UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its charter)
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
Registrant’s telephone number, including area code
Title of Each Class
Common Stock - $2.00 par value
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 (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
State the aggregate market value of voting stock held by nonaffiliates of the Registrant as of November 30, 2004. Common Stock and Class B Common Stock, $2.00 par value, $1,995,243,010.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 30, 2004. Common Stock, $2.00 par value, 38,117,166 shares and Class B Common Stock, $2.00 par value, 7,246,328 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2005 are incorporated by reference in Part III of this Form 10-K.
Forward-Looking Statements
Business
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for the Registrant’s Common Stock and Related Stockholder Matters
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Exhibit Index
Consolidated Financial Statements
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking and that is based largely on the Company’s current expectations and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties are changes in advertising demand, newsprint prices, interest rates, labor costs, legislative and regulatory rulings and other results of operations or financial conditions, difficulties in integration of acquired businesses or maintaining employee and customer relationships and increased capital and other costs. The words “may,” “will,” “would,” “could,” “believes,” “expects,” “anticipates,” “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 made as of the date of this report. The Company does not undertake to publicly update or revise its forward-looking statements.
PART I
ITEM 1. BUSINESS
The Company directly, and through its ownership of associated companies, publishes 44 daily newspapers in 19 states and approximately 200 weekly, classified and specialty publications, along with associated online services. The Company was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange in 1978. Before 2001, the Company also operated a number of network-affiliated and satellite television stations.
The Company is focused on five key strategic priorities. They are to:
Certain aspects of these priorities are discussed below.
HOWARD AND SIOUX CITY ACQUISITIONS
In April 2002, the Company acquired ownership of 15 daily newspapers and a 50% interest in the Sioux City, Iowa daily newspaper (SCN) by purchasing Howard Publications, Inc. (Howard). This acquisition was consistent with the strategy the Company announced in 2000 to buy daily newspapers with daily circulation of 30,000 or more. In July 2002, the Company acquired the remaining 50% of SCN. These acquisitions increased the Company’s circulation by more than 75 percent, to 1.1 million daily and 1.2 million on Sunday, and increased its revenue by nearly 50 percent. In February 2004, two daily newspapers acquired in the Howard acquisition were exchanged for two daily newspapers in Burley, Idaho and Elko, Nevada.
A key reason for the acquisitions is that historically, Howard and SCN generated substantially less revenue per paid unit of circulation than the Company’s existing newspapers. The expectation was that faster revenue growth could be achieved by applying the Company’s successful selling strategies and tactics to Howard and SCN.
In 2002 and 2003, the Company devoted substantial attention to the successful integration of Howard and SCN into its business. The Company made significant and immediate changes to systems, payroll, benefits and other areas of operations. The Company devoted resources and training to bring the Company’s successful selling strategies and tactics to Howard and SCN. The Company believes the integration has been completed with minimal disruption to the business and low turnover of key personnel.
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One measure of the success of the Company’s strategy to grow is its enterprise value, which is defined as the market value of its equity, plus debt outstanding, less cash assets. The chart above depicts the Company’s enterprise value, which has increased more than 112%, to $2,301,000,000, over the last three years.
MADISON NEWSPAPERS
The Company owns 50% of the capital stock of Madison Newspapers, Inc. (MNI) 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 MNI. The Company has a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provides other services to MNI. The Wisconsin State Journal is classified as one of the Lee group of newspapers in the newspaper business and in the rating services. Results of MNI are accounted for using the equity method. In 2003, MNI adopted the trade name Capital Newspapers.
ADVERTISING
Almost 75% of the Company’s revenue is derived from advertising. The Company’s strategies are to increase its share of local advertising through increased sales pressure in its existing markets and, over time, to increase circulation unit sales through internal expansion into existing and contiguous markets, augmented by selective acquisitions. Acquisition efforts are focused on newspapers with daily circulation of 30,000 or more, as noted above, and other publications that expand the Company’s operating revenue.
Many of the Company’s businesses operate in geographic groups of publications, or “clusters,” which provide operational efficiencies and extend sales penetration. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance or human resources, management or production of the publications. Sales penetration can occur if the sales effort is successful in cross-selling advertising into multiple publications. A table under the caption “Daily Newspapers and Markets” in Item 1 identifies those groups of newspapers operating in clusters.
The Company’s newspapers and classified and specialty publications compete with newspapers having regional circulation, magazines, radio, television, other advertising media such as billboards, other classified and specialty publications, direct mail, yellow pages directories, as well as other information content providers such as online services. In addition, several of the Company’s daily and Sunday newspapers compete with other local newspapers in nearby cities and towns. The Company estimates that it captures more than one-half of the total advertising dollars spent on print, broadcast and online advertising in substantially all of its markets.
The number of competitors in any given market varies, and cannot be estimated with any degree of certainty. However, all of the forms of competition noted above exist to some degree in the Company’s markets, including those listed in a table under the caption “Daily Newspapers and Markets” in Item 1. The Company’s competitors use pricing, frequency and other methods to compete for advertising business.
The following broadly define major categories of advertising revenue:
Retail advertising is revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts.
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National advertising is revenue earned from display advertising space, or for preprinted advertising inserted in the publication, to national accounts, if there is no local retailer representing the account in the market.
Classified advertising, which includes automotive, real estate for sale or rent, employment and other categories, is revenue earned from sales of advertising space in the classified section of the publication or from publications consisting primarily of such advertising.
Niche publications are specialty publications, such as lifestyle, business or home improvement publications that contain significant amounts of advertising.
Online advertising consists of display, banner, classified or other advertising on websites supporting the Company’s print publications.
Classified publications are periodic advertising publications available in racks or delivered free, by carriers or third-class mail, to all, or selected, households in a particular geographic area. Classified publications offer advertisers a cost-effective local advertising system and are particularly effective in larger markets with high media fragmentation in which metropolitan newspapers generally have low penetration.
The Company’s many geographic markets have significant differences in their advertising rate structures, some of which are highly complex. A single operation often has scores of rate alternatives.
Late in 2000, the newspaper industry began to experience declining advertising revenue demand for the first time in several years. The chart above compares newspaper advertising spending, as measured by the Newspaper Association of America and the Company’s same property advertising revenue, for the last five fiscal years. The advertising environment has continued to be adversely impacted by the state of the overall economy, including higher unemployment rates. The Company’s enterprises are generally located in mid-size and smaller markets. These markets have been more stable than major metropolitan markets during the most recent downturn in advertising spending but may not experience increases in such spending as significant as those in major metropolitan markets as the economy continues to improve.
CIRCULATION
After advertising, circulation is the Company’s largest source of revenue. The Company estimates that its products are sold to approximately one-half, and read by approximately three-fourths, of adults in its markets. For the six months ended September 2004, daily circulation of newspapers owned in both 2004 and 2003, which includes Howard and MNI, as measured by the Audit Bureau of Circulations (ABC), was flat, and Sunday circulation declined 0.1%, significantly outperforming the industry as a whole. Growth in circulation can, over time, also positively impact advertising revenue. The Company’s strategies to improve readership and circulation include continuous improvement of content and promotional efforts. Content can include focus on local news, features, other content, layout, reduction of factual errors or in
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other ways. Promotional efforts include advertising, contests and other efforts to increase awareness of the products. Customer service can also influence circulation. The Company’s enterprises are also focused on increasing the number of subscribers who pay for their subscriptions via automated payment mechanisms, such as credit cards or checking account withdrawals. Customers using these payment methods have historically higher retention. Other initiatives vary from property to property and are determined principally by the publishers at the local level in collaboration with senior management of the Company.
Circulation competition exists in all markets, even from unpaid products, but is most significant in markets with competing daily newspapers. These markets tend to be those markets near major metropolitan areas, where the size of the population is sufficient to support more than one daily newspaper.
Changes in telemarketing regulations effective in October 2003 impacted the Company’s ability to obtain new subscribers using this channel. Other methods to attract and retain subscribers have been, and remain in use. However, telemarketing has historically been the largest single source of new subscribers. Circulation starts obtained through the Company’s marketing efforts increased more than 10% in 2004, in spite of new telemarketing restrictions.
In 2004, several major newspaper publishers (not including the Company) announced significant downward adjustments to previously reported circulation totals. The Company does not anticipate any impact on its relationships with advertisers. Approximately three-fourths of the Company’s circulation is home delivery. Combined with small route sizes and the minimal use of independent distributors, monitoring and inspection of the Company’s circulation is not as difficult as in some major metropolitan markets. Nonetheless, the Company has enhanced its existing internal procedures in several areas to further ensure the integrity of its reported circulation.
