital news source. As with mobile, we have moved quickly to develop applications for tablets, including the iPad, and with our mobile audience growth and high advertiser interest we expect mobile and tablet advertising revenue to increase in the next few years. As new digital technologies emerge, we expect to move rapidly to make our content available on them.

In 2011, we began to implement charges for digital access to our content in certain of our markets using a metered model. In December 2013, that program has been rolled out in most of our markets, and is contributing to our subscription revenue.

Aggressively Control Costs

Throughout the recent economic downturn, we have aggressively transformed our business model and carefully managed our costs to maintain our margins and profitability. Since 2007, we reduced cash costs of our continuing operations (i.e., compensation, newsprint and ink, other operating expenses and workforce adjustments) by $285 million, or 36%. We regionalized staff functions, selectively consolidated and/or outsourced printing, discontinued unprofitable niche publications, reduced newsprint volume 58%, and sharpened our focus on cost control in all areas. We have reduced personnel while protecting our strengths in news, sales and digital products.

Our business transformation actions allowed us to maintain significant, stable cash flows since 2009 and significantly reduce debt, despite declining revenues. While future cost reductions will be more difficult to accomplish as a result of the significant reductions to our cost structure that we have achieved, we remain committed to maintaining strong cash flows.

PULITZER ACQUISITION
 
In 2005, we acquired Pulitzer Inc. (“Pulitzer”). Pulitzer published 14 daily newspapers and more than 100 weekly newspapers and specialty publications. Pulitzer also owned a 50% interest in TNI, as discussed more fully below. The acquisition of Pulitzer increased our paid circulation by more than 50% and revenue by more than 60% at that time. The acquisition was financed primarily with debt.
 
Pulitzer newspaper operations include St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (“PD LLC”), publishes the St. Louis Post-Dispatch, the only major daily newspaper serving the greater St. Louis metropolitan area, and a variety of specialty publications, and supports its related digital products. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
 
Pulitzer and its subsidiaries and affiliates currently publish 11 daily newspapers and support the related digital products, as well as publish approximately 75 weekly newspapers, shoppers and niche publications that serve markets in the Midwest, Southwest and West.

TNI Partners
 
As a result of the acquisition of Pulitzer, we own a 50% interest in TNI, the Tucson, Arizona newspaper partnership. TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and the owner of the remaining 50%, Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co., Inc., (“Gannett”), is responsible for printing,

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delivery, advertising and subscription activities of the Arizona Daily Star and, until May 2009, the Tucson Citizen, as well as their related digital products and specialty publications. In May 2009, Citizen discontinued print publication of the Tucson Citizen.
 
TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspapers and other media. Under the amended and restated operating agreement between Star Publishing and Citizen, the Arizona Daily Star remains the separate property of Star Publishing. Results of TNI are accounted for using the equity method. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.
 
Until the May 2009 discontinuation of print publication of the Tucson Citizen, TNI was subject to the provisions of the Newspaper Preservation Act of 1970, which permits joint operating agreements between newspapers under certain circumstances without violation of the Federal antitrust laws. Agency agreements generally allow newspapers operating in the same market to share certain printing and other facilities and to pool certain revenue and expenses in order to decrease aggregate expenses and thereby allow the continuing operation of multiple newspapers in the same market.
 
The TNI agency agreement (“Agency Agreement”), which remains in effect, has governed the operation since 1940. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Agency Agreement expires in 2015, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each. Star Publishing and Citizen also have a reciprocal right of first refusal to acquire the 50% interest in TNI owned by Citizen and Star Publishing, respectively, under certain circumstances.
 
MADISON NEWSPAPERS
 
We own 50% of the capital stock of MNI and 17% of the nonvoting common stock of The Capital Times Company (“TCT”). TCT owns the remaining 50% of the capital stock of MNI. MNI publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and supports their related digital products. MNI conducts business under the trade name Capital Newspapers. We have a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provide other services to MNI. Results of MNI are accounted for using the equity method. Net income or loss of MNI (after income taxes) is allocated equally to the Company and TCT.
 
ADVERTISING AND MARKETING SERVICES
 
Approximately 68% of our 2013 revenue was derived from advertising and marketing services. Our strategies are to increase our share of local advertising through increased sales activities in our existing markets and, over time, to increase our print and digital audiences through internal expansion into existing and contiguous markets and enhancement of digital products.
 
Several of our businesses operate in geographic groups of publications, or “clusters,” which provide operational efficiencies and extend sales penetration. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance, human resources, management and/or production of the publications. Sales penetration can improve if the sales effort is successful in cross-selling advertising into multiple publications and digital products. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.
 
Our newspapers, classified and specialty publications, and digital products compete with newspapers having national or regional circulation, magazines, radio, network, cable and satellite television, other advertising media such as outdoor, mobile, and movie theater promotions, other classified and specialty publications, direct mail, yellow pages directories, as well as other information content providers such as digital sites. Competition for advertising is based on audience size and composition, subscription levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of our daily and Sunday newspapers compete with other local daily or weekly newspapers. We believe we capture a substantial share of the total advertising dollars spent in each of our markets.

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

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The following broadly define major categories of advertising and marketing services revenue:
 
Retail advertising is revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts or regional and national businesses with local retail operations.

Classified advertising, which includes employment, automotive, real estate for sale or rent, legal and other categories, is revenue earned from sales of advertising space in the classified section of the publication or from publications consisting primarily of such advertising. Classified publications are periodic advertising publications available in racks or delivered free, by carriers or third-class mail, to all, or selected, households in a particular geographic area. Classified publications offer advertisers a cost-effective local advertising vehicle and are particularly effective in larger markets with higher media fragmentation.
 
National advertising is revenue earned from display advertising space, or for preprinted advertising inserted in the publication, to national accounts, if there is no local retailer representing the account in the market.
 
Digital advertising consists of display, banner, behavioral targeting, search, rich media, directories, classified or other advertising on websites or mobile devices associated and integrated with our print publications, other digital applications, or on third party affiliated websites, such as Yahoo! Inc. (“Yahoo!”). Digital advertising is reported in combination with print advertising in the retail, classified and national categories.

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

Marketing services includes a robust suite of custom digital marketing services that include: search engine optimization ("SEO") amplification, search engine marketing ("SEM"), web and mobile production, social media services and reputation monitoring and management. Our services also include media buying in audience extension networks (outside of those owned and operated by us) such as Centro Ad Lift, Google Ad Exchange and Facebook.
 
The advertising environment is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. Our enterprises are primarily located in midsize and small markets. Historically these markets have been more stable than major metropolitan markets during downturns in advertising spending but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.
 
DIGITAL ADVERTISING AND MARKETING SERVICES
 
Our digital activities include websites supporting each of our daily newspapers and certain of our other publications. Some of our website content is also available through output to mobile devices, including telephones and tablet devices. In addition, we also support a number of discrete mobile applications, such as for high school, college and professional sports. Digital activities of the newspapers are reported and managed as a part of our publishing operations.
 
