FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended September 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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.) 215 N. Main Street, Davenport, Iowa 52801 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (319) 383-2100 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange On Title of Each Class Which Registered - -------------------------------------------------------------------------------- Common Stock - $2.00 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of Class - -------------------- Class B Common Stock $2.00 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. [ ] State the aggregate market value of voting stock held by nonaffiliates of the registrant as of December 1, 1998. Common Stock and Class B Common Stock, $2.00 par value, $1,161,587,000. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of December 1, 1998. Common Stock, $2.00 par value, 32,787,354 shares; and Class B Common Stock, $2.00 par value, 11,573,584 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement dated December 29, 1998 are incorporated by reference in Part III of this Form 10-K.
PART I Item 1. Business This Annual Report on Form 10-K contains certain forward-looking statements that are based largely on the Company's current expectations and are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends, and uncertainties are changes in advertising demand, newsprint prices, interest rates, regulatory rulings, and other economic conditions, and the effect of acquisitions, investments, and dispositions on the Company's results of operations or financial condition. The words "believe," "expect," "anticipate," "intends," "plans," "projects," "considers," and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are as of the date of this filing. Item 1(a) Recent business developments. During the Company's fiscal year ended September 30, 1998, there were no material developments in the Company's business. Item 1(b) Financial information about industry segments. See Note 13 to the Notes to Financial Statements under Item 8, herein. Item 1(c) Narrative description of business. PUBLISHING The Company and its subsidiaries publish the following: Daily Newspapers: <TABLE> Circulation Newspaper City State Daily(M-F) Sunday ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Southern Illinoisian Carbondale Illinois 26,672 34,160 Herald & Review Decatur Illinois 38,503 47,502 Star Courier Kewanee Illinois 6,660 Quad City Times Davenport Iowa 51,897 76,838 Globe Gazette Mason City Iowa 20,422 24,525 Muscatine Journal Muscatine Iowa 8,484 The Ottumwa Courier Ottumwa Iowa 18,325 Winona Daily News Winona Minnesota 12,121 12,995 Billings Gazette Billings Montana 50,746 56,387 The Montana Standard Butte Montana 15,104 15,706 Independent Record Helena Montana 13,422 14,201 Missoulian Missoula Montana 31,277 37,721 Lincoln Journal Star Lincoln Nebraska 76,202 83,128 The Bismarck Tribune Bismarck North Dakota 29,740 32,430 Democrat-Herald Albany Oregon 22,222 22,433 * Ashland Daily Tidings Ashland Oregon 5,251 - - Corvallis Gazette-Times Corvallis Oregon 13,438 14,950 Rapid City Journal Rapid City South Dakota 30,351 33,931 LaCrosse Tribune LaCrosse Wisconsin 32,722 40,452 Wisconsin State Journal Madison Wisconsin 87,390 159,827 The Journal Times Racine Wisconsin 33,535 34,427 ------------------------ Total paid daily and Sunday circulation 624,484 741,613 ======================= <FN> Source - Annual Average of Audit Bureau of Circulation (ABC): Average of 6 months ended March 1998 and September 1998. (ABC had not completed its audit of the September 30, 1998 period as of the date of this report.) * From date of inception: September 13, 1998. </FN> </TABLE>
Weekly Newspapers: <TABLE> Newspaper City State Day(s) Circulation ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Aledo Times Record Aledo Illinois Wednesday 9,016 Bettendorf News Bettendorf Iowa Wednesday 2,600 Big Fork Eagle Big Fork Montana Wednesday 4,500 The Plattsmouth Journal Plattsmouth Nebraska Monday and Thursday 5,000 Mandan News Mandan North Dakota Thursday 1,920 Cottage Grove Sentinel Cottage Grove Oregon Wednesday 4,500 Gresham Outlook Gresham Oregon Wednesday and Saturday 8,814 Lebanon Express Lebanon Oregon Wednesday 3,500 Newport News-Times Newport Oregon Wednesday and Friday 13,948 Sandy Post Sandy Oregon Wednesday 2,006 The Springfield News Springfield Oregon Wednesday and Saturday 11,000 ------------- Total paid weekly circulation 66,804 ============= </TABLE> Source: Company Statistics The Company owns 50% of the capital stock of Madison Newspapers, Inc. and 17% of the nonvoting common stock of The Capital Times Company. The Capital Times Company owns the remaining 50% of the capital stock of Madison Newspapers, Inc. Madison Newspapers, Inc. owns the Wisconsin State Journal, a morning newspaper published seven days each week, and The Capital Times, an afternoon paper published Monday through Saturday each week. Both newspapers are produced in the printing plant of Madison Newspapers, Inc., which maintains common advertising, circulation, delivery, and business departments for the two newspapers.
The Company has a contract to furnish the editorial and news content for the Wisconsin State Journal. The Wisconsin State Journal is classified as one of the Lee Group of newspapers in the newspaper field and in the rating services. Classified Publications: <TABLE> Publication City State Day(s) Circulation --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Prescott Sun Prescott Arizona Wednesday 33,100 Dandy Dime Tucson Arizona Friday 28,500 The Town Crier Aledo Illinois Wednesday 9,016 The Atkinson-Annawan News Atkinson Illinois Thursday 700 Prairie Shopper Decatur Illinois Tuesday 45,063 Thrifty Nickel East Moline Illinois Thursday 11,665 Henry County Advertiser Geneseo Illinois Tuesday 20,300 The Gateway Express Clinton Iowa Wednesday and Friday 6,837 The Advertiser Davenport Iowa Wednesday 28,000 Winnebago/Hancock Shopper Forest City Iowa Monday 12,530 Mason City Shopper Mason City Iowa Tuesday 33,971 The Post Muscatine Iowa Tuesday 20,850 Wapello County Shopper Ottumwa Iowa Wednesday 21,400 Thrifty Nickel Billings Montana Thursday 30,000 Yellowstone Shopper Billings Montana Thursday 47,200 Mini Nickel Bozeman Montana Thursday 22,900 Nickel Saver Butte Montana Thursday 100,000 Western Shopper Deer Lodge Montana Wednesday 4,775 The Trader Dillon Montana Monday 6,183 Consumers Press Great Falls, Montana Thursday 32,969 Life & Times Press Hamilton Montana Wednesday 12,275 The Adit Helena Montana Wednesday 23,519 The Western Montana Messenger Missoula Montana Wednesday 33,000 Nifty Nickel Las Vegas Nevada Thursday 60,000 Penny Saver Albuquerque New Mexico Friday 26,000 Quik Quarter/Thrifty Nickel Albuquerque New Mexico Thursday 34,500 Pennysaver Dickinson North Dakota Wednesday 13,790 The Finder Mandan North Dakota Wednesday 39,161 Nickel Ads Portland Oregon Friday 202,000 Rapid City Advertiser Rapid City South Dakota Wednesday 28,000 Northern Hills Advertiser Spearfish South Dakota Wednesday 21,977 Pioneer Shopper St. George Utah Thursday 27,000 Little Nickel Lynnwood Washington Wednesday and Thursday 320,000 Nickel Saver Moses Lake Washington Thursday 21,500 Nickel Nik Spokane Washington Friday 37,000 Buyline Walla Walla Washington Thursday 2,000 Nickel Ads Wenatchee Washington Thursday 26,500 The Foxxy Shopper LaCrosse Wisconsin Tuesday 33,984 Cover Story Madison Wisconsin Sunday 85,000 Pennysaver Racine Wisconsin Monday 65,000 Foxxy Shopper Sparta Wisconsin Tuesday 42,462 ------------- Total non-paid weekly circulation 1,670,627 ============= Source: Company statistics </TABLE>
Classified publications are weekly advertising publications available in racks or delivered free by carriers or third-class mail to all households in a particular geographic area. Classified publications offer advertisers a cost-effective local advertising system. Classified publications are particularly effective in large markets with high media fragmentation in which major metropolitan newspapers generally have low penetration. Specialty Publications and Other Products and Services: City State ----------------------------------------------------------------- Auto Index Prescott Arizona Cars & Trucks Tuscon Arizona The Ridge Aledo Illinois Lee Direct Davenport Iowa Lee Print Davenport Iowa Classic Images Muscatine Iowa International Newspaper Network Big Fork Montana Quality Information Systems Billings Montana Western Business Billings Montana Intermountain Printing and Publishing Deer Lodge Montana Ag Almanac Great Falls Montana AutoFinder Missoula Montana Broadwater Townsend Montana Home Scene Las Vegas Nevada Las Vegas Showtime Las Vegas Nevada Nifty Nickel Cars & Trucks Las Vegas Nevada Farm & Ranch Guide Bismarck North Dakota Internet Broadcasting Partners Portland Oregon Tri-State Neighbor Sioux Falls South Dakota Value Express Colville Washington Home Buyer's Guide Spokane Washington Nickel Nik's RV Wheel Deals Spokane Washington Nickel Nik's Truck Deals Spokane Washington Nickel Nik's Wheel Deals Spokane Washington AgriView Madison Wisconsin Midwest Messenger Tekamah Nebraska The Eastman's Journal Thermopolis Wyoming The Company's strategy is to increase its share of local advertising in its existing markets, and over time, to increase circulation through internal expansion into contiguous markets and make selective acquisitions. The basic raw material of newspapers, classified, and specialty publications is newsprint. The Company and its subsidiaries purchase newsprint from U.S. and Canadian producers. The Company believes it will continue to receive a supply of newsprint adequate to its needs. Newsprint prices are volatile and fluctuate based upon factors which include both the foreign and domestic production capacity and consumption. The price fluctuations can have a significant effect on the results of operations. For the quantitative impacts of these fluctuations, see "Management Discussion and Analysis of Financial Condition and Results of perations" under Item 7, herein. Publishing revenue has traditionally been highest in the quarter ended December 31 and, likewise, has been lowest in the quarter ended March 31. The Company's newspapers, classified and specialty publications compete with newspapers having national or regional circulation, magazines, radio, television, other advertising media such as billboards, classified and specialty publications and direct mail, as well as other information content providers such as on-line services. In addition, many of the Company's daily and Sunday newspapers compete with other newspapers in nearby cities and towns.