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DAILY NEWSPAPERS AND MARKETS
The Company and MNI publish the following daily newspapers:
North County Times (5)
Madison Newspapers (4)
Wisconsin State Journal
The Capital Times
Daily Citizen
Portage Daily Register
Baraboo News Republic
The Times (5)
Lincoln Group
Lincoln Journal Star
Columbus Telegram
Fremont Tribune
Beatrice Daily Sun
Quad-Cities Group
Quad-City Times
Muscatine Journal
Billings Gazette
Waterloo-Cedar Falls Courier (5)
Sioux City Journal (5)
Central Illinois Newspaper Group
Herald & Review
Journal Gazette (5)
Times-Courier (5)
The Post-Star (5)
River Valley Group
La Crosse Tribune
Winona Daily News
Casper Star-Tribune (5)
Missoula Group
Missoulian
Ravalli Republic
Rapid City Journal
The Journal Times
The Southern Illinoisan
The Bismarck Tribune
Magic Valley Group
The Times-News (5)
Elko Daily Free Press (6)
South Idaho Press (6)
The Daily News (5)
Globe Gazette
The Times and Democrat (5)
Mid-Valley News Group
Democrat-Herald
Corvallis Gazette-Times
The Sentinel (5)
Independent Record
The Montana Standard
The Citizen (5)
The Ledger Independent (5)
The Chippewa Herald
Shawano Leader (4)
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ONLINE ADVERTISING AND SERVICES
The Company’s online activities are comprised of websites supporting each of its daily newspapers and certain of its other publications. The Company also owns 81% of an Internet service company (TownNews.com) which provides web infrastructure for more than 800 daily and weekly newspapers, and shoppers. Internet activities of the newspapers and TownNews.com are reported and managed as a part of the Company’s publishing operations. In addition, the Company has minority investments in two Internet service companies, PowerOne Media and CityXpress Corp, which provide integrated online classified solutions for the newspaper industry, integrate online editorial content and provide transactional and promotional opportunities.
Online businesses of the Company have experienced rapid, profitable growth over the last several years, which is expected to continue.
COMMERCIAL PRINTING
The Company offers commercial printing services through the following entities:
William Street Press
Hawkeye Printing and Trico Communications
Platen Press
Farcountry Press and Broadwater Printing
Journal Star Commercial Printing
Little Nickel Quik Print
Spokane Print and Mail
Triangle Press
Wingra Printing (1)
Certain of the Company’s newspapers also directly provide commercial printing services. Commercial printing business is highly competitive and generally has lower operating margins than newspapers.
NEWSPRINT
The basic raw material of newspapers, and 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 for its needs. Newsprint prices are volatile and fluctuate based upon factors that include both foreign and domestic production capacity and consumption. Between September 2003 and September 2004, the Resource Information Systems, Inc. 30 pound newsprint price index rose 10.0%. Price fluctuations can have a significant effect on the results of operations. For additional information regarding supply of newsprint, see “Contractual Obligations” under Item 7, included herein. For the quantitative impacts of these fluctuations, see “Quantitative And Qualitative Disclosures About Market Risk” under Item 7A, included herein.
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EXECUTIVE TEAM
The following table lists executive team members of the Company as of November 30, 2004:
Service
With TheCompany
Named
To Present
Office
Mary E. Junck
Rosanne M. Cheeseman
Nancy L. Green
Michael R. Gulledge
Daniel K. Hayes
James W. Hopson
Brian E. Kardell
Vytenis P. Kuraitis
Linda Ritchie Lindus
Kevin E. Mowbray
Michael E. Phelps
Gregory P. Schermer
Carl G. Schmidt
David B. Stoeffler
John VanStrydonck
Greg R. Veon
Mary E. Junck was elected Chairman, President and Chief Executive Officer in January 2002. From January 2001 to January 2002 she served as President and Chief Executive Officer. From January 2000 to January 2001 she served as President and Chief Operating Officer. From May 1999 to January 2000 she served as Executive Vice President and Chief Operating Officer. From May 1996 to April 1999 she was Executive Vice President of The Times Mirror Company and President of Eastern Newspapers. She was named Publisher and Chief Executive Officer of The Baltimore Sun in 1993.
Rosanne M. Cheeseman was appointed Vice President – Sales & Marketing in November 2004. From October 2002 to November 2004 she served as Advertising Director of the North County Times and was named Associate Publisher in November 2004. From 2000 to October 2002 she served as Director – Sales and Development of the Company and from April 1998 to 2000 she served as National Sales Manager.
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Nancy L. Green was appointed Vice President – Circulation in September 2002 and named Publisher of the Waterloo-Cedar Falls Courier in August 2004. From December 2000 to September 2002, she served as Director of Circulation Sales, Distribution and Marketing. For more than five years prior to December 2000, she served as a vice president in the University System of Georgia.
Michael R. Gulledge was appointed Group Publisher in February 2002 and named Publisher of the Billings Gazette in October 2000. From November 1996 to October 2000, he served as General Manager and Publisher of the Herald & Review.
Daniel K. Hayes was appointed Director of Communications in 1998.
James W. Hopson was elected Vice President – Publishing and named Publisher of the Wisconsin State Journal in July 2000. He is also Chairman of MNI. For more than five years prior to July 2000, he served as Chief Executive Officer of Thomson Newspapers Central Ohio Strategic Marketing Group.
Brian E. Kardell was appointed Vice President – Production and Chief Information Officer in August 2003. From 2001 to August 2003, he served as Vice President – Information Systems and Chief Information Officer. From 1997 to 2001, he served as Director of Information Services and Chief Information Officer.
Vytenis P. Kuraitis was elected Vice President – Human Resources in 1997.
Linda Ritchie Lindus was appointed Group Publisher in February 2002 and named Publisher of theHerald & Review in July 2002. From April 2000 to February 2002, she served as Publisher of The Southern Illinoisan. From 1999 to April 2000 she served as Publisher of The Spectrum and Chief Executive Officer of Thomson Newspapers Utah Strategic Marketing Group.
Kevin E. Mowbray was elected Vice President – Publishing and named Publisher of The Times in November 2004. From July 2002 to November 2004 he served as Vice President – Sales & Marketing of the Company. From 2000 to July 2002 he served as Publisher ofThe Bismarck Tribune. From 1998 to 2000 he served as General Manager of the Missoulian.
Michael E. Phelps was elected Vice President – Publishing and named Publisher of the Quad-City Times in June 2002. From February 2000 to June 2002 he served as Vice President – Sales and Marketing of the Company. For more than five years prior to February 2000, he was managing principal of Phelps, Cutler & Associates, newspaper management consultants.
Gregory P. Schermer was elected Vice President – Interactive Media in November 1997. He has served as Corporate Counsel of the Company since 1989.
Carl G. Schmidt was elected Vice President, Chief Financial Officer and Treasurer in May 2001. For more than five years prior to May 2001, he served as Senior Vice President and Chief Financial Officer of Johnson Outdoors Inc.
David B. Stoeffler was appointed Vice President – News in December 2001. From 1997 to December 2001, he served as Editor of the Lincoln Journal Star.
John VanStrydonck was elected Vice President – Publishing in June 2000 and named Publisher of the Missoulian in October 2002. From September 1994 to June 2000 he served as Publisher of the Rapid City Journal.
Greg R. Veon was elected Vice President – Publishing in November 1999.
EMPLOYEES
At September 30, 2004, the Company had approximately 6,700 employees, including approximately 1,500 part-time employees, exclusive of MNI. The Company considers its relationship with its employees to be good.
Approximately 100 employees in three locations are members of collective bargaining units.
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CORPORATE GOVERNANCE AND PUBLIC INFORMATION
The Company has a long, substantial history with regard to sound corporate governance practices. The Board of Directors has a lead independent director, and has had one for many years. Currently, six of eight members of the Board of Directors are independent, as are all positions on the Board’s Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by the Company’s independent registered public accounting firm and its affiliates.
In addition, information with regard to the Company’s revenue, including same property results, is reported to the public on a monthly basis, as is certain other statistical information, improving the timeliness of reporting of information to investors. The Company was also among the first in the nation to voluntarily record expense related to employee stock options.
