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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-0823980
- ------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
215 N. Main Street, Davenport, Iowa 52801
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (319) 383-2100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange On
Title of Each Class Which Registered
- --------------------------------------------------------------------------------
Common Stock - $2.00 par value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
- --------------------
Class B Common Stock $2.00 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of voting stock held by nonaffiliates of the
registrant as of December 1, 1998. Common Stock and Class B Common Stock, $2.00
par value, $1,161,587,000.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 1, 1998. Common Stock, $2.00 par value, 32,787,354
shares; and Class B Common Stock, $2.00 par value, 11,573,584 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement dated
December 29, 1998 are incorporated by reference in Part III of this Form 10-K.
PART I
Item 1. Business
This Annual Report on Form 10-K contains certain forward-looking statements that
are based largely on the Company's current expectations and are subject to
certain risks, trends, and uncertainties that could cause actual results to
differ materially from those anticipated. Among such risks, trends, and
uncertainties are changes in advertising demand, newsprint prices, interest
rates, regulatory rulings, and other economic conditions, and the effect of
acquisitions, investments, and dispositions on the Company's results of
operations or financial condition. The words "believe," "expect," "anticipate,"
"intends," "plans," "projects," "considers," and similar expressions generally
identify forward-looking statements. Readers are cautioned not to place undue
reliance on such forward-looking statements, which are as of the date of this
filing.
Item 1(a) Recent business developments. During the Company's fiscal year ended
September 30, 1998, there were no material developments in the Company's
business.
Item 1(b) Financial information about industry segments. See Note 13 to the
Notes to Financial Statements under Item 8, herein.
Item 1(c) Narrative description of business.
PUBLISHING
The Company and its subsidiaries publish the following:
Daily Newspapers:
Circulation
Newspaper City State Daily(M-F) Sunday
------------------------------------------------------------------------------------------------
Southern Illinoisian Carbondale Illinois 26,672 34,160
Herald & Review Decatur Illinois 38,503 47,502
Star Courier Kewanee Illinois 6,660
Quad City Times Davenport Iowa 51,897 76,838
Globe Gazette Mason City Iowa 20,422 24,525
Muscatine Journal Muscatine Iowa 8,484
The Ottumwa Courier Ottumwa Iowa 18,325
Winona Daily News Winona Minnesota 12,121 12,995
Billings Gazette Billings Montana 50,746 56,387
The Montana Standard Butte Montana 15,104 15,706
Independent Record Helena Montana 13,422 14,201
Missoulian Missoula Montana 31,277 37,721
Lincoln Journal Star Lincoln Nebraska 76,202 83,128
The Bismarck Tribune Bismarck North Dakota 29,740 32,430
Democrat-Herald Albany Oregon 22,222 22,433 *
Ashland Daily Tidings Ashland Oregon 5,251 - -
Corvallis Gazette-Times Corvallis Oregon 13,438 14,950
Rapid City Journal Rapid City South Dakota 30,351 33,931
LaCrosse Tribune LaCrosse Wisconsin 32,722 40,452
Wisconsin State Journal Madison Wisconsin 87,390 159,827
The Journal Times Racine Wisconsin 33,535 34,427
------------------------
Total paid daily and Sunday circulation 624,484 741,613
=======================
Source - Annual Average of Audit Bureau of Circulation (ABC): Average of 6
months ended March 1998 and September 1998. (ABC had not completed its audit of
the September 30, 1998 period as of the date of this report.)
* From date of inception: September 13, 1998.
Weekly Newspapers:
Newspaper City State Day(s) Circulation
----------------------------------------------------------------------------------------------------
Aledo Times Record Aledo Illinois Wednesday 9,016
Bettendorf News Bettendorf Iowa Wednesday 2,600
Big Fork Eagle Big Fork Montana Wednesday 4,500
The Plattsmouth Journal Plattsmouth Nebraska Monday and Thursday 5,000
Mandan News Mandan North Dakota Thursday 1,920
Cottage Grove Sentinel Cottage Grove Oregon Wednesday 4,500
Gresham Outlook Gresham Oregon Wednesday and Saturday 8,814
Lebanon Express Lebanon Oregon Wednesday 3,500
Newport News-Times Newport Oregon Wednesday and Friday 13,948
Sandy Post Sandy Oregon Wednesday 2,006
The Springfield News Springfield Oregon Wednesday and Saturday 11,000
-------------
Total paid weekly circulation 66,804
=============
Source: Company Statistics
The Company owns 50% of the capital stock of Madison Newspapers, Inc. and 17% of
the nonvoting common stock of The Capital Times Company. The Capital Times
Company owns the remaining 50% of the capital stock of Madison Newspapers, Inc.
Madison Newspapers, Inc. owns the Wisconsin State Journal, a morning
newspaper published seven days each week, and The Capital Times, an afternoon
paper published Monday through Saturday each week. Both newspapers are produced
in the printing plant of Madison Newspapers, Inc., which maintains common
advertising, circulation, delivery, and business departments for the two
newspapers.
The Company has a contract to furnish the editorial and news content for the
Wisconsin State Journal. The Wisconsin State Journal is classified as one of the
Lee Group of newspapers in the newspaper field and in the rating services.
Classified Publications:
Publication City State Day(s) Circulation
---------------------------------------------------------------------------------------------------
Prescott Sun Prescott Arizona Wednesday 33,100
Dandy Dime Tucson Arizona Friday 28,500
The Town Crier Aledo Illinois Wednesday 9,016
The Atkinson-Annawan News Atkinson Illinois Thursday 700
Prairie Shopper Decatur Illinois Tuesday 45,063
Thrifty Nickel East Moline Illinois Thursday 11,665
Henry County Advertiser Geneseo Illinois Tuesday 20,300
The Gateway Express Clinton Iowa Wednesday and Friday 6,837
The Advertiser Davenport Iowa Wednesday 28,000
Winnebago/Hancock Shopper Forest City Iowa Monday 12,530
Mason City Shopper Mason City Iowa Tuesday 33,971
The Post Muscatine Iowa Tuesday 20,850
Wapello County Shopper Ottumwa Iowa Wednesday 21,400
Thrifty Nickel Billings Montana Thursday 30,000
Yellowstone Shopper Billings Montana Thursday 47,200
Mini Nickel Bozeman Montana Thursday 22,900
Nickel Saver Butte Montana Thursday 100,000
Western Shopper Deer Lodge Montana Wednesday 4,775
The Trader Dillon Montana Monday 6,183
Consumers Press Great Falls, Montana Thursday 32,969
Life & Times Press Hamilton Montana Wednesday 12,275
The Adit Helena Montana Wednesday 23,519
The Western Montana Messenger Missoula Montana Wednesday 33,000
Nifty Nickel Las Vegas Nevada Thursday 60,000
Penny Saver Albuquerque New Mexico Friday 26,000
Quik Quarter/Thrifty Nickel Albuquerque New Mexico Thursday 34,500
Pennysaver Dickinson North Dakota Wednesday 13,790
The Finder Mandan North Dakota Wednesday 39,161
Nickel Ads Portland Oregon Friday 202,000
Rapid City Advertiser Rapid City South Dakota Wednesday 28,000
Northern Hills Advertiser Spearfish South Dakota Wednesday 21,977
Pioneer Shopper St. George Utah Thursday 27,000
Little Nickel Lynnwood Washington Wednesday and Thursday 320,000
Nickel Saver Moses Lake Washington Thursday 21,500
Nickel Nik Spokane Washington Friday 37,000
Buyline Walla Walla Washington Thursday 2,000
Nickel Ads Wenatchee Washington Thursday 26,500
The Foxxy Shopper LaCrosse Wisconsin Tuesday 33,984
Cover Story Madison Wisconsin Sunday 85,000
Pennysaver Racine Wisconsin Monday 65,000
Foxxy Shopper Sparta Wisconsin Tuesday 42,462
-------------
Total non-paid weekly circulation 1,670,627
=============
Source: Company statistics
Classified publications are weekly advertising publications available in racks
or delivered free by carriers or third-class mail to all households in a
particular geographic area. Classified publications offer advertisers a
cost-effective local advertising system. Classified publications are
particularly effective in large markets with high media fragmentation in which
major metropolitan newspapers generally have low penetration.
Specialty Publications and Other Products and Services:
City State
-----------------------------------------------------------------
Auto Index Prescott Arizona
Cars & Trucks Tuscon Arizona
The Ridge Aledo Illinois
Lee Direct Davenport Iowa
Lee Print Davenport Iowa
Classic Images Muscatine Iowa
International Newspaper Network Big Fork Montana
Quality Information Systems Billings Montana
Western Business Billings Montana
Intermountain Printing and Publishing Deer Lodge Montana
Ag Almanac Great Falls Montana
AutoFinder Missoula Montana
Broadwater Townsend Montana
Home Scene Las Vegas Nevada
Las Vegas Showtime Las Vegas Nevada
Nifty Nickel Cars & Trucks Las Vegas Nevada
Farm & Ranch Guide Bismarck North Dakota
Internet Broadcasting Partners Portland Oregon
Tri-State Neighbor Sioux Falls South Dakota
Value Express Colville Washington
Home Buyer's Guide Spokane Washington
Nickel Nik's RV Wheel Deals Spokane Washington
Nickel Nik's Truck Deals Spokane Washington
Nickel Nik's Wheel Deals Spokane Washington
AgriView Madison Wisconsin
Midwest Messenger Tekamah Nebraska
The Eastman's Journal Thermopolis Wyoming
The Company's strategy is to increase its share of local advertising in its
existing markets, and over time, to increase circulation through internal
expansion into contiguous markets and make selective acquisitions.
The basic raw material of newspapers, classified, and specialty publications is
newsprint. The Company and its subsidiaries purchase newsprint from U.S. and
Canadian producers. The Company believes it will continue to receive a supply of
newsprint adequate to its needs. Newsprint prices are volatile and fluctuate
based upon factors which include both the foreign and domestic production
capacity and consumption. The price fluctuations can have a significant effect
on the results of operations. For the quantitative impacts of these
fluctuations, see "Management Discussion and Analysis of Financial Condition
and Results of perations" under Item 7, herein.
Publishing revenue has traditionally been highest in the quarter ended December
31 and, likewise, has been lowest in the quarter ended March 31.
The Company's newspapers, classified and specialty publications compete with
newspapers having national or regional circulation, magazines, radio,
television, other advertising media such as billboards, classified and specialty
publications and direct mail, as well as other information content providers
such as on-line services. In addition, many of the Company's daily and Sunday
newspapers compete with other newspapers in nearby cities and towns.
BROADCASTING
The Company and its subsidiaries own and operate the following television
stations:
Nielsen DMA
Station Market Ranking
- --------------------------------------------------------------------------------
ABC Affiliate, KGUN-TV - Tucson, Arizona 78
CBS Affiliates:
KOIN-TV - Portland, Oregon 23
KRQE-TV - Albuquerque, New Mexico 49 (1)
KGMB-TV - Honolulu, Hawaii 71 (2)
KMTV - Omaha, Nebraska 73
NBC Affiliates:
WSAZ-TV - Huntington-Charleston, West Virginia 58
KSNW-TV - Wichita, Kansas 65 (3)
KSNT-TV - Topeka, Kansas 140
Telemundo Affiliate, KMAZ-TV - El Paso, Texas 99 (4)
UPN Affiliate, KASY-TV - Albuquerque, New Mexico
(operating under local marketing agreement) 49
(1) Combined DMA rank. KRQE-TV also operates stations KBIM-TV, Roswell, New
Mexico and KREZ-TV, Durango, Colorado.
