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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its Charter)
Delaware 42-0823980
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 N. Main Street, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
(Registrant's telephone number, including area code)
Indicate by a 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 [ ]
As of June 30, 2002, 34,384,196 shares of Common Stock and 9,906,138 shares of
Class B Common Stock of the Registrant were outstanding.
================================================================================
LEE ENTERPRISES, INCORPORATED
TABLE OF CONTENTS PAGE
- ---------------------------------------------------------------------------- ----------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - 1
Three months and nine months ended June 30, 2002 and
2001
Consolidated Balance Sheets - 2
June 30, 2002 and September 30, 2001
Consolidated Statements of Cash Flows - 3
Nine months ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 16
Risk
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
EXHIBITS
99.1 Statement Under Oath of Chief Executive Officer 18
99.2 Statement Under Oath of Chief Financial Officer 19
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenue:
Advertising $ 110,745 $ 71,613 $ 244,709 $ 211,973
Circulation 31,641 20,115 72,238 60,816
Other 18,427 16,770 49,990 50,761
Equity in net income of associated companies 2,867 1,647 6,796 5,531
- -----------------------------------------------------------------------------------------------------------------------------------
163,680 110,145 373,733 329,081
- -----------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation 62,928 42,165 143,464 126,237
Newsprint and ink 13,385 11,166 31,559 32,071
Depreciation 6,389 3,882 13,946 12,181
Amortization of intangible assets 5,866 3,997 9,614 11,707
Other 37,826 25,978 88,579 80,590
- -----------------------------------------------------------------------------------------------------------------------------------
126,394 87,188 287,162 262,786
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 37,286 22,957 86,571 66,295
- -----------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expenses), net:
Financial income 470 6,470 5,705 24,412
Financial expense (5,117) (3,279) (10,999) (9,624)
Gain (loss) on sales of assets 9 (1,472) (31) (1,472)
Other, net -- (213) (268) (844)
- -----------------------------------------------------------------------------------------------------------------------------------
(4,638) 1,506 (5,593) 12,472
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 32,648 24,463 80,978 78,767
Income tax expense 1,841 8,675 18,920 28,760
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 30,807 15,788 62,058 50,007
Discontinued operations:
Gain (loss) on disposition, net of income tax effect 1,281 (86) 1,154 250,653
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 32,088 $ 15,702 $ 63,212 $ 300,660
===================================================================================================================================
Earnings per common share:
Basic:
Continuing operations $ 0.70 $ 0.36 $ 1.41 $ 1.14
Discontinued operations 0.03 -- 0.03 5.74
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.73 $ 0.36 $ 1.44 $ 6.88
===================================================================================================================================
Diluted:
Continuing operations $ 0.69 $ 0.36 $ 1.40 $ 1.13
Discontinued operations 0.03 -- 0.03 5.69
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.72 $ 0.36 $ 1.43 $ 6.82
===================================================================================================================================
Dividends per common share $ 0.17 $ 0.17 $ 0.51 $ 0.51
===================================================================================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
1
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
June 30 September 30
(Thousands, except per share data) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 67,810 $ 272,169
Temporary cash investments -- 211,221
Accounts receivable, net 58,037 41,349
Receivable from associated companies -- 1,500
Inventories 6,617 3,997
Other 15,154 7,441
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 147,618 537,677
- -----------------------------------------------------------------------------------------------------------------------------------
Investments 24,509 32,525
Property and equipment, net 179,567 119,061
Goodwill and other intangibles 1,040,203 310,472
Other 3,779 662
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,395,676 $ 1,000,397
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,214 $ 10,817
Current maturities of long-term debt 11,600 11,600
Unearned income 28,534 18,201
Income taxes payable 2,741 57,281
Other 40,076 27,240
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 100,165 125,139
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 414,200 161,800
Deferred items 152,292 31,514
Stockholders' equity:
Serial convertible preferred, no par value;
authorized 500 shares: none issued
Common, $2 par value; authorized 60,000
shares; issued and outstanding:
June 30, 2002 34,384 shares 68,768 67,318
September 30, 2001 33,659 shares
Class B Common, $2 par value; authorized
30,000 shares; issued and outstanding: 19,812 20,758
June 30, 2002 9,906 shares
September 30, 2001 10,379 shares
Additional paid-in capital 55,152 48,164
Unearned compensation (2,169) (1,130)
Retained earnings 587,456 546,834