In 2013, we launched Amplified Digital Solutions, a robust suite of custom digital marketing services that include: SEO amplification, SEM, web and mobile production, social media services and reputation monitoring and management.  Amplified Digital Solutions also acts as a full service digital media buying agency which can buy digital marketing campaigns outside our owned and operated products and platforms for extended audience targeting.   

We are a member of the Local Media Consortium (the “Consortium”). The Consortium partners with companies like Google, Yahoo! and other technology companies and service providers aimed at increasing the potential share of new revenue and audience-building programs available to, as well as the quality of information and advertising services available from, Consortium members. The Consortium currently includes more than 30 companies and more than 700 local newspapers, as well as television and radio outlets, across the United States.

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

Our digital businesses experienced rapid growth in the second half of 2010 and again in 2011, 2012 and 2013 after

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recession-related declines in 2008 and 2009. Digital advertising reached 15.4% of total advertising and marketing services revenue in the 13 weeks ended September 29, 2013.

AUDIENCES
 
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 79.1% of adults in our larger markets. Scarborough Research from 2012 ranks the St. Louis Post-Dispatch and STLtoday.com as the market with the sixth highest combination of newspaper and web reach of the 25 most populated U.S. markets. Readership by young adults is also significant in our larger markets. We are maintaining large audiences in our markets through the combination of digital audience growth and strong newspaper readership, as illustrated in the table below, as well as through additional specialty and niche publications. In 2010, for the first time, we measured use of our daily newspapers by non-readers ("print users").
   
Audience reach is summarized as follows:
 
All Adults
(Percent, Past Seven Days)
2007
2008
2009
2010
2011
2012
2013
 
 
 
 
 
 
 
 
Print only
52.0
49.6
46.6
43.8
43.4
37.8
36.9
Print and digital
13.2
16.9
16.4
15.9
16.4
19.6
17.8
Digital only
4.6
6.1
6.6
8.4
7.9
9.4
10.5
Total readership
69.8
72.6
69.6
68.1
67.7
66.8
65.2
Print users (1)
NA
NA
NA
14.9
14.5
14.7
13.9
Total reach
69.8
72.6
69.6
83.0
82.2
81.5
79.1
 






 
Total print reach (1)
65.2
66.5
63.0
74.6
74.3
72.1
68.6
Total digital reach
17.8
23.0
23.0
24.3
24.3
29.0
28.3

 
Age 18-29
(Percent, Past Seven Days)
2007
2008
2009
2010
2011
2012
2013
 
 
 
 
 
 
 
 
Print only
36.1
38.7
41.0
32.1
33.0
31.5
30.7
Print and digital
13.8
19.4
16.4
15.6
13.7
18.4
15.6
Digital only
6.4
9.5
8.3
9.5
11.6
9.3
10.5
Total readership
56.3
67.6
65.7
57.2
58.3
59.2
56.8
Print users (1)
NA
NA
NA
21.8
21.1
24.5
22.0
Total reach
56.3
67.6
65.7
79.0
79.4
83.7
78.8
 






 
Total print reach (1)
49.9
58.1
57.4
69.5
67.8
74.4
68.3
Total digital reach
20.2
28.9
24.7
25.1
25.3
27.7
26.1
(1)
Print users were not measured prior to 2010. As a result, print reach in 2010-2013 is not comparable to 2007-2009.
Source:
Lee Enterprises Audience Report, Thoroughbred Research. January-June 2007-2013.
Markets:
11 largest markets in 2008-2013. 2007 data excludes Tucson, AZ and La Crosse, WI.
Margin of Error:
Total sample +/- 1.1%, Total digital sample +/- 1.3%
  
After advertising, subscriptions and single copy sales are our largest source of revenue. In 2011, we began to implement charges for digital access to our content in certain of our markets using a metered model. That program is now in place in most of our markets, and is contributing to our subscription revenue. According to Editor and Publisher International Yearbook data as reported by the NAA, nationwide daily newspaper circulation unit sales peaked in 1984 and Sunday circulation unit sales peaked in 1990. For the six months ended September 2013, our daily circulation units, which include TNI and MNI, as measured by the Alliance for Audited Media ("AAM") were 1.1 million and Sunday circulation units were 1.5 million.
 

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Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to improve audiences include continuous improvement of content and promotional efforts. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence print subscriptions. The introduction in 2010, and continued expansion since, of new mobile and tablet applications positively impacted our digital audiences.
 
Our enterprises are also focused on increasing the number of subscribers who pay for their subscriptions via automated payment mechanisms, such as credit cards or bank account withdrawals. We have historically experienced higher retention of customers using these payment methods. Other initiatives vary from location to location and are determined principally by management at the local level in collaboration with our senior management. Competition for print subscriptions is generally based on the content, journalistic quality and price of the publication.
 
Audience competition exists in all markets, even from unpaid products, but is most significant in markets with competing local daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population may be sufficient to support more than one daily newspaper.

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


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

 
Sunday

 
 
 
 
 
 
 
 
St. Louis Post-Dispatch
stltoday.com
St. Louis, MO
161,343

 
461,259

 
The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
86,549

 
91,102

 
Capital Newspapers (4)
 
 
 
 
 
 
Wisconsin State Journal
madison.com
Madison, WI
81,103

 
107,288

 
Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
7,735

 

 
Portage Daily Register
wiscnews.com/pdr
Portage, WI
3,955

 

 
Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
3,414

 

 
Arizona Daily Star (3)
azstarnet.com
Tucson, AZ
77,547

 
123,162

 
Lincoln Group
 
 
 
 
 
 
Lincoln Journal Star
journalstar.com
Lincoln, NE
51,004

 
62,380

 
Columbus Telegram
columbustelegram.com
Columbus, NE
6,893

 
7,947

 
Fremont Tribune
fremonttribune.com
Fremont, NE
6,481

 

 
Beatrice Daily Sun
beatricedailysun.com
Beatrice, NE
4,515

 

 
Quad-Cities Group
 
 
 
 
 
 
Quad-City Times
qctimes.com
Davenport, IA
40,499

 
52,173

 
Muscatine Journal
muscatinejournal.com
Muscatine, IA
5,477

 

 
The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
39,470

 
42,239

 
Billings Gazette
billingsgazette.com
Billings, MT
37,436

 
42,396

 
Central Illinois Newspaper Group
 
 
 
 
 
 
The Pantagraph
pantagraph.com
Bloomington, IL
32,683

 
37,735

 
Herald & Review
herald-review.com
Decatur, IL
26,154

 
40,143

 
Journal Gazette & Times-Courier
jg-tc.com
Mattoon/Charleston, IL
11,642

 

 
Sioux City Journal
siouxcityjournal.com
Sioux City, IA
29,370

 
32,611

 
The Post-Star
poststar.com
Glens Falls, NY
25,316

 
29,508

 
Casper Star-Tribune
trib.com
Casper, WY
24,940

 
21,729

 
Missoula Group
 
 
 
 
 
