10-K 1 a10k20149-28x14.htm 10-K 10K 2014 9-28-14

 
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 28, 2014
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 the 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 30, 2014, such aggregate market value is approximately $224,932,644. 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, 2014. Common Stock, $0.01 par value, 53,759,748 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2015 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
Principal Accounting Fees and Services
 
 
 
 
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 "2014", "2013", "2012" and the like refer to the fiscal years ended the last Sunday in September.
 
FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties, which in some instances are beyond our control, are:

Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
Our ability to comply with the financial covenants in our credit facilities;
Our ability to refinance our debt as it comes due;
That the warrants issued in our refinancing will not be exercised;
The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
Changes in advertising demand;
Potential changes in newsprint, other commodities and energy costs;
Interest rates;
Labor costs;
Legislative and regulatory rulings;
Our ability to achieve planned expense reductions;
Our ability to maintain employee and customer relationships;
Our ability to manage increased capital costs;
Our ability to maintain 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”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

PART I
 
ITEM 1. BUSINESS
 
Lee Enterprises, Incorporated is 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.

Our products include:

50 daily and 38 Sunday newspapers with print and digital subscribers totaling 1.1 million and 1.4 million, respectively, for the six months ended September 28, 2014, read by nearly four million people in print;
Websites and mobile and tablet apps in all of our markets that complement our newspapers and attracted 30.0 million unique visitors in September 2014, with 231.3 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 2014, the unemployment rate in five of our top ten markets by revenue was lower than the national average. We believe that all of these factors have had a positive impact on advertising revenue. Community newspapers remain a valuable source of local news and information to

1


readers and an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers that actively seek our content and serve as an attractive target for our advertisers.
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.

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 refinancing of our debt that extended the maturity to December 2015 or April 2017. 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.

In May 2013, we refinanced a portion of our debt, extending the maturity to April 2017. In 2014, we completed a long-term, comprehensive refinancing of our remaining debt (the "2014 Refinancing"). Final maturities of our debt have been extended to dates extending from April 2017 through December 2022. As a result, refinancing risk has been substantially reduced for the next several years.

Prior to 2014, we experienced significant net losses in all but one year since 2007 due primarily to non-cash charges for impairment of intangible 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 28, 2014. 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.

STRATEGIC INITIATIVES

We are focused on several broad strategic initiatives:

Continue Our Commitment To Provide Critical Local Content

We provide valuable, intensely local and original news and information that, in many cases, we believe our audiences cannot otherwise readily obtain. Our large and talented news and editorial staff provides constant, real-time local news with significant breadth, depth and reliability.

We believe the strength of our brands and the size of our news staff allow us to provide more comprehensive coverage of local news than our competitors in our markets.

Through the efforts of our journalists, we seek to provide information, engagement and leadership that is vital to our communities and critical to our democracy. We believe we stir public awareness, advance ideas, inspire vision, create debate and provoke action. We contribute to community betterment, promote education, foster commerce and help improve quality of life.

2


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 customers. 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.

In 2014, no single advertiser accounted for more than 1.8% of advertising revenue and our top 10 advertisers represented 9.8% of advertising revenue.

Reach A Huge, Attractive Audience Across Multiple Platforms

Based on detailed audience research conducted by a third party on our behalf for January to June 2014, we reached 78% of all adults over the course of a seven day period in 11 selected markets, which include most of our largest strategic business units. More than half of these adults-53%-read our newspapers in print, with 20% being both newspaper readers and visitors to our newspaper digital platforms. Another 12% were exclusive digital users. The remaining 13% primarily used our newspapers to obtain advertising and other information.

Furthermore, there is continuing strength of our audiences across all age groups. Among the 18-29 age group, for example, 39% read our printed newspapers, while 34% accessed our publications by web, mobile or tablet. Another 20% primarily used our newspapers to obtain advertising and other information.

As media use continues to evolve, it is clear that our audiences are moving from one platform to another throughout the day-accessing our content in print, on desktops and laptops, on smartphones and on tablets, using browsers, apps and replica edition viewers. We continue to develop new and innovative ways of reaching our audience wherever they are by, among other things, continually refining content and presentation to maximize the unique and evolving capabilities of each platform.

Increase Monetization Of Our Highly Visited Digital Platforms Through A Full Access Subscription Model

On our digital platforms, we provide news stories 24 hours a day and post regular updates of developing stories, often including video. Customers are able to access our stories digitally on websites, mobile devices and tablets. We offer advertisers a wide array of digital products, including video, digital couponing, behavioral targeting, banner ads and social networking.

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 tablet computers, and with our mobile audience growth and high advertiser interest we expect mobile and tablet advertising revenue to increase. As new digital technologies emerge, we expect to move rapidly to make our content available through them.

As a result, our digital audience has grown rapidly. Unique visitors to our digital sites increased by 29.2% to 30.0 million in September 2014 compared to 23.2 million in September 2013, while page views have increased by 10.6% to 231.3 million page views in September 2014 compared to 209.1 million page views in September 2013.

We are focused on continually improving the functionality, as well as the look and feel, of all our platforms, providing greater depth of news, information and advertising with easy access. Currently, we are arming our journalists with new tools to give them real-time information about audience engagement on our digital platforms, helping inform their decisions on both presentation and coverage.

Beginning in April 2014, we introduced full access subscriptions in several of our larger markets, and intend to expand this to all markets by June 2015. The full access model provides subscribers with complete digital access, including desktop, mobile, tablet and replica editions. These are offered as packages with print home delivery or as digital-only subscriptions, with subscription rates reflective of the expanded access. The bulk of the impact of this initiative on our revenue and subscriber base will be realized in 2015, with the remainder in 2016.

Offer Innovative Digital Marketing Solutions For Midsize And Small Businesses

Our digital businesses have experienced rapid growth since 2010 after recession-related declines in 2008 and 2009. Digital advertising grew 12.0% in 2014 and reached 18.5% of total advertising and marketing services revenue in the

3


13 weeks ended September 28, 2014. Total digital revenue in 2014 increased 17.1% over the prior year, and we expect total digital revenue, which represented 13.7% of total operating revenue in 2014, to continue to grow.