At www.lee.net, one may access a wide variety of information, including news releases, Securities and Exchange Commission filings, financial statistics, annual reports, presentations, governance facts, newspaper profiles and online links. The Company makes available via its website all filings made by the Company under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, and amendments thereto as soon as reasonably practicable after such filing with the Securities and Exchange Commission.
OTHER MATTERS
In the opinion of management, compliance with present statutory and regulatory requirements respecting environmental quality will not necessitate significant capital outlays, materially affect the earning power of the business of the Company, or cause material changes in the Company’s business, whether present or intended.
ITEM 2. PROPERTIES
The Company’s executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The lease expires in 2019.
All of the Company’s principal printing facilities (except Madison, Wisconsin, which is owned by MNI, a leased plant in Spokane, Washington and leased land for the Helena, Montana plant) are owned. All facilities are well maintained, in good condition, suitable for existing office and publishing operations and adequately equipped. None of the Company’s facilities is individually significant to its business.
The Baraboo News Republic, Beatrice Daily Sun, Corvallis Gazette-Times, Daily Citizen, Journal Gazette, Muscatine Journal, Ravalli Republic, Times Courier and Winona Daily News, as well as many of the Company’s and MNI’s approximately 200 other publications, are printed at other Lee facilities to enhance operating efficiency. The Company’s newspapers and other publications have formal or informal arrangements for backup of printing in the event of a disruption in production capability.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While the Company is unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters will not have a material adverse effect on the Company’s Consolidated Financial Statements, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Common Stock of the Company is listed on the New York Stock Exchange. Class B Common Stock is not traded on an exchange but is readily convertible to Common Stock. 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 at the option of the holder, into Common Stock. The table below shows the high and low prices of Common Stock for each quarter during the past three years, the closing price at the end of each quarter and the dividends per share.
STOCK PRICES
2004
High
Low
Closing
2003
2002
DIVIDENDS
Common Stock and Class B Common Stock have identical rights with respect to cash dividends and upon liquidation. For a more complete description of the relative rights of Common Stock and Class B Common Stock, see Note 8 of the Notes to Consolidated Financial Statements, included herein.
At September 30, 2004, the Company had 2,396 holders of Common Stock and 1,646 holders of Class B Common Stock.
During the three months ended September 30, 2004, the Company purchased shares of Common Stock, as noted in the table below, in transactions with participants in its 1990 Long-Term Incentive Plan. The transactions resulted from the withholding of shares to fund the exercise price and/or taxes related to the exercise of stock options. The Company is not currently engaged in share repurchases related to a publicly announced plan or program.
Total Number Of Shares
Purchased
Average Price
Per Share
July 2004
On November 17, 2004, the Board of Directors declared a dividend in the amount of $0.18 per share on the issued and outstanding Common Stock and Class B Common Stock of the Company, be paid on January 3, 2005, to stockholders of record on December 1, 2004.
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ITEM 6. SELECTED FINANCIAL DATA
OPERATING RESULTS
Operating revenue
Depreciation and amortization
Operating income, before equityin net income of associated companies
Equity in net income of associated companies
Operating income
Financial income
Financial expense
Income from continuing operations
Discontinued operations
Net income
EARNINGS PER COMMON SHARE
Basic:
Continuing operations
Diluted:
Weighted average common shares:
Basic
Diluted
Dividends per common share
BALANCE SHEET INFORMATION (End of Year)
Total assets
Debt, including current maturities
Stockholders’ equity
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OTHER INFORMATION
Operating income as a percent of revenue
Income from continuing operationsas a percent of revenue
Dividends as a percent of incomefrom continuing operations
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to the Company’s results of operations and financial condition as of, and for the three years ended, September 2004. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto.
NON-GAAP FINANCIAL MEASURES
Operating Cash Flow
Operating cash flow, which is defined as operating income before depreciation, amortization, and equity in net income of associated companies, and operating cash flow margin (operating cash flow divided by operating revenue) represent non-GAAP financial measures that are used in the analysis below. The Company believes that operating cash flow and the related margin percentage are useful measures of evaluating its financial performance because of their focus on the Company’s results from operations before depreciation and amortization. The Company also believes that these measures are several of the alternative financial measures of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a company and evaluate its ability to meet debt service requirements.
A reconciliation of operating cash flow to operating income, the most directly comparable measure under accounting principles generally accepted in the United State of America (GAAP), is included in the table below:
Operating cash flow
Operating income, before equity in netincome of associated companies
SAME PROPERTY COMPARISONS
Certain information below, as noted, is presented on a same property basis, which is exclusive of acquisitions and divestitures consummated in the current or prior year. The Company believes such comparisons provide meaningful information for an understanding of changes in its revenue and operating expenses. Same property comparisons exclude MNI. The Company owns 50% of the capital stock of MNI, which for financial reporting purposes is reported using the equity method of accounting. Same property comparisons also exclude corporate office costs.
CRITICAL ACCOUNTING POLICIES
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with
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GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to intangible assets and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of the Company’s accounting policies.
Goodwill and Other Intangible Assets
In assessing the recoverability of the Company’s goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company analyzes its goodwill and indefinite life intangible assets for impairment on an annual basis or more frequently if impairment indicators are present. See Note 5 of the Notes to Consolidated Financial Statements, included herein, for a more detailed explanation of the Company’s intangible assets.
Income Taxes
Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax bases. Deferred income 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 income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company files income tax returns with the Internal Revenue Service and various state tax jurisdictions. From time to time, the Company is subject to routine audits by those agencies, and those audits may result in proposed adjustments. The Company has considered the alternative interpretations that may be assumed by the various taxing agencies, believes its positions taken regarding its filings are valid, and that adequate tax liabilities have been recorded to resolve such matters.
Revenue Recognition
Advertising revenues are recorded when advertisements are placed in the publication and circulation revenues are recorded as newspapers are distributed over the subscription term. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for newspapers or advance payments for advertising.
Uninsured Risks
The Company is self-insured for health care and workers compensation costs of its employees, subject to stop loss insurance, which limits exposure to large claims. The Company accrues its estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other insurance carries deductible losses of varying amounts.
The Company’s reserve for workers compensation claims is an estimate of the remaining liability for retained losses. The amount has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.
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CONTINUING OPERATIONS
2004 vs. 2003
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
Year Ended
September 30
Advertising revenue:
Retail
National
Classified:
Daily newspapers:
Employment
Automotive
Real estate
All other
Other publications
Total classified
Niche publications
Online
Total advertising revenue
Circulation
Commercial printing
Online services and other
Total operating revenue
Compensation
Newsprint and ink
Other operating expenses
Non-operating expense, net
Income from continuing operations beforeincome taxes
Income tax expense
Earnings per common share:
In total, acquisitions accounted for $5,692,000 of revenue in 2004.
Sundays generate substantially more advertising and circulation revenue than any other day of the week. The year ended September 30, 2004 had the same number of Sundays as 2003.
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Advertising Revenue
In 2004, total same property advertising revenue increased $26,895,000. Same property retail revenue increased $9,136,000, or 3.3%, in 2004. Continuing emphasis on rate discipline, an increase in active accounts and a 0.4% increase in advertising lineage contributed to the increase. Same property average retail rates, excluding preprint insertions, increased 2.8% in 2004. Rate discipline means adhering to standard rates rather than negotiating specific rates for individual customer situations.
Same property classified advertising revenue increased approximately $10,942,000, or 6.6%, in 2004. Higher margin employment advertising at the daily newspapers increased 13.7% for the year on a same property basis. The Company’s increases in employment classified advertising compare favorably to national survey amounts. The September 2004 Help Wanted Index, as calculated by the Conference Board, declined 2.7% from the prior year level. Same property average automotive advertising decreased by 2.3% due to a 3.6% decline in advertising lineage from increased promotional financing and related advertising in the prior year. Same property real estate advertising increased 11.2% due to low mortgage interest rates and increases in advertising of real estate for rent from growth in home ownership. Other daily newspaper classified advertising increased 6.3% on a same property basis. Same property classified advertising rates increased 3.0%, primarily due to increases in employment advertising rates offset by a decrease in real estate advertising rates.
Advertising lineage, as reported on a same property basis for the Company’s daily newspapers only, consists of the following:
(Thousands Of Inches)
Classified
Advertising in niche publications increased 20.3% on a same property basis, due to new publications in existing markets and penetration of new and existing markets. Online advertising increased 32.6% on a same property basis, due to expanded use of the Company’s online business model and cross-selling with the Company’s print publications. Online specialty employment and automotive advertising registered particularly strong growth. Both of these categories are a strategic focus for the Company.