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 729,019 681,944
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,395,676 $ 1,000,397
===================================================================================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
2
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30
- -----------------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities:
Net income $ 63,212 $ 300,660
Less: discontinued operations (1,154) (250,653)
- -----------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 62,058 50,007
Adjustments to reconcile income from continuing operations to net cash provided
by operating activities of continuing operations:
Depreciation and amortization 23,560 23,888
Losses (gains) on sale of assets 31 1,472
Distributions in excess of current earnings of associated companies 3,330 2,337
Other, net (4,169) (6,849)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 84,810 70,855
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (required for) investing activities:
Proceeds from sales (purchases) of temporary cash investments, net 211,221 (282,807)
Purchases of property and equipment (7,775) (7,435)
Acquisitions, net (697,233) (4,230)
Proceeds from sales of assets 7,075 3,841
Other 232 (2,443)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash required for investing activities (486,480) (293,074)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash provided by (required for) financing activities:
Payments on short-term debt -- (37,937)
Proceeds from issuance of long-term debt 264,000 --
Payments on long-term debt (11,600) (11,600)
Financing costs (2,442) --
Common stock transactions (322) (8,689)
Dividends paid (15,014) (14,828)
Other 5,851 10,703
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (required for) financing activities 240,473 (62,351)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (required for) discontinued operations (43,162) 435,976
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (204,359) 151,406
Cash and cash equivalents:
Beginning of period 272,169 29,427
- -----------------------------------------------------------------------------------------------------------------------------------
End of period $ 67,810 $ 180,833
===================================================================================================================================
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
3
LEE ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 BASIS OF PRESENTATION
The Consolidated Financial Statements included herein are unaudited. In
the opinion of management, these statements contain all adjustments
(consisting of only normal recurring items) necessary to present fairly
the financial position of Lee Enterprises, Incorporated and subsidiaries
(the Company) as of June 30, 2002 and the results of operations and cash
flows for the periods presented. These Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included in the Company's 2001 Annual Report on Form
10-K.
Because of seasonal and other factors, the results of operations for the
three months and nine months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the full year.
Certain amounts as previously reported have been reclassified to conform
with the current period presentation.
2 INVESTMENT IN ASSOCIATED COMPANIES
The Company has a 50% ownership interest in Madison Newspapers, Inc.
(MNI), a company that publishes daily and Sunday newspapers and other
publications in Madison, Wisconsin, four other daily newspapers and
various other publications in Wisconsin.
Summarized financial information of MNI is as follows:
-------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
-------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
Revenue $ 27,980 $ 25,849 $ 78,850 $ 79,865
Operating expenses, excluding depreciation
and amortization 19,214 19,219 55,257 57,945
Depreciation and amortization 1,407 1,161 3,382 3,483
Operating income 7,359 5,469 20,211 18,437
Net income 4,395 3,293 12,254 11,062
===================================================================================================================
In April 2002, a subsidiary of MNI acquired the assets of Citizen
Newspapers, LLC, which owns the Beaver Dam Daily Citizen and various other
publications published in Wisconsin. Debt of MNI totaled $34,343,000 at
June 30, 2002 and $20,000,000 at June 30, 2001.
3 INCOME TAXES
The provision for income taxes includes deferred taxes and is based upon
estimated annual effective tax rates in the tax jurisdictions in which the
Company operates.
The favorable resolution of tax issues reduced income tax expense by
approximately $10,000,000 for the quarter ended June 30, 2002. The Company
has favorably resolved one element of a federal tax claim related to the
deductibility of losses on the 1997 sale of a business, which Internal
Revenue Service regulations had previously disallowed. Due to the
uncertainty of a favorable resolution at the time of sale, the amount
claimed was reserved in the Consolidated Financial Statements. The
reversal has been recorded in results from continuing operations as a
reduction of income tax expense. Additional elements of the claim remain
open and, if resolved favorably, would result in additional reduction of
tax expense in future periods.
A $4,000,000 reduction of income tax expense has been recorded in results
from discontinued operations in the quarter ended June 30, 2002, from
changes in estimates related to state taxes on the sale of broadcasting
operations in October 2000 and thereafter.