In addition to digital advertising, we provide digital marketing services aimed at midsize and small businesses ("SMBs"), including search marketing, social media and reputation management, audience extension, business profiles and website hosting and design. As the needs of our customers have evolved in an increasingly digital world, we have developed and continue to improve on additional marketing services to serve these demands. Lee Local offers SMBs solutions for search engine optimization (“SEO”), local online marketing, social media marketing, video advertising and web design. Lee Local helps to maximize marketing dollars to increase audience, expand brands, and enhance web presence. We believe that these innovative solutions will continue to drive meaningful new opportunities for us to grow our digital marketing revenue.

We have also developed Amplified Digital Solutions, a robust suite of custom digital marketing services that include: SEO amplification, search engine marketing (“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 that can purchase digital marketing campaigns outside our owned and operated products and platforms for extended audience targeting. In 2014 Amplified Digital Solutions grew by 16.3%.

INN Partners, L.C. ("TownNews"), of which we own 82.5%, provides digital infrastructure and digital publishing services for nearly 1,600 daily and weekly newspapers, along with universities, television stations and niche publications, as well as for us. We believe TownNews represents a powerful opportunity for us to drive additional digital revenue.

We are also 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 55 companies and more than 1,200 local newspapers, as well as television and radio outlets, across the United States.

Aggressively Manage Costs

We have aggressively transformed our business model and carefully controlled our costs to maintain our margins and cash flows. Since 2007, we reduced cash costs(1) of our continuing operations by $297 million, or more than 37%. We regionalized many staff functions, consolidated and/or selectively outsourced printing and ad production, discontinued unprofitable publications, reduced newsprint volume significantly, and sharpened our focus on cost management in all areas. We have reduced personnel while protecting our strengths in news, sales and digital products.

Generate Strong And Stable Free Cash Flow With A Commitment To Reduce Our Debt

Throughout the last economic downturn and subsequent recovery, and during a time of unprecedented transition for our industry, we have posted steady results. Our operating cash flow margins(1) have improved nearly back to pre-recession levels, with modest capital expenditures, and we have continued to generate significant free cash flow(1).

Since 2009, we have dedicated substantially all of our free cash flow to debt repayment, and we intend to continue to use our free cash flow to reduce debt. Our operating cash flow(1) has been relatively stable for the last six years. During that time, we have continued our focus on cost efficiencies while investing in revenue drivers. We believe that our operating cash flow margin(1) of more than 23% in 2014 remains among the highest in the industry.

The principal amount of debt was reduced by a net amount of $42.8 million in 2014. Another $32.0 million, which was borrowed to fund costs of the 2014 Refinancing, was also repaid in 2014. Since 2005, we have reduced debt by $883 million.

(1)     See "Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

PULITZER
 
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.

4


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, 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 2040, 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 non-voting 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.
 

5


ADVERTISING AND MARKETING SERVICES
 
Approximately 67% of our 2014 revenue was derived from advertising and marketing services.
 
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: SEO amplification, 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.

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, 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.
 

6


AUDIENCES
 
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 78.2% of adults in our larger markets. Scarborough Research from 2013 ranks the St. Louis Post-Dispatch and STLtoday.com as the market with the third highest combination of newspaper and web reach of the 25 most populated U.S. markets. 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
2014
 
 
 
 
 
 
 
 
 
Print only
52.0
49.6
46.6
43.8
43.4
37.8
36.9
33.1
Print and digital
13.2
16.9
16.4
15.9
16.4
19.6
17.8
20.0
Digital only
4.6
6.1
6.6
8.4
7.9
9.4
10.5
12.1
Total readership
69.8
72.6
69.6
68.1
67.7
66.8
65.2
65.2
Print users (1)
NA
NA
NA
14.9
14.5
14.7
13.9
13.0
Total reach
69.8
72.6
69.6
83.0
82.2
81.5
79.1
78.2
 






 
 
Total print reach (1)
65.2
66.5
63.0
74.6
74.3
72.1
68.6
66.1
Total digital reach
17.8
23.0
23.0
24.3
24.3
29.0
28.3
32.1

 
Age 18-29
(Percent, Past Seven Days)
2007
2008
2009
2010
2011
2012
2013
2014
 
 
 
 
 
 
 
 
 
Print only
36.1
38.7
41.0
32.1
33.0
29.4
30.7
20.3
Print and digital
13.8
19.4
16.4
15.6
13.7
20.5
15.6
18.3
Digital only
6.4
9.5
8.3
9.5
11.6
10.7
10.5
15.3
Total readership
56.3
67.6
65.7
57.2
58.3
60.6
56.8
53.9
Print users (1)
NA
NA
NA
21.8
21.1
23.7
22.0
19.5
Total reach
56.3
67.6
65.7
79.0
79.4
84.3
78.8
73.4
 






 
 
Total print reach (1)
49.9
58.1
57.4
69.5
67.8
73.6
68.3
58.1
Total digital reach
20.2
28.9
24.7
25.1
25.3
31.2
26.1
33.6
(1)
Print users were not measured prior to 2010. As a result, print reach in 2010-2014 is not comparable to 2007-2009.
Source:
Lee Enterprises Audience Report, Thoroughbred Research. January-June 2007-2014.
Markets:
11 largest markets in 2008-2014. 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. 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 2014, 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 1.4 million.
 
Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to improve audiences include continuous improvement of content and promotional efforts. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence subscriptions. The introduction in 2010, and continued improvement since, of new mobile and tablet applications has positively impacted our digital audiences.
 

7


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 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.