(2) KGMB-TV also operates stations KGMD-TV, Hilo, Hawaii and KGMV-TV, Maui,
Hawaii.
(3) KSNW-TV also operates stations KSNG-TV, Garden City, Kansas; KSNC-TV, Great
Bend, Kansas; and KSNK-TV, Oberlin, Kansas/McCook, Nebraska.
(4) KZIA-TV changed its call letters to KMAZ-TV effective October 31, 1997.
Affiliation changed from UPN effective January 15, 1998.
Broadcasting revenue has traditionally been highest in the quarter ended
December 31 and, likewise, has been lowest in the quarter ended March 31.
The Company's television stations compete with other over-the-air broadcast
television stations, direct broadcast satellite ("DBS") and cable television,
radio companies, other advertising media such as newspapers, magazines and
billboards, as well as other information content providers such as on-line
services. Competition in the television broadcasting industry occurs primarily
in individual market areas. Generally, a television station in one market does
not compete with other stations in other market areas, nor does a group of
stations, such as those owned by the Company, compete with any other group of
stations as such. DBS and cable television systems in the Company's broadcasting
markets operate on a subscriber payment basis and compete by importing
out-of-market television signals or by originating programming to the extent
permitted or required by present or future rules of the Federal Communications
Commission ("FCC").
The Company's television broadcasting operations are subject to the jurisdiction
of the FCC under the Communications Act of 1934, as amended (the "Act"). The Act
empowers the FCC, among other things, to issue, revoke or modify broadcasting
licenses, to assign frequency bands, to determine the location of stations, to
regulate the apparatus used by stations, to establish areas to be served, to
adopt regulations necessary to carry out the provisions of the Act and to impose
penalties for violation of such regulations. Television licenses are granted for
a maximum period of five years and, upon application, may be renewed for
additional five-year terms. The FCC is required to hold a hearing on a renewal
application if a substantial and material question of fact is raised with
respect to the renewal application, or if for any reason the FCC is unable to
find that the grant of the renewal application would serve the public interest,
convenience and necessity. Renewal of the Company's television licenses has
never been denied and all such licenses are now in full force and effect.
OTHER MATTERS
In the opinion of management, compliance with present statutory and regulatory
requirements respecting environmental quality will not necessitate significant
capital outlays, or materially affect the earning power of the business of the
Company, or cause material changes in the Company's business, whether present or
intended.
In September 1998, the Company, its subsidiaries and associated companies had
approximately 6,100 employees, including approximately 2,100 part-time
employees.
Item 2. Properties
The Company's executive offices are located in facilities leased at 215 North
Main Street, Davenport, Iowa.
All of the printing plants (except Madison which is owned by Madison
Newspapers, Inc.) are owned by the Company. All printing plants
(including Madison) are well maintained, are in good condition, and are
suitable for the present office and publishing operations. Upon
completion of the production facility expansion in Lincoln, Nebraska, the
Company believes all plants will be adequately equipped with typesetting,
printing and other required equipment.
All offices, studios, and transmitter buildings of the broadcasting divisions
are owned or subject to long-term lease by the Company. All of the television
properties are adequately equipped for present operations, and are in good
condition and repair. See Item 7 "Management Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity, Capital Resources and
Commitments" for a discussion of the implementation of digital television
service. Network television programs are received via satellite.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Company
The following table shows the names and ages of all executive officers of the
Company, the period of service for each with the Company, the period during
which each has held his present office and the office held by each.
Period of Service Period In
Name Age With Company Present Office Present Office
- -------------------------------------------------------------------------------------------------------------
Richard D. Gottlieb 56 35 years 7 years President and Chief Executive
Officer
Ronald L. Rickman 60 39 years 1 year President - Publishing Group
Gary N. Schmedding 60 26 years 1 year President - Broadcast Group
Group
Larry L. Bloom 49 5 years 5 years Senior Vice President - Finance,
Treasurer, and Chief
Financial Officer
Greg R. Veon 46 22 years 3 years Vice President - Marketing
Richard F. Anderson 57 1 year 1 year President - The Pacific
Northwest Group
Vytenis P. Kuraitis 50 4 years 2 years Vice President - Human
Resources
Charles D. Waterman, III 52 9 years 9 years Secretary
George C. Wahlig 51 9 years 6 years Vice President - Finance and
Chief Accounting Officer
Gregory P. Schermer 44 10 years 1 year Vice President - Interactive
Media
Ronald L. Rickman was elected President - Publishing Group in November 1997. For
more than five years prior thereto he was Vice President - Publishing Group.
Gary N. Schmedding was elected President - Broadcast Group in November 1997. For
more than five years prior thereto he was Vice President - Broadcast Group.
Greg R. Veon was elected Vice President - Marketing in November 1995; from 1992
through November 1995 he was Vice President and General Manager of KOIN-TV,
Portland, Oregon.
Richard F. Anderson was elected President - The Pacific Northwest Group in
November 1997; from 1992 through September 1997 he was General Manager and
President of The Pacific Northwest Publishing Group for Capital Cities/ABC, Inc.
Vytenis P. Kuraitis was elected Vice President - Human Resources in January
1997. From August 1994 through January 1997 he was Director of Human Resources.
For more than two years prior thereto, he was the National Practice Director for
Executive Compensation for AON.
Charles D. Waterman, III was elected Secretary of the Company in November 1989.
He is presently, and for more than the past five years has been, a partner in
the law firm of Lane & Waterman, Davenport, Iowa, general counsel of the
Company.
Gregory P. Schermer was elected Vice President - Interactive Media in November
1997; from 1989 through November 1997 he was, and continues to serve as,
corporate counsel for the Company.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
COMMON STOCK PRICES AND DIVIDENDS
Lee Common Stock is listed on the New York Stock Exchange. Lee Class B Common
Stock was issued to stockholders of record of the Company in 1986 pursuant to a
100% stock dividend and is converted at sale or the option of the holder into
Lee Common Stock. The table below shows the high and low prices of Lee Common
Stock for each quarter during the past three years, the closing price at the end
of each quarter and the dividends paid per share.
Quarter
--------------------------------------------------
4th 3rd 2nd 1st
--------------------------------------------------
STOCK PRICES
1998:
High ............. $ 31-3/4 $ 33-7/8 $ 33-9/16 $ 29-13/16
Low .............. 23-1/2 27-5/16 28 25-1/2
Closing .......... 25-15/16 30-5/8 33-9/16 29-9/16
1997:
High ............. 29-1/8 27 25-1/8 23-5/8
Low .............. 25 22-3/8 22-3/8 21
Closing .......... 28-3/8 26-3/8 24-1/4 23-1/4
1996:
High ............. 23-5/8 24-3/8 22-3/4 23
Low .............. 19-3/4 20-1/2 20 19-11/16
Closing .......... 22-7/8 23-5/8 21-1/8 23
DIVIDENDS PAID
1998 ............. $ 0.14 $ 0.14 $ 0.14 $ 0.14
1997 ............. 0.13 0.13 0.13 0.13
1996 ............. 0.12 0.12 0.12 0.12
For a description of the relative rights of Common Stock and Class B Common
Stock, see Note 7 of the Notes to Consolidated Financial Statements under Item
8, herein.
At September 30, 1998, the Company had 3,653 holders of Common Stock and 2,283
holders of Class B Common Stock.
Item 6. Selected Financial Data
FIVE YEAR FINANCIAL PERFORMANCE
Year Ended September 30: 1998 1997 1996 1995 1994
----------------------------------------------------
(In Thousands Except Per Share Data)
OPERATIONS
Operating revenue ........... $517,293 $446,686 $427,369 $383,740 $341,241
====================================================
Income from continuing
operations ............... $ 62,233 $ 62,745 $ 53,670 $ 52,232 $ 45,137
Discontinued operations ..... - - - - 7,725 6,227 5,717
Gain (loss) on disposition
of discontinued
operations ............... - - 1,485 (15,948) - - - -
----------------------------------------------------
Net income ....... $ 62,233 $ 64,230 $ 45,447 $ 58,459 $ 50,854
====================================================
PER SHARE AMOUNTS
Weighted average
shares:
Basic .................... 44,829 46,393 46,973 46,053 46,038
Diluted .................. 45,557 47,243 47,899 46,873 46,806
Basic:
Income from continuing
operations ............. $ 1.39 $ 1.35 $ 1.14 $ 1.13 $ 0.98
Discontinued operations .. - - - - 0.16 0.14 0.12
Gain (loss) on disposition
of discontinued
operations ............. - - 0.03 (0.33) - - - -
----------------------------------------------------
Net income ....... $ 1.39 $ 1.38 $ 0.97 $ 1.27 $ 1.10
====================================================
Diluted:
Income from continuing
operations ............. $ 1.37 $ 1.33 $ 1.12 $ 1.12 $ 0.97
Discontinued operations .. - - - - 0.16 0.13 0.12
Gain (loss) on disposition
of discontinued
operations ............. - - 0.03 (0.33) - - - -
----------------------------------------------------
Net income ....... $ 1.37 $ 1.36 $ 0.95 $ 1.25 $ 1.09
====================================================
Dividends ................... $ 0.56 $ 0.52 $ 0.48 $ 0.44 $ 0.42
OTHER DATA
Total assets ................ $660,585 $650,963 $527,416 $559,929 $474,701
Debt, including
current maturities ....... 219,481 203,735 95,503 123,489 130,532
Stockholders' equity ........ 319,759 319,390 324,954 311,042 241,930
Item 7. Management Discussion and Analysis of Financial Condition
and Results of Operations
This Management Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements that are based largely on
the Company's current expectations and are subject to certain risks, trends, and
uncertainties that could cause actual results to differ materially from those
anticipated. Among such risks, trends, and uncertainties are changes in
advertising demand, newsprint prices, interest rates, regulatory rulings, and
other economic conditions and the effect of acquisitions, investments, and
dispositions on the Company's results of operations or financial condition. The
words "believe," "expect," "anticipate," "intends," "plans," "projects,"
"considers," and similar expressions generally identify forward-looking
statements. Readers are cautioned not to place undue reliance on such
forward-looking statements, which are as of the date of this filing.
Operating results are summarized below:
1998 1997 1996
------------------------------
(Dollars in Thousands,
Except Per Share Data)
Operating revenue ....................... $517,293 $446,686 $427,369
Percent change ....................... 15.8% 4.5% 11.4%
Income before depreciation, amortization,
interest and taxes (EBITDA) * ........ 150,423 132,455 122,540
Percent change ....................... 13.6% 8.1% 8.6%
Operating income ........................ 112,847 104,151 94,741
Percent change ....................... 8.3% 9.9% 3.6%
Income from continuing operations ....... 62,233 62,745 53,670
Percent change ....................... (0.8)% 16.9% 2.8%
Earnings per share, continuing operations
Basic ................................ 1.39 1.35 1.14
Percent change .................... 3.0% 18.4% 0.1%
Diluted .............................. 1.37 1.33 1.12
Percent change .................... 3.0% 18.8% --%
* EBITDA is not a financial performance measurement under generally accepted
accounting principles (GAAP), and should not be considered in isolation or a
substitute for GAAP performance measurements. EBITDA is also not reflected in
our consolidated statement of cash flows; but it is a common and meaningful
alternative performance measurement for comparison to other companies in our
industry.