BROADCASTING The Company and its subsidiaries own and operate the following television stations: Nielsen DMA Station Market Ranking - -------------------------------------------------------------------------------- ABC Affiliate, KGUN-TV - Tucson, Arizona 78 CBS Affiliates: KOIN-TV - Portland, Oregon 23 KRQE-TV - Albuquerque, New Mexico 49 (1) KGMB-TV - Honolulu, Hawaii 71 (2) KMTV - Omaha, Nebraska 73 NBC Affiliates: WSAZ-TV - Huntington-Charleston, West Virginia 58 KSNW-TV - Wichita, Kansas 65 (3) KSNT-TV - Topeka, Kansas 140 Telemundo Affiliate, KMAZ-TV - El Paso, Texas 99 (4) UPN Affiliate, KASY-TV - Albuquerque, New Mexico (operating under local marketing agreement) 49 (1) Combined DMA rank. KRQE-TV also operates stations KBIM-TV, Roswell, New Mexico and KREZ-TV, Durango, Colorado. (2) KGMB-TV also operates stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Maui, Hawaii. (3) KSNW-TV also operates stations KSNG-TV, Garden City, Kansas; KSNC-TV, Great Bend, Kansas; and KSNK-TV, Oberlin, Kansas/McCook, Nebraska. (4) KZIA-TV changed its call letters to KMAZ-TV effective October 31, 1997. Affiliation changed from UPN effective January 15, 1998. Broadcasting revenue has traditionally been highest in the quarter ended December 31 and, likewise, has been lowest in the quarter ended March 31. The Company's television stations compete with other over-the-air broadcast television stations, direct broadcast satellite ("DBS") and cable television, radio companies, other advertising media such as newspapers, magazines and billboards, as well as other information content providers such as on-line services. Competition in the television broadcasting industry occurs primarily in individual market areas. Generally, a television station in one market does not compete with other stations in other market areas, nor does a group of stations, such as those owned by the Company, compete with any other group of stations as such. DBS and cable television systems in the Company's broadcasting markets operate on a subscriber payment basis and compete by importing out-of-market television signals or by originating programming to the extent permitted or required by present or future rules of the Federal Communications Commission ("FCC"). The Company's television broadcasting operations are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the "Act"). The Act empowers the FCC, among other things, to issue, revoke or modify broadcasting licenses, to assign frequency bands, to determine the location of stations, to regulate the apparatus used by stations, to establish areas to be served, to adopt regulations necessary to carry out the provisions of the Act and to impose penalties for violation of such regulations. Television licenses are granted for a maximum period of five years and, upon application, may be renewed for additional five-year terms. The FCC is required to hold a hearing on a renewal application if a substantial and material question of fact is raised with respect to the renewal application, or if for any reason the FCC is unable to find that the grant of the renewal application would serve the public interest, convenience and necessity. Renewal of the Company's television licenses has never been denied and all such licenses are now in full force and effect. OTHER MATTERS In the opinion of management, compliance with present statutory and regulatory requirements respecting environmental quality will not necessitate significant capital outlays, or materially affect the earning power of the business of the Company, or cause material changes in the Company's business, whether present or intended. In September 1998, the Company, its subsidiaries and associated companies had approximately 6,100 employees, including approximately 2,100 part-time employees.
Item 2. Properties The Company's executive offices are located in facilities leased at 215 North Main Street, Davenport, Iowa. All of the printing plants (except Madison which is owned by Madison Newspapers, Inc.) are owned by the Company. All printing plants (including Madison) are well maintained, are in good condition, and are suitable for the present office and publishing operations. Upon completion of the production facility expansion in Lincoln, Nebraska, the Company believes all plants will be adequately equipped with typesetting, printing and other required equipment. All offices, studios, and transmitter buildings of the broadcasting divisions are owned or subject to long-term lease by the Company. All of the television properties are adequately equipped for present operations, and are in good condition and repair. See Item 7 "Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity, Capital Resources and Commitments" for a discussion of the implementation of digital television service. Network television programs are received via satellite. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Executive Officers of the Company The following table shows the names and ages of all executive officers of the Company, the period of service for each with the Company, the period during which each has held his present office and the office held by each. <TABLE> Period of Service Period In Name Age With Company Present Office Present Office - ------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Richard D. Gottlieb 56 35 years 7 years President and Chief Executive Officer Ronald L. Rickman 60 39 years 1 year President - Publishing Group Gary N. Schmedding 60 26 years 1 year President - Broadcast Group Group Larry L. Bloom 49 5 years 5 years Senior Vice President - Finance, Treasurer, and Chief Financial Officer Greg R. Veon 46 22 years 3 years Vice President - Marketing Richard F. Anderson 57 1 year 1 year President - The Pacific Northwest Group Vytenis P. Kuraitis 50 4 years 2 years Vice President - Human Resources Charles D. Waterman, III 52 9 years 9 years Secretary George C. Wahlig 51 9 years 6 years Vice President - Finance and Chief Accounting Officer Gregory P. Schermer 44 10 years 1 year Vice President - Interactive Media </TABLE> Ronald L. Rickman was elected President - Publishing Group in November 1997. For more than five years prior thereto he was Vice President - Publishing Group. Gary N. Schmedding was elected President - Broadcast Group in November 1997. For more than five years prior thereto he was Vice President - Broadcast Group.
Greg R. Veon was elected Vice President - Marketing in November 1995; from 1992 through November 1995 he was Vice President and General Manager of KOIN-TV, Portland, Oregon. Richard F. Anderson was elected President - The Pacific Northwest Group in November 1997; from 1992 through September 1997 he was General Manager and President of The Pacific Northwest Publishing Group for Capital Cities/ABC, Inc. Vytenis P. Kuraitis was elected Vice President - Human Resources in January 1997. From August 1994 through January 1997 he was Director of Human Resources. For more than two years prior thereto, he was the National Practice Director for Executive Compensation for AON. Charles D. Waterman, III was elected Secretary of the Company in November 1989. He is presently, and for more than the past five years has been, a partner in the law firm of Lane & Waterman, Davenport, Iowa, general counsel of the Company. Gregory P. Schermer was elected Vice President - Interactive Media in November 1997; from 1989 through November 1997 he was, and continues to serve as, corporate counsel for the Company. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters COMMON STOCK PRICES AND DIVIDENDS Lee Common Stock is listed on the New York Stock Exchange. Lee Class B Common Stock was issued to stockholders of record of the Company in 1986 pursuant to a 100% stock dividend and is converted at sale or the option of the holder into Lee Common Stock. The table below shows the high and low prices of Lee Common Stock for each quarter during the past three years, the closing price at the end of each quarter and the dividends paid per share. Quarter -------------------------------------------------- 4th 3rd 2nd 1st -------------------------------------------------- STOCK PRICES 1998: High ............. $ 31-3/4 $ 33-7/8 $ 33-9/16 $ 29-13/16 Low .............. 23-1/2 27-5/16 28 25-1/2 Closing .......... 25-15/16 30-5/8 33-9/16 29-9/16 1997: High ............. 29-1/8 27 25-1/8 23-5/8 Low .............. 25 22-3/8 22-3/8 21 Closing .......... 28-3/8 26-3/8 24-1/4 23-1/4 1996: High ............. 23-5/8 24-3/8 22-3/4 23 Low .............. 19-3/4 20-1/2 20 19-11/16 Closing .......... 22-7/8 23-5/8 21-1/8 23 DIVIDENDS PAID 1998 ............. $ 0.14 $ 0.14 $ 0.14 $ 0.14 1997 ............. 0.13 0.13 0.13 0.13 1996 ............. 0.12 0.12 0.12 0.12 For a description of the relative rights of Common Stock and Class B Common Stock, see Note 7 of the Notes to Consolidated Financial Statements under Item 8, herein. At September 30, 1998, the Company had 3,653 holders of Common Stock and 2,283 holders of Class B Common Stock.
Item 6. Selected Financial Data FIVE YEAR FINANCIAL PERFORMANCE <TABLE> Year Ended September 30: 1998 1997 1996 1995 1994 ---------------------------------------------------- (In Thousands Except Per Share Data) <S> <C> <C> <C> <C> <C> OPERATIONS Operating revenue ........... $517,293 $446,686 $427,369 $383,740 $341,241 ==================================================== Income from continuing operations ............... $ 62,233 $ 62,745 $ 53,670 $ 52,232 $ 45,137 Discontinued operations ..... - - - - 7,725 6,227 5,717 Gain (loss) on disposition of discontinued operations ............... - - 1,485 (15,948) - - - - ---------------------------------------------------- Net income ....... $ 62,233 $ 64,230 $ 45,447 $ 58,459 $ 50,854 ==================================================== PER SHARE AMOUNTS Weighted average shares: Basic .................... 44,829 46,393 46,973 46,053 46,038 Diluted .................. 45,557 47,243 47,899 46,873 46,806 Basic: Income from continuing operations ............. $ 1.39 $ 1.35 $ 1.14 $ 1.13 $ 0.98 Discontinued operations .. - - - - 0.16 0.14 0.12 Gain (loss) on disposition of discontinued operations ............. - - 0.03 (0.33) - - - - ---------------------------------------------------- Net income ....... $ 1.39 $ 1.38 $ 0.97 $ 1.27 $ 1.10 ==================================================== Diluted: Income from continuing operations ............. $ 1.37 $ 1.33 $ 1.12 $ 1.12 $ 0.97 Discontinued operations .. - - - - 0.16 0.13 0.12 Gain (loss) on disposition of discontinued operations ............. - - 0.03 (0.33) - - - - ---------------------------------------------------- Net income ....... $ 1.37 $ 1.36 $ 0.95 $ 1.25 $ 1.09 ==================================================== Dividends ................... $ 0.56 $ 0.52 $ 0.48 $ 0.44 $ 0.42 OTHER DATA Total assets ................ $660,585 $650,963 $527,416 $559,929 $474,701 Debt, including current maturities ....... 219,481 203,735 95,503 123,489 130,532 Stockholders' equity ........ 319,759 319,390 324,954 311,042 241,930 </TABLE> Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations This Management Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements that are based largely on the Company's current expectations and are subject to certain risks, trends, and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends, and uncertainties are changes in advertising demand, newsprint prices, interest rates, regulatory rulings, and other economic conditions and the effect of acquisitions, investments, and dispositions on the Company's results of operations or financial condition. The words "believe," "expect," "anticipate," "intends," "plans," "projects," "considers," and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are as of the date of this filing.