8


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
150,835

 
438,058

 
Arizona Daily Star (3)
azstarnet.com
Tucson, AZ
77,528

 
124,007

 
The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
77,238

 
85,324

 
Capital Newspapers (4)
 
 
 
 
 
 
Wisconsin State Journal
madison.com
Madison, WI
70,732

 
93,022

 
Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
7,371

 

 
Portage Daily Register
wiscnews.com/pdr
Portage, WI
3,724

 

 
Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
3,194

 

 
Lincoln Group
 
 
 
 
 
 
Lincoln Journal Star
journalstar.com
Lincoln, NE
49,737

 
59,089

 
Columbus Telegram
columbustelegram.com
Columbus, NE
6,705

 
7,811

 
Fremont Tribune
fremonttribune.com
Fremont, NE
6,430

 

 
Beatrice Daily Sun
beatricedailysun.com
Beatrice, NE
4,417

 

 
The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
37,540

 
39,088

 
Quad-Cities Group
 
 
 
 
 
 
Quad-City Times
qctimes.com
Davenport, IA
36,160

 
47,308

 
Muscatine Journal
muscatinejournal.com
Muscatine, IA
4,886

 

 
Billings Gazette
billingsgazette.com
Billings, MT
32,663

 
36,884

 
Central Illinois Newspaper Group
 
 
 
 
 
 
The Pantagraph
pantagraph.com
Bloomington, IL
30,364

 
34,515

 
Herald & Review
herald-review.com
Decatur, IL
24,082

 
38,427

 
Journal Gazette & Times-Courier
jg-tc.com
Mattoon/Charleston, IL
10,761

 

 
Sioux City Journal
siouxcityjournal.com
Sioux City, IA
26,626

 
29,861

 
The Post-Star
poststar.com
Glens Falls, NY
23,573

 
28,001

 
The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
22,739

 
25,625

 
Missoula Group
 
 
 
 
 
 
Missoulian
missoulian.com
Missoula, MT
22,222

 
26,839


Ravalli Republic
ravallinews.com
Hamilton, MT
2,979

(5) 
2,979

(5 
) 
River Valley Newspaper Group
 
 
 
 
 
 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
22,054

 
30,962

 
Winona Daily News
winonadailynews.com
Winona, MN
7,631

 
9,061

 
The Chippewa Herald
chippewa.com
Chippewa Falls, WI
4,276

 
4,119

 
The Journal Times
journaltimes.com
Racine, WI
21,575

 
24,350

 
The Southern Illinoisan
thesouthern.com
Carbondale, IL
21,270

 
26,958

 
Casper Star-Tribune
trib.com
Casper, WY
20,798

 
21,026

 
Rapid City Journal
rapidcityjournal.com
Rapid City, SD
19,130

 
22,961

 
The Daily News
tdn.com
Longview, WA
18,536

 
16,741

 
The Daily Herald
heraldextra.com
Provo, UT
17,901

 
26,811

 
Magic Valley Group
 
 
 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
17,537

 
17,306

 
Elko Daily Free Press
elkodaily.com
Elko, NV
5,174

(5) 

 

9


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

 
Sunday

 
 
 
 
 
 
 
 
Central Coast Newspapers
 
 
 
 
 
 
Santa Maria Times
santamariatimes.com
Santa Maria, CA
16,121

 
15,609

 
The Lompoc Record
lompocrecord.com
Lompoc, CA
2,777

 
2,877

 
The Sentinel
cumberlink.com
Carlisle, PA
13,828

 
11,816

 
Globe Gazette
globegazette.com
Mason City, IA
12,278

 
15,894

 
Helena/Butte Group
 
 
 
 
 
 
Independent Record
helenair.com
Helena, MT
12,248

 
12,626

 
The Montana Standard
mtstandard.com
Butte, MT
10,645

 
10,736

 
Mid-Valley News Group
 
 
 
 
 
 
Albany Democrat-Herald
democratherald.com
Albany, OR
11,598

 
12,168

 
Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
9,524

 
9,566

 
Napa Valley Register
napavalleyregister.com
Napa, CA
11,185

 
11,437

 
The Times and Democrat
thetandd.com
Orangeburg, SC
9,792

 
9,641

 
Arizona Daily Sun
azdailysun.com
Flagstaff, AZ
9,145

 
9,861

 
The World
theworldlink.com
Coos Bay, OR
7,003

 

 
The Sentinel
hanfordsentinel.com
Hanford, CA
6,860

 

 
The Citizen
auburnpub.com
Auburn, NY
6,646

 
8,224

 
The Ledger Independent
maysville-online.com
Maysville, KY
5,114

 

 
Daily Journal
dailyjournalonline.com
Park Hills, MO
4,833

 

 
 
 
 
1,057,985

 
1,447,588

 
(1)
Source: AAM: Six months ended September 2014, unless otherwise noted. Amounts are not comparable to the prior year period due to changes in AAM measurements
(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.
 

10


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
67
June 1999
January 2002
Chairman, President and Chief Executive Officer
 
 
 
 
 
Joyce L. Dehli
56
August 1987
February 2006
Vice President - News
 
 
 
 
 
Paul M. Farrell
59
October 2013
October 2013
Vice President - Digital Sales
 
 
 
 
 
Suzanna M. Frank
44
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Astrid J. Garcia
64
December 2006
December 2013
Vice President - Human Resources
 
 
 
 
 
James A. Green
48
March 2013
March 2013
Vice President - Digital
 
 
 
 
 
Michael R. Gulledge
54
October 1982
September 2012
Vice President - Sales and Marketing
 
 
 
 
 
Daniel K. Hayes
69
September 1969
September 2005
Vice President - Corporate Communications
 
 
 
 
 
Kevin D. Mowbray
52
September 1986
May 2013
Vice President and Chief Operating Officer
 
 
 
 
 
Gregory P. Schermer
60
February 1989
October 2012
Vice President - Strategy
 
 
 
 
 
Carl G. Schmidt
58
May 2001
May 2001
Vice President, Chief Financial Officer and Treasurer
 
 
 
 
 
Michele Fennelly White
52
June 1994
June 2011
Vice President - Information Technology and Chief Information Officer
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.

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


11


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.
 
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.
 
Ms. Junck and Messrs. Farrell, Green, Gulledge, Mowbray, Schermer and Schmidt have been designated by the Board of Directors as executive officers for United States Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 28, 2014, we had approximately 4,700 employees, including approximately 1,200 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2014 totaled approximately 4,500. We consider our relationships with our employees to be good.
Bargaining units represent 420, 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 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.
 

12


Substantially all of our debt was scheduled to mature in April 2012. In January 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. In May 2013, we again refinanced the $94,000,000 remaining balance of the Pulitzer Notes (the "New Pulitzer Notes") with BH Finance LLC ("Berkshire"), a subsidiary of Berkshire Hathaway, Inc.