The fiscal 1998 comparisons are significantly affected by the September 8, 1997
acquisition of The Pacific Northwest Group. The Pacific Northwest Group
publishes eight daily and weekly newspapers geographically clustered in Oregon's
Willamette Valley and classified publications in eight markets in the states of
Washington, Oregon, Nevada, and Utah. For additional information related to this
acquisition, see Note 3 of the Notes to Consolidated Financial Statements under
Item 8, herein.
The following unaudited pro forma operating results are as if Lee had owned its
recently acquired properties since October 1, 1996.
1998 1997
---------------------
(Pro Forma Dollars in
Thousands, Except Per
Share Data)
Operating revenue ............................ $517,293 $497,872
Percent change ............................ 3.9%
Income before depreciation, amortization,
interest and taxes ........................ 150,423 146,898
Percent change ............................ 2.4%
Operating income ............................. 112,847 110,241
Percent change ............................ 2.4%
Income from continuing operations ............ 62,233 59,470
Percent change ............................ 4.6%
Earnings per share, continuing operations:
Basic ..................................... 1.39 1.28
Percent change ......................... 8.6%
Basic ..................................... 1.37 1.26
Percent change ......................... 8.7%
PUBLISHING
1998 1997 1996
------------------------------
(Dollars in Thousands)
Operating revenue ....................... $382,894 $318,441 $302,564
Percent change ....................... 20.2% 5.2% 10.1%
Operating income:
Wholly-owned properties .............. 94,159 88,865 75,687
Percent change .................... 6.0% 17.4% 10.7%
Equity in net income ................. 8,367 7,756 7,008
Percent change .................... 7.9% 10.7% (15.3)%
Operating margin, wholly-owned properties 24.6% 27.9% 25.0%
The publishing segment includes newspapers, classified and specialty
publications. Operating revenue consists of the following:
1998 1997 1996
------------------------------
(Dollars in Thousands)
Daily newspapers:
Advertising ............. $195,852 $179,822 $169,151
Percent change ....... 8.9% 6.3% 10.3%
Circulation ............. 81,912 80,522 79,814
Percent change ....... 1.7% 0.9% 9.5%
Other ...................... 105,130 58,097 53,599
Percent change .......... 81.0% 8.4% 10.1%
Exclusive of The Pacific Northwest Group acquisition, advertising revenue
increased 5.0% and 6.0%, circulation revenue (decreased) increased (.6%) and
.7%, and other revenue increased 4.6% and 3.8% in 1998 and 1997, respectively.
The following daily newspaper advertising lineage, circulation volume
statistics, and related revenue results are presented on a pro forma basis for
daily newspapers wholly owned at the end of fiscal 1998.
Changes in advertising units for classified and local advertising, which account
for more than 70% of newspaper advertising revenue, are as follows:
A DVERTISING LINEAGE, IN THOUSANDS OF INCHES (PRO FORMA ):
1998 1997 1996
---------------------------------------
Classified ................... 4,365 4,252 4,067
Percent change ............ 2.7% 4.5% (0.2)%
Local ........................ 5,638 5,630 5,697
Percent change ............ 0.1% (1.2)% (2.3)%
Classified advertising revenue increased approximately 9.7% in 1998, 9.7% in
1997, and 6.5% in 1996. The average rate realized increased 6.9% in 1998, 5.0%
in 1997, and 6.8% in 1996. In 1998 continued significant growth in employment
advertising and growth in real estate advertising offset a small reduction in
automotive advertising. In 1997 significant growth in employment advertising
offset softness in automotive and other advertising. In 1996 automotive
advertising decreased until late in the fiscal year.
Local "run-of-press" advertising is advertising by merchants in the local
community which is printed in the newspaper, rather than "preprints", which are
printed separately by the Company or others and inserted into the newspaper. In
1998 revenue increased 1.3% as the Company offered price incentives in return
for larger or more frequent ads resulting in a .1% increase in local advertising
units. Revenue increased 3.1% in 1997 and 1996 on higher average rates despite
decreases in advertising inches.
Total revenue realized from local and national merchants is increasing despite
the shift from run-of-press advertising to preprints which have lower-priced,
higher-volume distribution rates. Preprint revenue increased 4.8% in 1998, 5.2%
in 1997, and was flat in 1996 due to cutbacks by advertisers during the 1995
holiday season.
In 1998 circulation revenue decreased (.6%) and volume decreased (.7%). Volume
decreases in 1997 continued through the first half of 1998. Intensive promotion
efforts and reduced price offers increased volume above 1997 year-end levels by
the close of the fiscal year. In 1997 and 1996 circulation revenue increased .8%
and 3.8% as a result of higher rates, which offset volume decreases of (2.3%)
and (1.7%), respectively.
Other revenue consists of revenue from weekly newspapers, classified, specialty
publications, commercial printing, products delivered outside the newspaper
(which include activities such as target marketing, special event production,
and on-line service) and editorial service contracts with Madison Newspapers,
Inc.
Other revenue by category and by property is as follows:
1998 1997 1996
------------------------------
(In Thousands)
Weekly newspapers, classified and specialty publications:
Properties owned for entire period ....................... $ 23,927 $ 22,711 $ 21,750
Acquired since September 30, 1995 ........................ 46,363 3,072 485
Commercial printing:
Properties owned for entire period ....................... 13,858 14,351 14,354
Acquired since September 30, 1995 ........................ 947
Products delivered outside the newspaper:
Properties owned for entire period ....................... 11,650 9,928 9,443
Acquired since September 30, 1995 ........................ 17 59
Editorial service contracts ................................. 8,368 7,976 7,567
------------------------------
$105,130 $ 58,097 $ 53,599
==============================
The following table sets forth the percentage of revenue of certain items in the
publishing segment.
1998 1997 1996
------------------------
Revenue .................................................... 100.0% 100.0% 100.0%
------------------------
Compensation costs ......................................... 35.1 34.0 33.8
Newsprint and ink .......................................... 10.7 9.7 12.7
Other operating expenses ................................... 23.1 23.4 23.6
------------------------
68.9 67.1 70.1
------------------------
Income before depreciation, amortization, interest and taxes 31.1 32.9 29.9
Depreciation and amortization .............................. 6.5 5.0 4.9
------------------------
Operating margin wholly-owned properties ................... 24.6% 27.9% 25.0%
========================
Exclusive of the effects of acquisitions, in 1998 costs other than depreciation
and amortization increased 5.2%. Newsprint and ink costs increased 12.2% due to
higher prices for newsprint and greater consumption. Compensation cost increased
5.3% due to an increase in average compensation and hours worked. Other
operating costs increased 2.1%.
Exclusive of the effects of the 1997 acquisitions, in 1997 costs other than
depreciation and amortization decreased (.5%). Newsprint and ink costs decreased
(20.9%) due to lower prices for newsprint. Prices were lower in all four
quarters of 1997 as compared to the same quarters of 1996; however, after
decreases in the first and second quarters, prices increased in the third and
fourth quarters of 1997. Newsprint consumption was flat in 1997 as compared to
1996. Compensation costs increased 4.4% as a result of salary increases. Other
operating costs increased 3.7% due to normal inflationary increases.
Exclusive of the effects of the 1995 acquisitions, in 1996 costs other than
depreciation and amortization increased 3%. Newsprint and ink costs increased
9.4% due to price increases for newsprint. High prices during the first two
quarters of the fiscal year stabilized during the third quarter and were lower
in the fourth quarter of 1996 than the fourth quarter of 1995. Newsprint
consumption was flat in 1996 as compared to 1995, as higher consumption for
commercial printing was offset by conservation efforts by the newspapers.
Compensation costs increased 4% due primarily to salary increases. Other
operating costs did not increase significantly.
BROADCASTING
1998 1997 1996
-------------------------------
(Dollars in Thousands)
Operating revenue ...... $126,032 $120,489 $117,797
Percent change ...... 4.6% 2.3% 17.1%
Operating income ....... 24,948 22,262 22,953
Percent change ...... 12.1% (3.0)% (14.8)%
Operating margin ....... 19.8% 18.5% 19.5%
Revenue for 1998 increased $5,543,000, 4.6%. Local/regional/national revenue
increased $6,834,000 due to winter Olympics advertising in the second quarter
and improved rates realized. Political advertising decreased $1,063,000.
Production revenues and revenues from other sources were flat.
Revenue for 1997 increased $2,692,000, 2.3%. Local/regional/national revenue
increased $1,342,000 while political advertising decreased $244,000. Production
revenue increased $562,000 due to the addition of a second mobile production
facility at MIRA Productions in Portland, Oregon, and revenues from other
services increased $913,000.
In 1996, exclusive of acquisitions, operating revenue decreased (.6%).
Local/regional/national revenue decreased $2,600,000, due to softness in
automotive and retail spot buying. Political advertising increased $1,000,000.
Production revenue increased $760,000, primarily due to a new mobile production
facility at MIRA Productions in Portland, Oregon.
The following table sets forth the percentage of revenue of certain items in the
broadcasting segment.
1998 1997 1996
------------------------
Revenue .................................................... 100.0% 100.0% 100.0%
------------------------
Compensation costs ......................................... 40.9 41.8 39.5
Programming costs .......................................... 6.6 6.6 7.9
Other operating expenses ................................... 23.6 23.4 22.6
------------------------
71.1 71.8 70.0
------------------------
Income before depreciation, amortization, interest and taxes 28.9 28.2 30.0
Depreciation and amortization .............................. 9.1 9.7 10.5
------------------------
Operating margin wholly-owned properties ................... 19.8% 18.5% 19.5%
========================
Operating income increased in 1998 by $2,686,000. Compensation costs increased
$1,092,000, 2.2% due to an increase in the average hourly rate which offset a
decrease in the number of hours worked. Programming costs increased by $462,000,
5.8% due to an increase in the cost of syndicated programs. Other operating
expense increased $1,477,000, 5.2% due to increased costs for promotion,
audience ratings services, and bad debt expense when two advertisers filed for
bankruptcy.
Operating income decreased in 1997 by $691,000. Compensation costs increased
$3,898,000, 8.4% due to an increase in the number of hours worked and an
increase in the average hourly rate. Programming costs decreased by $1,344,000,
(14.5%), due to decreased amortization from programs amortized on an accelerated
basis offset in part by a $400,000 write-down of programming at KMAZ-TV El Paso
due to the January 1998 conversion to a Telemundo affiliate providing Spanish
language programming. Other operating expense increased 5.8% due to the rental
of two news helicopters in 1997 and increased outside services. The primary
driver of the outside services increase is MIRA Productions, which uses contract
labor and rental equipment for special projects.