Operating results are summarized below: 1998 1997 1996 ------------------------------ (Dollars in Thousands, Except Per Share Data) Operating revenue ....................... $517,293 $446,686 $427,369 Percent change ....................... 15.8% 4.5% 11.4% Income before depreciation, amortization, interest and taxes (EBITDA) * ........ 150,423 132,455 122,540 Percent change ....................... 13.6% 8.1% 8.6% Operating income ........................ 112,847 104,151 94,741 Percent change ....................... 8.3% 9.9% 3.6% Income from continuing operations ....... 62,233 62,745 53,670 Percent change ....................... (0.8)% 16.9% 2.8% Earnings per share, continuing operations Basic ................................ 1.39 1.35 1.14 Percent change .................... 3.0% 18.4% 0.1% Diluted .............................. 1.37 1.33 1.12 Percent change .................... 3.0% 18.8% --% * EBITDA is not a financial performance measurement under generally accepted accounting principles (GAAP), and should not be considered in isolation or a substitute for GAAP performance measurements. EBITDA is also not reflected in our consolidated statement of cash flows; but it is a common and meaningful alternative performance measurement for comparison to other companies in our industry. The fiscal 1998 comparisons are significantly affected by the September 8, 1997 acquisition of The Pacific Northwest Group. The Pacific Northwest Group publishes eight daily and weekly newspapers geographically clustered in Oregon's Willamette Valley and classified publications in eight markets in the states of Washington, Oregon, Nevada, and Utah. For additional information related to this acquisition, see Note 3 of the Notes to Consolidated Financial Statements under Item 8, herein. The following unaudited pro forma operating results are as if Lee had owned its recently acquired properties since October 1, 1996. 1998 1997 --------------------- (Pro Forma Dollars in Thousands, Except Per Share Data) Operating revenue ............................ $517,293 $497,872 Percent change ............................ 3.9% Income before depreciation, amortization, interest and taxes ........................ 150,423 146,898 Percent change ............................ 2.4% Operating income ............................. 112,847 110,241 Percent change ............................ 2.4% Income from continuing operations ............ 62,233 59,470 Percent change ............................ 4.6% Earnings per share, continuing operations: Basic ..................................... 1.39 1.28 Percent change ......................... 8.6% Basic ..................................... 1.37 1.26 Percent change ......................... 8.7% PUBLISHING 1998 1997 1996 ------------------------------ (Dollars in Thousands) Operating revenue ....................... $382,894 $318,441 $302,564 Percent change ....................... 20.2% 5.2% 10.1% Operating income: Wholly-owned properties .............. 94,159 88,865 75,687 Percent change .................... 6.0% 17.4% 10.7% Equity in net income ................. 8,367 7,756 7,008 Percent change .................... 7.9% 10.7% (15.3)% Operating margin, wholly-owned properties 24.6% 27.9% 25.0%
The publishing segment includes newspapers, classified and specialty publications. Operating revenue consists of the following: 1998 1997 1996 ------------------------------ (Dollars in Thousands) Daily newspapers: Advertising ............. $195,852 $179,822 $169,151 Percent change ....... 8.9% 6.3% 10.3% Circulation ............. 81,912 80,522 79,814 Percent change ....... 1.7% 0.9% 9.5% Other ...................... 105,130 58,097 53,599 Percent change .......... 81.0% 8.4% 10.1% Exclusive of The Pacific Northwest Group acquisition, advertising revenue increased 5.0% and 6.0%, circulation revenue (decreased) increased (.6%) and .7%, and other revenue increased 4.6% and 3.8% in 1998 and 1997, respectively. The following daily newspaper advertising lineage, circulation volume statistics, and related revenue results are presented on a pro forma basis for daily newspapers wholly owned at the end of fiscal 1998. Changes in advertising units for classified and local advertising, which account for more than 70% of newspaper advertising revenue, are as follows: A DVERTISING LINEAGE, IN THOUSANDS OF INCHES (PRO FORMA ): 1998 1997 1996 --------------------------------------- Classified ................... 4,365 4,252 4,067 Percent change ............ 2.7% 4.5% (0.2)% Local ........................ 5,638 5,630 5,697 Percent change ............ 0.1% (1.2)% (2.3)% Classified advertising revenue increased approximately 9.7% in 1998, 9.7% in 1997, and 6.5% in 1996. The average rate realized increased 6.9% in 1998, 5.0% in 1997, and 6.8% in 1996. In 1998 continued significant growth in employment advertising and growth in real estate advertising offset a small reduction in automotive advertising. In 1997 significant growth in employment advertising offset softness in automotive and other advertising. In 1996 automotive advertising decreased until late in the fiscal year. Local "run-of-press" advertising is advertising by merchants in the local community which is printed in the newspaper, rather than "preprints", which are printed separately by the Company or others and inserted into the newspaper. In 1998 revenue increased 1.3% as the Company offered price incentives in return for larger or more frequent ads resulting in a .1% increase in local advertising units. Revenue increased 3.1% in 1997 and 1996 on higher average rates despite decreases in advertising inches. Total revenue realized from local and national merchants is increasing despite the shift from run-of-press advertising to preprints which have lower-priced, higher-volume distribution rates. Preprint revenue increased 4.8% in 1998, 5.2% in 1997, and was flat in 1996 due to cutbacks by advertisers during the 1995 holiday season. In 1998 circulation revenue decreased (.6%) and volume decreased (.7%). Volume decreases in 1997 continued through the first half of 1998. Intensive promotion efforts and reduced price offers increased volume above 1997 year-end levels by the close of the fiscal year. In 1997 and 1996 circulation revenue increased .8% and 3.8% as a result of higher rates, which offset volume decreases of (2.3%) and (1.7%), respectively. Other revenue consists of revenue from weekly newspapers, classified, specialty publications, commercial printing, products delivered outside the newspaper (which include activities such as target marketing, special event production, and on-line service) and editorial service contracts with Madison Newspapers, Inc.
Other revenue by category and by property is as follows: <TABLE> 1998 1997 1996 ------------------------------ (In Thousands) <S> <C> <C> <C> Weekly newspapers, classified and specialty publications: Properties owned for entire period ....................... $ 23,927 $ 22,711 $ 21,750 Acquired since September 30, 1995 ........................ 46,363 3,072 485 Commercial printing: Properties owned for entire period ....................... 13,858 14,351 14,354 Acquired since September 30, 1995 ........................ 947 Products delivered outside the newspaper: Properties owned for entire period ....................... 11,650 9,928 9,443 Acquired since September 30, 1995 ........................ 17 59 Editorial service contracts ................................. 8,368 7,976 7,567 ------------------------------ $105,130 $ 58,097 $ 53,599 ============================== </TABLE> The following table sets forth the percentage of revenue of certain items in the publishing segment. <TABLE> 1998 1997 1996 ------------------------ <S> <C> <C> <C> Revenue .................................................... 100.0% 100.0% 100.0% ------------------------ Compensation costs ......................................... 35.1 34.0 33.8 Newsprint and ink .......................................... 10.7 9.7 12.7 Other operating expenses ................................... 23.1 23.4 23.6 ------------------------ 68.9 67.1 70.1 ------------------------ Income before depreciation, amortization, interest and taxes 31.1 32.9 29.9 Depreciation and amortization .............................. 6.5 5.0 4.9 ------------------------ Operating margin wholly-owned properties ................... 24.6% 27.9% 25.0% ======================== </TABLE> Exclusive of the effects of acquisitions, in 1998 costs other than depreciation and amortization increased 5.2%. Newsprint and ink costs increased 12.2% due to higher prices for newsprint and greater consumption. Compensation cost increased 5.3% due to an increase in average compensation and hours worked. Other operating costs increased 2.1%. Exclusive of the effects of the 1997 acquisitions, in 1997 costs other than depreciation and amortization decreased (.5%). Newsprint and ink costs decreased (20.9%) due to lower prices for newsprint. Prices were lower in all four quarters of 1997 as compared to the same quarters of 1996; however, after decreases in the first and second quarters, prices increased in the third and fourth quarters of 1997. Newsprint consumption was flat in 1997 as compared to 1996. Compensation costs increased 4.4% as a result of salary increases. Other operating costs increased 3.7% due to normal inflationary increases. Exclusive of the effects of the 1995 acquisitions, in 1996 costs other than depreciation and amortization increased 3%. Newsprint and ink costs increased 9.4% due to price increases for newsprint. High prices during the first two quarters of the fiscal year stabilized during the third quarter and were lower in the fourth quarter of 1996 than the fourth quarter of 1995. Newsprint consumption was flat in 1996 as compared to 1995, as higher consumption for commercial printing was offset by conservation efforts by the newspapers. Compensation costs increased 4% due primarily to salary increases. Other operating costs did not increase significantly. BROADCASTING 1998 1997 1996 ------------------------------- (Dollars in Thousands) Operating revenue ...... $126,032 $120,489 $117,797 Percent change ...... 4.6% 2.3% 17.1% Operating income ....... 24,948 22,262 22,953 Percent change ...... 12.1% (3.0)% (14.8)% Operating margin ....... 19.8% 18.5% 19.5%
Revenue for 1998 increased $5,543,000, 4.6%. Local/regional/national revenue increased $6,834,000 due to winter Olympics advertising in the second quarter and improved rates realized. Political advertising decreased $1,063,000. Production revenues and revenues from other sources were flat. Revenue for 1997 increased $2,692,000, 2.3%. Local/regional/national revenue increased $1,342,000 while political advertising decreased $244,000. Production revenue increased $562,000 due to the addition of a second mobile production facility at MIRA Productions in Portland, Oregon, and revenues from other services increased $913,000. In 1996, exclusive of acquisitions, operating revenue decreased (.6%). Local/regional/national revenue decreased $2,600,000, due to softness in automotive and retail spot buying. Political advertising increased $1,000,000. Production revenue increased $760,000, primarily due to a new mobile production facility at MIRA Productions in Portland, Oregon. The following table sets forth the percentage of revenue of certain items in the broadcasting segment. <TABLE> 1998 1997 1996 ------------------------ <S> <C> <C> <C> Revenue .................................................... 100.0% 100.0% 100.0% ------------------------ Compensation costs ......................................... 40.9 41.8 39.5 Programming costs .......................................... 6.6 6.6 7.9 Other operating expenses ................................... 23.6 23.4 22.6 ------------------------ 71.1 71.8 70.0 ------------------------ Income before depreciation, amortization, interest and taxes 28.9 28.2 30.0 Depreciation and amortization .............................. 9.1 9.7 10.5 ------------------------ Operating margin wholly-owned properties ................... 19.8% 18.5% 19.5% ======================== </TABLE> Operating income increased in 1998 by $2,686,000. Compensation costs increased $1,092,000, 2.2% due to an increase in the average hourly rate which offset a decrease in the number of hours worked. Programming costs increased by $462,000, 5.8% due to an increase in the cost of syndicated programs. Other operating expense increased $1,477,000, 5.2% due to increased costs for promotion, audience ratings services, and bad debt expense when two advertisers filed for bankruptcy. Operating income decreased in 1997 by $691,000. Compensation costs increased $3,898,000, 8.4% due to an increase in the number of hours worked and an increase in the average hourly rate. Programming costs decreased by $1,344,000, (14.5%), due to decreased amortization from programs amortized on an accelerated basis offset in part by a $400,000 write-down of programming at KMAZ-TV El Paso due to the January 1998 conversion to a Telemundo affiliate providing Spanish language programming. Other operating expense increased 5.8% due to the rental of two news helicopters in 1997 and increased outside services. The primary driver of the outside services increase is MIRA Productions, which uses contract labor and rental equipment for special projects. Exclusive of the effects of acquisitions, operating income decreased by $6,500,000 or 23.8% in 1996. Compensation costs increased by 5.1% primarily due to a 6.9% increase in hours worked, mainly due to expanded operations at our New Mexico locations. Programming costs increased by $2,000,000, 31.8% as a result of the addition of highly-rated syndicated programming and the write-down of certain programming to net realizable value. Other operating costs increased 4.2% due to higher expenditures for repairs and maintenance and sales and audience promotion. CORPORATE Corporate costs in 1998 decreased by $105,000, (.7%). Reductions in financial system installation costs, incentive compensation, and donations were offset by increases in depreciation and other expenses.