On March 31, 2014, we completed the 2014 Refinancing, which includes the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”) among the Company, certain subsidiaries party thereto from time to time (the “Subsidiary Guarantors”), U.S. Bank National Association, as Trustee (the "Notes Trustee"), and Deutsche Bank Trust Company Americas, as Collateral Agent;
 
$250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”) among the Company, the lenders party thereto from time to time (the “1st Lien Lenders”), and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent; and

$150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”) among the Company, the lenders party thereto from time to time (the “2nd Lien Lenders”), and Wilmington Trust, National Association, as Administrative Agent and Collateral Agent.

The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan enabled us to repay in full, including accrued interest, and terminate, on March 31, 2014: (i) the remaining principal balance of $593,000,000 under our previous 1st lien agreement, and related subsidiary guaranty, security and pledge agreements, intercompany subordination and intercreditor agreements; and (ii) the remaining principal balance of $175,000,000 under our previous 2nd lien agreement, and related subsidiary guaranty, security and pledge agreements, intercompany subordination and intercreditor agreements. We also used the proceeds of the refinancing to pay fees and expenses totaling $30,931,000 related to the 2014 Refinancing.

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 28, 2014, after consideration of letters of credit, we have approximately $27,605,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 28, 2014 totals $44,750,000. This liquidity amount excludes any future cash flows. Our unlevered free cash flow(1) has been stable for the last six years and has exceeded $152,000,000 in each year from 2009 through 2014, but there can be no assurance that such cash flows will continue. 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 28, 2014, the principal amount of our outstanding debt totals $804,750,000. At September 28, 2014, our debt, net of cash, is 4.7 times our 2014 adjusted EBITDA(1), compared to a ratio of 4.8 at September 29, 2013.

The 2014 Refinancing significantly enhances our debt maturity profile. Final maturities of our debt have been extended to dates extending from April 2017 through December 2022. As a result, refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, 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 applicable lenders to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan 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.

(1)     See "Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

13


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. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 28, 2014.

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 recovered slowly in either nominal or real (inflation adjusted) terms. Our revenue, operating results and cash flows were significantly impacted by the recession and its aftermath. The duration and depth of an economic recession, and pace of economic recovery, in markets in which we operate, may influence our future results.

OPERATING REVENUE
 
Our Revenue May Not Return To Historical Levels

A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic activity, both locally and nationally. Newspaper publishing is both capital and labor intensive and, as a result, newspapers have relatively high fixed costs. Accordingly, changes in advertising revenue could have a disproportionate effect on our results of operations.

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 has been rising since 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. As media audiences fragment, 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. This increased competition has had, and may continue to have, an adverse effect on our business and financial results. The digital media industry experiences additional competitive challenges because barriers to entry can be low and geographic location is less relevant.

Technological developments also pose other challenges that could adversely affect our revenue and competitive position. New delivery platforms may lead to pricing restrictions and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites and other digital platforms proliferates.

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 digital 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 pace of the current economic recovery. For example, a slow recovery in the housing market impacts retail advertising related to home improvement, furniture and home electronics.

14


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.

See "Advertising and Marketing Services” in Item 1, included herein, for additional information on the risks associated with advertising revenue.

Subscription Revenue

Advertising and subscription revenue is affected by readership of our publications and digital products. Although our aggregate print and digital audience is relatively stable, subscription sales have nonetheless been declining for many years, reflecting general trends in the newspaper industry, including consumer migration toward digital platforms and other media for news and information. The possibility exists that future subscription price increases may be difficult to accomplish or maintain 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. We face increasing competition from other digital sources for subscription revenue. This competition has intensified as a result of the continued development of digital media technologies. To maintain our subscription base, we may be required to incur additional costs that we may not be able to recover through subscription and advertising revenue. We may not be able to achieve a profitable balance between subscription levels and advertising revenue. In addition, 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.

In 2011, we began introducing charges for digital content using a metered model in certain of our markets that ended free, unlimited access to our newspapers’ websites. In 2014, we began the transition of our subscriptions to full digital access, including desktop, mobile and tablet. If we are not successful in the implementation of this strategy, our ability to produce anticipated subscription revenue and sustain our print and/or digital audiences may be negatively impacted. Our ability to build a subscriber base on our digital platforms through these packages depends on market acceptance, consumer habits, pricing, an adequate digital infrastructure, terms of delivery platforms and other factors. In addition, the price increase may result in fewer page views or unique visitors to our digital platforms if viewers are unwilling to pay to gain access to our digital content. Stagnation, or a decline in traffic levels, may adversely affect our advertiser base and advertising rates and result in a decline in digital revenue.

See "Audiences” in Item 1, included herein, for additional information on the risks associated with subscription revenue.

If We Are Not Successful In Growing And Managing Our Digital Business, Our Business, Financial Condition, Results Of Operations And Prospects Could Be Adversely Affected

Our future growth depends to a significant degree upon the development and management of our digital business. The growth of our digital business over the long term depends on various factors, including, among other things, the ability to:

Continue to increase digital audiences;

Attract advertisers to our digital platforms;

Maintain or increase the advertising rates on our digital platforms;

 
Exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services;

Invest funds and resources in digital opportunities; and


15


Partner with, or use services from, providers that can assist us in effectively growing our digital business.

In addition, we expect that our digital business will continue to increase as a percentage of our total revenue. In 2014, total digital revenue (including revenue from digital subscriptions) comprised 13.7% of total revenue, as compared to 11.4% in 2013. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited, to the following:

Continuing training of our sales force to more effectively sell advertising in the digital advertising arena versus our historical print advertising business;

Attracting and retaining employees with skill sets and the knowledge base needed to successfully operate our digital business; and

Managing the transition to a digital business from a historically print-focused business.

OPERATING EXPENSES
 
We May Not Be Able To Reduce Future Expenses To Offset Potential Revenue Declines
 
We reduced cash costs of our continuing operations (compensation, newsprint and ink, other operating expenses and workforce adjustments) by $297 million, or more than 37%, 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. Since 2007 we have recorded impairment charges totaling almost $1.3 billion 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 and Postretirement Obligations
May Reduce The Cash Available For Our Business

Pension liabilities, net of plan assets, totaled $50.2 million at September 28, 2014. Contributions to pension plans are expected to total $3.8 million in 2015. At September 28, 2014, the assets of our postretirement plans exceeded plan liabilities by $14.1 million.