Circulation and Other Revenue
Same property circulation revenue decreased $417,000, or 0.3%, in 2004. The Company’s total average daily newspaper circulation units, including MNI, as measured by the Audit Bureau of Circulations was flat for the six months ended September 2004, and Sunday circulation declined 0.1%, significantly outperforming the industry as a whole. For the six months ended March 2004, total average daily circulation units, including MNI, declined 0.1% and Sunday circulation increased 0.5% compared to the same period in the prior year. The Company is focused on growing circulation units and revenue through a number of initiatives.
Same property commercial printing revenue increased $1,243,000, or 6.7%, in 2004. Same property online services and other revenue increased $2,577,000, or 11.1%, in 2004.
Operating Expenses and Results of Operations
Costs other than depreciation and amortization increased $24,897,000, or 5.3%, in 2004, and increased 4.7% on a same property basis. In total, acquisitions accounted for $5,052,000 of operating costs, excluding depreciation and amortization, in 2004.
Compensation expense increased $8,748,000, or 3.3%, in 2004 due to costs of acquired businesses and a 3.2% increase in same property compensation expense. Normal salary adjustments and associated
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increases in taxes and benefits account for the increase in same property costs. Same property full time equivalent employees declined 1.2% in 2004 from the prior year level. Reduced medical expense from plan changes in the current year offset other increases. Same property full time equivalent employees are expected to rise in 2005, after four consecutive years of declines, as are medical costs. As a result, overall compensation expense may increase in 2005 at a higher rate than in 2004.
Newsprint and ink costs increased $6,547,000, or 11.5%, in 2004 due to price increases and a 2.5% increase in volume. Newsprint unit costs have been rising since late 2002 and may negatively impact 2005 results.
Other operating costs, exclusive of depreciation and amortization, increased $9,602,000, or 6.5%, in 2004 and increased 5.3% on a same property basis. A $550,000 accrual for the prospect that the Company, similar to others in the newspaper industry, will be required to refund approved critical vendor payments received from Kmart Corporation following its bankruptcy proceedings in 2002 increased this category of costs in the current year. Costs of new niche publications and expenses to increase circulation using sources other than telemarketing also contributed to the growth in costs. Changes in telemarketing regulations enacted in 2004 may continue to impact the Company’s ability to solicit new subscribers, and the cost of such solicitation, in the future. In 2004, however, the Company was able to increase circulation starts obtained through the Company’s marketing efforts more than 10%, in spite of new telemarketing restrictions. The Company also experienced increases in delivery costs from rising fuel prices.
Depreciation expense increased $2,046,000, or 11.0% in 2004, due primarily to increases in capital spending in 2003 and 2004.
Operating cash flow increased 6.3% to $186,241,000 in 2004 from $175,147,000 in 2003. Operating cash flow margin increased to 27.3% from 27.1% in the prior year. Equity in net income in associated companies increased during 2004. Operating income margin increased to 21.4% in 2004 from 21.3%. The Company was able to increase margins in 2004, in spite of significant increases in newsprint costs, due to strong revenue growth.
Non-operating Income and Expense
Financial expense decreased $3,870,000, or 23.4%, to $12,665,000 due to $91,600,000 of debt reduction from operating cash flow, offset by rising interest rates on floating rate debt.
Overall Results
Income taxes were 35.8% of pretax income from continuing operations in 2004 and 2003. The favorable resolution of tax issues reduced income tax expense by approximately $1,200,000 in 2004. The effective rate would have been 36.7% in 2004 without this event.
As a result of all of the above, income from continuing operations totaled $86,469,000 in 2004, an increase of 11.0% compared to $77,881,000 in 2003. Earnings per diluted common share increased 9.7% to $1.92 in 2004 from $1.75 in 2003.
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2003 vs. 2002
All categories of revenue were substantially impacted by the acquisitions of Howard, which the Company purchased in April 2002, and the remaining 50% of SCN in July 2002. In total, acquisitions accounted for $233,395,000 of revenue in 2003 and $108,491,000 of revenue in 2002. Businesses sold in 2002, but still included in continuing operations did not impact 2003 but accounted for $4,060,000 of revenue in the prior year.
Sundays generate substantially more advertising and circulation revenue than any other day of the week. The year ended September 30, 2003 had the same number of Sundays as 2002.
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In 2003, total same property advertising revenue increased $8,703,000, or 3.0%. Same property retail revenue in the Company’s markets was not as adversely impacted by the economy as major metropolitan markets, and increased $3,618,000, or 2.2%, in 2003. Increased emphasis on rate discipline and new accounts helped offset declines in advertising volume. Same property average retail rates, excluding preprint insertions, increased 4.2% in 2003.
Same property classified advertising revenue increased approximately $1,962,000, or 2.0%, in 2003. Higher margin employment advertising at the daily newspapers decreased 5.2% for the year on a same property basis. The Company’s declines in employment classified advertising compare favorably to national survey amounts. The September 2003 Help Wanted Index, as calculated by the Conference Board, declined 14% from the prior year level. Same property average automotive advertising increased by 0.4% due to promotional financing by auto manufacturers. Same property real estate advertising increased 10.0% due to lower mortgage interest rates and increases in advertising of real estate for rent from growth in home ownership. Other daily newspaper classified advertising decreased 2.2% on a same property basis. Same property classified advertising rates declined 0.5%, primarily due to declines in employment advertising.
Advertising in niche publications, a strategic focus for the Company, increased 36.0% on a same property basis, due to new publications in existing markets and penetration of new and existing markets. Online advertising increased 29.4% on a same property basis, due to expanded use of the Company’s online business model and cross-selling with the Company’s print publications.
Same property circulation revenue decreased $138,000, or 0.2%, in 2003. The Company’s total average daily newspaper circulation units, including MNI, as measured by the Audit Bureau of Circulations, decreased 0.1% and Sunday circulation increased 0.2% for the six months ended September 2003 compared to the same period in the prior year. For the six months ended March 2003, total average daily circulation units, including MNI, increased 0.6% and Sunday circulation increased 0.3% compared to the same period in the prior year.
Same property commercial printing revenue declined $1,757,000, or 9.0%, in 2003 due, in part, to economic conditions and the loss of certain key customers. Same property online services and other revenue increased $1,114,000, or 6.1%, in 2003.
Costs other than depreciation and amortization increased $97,432,000, or 26.0%, in 2003. All categories of expenses were impacted by the acquisitions of Howard, which the Company purchased in April 2002, and the remaining 50% of SCN in July 2002. In total, acquisitions accounted for $167,514,000 of operating costs, excluding depreciation and amortization, in 2003 and $75,952,000 in the prior year. Businesses sold did not impact operating expenses in 2003, but accounted for $3,362,000 of operating expenses other than depreciation and amortization in the prior year.
Compensation expense increased $60,548,000, or 29.3%, in 2003 due to costs of acquired businesses and a 5.7% increase in same property compensation expense. Higher medical expenses, normal salary
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adjustments, higher incentive compensation from increasing revenue, and one-time and permanent cost reductions in benefit programs in 2002 contributed to the increase in same property costs. Exclusive of the prior year changes in benefit programs, same property compensation expense increased 2.9% in 2003. Same property full time equivalent employees declined 1.1% in 2003 from the prior year level, offsetting other compensation cost increases.
Newsprint and ink costs increased $13,628,000, or 31.5%, in 2003 as volume increases related to acquired businesses more than offset overall lower prices and same property volume declines. In spite of overall lower prices, newsprint unit costs rose throughout 2003. Other operating costs, exclusive of depreciation and amortization, increased $23,256,000, or 18.7%, in 2003 as costs of acquired businesses more than offset 0.6% cost savings on a same property basis. The increase in depreciation and amortization expense in 2003 is primarily due to the acquisitions of Howard and SCN.
Operating cash flow increased 21.8% to $175,147,000 in 2003 from $143,814,000 in 2002. Operating cash flow margin declined to 27.1% from 27.7% in the prior year reflecting a full year of results of acquired businesses with lower margins in the current year compared to six months in the prior year. Equity in net income in associated companies declined during 2003 due primarily to the inclusion of SCN in consolidated results in the current year. In the prior year, SCN was accounted for as an equity investment from April through June, prior to the acquisition of the remaining 50% in July 2002. Operating income margin decreased to 21.3% in 2003 from 22.8% for the same reasons, but was further impacted by a higher level of amortization from acquisitions.