 
Missoulian
missoulian.com
Missoula, MT
23,730

 
28,236


Ravalli Republic
ravallinews.com
Hamilton, MT
2,107

(5) 
3,414

(5 
) 
The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
23,636

 
26,454

 
River Valley Newspaper Group
 
 
 
 
 
 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
23,515

 
32,864

 
Winona Daily News
winonadailynews.com
Winona, MN
8,315

 
9,531

 
The Chippewa Herald
chippewa.com
Chippewa Falls, WI
4,731

 
4,641

 
The Southern Illinoisan
thesouthern.com
Carbondale, IL
23,458

 
28,661

 
Rapid City Journal
rapidcityjournal.com
Rapid City, SD
23,004

 
27,166

 
The Journal Times
journaltimes.com
Racine, WI
22,562

 
25,582

 
Northwest Group
 
 
 
 
 
 
The Daily News
tdn.com
Longview, WA
20,701

 
17,877

 
Albany Democrat-Herald
democratherald.com
Albany, OR
12,728

 
13,476

 
Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
9,903

 
9,881

 
The World
theworldlink.com
Coos Bay, OR
7,501

 

 

8


 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2)

 
Sunday

 
 
 
 
 
 
 
 
The Daily Herald
heraldextra.com
Provo, UT
20,453

 
26,885

 
Magic Valley Group
 
 
 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
16,533

 
17,807

 
Elko Daily Free Press
elkodaily.com
Elko, NV
5,269

(5) 

 
The Sentinel
cumberlink.com
Carlisle, PA
15,387

 
13,576

 
Globe Gazette
globegazette.com
Mason City, IA
13,228

 
17,072

 
Helena/Butte Group
 
 
 
 
 
 
Independent Record
helenair.com
Helena, MT
13,145

 
13,547

 
The Montana Standard
mtstandard.com
Butte, MT
11,927

 
11,973

 
Napa Valley Register
napavalleyregister.com
Napa, CA
11,602

 
11,924

 
The Times and Democrat
thetandd.com
Orangeburg, SC
10,809

 
11,511

 
Central Coast Newspapers
 
 
 
 
 
 
Santa Maria Times
santamariatimes.com
Santa Maria, CA
10,748

 
15,857

 
The Lompoc Record
lompocrecord.com
Lompoc, CA
3,373

 
3,456

 
Arizona Daily Sun
azdailysun.com
Flagstaff, AZ
9,511

 
9,849

 
The Sentinel
hanfordsentinel.com
Hanford, CA
7,273

 

 
The Citizen
auburnpub.com
Auburn, NY
6,807

 
8,537

 
The Ledger Independent
maysville-online.com
Maysville, KY
5,442

 

 
Daily Journal
dailyjournalonline.com
Park Hills, MO
5,160

 

 
 
 
 
1,136,084

 
1,541,449

 
(1)
Source: AAM: Six months ended September 2013, unless otherwise noted.
(2)
Not all newspapers are published Monday through Saturday
(3)
Owned by Star Publishing and published through TNI.
(4)
Owned by MNI.
(5)
Source: Company statistics.
 
NEWSPRINT
 
The basic raw material of newspapers, and classified and specialty publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. Price fluctuations can have a significant effect on our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
 

9


EXECUTIVE TEAM
 
The following table lists our current executive team members:
Name
Age
Service
With The
Company
Named
To Current
Position
Current Position
 
 
 
 
 
Mary E. Junck
66
June 1999
January 2002
Chairman, President and Chief Executive Officer
 
 
 
 
 
Joyce L. Dehli
55
August 1987
February 2006
Vice President - News
 
 
 
 
 
Paul M. Farrell
58
October 2013
October 2013
Vice President - Digital Sales
 
 
 
 
 
Suzanna M. Frank
43
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Astrid J. Garcia
63
December 2006
December 2013
Vice President - Human Resources
 
 
 
 
 
James A. Green
47
March 2013
March 2013
Vice President - Digital
 
 
 
 
 
Michael R. Gulledge
53
October 1982
September 2012
Vice President - Sales and Marketing
 
 
 
 
 
Daniel K. Hayes
68
September 1969
September 2005
Vice President - Corporate Communications
 
 
 
 
 
Michele Fennelly White
51
June 1994
June 2011
Vice President - Information Technology and Chief Information Officer
 
 
 
 
 
Kevin D. Mowbray
51
September 1986
May 2013
Vice President and Chief Operating Officer
 
 
 
 
 
Gregory P. Schermer
59
February 1989
October 2012
Vice President - Strategy
 
 
 
 
 
Carl G. Schmidt
57
May 2001
May 2001
Vice President, Chief Financial Officer and Treasurer
 
 
 
 
 
Greg R. Veon
61
April 1976
November 1999
Vice President - Publishing
 
 
 
 
 
Mary E. Junck was elected Chairman, President and Chief Executive Officer in 2002. She was elected to the Board of Directors of the Company in 1999.
 
Joyce L. Dehli was appointed Vice President - News in 2006.
 
Paul M. Farrell was appointed Vice President - Digital Sales in October 2013. From September 2012 to October 2013, he served as Publisher of the Connecticut Media Group of Hearst Media Services. From May 2007 to August 2012, he served as Vice President - Sales and Marketing of the Company.

Suzanna M. Frank was appointed Vice President - Audience in March 2008. From 2003 to March 2008 she served as Director of Research and Marketing of the Company.
 
Astrid J. Garcia was appointed Vice President - Human Resources in December 2013. From 2006 to November 2013 she served as Vice President of Human Resources, Labor Relations and Operations of the St. Louis Post-Dispatch.

James A. Green was appointed Vice President - Digital in March 2013. From June 2011 to March 2013, he served as Executive Vice President and General Manager of Travidia, Inc., a developer of newspaper digital shopping media and marketing programs. From 2004 to June 2011 he served as Chief Marketing Officer of Travidia, Inc.

Michael R. Gulledge was elected Vice President - Sales and Marketing in September 2012 and named Publisher of the Billings Gazette in 2000. From 2005 to September 2012 he served as a Vice President - Publishing.

10


Daniel K. Hayes was appointed Vice President - Corporate Communications in 2005.

Michele Fennelly White was appointed Vice President - Information Technology and Chief Information Officer in June 2011. From 1999 to June 2011, she served as Director of Technical Support.
 
Kevin D. Mowbray was elected Vice President and Chief Operating Officer in May 2013. From 2004 to May 2013 he served as a Vice President - Publishing and was Publisher of the St. Louis Post-Dispatch from 2006 until May 2013.
 
Gregory P. Schermer was elected Vice President - Strategy in October 2012. From 1997 to October 2012 he served as Vice-President - Interactive Media.  He was elected to the Board of Directors of the Company in 1999. 

Carl G. Schmidt was elected Vice President, Chief Financial Officer and Treasurer in 2001. From 2007 to May 2013, he also served as a Vice President - Publishing.
 
Greg R. Veon was elected a Vice President - Publishing in 1999 and named Publisher of the Quad-City Times in June 2011.
 