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 securities markets could cause declines in the values of our pension assets. In addition, a decrease in the discount rates used to determine the liability for 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 (the "PPA"), 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 and 2014 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.

16


In October 2014, the Society of Actuaries released new mortality tables. The new tables generally result in increases in life expectancy. We used the new mortality tables to value our pension and postretirement liabilities at September 28, 2014, which increased such liabilities, in total, by approximately $18.5 million, with a corresponding decrease in accumulated other comprehensive income in our Consolidated Balance Sheet as of that date.

We May Be Subject To Withdrawal Liability In Connection With Certain Multiemployer Pension Plans, Which May Reduce The Cash Available For Our Business

Pursuant to our collective bargaining obligations, we contribute to three multiemployer pension plans on behalf of certain of our employees. Based on the most recent communications from the plans’ administrators, two of these plans are currently in “critical” status, as that term is used in relation to such plans under the PPA. For plans that are in critical status, benefit reductions may apply and/or we could be required to make additional contributions.

If, we were to withdraw from one of these plans or trigger a partial withdrawal due to declines in contribution base units, and the plan had unfunded vested benefits at the time of our withdrawal or partial withdrawal, we could owe the plan significant withdrawal liability, which could reduce the cash available for our business.
 
EQUITY CAPITAL
 
A Decrease In Our Stock Price May Limit The Ability To Trade Our Stock
Or For The Company To Raise Equity Capital

Under the NYSE listing standards, if our common stock fails to maintain an adequate per share price and our total market capitalization falls below $50.0 million, our common stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE 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. However, there can be no assurance that we will continue to be able to meet these listing standards, and the removal of our common stock from the NYSE could adversely affect our ability to raise equity capital.

OTHER

Cybersecurity Risks Could Harm Our Ability To Operate Effectively

In 2014, 17.0% of our advertising and marketing services revenue was obtained from digital advertising, primarily on our digital platforms, 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. However, the techniques used to obtain unauthorized access and to disable systems and websites change frequently and may be difficult to detect for long periods of time. There can be no assurance that we, or the security systems we implement, will protect against all of these rapidly changing risks. Prolonged system outages or a cyber incident that goes undetected 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 and regulations that protect personal data. We maintain insurance coverage against certain of such risks, but cannot guarantee that such coverage will be sufficient with respect to any given incident.

We May Not Be Able To Protect Our Intellectual Property Rights, Which May Adversely Affect Our Business

Our business depends on our intellectual property, including our valuable brands and content. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position.

Unauthorized parties may attempt to copy or otherwise obtain and use our content or infringe upon, dilute, reproduce, misappropriate or otherwise violate our intellectual property. There can be no assurance that the steps we have taken to protect our proprietary rights will be successful in any given case.

17


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 28, 2014 is as follows:
(Square Feet)
Owned

Leased

 
 
 
PD LLC
749,000

6,000

Suburban Journals
36,000

17,000

   
Nearly 40% 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 sought relief related to alleged violations of various employment-based statutes, and requested 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, a motion to decertify the class was filed, which was granted as to plaintiffs' minimum wage, overtime, unreimbursed meal, and unreimbursed rest period claims. In July 2014 we reached a settlement with the plaintiffs, which remains subject to court approval, and recorded a liability of $2,300,000 in 2014.

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

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


18


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 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

 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
High
3.92

 
5.42

 
4.78

 
4.72

Low
2.60

 
3.30

 
3.81

 
3.24

Closing
3.47

 
4.47

 
4.45

 
3.38

 
 
 
 
 
 
 
 
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

 
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 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 28, 2014, we had 6,647 holders of record of our Common Stock.
 
Our debt agreements generally limit our ability to pay dividends and repurchase Common Stock unless in each case no default has occurred and we have satisfied certain financial measurements. See Note 5 of the Notes to Consolidated Financial Statements, included herein.


19


PERFORMANCE PRESENTATION
 
The following graph compares the 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, 2014 (with September 30, 2009 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©: 2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
The value of $100 invested on September 30, 2009 in stock of the Company, the Old Peer Group Index, New Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
 
September 30
 
(Dollars)
2009

 
2010

 
2011

 
2012

 
2013

 
2014

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
97.45

 
28.36

 
53.82

 
96.00

 
122.91

Old Peer Group Index
100.00

 
95.69

 
74.89

 
116.59

 
184.50

 
203.00

New Peer Group Index
100.00

 
102.93

 
78.19

 
142.03

 
216.07

 
232.69

S&P 500 Stock Index
100.00

 
110.16

 
111.42

 
145.07

 
173.13

 
207.30

 
The S&P 500 Stock Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The New Peer Group Index is comprised of six U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The New Peer Group Index includes A.H. Belo Corp., Gannett, Journal Communications, Inc., The McClatchy Company, The New York Times Company and The E.W. Scripps Company. Graham Holdings Company (formerly known as The Washington Post Company) which is included in the Old Peer Group Index, has been excluded from the New Peer Group Index due to the sale of its publishing business in 2014.


20


ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2014

 
2013

 
2012

 
2011

 
2010

 
 
 
 

 
 

 
 

 
 

OPERATING RESULTS (1) (2)
 
 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Operating revenue
656,697

 
674,740

 
706,921

 
723,221

 
743,927

Operating expenses, excluding depreciation, amortization, and impairment of intangible and other assets
501,642

 
514,013

 
544,204

 
560,729

 
575,659

Depreciation and amortization
48,511

 
55,527

 
65,191

 
69,244

 
71,086

Loss (gain) on sales of assets, net
(1,338
)
 
110

 
(52
)
 
252

 

Impairment of intangible and other assets (3)
2,980

 
171,094

 
1,388

 
204,289

 
899

Curtailment gains

 

 

 
16,137

 
45,012

Equity in earnings of associated companies
8,297

 
8,685

 
7,231

 
6,151

 
7,746

Reduction in investment in TNI (3)

 

 

 
11,900

 

Operating income (loss)
113,199

 
(57,319
)
 
103,421

 
(100,905
)
 
149,041

Financial income
385

 
300

 
236

 
296

 
411

Interest expense
(79,724
)
 
(89,447
)
 
(83,078
)
 
(52,696
)
 