Corporate costs in 1997 increased by $3,800,000, 35.1% as a result of increased marketing costs and the enhancement of computer software. Corporate costs in 1996 decreased by $1,300,000, (10.4%) primarily due to decreased levels of incentive compensation and lower medical plan costs resulting from a 1995 plan redesign. INTEREST EXPENSE Interest expense increased by approximately $6,300,000 in 1998 due to borrowings to finance The Pacific Northwest Group acquisition. Interest expense decreased by approximately $1,300,000 in 1997 and $2,300,000 in 1996. The most significant element of the decreases was a lower debt level which reduced interest expense by approximately $1,500,000 and $2,400,000, respectively, in 1997 and 1996. Interest on deferred compensation arrangements for executives and others is offset by financial income earned on the invested funds held in trust. Financial income and interest expense increased by $24,000, $1,700,000, and $600,000 in 1998, 1997, and 1996, respectively, as a result of these arrangements. INCOME TAXES Income taxes were 37.8% of pretax income in 1998, 38.0% in 1997, and 38.8% in 1996. DISCONTINUED OPERATIONS On January 17, 1997, the Company consummated the sale of the capital stock of its graphic arts products subsidiary, NAPP Systems Inc., for approximately $55,900,000, net of selling expenses. The results for NAPP Systems Inc.'s operations have been classified as discontinued operations for all periods presented in the consolidated statements of income. The assets and liabilities of discontinued operations have been classified in the consolidated balance sheet as "net assets of discontinued operations" as of September 30, 1996. For the year ended September 30, 1996 the Company recorded an after-tax charge of $15,948,000 which included estimated earnings and dividends through the closing date. For the year ended September 30, 1997, the Company recorded an after-tax gain of $1,485,000 due to higher than estimated earnings and dividends through the closing date. For additional information related to the disposition, see Note 2 of the Notes to Consolidated Financial Statements under Item 8, herein. LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS Cash provided by operations totaled $100,739,000 in 1998. The Company has $50,000,000 available under a revolving credit arrangement with banks which expires in 2003. The major sources and uses of cash in 1998 were as follows: (In Thousands) Sources of cash: Operations ................................................... $100,739 Long-term borrowings ......................................... 185,000 All other .................................................... 2,256 -------- 287,995 -------- Uses of cash: Acquisitions ................................................. 11,944 Purchase of property and equipment ........................... 26,725 Cash dividends paid .......................................... 25,160 Purchase of Lee Enterprises, Incorporated stock .............. 51,388 Payment of debt .............................................. 170,000 -------- 285,217 -------- Increase in cash .................................. $ 2,778 ========
The Company generally finances significant acquisitions by long-term borrowings. Recurring capital expenditures for new and improved facilities and equipment are expected to be about $20,000,000 in 1999. The FCC has required implementation of digital television ("DTV") service which includes high definition television systems. Implementation of DTV service will impose substantial additional costs on television stations to provide the new service due to increased equipment costs. KOIN-TV in Portland, Oregon is required by the FCC to broadcast a digital TV signal by November 1999. The Company has plans to spend approximately $2,000,000 in fiscal 1999 for DTV conversion. The Company has not completed its assessment of the balance of the capital expenditures required or the benefits to the Company of converting to DTV. Consequently, the Company cannot at this time predict the impact this conversion will have on liquidity, capital resources, and results of operations. The Company also is in the process of building a new production facility for the Journal-Star in Lincoln, Nebraska. The total cost is expected to be approximately $32,000,000 and will be completed in fiscal 2000. Approximately $7,000,000 has been spent through September 30, 1998 on this project and spending in fiscal 1999 is expected to be approximately $14,000,000. Also the Company intends to spend approximately $2,000,000 in fiscal 1999 for expanded commercial printing facilities. The Company anticipates that funds necessary for capital expenditures and other requirements will be available from internally generated funds and the Company's revolving credit agreements. DIVIDENDS AND COMMON STOCK PRICES The current quarterly cash dividend is 15 cents per share, an annual rate of 60 cents. During the fiscal year ended September 30, 1998, the Company paid dividends of $25,160,000 or 40.1% of 1998's earnings from continuing operations. The Company will continue to review its dividend policy to assure that it remains consistent with its capital demands. Covenants under borrowing arrangements are not considered restrictive to payment of dividends. Lee Common Stock is listed on the New York Stock Exchange. The table under Item 5 herein shows the high and low prices of Lee Common Stock for each quarter during the past three years. It also shows the closing price at the end of each quarter and the dividends paid in the quarter. INFLATION The net effect of inflation on operations has not been material in the last several years because of efforts by the Company to lessen the effect of rising costs through a strategy of improving productivity, controlling costs and, where conditions permit, increasing selling prices. EMERGING ACCOUNTING STANDARDS In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information". Statement No. 130 establishes standards for reporting comprehensive income in financial statements. Statement No. 131 expands certain reporting and disclosure requirements for segments from current standards. The Statements are effective for fiscal years beginning after December 15, 1997 and the Company does not expect the adoption of these new standards to result in material changes to previously reported amounts or disclosures. YEAR 2000 The Year 2000 Issue concerns the inability of information technology (IT) systems and equipment utilizing microprocessors to recognize and process date-sensitive information after 1999 due to the use of only the last two digits to refer to a year. This problem could affect both computer software and hardware and other equipment that relies on microprocessors. Management has completed a company-wide evaluation of this impact on its IT systems. Evaluation of date-sensitive publishing equipment is expected to be complete by December 31, 1998 with the evaluation of broadcasting equipment expected to be complete by March 31, 1999. Renovation and testing have been completed on all significant IT systems that utilize company-developed software that were not Year 2000 compliant with the exception of the newspaper advertising system. That system has been renovated and is currently being tested. Installation of the renovated advertising system is scheduled to be complete by January 31, 1999. The Company has received representations that significant software developed by others is Year 2000 compliant. Testing of these systems is expected to be complete by March 31, 1999. Installation of a new Year 2000-compliant financial system is approximately 70% complete and is planned to be complete by July 31, 1999. Testing of computer hardware for IT systems is approximately 90% complete. Renovation efforts and testing of systems/equipment are expected to be complete by June 30, 1999.
The Company will monitor the progress of material vendors and suppliers whose uninterrupted delivery of product or service is material to the production or distribution of our print and broadcast products in their efforts to become Year 2000 compliant. Material vendors and suppliers include electric utilities, telecommunications, news and content providers, television networks, other television programming suppliers, the U.S. Postal Service, and financial institutions. From September 30, 1994 through September 30, 1998, the Company has spent approximately $500,000 to address Year 2000 issues for IT systems (exclusive of the cost of the new financial, newspaper production and other systems that were scheduled to be replaced before the year 2000 for reasons other than Year 2000 compliance). Total costs to address Year 2000 issues for IT systems are currently estimated to be less than $1,000,000 and consist primarily of staff and consultant costs. Year 2000 remediation will require the replacement of telephone switches and software at a cost of $600,000 to $1,000,000. Through September 30, 1998 approximately $300,000 had been spent for new telephone equipment. An estimate of the cost of replacement of newspaper and broadcasting equipment will be available after the completion of the evaluations described above. Funds for these costs are expected to be provided by the operating cash flows or bank line of credit of the Company. The Company could be faced with severe consequences if Year 2000 issues are not identified and resolved in a timely manner by the Company and material third-parties. A worst-case scenario would result in the short-term inability of the Company to produce/distribute newspapers or broadcast television programming due to unresolved Year 2000 issues. This would result in lost revenues; however, the amount would be dependent on the length and nature of the disruption, which cannot be predicted or estimated. In light of the possible consequences, the Company is devoting the resources needed to address Year 2000 issues in a timely manner. Management monitors the progress of the Company's Year 2000 efforts and provides update reports to the audit committee of the Board of Directors at each meeting. While management expects a successful resolution of these issues, there can be no guarantee that material third-parties, on which the Company relies, will address all Year 2000 issues on a timely basis or that their failure to successfully address all issues would not have an adverse effect on the Company. The Company is in the process of reviewing its existing contingency plans in case business interruptions do occur. Management expects the review of these plans to be complete by June 30, 1999. QUARTERLY RESULTS The Company's largest source of publishing revenue, local run-of-press advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, local run-of-press advertising is higher in the first and third quarters. Newspaper classified advertising revenue (which includes real estate and automobile ads) and broadcasting revenue are lowest in January and February, which are included in our second fiscal quarter. Quarterly results of operations are summarized under Item 8, herein.
Item 8. Financial Statements and Supplementary Data FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS <TABLE> September 30, ---------------------------- 1998 1997 1996 ---------------------------- (Dollars in Thousands) <S> <C> <C> <C> ASSETS Current Assets: Cash and cash equivalents ................................ $ 16,941 $ 14,163 $ 19,267 Trade receivables, less allowance for doubtful accounts 1998 $4,110; 1997 $4,600; 1996 $4,000 ........................................... 60,443 56,960 48,773 Receivables from associated companies .................... 1,437 1,437 1,438 Inventories .............................................. 3,878 3,716 3,668 Program rights and other ................................. 16,892 17,691 17,183 Net assets of discontinued operations .................... - - - - 56,379 ---------------------------- Total current assets .......................... 99,591 93,967 146,708 ---------------------------- Investments: Associated companies ..................................... 14,107 12,185 11,488 Other .................................................... 12,364 12,506 10,668 ---------------------------- 26,471 24,691 22,156 ---------------------------- Property and Equipment: Land and improvements .................................... 13,856 12,994 10,140 Buildings and improvements ............................... 65,945 64,937 57,995 Equipment ................................................ 219,491 194,510 173,752 ---------------------------- 299,292 272,441 241,887 Less accumulated depreciation ............................ 170,920 152,415 137,182 ---------------------------- 128,372 120,026 104,705 ---------------------------- Intangibles and Other Assets: Intangibles .............................................. 398,111 404,481 246,061 Other .................................................... 8,040 7,798 7,786 ---------------------------- 406,151 412,279 253,847 ---------------------------- $660,585 $650,963 $527,416 ============================ </TABLE> See Notes to Consolidated Financial Statements.