Elected officers are considered to be executive officers for United States Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 29, 2013, we had approximately 5,000 employees, including approximately 1,300 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2013 totaled approximately 4,600. We consider our relationships with our employees to be good.
Bargaining units represent 432, or 70%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates through October 2015.
Approximately 45 employees in four additional locations are represented by collective bargaining units.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
 
We have a long, substantial history of sound corporate governance practices. Our Board of Directors has a lead independent director, and has had one for many years. Currently, eight of ten members of our Board of Directors are independent, as are all members of the Board's Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by our independent registered public accounting firm and its affiliates.
 
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"), including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All such filings are available free of charge. The content of any website referred to in this Annual Report is not incorporated by reference unless expressly noted.
 
ITEM 1A. RISK FACTORS
 
Risk exists that our past results may not be indicative of future results. A discussion of our risk factors follows. See also, “Forward-Looking Statements”, included herein. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations.
 
DEBT AND LIQUIDITY
 
We May Have Insufficient Earnings Or Liquidity To Meet Our Future Debt Obligations
 
We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 5 of the Notes to Consolidated Financial Statements, included herein. In February 2009, we completed a comprehensive restructuring of our then-existing credit agreement and a refinancing of our Pulitzer

11


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 (the "New Pulitzer Notes") with BH Finance LLC ("Berkshire"),a subsidiary of Berkshire Hathaway, Inc. 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 September 29, 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 September 29, 2013 totals $47,504,000. This liquidity amount excludes any future cash flows. Our unlevered free cash flow has been stable for the last five years and has exceeded $152,000,000 in each year from 2009 through 2013 but there can be no assurance that such stability will continue. See "Non-GAAP Financial Measures" in Item 7, included herein. 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 September 29, 2013, the principal amount of our outstanding debt totals $847,500,000, achieving the September 2015 target level in Lee's reorganization plan two years early. Lower cash balances and asset sales have contributed to the improvement in debt repayment compared to the Plan. At September 29, 2013, the principal amount of our debt, net of cash, is 4.8 times our 2013 Adjusted EBITDA, compared to a ratio of 5.3 at September 30, 2012.

We expect to refinance amounts outstanding under our debt agreements on or before their respective maturity dates with other loans, debt securities or equity securities, in privately negotiated transactions (including exchanges), or public offerings.  The timing of such refinancing will depend on many factors, including market conditions, our liquidity requirements, our debt maturity profile, and contractual restrictions.  We continuously monitor the credit and equity markets for refinancing opportunities, and have ongoing relationships with experts in debt and equity financing to assist us. 

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 September 29, 2013.

ECONOMIC CONDITIONS
 
General Economic Conditions May Continue To Impact Our Revenue And Operating Results
 
According to the National Bureau of Economic Research, the United States economy was in a recession from December 2007 until June 2009. It is widely believed that certain elements of the economy, such as housing, auto sales and employment, were in decline before December 2007, and some elements have still not recovered to pre-recession levels in either nominal or real (inflation adjusted) terms. 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.


12


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

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

Many advertisers, including major retail store chains, automobile manufacturers and dealers, banks and telecommunications companies, have experienced significant merger and acquisition activity over the last several years, and some have gone out of business, effectively reducing the number of brand names under which the merged entities operate. Our retail revenue is also being impacted by the slow pace of the current economic recovery. For example, a decline in the housing market negatively impacts retail advertising related to home improvement, furniture and home electronics.
 
Classified Advertising
 
Classified advertising is the category that has been most significantly impacted by changing advertising trends and the current economic environment. All categories of classified advertising have generally declined since 2007. While automobile sales have rebounded significantly, neither the unemployment rate nor the housing industry have, as yet, recovered to pre-recession levels.
 
See “Advertising and Marketing Services” in Item 1, included herein, for additional information on the risks associated with advertising revenue.
 
Subscription Revenue
 
Although our overall audience is stable and our subscription results have historically benchmarked favorably to national averages, as compiled by the AAM, subscription sales have nonetheless been declining for many years. The possibility exists that future subscription price increases may be difficult to accomplish as a result of future declines in subscription sales, and that price decreases may be necessary to retain or grow subscription volume. We are maintaining our share of audience through digital audience growth and strong newspaper readership.
 
In addition, as audience attention increasingly focuses on digital media, circulation of our newspapers may be adversely affected, which may decrease subscription revenue and exacerbate declines in print advertising. If we are not successful in growing our digital businesses, including digital subscription revenue, to offset declines in revenue from our print products, our business, financial condition and prospects will be adversely affected. 
 

13


See “Audiences” in Item 1, included herein, for additional information on the risks associated with subscription revenue.
 
OPERATING EXPENSES
 
We May Not Be Able To Reduce Future Expenses To Offset Potential Revenue Declines
 
We reduced cash costs of our continuing operations (i.e., compensation, newsprint and ink, other operating expenses and workforce adjustments) by $285 million, or 36%, since 2007. Such expense reductions are not expected to significantly impact our ability to deliver advertising, news or other content to our customers. As a result of the significant reductions of our cost structure we have achieved since 2007, future cost reductions will be more difficult to accomplish.
 
Newsprint comprises a significant amount of our operating costs. See “Newsprint” in Item 1, and “Commodities” in Item 7A, included herein, for additional information on the risks associated with changes in newsprint costs.

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

We May Incur Additional Non-Cash Impairment Charges

We have significant amounts of goodwill and identified intangible assets. In 2013, 2011, 2009 and 2008, we recorded substantial impairment charges to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance. See “Critical Accounting Policies” in Item 7, included herein, for additional information on the risks associated with such assets.

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

Pension liabilities, net of plan assets, totaled $30.6 million at September 29, 2013, a $38.1 million improvement from September 30, 2012, due to strong asset returns and an increase in discount rates used to measure the liabilities. Contributions to pension plans are expected to total $1.4 million in 2014, a 77% reduction from 2013.

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

As of July 1, 2011, our Common Stock traded at an average 30-day closing market price of less than $1 per share. Under the NYSE listing standards, if our Common Stock fails to maintain an adequate per share price and total market capitalization of less than $50,000,000, our Common Stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE first notified us that our Common Stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our Common Stock 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.


14


OTHER

Cybersecurity Risks Could Harm Our Ability To Operate Effectively

In 2013, 14.4% of our advertising and marketing services revenue was obtained from advertising in our digital products, and one of our businesses provides digital infrastructure and digital publishing services for other companies. We use computers in substantially all aspects of our business operations. Such uses give rise to cybersecurity risks, including the misappropriation of personally identifiable information that we store and manage. We have preventive systems and processes in place to protect against the risk of cyber incidents. Prolonged system outages or a cyber incident that would be undetected for an extended period could reduce our print and/or digital revenue, increase our operating costs, disrupt our operations, harm our reputation, lead to legal exposure to customers and/or subject us to liability under laws that protect personal data. We maintain insurance coverage against certain of such risks.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The initial lease term expires in 2019.
 
All of our principal printing facilities are owned, except Madison, Wisconsin (which is owned by MNI), Tucson (which is jointly owned by Star Publishing and Citizen), St. Louis (as described below) and leased land for the Helena, Montana plant. All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped. With the exception of St. Louis, none of our facilities is individually significant to our business.