4
4 EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per common share:
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
-----------------------------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------------
Income applicable to common stock:
Continuing operations $ 30,807 $ 15,788 $ 62,058 $ 50,007
Discontinued operation 1,281 (86) 1,154 250,653
-----------------------------------------------------------------------------------------------------------------------------
Net income $ 32,088 $ 15,702 $ 63,212 $300,660
=============================================================================================================================
Weighted average common shares outstanding 44,265 43,921 44,172 43,810
Less non-vested restricted stock 121 88 118 89
-----------------------------------------------------------------------------------------------------------------------------
Basic average common shares 44,144 43,833 44,054 43,721
Dilutive stock options and restricted stock 330 285 295 320
-----------------------------------------------------------------------------------------------------------------------------
Diluted average common shares 44,474 44,118 44,349 44,041
=============================================================================================================================
Earnings per common share:
Basic:
Continuing operations $ 0.70 $ 0.36 $ 1.41 $ 1.14
Discontinued operations 0.03 -- 0.03 5.74
-----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.73 $ 0.36 $ 1.44 $ 6.88
=============================================================================================================================
Diluted:
Continuing operations $ 0.69 $ 0.36 $ 1.40 $ 1.13
Discontinued operations 0.03 -- 0.03 5.69
-----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.72 $ 0.36 $ 1.43 $ 6.82
=============================================================================================================================
In July 2002, the Company announced that effective October 1, 2002, stock
option grants would be accounted for as an expense in the Consolidated
Statements of Income, according to the provisions of Statement of
Financial Accounting Standards 123, Accounting for Stock-Based
Compensation.
5 ACQUISITIONS
In April 2002, the Company acquired the stock of Howard Publications, Inc.
(Howard), a privately owned company comprised of 15 daily newspapers, 50%
of the stock of Sioux City Newspapers, Inc. (SCN), and related specialty
publications. The transaction was valued at approximately $697,000,000
after taking into account $50,000,000 of cash on the Howard balance sheet
to be retained by the Company, and other adjustments. Certain
non-publishing businesses of Howard were not included in the transaction.
The Company paid the purchase price and expenses related to the
transaction from $434,000,000 of available funds, including proceeds from
the sale of its broadcast properties, which was substantially completed in
October 2000, and revolving loans under the terms of a five year,
$350,000,000 credit agreement dated as of March 28, 2002 among the
Company, Bank of America, N.A. (BofA), as administrative agent, and the
other lenders party thereto. The initial interest rate of the revolving
loans is, at the option of the Company, LIBOR plus 1.25% or a base rate
equal to the greater of the federal funds rate plus 0.5% or the BofA prime
rate. The credit agreement contains covenants, including interest coverage
and leverage ratios, which are not expected to be restrictive to normal
operations or historical amounts of stockholder dividends.
The representations and warranties of Howard stockholders are secured for
varying amounts pursuant to an escrow agreement between the Company and
the indemnifying Howard stockholders.
Because of the size and complexity of the acquisition, the Company has not
yet completed the required determination of fair value of the assets and
liabilities of Howard and related allocation of the purchase price. A
significant portion of the total purchase price will be allocated between
separately identifiable intangible assets, which may have finite lives and
goodwill, which is not subject to amortization. Accordingly, the final
determination of value could result in a significant increase or decrease
in amortization expense in future periods from the amounts estimated for
the quarter ended June 30, 2002, and reported results overall. For
5
example, the Company would record additional amortization expense of
$500,000 annually for every $10,000,000 of value allocated to identifiable
intangible assets, assuming a twenty-year useful life, compared to no
amortization expense being recorded if such value is allocated to goodwill
or an indefinite lived intangible asset. Any changes from amounts
previously estimated would not impact the Company's cash flows.
Amortization expense recorded in the Consolidated Financial Statements
related to the Howard acquisition for the quarter ended June 30, 2002, was
estimated at approximately $4,400,000.
In July 2002, the Company acquired the remaining fifty percent interest in
SCN from a privately owned company. The transaction was valued at
$60,300,000 and was funded in part with approximately $42,000,000 in cash
and temporary cash investments. The remainder of the purchase price was
funded by the Company's credit agreement. $3,000,000 of the purchase price
is payable in November 2002. The Company's Flathead group of weekly
newspapers in Montana was transferred as partial consideration for the
purchase. The Company recognized an after-tax loss of $2,688,000 on the
transfer of the Flathead newspapers, which was recorded in discontinued
operations for the quarter ended June 30, 2002.
The pro forma consolidated statements of income for the nine months ended
June 30, 2002 and the three and nine months ended June 30, 2001, set forth
below, present the results of operations as if the acquisition of Howard,
including 50% of SCN, had occurred at the beginning of each period and are
not necessarily indicative of future results or actual results that would
have been achieved had the acquisition occurred as of the beginning of the
period.