<TABLE> September 30, -------------------------------- 1998 1997 1996 -------------------------------- (Dollars In Thousands) <S> <C> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current maturities of long-term debt .................................................. $ 33,453 $177,561 $ 43,213 Accounts payable ......................................... 14,277 23,429 15,369 Compensation and other accruals .......................... 26,966 27,324 20,419 Income taxes payable ..................................... 6,475 4,754 4,738 Unearned income .......................................... 16,890 15,840 14,038 -------------------------------- Total current liabilities ..................... 98,061 248,908 97,777 -------------------------------- Long-Term Debt, net of current maturities ................... 186,028 26,174 52,290 -------------------------------- Deferred Items: Retirement and compensation .............................. 13,117 13,948 11,611 Income taxes ............................................. 43,620 42,543 40,784 -------------------------------- 56,737 56,491 52,395 -------------------------------- Stockholders' Equity: Capital stock: Serial convertible preferred, no par value; authorized 500,000 shares; issued none Common, $2 par value; authorized 60,000,000 shares; issued and outstanding 1998 32,572,000 shares .............................. 65,144 66,719 68,578 Class B, common, $2 par value; authorized 30,000,000 shares; issued and outstanding 1998 11,778,000 shares .............................. 23,556 24,298 25,466 Additional paid-in capital ............................... 28,715 25,629 20,189 Unearned compensation .................................... (650) (493) (637) Retained earnings ........................................ 202,994 203,237 211,358 -------------------------------- 319,759 319,390 324,954 -------------------------------- $660,585 $650,963 $527,416 ================================ </TABLE>
CONSOLIDATED STATEMENTS OF INCOME <TABLE> Year Ended September 30, -------------------------------- 1998 1997 1996 -------------------------------- (In Thousands Except Per Share Data) <S> <C> <C> <C> Operating revenue: Publishing: Daily newspapers: Advertising ............................ $195,852 $179,822 $169,151 Circulation ............................ 81,912 80,522 79,814 Other .................................... 105,130 58,097 53,599 Broadcasting ................................ 126,032 120,489 117,797 Equity in net income of associated companies 8,367 7,756 7,008 -------------------------------- 517,293 446,686 427,369 -------------------------------- Operating expenses: Compensation costs .......................... 192,755 165,547 153,076 Newsprint and ink ........................... 41,165 30,906 38,535 Depreciation ................................ 19,662 17,175 16,236 Amortization of intangibles ................. 17,914 11,129 11,563 Other ....................................... 132,950 117,778 113,218 -------------------------------- 404,446 342,535 332,628 -------------------------------- Operating income ................. 112,847 104,151 94,741 -------------------------------- Financial (income) expense: Interest expense ............................ 14,611 8,321 9,648 Financial (income) .......................... (1,896) (5,392) (2,609) -------------------------------- 12,715 2,929 7,039 -------------------------------- Income from continuing operations before taxes on income ........... 100,132 101,222 87,702 Income taxes ................................... 37,899 38,477 34,032 -------------------------------- Income from continuing operations 62,233 62,745 53,670 -------------------------------- Discontinued operations: Income from discontinued operations, net of income tax effect ........................ - - - - 7,725 Gain (loss) on disposition of discontinued operations, net of income tax effect ..... - - 1,485 (15,948) -------------------------------- - - 1,485 (8,223) -------------------------------- Net income ....................... $ 62,233 $ 64,230 $ 45,447 ================================ Earnings per share: Basic: Income from continuing operations ........ $ 1.39 $ 1.35 $ 1.14 Income (loss) from discontinued operations - - 0.03 (0.17) -------------------------------- Net income ....................... $ 1.39 $ 1.38 $ 0.97 ================================ Diluted: Income from continuing operations ........ $ 1.37 $ 1.33 $ 1.12 Income (loss) from discontinued operations - - 0.03 (0.17) -------------------------------- Net income ....................... $ 1.37 $ 1.36 $ 0.95 ================================ </TABLE> See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> Year Ended September 30, -------------------------------------------------------------------- Amount Shares -------------------------------- ------------------------------- 1998 1997 1996 1998 1997 1996 -------------------------------- ------------------------------- (In Thousands Except Per Share Data) <S> <C> <C> <C> <C> <C> <C> Common Stock: Balance, beginning .......... $ 66,719 $ 68,578 $ 68,396 33,359 34,289 34,198 Conversion from Class B Common Stock ........... 649 1,131 862 325 565 431 Shares issued ............ 286 474 404 143 237 202 Shares reacquired ........ (2,510) (3,464) (1,084) (1,255) (1,732) (542) -------------------------------- ------------------------------- Balance, ending ............. $ 65,144 $ 66,719 $ 68,578 32,572 33,359 34,289 ================================ =============================== Class B Common Stock: Balance, beginning .......... $ 24,298 $ 25,466 $ 26,336 12,149 12,733 13,168 Conversion to Common Stock .................. (649) (1,131) (862) (325) (565) (431) Shares reacquired ........ (93) (37) (8) (46) (19) (4) -------------------------------- ------------------------------- Balance, ending ............. $ 23,556 $ 24,298 $ 25,466 11,778 12,149 12,733 ================================ =============================== Additional Paid-In Capital: Balance, beginning .......... $ 25,629 $ 20,189 $ 17,404 Shares issued ............ 3,086 5,440 2,785 -------------------------------- Balance, ending ............. $ 28,715 $ 25,629 $ 20,189 ================================ Unearned Compensation: Balance, beginning .......... $ (493) $ (637) $ (533) Restricted shares issued . (714) (405) (637) Restricted shares canceled 7 59 4 Amortization ............. 550 490 529 -------------------------------- Balance, ending ............. $ (650) $ (493) $ (637) ================================ Retained Earnings: Balance, beginning .......... $203,237 $211,358 $199,439 Net income ............... 62,233 64,230 45,447 Cash dividends per share 1998 $.56; 1997 $.52; 1996 $.48; ............. (25,160) (24,173) (22,603) Shares reacquired ........ (37,316) (48,178) (10,925) -------------------------------- Balance, ending ............. $202,994 $203,237 $211,358 ================================ Stockholders' Equity ........... $319,759 $319,390 $324,954 44,350 45,508 47,022 ================================ =============================== </TABLE> See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> Year Ended September 30, -------------------------------- 1998 1997 1996 -------------------------------- (In Thousands) <S> <C> <C> <C> Cash Provided by Operating Activities: Net income ........................................ $ 62,233 $ 64,230 $ 45,447 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 37,576 29,581 32,159 (Gain) loss on disposition of discontinued operations ................................... (1,985) 14,563 Distributions less than earnings of associated companies .................................... (1,922) (696) (734) Change in assets and liabilities, net of effects from business acquisitions: (Increase) in receivables .................... (3,131) (2,817) (1,347) Decrease in inventories, program rights and other .................................... 1,427 1,552 768 Increase (decrease) in accounts payable, accrued expenses and unearned income ..... 2,370 3,144 (9,446) Increase in income taxes payable ............. 1,721 516 2,067 Other, primarily deferred items .............. 465 4,021 4,066 -------------------------------- Net cash provided by operating activities ............................. 100,739 97,546 87,543 -------------------------------- Cash (Required for) Investing Activities: Acquisitions ...................................... (11,944) (188,689) - - Purchase of property and equipment ................ (26,725) (16,342) (18,796) Purchase of temporary investments ................. - - - - (200) Proceeds from maturities of temporary investments .................................... - - - - 400 Proceeds from sale of subsidiary .................. - - 54,795 - - Other ............................................. (952) (1,838) (2,089) -------------------------------- Net cash (required for) investing activities ............................. (39,621) (152,074) (20,685) -------------------------------- Cash Provided by (Required for) Financing Activities: Purchase of common stock .......................... (51,388) (41,055) (11,917) Cash dividends paid ............................... (25,160) (24,173) (22,603) Proceeds from long-term borrowings ................ 185,000 - - - - Proceeds from (payments on) short-term notes payable, net ............................. (145,000) 130,000 - - Principal payments on long-term borrowings ........ (25,000) (21,219) (26,209) Other ............................................. 3,208 5,871 2,455 -------------------------------- Net cash provided by (required for) financing activities ................... $(58,340) $ 49,424 $(58,274) -------------------------------- Net increase (decrease) in cash and cash equivalents ............................ $ 2,778 $ (5,104) $ 8,584 Cash and cash equivalents: Beginning ......................................... 14,163 19,267 10,683 -------------------------------- Ending ............................................ $ 16,941 $ 14,163 $ 19,267 ================================ </TABLE> See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Nature of Business and Significant Accounting Policies Nature of business: The Company has two principal businesses: publishing and broadcasting. As of September 30, 1998, operating divisions and associated companies publish twenty-one daily and eleven weekly newspapers, forty-one classified and twenty-seven specialty publications, and operate nine full-service network-affiliated television stations and seven satellite television stations. Significant accounting policies: Accounting estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany items have been eliminated. INVENTORIES: Newsprint inventories are priced at the lower of cost or market with cost being determined primarily by the last-in, first-out method. Newsprint inventories as of September 30, 1998, 1997, and 1996 were less than replacement cost by $4,815,000, $4,856,000, and $5,087,000, respectively. PROGRAM RIGHTS: Cost of program rights is stated at the lower of cost or estimated net realizable value. The total cost of the rights is recorded as an asset and a liability when the program becomes available for broadcast. Cost of program rights is charged to operations primarily on accelerated bases related to the usage of the program. The current portion of program rights represents those rights that will be amortized in the succeeding year. INVESTMENTS: Investments in the common stock or joint venture capital of associated companies are reported at cost plus the Company's share of undistributed earnings since acquisition, less amortization of intangibles. Long-term loans to associated companies are included in investments in associated companies. Other investments primarily consist of various securities held in trust under a deferred compensation arrangement. These investments are classified as trading securities and carried at fair value with gains and losses reported in the consolidated statements of income. PROPERTY AND EQUIPMENT: Property and equipment is carried at cost. Equipment, except for printing presses and broadcast towers, is depreciated primarily by declining-balance methods. The straight-line method is used for all other assets. The estimated useful lives in years are as follows: Years -------------- Buildings and improvements 5-25 Publishing: Printing presses 15-20 Other major equipment 3-11 Broadcasting: Towers 15-20 Other major equipment 3-10 The Company capitalizes interest as part of the cost of constructing major facilities. INTANGIBLES: Intangibles include covenants not to compete, consulting agreements, customer lists, broadcast licenses and agreements, newspaper subscriber lists, and the excess costs over fair value of net assets of businesses acquired.