Information related to St. Louis facilities at September 29, 2013 is as follows:
(Square Feet)
Owned

Leased

 
 
 
PD LLC
749,000

7,000

Suburban Journals
41,000

17,000

   
Several of our daily newspapers, as well as many of our nearly 300 other publications, are printed at other Company facilities, or such printing is outsourced, to enhance operating efficiency. We are continuing to evaluate additional insourcing and outsourcing opportunities in order to more effectively manage our operating and capital costs.
 
Our newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.

ITEM 3. LEGAL PROCEEDINGS
 
In 2008, a group of newspaper carriers filed suit against us in the United States District Court for the Southern District of California, claiming to be our employees and not independent contractors. The plaintiffs seek relief related to alleged violations of various employment-based statutes, and request punitive damages and attorneys' fees. In 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 decertify the class, which was granted as to plaintiffs’ minimum wage, overtime, unreimbursed meal and unreimbursed rest period claims. The Company denies the allegations of employee status, consistent with our past practices and industry standards, and will continue to vigorously contest the remaining claims in the action, which are not covered by insurance. At this time we are unable to predict whether the ultimate economic outcome, if any, could have a material effect on our Consolidated Financial Statements, taken as a whole.

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

15


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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

 
March

 
June

 
September

 
 
 
 
 
 
 
 
2013
 
 
 
 
 
 
 
High
1.75

 
1.48

 
2.18

 
3.20

Low
1.10

 
1.15

 
1.21

 
2.03

Closing
1.14

 
1.27

 
2.04

 
2.70

 
 
 
 
 
 
 
 
2012
 
 
 
 
 
 
 
High
0.91

 
1.73

 
1.99

 
1.67

Low
0.49

 
0.69

 
1.07

 
1.15

Closing
0.70

 
1.28

 
1.62

 
1.48

 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
High
2.94

 
3.41

 
3.47

 
1.15

Low
1.72

 
2.24

 
0.79

 
0.58

Closing
2.46

 
2.70

 
0.89

 
0.78

 
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.

At September 29, 2013, we had 6,941 holders of record of our Common Stock.
 
Our debt agreements require us to suspend stockholder dividends and share repurchases through December 2015. See Note 5 of the Notes to Consolidated Financial Statements, included herein.


16


Performance Presentation
 
The following graph compares the quarterly percentage change in the cumulative total return of the Company, the Standard & Poor's ("S&P") 500 Stock Index, and a peer group index, in each case for the five years ended September 30, 2013 (with September 30, 2008 as the measurement point). Total return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer's share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.
Copyright©: 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
The value of $100 invested on September 30, 2008 in stock of the Company, the Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
 
September 30
 
(Dollars)
2008

 
2009

 
2010

 
2011

 
2012

 
2013

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
78.57

 
76.57

 
22.29

 
42.29

 
75.43

Peer Group Index
100.00

 
78.19

 
74.82

 
58.55

 
91.16

 
144.26

S&P 500 Stock Index
100.00

 
93.09

 
102.55

 
103.72

 
135.05

 
161.17

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


17


ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2013

 
2012

 
2011

 
2010

 
2009

 
 
 
 

 
 

 
 

 
 

OPERATING RESULTS (1) (2)
 
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Operating revenue
674,740

 
706,921

 
723,221

 
743,927

 
800,738

Operating expenses, excluding depreciation, amortization, and impairment of goodwill and other assets
514,013

 
544,204

 
560,729

 
575,659

 
637,607

Depreciation and amortization
55,637

 
65,139

 
69,496

 
71,086

 
77,344

Impairment of goodwill and other assets (3)
171,094

 
1,388

 
204,289

 
899

 
244,548

Curtailment gains

 

 
16,137

 
45,012

 

Equity in earnings of associated companies
8,685

 
7,231

 
6,151

 
7,746

 
5,120

Reduction in investment in TNI (3)

 

 
11,900

 

 
19,951

Operating income (loss)
(57,319
)
 
103,421

 
(100,905
)
 
149,041

 
(173,592
)
Financial income
300

 
236

 
296

 
411

 
1,886

Interest expense
(89,447
)
 
(83,078
)
 
(52,696
)
 
(63,117
)
 
(75,425
)
Debt financing costs
(646
)
 
(2,823
)
 
(12,612
)
 
(8,514
)
 
(17,467
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
(76,478
)
 
(13,381
)
 
(145,156
)
 
47,326

 
(180,197
)
Discontinued operations, net of income taxes
(1,246
)
 
(2,918
)
 
(1,525
)
 
(1,148
)
 
130

Net income (loss)
(77,724
)
 
(16,299
)
 
(146,681
)
 
46,178

 
(180,067
)
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
(78,317
)
 
(16,698
)
 
(146,868
)
 
46,105

 
(123,191
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
(77,071
)
 
(13,780
)
 
(145,343
)
 
47,253

 
(123,321
)
 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations
(1.49
)
 
(0.28
)
 
(3.24
)
 
1.06

 
(2.77
)
Discontinued operations
(0.02
)
 
(0.06
)
 
(0.03
)
 
(0.03
)
 

 
(1.51
)
 
(0.34
)
 
(3.27
)
 
1.03

 
(2.77
)
 
Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
(1.49
)
 
(0.28
)
 
(3.24
)
 
1.05

 
(2.77
)
Discontinued operations
(0.02
)
 
(0.06
)
 
(0.03
)
 
(0.03
)
 

 
(1.51
)
 
(0.34
)
 
(3.27
)
 
1.03

 
(2.77
)
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
51,833

 
49,261

 
44,847

 
44,555

 
44,442

Diluted
51,833

 
49,261

 
44,847

 
44,955

 
44,442

 
BALANCE SHEET INFORMATION (End of Year)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
827,705

 
1,061,136

 
1,158,248

 
1,440,116

 
1,515,612

Debt, including current maturities (4)
847,500

 
945,850

 
994,550

 
1,081,590

 
1,168,335

Debt, net of cash, restricted cash and investments (4)
829,938

 
931,930

 
966,023

 
1,052,545

 
1,151,106

Stockholders' equity (deficit)
(170,350
)
 
(114,633
)
 
(101,346
)
 
56,823

 
23,598



18


(1
)
Results of discontinued operations have been restated for all periods presented.
(2
)
2012 includes 53 weeks of business operations. All other years include 52 weeks.
(3
)
The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows:
(Thousands of Dollars)
2013

 
2012

 
2011

 
2010

 
2009

 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
Goodwill

 

 
186,281

 

 
193,471

Nonamortized intangible assets
1,567

 

 
13,109

 

 
12,650

Amortizable intangible assets
169,041

 

 
4,199

 

 
33,848

Property and equipment
486

 
1,388

 
700

 
899

 
4,579

 
171,094

 
1,388

 
204,289

 
899

 
244,548

Reduction in investment in TNI

 

 
11,900

 

 
19,951

 
171,094

 
1,388

 
216,189

 
899

 
264,499

 
 
 
 
 
 
 
 
 
 
Discontinued operations

 
3,606

 
850

 
2,391

 
1,405

(4
)
Principal amount of debt, excluding fair value adjustments. See Note 5 of the Notes to Consolidated Financial Statements, included herein.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion includes comments and analysis relating to our results of operations and financial condition as of, and for each of the three years ended, September 29, 2013. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
 
NON-GAAP FINANCIAL MEASURES
 
No non-GAAP financial measure should be considered as a substitute for any related GAAP financial measure. However, we believe the use of non-GAAP financial measures provides meaningful supplemental information with which to evaluate its financial performance, or assist in forecasting and analyzing future periods. 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 and its ability to meet debt service requirements.
 