Financial income decreased $4,887,000 to $1,120,000 in 2003. The Company’s invested balances decreased $433,000,000 due to the April 2002 acquisition of Howard. Balances were further reduced in 2002 by final income tax payments related to the sale of broadcast properties in 2001. Reinvestment rates have also declined from the prior year. Financial expense increased to $16,535,000 due to increased debt from the acquisitions of Howard and SCN, offset by lower interest rates and subsequent debt reduction from operating cash flow.
Income taxes were 35.8% and 27.1% of pretax income from continuing operations in 2003 and 2002, respectively. The favorable resolution of tax issues reduced income tax expense by approximately $10,100,000 in 2002. The effective rate would have been 36.4% in 2002 without this event.
As a result of all of the above, income from continuing operations totaled $77,881,000 in 2003, compared to $78,505,000 in 2002. Earnings per diluted common share decreased to $1.75 in 2003 from $1.77 in 2002. The favorable resolution of tax issues increased 2002 results by $0.23 per share.
DISCONTINUED OPERATIONS
In February 2004, the Company exchanged its daily newspapers in Freeport, Illinois and Corning, New York for two daily newspapers and eight weekly and specialty publications in Nevada and Idaho. The transaction resulted in an after-tax loss of $228,000, which is recorded in discontinued operations in 2004.
A $4,000,000 reduction of income tax expense has been recorded in results from discontinued operations in 2002, from changes in estimates related to state taxes on the sale of broadcasting operations.
In July 2002, the Company acquired the remaining 50% of SCN. The Company’s Flathead group of weekly newspapers in Montana was transferred as partial consideration for the purchase. The Company recognized an after-tax loss of $2,688,000 on the transfer of the Flathead newspapers, which is recorded in discontinued operations in 2002. The after-tax loss was reduced by $65,000 in 2004.
In October 2002, the Company completed the sale of its Ashland, Oregon, daily newspaper. The transaction resulted in an after-tax loss on sale of $300,000, which is recorded in discontinued operations in 2002. An additional after-tax loss of $20,000 was recorded in 2003.
Revenue from discontinued operations in 2004, 2003 and 2002 was $3,142,000, $9,408,000 and $10,756,000, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $130,519,000 in 2004, $139,661,000 in 2003 and $115,791,000 in 2002. Increased income from continuing operations, which was more than offset by increases in working capital, accounted for the change between 2004 and 2003. Decreases in working capital from the acquisitions of Howard and SCN in 2002 accounted for the change between 2003 and 2002.
Cash required for investing activities totaled $27,088,000 in 2004, $12,543,000 in 2003, and $547,393,000 in 2002. Capital spending and acquisitions accounted for substantially all of the usage of funds in 2004. Capital spending accounted for substantially all of the usage of funds in 2003. Acquisitions accounted for substantially all of the usage of funds in 2002.
The Company anticipates that funds necessary for capital expenditures, which are expected to total approximately $20,000,000 in 2005, and other requirements, will be available from internally generated funds, availability under its existing credit agreement or, if necessary, by accessing the capital markets.
Financing activities provided funds of $217,163,000 in 2002. Such activities required funds of $105,854,000 in 2004 and $135,764,000 in 2003 primarily for debt reduction and dividends. The Company’s cash dividend payments have been influenced by timing. The annual dividend was $0.72 per share in 2004 and $0.68 per share in 2003 and 2002.
The Company entered into a five-year, $350,000,000 credit agreement in March 2002. The primary purposes of the agreement were to fund the acquisition of Howard, and to provide liquidity for other corporate purposes. $279,000,000 was borrowed under this agreement in 2002 to consummate the acquisitions of Howard and SCN. At September 30, 2004 the outstanding principal balance was $100,000,000.
Debt agreements provide for restrictions as to indebtedness, liens, sales, mergers, acquisitions and investments and require the Company to maintain leverage and interest coverage ratios. Covenants under these agreements are not considered restrictive to normal operations or historical amounts of stockholder dividends. At September 30, 2004, the Company was in compliance with these covenants.
Cash required by discontinued operations totaled $631,000 in 2004 and primarily reflects tax payments related to nondeductible goodwill and basis differences in identified intangible assets associated with the exchange of the Company’s daily newspapers in Corning, New York and Freeport, Illinois in February 2004, offset by changes in working capital of sold properties. Cash provided by discontinued operations totaled $5,329,000 in 2003 and primarily reflects net proceeds from the sale of the Ashland, Oregon daily newspaper. Cash required for discontinued operations totaled $43,349,000 in 2002, primarily for income tax payments related to the gain on sale of broadcast operations.
SEASONALITY
The Company’s largest source of publishing revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the first and third fiscal quarters. Newspaper advertising revenue is lowest in the second fiscal quarter.
Quarterly results of operations are summarized in Note 17 to the Consolidated Financial Statements, included herein.
INFLATION
The Company has not been significantly impacted by general inflationary pressures over the last several years. The Company anticipates that changing costs of newsprint, its basic raw material, may impact future operating costs. Price increases (or decreases) for the Company’s products are implemented when deemed appropriate by management. The Company continuously evaluates price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.
In July 2004, several newsprint manufacturers announced price increases of $50 per metric ton, effective for deliveries in September 2004. The final extent of changes in current prices, if any, is subject to negotiation between such manufacturers and the Company.
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CONTRACTUAL OBLIGATIONS
The following table summarizes the more significant of the Company’s contractual obligations.
Nature of Obligation
Long-term debt
Lease obligations
Newsprint (Metric Tons)
Substantially all of the Company’s deferred income tax liabilities are related to acquisitions and will not result in future cash payments. See Note 10 of the Notes to Consolidated Financial Statements, included herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.
INTEREST RATES
The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to the London Interbank Offered Rate (LIBOR). A one percent increase in LIBOR would decrease income from continuing operations before income taxes approximately $1,000,000, based on floating rate debt outstanding at September 30, 2004, excluding MNI.
Interest rate risk in the Company’s investment portfolio is managed by investing only in securities with a maturity at date of acquisition of 180 days or less. Only high-quality investments are considered. In April 2002, the Company liquidated substantially all of its investment portfolio in conjunction with the acquisition of Howard.
COMMODITIES
Certain materials used by the Company are exposed to commodity price changes. The Company manages this risk through instruments such as purchase orders and non-cancelable supply contracts. Primary commodity price exposures are newsprint and, to a lesser extent, ink.
A $10 per metric ton newsprint price increase would result in a reduction in income from continuing operations before income taxes of approximately $1,115,000, based on actual consumption in 2004, excluding MNI.
SENSITIVITY TO CHANGES IN VALUE
The estimate that follows is intended to measure the maximum potential impact on fair value of fixed rate debt of the Company in one year from adverse changes in market interest rates under normal market conditions. The calculation is not intended to represent the actual loss in fair value that the Company expects to incur. The estimate does not consider favorable changes in market rates. The position included in the calculation is fixed rate debt, which totals $113,600,000 at September 30, 2004, excluding MNI.
The estimated maximum potential one-year loss in fair value from a 100 basis point movement in interest rates on market risk sensitive instruments outstanding at September 30, 2004 is approximately $4,976,000. There is no impact on reported results from such changes in interest rates.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
In order to ensure that the information that must be disclosed in filings with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner, the Company has disclosure controls and procedures in place. The Chief Executive Officer, Mary E. Junck, and Chief Financial Officer, Carl G. Schmidt, have reviewed and evaluated disclosure controls and procedures as of September 30, 2004, and have concluded that such controls and procedures are appropriate and that no changes are required.
There have been no significant changes in internal controls, or in other factors that could affect internal controls, since September 30, 2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this Item, except for certain information included under the caption “Executive Team” in Part I of this Form 10-K, is included in the Company’s Proxy Statement to be filed in January 2005, which is incorporated herein by reference, under the captions “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”.
The Company has a Code of Business Conduct and Ethics (Code) that applies to all of its employees, including its principal executive officer, chief financial officer and principal financial and accounting officer. The Code is monitored by the Audit Committee of the Company’s Board of Directors and is annually affirmed by its directors and executive officers. The Company maintains a corporate governance page on its website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance.” A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by the Company from, a provision of the Code will be posted on the Company’s website.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2005, which is incorporated herein by reference, under the captions “Proposal 1 - Election of Directors”, “Compensation of Directors” and “Executive Compensation”; provided, however, that the subsection entitled “Executive Compensation – Report of the Executive Compensation Committee of the Board of Directors on Executive Compensation” shall not be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2005, which is incorporated herein by reference, under the caption “Voting Securities and Principal Holders Thereof”.