The excess costs over fair value of net tangible assets include $21,510,000 incurred prior to October 31, 1970, which is not being amortized. Excess costs related to specialty publications are being amortized over 10 to 15 year periods. Intangibles, representing non-compete covenants, consulting agreements, customer lists, broadcast licenses and agreements, and newspaper subscriber lists are being amortized over periods of 3 to 40 years. The remaining costs are being amortized over a period of 40 years. All intangibles are amortized by the straight-line method. The Company reviews its intangibles and other long-lived assets annually to determine potential impairment. In performing the review, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment is recognized. The amount of impairment is measured based upon projected discounted future cash flows using a discount rate reflecting the Company's average cost of funds. Unearned income: Unearned income arises as a normal part of business from advance subscription payments for newspapers. Revenue is recognized in the period in which it is earned. ADVERTISING costs: Advertising costs, which are not material, are expensed as incurred. INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128 "Earnings Per Share". Statement No. 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to Statement No. 128 requirements. CASH AND CASH EQUIVALENTS: For the purpose of reporting cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents. RESTRICTED STOCK: The Company amortizes as compensation cost the value of restricted stock, issued under a long-term incentive plan, by the straight-line method over the three year restriction period. Note 2. Discontinued Operations On January 17, 1997 the Company sold the capital stock of its graphic arts products subsidiary, NAPP Systems Inc., for approximately $55,900,000, net of selling expenses. The results for NAPP Systems Inc.'s operations have been classified as discontinued operations for all periods presented in the consolidated statements of income. The assets and liabilities of discontinued operations have been classified in the consolidated balance sheet as "net assets of discontinued operations" as of September 30, 1996.
Summary operating results of discontinued operations are as follows: 1997 1996 ------------------ (In Thousands) Revenue ...................................... $ - - $65,552 Costs and expenses ........................... - - 51,040 ------------------ Income before income taxes ................... - - 14,512 Provision for income taxes ................... - - 6,787 ------------------ Income, net of tax ............. - - 7,725 ------------------ Gain (loss) on disposition before income taxes 1,985 (14,563) Provision for income taxes ................... 500 1,385 ------------------ Gain (loss) on disposition ..... 1,485 (15,948) ------------------ Income (loss) from discontinued operations ..................... $ 1,485 $(8,223) ================== Net assets of discontinued operations as of September 30, 1996 are as follows (in thousands): Accounts receivable, net ...................................... $ 9,720 Inventories ................................................... 12,606 Other ......................................................... 206 Property and equipment, net ................................... 4,996 Intangibles, net .............................................. 52,777 ------- Total ........................................... 80,305 ------- Accrued loss on disposal ...................................... 14,563 Deferred income taxes ......................................... 1,104 Other liabilities ............................................. 6,683 Long-term debt ................................................ 1,427 Deferred compensation ......................................... 149 ------- 23,926 ------- Net assets of discontinued operations ...................................... $56,379 ======= Note 3. Acquisitions On September 8, 1997, the Company acquired, for cash, 100% of the outstanding stock of Southern Utah Media, Inc. (now known as The Pacific Northwest Publishing Group, Inc.), Oregon News Media, Inc., and Nevada Media, Inc. (collectively referred to as The Pacific Northwest Group). The Pacific Northwest Group publishes daily and weekly newspapers and classified publications. The total acquisition cost was $186,253,000. The excess of the total acquisition cost, over the fair value of the net assets acquired, was $166,916,000. The acquisition has been accounted for as a purchase, and the results of operations of The Pacific Northwest Group since the date of acquisition are included in the consolidated financial statements. Unaudited pro forma consolidated results of operations for the year ended September 30, 1997, as though The Pacific Northwest Group had been acquired as of October 1, 1996 follows: Year Ended September 30, 1997 ---------------- (In Thousands, Except Per Share Data) Operating revenue $494,764 Income from continuing operations 59,703 Earnings per share, continuing operations: Basic 1.29 Diluted 1.26
The above amounts reflect adjustments for amortization of intangibles, additional depreciation on revalued purchased assets, and imputed interest on borrowed funds. The Company also acquired five classified or specialty publications and one commercial printer in 1998 and five classified or specialty publications in 1997. The purchase price of business acquisitions was allocated as follows: Year Ended September 30, -------------------- 1998 1997 -------------------- (In Thousands) Noncash working capital acquired ............ $ 377 $ 2,897 Property and equipment ...................... 1,326 16,278 Intangibles ................................. 11,485 169,554 Other long-term assets ...................... - - 10 Issuance of note payable .................... (1,194) (50) Deferred items .............................. (50) - - -------------------- Total cash purchase price ..... $ 11,944 $188,689 ==================== Note 4. Investments in Associated Companies The Company has a 50% ownership interest in Madison Newspapers, Inc., a newspaper publishing company operating in Madison, Wisconsin, and interests in other ventures, including marketing and Internet services. Summarized financial information of the associated companies is as follows: <TABLE> Combined Associates 1998 1997 1996 - ------------------------------------------------------------------------------------ (In Thousands) <S> <C> <C> <C> ASSETS Current assets .......................................... $25,867 $23,854 $23,470 Investments and other assets ............................ 5,966 5,700 3,912 Property and equipment, net ............................. 10,204 9,730 6,741 ------------------------- $42,037 $39,284 $34,123 ========================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities ..................................... $14,510 $14,792 $11,778 Long-term debt .......................................... 661 435 515 Stockholders' equity .................................... 26,866 24,057 21,830 ------------------------- $42,037 $39,284 $34,123 ========================= Revenue ................................................. $85,436 $79,677 $73,016 Income before depreciation, amortization, interest, and income taxes ..................................... 29,434 26,895 23,663 Operating income ........................................ 26,553 24,732 21,962 Net income .............................................. 16,738 15,517 14,016 </TABLE> Receivables from associated companies consist of dividends. Certain information relating to Company investments in these associated companies is as follows: 1998 1997 1996 ----------------------------- (In Thousands) Share of: Stockholders' equity ............ $13,433 $12,028 $10,915 Undistributed earnings .......... 13,281 11,568 10,574
Note 5. Debt The Company has a $50,000,000 unsecured revolving loan agreement with a bank group which expires in 2003. Interest rates float at rates specified in the agreement. There were no borrowings under this agreement at September 30, 1998. The Company has long-term obligations, net of current maturities, as follows: <TABLE> September 30, ----------------------------- 1998 1997 1996 ----------------------------- (In Thousands) <S> <C> <C> <C> Insurance companies senior notes payable, 6.14% to 6.64%, due in varying amounts from 2001 to 2013 .................................... $185,000 $ - - $ - - Insurance company senior notes payable, effective rate of 9.96%, $25,000,000 due January 1999 ..................................... - - 25,000 50,000 Program contracts, noninterest bearing, due through 2002 ......................................... 1,028 1,174 2,290 ----------------------------- $186,028 $ 26,174 $ 52,290 ============================= </TABLE> Aggregate maturities during the next five years are $33,453,000, $689,000, $11,814,000, $11,725,000, and $11,600,000. Covenants under these agreements are not considered restrictive to normal operations or anticipated stockholder dividends. Note 6. Retirement and Compensation Plans Substantially all the Company's employees are covered by a qualified defined contribution retirement plan. The Company has other retirement and compensation plans for executives and others. Retirement and compensation plan costs, including interest on deferred compensation costs, charged to operations were $10,400,000 in 1998, $10,300,000 in 1997, and $11,200,000 in 1996. Note 7. Common Stock, Class B Common Stock, and Preferred Stock Purchase Rights Class B Common Stock has ten votes per share on all matters and generally votes as a class with Common Stock (which has one vote per share). The transfer of Class B Common Stock is restricted; however, Class B Common Stock is at all times convertible into shares of Common Stock on a share-for-share basis. Common Stock and Class B Common Stock have identical rights with respect to cash dividends and upon liquidation. All outstanding Class B Common Stock converts to Common Stock when the shares of Class B Common Stock total less than 5,600,000 shares. On May 7, 1998, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding Common and Class B Common share (Common Shares) of the Company. The Rights are attached to and automatically trade with the outstanding shares of the Company's Common Stock. The Rights will become exercisable only in the event that any person or group of affiliated persons becomes a holder of 20% or more of the Company's outstanding Common Shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 20% of the Company's outstanding Common Shares. Once the Rights become exercisable, they entitle all other shareholders to purchase, by payment of a $150 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50% position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of Common Stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration on May 31, 2008.