(63,117
)
Debt financing costs
(22,927
)
 
(646
)
 
(2,823
)
 
(12,612
)
 
(8,514
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
7,671

 
(76,478
)
 
(13,381
)
 
(145,156
)
 
47,326

Discontinued operations, net of income taxes

 
(1,246
)
 
(2,918
)
 
(1,525
)
 
(1,148
)
Net income (loss)
7,671

 
(77,724
)
 
(16,299
)
 
(146,681
)
 
46,178

 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
6,795

 
(78,317
)
 
(16,698
)
 
(146,868
)
 
46,105

 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
6,795

 
(77,071
)
 
(13,780
)
 
(145,343
)
 
47,253

 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations
0.13

 
(1.49
)
 
(0.28
)
 
(3.24
)
 
1.06

Discontinued operations

 
(0.02
)
 
(0.06
)
 
(0.03
)
 
(0.03
)
 
0.13

 
(1.51
)
 
(0.34
)
 
(3.27
)
 
1.03

 
Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
0.13

 
(1.49
)
 
(0.28
)
 
(3.24
)
 
1.05

Discontinued operations

 
(0.02
)
 
(0.06
)
 
(0.03
)
 
(0.03
)
 
0.13

 
(1.51
)
 
(0.34
)
 
(3.27
)
 
1.03

 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
52,273

 
51,833

 
49,261

 
44,847

 
44,555

Diluted
53,736

 
51,833

 
49,261

 
44,847

 
44,955

 
BALANCE SHEET INFORMATION (End of Year)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
811,275

 
827,705

 
1,061,136

 
1,158,248

 
1,440,116

Debt, including current maturities (4)
804,750

 
847,500

 
945,850

 
994,550

 
1,081,590

Debt, net of cash, restricted cash and investments (4)
787,605

 
829,938

 
931,930

 
966,023

 
1,052,545

Stockholders' equity (deficit)
(178,253
)
 
(170,350
)
 
(114,633
)
 
(101,346
)
 
56,823

(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.

21


(3
)
The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows:
(Thousands of Dollars)
2014

 
2013

 
2012

 
2011

 
2010

 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
Goodwill

 

 

 
186,281

 

Non-amortized intangible assets
1,936

 
1,567

 

 
13,109

 

Amortizable intangible assets

 
169,041

 

 
4,199

 

Property and equipment
1,044

 
486

 
1,388

 
700

 
899

 
2,980

 
171,094

 
1,388

 
204,289

 
899

Reduction in investment in TNI

 

 

 
11,900

 

 
2,980

 
171,094

 
1,388

 
216,189

 
899

 
 
 
 
 
 
 
 
 
 
Discontinued operations

 

 
3,606

 
850

 
2,391

(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 28, 2014. 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 our financial performance, or assist in forecasting and analyzing future periods. We also believe such non-GAAP financial measures are alternative indicators of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a publishing business and its ability to meet debt service requirements.
 
The non-GAAP financial measures we use are defined as follows:

Adjusted EBITDA is defined as operating income (loss), plus depreciation, amortization, impairment charges, stock compensation and our 50% share 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.

Cash Costs are defined as compensation, newsprint and ink, other operating expenses and certain
unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges,
other non-cash operating expenses and other unusual matters are excluded.

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. The terms operating cash flow and EBITDA are used interchangeably.

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.


22


We also present comparable 52 week results, which are defined as 2014 and 2013 results on a reported basis compared to 2012 results on a 52 week basis excluding the extra week of operations.

Tables reconciling operating cash flow, adjusted EBITDA, unlevered free cash flow and free cash flow to operating income (loss), the most directly comparable measure under GAAP, are set forth in Item 7, included herein, under the caption "Selected Consolidated Financial Information".

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

The subtotals of operating expenses representing cash costs can be found in tables in Item 7, included herein, under the captions “2014 vs. 2013” and “2013 vs. 2012”.

We also present selected information for Lee Legacy and Pulitzer. Lee Legacy constitutes the business of the Company, including MNI, but excluding Pulitzer and TNI. See "Selected Lee Legacy Financial Information, and "Selected Pulitzer Financial Information" in Item 7, included herein.

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

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of our accounting policies.

Goodwill and Other Intangible Assets
 
In assessing the recoverability of goodwill and other non-amortized 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 non-amortized 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. Fair value is allocated to our assets and liabilities to determine an implied goodwill fair value. A non-cash impairment charge will generally be recognized when the book value of goodwill exceeds its implied fair value.

Should we determine that a non-amortized 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.
 
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

23


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.

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.
 
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.

In 2014 and 2012, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2013, we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was in excess of its carrying value. As a result no goodwill impairment was recorded.

In 2014 and 2013, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. In 2013 we determined that the cash flows from 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 to fair value. We also recorded pretax, non-cash charges to reduce the carrying value of property and equipment in 2014, 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)
2014

 
2013

 
2012

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Non-amortized intangible assets
1,936

 
1,567

 

Amortizable intangible assets

 
169,041

 

Property and equipment
1,044

 
486

 
1,388

 
2,980

 
171,094

 
1,388

 
 
 
 
 
 
Discontinued operations

 

 
3,606


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.

In October 2014, the Society of Actuaries released new mortality tables. The new tables generally result in increases in life expectancy. We used the new mortality tables to value our pension and postretirement liabilities at September 28, 2014, which increased such liabilities, in total, by approximately $18.5 million, with a corresponding decrease in accumulated other comprehensive income in our Consolidated Balance Sheet as of that date.

24


Income Taxes
 
Deferred income taxes are provided using the asset and 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 that some portion or all of the deferred income tax assets will not be realized through future income. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.
 
We file income tax returns with the Internal Revenue Service (“IRS”) and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
 
 Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term or as 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 May 2014, the Financial Accounting Standards Board ("FASB") issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of these requirements is required in 2018. We have not yet determined the potential impact on our Consolidated Financial Statements.

In August 2014, the FASB issued a new going concern standard. The new standard changes the period that companies use to evaluate their ability to meet obligations to a look-forward period of one year from the financial statement issuance date, from one year from the balance sheet date. The new standard also changes disclosure requirements. The

25


adoption of the new standard is required in 2017. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements, taken as a whole.