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Information as of September 30, 2004 with respect to equity compensation plans is as follows:
Number OfSecuritiesRemainingAvailable For
Future Issuance
Equity compensation plans approved by stockholders (1)(2)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Vertis, Inc. (Vertis) provides the Company, in the normal course of business, with an Internet subscription service that allows access to advertising prototypes. Fees paid to Vertis totaled $95,000 in 2004, $112,000 in 2003 and $76,000 in 2002. A director of the Company is an officer of Vertis. In 2003, Vertis acquired The Newspaper Network, Inc. (TNN), which is in the business of placing advertising, including advertising in the Company’s newspapers, for its clients. TNN customarily receives fees from its clients for such services, but receives no compensation from the Company.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2005, which is incorporated herein by reference, under the caption “Relationship with Independent Public Accountants”.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on Form 10-K:
FINANCIAL STATEMENTS
Consolidated Balance Sheets – September 30, 2004 and 2003
Consolidated Statements of Income – Years ended September 30, 2004, 2003 and 2002
Consolidated Statements of Stockholders’ Equity – Years ended September 30, 2004, 2003 and 2002
Consolidated Statements of Cash Flows – Years ended September 30, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements.
EXHIBITS
See Exhibit Index.
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REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the three months ended September 30, 2004:
July 19, 2004
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SIGNATURES
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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of December 2004.
/s/ Mary E. Junck
Chairman, President and Chief Executive Officer
Vice President, Chief Financial Officerand Treasurer
(Principal Financial and Accounting Officer)
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 their respective capacities on the 14th day of December 2004.
/s/ Nancy S. Donovan
Nancy S. Donovan
Executive Officer and Director
/s/ William E. Mayer
William E. Mayer
/s/ Herbert W. Moloney III
Herbert W. Moloney III
/s/ Andrew E. Newman
Andrew E. Newman
/s/ Gordon D. Prichett
Gordon D. Prichett
/s/ Gregory P. Schermer
Vice President - Interactive Media
and Corporate Counsel and Director
/s/ Mark Vittert
Director
Mark Vittert
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EXHIBIT INDEX
Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by the Company with the Securities and Exchange Commission, as indicated. Exhibits marked with a plus (+) are management contracts or compensatory plan contracts or arrangements filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. All other documents listed are filed with this Annual Report on Form 10-K.
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27
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
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CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Common Share Data)
Operating revenue:
Advertising
Other
Operating expenses:
Depreciation
Amortization of intangible assets
Operating income, before equity in net income ofassociated companies
Non-operating income (expense):
Loss on sales of businesses
Other, net
Income from continuing operations before income taxes
Discontinued operations:
Gain (loss) from discontinued operations, net of income tax effect
Gain (loss) on disposition, net of income tax effect
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(Thousands, Except Per Share Data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts:
2004 $6,374; 2003 $5,527
Receivable from associated companies
Inventories
Deferred income taxes
Assets of discontinued operations
Investments:
Associated companies
Property and equipment:
Land and improvements
Buildings and improvements
Equipment
Less accumulated depreciation
Goodwill
Other intangible assets
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LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt
Accounts payable
Compensation and other accrued liabilities
Income taxes payable
Dividends payable
Liabilities of discontinued operations
Unearned revenue
Long-term debt, net of current maturities
Deferred items:
Retirement and compensation
Income taxes
Stockholders’ equity:
Serial convertible preferred stock, no par value;authorized 500 shares; none issued
Common Stock, $2 par value; authorized60,000 shares; issued and outstanding:
2004 37,028 shares;
2003 35,497 shares
Class B Common Stock, $2 par value; authorized30,000 shares; issued and outstanding:
2004 8,189 shares;
2003 9,124 shares
Additional paid-in capital
Unearned compensation
Retained earnings
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock:
Balance, beginning of year
Conversion from Class BCommon Stock
Shares issued
Shares reacquired
Balance, end of year
Class B Common Stock:
Conversion to Common Stock
Additional paid-in capital:
Stock option expense
Tax benefit of stock options exercised
Unearned compensation:
Restricted shares issued
Restricted shares canceled
Amortization
Retained earnings:
Cash dividends per common share
Total stockholders’ equity
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Cash provided by operating activities:
Results of discontinued operations
Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations:
Stock compensation expense
Distributions less than earnings of associated companies
Change in operating assets and liabilities, net of effects from business acquisitions:
Decrease (increase) in receivables
Decrease (increase) in inventories and other
Increase (decrease) in accounts payable, accrued expenses and unearned revenue
Increase (decrease) in income taxes payable
Net cash provided by operating activities
Cash required for investing activities:
Sales of temporary cash investments, net
Purchases of property and equipment
Acquisitions, net
Proceeds from sales of businesses
Net cash required for investing activities
Cash provided by (required for) financing activities:
Proceeds from (payments on) notes payable, net
Payments on long-term debt
Purchases of common stock
Proceeds from long-term debt
Financing costs
Cash dividends paid
Other, primarily issuance of common stock
Net cash provided by (required for) financing activities
Net cash provided by (required for) discontinued operations
Net decrease in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
End of year
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company directly, and through its ownership of associated companies, publishes 44 daily newspapers in 19 states and approximately 200 weekly, classified and specialty publications, along with associated online services. The Company currently operates in a single business segment as its enterprises have similar economic characteristics, products, customers and distribution.
Basis of Presentation
Certain amounts as previously reported have been reclassified to conform with the current year presentation.
References to 2004, 2003 and 2002 mean the years ended September 30, 2004, 2003 and 2002, respectively.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, revenue 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, or majority-owned, subsidiaries. All significant intercompany transactions have been eliminated.
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.
Investments
Investments in the common stock of associated companies are accounted for using the equity method and are reported at cost plus the Company’s share of undistributed earnings since acquisition, less amortization of intangible assets.
Other investments primarily consist of marketable securities held in trust under a deferred compensation arrangement and investments for which no established market exists. Marketable securities are classified as trading securities and carried at fair value with gains and losses reported in the Consolidated Statements of Income. Non-marketable securities are carried at cost.
Accounts Receivable
The Company evaluates its allowance for doubtful accounts receivable based on the customer’s historical credit experience, payment trends and other economic factors, to the extent available.
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 at September 30, 2004 and 2003 are less than replacement cost by $3,142,000 and $2,439,000, respectively.
Other inventories consisting of ink, plates and film are priced at the lower of cost or market, with cost being determined by the first-in, first-out method.
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Property and Equipment
Property and equipment are carried at cost. Equipment, except for printing presses and mailroom equipment, is depreciated primarily by declining-balance methods. The straight-line method is used for all other assets. The estimated useful lives are as follows:
Printing presses and mailroom equipment
The Company capitalizes interest as a component of the cost of constructing major facilities.
Intangible assets include covenants not to compete, consulting agreements, customer lists, newspaper subscriber lists, mastheads and other. Intangible assets subject to amortization are being amortized as follows:
Noncompete and consulting agreements
Customer lists
Newspaper subscriber lists
In assessing the recoverability of the Company’s goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company analyzes its goodwill and indefinite life intangible assets for impairment on an annual basis or more frequently if impairment indicators are present.
Advertising Costs
Advertising costs are expensed as incurred.
Stock Compensation
The Company has three stock-based compensation plans. The Company accounts for grants under those plans under the fair value expense recognition provisions of FASB Statement 123, Accounting for Stock-
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Based Compensation, for stock-based employee compensation, as amended by FASB Statement 148, Accounting for Stock-Based Compensation – Transition and Disclosure.
The Company amortizes as compensation expense the value of restricted Common Stock, issued under a long-term incentive plan, by the straight-line method over the restriction period, which is generally one to three years.
The Company is self-insured for health care and workers compensation costs of its employees, subject to stop loss insurance, which limits exposure to large claims. The Company accrues its estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other insurance carries deductible losses of varying amounts. Letters of credit totaling $3,670,000 at September 30, 2004 are outstanding in support of the Company’s insurance program.