Note 8. Stock Option, Restricted Stock, and Stock Purchase Plans At September 30, 1998, the Company has three stock-based compensation plans which are described below. As permitted under generally accepted accounting principles, grants under those plans are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the stock option or the stock purchase plans. Had compensation costs for all of the stock-based compensation plans been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123), reported net income and earnings per common share would have been reduced to the pro forma amounts shown below: 1998 1997 1996 ----------------------------- (Thousands, Except Per Share Data) Net income: As reported ............ $62,233 $64,230 $45,447 Pro forma .............. 60,945 63,180 44,919 Earnings per share: Basic: As reported ......... 1.39 1.38 0.97 Pro forma ........... 1.36 1.36 0.96 Diluted: As reported ......... 1.37 1.36 0.95 Pro forma ........... 1.34 1.34 0.94 The pro forma effects of applying Statement No. 123 are not indicative of future amounts since, among other reasons, the pro forma requirements of the Statement have been applied only to options granted after October 1, 1995. Stock option and restricted stock plans: The Company has reserved 5,729,000 shares of common stock for issuance to key employees under incentive and nonstatutory stock option plans and a restricted stock plan approved by stockholders. Options have been granted at a price equal to the fair market value on the date of grant, and are exercisable in cumulative installments over a ten year period. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1998, 1997, and 1996, respectively: dividend rates of 1.95%, 2.22%, and 2.22%; price volatility of 14.5%, 16.5%, and 19.5%; risk-free interest rates based upon the life of the option ranging from 5.29% to 5.77%, 5.89% to 6.67%, and 5.46% to 6.55%; and expected lives based upon the life of the option ranging from 2.5 to 8 years. A summary of the stock option plans is as follows: Number of Shares -------------------------------- 1998 1997 1996 -------------------------------- (In Thousands) Under option, beginning of year ......... 1,509 2,279 2,220 Granted .............................. 190 155 241 Terminated and canceled .............. (5) (8) (3) Exercised ............................ (203) (917) (179) ------------------------------- Under option, end of year ............... 1,491 1,509 2,279 =============================== Options exercisable, end of year ........ 978 1,192 1,861 =============================== Average Price --------------------------- 1998 1997 1996 --------------------------- Granted during the year ................ $ 27.18 $ 22.20 $ 19.96 Exercised during the year .............. 15.88 13.64 12.64 Under option, end of year .............. 17.15 15.82 14.52 Weighted-average fair value per option of options granted ........... 6.95 5.71 5.47
A further summary of options outstanding as of September 30, 1998 is as follows: <TABLE> Options Outstanding ----------------------------------------- Weighted- Options Exercisable Average ---------------------------- Number Remaining Weighted- Number Weighted- Outstanding Contractual Average Exercisable Average Range of (In Life Exercise (In Exercise Exercise Prices Thousands) (In Years) Price Thousands) Price ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> $11 to $14 353 2.7 $ 11.01 353 $ 11.01 $15 to $20 821 4.6 16.76 589 16.13 $20 to $22 124 7.4 21.46 14 21.19 $25 to $29 175 9.0 26.64 4 27.36 $30 to $34 18 4.2 32.36 18 32.36 --------------- -------------- 1,491 4.9 17.15 978 14.70 =============== ============== </TABLE> Restricted stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within three years of the grant date for reasons other than normal retirement, death or disability. In 1998, 1997, and 1996, the Company granted 26,000, 18,000, and 32,000, respectively, of restricted stock to employees. As of September 30, 1998, 70,000 shares of restricted stock were outstanding. At September 30, 1998, 4,238,000 shares were available for granting of stock options or issuance of restricted stock. Stock purchase plan: The Company has 1,293,000 additional shares of common stock available for issuance pursuant to an employee stock purchase plan. April 30, 1999 is the exercise date for the current offering. The purchase price is the lower of 85% of the fair market value at the date of the grant or the exercise date which is one year from the date of the grant. The weighted-average fair value per share of purchase rights granted in 1998, 1997, and 1996 computed using the Black-Scholes option-pricing model was $6.65, $5.28, and $4.92, respectively. In 1998, 1997, and 1996 employees purchased 95,000, 106,000, and 124,000 shares, respectively, at a per share price of $20.98 in 1998, $19.02 in 1997, and $15.26 in 1996. Note 9. Income Tax Matters Components of income tax expense consist of the following: Year Ended September 30, ------------------------- 1998 1997 1996 ------------------------- (In Thousands) Paid or payable on currently taxable income: Federal .......................................... $29,943 $32,188 $32,965 State ............................................ 5,525 6,595 6,541 Net increase due to deferred income taxes ........... 2,431 194 2,698 ------------------------- $37,899 $38,977 $42,204 ========================= The total tax provision has been allocated to the following financial statement items: Year Ended September 30, ------------------------- 1998 1997 1996 ------------------------- (In Thousands) Income from continuing operations ................... $37,899 $38,477 $34,032 Discontinued operations: Income from discontinued operations .............. - - - - 6,787 Disposition of discontinued operations ........... - - 500 1,385 ------------------------- $37,899 $38,977 $42,204 =========================
Income tax expense for the years ended September 30, 1998, 1997, and 1996 is different than the amount computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows: % of Pre-Tax Income ------------------------ 1998 1997 1996 ------------------------ Computed "expected" income tax expense ............. 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit ..... 3.9 4.4 4.4 Net income of associated companies taxed at dividend rates ........................................... (2.6) (2.4) (2.5) Goodwill amortization .............................. 1.7 1.7 2.0 Other .............................................. (0.2) (0.7) (0.1) ------------------------ 37.8% 38.0% 38.8% ======================== Foreign taxes are not material. Net deferred tax liabilities consist of the following components as of September 30, 1998, 1997, and 1996: 1998 1997 1996 ------------------------- (In Thousands) Deferred tax liabilities: Property and equipment ........................... $ 8,334 $ 9,409 $ 9,054 Equity in undistributed earnings of affiliates ... 1,096 903 897 Deferred gain on sale of broadcast properties .... 3,308 3,308 3,308 Identifiable intangible assets ................... 32,653 32,319 32,409 Other ............................................ 2,981 3,334 2,657 ------------------------- 48,372 49,273 48,325 ------------------------- Deferred tax assets: Accrued compensation ............................. 7,747 7,950 7,290 Receivable allowance ............................. 728 1,976 1,774 Loss carryforwards acquired ...................... 6,774 7,961 9,147 Capital loss carryforward ........................ 8,121 8,425 8,425 Other ............................................ 1,745 2,135 2,155 ------------------------- 25,115 28,447 28,791 Less, valuation allowance ........................ 15,325 15,325 15,325 ------------------------- 9,790 13,122 13,466 ------------------------- $38,582 $36,151 $34,859 ========================= The components giving rise to the net deferred tax liabilities described above have been included in the accompanying balance sheets as of September 30, 1998, 1997, and 1996 as follows: 1998 1997 1996 ------------------------------ (In Thousands) Current assets ................................. $ 5,038 $ 6,392 $ 5,925 Noncurrent liabilities ......................... (43,620) (42,543) (40,784) ----------------------------- $(38,582) $(36,151) $(34,859) ============================= The Company provided a valuation allowance of $8,425,000 during 1996 due to limitations imposed by the tax laws on the Company's ability to realize the benefit of the capital loss carryforward related to the disposal of NAPP Systems Inc. In addition, as a result of the operations of SJL of Kansas Corp. (SJL) management has determined that the valuation allowance related to the acquired operating loss carryforward should be reduced to $6,900,000 from the original reserve of $10,263,000 with a corresponding $3,363,000 reduction to goodwill. As of September 30, 1998 the SJL net operating loss carryforward was approximately $17,150,000 and will expire in varying amounts from 1999 to 2010.
Note 10. Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The carrying amounts of cash and cash equivalents, temporary investments, receivables, and accounts payable approximate fair value because of the short maturity of those instruments. The carrying value of other investments consisting of debt and equity securities in a deferred compensation trust are carried at fair value based upon quoted market prices and $3,818,000 of equity securities, consisting primarily of the Company's 17% ownership of the nonvoting common stock of The Capital Times Company, are carried at cost, as the fair value is not readily determinable. The fair value of the Company's debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair values of the Company's debt instruments are as follows: Carrying Amount Fair Value -------------------- (In Thousands) September 30: 1998 $219,481 $245,784 1997 203,735 204,603 1996 95,503 97,672 Note 11. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share amounts): <TABLE> Year Ended September 30, ---------------------------- 1998 1997 1996 ---------------------------- <S> <C> <C> <C> Numerator: Income applicable to common shares: Income from continuing operations ................. $ 62,233 $ 62,745 $ 53,670 Income (loss) from discontinued operations ........ - - 1,485 (8,223) ---------------------------- $ 62,233 $ 64,230 $ 45,447 ============================ Denominator: Basic-weighted average common shares outstanding ....................................... 44,829 46,393 46,973 Dilutive effect of employee stock options ............ 728 850 926 ---------------------------- Diluted outstanding shares ........................... 45,557 47,243 47,899 ============================ Basic earnings per share: Income from continuing operations .................... $ 1.39 $ 1.35 $ 1.14 Income (loss) from discontinued operations ........... - - 0.03 (0.17) ---------------------------- Net income ................................ $ 1.39 $ 1.38 $ 0.97 ============================ Diluted earnings per share: Income from continuing operations .................... $ 1.37 $ 1.33 $ 1.12 Income (loss) from discontinued operations ........... - - 0.03 (0.17) ---------------------------- Net income ................................ $ 1.37 $ 1.36 $ 0.95 ============================ </TABLE> Note 12. Pending Accounting Changes In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income" and Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information". Statement No. 130 establishes standards for reporting comprehensive income in financial statements. Statement No. 131 expands certain reporting and disclosure requirements for segments from current standards. The Statements are effective for fiscal years beginning after December 15, 1997 and the Company does not expect the adoption of these new standards to result in material changes to previously reported amounts or disclosures.