Exclusive of the effects of acquisitions, operating income decreased by
$6,500,000 or 23.8% in 1996. Compensation costs increased by 5.1% primarily due
to a 6.9% increase in hours worked, mainly due to expanded operations at our New
Mexico locations. Programming costs increased by $2,000,000, 31.8% as a result
of the addition of highly-rated syndicated programming and the write-down of
certain programming to net realizable value. Other operating costs increased
4.2% due to higher expenditures for repairs and maintenance and sales and
audience promotion.
CORPORATE
Corporate costs in 1998 decreased by $105,000, (.7%). Reductions in financial
system installation costs, incentive compensation, and donations were offset by
increases in depreciation and other expenses.
Corporate costs in 1997 increased by $3,800,000, 35.1% as a result of increased
marketing costs and the enhancement of computer software.
Corporate costs in 1996 decreased by $1,300,000, (10.4%) primarily due to
decreased levels of incentive compensation and lower medical plan costs
resulting from a 1995 plan redesign.
INTEREST EXPENSE
Interest expense increased by approximately $6,300,000 in 1998 due to borrowings
to finance The Pacific Northwest Group acquisition. Interest expense decreased
by approximately $1,300,000 in 1997 and $2,300,000 in 1996. The most significant
element of the decreases was a lower debt level which reduced interest expense
by approximately $1,500,000 and $2,400,000, respectively, in 1997 and 1996.
Interest on deferred compensation arrangements for executives and others is
offset by financial income earned on the invested funds held in trust. Financial
income and interest expense increased by $24,000, $1,700,000, and $600,000 in
1998, 1997, and 1996, respectively, as a result of these arrangements.
INCOME TAXES
Income taxes were 37.8% of pretax income in 1998, 38.0% in 1997, and 38.8% in
1996.
DISCONTINUED OPERATIONS
On January 17, 1997, the Company consummated the sale of the capital stock of
its graphic arts products subsidiary, NAPP Systems Inc., for approximately
$55,900,000, net of selling expenses.
The results for NAPP Systems Inc.'s operations have been classified as
discontinued operations for all periods presented in the consolidated statements
of income. The assets and liabilities of discontinued operations have been
classified in the consolidated balance sheet as "net assets of discontinued
operations" as of September 30, 1996. For the year ended September 30, 1996 the
Company recorded an after-tax charge of $15,948,000 which included estimated
earnings and dividends through the closing date. For the year ended September
30, 1997, the Company recorded an after-tax gain of $1,485,000 due to higher
than estimated earnings and dividends through the closing date. For additional
information related to the disposition, see Note 2 of the Notes to Consolidated
Financial Statements under Item 8, herein.
LIQUIDITY, CAPITAL RESOURCES AND COMMITMENTS
Cash provided by operations totaled $100,739,000 in 1998. The Company has
$50,000,000 available under a revolving credit arrangement with banks which
expires in 2003. The major sources and uses of cash in 1998 were as follows:
(In
Thousands)
Sources of cash:
Operations ................................................... $100,739
Long-term borrowings ......................................... 185,000
All other .................................................... 2,256
--------
287,995
--------
Uses of cash:
Acquisitions ................................................. 11,944
Purchase of property and equipment ........................... 26,725
Cash dividends paid .......................................... 25,160
Purchase of Lee Enterprises, Incorporated stock .............. 51,388
Payment of debt .............................................. 170,000
--------
285,217
--------
Increase in cash .................................. $ 2,778
========
The Company generally finances significant acquisitions by long-term borrowings.
Recurring capital expenditures for new and improved facilities and equipment are
expected to be about $20,000,000 in 1999. The FCC has required implementation of
digital television ("DTV") service which includes high definition television
systems. Implementation of DTV service will impose substantial additional costs
on television stations to provide the new service due to increased equipment
costs. KOIN-TV in Portland, Oregon is required by the FCC to broadcast a digital
TV signal by November 1999. The Company has plans to spend approximately
$2,000,000 in fiscal 1999 for DTV conversion. The Company has not completed its
assessment of the balance of the capital expenditures required or the benefits
to the Company of converting to DTV. Consequently, the Company cannot at this
time predict the impact this conversion will have on liquidity, capital
resources, and results of operations.
The Company also is in the process of building a new production facility for the
Journal-Star in Lincoln, Nebraska. The total cost is expected to be
approximately $32,000,000 and will be completed in fiscal 2000. Approximately
$7,000,000 has been spent through September 30, 1998 on this project and
spending in fiscal 1999 is expected to be approximately $14,000,000. Also the
Company intends to spend approximately $2,000,000 in fiscal 1999 for expanded
commercial printing facilities. The Company anticipates that funds necessary for
capital expenditures and other requirements will be available from internally
generated funds and the Company's revolving credit agreements.
DIVIDENDS AND COMMON STOCK PRICES
The current quarterly cash dividend is 15 cents per share, an annual rate of 60
cents.
During the fiscal year ended September 30, 1998, the Company paid dividends of
$25,160,000 or 40.1% of 1998's earnings from continuing operations. The Company
will continue to review its dividend policy to assure that it remains consistent
with its capital demands. Covenants under borrowing arrangements are not
considered restrictive to payment of dividends. Lee Common Stock is listed on
the New York Stock Exchange. The table under Item 5 herein shows the high and
low prices of Lee Common Stock for each quarter during the past three years. It
also shows the closing price at the end of each quarter and the dividends paid
in the quarter.
INFLATION
The net effect of inflation on operations has not been material in the last
several years because of efforts by the Company to lessen the effect of rising
costs through a strategy of improving productivity, controlling costs and, where
conditions permit, increasing selling prices.
EMERGING ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
and Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information". Statement No. 130 establishes standards for reporting
comprehensive income in financial statements. Statement No. 131 expands certain
reporting and disclosure requirements for segments from current standards. The
Statements are effective for fiscal years beginning after December 15, 1997 and
the Company does not expect the adoption of these new standards to result in
material changes to previously reported amounts or disclosures.
YEAR 2000
The Year 2000 Issue concerns the inability of information technology (IT)
systems and equipment utilizing microprocessors to recognize and process
date-sensitive information after 1999 due to the use of only the last two digits
to refer to a year. This problem could affect both computer software and
hardware and other equipment that relies on microprocessors. Management has
completed a company-wide evaluation of this impact on its IT systems. Evaluation
of date-sensitive publishing equipment is expected to be complete by December
31, 1998 with the evaluation of broadcasting equipment expected to be complete
by March 31, 1999. Renovation and testing have been completed on all significant
IT systems that utilize company-developed software that were not Year 2000
compliant with the exception of the newspaper advertising system. That system
has been renovated and is currently being tested. Installation of the renovated
advertising system is scheduled to be complete by January 31, 1999. The Company
has received representations that significant software developed by others is
Year 2000 compliant. Testing of these systems is expected to be complete by
March 31, 1999. Installation of a new Year 2000-compliant financial system is
approximately 70% complete and is planned to be complete by July 31, 1999.
Testing of computer hardware for IT systems is approximately 90% complete.
Renovation efforts and testing of systems/equipment are expected to be complete
by June 30, 1999.
The Company will monitor the progress of material vendors and suppliers whose
uninterrupted delivery of product or service is material to the production or
distribution of our print and broadcast products in their efforts to become Year
2000 compliant. Material vendors and suppliers include electric utilities,
telecommunications, news and content providers, television networks, other
television programming suppliers, the U.S. Postal Service, and financial
institutions.
From September 30, 1994 through September 30, 1998, the Company has spent
approximately $500,000 to address Year 2000 issues for IT systems (exclusive of
the cost of the new financial, newspaper production and other systems that were
scheduled to be replaced before the year 2000 for reasons other than Year 2000
compliance). Total costs to address Year 2000 issues for IT systems are
currently estimated to be less than $1,000,000 and consist primarily of staff
and consultant costs. Year 2000 remediation will require the replacement of
telephone switches and software at a cost of $600,000 to $1,000,000. Through
September 30, 1998 approximately $300,000 had been spent for new telephone
equipment. An estimate of the cost of replacement of newspaper and broadcasting
equipment will be available after the completion of the evaluations described
above. Funds for these costs are expected to be provided by the operating cash
flows or bank line of credit of the Company.
The Company could be faced with severe consequences if Year 2000 issues are not
identified and resolved in a timely manner by the Company and material
third-parties. A worst-case scenario would result in the short-term inability of
the Company to produce/distribute newspapers or broadcast television programming
due to unresolved Year 2000 issues. This would result in lost revenues; however,
the amount would be dependent on the length and nature of the disruption, which
cannot be predicted or estimated. In light of the possible consequences, the
Company is devoting the resources needed to address Year 2000 issues in a timely
manner. Management monitors the progress of the Company's Year 2000 efforts and
provides update reports to the audit committee of the Board of Directors at each
meeting. While management expects a successful resolution of these issues, there
can be no guarantee that material third-parties, on which the Company relies,
will address all Year 2000 issues on a timely basis or that their failure to
successfully address all issues would not have an adverse effect on the Company.
The Company is in the process of reviewing its existing contingency plans in
case business interruptions do occur. Management expects the review of these
plans to be complete by June 30, 1999.
QUARTERLY RESULTS
The Company's largest source of publishing revenue, local run-of-press
advertising, is seasonal and tends to fluctuate with retail sales in markets
served. Historically, local run-of-press advertising is higher in the first and
third quarters. Newspaper classified advertising revenue (which includes real
estate and automobile ads) and broadcasting revenue are lowest in January and
February, which are included in our second fiscal quarter.
Quarterly results of operations are summarized under Item 8, herein.
Item 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------------
1998 1997 1996
----------------------------
(Dollars in Thousands)
ASSETS
Current Assets:
Cash and cash equivalents ................................ $ 16,941 $ 14,163 $ 19,267
Trade receivables, less allowance for doubtful
accounts 1998 $4,110; 1997 $4,600;
1996 $4,000 ........................................... 60,443 56,960 48,773
Receivables from associated companies .................... 1,437 1,437 1,438
Inventories .............................................. 3,878 3,716 3,668
Program rights and other ................................. 16,892 17,691 17,183
Net assets of discontinued operations .................... - - - - 56,379
----------------------------
Total current assets .......................... 99,591 93,967 146,708
----------------------------
Investments:
Associated companies ..................................... 14,107 12,185 11,488
Other .................................................... 12,364 12,506 10,668
----------------------------
26,471 24,691 22,156
----------------------------
Property and Equipment:
Land and improvements .................................... 13,856 12,994 10,140
Buildings and improvements ............................... 65,945 64,937 57,995
Equipment ................................................ 219,491 194,510 173,752
----------------------------
299,292 272,441 241,887
Less accumulated depreciation ............................ 170,920 152,415 137,182
----------------------------
128,372 120,026 104,705
----------------------------
Intangibles and Other Assets:
Intangibles .............................................. 398,111 404,481 246,061
Other .................................................... 8,040 7,798 7,786
----------------------------
406,151 412,279 253,847
----------------------------
$660,585 $650,963 $527,416
============================
See Notes to Consolidated Financial Statements.