-------------------------------------------------------------------------------------
Three Months Nine Months
Ended Ended
June 30 June 30
-------------------------------------------------------------------------------------
(Thousands, Except Per Common Share Data) 2001 2002 2001
-------------------------------------------------------------------------------------
Total revenues $165,049 $467,984 $497,209
Income from continuing operations 13,832 61,981 42,742
Earnings per common share:
Basic $ 0.32 $ 1.41 $ 0.98
Diluted 0.31 1.40 0.97
=====================================================================================
The preliminary purchase price allocation for Howard, which includes 50%
of SCN, as of April 1, 2002, is as follows:
--------------------------------------------------------------------------
(Thousands)
--------------------------------------------------------------------------
Current assets $ 21,787
Property and equipment 68,959
Intangible and other assets 755,377
--------------------------------------------------------------------------
Total assets acquired 846,123
Current liabilities 23,509
Long-term liabilities 125,674
--------------------------------------------------------------------------
Net assets acquired 696,940
Less: acquisition costs 3,000
--------------------------------------------------------------------------
Purchase price $ 693,940
==========================================================================
6 SALES OF ASSETS
In December 2001, the Company sold all of the assets of its specialty
publication in Klamath Falls, Oregon. In January 2002, the Company sold
all of the operating assets of its specialty publications in Las Vegas,
Nevada, Great Falls, Montana and St. George, Utah. In February 2002, the
Company sold all of its operating assets of its specialty publication in
Redding, California. Net proceeds from the sales totaled approximately
$7,075,000. The Company realized a net loss on the transactions. The
estimated loss, which was recognized in the year ended September 2001,
approximates the actual amount.
6
7 STOCK OWNERSHIP PLANS
A summary of activity related to the Company's stock option plan is as
follows:
-------------------------------------------------------------------------------------------------------------------
Weighted
Average
(Thousands, except per common share data) Shares Exercise Price
-------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2001 967 $ 26.44
Granted 290 35.60
Exercised (151) 25.67
Cancelled (35) 28.88
-------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 2002 1,071 $ 28.95
===================================================================================================================
Options to purchase 1,004,875 shares of common stock with a weighted
average exercise price of $26.50 per share were outstanding at June 30,
2001.
8 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement 141, Business Combinations, and
Statement 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated or completed after June 30, 2001. Statement 141
also specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. Statement 142 also requires that intangible
assets with definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed
for impairment in accordance with Statement 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
In August 2001, FASB issued Statement 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes FASB Statement 121,
discussed above, but retains the fundamental provisions of Statement 121
with regard to recognition and measurement of impairment of long-lived
assets.
The Company was required to adopt the provisions of Statement 141
immediately, except with regard to business combinations initiated prior
to July 1, 2001, and Statements 142 and 144 effective no later than
October 1, 2002. Furthermore, intangible assets determined to have an
indefinite useful life and goodwill that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized.
The Company elected to adopt Statements 141, 142 and 144 effective October
1, 2001.
Statement 141 requires, upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in
a prior purchase business combination, and make any necessary
reclassifications in order to conform with the new criteria for
recognition apart from goodwill. Upon adoption of Statement 142, the
Company reassessed the useful lives and residual values of all intangible
assets acquired in purchase business combinations. In addition, the
Company is required to test the intangible assets identified as having an
indefinite useful life and goodwill for impairment in accordance with the
provisions of Statement 142. There were no significant reclassifications
or impairment losses identified as a result of adoption.