Discontinued Operations
In accordance with the provisions of FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operations and related losses on properties sold, or identified as held for sale, have been presented as discontinued operations in the Consolidated Statements of Income for all periods presented. Gains are recognized when realized.
Acquisitions
All acquisitions are accounted for as a purchase and, accordingly, the results of operations since the respective dates of acquisition are included in the Consolidated Financial Statements.
In February 2004, the Company exchanged its daily newspapers in Freeport, Illinois and Corning, New York and cash totaling $2,215,000 for two daily newspapers in Burley, Idaho and Elko, Nevada and eight weekly and specialty publications. In 2004 the Company also purchased five specialty publications at a cost of $6,694,000. The Company purchased three specialty publications at a cost of $1,073,000 in 2003. These acquisitions did not have a material effect on the Company’s Consolidated Financial Statements.
In April 2002, the Company acquired the stock of Howard Publications, Inc. (Howard), a privately owned company comprised of 15 daily newspapers, 50% of the stock of Sioux City Newspapers, Inc. (SCN), and related specialty publications. The transaction was valued at approximately $696,800,000 after taking into account $50,000,000 of cash on the Howard balance sheet retained by the Company, and other adjustments. Certain non-publishing businesses of Howard were not included in the transaction. The Company paid the purchase price and expenses related to the transaction from $433,000,000 of available funds, including proceeds from the sale of its broadcast properties in 2001, and revolving loans under the terms of a five year, $350,000,000 credit agreement.
The representations and warranties of Howard stockholders were secured for varying amounts pursuant to an escrow agreement between the Company and the indemnifying Howard stockholders.
In July 2002, the Company acquired the remaining 50% of SCN from a privately owned company. The transaction was valued at approximately $57,000,000 and was funded in part with approximately $42,000,000 in cash and temporary cash investments. The remainder of the purchase price was funded by the Company’s credit agreement. $3,000,000 of the purchase price was payable in November 2002. The Company’s Flathead group of weekly newspapers in Montana was transferred as partial consideration for the purchase.
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The unaudited pro forma consolidated income information for 2002, set forth below, presents results of operations as if the acquisitions of Howard and SCN had occurred at the beginning of 2002 and are not necessarily indicative of future results or actual results that would have been achieved had the acquisitions occurred as of the beginning of 2002. Pro forma results for 2004 and 2003 are not presented because the impact of acquisitions in those years is not significant.
The amounts in the table below are adjusted for the 2004 divestitures of the Freeport, Illinois and Corning, New York daily newspapers and related specialty publications.
Earnings per common share from continuing operations:
The purchase price allocation for Howard, including SCN, the divested Freeport, Illinois and Corning, New York operations and direct costs of acquisitions, is as follows:
Current assets
Property and equipment
Total assets acquired
Current liabilities
Long-term liabilities
Acquired intangible assets consist of the following:
Amortizable intangible assets:
Noncompete agreements
Nonamortized intangible assets:
Mastheads
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Divestitures
The Company sold several specialty publications in 2002. These transactions were initiated prior to the adoption of Statement 144 and, accordingly, results to the respective dates of sale and the gain or loss on sale are included in continuing operations. Proceeds from sales of properties or exchanges consist of the following:
Noncash working capital
Intangible assets
Loss recognized on sales of businesses
Subsequent Events
In October 2004 the Company exchanged an Internet service provider business for a weekly newspaper and separately purchased two specialty publications at a cost of $300,000. In December 2004 the Company purchased eleven weekly newspapers and specialty publications at a cost of $3,821,000.
In February 2004, the Company exchanged its daily newspapers in Freeport, Illinois and Corning, New York for two daily newspapers and eight weekly and specialty publications in Nevada and Idaho. The transaction resulted in an after tax loss of $228,000, which is recorded in discontinued operations in 2004.
The Company’s Flathead group of weekly newspapers in Montana was transferred as partial consideration for the purchase of the remaining 50% of SCN. The Company recognized an after-tax loss of $2,688,000 on the transfer of the Flathead newspapers, which is recorded in discontinued operations in 2002. The after-tax loss was reduced by $65,000 in 2004.
In 2002, the Company completed the sale of its Ashland, Oregon, daily newspaper. The transaction resulted in an after-tax loss on sale of $300,000, which is recorded in discontinued operations in 2002. An additional after tax loss of approximately $20,000 was recognized in 2003.
Results for Freeport, Corning, Flathead and Ashland are recorded in discontinued operations for all periods presented in accordance with the provisions of Statement 144.
Income from discontinued operations consists of the following:
Income from, or gain (loss) on sale of,discontinued operations
Income tax expense (benefit)
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Income tax expense (benefit) related to discontinued operations differs from the amounts computed by applying the U.S. federal income tax rate as follows:
Computed “expected” income tax expense (benefit)
State income taxes, net of federal tax benefit
Resolution of tax issues
Tax expense of $2,812,000 was recorded in results of discontinued operations in 2004 related primarily to nondeductible goodwill and basis differences in identified intangible assets associated with the February 2004 exchange transaction described above.
The components of assets and liabilities of discontinued operations at September 30, 2003 are not significant.
Madison Newspapers, Inc.
The Company has a 50% ownership interest in Madison Newspapers, Inc. (MNI), a company that publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations. MNI conducts its business under the trade name Capital Newspapers.
Summarized financial information of MNI is as follows:
Investments and other assets
Property and equipment, net
Current liabilities, excluding debt
Operating expenses, excluding depreciation and amortization
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Accounts receivable from associated companies consist of dividends due from MNI. Fees for editorial, marketing and information technology services provided to MNI by the Company are included in other revenue and totaled $9,994,000, $9,665,000 and $8,962,000 in 2004, 2003 and 2002, respectively. In 2003, the Company also received $694,000 for purchase of a software system.
Certain other information relating to the Company’s investment in MNI is as follows:
Company’s share of:
Undistributed earnings
In April 2002, a subsidiary of MNI acquired certain of the assets of Citizen Newspapers, LLC, which owned the Beaver Dam Daily Citizen and various other publications in Wisconsin. The purchase price was approximately $18,440,000.
CityXpress Corp
In April 2004 the Company converted its notes receivable from CityXpress Corp (CityXpress) to common stock. As a result the Company has a 36% ownership interest in CityXpress. The operations of, and the Company’s investment in, CityXpress are not significant to the Consolidated Financial Statements.
Changes in the carrying amount of goodwill related to continuing operations are as follows:
Goodwill, beginning of period, as previously reported
Goodwill, included in assets of discontinued operations
Goodwill, beginning of year, as reclassified
Goodwill related to acquisitions
Goodwill, end of year
Identified intangible assets related to continuing operations consist of the following:
Less accumulated amortization
Customer and newspaper subscriber lists
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Annual amortization of intangible assets related to continuing operations for the five years ending September 2009 is estimated to be $25,113,000, $23,416,000, $23,353,000, $22,808,000, and $22,382,000, respectively.
In conjunction with the acquisition of Howard, the Company entered into a five-year, $350,000,000 credit agreement dated as of March 28, 2002 among the Company, Bank of America, N.A. (BofA), as administrative agent, and the other lenders party thereto. The previously existing revolving credit agreement was simultaneously cancelled. The interest rate of the revolving loans at September 30, 2004 is, at the option of the Company, LIBOR plus 1.0% or a base rate equal to the greater of the federal funds rate plus 0.5% or the BofA prime rate. The weighted average interest rate on floating rate debt is 2.84% and 2.26% at September 30, 2004 and 2003, respectively.
Debt consists of the following:
2002 credit agreement
1998 Note Purchase Agreement, 6.14% to 6.64%due in varying amounts to 2013
Less current maturities
Aggregate maturities during the five years ending September 2009 are $11,600,000, $12,400,000, $112,400,000, $12,400,000 and $12,400,000, respectively.
Substantially all the Company’s employees are eligible to participate in a qualified defined contribution retirement plan. The Company also has other retirement and compensation plans for executives and others. Retirement and compensation plan costs, including interest on deferred compensation costs, charged to continuing operations are $18,692,000 in 2004, $16,962,000 in 2003, and $13,829,000 in 2002.
The Company is obligated under an unfunded plan to provide certain fixed retirement payments to certain former employees. The plan is frozen and no additional benefits are being accrued. The accrued liability under the plan is $3,152,000 and $3,317,000 at September 30, 2004 and 2003, respectively.
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. 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 outstanding total less than 5,600,000 shares.