September 30,
--------------------------------
1998 1997 1996
--------------------------------
(Dollars In Thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current maturities of long-term
debt .................................................. $ 33,453 $177,561 $ 43,213
Accounts payable ......................................... 14,277 23,429 15,369
Compensation and other accruals .......................... 26,966 27,324 20,419
Income taxes payable ..................................... 6,475 4,754 4,738
Unearned income .......................................... 16,890 15,840 14,038
--------------------------------
Total current liabilities ..................... 98,061 248,908 97,777
--------------------------------
Long-Term Debt, net of current maturities ................... 186,028 26,174 52,290
--------------------------------
Deferred Items:
Retirement and compensation .............................. 13,117 13,948 11,611
Income taxes ............................................. 43,620 42,543 40,784
--------------------------------
56,737 56,491 52,395
--------------------------------
Stockholders' Equity:
Capital stock:
Serial convertible preferred, no par value;
authorized 500,000 shares; issued none
Common, $2 par value; authorized
60,000,000 shares; issued and outstanding
1998 32,572,000 shares .............................. 65,144 66,719 68,578
Class B, common, $2 par value; authorized
30,000,000 shares; issued and outstanding
1998 11,778,000 shares .............................. 23,556 24,298 25,466
Additional paid-in capital ............................... 28,715 25,629 20,189
Unearned compensation .................................... (650) (493) (637)
Retained earnings ........................................ 202,994 203,237 211,358
--------------------------------
319,759 319,390 324,954
--------------------------------
$660,585 $650,963 $527,416
================================
CONSOLIDATED STATEMENTS OF INCOME
Year Ended September 30,
--------------------------------
1998 1997 1996
--------------------------------
(In Thousands Except
Per Share Data)
Operating revenue:
Publishing:
Daily newspapers:
Advertising ............................ $195,852 $179,822 $169,151
Circulation ............................ 81,912 80,522 79,814
Other .................................... 105,130 58,097 53,599
Broadcasting ................................ 126,032 120,489 117,797
Equity in net income of associated companies 8,367 7,756 7,008
--------------------------------
517,293 446,686 427,369
--------------------------------
Operating expenses:
Compensation costs .......................... 192,755 165,547 153,076
Newsprint and ink ........................... 41,165 30,906 38,535
Depreciation ................................ 19,662 17,175 16,236
Amortization of intangibles ................. 17,914 11,129 11,563
Other ....................................... 132,950 117,778 113,218
--------------------------------
404,446 342,535 332,628
--------------------------------
Operating income ................. 112,847 104,151 94,741
--------------------------------
Financial (income) expense:
Interest expense ............................ 14,611 8,321 9,648
Financial (income) .......................... (1,896) (5,392) (2,609)
--------------------------------
12,715 2,929 7,039
--------------------------------
Income from continuing operations
before taxes on income ........... 100,132 101,222 87,702
Income taxes ................................... 37,899 38,477 34,032
--------------------------------
Income from continuing operations 62,233 62,745 53,670
--------------------------------
Discontinued operations:
Income from discontinued operations, net of
income tax effect ........................ - - - - 7,725
Gain (loss) on disposition of discontinued
operations, net of income tax effect ..... - - 1,485 (15,948)
--------------------------------
- - 1,485 (8,223)
--------------------------------
Net income ....................... $ 62,233 $ 64,230 $ 45,447
================================
Earnings per share:
Basic:
Income from continuing operations ........ $ 1.39 $ 1.35 $ 1.14
Income (loss) from discontinued operations - - 0.03 (0.17)
--------------------------------
Net income ....................... $ 1.39 $ 1.38 $ 0.97
================================
Diluted:
Income from continuing operations ........ $ 1.37 $ 1.33 $ 1.12
Income (loss) from discontinued operations - - 0.03 (0.17)
--------------------------------
Net income ....................... $ 1.37 $ 1.36 $ 0.95
================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended September 30,
--------------------------------------------------------------------
Amount Shares
-------------------------------- -------------------------------
1998 1997 1996 1998 1997 1996
-------------------------------- -------------------------------
(In Thousands Except Per Share Data)
Common Stock:
Balance, beginning .......... $ 66,719 $ 68,578 $ 68,396 33,359 34,289 34,198
Conversion from Class B
Common Stock ........... 649 1,131 862 325 565 431
Shares issued ............ 286 474 404 143 237 202
Shares reacquired ........ (2,510) (3,464) (1,084) (1,255) (1,732) (542)
-------------------------------- -------------------------------
Balance, ending ............. $ 65,144 $ 66,719 $ 68,578 32,572 33,359 34,289
================================ ===============================
Class B Common Stock:
Balance, beginning .......... $ 24,298 $ 25,466 $ 26,336 12,149 12,733 13,168
Conversion to Common
Stock .................. (649) (1,131) (862) (325) (565) (431)
Shares reacquired ........ (93) (37) (8) (46) (19) (4)
-------------------------------- -------------------------------
Balance, ending ............. $ 23,556 $ 24,298 $ 25,466 11,778 12,149 12,733
================================ ===============================
Additional Paid-In Capital:
Balance, beginning .......... $ 25,629 $ 20,189 $ 17,404
Shares issued ............ 3,086 5,440 2,785
--------------------------------
Balance, ending ............. $ 28,715 $ 25,629 $ 20,189
================================
Unearned Compensation:
Balance, beginning .......... $ (493) $ (637) $ (533)
Restricted shares issued . (714) (405) (637)
Restricted shares canceled 7 59 4
Amortization ............. 550 490 529
--------------------------------
Balance, ending ............. $ (650) $ (493) $ (637)
================================
Retained Earnings:
Balance, beginning .......... $203,237 $211,358 $199,439
Net income ............... 62,233 64,230 45,447
Cash dividends per share
1998 $.56; 1997 $.52;
1996 $.48; ............. (25,160) (24,173) (22,603)
Shares reacquired ........ (37,316) (48,178) (10,925)
--------------------------------
Balance, ending ............. $202,994 $203,237 $211,358
================================
Stockholders' Equity ........... $319,759 $319,390 $324,954 44,350 45,508 47,022
================================ ===============================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
--------------------------------
1998 1997 1996
--------------------------------
(In Thousands)
Cash Provided by Operating Activities:
Net income ........................................ $ 62,233 $ 64,230 $ 45,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 37,576 29,581 32,159
(Gain) loss on disposition of discontinued
operations ................................... (1,985) 14,563
Distributions less than earnings of associated
companies .................................... (1,922) (696) (734)
Change in assets and liabilities, net of effects
from business acquisitions:
(Increase) in receivables .................... (3,131) (2,817) (1,347)
Decrease in inventories, program rights and
other .................................... 1,427 1,552 768
Increase (decrease) in accounts payable,
accrued expenses and unearned income ..... 2,370 3,144 (9,446)
Increase in income taxes payable ............. 1,721 516 2,067
Other, primarily deferred items .............. 465 4,021 4,066
--------------------------------
Net cash provided by operating
activities ............................. 100,739 97,546 87,543
--------------------------------
Cash (Required for) Investing Activities:
Acquisitions ...................................... (11,944) (188,689) - -
Purchase of property and equipment ................ (26,725) (16,342) (18,796)
Purchase of temporary investments ................. - - - - (200)
Proceeds from maturities of temporary
investments .................................... - - - - 400
Proceeds from sale of subsidiary .................. - - 54,795 - -
Other ............................................. (952) (1,838) (2,089)
--------------------------------
Net cash (required for) investing
activities ............................. (39,621) (152,074) (20,685)
--------------------------------
Cash Provided by (Required for) Financing Activities:
Purchase of common stock .......................... (51,388) (41,055) (11,917)
Cash dividends paid ............................... (25,160) (24,173) (22,603)
Proceeds from long-term borrowings ................ 185,000 - - - -
Proceeds from (payments on) short-term
notes payable, net ............................. (145,000) 130,000 - -
Principal payments on long-term borrowings ........ (25,000) (21,219) (26,209)
Other ............................................. 3,208 5,871 2,455
--------------------------------
Net cash provided by (required for)
financing activities ................... $(58,340) $ 49,424 $(58,274)
--------------------------------
Net increase (decrease) in cash and cash
equivalents ............................ $ 2,778 $ (5,104) $ 8,584
Cash and cash equivalents:
Beginning ......................................... 14,163 19,267 10,683
--------------------------------
Ending ............................................ $ 16,941 $ 14,163 $ 19,267
================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Nature of Business and Significant Accounting Policies
Nature of business:
The Company has two principal businesses: publishing and broadcasting. As of
September 30, 1998, operating divisions and associated companies publish
twenty-one daily and eleven weekly newspapers, forty-one classified and
twenty-seven specialty publications, and operate nine full-service
network-affiliated television stations and seven satellite television
stations.
Significant accounting policies:
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany items have been eliminated.
INVENTORIES: Newsprint inventories are priced at the lower of cost or market
with cost being determined primarily by the last-in, first-out method.
Newsprint inventories as of September 30, 1998, 1997, and 1996 were less than
replacement cost by $4,815,000, $4,856,000, and $5,087,000, respectively.
PROGRAM RIGHTS: Cost of program rights is stated at the lower of cost or
estimated net realizable value. The total cost of the rights is recorded as
an asset and a liability when the program becomes available for broadcast.
Cost of program rights is charged to operations primarily on accelerated
bases related to the usage of the program. The current portion of program
rights represents those rights that will be amortized in the succeeding year.
INVESTMENTS: Investments in the common stock or joint venture capital of
associated companies are reported at cost plus the Company's share of
undistributed earnings since acquisition, less amortization of intangibles.
Long-term loans to associated companies are included in investments in
associated companies.
Other investments primarily consist of various securities held in trust under
a deferred compensation arrangement. These investments are classified as
trading securities and carried at fair value with gains and losses reported
in the consolidated statements of income.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost. Equipment,
except for printing presses and broadcast towers, is depreciated primarily by
declining-balance methods. The straight-line method is used for all other
assets. The estimated useful lives in years are as follows:
Years
--------------
Buildings and improvements 5-25
Publishing:
Printing presses 15-20
Other major equipment 3-11
Broadcasting:
Towers 15-20
Other major equipment 3-10
The Company capitalizes interest as part of the cost of constructing major
facilities.
INTANGIBLES: Intangibles include covenants not to compete, consulting
agreements, customer lists, broadcast licenses and agreements, newspaper
subscriber lists, and the excess costs over fair value of net assets of
businesses acquired.
The excess costs over fair value of net tangible assets include $21,510,000
incurred prior to October 31, 1970, which is not being amortized. Excess
costs related to specialty publications are being amortized over 10 to 15
year periods. Intangibles, representing non-compete covenants, consulting
agreements, customer lists, broadcast licenses and agreements, and newspaper
subscriber lists are being amortized over periods of 3 to 40 years. The
remaining costs are being amortized over a period of 40 years. All
intangibles are amortized by the straight-line method.
The Company reviews its intangibles and other long-lived assets annually to
determine potential impairment. In performing the review, the Company
estimates the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount
of the asset, an impairment is recognized. The amount of impairment is
measured based upon projected discounted future cash flows using a discount
rate reflecting the Company's average cost of funds.