The non-GAAP financial measures utilized by us are defined as follows:

Adjusted EBITDA is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation and 50% of EBITDA from associated companies, minus equity in earnings of associated companies and curtailment gains.

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

Operating Cash Flow is defined as operating income (loss) plus depreciation, amortization and impairment charges, minus equity in earnings of associated companies and curtailment gains. Operating cash flow margin is defined as operating cash flow divided by operating revenue.

Unlevered Free Cash Flow is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation, distributions from associated companies and cash income tax refunds, minus equity in earnings of associated companies, curtailment gains, cash income taxes, pension contributions and capital expenditures. Changes in working capital, asset sales, minority interest and discontinued operations are excluded. Free Cash Flow also includes financial income, interest expense and debt financing and reorganization costs.

We also present comparable 13- and 52-week results, which are defined as 2013 results on a reported basis compared to 2012 results on a reported basis excluding the extra week of operations.

19


The table below reconciles operating cash flow, operating cash flow margin, adjusted EBITDA, unlevered free cash flow and free cash flow to operating income (loss), the most directly comparable measures under GAAP.
 
2013
 
2012
 
2011
 
(Thousands of Dollars)
Amount

Percent of Revenue

Amount

Percent of Revenue

Amount

Percent of Revenue

 
52 Weeks
 
53 Weeks
 
52 Weeks
 
Operating income (loss)
(57,319
)
(8.5
)
103,421

14.6

(100,905
)
(14.0
)
Equity in earnings of associated companies
(8,685
)
(1.3
)
(7,231
)
(1.0
)
(6,151
)
(0.9
)
Depreciation and amortization
55,637

8.2

65,139

9.2

69,496

9.6

Impairment of intangible and other assets
171,094

25.4

1,388

0.2

216,189

29.9

Curtailment gains




(16,137
)
(2.2
)
Operating cash flow
160,727

23.8

162,717

23.0

162,492

22.5

Ownership share of TNI EBITDA (50%)
5,797

 
4,753

 
4,190

 
Ownership share of MNI EBITDA (50%)
5,981

 
5,816

 
5,750

 
Stock compensation
1,261

 
1,080

 
1,287

 
Adjusted EBITDA
173,766

 
174,366

 
173,719

 
Ownership share of associated companies EBITDA (50%)
(11,778
)
 
(10,569
)
 
(9,940
)
 
Distributions from associated companies
11,398

 
9,086

 
8,316

 
Capital expenditures
(9,740
)
 
(7,843
)
 
(7,430
)
 
Pension contributions
(6,016
)
 
(6,807
)
 
(2,137
)
 
Cash income tax refunds (paid)
9,126

 
1,140

 
(10,462
)
 
Unlevered free cash flow
166,756

 
159,373

 
152,066

 
Financial income
300

 
236

 
296

 
Interest expense settled in cash
(84,012
)
 
(78,288
)
 
(52,641
)
 
Debt financing and reorganization costs paid
(1,071
)
 
(32,408
)
 
(11,601
)
 
Free cash flow
81,973

 
48,913

 
88,120

 

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

SAME PROPERTY COMPARISONS

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

CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates.


20


We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of our accounting policies.
Goodwill and Other Intangible Assets
 
In assessing the recoverability of goodwill and other nonamortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections, stock price and other industry or market considerations. This assessment is normally made in the last fiscal quarter of each year.

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

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.

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 and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
Due primarily to our stockholders' deficit in 2013 and to the difference between our stock price and the per share carrying value of our net assets in 2011, we analyzed the carrying value of our net assets in 2013 and 2011. Continued deterioration in our revenue and the weak economic environment were also factors in the timing of the analyses.

In 2013, we concluded the fair value of our business was in excess of the carrying value of our net assets. As a result no goodwill impairment was recorded. However, we determined that the cash flows from nonamortized and amortizable intangible assets were not sufficient to recover their carrying values. As a result, we recorded non-cash charges to reduce the carrying values of such assets.
 
In 2011, 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 values of goodwill, nonamortized and amortizable intangible assets. 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 2013, 2012 and 2011. We recorded deferred income tax benefits related to these charges.
 

21


A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2013

 
2012

 
2011

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Goodwill

 

 
186,281

Nonamortized intangible assets
1,567

 

 
13,109

Amortizable intangible assets
169,041

 

 
4,199

Property and equipment
486

 
1,388

 
700

 
171,094

 
1,388

 
204,289

Reduction in investment in TNI

 

 
11,900

 
171,094

 
1,388

 
216,189

 
 
 
 
 
 
Discontinued operations

 
3,606

 
850


We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.
 
Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.
 
Pension, Postretirement and Postemployment Benefit Plans
 
We evaluate our liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If we used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
 
Increases in market interest rates, which may impact plan assumptions, generally result in lower service costs for current employees, higher interest expense and lower liabilities. Actual returns on plan assets that are lower than the plan assumptions will generally result in decreases in a plan's funded status and may necessitate additional contributions.
 
Income Taxes
 
Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
 
We file income tax returns with the Internal Revenue Service (“IRS”) and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either

22


positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
 
 Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital product. Subscription revenue is recorded over the print or digital product subscription term or as such newspapers are individually sold. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for print or digital products or advance payments for advertising.
 
Uninsured Risks
 
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits exposure to large claims. We accrue our estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts.
 
Our accrued reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

An increasing frequency of large claims, deterioration in overall claim experience or changes in federal or state laws affecting our liability for such claims could increase the volatility of expenses for such self-insured risks.

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.

In 2013, the FASB issued an amendment to an existing accounting standard, which requires an entity to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This guidance does not change the current requirements for reporting net income or other comprehensive income in the financial statements and is effective beginning in 2014. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements.