Note 13. Line of Business Information <TABLE> Year Ended September 30, ------------------------------ 1998 1997 1996 ------------------------------ (In Thousands) <S> <C> <C> <C> Revenue: Publishing: Wholly-owned properties .................... $382,894 $318,441 $302,564 Equity in net income of associated companies 8,367 7,756 7,008 Broadcasting .................................. 126,032 120,489 117,797 ------------------------------ Total revenue ...................... $517,293 $446,686 $427,369 ============================== Operating income: Publishing .................................... $102,526 $ 96,621 $ 82,695 Broadcasting .................................. 24,948 22,262 22,953 Corporate and other ........................... (14,627) (14,732) (10,907) ------------------------------ Total operating income ............. $112,847 $104,151 $ 94,741 ============================== Identifiable assets: Publishing .................................... $425,825 $413,834 $226,097 Broadcasting .................................. 190,621 195,567 198,441 Graphic arts (discontinued operations) ........ - - - - 56,379 Corporate ..................................... 44,139 41,562 46,499 ------------------------------ Total identifiable assets .......... $660,585 $650,963 $527,416 ============================== Depreciation: Publishing .................................... $ 11,280 $ 9,054 $ 8,063 Broadcasting .................................. 7,259 7,432 7,309 Corporate ..................................... 1,123 689 864 ------------------------------ Total depreciation ................. $ 19,662 $ 17,175 $ 16,236 ============================== Amortization of intangibles: Publishing .................................... $ 13,688 $ 6,902 $ 6,505 Broadcasting .................................. 4,226 4,227 5,058 ------------------------------ Total amortization of intangibles .. $ 17,914 $ 11,129 $ 11,563 ============================== Capital expenditures: Publishing .................................... $ 16,987 $ 8,834 $ 11,018 Broadcasting .................................. 6,825 6,516 6,948 Graphic arts (discontinued operations) ........ - - - - 290 Corporate ..................................... 2,913 992 540 ------------------------------ Total capital expenditures ......... $ 26,725 $ 16,342 $ 18,796 ============================== </TABLE>
Note 14. Other Information Balance sheet information: Program rights and other consist of the following: September 30, ------------------------- 1998 1997 1996 ------------------------- (In Thousands) Program rights ...................................... $ 8,140 $ 7,020 $ 6,577 Deferred income taxes ............................... 5,038 6,392 5,925 Other ............................................... 3,714 4,279 4,681 ------------------------- $16,892 $17,691 $17,183 ========================= Intangibles consist of the following: September 30, ---------------------------- 1998 1997 1996 ---------------------------- (In Thousands) Goodwill ......................................... $332,821 $325,758 $194,746 Less, accumulated amortization ................... 63,584 55,303 50,240 ---------------------------- 269,237 270,455 144,506 ---------------------------- Noncompete covenants and consulting agreements .................................... 28,213 26,314 25,739 Less, accumulated amortization ................... 23,522 21,201 18,859 ---------------------------- 4,691 5,113 6,880 ---------------------------- Customer lists, broadcasting licenses and agreements, and newspaper subscriber lists .... 157,011 154,444 116,472 Less, accumulated amortization ................... 32,828 25,531 21,797 ---------------------------- 124,183 128,913 94,675 ---------------------------- $398,111 $404,481 $246,061 ============================ Compensation and other accruals consist of the following: September 30, ------------------------- 1998 1997 1996 ------------------------- (In Thousands) Compensation ........................................ $12,092 $12,029 $ 8,156 Vacation pay ........................................ 4,384 4,080 3,946 Retirement and stock purchase plans ................. 5,005 4,708 2,930 Interest ............................................ 519 1,639 1,429 Other ............................................... 4,966 4,868 3,958 ------------------------- $26,966 $27,324 $20,419 =========================
Cash flows information: <TABLE> Year Ended September 30, ------------------------------ 1998 1997 1996 ------------------------------ (In Thousands) <S> <C> <C> <C> Cash payments for: Interest, net of capitalized interest 1998 $169 .... $ 15,731 $ 8,111 $ 10,052 ============================== Income taxes ....................................... $ 33,747 $ 40,767 $ 41,021 ============================== Program rights were acquired by issuing long-term contracts as follows ..................... $ 9,017 $ 7,300 $ 7,700 ============================== Issuance of restricted common stock, net .............. $ 682 $ 244 $ 590 ============================== Change in tax contingency estimates: Reduction in goodwill .............................. $ - - $ - - $ 3,363 ============================== Reduction in deferred income taxes ................. $ - - $ - - $ 3,363 ============================== Change in purchase accounting estimates: Reduction in identified intangibles ................ $ - - $ - - $ 8,000 Additional long-term debt .......................... - - - - 16 ------------------------------ $ - - $ - - $ 8,016 ============================== Reduction in deferred income taxes .................... $ - - $ - - $ 2,666 Increase in goodwill .................................. - - - - 4,085 Increase in other long-term assets .................... - - - - 1,265 ------------------------------ $ - - $ - - $ 8,016 ============================== Accounts payable for stock acquired ................... $(10,926) $ 10,926 $ - - ============================== Proceeds from sale of NAPP Systems Inc., net of selling costs ............................... $ - - $ 55,914 $ - - Less cash retained ................................. - - (1,119) - - ------------------------------ Proceeds from sale of subsidiary ........ $ - - $ 54,795 $ - - ============================== </TABLE>
SUPPLEMENTARY DATA QUARTERLY RESULTS (UNAUDITED) <TABLE> 4th 3rd 2nd 1st -------------------------------------- (In Thousands Except Per Share Data) <S> <C> <C> <C> <C> 1998 Quarter: Operating revenue ...................... $129,596 $135,093 $121,345 $131,259 ====================================== Net income .................. $ 14,947 $ 18,091 $ 12,611 $ 16,584 ====================================== Earnings per share: Basic ............................... $ 0.34 $ 0.41 $ 0.28 $ 0.37 ====================================== Diluted ............................. $ 0.33 $ 0.40 $ 0.28 $ 0.36 ====================================== 1997 Quarter: Operating revenue ...................... $112,538 $112,693 $101,787 $119,668 ====================================== Income from continuing operations ...... $14,638 $ 17,759 $ 11,240 $ 19,108 Income from discontinued operations .......................... - - 485 1,000 - - -------------------------------------- Net income .................. $ 14,638 $ 18,244 $ 12,240 $ 19,108 ====================================== Earnings per share: Basic: Income from continuing operations . $ 0.32 $ 0.38 $ 0.24 $ 0.41 Income from discontinued operations - - 0.01 0.02 - - -------------------------------------- Net income .................. $ 0.32 $ 0.39 $ 0.26 $ 0.41 ====================================== Diluted: Income from continuing operations . $ 0.31 $ 0.38 $ 0.24 $ 0.40 Income from discontinued operations - - 0.01 0.02 - - -------------------------------------- Net income .................. $ 0.31 $ 0.39 $ 0.26 $ 0.40 ====================================== 1996 Quarter: Operating revenue ...................... $107,129 $109,499 $ 99,960 $110,781 ====================================== Income from continuing operations ...... $ 14,513 $ 15,381 $ 9,084 $ 14,692 Income from discontinued operations .... (12,856) 1,664 1,721 1,248 -------------------------------------- Net income .................. $ 1,657 $ 17,045 $ 10,805 $ 15,940 ====================================== Earnings per share: Basic: Income from continuing operations . $ 0.31 $ 0.33 $ 0.19 $ 0.31 Income (loss) from discontinued operations .................... (0.27) 0.03 0.04 0.03 -------------------------------------- Net income .................. $ 0.04 $ 0.36 $ 0.23 $ 0.34 ====================================== Diluted: Income from continuing operations . $ 0.30 $ 0.32 $ 0.19 $ 0.30 Income (loss) from discontinued operations .................... (0.27) 0.04 0.04 0.03 -------------------------------------- Net income .................. $ 0.03 $ 0.36 $ 0.23 $ 0.33 ====================================== </TABLE>
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not applicable. PART III The information called for by Part III of this Form 10-K is omitted in accordance with General Instruction G because the Company will file with the Commission a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the close of the Company's fiscal year ended September 30, 1998.
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page Number ----------- (a) 1. Financial Statements Independent Auditor's Report and Consent Financial Statements Consolidated balance sheets as of September 30, 1998, 1997, and 1996 Consolidated statements of income years ended September 30, 1998, 1997, and 1996 Consolidated statements of stockholders' equity years ended September 30, 1998, 1997, and 1996 Consolidated statements of cash flows years ended September 30, 1998, 1997, and 1996 Notes to consolidated financial statements (a) 2. Financial statements schedule Schedule II - Valuation and qualifying accounts years ended September 30, 1998, 1997, and 1996 All other schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Notes to Financial Statements. (a) 3. Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K). 10 Form of Employment Agreement for Lee Enterprises, Incorporated Executive Group 10 Amendments to Lee Enterprises, Incorporated 1990 Long Term Incentive Plan 10 Form of Indemnification Agreement for Lee Enterprises, Incorporated Directors and Executive Group 10 Credit Agreement dated as of December 24, 1998 among Lee Enterprises, Incorporated, the financial institutions party thereto as Lenders, and Bank of America National Trust and Savings Association, as Agent (if available) 21 Subsidiaries 24 Power of Attorney 27 Financial Data Schedule (b) The following reports on Form 8-K were filed for the three months ended September 30, 1998. None * * * * *
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1991) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 2-56652 (filed June 17, 1976), 2-58393 (filed March 11, 1977), 2-77121 (filed April 22, 1982), 33-19725 (filed January 20, 1988), 33-46708 (filed March 31, 1992), and 333-6435 and 333-6433 (filed June 20, 1996). Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
INDEPENDENT AUDITOR'S REPORT AND CONSENT To the Stockholders Lee Enterprises, Incorporated and Subsidiaries Davenport, Iowa We have audited the accompanying consolidated balance sheets of Lee Enterprises, Incorporated and subsidiaries as of September 30, 1998, 1997, and 1996 and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lee Enterprises, Incorporated and subsidiaries as of September 30, 1998, 1997, and 1996 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. In our opinion, Schedule II included in this Annual Report on Form 10-K for the year ended September 30, 1998, present fairly the information set forth therein, in conformity with generally accepted accounting principles. We consent to the incorporation by reference in the Registration Statements on Form S-8 No. 2-56652, No. 2-77121, No. 2-58393, No. 33-19725, No. 33-46708, No. 333-6435 and No. 333-6433 and in the related Prospectuses of our report dated November 4, 1998 with respect to the financial statements of Lee Enterprises, Incorporated, incorporated by reference and the schedule included in this Annual Report on Form 10-K for the year ended September 30, 1998 and to the reference to us under the heading "Experts" in such Prospectuses. /s/ McGladrey & Pullen, LLP Davenport, Iowa November 4, 1998
LEE ENTERPRISES, INCORPORATED AND WHOLLY-OWNED SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (In Thousands) <TABLE> Column A Column B Column C Column D Column E (1) Balance at Additions Charged Deduction Balance Beginning Charged to Other from at Close Description of Period to Income Accounts Reserves of Period - ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> Allowance for doubtful accounts: For the year ended September 30, 1998 ... $4,600 $2,996 $ - - $3,486 $4,110 For the year ended September 30, 1997 ... 4,000 2,934 428 2,762 4,600 For the year ended September 30, 1996 ... 4,100 2,560 (375) 2,285 4,000 <FN> (1) Represents accounts written off as uncollectible, net of recoveries which are immaterial. (2) Balance upon disposal of NAPP Systems Inc. (3) Balance upon acquisition of 100% of The Pacific Northwest Group. </FN> </TABLE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: December 29, 1998 LEE ENTERPRISES, INCORPORATED --------------------------------- /s/ Richard D. Gottlieb /s/ Larry L. Bloom Richard D. Gottlieb, Larry L. Bloom, President, Chief Executive Officer, and Senior Vice-President of Finance, Director Treasurer and Chief Financial Officer /s/ G.C. Wahlig G. C. Wahlig, Vice President of Finance and Chief Accounting Officer We, the undersigned directors of Lee Enterprises, Incorporated, hereby severally constitute Richard D. Gottlieb and Larry L. Bloom, and each of them, our true and lawful attorneys with full power to them, and each of them, to sign for us and in our names, in the capacities indicated below, the Annual Report on Form 10-K of Lee Enterprises, Incorporated for the fiscal year ended September 30, 1998 to be filed herewith and any amendments to said Annual Report, and generally do all such things in our name and behalf in our capacities as directors to enable Lee Enterprises, Incorporated to comply with the provisions of the Securities Exchange Act of 1934 as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or either of them, to said Annual Report on Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: Signature Date /s/ Rance E. Crain - --------------------------------------- Rance E. Crain, Director November 18, 1998 /s/ J. P. Guerin - --------------------------------------- J. P. Guerin, Director November 18, 1998 /s/ Andrew E. Newman - --------------------------------------- Andrew E. Newman, Director November 18, 1998 /s/ Gordon Prichett - --------------------------------------- Gordon Prichett , Director November 18, 1998 /s/ Charles E. Rickershauser, Jr. - --------------------------------------- Charles E. Rickershauser, Jr., Director November 18, 1998 /s/ Ronald L. Rickman - --------------------------------------- Ronald L. Rickman, Director November 18, 1998 /s/ Lloyd G. Schermer - ---------------------------------------- Lloyd G. Schermer, Chairman of the Board and Director November 18, 1998 /s/ Phyllis Sewell - ----------------------------------------- Phyllis Sewell, Director November 18, 1998 /s/ Richard W. Sonnenfeldt - ----------------------------------------- Richard W. Sonnenfeldt, Director November 18, 1998 /s/ Mark Vittert - ----------------------------------------- Mark Vittert, Director November 18, 1998