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In 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 share of Common Stock and Class B Common Stock (collectively Common Shares) of the Company. Rights are attached to and automatically trade with the Company’s Common Shares.
Rights 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 stockholders 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 in May 2008.
The Company has three stock-based compensation plans. The Company accounts for grants under those plans under the fair value expense recognition provisions of Statement 123, Accounting for Stock-Based Compensation, for stock-based employee compensation, as amended by Statement 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Total stock compensation expense is $5,874,000, $4,628,000 and $3,936,000 in 2004, 2003, and 2002, respectively.
Stock Options and Restricted Stock
The Company has reserved 3,271,000 shares of Common Stock for issuance to employees under an incentive and nonstatutory stock option and 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: dividend rates of 1.7% to 2.0%; price volatility of 21.2% to 29.8%; risk-free interest rates based upon the life of the option ranging from 2.3% to 4.7%; and expected lives based upon the life of the option ranging from 4.1 to 9.3 years.
A summary of stock option activity is as follows:
Under option, beginning of year
Granted
Exercised
Canceled
Under option, end of year
Exercisable, end of year
Weighted average prices of options are as follows:
Fair value of options granted
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A summary of options outstanding at September 30, 2004 is as follows:
Range of
Exercise
Prices
Weighted-
Average
RemainingContractual
Life
(In Years)
AverageExercise
Price
$15 to 20
20 to 25
25 to 30
30 to 35
35 to 40
40 to 45
45 to 50
Restricted Common 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 2004, 2003 and 2002, the Company granted 100,000, 71,000 and 58,000 shares, respectively, of restricted Common Stock to employees. At September 30, 2004, 219,400 shares of restricted Common Stock were outstanding.
At September 30, 2004, 2,349,000 shares are available for granting of stock options or issuance of restricted Common Stock.
In November 2004, 139,600 options were granted at an exercise price of $47.64 per share and 109,500 shares of restricted Common Stock were issued.
Stock Purchase Plan
The Company has 761,000 shares of Common Stock available for issuance pursuant to an employee stock purchase plan. April 30, 2005 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 grant or the exercise date, which is one year from the date of grant. The weighted-average fair values of purchase rights granted in 2004, 2003 and 2002, computed using the Black-Scholes option-pricing model, are $9.28, $8.35 and $9.23, respectively.
In 2004, 2003 and 2002 employees purchased 88,000, 76,000 and 63,000 shares, respectively, at a price of $30.25 in 2004, $30.08 in 2003 and $26.44 in 2002.
Income tax expense consists of the following:
Current:
Federal
State
Deferred
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Income tax expense related to continuing operations differs from the amounts computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows:
Computed “expected” income tax expense
Net income of associated companies taxedat dividend rates
The favorable resolution of tax issues reduced income tax expense in 2002 by approximately $10,100,000. The Company has favorably resolved one element of a federal tax claim related to the deductibility of losses on the 1997 sale of a business. Due to the uncertainty of a favorable resolution at the time of sale, the amount claimed was reserved in the Consolidated Financial Statements. The reversal has been recorded in results from continuing operations as a reduction of income tax expense in 2002.
Substantial deferred income tax liabilities were recorded in 2002 as a result of acquisitions. Net deferred income tax liabilities consist of the following components:
Deferred income tax liabilities:
Equity in undistributed earnings of affiliates
Identifiable intangible assets
Deferred income tax assets:
Accrued compensation
Allowance for doubtful accounts
Net deferred income tax liabilities
Net deferred income tax liabilities have been classified in the accompanying Consolidated Balance Sheets as follows:
Less non-current liabilities
A $4,000,000 reduction of income tax expense from changes in estimates related to state income taxes on the sale of broadcasting operations in 2000 and thereafter has been recorded in results from discontinued operations in 2002.
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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, accounts receivable, 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, is carried at fair value based upon quoted market prices. Equity securities totaling $4,871,000, 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 floating rate debt approximates the carrying amount.
The fair value of the Company’s fixed rate 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 fixed rate debt are as follows:
Carrying amount
Fair value
The following table sets forth the computation of basic and diluted earnings per common share:
Income (loss) applicable to common stock:
Weighted average common shares
Less non-vested restricted Common Stock
Basic average common shares
Dilutive stock options and restricted Common Stock
Diluted average common shares
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Compensation and other accrued liabilities related to continuing operations consist of the following:
Retirement and stock purchase plans
Interest
Cash flow information is as follows:
Cash payments for:
Income taxes, net of refunds
Capital expenditures related to discontinued operations
Valuation and qualifying account information related to continuing operations is as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Additions charged to expense
Reserves of businesses acquired or sold
Deductions from reserves
ALLOWANCE FOR LOSSES ON LOANS
Conversion of loans to equity
In 2002, the Company accrued a $1,000,000 contribution to Lee Foundation, the directors of which are officers of the Company. The contribution was paid in 2003. Lee Foundation supports not-for-profit organizations in the communities in which newspapers and other publications of the Company are located. Company officers receive no compensation from Lee Foundation.
Vertis, Inc. (Vertis) provides the Company, in the normal course of business, with an Internet subscription service that allows access to advertising prototypes. Fees paid to Vertis totaled $95,000 in 2004, $112,000 in 2003 and $76,000 in 2002. A director of the Company is an officer of Vertis. In 2003, Vertis
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acquired The Newspaper Network, Inc. (TNN), which is in the business of placing advertising, including advertising in the Company’s newspapers, for its clients. TNN customarily receives fees from its clients for such services, but receives no compensation from the Company.
Newsprint
In 2002, the Company entered into a four-year contract for the annual purchase of 45,000 metric tons of newsprint, at market prices, from a single supplier. The commitment represents approximately one-third of the Company’s annual volume, inclusive of MNI. The commitment is reduced to the extent it exceeds 75% of the Company’s annual usage. The Company has other newsprint commitments, for amounts totaling up to 71,000 metric tons per year, at market prices, with other suppliers, expiring at various dates through 2006.
Operating Leases
The Company has operating lease commitments for certain of its office, production, and distribution facilities. Management expects that in the normal course of business, existing leases will be renewed or replaced by other leases. Minimum lease payments during the five years ending September 2009 and thereafter are $2,462,000, $1,916,000, $1,515,000, $1,156,000, $947,000, and $8,607,000, respectively. Total operating lease expense is $3,279,000, $3,030,000, and $2,542,000, in 2004, 2003, and 2002, respectively.
The Company files income tax returns with the Internal Revenue Service and various state tax jurisdictions. From time to time, the Company is subject to routine audits by those agencies, and those audits may result in proposed adjustments. The primary issues in audits currently in process relate to the appropriate determination of gains, and allocation to the various taxing authorities thereof, on businesses sold in 2001 and 1997. The Company may also be subject to claims for transferee income tax liability related to businesses acquired in 2000. The Company has considered the alternative interpretations that may be assumed by the various taxing agencies, believes its positions taken regarding its filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Income in the periods in which such matters are ultimately determined. The Company does not believe the final resolution of such matters will be material to its consolidated financial position.
Litigation
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related Consolidated Statements of Income, Stockholders’ Equity, and Cash Flows for each of three years in the period ended September 30, 2004. 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 standards of the Public Company Accounting Oversight Board (United States). 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, such Consolidated Financial Statements present fairly, in all material respects, the financial position of Lee Enterprises, Incorporated and subsidiaries at September 30, 2004 and 2003, and the results of their operations and their cash flows for each of three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America.
December 10, 2004
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REPORT OF MANAGEMENT
The management of Lee Enterprises, Incorporated is responsible for the preparation and integrity of all financial statements and other information contained in this Annual Report on Form 10-K. We rely on a system of internal financial and disclosure controls to meet the responsibility of providing accurate financial statements. These controls provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management’s authorization and that the financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
The financial statements for each of the years covered in this Annual Report on Form 10-K have been audited by an independent registered public accounting firm, which has provided an independent assessment as to the fairness of the financial statements, after obtaining an understanding of the Company’s systems and procedures and performing such other audit tests as deemed necessary.
The Audit Committee of the Board of Directors, which is composed solely of directors who are not officers of the Company, meets regularly with management and the independent accounting firm to review the results of their work and to satisfy itself that their respective responsibilities are being properly discharged. The independent accounting firm has full and free access to the Audit Committee and has regular discussions with the Committee regarding appropriate auditing and financial reporting matters.
Vice President, Chief Financial Officer and Treasurer
December 14, 2004
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