Unearned income: Unearned income arises as a normal part of business from
advance subscription payments for newspapers. Revenue is recognized in the
period in which it is earned.
ADVERTISING costs: Advertising costs, which are not material, are expensed as
incurred.
INCOME TAXES: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
loss carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128 "Earnings Per Share". Statement No. 128 replaced the
previously reported primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to Statement No. 128 requirements.
CASH AND CASH EQUIVALENTS: For the purpose of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less at date of acquisition to be cash
equivalents.
RESTRICTED STOCK: The Company amortizes as compensation cost the value of
restricted stock, issued under a long-term incentive plan, by the
straight-line method over the three year restriction period.
Note 2. Discontinued Operations
On January 17, 1997 the Company sold the capital stock of its graphic arts
products subsidiary, NAPP Systems Inc., for approximately $55,900,000, net of
selling expenses. The results for NAPP Systems Inc.'s operations have been
classified as discontinued operations for all periods presented in the
consolidated statements of income. The assets and liabilities of discontinued
operations have been classified in the consolidated balance sheet as "net assets
of discontinued operations" as of September 30, 1996.
Summary operating results of discontinued operations are as follows:
1997 1996
------------------
(In Thousands)
Revenue ...................................... $ - - $65,552
Costs and expenses ........................... - - 51,040
------------------
Income before income taxes ................... - - 14,512
Provision for income taxes ................... - - 6,787
------------------
Income, net of tax ............. - - 7,725
------------------
Gain (loss) on disposition before income taxes 1,985 (14,563)
Provision for income taxes ................... 500 1,385
------------------
Gain (loss) on disposition ..... 1,485 (15,948)
------------------
Income (loss) from discontinued
operations ..................... $ 1,485 $(8,223)
==================
Net assets of discontinued operations as of September 30, 1996 are as follows
(in thousands):
Accounts receivable, net ...................................... $ 9,720
Inventories ................................................... 12,606
Other ......................................................... 206
Property and equipment, net ................................... 4,996
Intangibles, net .............................................. 52,777
-------
Total ........................................... 80,305
-------
Accrued loss on disposal ...................................... 14,563
Deferred income taxes ......................................... 1,104
Other liabilities ............................................. 6,683
Long-term debt ................................................ 1,427
Deferred compensation ......................................... 149
-------
23,926
-------
Net assets of discontinued
operations ...................................... $56,379
=======
Note 3. Acquisitions
On September 8, 1997, the Company acquired, for cash, 100% of the outstanding
stock of Southern Utah Media, Inc. (now known as The Pacific Northwest
Publishing Group, Inc.), Oregon News Media, Inc., and Nevada Media, Inc.
(collectively referred to as The Pacific Northwest Group). The Pacific Northwest
Group publishes daily and weekly newspapers and classified publications. The
total acquisition cost was $186,253,000. The excess of the total acquisition
cost, over the fair value of the net assets acquired, was $166,916,000.
The acquisition has been accounted for as a purchase, and the results of
operations of The Pacific Northwest Group since the date of acquisition are
included in the consolidated financial statements.
Unaudited pro forma consolidated results of operations for the year ended
September 30, 1997, as though The Pacific Northwest Group had been acquired as
of October 1, 1996 follows:
Year Ended
September 30,
1997
----------------
(In Thousands,
Except Per
Share Data)
Operating revenue $494,764
Income from continuing operations 59,703
Earnings per share, continuing operations:
Basic 1.29
Diluted 1.26
The above amounts reflect adjustments for amortization of intangibles,
additional depreciation on revalued purchased assets, and imputed interest on
borrowed funds.
The Company also acquired five classified or specialty publications and one
commercial printer in 1998 and five classified or specialty publications in
1997.
The purchase price of business acquisitions was allocated as follows:
Year Ended
September 30,
--------------------
1998 1997
--------------------
(In Thousands)
Noncash working capital acquired ............ $ 377 $ 2,897
Property and equipment ...................... 1,326 16,278
Intangibles ................................. 11,485 169,554
Other long-term assets ...................... - - 10
Issuance of note payable .................... (1,194) (50)
Deferred items .............................. (50) - -
--------------------
Total cash purchase price ..... $ 11,944 $188,689
====================
Note 4. Investments in Associated Companies
The Company has a 50% ownership interest in Madison Newspapers, Inc., a
newspaper publishing company operating in Madison, Wisconsin, and interests in
other ventures, including marketing and Internet services.
Summarized financial information of the associated companies is as follows:
Combined Associates 1998 1997 1996
- ------------------------------------------------------------------------------------
(In Thousands)
ASSETS
Current assets .......................................... $25,867 $23,854 $23,470
Investments and other assets ............................ 5,966 5,700 3,912
Property and equipment, net ............................. 10,204 9,730 6,741
-------------------------
$42,037 $39,284 $34,123
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities ..................................... $14,510 $14,792 $11,778
Long-term debt .......................................... 661 435 515
Stockholders' equity .................................... 26,866 24,057 21,830
-------------------------
$42,037 $39,284 $34,123
=========================
Revenue ................................................. $85,436 $79,677 $73,016
Income before depreciation, amortization, interest,
and income taxes ..................................... 29,434 26,895 23,663
Operating income ........................................ 26,553 24,732 21,962
Net income .............................................. 16,738 15,517 14,016
Receivables from associated companies consist of dividends. Certain information
relating to Company investments in these associated companies is as follows:
1998 1997 1996
-----------------------------
(In Thousands)
Share of:
Stockholders' equity ............ $13,433 $12,028 $10,915
Undistributed earnings .......... 13,281 11,568 10,574
Note 5. Debt
The Company has a $50,000,000 unsecured revolving loan agreement with a bank
group which expires in 2003. Interest rates float at rates specified in the
agreement. There were no borrowings under this agreement at September 30, 1998.
The Company has long-term obligations, net of current maturities, as follows:
September 30,
-----------------------------
1998 1997 1996
-----------------------------
(In Thousands)
Insurance companies senior notes payable,
6.14% to 6.64%, due in varying amounts
from 2001 to 2013 .................................... $185,000 $ - - $ - -
Insurance company senior notes payable,
effective rate of 9.96%, $25,000,000
due January 1999 ..................................... - - 25,000 50,000
Program contracts, noninterest bearing, due
through 2002 ......................................... 1,028 1,174 2,290
-----------------------------
$186,028 $ 26,174 $ 52,290
=============================
Aggregate maturities during the next five years are $33,453,000, $689,000,
$11,814,000, $11,725,000, and $11,600,000. Covenants under these agreements are
not considered restrictive to normal operations or anticipated stockholder
dividends.
Note 6. Retirement and Compensation Plans
Substantially all the Company's employees are covered by a qualified defined
contribution retirement plan. The Company has other retirement and compensation
plans for executives and others. Retirement and compensation plan costs,
including interest on deferred compensation costs, charged to operations were
$10,400,000 in 1998, $10,300,000 in 1997, and $11,200,000 in 1996.
Note 7. Common Stock, Class B Common Stock, and Preferred Stock Purchase Rights
Class B Common Stock has ten votes per share on all matters and generally votes
as a class with Common Stock (which has one vote per share). The transfer of
Class B Common Stock is restricted; however, Class B Common Stock is at all
times convertible into shares of Common Stock on a share-for-share basis. Common
Stock and Class B Common Stock have identical rights with respect to cash
dividends and upon liquidation. All outstanding Class B Common Stock converts to
Common Stock when the shares of Class B Common Stock total less than 5,600,000
shares.
On May 7, 1998, the Board of Directors adopted a Shareholder Rights Plan (Plan).
Under the Plan, the Board declared a dividend of one Preferred Share Purchase
Right (Right) for each outstanding Common and Class B Common share (Common
Shares) of the Company. The Rights are attached to and automatically trade with
the outstanding shares of the Company's Common Stock.
The Rights will become exercisable only in the event that any person or group of
affiliated persons becomes a holder of 20% or more of the Company's outstanding
Common Shares, or commences a tender or exchange offer which, if consummated,
would result in that person or group of affiliated persons owning at least 20%
of the Company's outstanding Common Shares. Once the Rights become exercisable,
they entitle all other shareholders to purchase, by payment of a $150 exercise
price, one one-thousandth of a share of Series A Participating Preferred Stock,
subject to adjustment, with a value of twice the exercise price. In addition, at
any time after a 20% position is acquired and prior to the acquisition of a 50%
position, the Board of Directors may require, in whole or in part, each
outstanding Right (other than Rights held by the acquiring person or group of
affiliated persons) to be exchanged for one share of Common Stock or one
one-thousandth of a share of Series A Preferred Stock. The Rights may be
redeemed at a price of $0.001 per Right at any time prior to their expiration on
May 31, 2008.
Note 8. Stock Option, Restricted Stock, and Stock Purchase Plans
At September 30, 1998, the Company has three stock-based compensation plans
which are described below. As permitted under generally accepted accounting
principles, grants under those plans are accounted for following APB Opinion No.
25 and related interpretations. Accordingly, no compensation cost has been
recognized for grants under the stock option or the stock purchase plans. Had
compensation costs for all of the stock-based compensation plans been determined
based on the grant date fair values of awards (the method described in FASB
Statement No. 123), reported net income and earnings per common share would have
been reduced to the pro forma amounts shown below:
1998 1997 1996
-----------------------------
(Thousands, Except
Per Share Data)
Net income:
As reported ............ $62,233 $64,230 $45,447
Pro forma .............. 60,945 63,180 44,919
Earnings per share:
Basic:
As reported ......... 1.39 1.38 0.97
Pro forma ........... 1.36 1.36 0.96
Diluted:
As reported ......... 1.37 1.36 0.95
Pro forma ........... 1.34 1.34 0.94
The pro forma effects of applying Statement No. 123 are not indicative of future
amounts since, among other reasons, the pro forma requirements of the Statement
have been applied only to options granted after October 1, 1995.
Stock option and restricted stock plans:
The Company has reserved 5,729,000 shares of common stock for issuance to key
employees under incentive and nonstatutory stock option plans and a
restricted stock plan approved by stockholders. Options have been granted at
a price equal to the fair market value on the date of grant, and are
exercisable in cumulative installments over a ten year period. The fair value
of each grant is estimated at the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions for
grants in 1998, 1997, and 1996, respectively: dividend rates of 1.95%, 2.22%,
and 2.22%; price volatility of 14.5%, 16.5%, and 19.5%; risk-free interest
rates based upon the life of the option ranging from 5.29% to 5.77%, 5.89% to
6.67%, and 5.46% to 6.55%; and expected lives based upon the life of the
option ranging from 2.5 to 8 years.