Changes in the carrying amount of goodwill are as follows:
---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
---------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------
Goodwill, beginning of period $ 220,847 $ 239,349 $ 230,231 $ 241,960
Goodwill related to acquisitions -- 232 247 3,058
Goodwill related to sales of businesses (2,522) (830) (12,153) (2,285)
Amortization -- (1,991) -- (5,973)
---------------------------------------------------------------------------------------------------------------------
Goodwill, end of period $ 218,325 $ 236,760 $ 218,325 $ 236,760
=====================================================================================================================
7
The impact of adoption of these statements is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations, as reported $ 30,807 $ 15,788 $ 62,058 $ 50,007
Goodwill amortization, net of income tax benefit -- 1,488 -- 4,464
Goodwill amortization of associated companies -- 59 -- 177
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations, as adjusted 30,807 17,335 62,058 54,648
Discontinued operations 1,281 (86) 1,154 250,653
- ------------------------------------------------------------------------------------------------------------------------------------
Net income, as adjusted $ 32,088 $ 17,249 $ 63,212 $305,301
====================================================================================================================================
The earnings per common share impact related to the adoption of these statements
is as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Basic:
Income from continuing operations, as reported $0.70 $0.36 $1.41 $1.14
Goodwill amortization -- 0.03 -- 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations, as adjusted 0.70 0.39 1.41 1.25
Discontinued operations 0.03 -- 0.03 5.74
- ------------------------------------------------------------------------------------------------------------------------------------
Net income, as adjusted $0.73 $0.39 $1.44 $6.99
====================================================================================================================================
Diluted:
Income from continuing operations, as reported $0.69 $0.36 $1.40 $1.13
Goodwill amortization -- 0.03 -- 0.10
- ------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations, as adjusted 0.69 0.39 1.40 1.23
Discontinued operations 0.03 -- 0.03 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Net income, as adjusted $0.72 $0.39 $1.43 $6.92
====================================================================================================================================
As discussed in Note 5, the Company has not yet completed the allocation
of the purchase price for the Howard acquisition. As a result, no amounts
have been allocated between identifiable intangible assets and goodwill.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes comments and analysis relating to the
Company's results of operations and financial condition as of and for the three
months and nine months ended June 30, 2002. This discussion should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor"
for forward-looking statements. This report contains information that may be
deemed forward-looking and that is based largely on the Company's current
expectations and is subject to certain risks, trends and uncertainties that
could cause actual results to differ materially from those anticipated. Among
such risks, trends and other uncertainties are changes in advertising demand,
newsprint prices, interest rates, labor costs, legislative and regulatory
rulings and other results of operations or financial conditions, difficulties in
integration of acquired businesses or maintaining employee and customer
relationships and increased capital and other costs. The words "may," "will,"
"would," "could," "believes," "expects," "anticipates," "intends," "plans,"
"projects," "considers" and similar expressions generally identify
forward-looking statements. Readers are cautioned not to place undue reliance on
such forward-looking statements, which are made as of the date of this report.
The Company does not undertake to publicly update or revise its forward-looking
statements.
CONTINUING OPERATIONS -- QUARTER ENDED JUNE 30, 2002
Operating results, as reported in the Consolidated Financial Statements, are
summarized below:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001 Percent Change
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenue $ 163,680 $ 110,145 48.6%
Income before interest, taxes, depreciation
and amortization (EBITDA) (1) 49,541 30,836 60.7
Operating income 37,286 22,957 62.4
Nonoperating income (expense), net (4,638) 1,506 N/M
Income from continuing operations 30,807 15,788 95.2
Earnings per common share:
Basic $ 0.70 $ 0.36 94.4%
Diluted 0.69 0.36 91.7
====================================================================================================================================
(1) EBITDA is not a financial performance measurement under accounting
principles generally accepted in the United States (GAAP), and should not be
considered in isolation or as a substitute for GAAP performance measurements.
EBITDA is also not reflected in the Consolidated Statements of Cash Flows, but
it is a common and meaningful alternative performance measurement for comparison
to other companies in the newspaper publishing industry. The computation also
excludes other nonoperating items, primarily interest, gains and losses on sales
of assets and losses related to other ventures.
9
Revenue, as reported in the Consolidated Financial Statements, consists of the
following:
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30
- ---------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 Percent Change
- ---------------------------------------------------------------------------------------------------------------------------
Advertising:
Retail $ 65,616 $ 42,240 55.3%
National 3,771 2,454 53.7
Classified:
Employment 9,412 7,014 34.2
Automotive 9,126 5,456 67.3
Real estate 6,483 4,169 55.5
All other 16,337 10,280 58.9
- ---------------------------------------------------------------------------------------------------------------------------
Total classified 41,358 26,919 53.6
- ---------------------------------------------------------------------------------------------------------------------------
Total advertising 110,745 71,613 54.6
- ---------------------------------------------------------------------------------------------------------------------------
Circulation 31,641 20,115 57.3
Other:
Commercial printing 6,430 6,787 (5.3)
Internet/online 2,654 1,509 75.9
Niche publications and other 7,045 6,247 (12.8)
Editorial service contracts 2,298 2,227 3.2
- ---------------------------------------------------------------------------------------------------------------------------
18,427 16,770 9.9
Equity in net income of associated companies 2,867 1,647 74.1
- ---------------------------------------------------------------------------------------------------------------------------
Total operating revenue $163,680 $110,145 48.6%
===========================================================================================================================
All categories of revenue were substantially impacted by the acquisition of
Howard, which the Company purchased April 1, 2002. In total, acquisitions
accounted for $54,903,000 of revenue growth in the current year quarter.