23


CONTINUING OPERATIONS

2013 vs. 2012
 
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2013

 
2012

 
Percent Change

 
52 Weeks

 
53 Weeks

 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
289,326

 
304,686

 
(5.0
)
Classified:
 
 
 
 
 
Employment
33,560

 
36,911

 
(9.1
)
Automotive
34,375

 
39,054

 
(12.0
)
Real estate
18,862

 
20,805

 
(9.3
)
All other
47,198

 
51,837

 
(8.9
)
Total classified
133,995

 
148,607

 
(9.8
)
National
24,056

 
29,618

 
(18.8
)
Niche publications and other
12,468

 
12,267

 
1.6

Total advertising and marketing services revenue
459,845

 
495,178

 
(7.1
)
Subscription
177,111

 
173,971

 
1.8

Commercial printing
12,625

 
12,731

 
(0.8
)
Other
25,159

 
25,041

 
0.5

Total operating revenue
674,740

 
706,921

 
(4.6
)
Compensation
254,831

 
274,427

 
(7.1
)
Newsprint and ink
43,481

 
51,635

 
(15.8
)
Other operating expenses
213,021

 
213,502

 
(0.2
)
Workforce adjustments
2,680

 
4,640

 
(42.2
)
 
514,013

 
544,204

 
(5.5
)
Operating cash flow
160,727

 
162,717

 
(1.2
)
Depreciation
21,412

 
23,443

 
(8.7
)
Amortization
34,225

 
41,696

 
(17.9
)
Impairment of intangible and other assets
171,094

 
1,388

 
NM

Equity in earnings of associated companies
8,685

 
7,231

 
20.1

Operating income (loss)
(57,319
)
 
103,421

 
NM

Non-operating expense, net
(81,904
)
 
(88,198
)
 
(7.1
)
Income (loss) from continuing operations before reorganization costs and income taxes
(139,223
)
 
15,223

 
NM

Reorganization costs

 
37,765

 
NM

Loss from continuing operations before income taxes
(139,223
)
 
(22,542
)
 
NM

Income tax benefit
(62,745
)
 
(9,161
)
 
NM

Net loss from continuing operations
(76,478
)
 
(13,381
)
 
NM

Discontinued operations, net of income taxes
(1,246
)
 
(2,918
)
 
(57.3
)
Net loss
(77,724
)
 
(16,299
)
 
NM

Net income attributable to non-controlling interests
(593
)
 
(399
)
 
48.6

Loss attributable to Lee Enterprises, Incorporated
(78,317
)
 
(16,698
)
 
NM

Other comprehensive income (loss), net
21,101

 
(7,348
)
 
NM

Comprehensive loss
(57,216
)
 
(24,046
)
 
NM

 
 
 
 
 
 
Loss from continuing operations attributable to Lee Enterprises, Incorporated
(77,071
)
 
(13,780
)
 
NM

 
 
 
 
 
 
Loss per common share:
 
 
 
 
 
Basic
(1.51
)
 
(0.34
)
 
NM

Diluted
(1.51
)
 
(0.34
)
 
NM



24


Because of period accounting, year-over-year comparisons are distorted. 2012 included an additional week of business activity, which added both revenue and cash costs in comparison with 2013. The table below summarizes certain key 2013 financial results on a comparable basis, excluding the extra week of operations in 2012:
(Thousands of Dollars)
2013

2012

Percent Change

 
52 Weeks

52 Weeks

 
Advertising and marketing services revenue
459,845

486,638

(5.5
)
Total digital revenue
77,027

72,108

6.8

Subscription revenue
177,111

170,740

3.7

Total operating revenue
674,740

694,596

(2.9
)
Operating expenses, excluding depreciation, amortization and unusual matters
511,333

531,170

(3.7
)
Operating cash flow
160,727

158,841

1.2

Adjusted EBITDA
173,766

170,315

2.0

Operating income (loss)
(57,319
)
99,371

NM


Unless otherwise noted, the comparisons below are presented on a reported basis.

Excluding the additional week of operations in 2012, total revenue decreased approximately 2.9% in 2013 compared to the prior year. 2013 total operating revenue decreased 4.6% compared to 2012 on a reported basis. We expect year-over-year revenue comparisons to improve as economic conditions in our markets also improve.

Advertising and Marketing Services Revenue

Excluding the extra week of operations in 2012, 2013 advertising and marketing services revenue decreased 5.5% compared to the prior year and decreased $35,333,000, or 7.1%, compared to 2012 on a reported basis. Retail advertising decreased 5.0%. Retail preprint insertion revenue decreased 0.3%. Digital retail advertising on a stand alone basis increased 3.2%, partially offsetting print declines.

Classified revenue decreased 9.8% in 2013 on a reported basis. Employment revenue decreased 9.1% while automotive advertising decreased 12.0%, real estate decreased 9.3% and other classified decreased 8.9%. Digital classified revenue on a stand-alone basis increased 1.4%, partially offsetting print declines.

National advertising decreased $5,562,000, or 18.8% on a reported basis. Digital national advertising on a stand-alone basis decreased 17.8%. Advertising in niche publications and other increased 1.6%.

On a stand-alone basis, digital advertising and marketing services revenue increased 1.8% on a reported basis in 2013, representing 14.4% of total advertising and marketing services revenue. Year-over-year total digital advertising has been rising steadily since December 2009. Print advertising and marketing services revenue on a stand-alone basis decreased 8.5% in 2013.

Subscription and Other Revenue

Excluding the extra week of operations in 2012, 2013 subscription revenue increased 3.7% compared to the prior year and increased $3,140,000, or 1.8%, compared to 2012 on a reported basis. The increases are primarily due to price increases and increases in digital subscribers, which were partially offset by decreases in print subscribers.

Our average daily newspaper circulation units, including TNI and MNI, as measured by the AAM, decreased 3.5% and Sunday circulation increased 7.4% in 2013 compared to 2012, as a result of an increase in branded editions.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 23.2 million unique visitors in the month of September 2013, an increase of 2.7% from September 2012, with 209.1 million page views. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong newspaper readership.


25


Commercial printing revenue decreased $106,000, or 0.8% on a reported basis, in 2013. Other revenue increased $118,000, or 0.5%, in 2013.

Operating Expenses

Excluding the extra week of operations in 2012, 2013 operating expenses excluding depreciation, amortization and unusual matters decreased 3.7% compared to the prior year and decreased $28,231,000, or 5.2%, compared to 2012 on a reported basis.

Compensation expense decreased $19,596,000, or 7.1%, on a reported basis in 2013, driven by a decline in average full time equivalent employees of 8.3%.

Newsprint and ink costs decreased $8,154,000, or 15.8%, on a reported basis in 2013, as a result of a reduction in newsprint volume of 13.6%. See “Commodities” in Item 7A, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters, decreased $481,000, or 0.2%, on a reported basis, in 2013.

Reductions in staffing resulted in workforce adjustment costs, primarily severance, totaling $2,680,000 and $4,640,000 in 2013 and 2012, respectively.

Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow increased 1.2%, excluding the extra week of operations in 2012 and decreased 1.2%, to $160,727,000, in 2013 compared to $162,717,000 in 2012, on a reported basis. Operating cash flow margin increased to 23.8% in 2013 from 23.0% in 2012, reflecting a larger percentage decrease in operating expenses than the decrease in operating revenue.

Depreciation expense decreased $2,031,000, or 8.7%, in 2013 and amortization expense decreased $7,471,000, or 17.9%, in 2013 due to full amortization of certain assets in prior years and impairment charges in the current year.