A summary of the stock option plans is as follows:
Number of Shares
--------------------------------
1998 1997 1996
--------------------------------
(In Thousands)
Under option, beginning of year ......... 1,509 2,279 2,220
Granted .............................. 190 155 241
Terminated and canceled .............. (5) (8) (3)
Exercised ............................ (203) (917) (179)
-------------------------------
Under option, end of year ............... 1,491 1,509 2,279
===============================
Options exercisable, end of year ........ 978 1,192 1,861
===============================
Average Price
---------------------------
1998 1997 1996
---------------------------
Granted during the year ................ $ 27.18 $ 22.20 $ 19.96
Exercised during the year .............. 15.88 13.64 12.64
Under option, end of year .............. 17.15 15.82 14.52
Weighted-average fair value per
option of options granted ........... 6.95 5.71 5.47
A further summary of options outstanding as of September 30, 1998 is as follows:
Options Outstanding
-----------------------------------------
Weighted- Options Exercisable
Average ----------------------------
Number Remaining Weighted- Number Weighted-
Outstanding Contractual Average Exercisable Average
Range of (In Life Exercise (In Exercise
Exercise Prices Thousands) (In Years) Price Thousands) Price
-------------------------------------------------------------------------------------------------
$11 to $14 353 2.7 $ 11.01 353 $ 11.01
$15 to $20 821 4.6 16.76 589 16.13
$20 to $22 124 7.4 21.46 14 21.19
$25 to $29 175 9.0 26.64 4 27.36
$30 to $34 18 4.2 32.36 18 32.36
--------------- --------------
1,491 4.9 17.15 978 14.70
=============== ==============
Restricted stock is subject to an agreement requiring forfeiture by the employee
in the event of termination of employment within three years of the grant date
for reasons other than normal retirement, death or disability. In 1998, 1997,
and 1996, the Company granted 26,000, 18,000, and 32,000, respectively, of
restricted stock to employees. As of September 30, 1998, 70,000 shares of
restricted stock were outstanding.
At September 30, 1998, 4,238,000 shares were available for granting of stock
options or issuance of restricted stock.
Stock purchase plan:
The Company has 1,293,000 additional shares of common stock available for
issuance pursuant to an employee stock purchase plan. April 30, 1999 is the
exercise date for the current offering. The purchase price is the lower of 85%
of the fair market value at the date of the grant or the exercise date which is
one year from the date of the grant. The weighted-average fair value per share
of purchase rights granted in 1998, 1997, and 1996 computed using the
Black-Scholes option-pricing model was $6.65, $5.28, and $4.92, respectively.
In 1998, 1997, and 1996 employees purchased 95,000, 106,000, and 124,000 shares,
respectively, at a per share price of $20.98 in 1998, $19.02 in 1997, and $15.26
in 1996.
Note 9. Income Tax Matters
Components of income tax expense consist of the following:
Year Ended September 30,
-------------------------
1998 1997 1996
-------------------------
(In Thousands)
Paid or payable on currently taxable income:
Federal .......................................... $29,943 $32,188 $32,965
State ............................................ 5,525 6,595 6,541
Net increase due to deferred income taxes ........... 2,431 194 2,698
-------------------------
$37,899 $38,977 $42,204
=========================
The total tax provision has been allocated to the following financial statement
items:
Year Ended September 30,
-------------------------
1998 1997 1996
-------------------------
(In Thousands)
Income from continuing operations ................... $37,899 $38,477 $34,032
Discontinued operations:
Income from discontinued operations .............. - - - - 6,787
Disposition of discontinued operations ........... - - 500 1,385
-------------------------
$37,899 $38,977 $42,204
=========================
Income tax expense for the years ended September 30, 1998, 1997, and 1996 is
different than the amount computed by applying the U.S. federal income tax rate
to income before income taxes. The reasons for these differences are as follows:
% of Pre-Tax Income
------------------------
1998 1997 1996
------------------------
Computed "expected" income tax expense ............. 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit ..... 3.9 4.4 4.4
Net income of associated companies taxed at dividend
rates ........................................... (2.6) (2.4) (2.5)
Goodwill amortization .............................. 1.7 1.7 2.0
Other .............................................. (0.2) (0.7) (0.1)
------------------------
37.8% 38.0% 38.8%
========================
Foreign taxes are not material.
Net deferred tax liabilities consist of the following components as of September
30, 1998, 1997, and 1996:
1998 1997 1996
-------------------------
(In Thousands)
Deferred tax liabilities:
Property and equipment ........................... $ 8,334 $ 9,409 $ 9,054
Equity in undistributed earnings of affiliates ... 1,096 903 897
Deferred gain on sale of broadcast properties .... 3,308 3,308 3,308
Identifiable intangible assets ................... 32,653 32,319 32,409
Other ............................................ 2,981 3,334 2,657
-------------------------
48,372 49,273 48,325
-------------------------
Deferred tax assets:
Accrued compensation ............................. 7,747 7,950 7,290
Receivable allowance ............................. 728 1,976 1,774
Loss carryforwards acquired ...................... 6,774 7,961 9,147
Capital loss carryforward ........................ 8,121 8,425 8,425
Other ............................................ 1,745 2,135 2,155
-------------------------
25,115 28,447 28,791
Less, valuation allowance ........................ 15,325 15,325 15,325
-------------------------
9,790 13,122 13,466
-------------------------
$38,582 $36,151 $34,859
=========================
The components giving rise to the net deferred tax liabilities described above
have been included in the accompanying balance sheets as of September 30, 1998,
1997, and 1996 as follows:
1998 1997 1996
------------------------------
(In Thousands)
Current assets ................................. $ 5,038 $ 6,392 $ 5,925
Noncurrent liabilities ......................... (43,620) (42,543) (40,784)
-----------------------------
$(38,582) $(36,151) $(34,859)
=============================
The Company provided a valuation allowance of $8,425,000 during 1996 due to
limitations imposed by the tax laws on the Company's ability to realize the
benefit of the capital loss carryforward related to the disposal of NAPP Systems
Inc. In addition, as a result of the operations of SJL of Kansas Corp. (SJL)
management has determined that the valuation allowance related to the acquired
operating loss carryforward should be reduced to $6,900,000 from the original
reserve of $10,263,000 with a corresponding $3,363,000 reduction to goodwill. As
of September 30, 1998 the SJL net operating loss carryforward was approximately
$17,150,000 and will expire in varying amounts from 1999 to 2010.
Note 10. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
The carrying amounts of cash and cash equivalents, temporary investments,
receivables, and accounts payable approximate fair value because of the short
maturity of those instruments. The carrying value of other investments
consisting of debt and equity securities in a deferred compensation trust are
carried at fair value based upon quoted market prices and $3,818,000 of equity
securities, consisting primarily of the Company's 17% ownership of the nonvoting
common stock of The Capital Times Company, are carried at cost, as the fair
value is not readily determinable.
The fair value of the Company's debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities. The estimated fair values of
the Company's debt instruments are as follows:
Carrying
Amount Fair Value
--------------------
(In Thousands)
September 30:
1998 $219,481 $245,784
1997 203,735 204,603
1996 95,503 97,672
Note 11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share amounts):
Year Ended September 30,
----------------------------
1998 1997 1996
----------------------------
Numerator:
Income applicable to common shares:
Income from continuing operations ................. $ 62,233 $ 62,745 $ 53,670
Income (loss) from discontinued operations ........ - - 1,485 (8,223)
----------------------------
$ 62,233 $ 64,230 $ 45,447
============================
Denominator:
Basic-weighted average common shares
outstanding ....................................... 44,829 46,393 46,973
Dilutive effect of employee stock options ............ 728 850 926
----------------------------
Diluted outstanding shares ........................... 45,557 47,243 47,899
============================
Basic earnings per share:
Income from continuing operations .................... $ 1.39 $ 1.35 $ 1.14
Income (loss) from discontinued operations ........... - - 0.03 (0.17)
----------------------------
Net income ................................ $ 1.39 $ 1.38 $ 0.97
============================
Diluted earnings per share:
Income from continuing operations .................... $ 1.37 $ 1.33 $ 1.12
Income (loss) from discontinued operations ........... - - 0.03 (0.17)
----------------------------
Net income ................................ $ 1.37 $ 1.36 $ 0.95
============================
Note 12. Pending Accounting Changes
In June 1997, the FASB issued Statement No. 130 "Reporting Comprehensive Income"
and Statement No. 131 "Disclosures about Segments of an Enterprise and Related
Information". Statement No. 130 establishes standards for reporting
comprehensive income in financial statements. Statement No. 131 expands certain
reporting and disclosure requirements for segments from current standards. The
Statements are effective for fiscal years beginning after December 15, 1997 and
the Company does not expect the adoption of these new standards to result in
material changes to previously reported amounts or disclosures.