26


CONTINUING OPERATIONS

2014 vs. 2013
 
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2014

 
2013

 
Percent Change

 
52 Weeks

 
52 Weeks

 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
282,407

 
292,417

 
(3.4
)
Classified:
 
 
 
 
 
Employment
33,123

 
33,560

 
(1.3
)
Automotive
29,547

 
34,424

 
(14.2
)
Real estate
17,699

 
18,862

 
(6.2
)
All other
44,298

 
47,197

 
(6.1
)
Total classified
124,667

 
134,043

 
(7.0
)
National
24,867

 
23,999

 
3.6

Niche publications and other
10,060

 
10,081

 
(0.2
)
Total advertising and marketing services revenue
442,001

 
460,540

 
(4.0
)
Subscription
176,826

 
177,056

 
(0.1
)
Commercial printing
12,050

 
12,625

 
(4.6
)
Other
25,820

 
24,519

 
5.3

Total operating revenue
656,697

 
674,740

 
(2.7
)
Compensation
243,054

 
254,831

 
(4.6
)
Newsprint and ink
37,994

 
43,481

 
(12.6
)
Other operating expenses
219,329

 
213,021

 
3.0

Workforce adjustments
1,265

 
2,680

 
(52.8
)
Cash costs
501,642

 
514,013

 
(2.4
)
Operating cash flow
155,055

 
160,727

 
(3.5
)
Depreciation
20,920

 
21,302

 
(1.8
)
Amortization
27,591

 
34,225

 
(19.4
)
Loss (gain) on sales of assets, net
(1,338
)
 
110

 
NM

Impairment of intangible and other assets
2,980

 
171,094

 
(98.3
)
Equity in earnings of associated companies
8,297

 
8,685

 
(4.5
)
Operating income (loss)
113,199

 
(57,319
)
 
NM

Non-operating expense, net
(99,238
)
 
(81,904
)
 
21.2

Income (loss) from continuing operations before income taxes
13,961

 
(139,223
)
 
NM

Income tax expense (benefit)
6,290

 
(62,745
)
 
NM

Income (loss) from continuing operations
7,671

 
(76,478
)
 
NM

Discontinued operations, net of income taxes

 
(1,246
)
 
NM

Net income (loss)
7,671

 
(77,724
)
 
NM

Net income attributable to non-controlling interests
(876
)
 
(593
)
 
47.7

Income (loss) attributable to Lee Enterprises, Incorporated
6,795

 
(78,317
)
 
NM

Other comprehensive income (loss), net
(17,497
)
 
21,101

 
NM

Comprehensive loss
(10,702
)
 
(57,216
)
 
(81.3
)
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
6,795

 
(77,071
)
 
NM

 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
Basic
0.13

 
(1.51
)
 
NM

Diluted
0.13

 
(1.51
)
 
NM


Total revenue decreased approximately 2.7% in 2014 compared to the prior year on a reported basis. Excluding the impact of a subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue decreased 3.7%. The reclassification will increase both print subscription

27


revenue and operating expenses, with no impact on operating cash flow or operating income. Certain delivery expenses were previously reported as a reduction of revenue. A table below details the impact of the reclassification on revenue and cash costs. Unless otherwise noted, the comparisons below are presented on a reported basis.

Advertising and Marketing Services Revenue

2014 advertising and marketing services revenue decreased $18,539,000, or 4.0%, compared to 2013. Retail advertising decreased 3.4%. Retail preprint insertion revenue decreased 1.7%. Digital retail advertising on a stand alone basis increased 8.1%, partially offsetting print declines.

Classified revenue decreased 7.0% in 2014. Employment revenue decreased 1.3% while automotive advertising decreased 14.2%, real estate decreased 6.2% and other classified decreased 6.1%. Digital classified revenue on a stand-alone basis increased 7.6%, partially offsetting print declines.

National advertising increased $868,000, or 3.6% on a reported basis. Digital national advertising on a stand-alone basis increased 96.2%. Advertising in niche publications and other decreased 0.2%.

On a stand-alone basis, digital advertising and marketing services revenue increased 12.0%, to $75,179,000, in 2014, representing 17.0% of total advertising and marketing services revenue. Total digital revenue for 2014, including advertising and marketing services, subscriptions and all other digital business, totaled $90,198,000, an increase of 17.1% from a year ago. Print advertising and marketing services revenue on a stand-alone basis decreased 6.8%.

Subscription and Other Revenue

2014 subscription revenue decreased $230,000, or 0.1%, compared to 2013 on a reported basis. The decreases are primarily due to decreases in print subscribers partially offset by price increases, increases in digital subscribers and the subscription-related expense reclassification.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 1.1 million for the six months ended September 2014, as measured by the AAM. Sunday circulation totaled 1.4 million. Amounts are not comparable to the prior year period due to changes in AAM measurements.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 30.0 million unique visitors in the month of September 2014, an increase of 29.2% from September 2013, with 231.3 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.

Commercial printing revenue decreased $575,000, or 4.6% in 2014. Other revenue increased $1,301,000, or 5.3%, in 2014.

Operating Expenses

Cash costs decreased $12,371,000, or 2.4%, in 2014 compared to 2013. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 3.7%, exceeding our published guidance of a decrease of 3.0-3.5%.

Compensation expense decreased $11,777,000, or 4.6%, in 2014, driven by a decline in average full-time equivalent employees of 4.8%.

Newsprint and ink costs decreased $5,487,000, or 12.6%, in 2014, primarily as a result of a reduction in newsprint volume of 11.5%. 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, increased $6,308,000, or 3.0%, in 2014, due to the subscription-related expense reclassification.

Reductions in staffing resulted in workforce adjustment costs totaling $1,265,000 and $2,680,000 in 2014 and 2013, respectively.