Businesses sold in the current year did not impact revenue in the current year
quarter but accounted for $2,599,000 of revenue in the prior year quarter.
The Howard acquisition fits the Company's core strategy of buying midsize
newspapers in growing markets and will further strengthen the Company's standing
as the pre-eminent newspaper group serving midsize markets.
REVENUE -- SAME PROPERTY
THE FOLLOWING DISCUSSION OF REVENUE IS PRESENTED ON AN OPERATING BASIS, WHICH
INCLUDES 100% OF THE REVENUE AND EXPENSES OF MNI, WHICH IS OWNED 50% BY THE
COMPANY AND ACCOUNTED FOR IN THE CONSOLIDATED FINANCIAL STATEMENTS USING THE
EQUITY METHOD. IT IS ALSO EXCLUSIVE OF ACQUISITIONS AND DIVESTITURES. THE
COMPANY BELIEVES SUCH COMPARISONS PROVIDE THE MOST MEANINGFUL INFORMATION FOR AN
UNDERSTANDING OF ITS BUSINESS.
The quarter ended June 30, 2002 had the same number of Sundays and weekdays as
the same period last year.
For the quarter ended June 30, 2002, total revenue increased $1,173,000, or
0.9%, with an increase in total advertising revenue of $631,000, or 0.7%, and an
increase in total daily newspaper advertising lineage of 2.8%. Retail revenue
increased $1,645,000, or 3.3%, and retail average rates increased 0.8% during
the same three-month period.
Classified advertising revenue decreased approximately $1,047,000, or 3.1%, for
the quarter ended June 30, 2002. Higher margin employment advertising at the
daily newspapers accounted for substantially all of the decrease and declined
15.7% for the period. The national help-wanted index registered a 19% decline in
employment advertising lineage for the same period. Real estate advertising
increased 4.8% due in part to attractive mortgage rates. Automotive advertising
increased 1%.
Circulation revenue increased $310,000, or 1.2%. The Company's same property
unaudited daily newspaper circulation increased 1.2% and Sunday circulation
increased 0.7% for the quarter ended June 30, 2002. The Company remains focused
on growing circulation units through a number of initiatives.
Other revenue increased $952,000, or 4.7%. Internet/online revenue increased
$445,000, or 27.5%, due to growth in advertising revenue and cross-selling with
the Company's newspaper advertising.
10
Advertising lineage, as reported on a same property operating basis for daily
newspapers only, consists of the following:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands of Inches) 2002 2001 Percent Change
- ------------------------------------------------------------------------------------------------------------------------------------
Advertising:
Retail 1,846 1,814 1.8%
National 101 100 1.0
Classified 1,788 1,720 3.9
- ------------------------------------------------------------------------------------------------------------------------------------
3,735 3,634 2.8%
====================================================================================================================================
OPERATING EXPENSES AND RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue of certain operating
expenses as reported in the Consolidated Financial Statements:
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
June 30
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Compensation 38.4% 38.3%
Newsprint and ink 8.2 10.1
Other operating expenses 23.1 23.6
- ------------------------------------------------------------------------------------------------------------------------------------
69.7 72.0
- ------------------------------------------------------------------------------------------------------------------------------------
EBITDA margin 30.3 28.0
Depreciation and amortization 7.5 7.2
- ------------------------------------------------------------------------------------------------------------------------------------
Operating margin 22.8% 20.8%
====================================================================================================================================
Costs other than depreciation and amortization increased $34,830,000, or 43.9%.
All categories of expenses were impacted by the acquisition of Howard, which the
Company purchased April 1, 2002. In total, acquisitions accounted for
$38,230,000 of operating costs other than depreciation and amortization in the
current year. Businesses sold in the current year did not impact operating
expenses in the current year quarter but accounted for $2,250,000 of such
expenses, other than depreciation and amortization, in the prior year quarter.
Compensation expense increased $20,763,000, or 49.2%, as workforce reductions,
delayed salary increases and both one-time and permanent changes in benefit
programs in existing businesses were more than offset by costs of acquired
businesses. Overall, same property full-time equivalent personnel declined 1.3%.
Newsprint and ink costs increased $2,219,000, or 19.9%, as the result of
continued price decreases and a 0.4% decrease in same property consumption
offset by costs of acquired businesses. Other operating costs, exclusive of
depreciation and amortization, increased $11,848,000, or 45.6%.