Note 13. Line of Business Information
Year Ended September 30,
------------------------------
1998 1997 1996
------------------------------
(In Thousands)
Revenue:
Publishing:
Wholly-owned properties .................... $382,894 $318,441 $302,564
Equity in net income of associated companies 8,367 7,756 7,008
Broadcasting .................................. 126,032 120,489 117,797
------------------------------
Total revenue ...................... $517,293 $446,686 $427,369
==============================
Operating income:
Publishing .................................... $102,526 $ 96,621 $ 82,695
Broadcasting .................................. 24,948 22,262 22,953
Corporate and other ........................... (14,627) (14,732) (10,907)
------------------------------
Total operating income ............. $112,847 $104,151 $ 94,741
==============================
Identifiable assets:
Publishing .................................... $425,825 $413,834 $226,097
Broadcasting .................................. 190,621 195,567 198,441
Graphic arts (discontinued operations) ........ - - - - 56,379
Corporate ..................................... 44,139 41,562 46,499
------------------------------
Total identifiable assets .......... $660,585 $650,963 $527,416
==============================
Depreciation:
Publishing .................................... $ 11,280 $ 9,054 $ 8,063
Broadcasting .................................. 7,259 7,432 7,309
Corporate ..................................... 1,123 689 864
------------------------------
Total depreciation ................. $ 19,662 $ 17,175 $ 16,236
==============================
Amortization of intangibles:
Publishing .................................... $ 13,688 $ 6,902 $ 6,505
Broadcasting .................................. 4,226 4,227 5,058
------------------------------
Total amortization of intangibles .. $ 17,914 $ 11,129 $ 11,563
==============================
Capital expenditures:
Publishing .................................... $ 16,987 $ 8,834 $ 11,018
Broadcasting .................................. 6,825 6,516 6,948
Graphic arts (discontinued operations) ........ - - - - 290
Corporate ..................................... 2,913 992 540
------------------------------
Total capital expenditures ......... $ 26,725 $ 16,342 $ 18,796
==============================
Note 14. Other Information
Balance sheet information:
Program rights and other consist of the following:
September 30,
-------------------------
1998 1997 1996
-------------------------
(In Thousands)
Program rights ...................................... $ 8,140 $ 7,020 $ 6,577
Deferred income taxes ............................... 5,038 6,392 5,925
Other ............................................... 3,714 4,279 4,681
-------------------------
$16,892 $17,691 $17,183
=========================
Intangibles consist of the following:
September 30,
----------------------------
1998 1997 1996
----------------------------
(In Thousands)
Goodwill ......................................... $332,821 $325,758 $194,746
Less, accumulated amortization ................... 63,584 55,303 50,240
----------------------------
269,237 270,455 144,506
----------------------------
Noncompete covenants and consulting
agreements .................................... 28,213 26,314 25,739
Less, accumulated amortization ................... 23,522 21,201 18,859
----------------------------
4,691 5,113 6,880
----------------------------
Customer lists, broadcasting licenses and
agreements, and newspaper subscriber lists .... 157,011 154,444 116,472
Less, accumulated amortization ................... 32,828 25,531 21,797
----------------------------
124,183 128,913 94,675
----------------------------
$398,111 $404,481 $246,061
============================
Compensation and other accruals consist of the following:
September 30,
-------------------------
1998 1997 1996
-------------------------
(In Thousands)
Compensation ........................................ $12,092 $12,029 $ 8,156
Vacation pay ........................................ 4,384 4,080 3,946
Retirement and stock purchase plans ................. 5,005 4,708 2,930
Interest ............................................ 519 1,639 1,429
Other ............................................... 4,966 4,868 3,958
-------------------------
$26,966 $27,324 $20,419
=========================
Cash flows information:
Year Ended September 30,
------------------------------
1998 1997 1996
------------------------------
(In Thousands)
Cash payments for:
Interest, net of capitalized interest 1998 $169 .... $ 15,731 $ 8,111 $ 10,052
==============================
Income taxes ....................................... $ 33,747 $ 40,767 $ 41,021
==============================
Program rights were acquired by issuing
long-term contracts as follows ..................... $ 9,017 $ 7,300 $ 7,700
==============================
Issuance of restricted common stock, net .............. $ 682 $ 244 $ 590
==============================
Change in tax contingency estimates:
Reduction in goodwill .............................. $ - - $ - - $ 3,363
==============================
Reduction in deferred income taxes ................. $ - - $ - - $ 3,363
==============================
Change in purchase accounting estimates:
Reduction in identified intangibles ................ $ - - $ - - $ 8,000
Additional long-term debt .......................... - - - - 16
------------------------------
$ - - $ - - $ 8,016
==============================
Reduction in deferred income taxes .................... $ - - $ - - $ 2,666
Increase in goodwill .................................. - - - - 4,085
Increase in other long-term assets .................... - - - - 1,265
------------------------------
$ - - $ - - $ 8,016
==============================
Accounts payable for stock acquired ................... $(10,926) $ 10,926 $ - -
==============================
Proceeds from sale of NAPP Systems Inc.,
net of selling costs ............................... $ - - $ 55,914 $ - -
Less cash retained ................................. - - (1,119) - -
------------------------------
Proceeds from sale of subsidiary ........ $ - - $ 54,795 $ - -
==============================
SUPPLEMENTARY DATA
QUARTERLY RESULTS (UNAUDITED)
4th 3rd 2nd 1st
--------------------------------------
(In Thousands Except Per Share Data)
1998 Quarter:
Operating revenue ...................... $129,596 $135,093 $121,345 $131,259
======================================
Net income .................. $ 14,947 $ 18,091 $ 12,611 $ 16,584
======================================
Earnings per share:
Basic ............................... $ 0.34 $ 0.41 $ 0.28 $ 0.37
======================================
Diluted ............................. $ 0.33 $ 0.40 $ 0.28 $ 0.36
======================================
1997 Quarter:
Operating revenue ...................... $112,538 $112,693 $101,787 $119,668
======================================
Income from continuing operations ...... $14,638 $ 17,759 $ 11,240 $ 19,108
Income from discontinued
operations .......................... - - 485 1,000 - -
--------------------------------------
Net income .................. $ 14,638 $ 18,244 $ 12,240 $ 19,108
======================================
Earnings per share:
Basic:
Income from continuing operations . $ 0.32 $ 0.38 $ 0.24 $ 0.41
Income from discontinued operations - - 0.01 0.02 - -
--------------------------------------
Net income .................. $ 0.32 $ 0.39 $ 0.26 $ 0.41
======================================
Diluted:
Income from continuing operations . $ 0.31 $ 0.38 $ 0.24 $ 0.40
Income from discontinued operations - - 0.01 0.02 - -
--------------------------------------
Net income .................. $ 0.31 $ 0.39 $ 0.26 $ 0.40
======================================
1996 Quarter:
Operating revenue ...................... $107,129 $109,499 $ 99,960 $110,781
======================================
Income from continuing operations ...... $ 14,513 $ 15,381 $ 9,084 $ 14,692
Income from discontinued operations .... (12,856) 1,664 1,721 1,248
--------------------------------------
Net income .................. $ 1,657 $ 17,045 $ 10,805 $ 15,940
======================================
Earnings per share:
Basic:
Income from continuing operations . $ 0.31 $ 0.33 $ 0.19 $ 0.31
Income (loss) from discontinued
operations .................... (0.27) 0.03 0.04 0.03
--------------------------------------
Net income .................. $ 0.04 $ 0.36 $ 0.23 $ 0.34
======================================
Diluted:
Income from continuing operations . $ 0.30 $ 0.32 $ 0.19 $ 0.30
Income (loss) from discontinued
operations .................... (0.27) 0.04 0.04 0.03
--------------------------------------
Net income .................. $ 0.03 $ 0.36 $ 0.23 $ 0.33
======================================
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
The information called for by Part III of this Form 10-K is omitted in
accordance with General Instruction G because the Company will file with the
Commission a definitive proxy statement pursuant to Regulation 14A not later
than 120 days after the close of the Company's fiscal year ended September 30,
1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
Page Number
-----------
(a) 1. Financial Statements
Independent Auditor's Report and Consent
Financial Statements
Consolidated balance sheets as of
September 30, 1998, 1997, and 1996
Consolidated statements of income years ended
September 30, 1998, 1997, and 1996
Consolidated statements of stockholders' equity
years ended September 30, 1998, 1997, and 1996
Consolidated statements of cash flows years ended
September 30, 1998, 1997, and 1996
Notes to consolidated financial statements
(a) 2. Financial statements schedule
Schedule
II - Valuation and qualifying accounts years ended
September 30, 1998, 1997, and 1996
All other schedules have been omitted as not required, not
applicable, not deemed material or because the information is
included in the Notes to Financial Statements.
(a) 3. Exhibits (listed by numbers corresponding to the Exhibit Table of
Item 601 in Regulation S-K).
10 Form of Employment Agreement for Lee Enterprises, Incorporated
Executive Group
10 Amendments to Lee Enterprises, Incorporated 1990 Long Term
Incentive Plan
10 Form of Indemnification Agreement for Lee Enterprises, Incorporated
Directors and Executive Group
10 Credit Agreement dated as of December 24, 1998 among Lee
Enterprises, Incorporated, the financial institutions party thereto
as Lenders, and Bank of America National Trust and Savings
Association, as Agent (if available)
21 Subsidiaries
24 Power of Attorney
27 Financial Data Schedule
(b) The following reports on Form 8-K were filed for the three months ended
September 30, 1998.
None
* * * * *
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1991) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Nos. 2-56652
(filed June 17, 1976), 2-58393 (filed March 11, 1977), 2-77121 (filed April 22,
1982), 33-19725 (filed January 20, 1988), 33-46708 (filed March 31, 1992), and
333-6435 and 333-6433 (filed June 20, 1996).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
INDEPENDENT AUDITOR'S REPORT
AND CONSENT
To the Stockholders
Lee Enterprises, Incorporated
and Subsidiaries
Davenport, Iowa
We have audited the accompanying consolidated balance sheets of Lee Enterprises,
Incorporated and subsidiaries as of September 30, 1998, 1997, and 1996 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lee Enterprises,
Incorporated and subsidiaries as of September 30, 1998, 1997, and 1996 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
In our opinion, Schedule II included in this Annual Report on Form 10-K for the
year ended September 30, 1998, present fairly the information set forth therein,
in conformity with generally accepted accounting principles.
We consent to the incorporation by reference in the Registration Statements on
Form S-8 No. 2-56652, No. 2-77121, No. 2-58393, No. 33-19725, No. 33-46708, No.
333-6435 and No. 333-6433 and in the related Prospectuses of our report dated
November 4, 1998 with respect to the financial statements of Lee Enterprises,
Incorporated, incorporated by reference and the schedule included in this Annual
Report on Form 10-K for the year ended September 30, 1998 and to the reference
to us under the heading "Experts" in such Prospectuses.
/s/ McGladrey & Pullen, LLP
Davenport, Iowa
November 4, 1998
LEE ENTERPRISES, INCORPORATED
AND WHOLLY-OWNED SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
(1)
Balance at Additions Charged Deduction Balance
Beginning Charged to Other from at Close
Description of Period to Income Accounts Reserves of Period
- ------------------------------------------------------------------------------------
Allowance for doubtful
accounts:
For the year ended
September 30, 1998 ... $4,600 $2,996 $ - - $3,486 $4,110
For the year ended
September 30, 1997 ... 4,000 2,934 428 2,762 4,600
For the year ended
September 30, 1996 ... 4,100 2,560 (375) 2,285 4,000
(1) Represents accounts written off as uncollectible, net of recoveries which
are immaterial.
(2) Balance upon disposal of NAPP Systems Inc.
(3) Balance upon acquisition of 100% of The Pacific Northwest Group.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 29, 1998 LEE ENTERPRISES, INCORPORATED
---------------------------------
/s/ Richard D. Gottlieb /s/ Larry L. Bloom
Richard D. Gottlieb, Larry L. Bloom,
President, Chief Executive Officer, and Senior Vice-President of Finance,
Director Treasurer and Chief Financial
Officer
/s/ G.C. Wahlig
G. C. Wahlig,
Vice President of Finance and
Chief Accounting Officer
We, the undersigned directors of Lee Enterprises, Incorporated, hereby severally
constitute Richard D. Gottlieb and Larry L. Bloom, and each of them, our true
and lawful attorneys with full power to them, and each of them, to sign for us
and in our names, in the capacities indicated below, the Annual Report on Form
10-K of Lee Enterprises, Incorporated for the fiscal year ended September 30,
1998 to be filed herewith and any amendments to said Annual Report, and
generally do all such things in our name and behalf in our capacities as
directors to enable Lee Enterprises, Incorporated to comply with the provisions
of the Securities Exchange Act of 1934 as amended, and all requirements of the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or either of them, to
said Annual Report on Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated:
Signature Date
/s/ Rance E. Crain
- ---------------------------------------
Rance E. Crain, Director November 18, 1998
/s/ J. P. Guerin
- ---------------------------------------
J. P. Guerin, Director November 18, 1998
/s/ Andrew E. Newman
- ---------------------------------------
Andrew E. Newman, Director November 18, 1998
/s/ Gordon Prichett
- ---------------------------------------
Gordon Prichett , Director November 18, 1998
/s/ Charles E. Rickershauser, Jr.
- ---------------------------------------
Charles E. Rickershauser, Jr., Director November 18, 1998
/s/ Ronald L. Rickman
- ---------------------------------------
Ronald L. Rickman, Director November 18, 1998
/s/ Lloyd G. Schermer
- ----------------------------------------
Lloyd G. Schermer, Chairman of the Board
and Director November 18, 1998
/s/ Phyllis Sewell
- -----------------------------------------
Phyllis Sewell, Director November 18, 1998
/s/ Richard W. Sonnenfeldt
- -----------------------------------------
Richard W. Sonnenfeldt, Director November 18, 1998
/s/ Mark Vittert
- -----------------------------------------
Mark Vittert, Director November 18, 1998