28


Certain results, excluding the impact of the subscription-related expense reclassification, are as follows:
(Thousands of Dollars)
2014

2013

Percent Change

 
 
 
 
Subscription revenue, as reported
176,826

177,056

(0.1
)
Adjustment for subscription-related expense reclassification
(6,707
)

NM

Subscription revenue, as adjusted
170,119

177,056

(3.9
)
 
 
 
 
Total operating revenue, as reported
656,697

674,740

(2.7
)
Adjustment for subscription-related expense reclassification
(6,707
)

NM

Total operating revenue, as adjusted
649,990

674,740

(3.7
)
 
 
 
 
Other operating expenses, as reported
219,329

213,021

3.0

Adjustment for subscription-related expense reclassification
(6,707
)

NM

Other operating expenses, as adjusted
212,622

213,021

(0.2
)
 
 
 
 
Total cash costs, as reported
501,642

514,013

(2.4
)
Adjustment for subscription-related expense reclassification
(6,707
)

NM

Total cash costs, as adjusted
494,935

514,013

(3.7
)

Approximately $6,246,000, or 93.1% of the reclassification impacts revenue and cash costs of our Lee Legacy operations, and approximately $461,000, or 6.9% impacts Pulitzer. The subscription-related expense reclassification also increased both revenue and cash costs of MNI by $4,500,000 in 2014 and is not included in the table above.

Operating Cash Flow and Results of Operations

As a result of the factors noted above, operating cash flow decreased 3.5%, to $155,055,000, in 2014 compared to $160,727,000 in 2013. Operating cash flow margin decreased to 23.6% in 2014 from 23.8% in 2013, reflecting a larger percentage decrease in operating revenue than the decrease in operating expenses and the impact of the subscription-related expense reclassification.

Depreciation expense decreased $382,000, or 1.8%, in 2014 and amortization expense decreased $6,634,000, or 19.4%, in 2014 due to full amortization of certain assets in prior years and impairment charges in the prior year.

In 2014 and 2013, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets.

In 2013 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 of such assets to fair value. We also recorded pre-tax, non-cash charges to reduce the carrying value of property and equipment in 2014 and 2013. We recorded deferred income tax benefits related to these charges.
 
A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2014

2013

 
 
 
Continuing operations:
 
 
Non-amortized intangible assets
1,936

1,567

Amortizable intangible assets

169,041

Property and equipment
1,044

486

 
2,980

171,094


Equity in earnings in associated companies decreased $388,000 in 2014.

The factors noted above resulted in operating income of $113,199,000 in 2014, compared to an operating loss of $57,319,000 in 2013. Operating income margin increased to 17.2% from a deficit of 8.5% a year ago.

29


Non-operating Income and Expense

Interest expense decreased $9,723,000, or 10.9%, to $79,724,000 in 2014 due primarily to lower debt balances and the refinancing of the Pulitzer Notes in May 2013. Interest expense in 2014 also includes $2,394,000 of non-cash amortization of a present value adjustment of debt compared to $5,117,000 in 2013.

We charged $22,927,000 of debt financing costs to expense and also recorded a $2,300,000 loss related to a litigation settlement in 2014. The litigation settlement is classified as other, net in the Consolidated Statements of Operations and Comprehensive Income (Loss).

As more fully discussed in Note 5 of the Notes to Consolidated Financial Statements, included herein (and certain capitalized terms used below defined), in connection with the 2014 Refinancing, we issued Warrants, which were recorded at fair value and are included in other liabilities in our Consolidated Balance Sheets. We remeasure the related liability to fair value each reporting period. Due to the decrease in the price of our Common Stock since March 31, 2014, we recorded non-operating income of $6,122,000 related to the decrease in the value of the Warrants in 2014.

In 2013, 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).

Overall Results

We recognized income tax expense of 45.1% of income from continuing operations before income taxes in 2014 and income tax benefit of 45.1% of loss from continuing operations before income taxes in 2013. 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.

As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated (which includes discontinued operations) totaled $6,795,000 in 2014 compared to a loss of $78,317,000 in 2013. We recorded earnings per diluted common share of $0.13 in 2014 and a loss per diluted common share of $1.51 in 2013. Excluding unusual matters, as detailed in the table below, diluted earnings per common share, as adjusted, were $0.41 in 2014, compared to $0.47 in 2013. Per share amounts may not add due to rounding.
 
2014
 
 
2013
 
(Thousands of Dollars, Except Per Share Data)
Amount

 
Per Share

 
Amount

 
Per Share

 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated, as reported
6,795

 
0.13

 
(78,317
)
 
(1.51
)
Adjustments:
 
 
 
 
 
 
 
Impairment of intangible and other assets
2,980

 
 
 
171,094

 
 
Gain on sales of investments, net

 
 
 
(6,909
)
 
 
Debt financing and reorganization costs
22,927

 
 
 
646

 
 
Other, net
891

 
 
 
7,828

 
 
 
26,798

 
 
 
172,659

 
 
Income tax effect of adjustments, net
(11,487
)
 
 
 
(70,991
)
 
 
 
15,311

 
0.28

 
101,668

 
1.96

Unusual matters related to discontinued operations

 

 
1,014

 
0.02

Income attributable to Lee Enterprises, Incorporated, as adjusted
22,106

 
0.41

 
24,365

 
0.47






30


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

 
 
Operating revenue:
 
 
 
 
 
Retail
292,417

 
307,226

 
(4.8
)
Classified:
 
 
 
 
 
Employment
33,560

 
36,911

 
(9.1
)
Automotive
34,424

 
39,054

 
(11.9
)
Real estate
18,862

 
20,805

 
(9.3
)
All other
47,197

 
51,837

 
(9.0
)
Total classified
134,043

 
148,607

 
(9.8
)
National
23,999

 
29,506

 
(18.7
)
Niche publications and other
10,081

 
10,224

 
(1.4
)
Total advertising and marketing services revenue
460,540

 
495,563

 
(7.1
)
Subscription
177,056

 
173,971

 
1.8

Commercial printing
12,625

 
12,731

 
(0.8
)
Other
24,519

 
24,656

 
(0.6
)
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
)
Cash costs
514,013

 
544,204

 
(5.5
)
Operating cash flow
160,727

 
162,717

 
(1.2
)
Depreciation
21,302

 
23,495

 
(9.3
)
Amortization
34,225

 
41,696

 
(17.9
)
Loss (gain) on sales of assets, net
110

 
(52
)
 
NM

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

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 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



31


Because of period accounting, year-over-year comparisons are distorted. 2012 included an additional week of business activity, which added both revenue and operating expenses 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
460,540

487,023

(5.4
)
Total digital revenue
77,027

72,108

6.8

Subscription revenue
177,056

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