On October 1, 2001 the Company adopted the provisions of FASB Statements 141 and
142. As a result, goodwill acquired in a purchase business combination is no
longer being amortized, but is tested for impairment annually. Amortization
expense related to goodwill was $1,974,000 for the three months ended June 30,
2001. The change in depreciation and amortization expense from the prior year is
primarily due to the acquisition of Howard, offset by the change in goodwill
amortization.
Because of the size and complexity of the acquisition, the Company has not yet
completed the required determination of fair value of the assets and liabilities
of Howard and related allocation of the purchase price. A significant portion of
the total purchase price will be allocated between separately identifiable
intangible assets, which may have finite lives and goodwill, which is not
subject to amortization. Accordingly, the final determination of value could
result in a significant increase or decrease in amortization expense in future
periods from the amounts estimated for the quarter ended June 30, 2002, and
reported results overall. For example, the Company would record additional
amortization expense of $500,000 annually for every $10,000,000 of value
allocated to identifiable intangible assets, assuming a twenty-year useful life,
compared to no amortization expense being recorded if such value is allocated to
goodwill or an indefinite lived intangible asset. Any changes from amounts
previously estimated would not impact the Company's cash flows. Amortization
expense recorded in the Consolidated Financial Statements related to the Howard
acquisition for the quarter ended June 30, 2002, was estimated at approximately
$4,400,000.
EBITDA improved 60.6% to $49,541,000 from $30,836,000 in the prior year. EBITDA
margin improved to 30.3% from 28.0% in the prior year. The Company's efforts at
controlling expenses and lower newsprint prices all contributed to the
improvement, offset to some extent by lower margins of acquired businesses.
Operating margin increased to 22.8% from 20.8% for the same reasons, but was
further impacted by a higher level of amortization from acquisitions, offset by
the goodwill accounting change.
11
NONOPERATING INCOME AND INCOME TAXES
Financial income decreased $6,000,000 to $470,000. The Company's invested
balances decreased $434,000,000 due to the April 1, 2002 acquisition of Howard.
Reinvestment rates on remaining balances have also declined from the prior year.
The effective income tax rates were 5.6% and 35.5% for the quarters ended June
30, 2002 and 2001, respectively. The favorable resolution of tax issues reduced
income tax expense by approximately $10,000,000 in the current year quarter. The
effective rate would have been 36.3% without the adjustment. The prior year
effective tax rate included the effect of goodwill amortization that was not
deductible for tax purposes.
CONTINUING OPERATIONS -- NINE MONTHS ENDED JUNE 30, 2002
Operating results, as reported in the Consolidated Financial Statements, are
summarized below:
- ------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30
- ------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001 Percent Change
- ------------------------------------------------------------------------------------------------------
Operating revenue $ 373,733 $ 329,081 13.6%
Income before interest, taxes, depreciation
and amortization (EBITDA) 110,131 90,183 22.1
Operating income 86,571 66,295 30.6
Nonoperating income (expense), net (5,593) 12,472 (144.8)
Income from continuing operations 62,058 50,007 24.1
Earnings per common share:
Basic $ 1.41 $ 1.14 23.7%
Diluted 1.40 1.13 23.9
=====================================================================================================
Revenue, as reported in the Consolidated Financial Statements, consists of the
following:
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30
- ------------------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 Percent Change
- ------------------------------------------------------------------------------------------------------------------------------------
Advertising:
Retail $148,953 $127,500 16.8%
National 8,929 8,068 10.7
Classified:
Employment 19,623 20,904 (6.1)
Automotive 19,304 15,464 24.8
Real estate 14,061 11,698 20.2
All other 33,839 28,339 19.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total classified 86,827 76,405 13.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total advertising 244,709 211,973 15.4
- ------------------------------------------------------------------------------------------------------------------------------------
Circulation 72,238 60,816 18.8
Other:
Commercial printing 18,515 19,926 (7.1)
Internet/online 5,727 4,051 41.4
Niche publications and other 18,988 19,668 (3.4)
Editorial service contracts 6,760 7,116 (5.0)
- ------------------------------------------------------------------------------------------------------------------------------------
49,990 50,761 (1.5)
Equity in net income of associated companies 6,796 5,531 22.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating revenue $373,733 $329,081 13.6%
====================================================================================================================================
All categories of revenue were substantially impacted by the acquisition of
Howard, which the Company purchased April 1, 2002. In total, acquisitions
accounted for $54,903,000 of revenue growth in the current year. Businesses sold
in the current year accounted for $2,346,000 of revenue in the current year and
$8,514,000 of revenue in the prior year.