Due primarily to the Company's stockholders' deficit, we analyzed the carrying value of our net assets in 2013. Continued deterioration in our revenue and the weak economic environment were also factors in the timing of the analysis. We concluded the fair value of goodwill was in excess of its carrying value. As a result no goodwill impairment was recorded.

However, we determined that the cash flows from certain amortizable intangible assets were not sufficient to recover their carrying values. As a result, we recorded a non-cash charge to reduce their carrying values to fair value. We also recorded non-cash charges to reduce the carrying value of property and equipment in 2013 and 2012. We recorded deferred income tax benefits related to these charges.
 
A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2013

2012

 
 
 
Continuing operations:
 
 
Nonamortized intangible assets
1,567


Amortizable intangible assets
169,041


Property and equipment
486

1,388

 
171,094

1,388

 
 
 
Discontinued operations

3,606


The Patient Protection and Affordable Care Act, along with its companion reconciliation legislation (together the “Affordable Care Act”), were enacted into law in 2010. The Affordable Care Act will be supported by a substantial number of underlying regulations, some of which have not been issued. More recently, certain provisions applicable to employers were delayed. Accordingly, a complete determination of the impact of the Affordable Care Act cannot be made at this time. However, we expect our future health care costs to increase more rapidly based on analysis

26


published by the United States Department of Health and Human Services, input from independent advisors and our understanding of various provisions of the Affordable Care Act that differ from our current medical plans. We may be able to mitigate certain of these future cost increases through changes in plan design. We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability. 

Equity in earnings in associated companies increased $1,454,000 in 2013.

The factors noted above resulted in an operating loss of $57,319,000 in 2013, on a reported basis, compared to operating income of $103,421,000 in 2012.

Nonoperating Income and Expense

Interest expense increased $6,369,000, or 7.7%, to $89,447,000 in 2013 due primarily to higher interest rates on our debt since the January 2012 refinancing, which were partially offset by lower debt balances and refinancing of the Pulitzer Notes. Our weighted average cost of debt was 9.2% at September 29, 2013, the same as a year ago. Interest expense includes $5,117,000 and $3,919,000 of non-cash amortization of a present value adjustment of debt in 2013 and 2012, respectively.

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 decline due to lower debt balances, which decreased $98,350,000 in 2013, 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. This gain is classified as other, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Changes to our pension plans in 2011 and 2010 were the subject of litigation, or arbitration claims, under the terms of the respective collective bargaining agreements. In 2012, we settled all such claims with payments to plan participants totaling $2,802,000. These payments are classified as other, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

Overall Results

We recognized $37,765,000 of reorganization costs in 2012. We recognized income tax benefit of 45.1% and 40.6% of loss from continuing operations before income taxes in 2013 and 2012, respectively. See Note 11 of the Notes to Consolidated Financial Statements, included herein, for a reconciliation of the expected federal income tax rate to the actual tax rates.


27


As a result of the factors noted above, loss attributable to Lee Enterprises, Incorporated (which includes discontinued operations) totaled $78,317,000 in 2013 compared to a loss of $16,698,000 in 2012. We recorded loss per diluted common share of $1.51 in 2013 and $0.34 in 2012. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.47 in 2013, compared to $0.42 in 2012. Per share amounts may not add due to rounding.
 
September 29
2013
 
 
September 30
2012
 
(Thousands of Dollars, Except Per Share Data)
Amount

 
Per Share

 
Amount

 
Per Share

 
52 Weeks
 
 
53 Weeks
 
Loss attributable to Lee Enterprises, Incorporated, as reported
(78,317
)
 
(1.51
)
 
(16,698
)
 
(0.34
)
Adjustments:
 
 
 
 
 
 
 
Impairment of intangible and other assets
171,094

 
 
 
1,388

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

 
 
Litigation settlement

 
 
 
2,802

 
 
Debt financing and reorganization costs
645

 
 
 
40,588

 
 
Amortization of debt present value adjustment
5,117

 
 
 
3,919

 
 
Other, net
2,711

 
 
 
5,660

 
 
 
172,658

 
 
 
54,357

 
 
Income tax effect of adjustments, net
(70,991
)
 
 
 
(19,489
)
 
 
 
101,667

 
1.96

 
34,868

 
0.71

Unusual matters related to discontinued operations
1,014

 
0.02

 
2,694

 
0.05

Income attributable to Lee Enterprises, Incorporated, as adjusted
24,364

 
0.47

 
20,864

 
0.42


DISCONTINUED 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 2013. Operating results of The Garden Island have been classified as discontinued operations for all periods presented.

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 $1,168,000, after income taxes, and was recorded in discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) in 2013. Operating results of the North County Times have been classified as discontinued operations for all periods presented.




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CONTINUING OPERATIONS

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

 
2011

 
Percent Change

 
53 Weeks

 
52 Weeks

 
 
Operating revenue:
 
 
 
 
 
Retail
304,686

 
313,691

 
(2.9
)
Classified:
 
 
 
 
 
Employment
36,911

 
37,159

 
(0.7
)
Automotive
39,054

 
40,165

 
(2.8
)
Real estate
20,805

 
23,576

 
(11.8
)
All other
51,837

 
56,472

 
(8.2
)
Total classified
148,607

 
157,372

 
(5.6
)
National
29,618

 
31,641

 
(6.4
)
Niche publications and other
12,267

 
13,390

 
(8.4
)
Total advertising and marketing services revenue
495,178

 
516,094

 
(4.1
)
Subscription
173,971

 
171,395

 
1.5

Commercial printing
12,731

 
11,175

 
13.9

Other
25,041

 
24,557

 
2.0

Total operating revenue
706,921

 
723,221

 
(2.3
)
Compensation
274,427

 
281,476

 
(2.5
)
Newsprint and ink
51,635

 
55,818

 
(7.5
)
Other operating expenses
213,502

 
219,515

 
(2.7
)
Workforce adjustments
4,640

 
3,920

 
18.4

 
544,204

 
560,729

 
(2.9
)
Operating cash flow
162,717

 
162,492

 
0.1

Depreciation
23,443

 
25,624

 
(8.5
)
Amortization
41,696

 
43,872

 
(5.0
)
Impairment of intangible and other assets
1,388

 
204,289

 
NM

Curtailment gains

 
16,137

 
NM

Equity in earnings of associated companies
7,231

 
6,151

 
17.6

Reduction of investment in TNI Partners

 
11,900

 
NM

Operating income (loss)
103,421

 
(100,905
)
 
NM

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

Income (loss) from continuing operations before reorganization costs and income taxes
15,223

 
(165,322
)
 
NM

Reorganization costs
37,765

 

 
NM

Loss from continuing operations before income taxes
(22,542
)
 
(165,322
)
 
(86.4
)
Income tax benefit
(9,161
)
 
(20,166
)
 
(54.6
)
Net loss from continuing operations
(13,381
)
 
(145,156
)
 
(90.8
)
Discontinued operations, net of income taxes
(2,918
)
 
(1,525
)
 
91.3

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

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