12
REVENUE -- SAME PROPERTY
THE FOLLOWING DISCUSSION OF REVENUE IS PRESENTED ON AN OPERATING BASIS, WHICH
INCLUDES 100% OF THE REVENUE AND EXPENSES OF MNI, WHICH IS OWNED 50% BY THE
COMPANY AND ACCOUNTED FOR IN THE CONSOLIDATED FINANCIAL STATEMENTS USING THE
EQUITY METHOD. IT IS ALSO EXCLUSIVE OF ACQUISITIONS AND DIVESTITURES. THE
COMPANY BELIEVES SUCH COMPARISONS PROVIDE THE MOST MEANINGFUL INFORMATION FOR AN
UNDERSTANDING OF ITS BUSINESS.
The nine months ended June 30, 2002 had the same number of Sundays and weekdays
as the same period last year.
For the nine months ended June 30, 2002, total revenue declined $7,628,000, or
1.9%, with a decline in total advertising revenue of $6,160,000, or 2.4%, and a
decline in total daily newspaper advertising lineage of 0.9%. Retail revenue
increased $399,000, or 0.3%, while retail average rates increased 2.3% during
the same nine-month period.
Classified advertising revenue decreased approximately $6,043,000, or 6.3%, in
2002. Higher margin employment advertising at the daily newspapers accounted for
substantially all of the decrease and declined 24.8% for the nine-month period.
Circulation revenue increased approximately $304,000, or 0.4%. The Company's
same property unaudited daily newspaper circulation increased 1.3% and Sunday
circulation increased 0.4% for the nine months ended June 30, 2002. The Company
is focused on growing circulation units through a number of initiatives.
Other revenue decreased $1,772,000, or 2.9%. Commercial printing declined
$1,613,000, or 6.4%, due to losses of, or declines in volume from, key
customers. Internet/online revenue increased $967,000, or 21.8%, due to growth
in advertising revenue and cross-selling with the Company's newspaper
advertising, partially offsetting the overall decline in other revenue.
Advertising lineage, as reported on a same property operating basis for daily
newspapers only, consists of the following:
- --------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30
- --------------------------------------------------------------------------------------------------------------------------
(Thousands of Inches) 2002 2001 Percent Change
- --------------------------------------------------------------------------------------------------------------------------
Advertising:
Retail 5,500 5,610 (2.0)%
National 293 312 (6.1)
Classified 4,937 4,903 0.7
- --------------------------------------------------------------------------------------------------------------------------
10,730 10,825 (0.9)%
==========================================================================================================================
OPERATING EXPENSES AND RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue of certain operating
expenses as reported in the Consolidated Financial Statements:
- --------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
June 30
2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Compensation 38.4% 38.4%
Newsprint and ink 8.4 9.7
Other operating expenses 23.7 24.5
- --------------------------------------------------------------------------------------------------------------------------
70.5 72.6
- --------------------------------------------------------------------------------------------------------------------------
EBITDA margin 29.5 27.4
Depreciation and amortization 6.3 7.3
- --------------------------------------------------------------------------------------------------------------------------
Operating margin 23.2% 20.1%
==========================================================================================================================
Costs other than depreciation and amortization increased $24,704,000, or 10.3%.
All categories of expenses were impacted by the acquisition of Howard, which the
Company purchased April 1, 2002. In total, acquisitions accounted for
$38,230,000 of operating costs other than depreciation and amortization in the
current year.
13
Businesses sold in the current year accounted for $2,112,000 of operating
expenses other than depreciation and amortization, in the current year and
$7,821,000 of such expenses in the prior year. Compensation expense increased
$17,227,000, or 13.6%, as workforce reductions, delayed salary increases and
both one-time and permanent changes in benefit programs in existing businesses
were more than offset by costs of acquired businesses. Overall, same property
full-time equivalent personnel declined 2.9%. Newsprint and ink costs decreased
$512,000, or 1.6%, as the result of continued price decreases offsetting a 0.6%
increase in same property consumption and costs of acquired businesses. Other
operating costs, exclusive of depreciation and amortization, increased
$7,989,000, or 9.9%.
On October 1, 2001 the Company adopted the provisions of FASB Statements 141 and
142. As a result, goodwill acquired in a purchase business combination is no
longer being amortized, but is tested for impairment annually. Amortization
expense related to goodwill was $5,922,000 for the nine months ended June 30,
2001. The change in depreciation and amortization expense from the prior year is
primarily due to the acquisition of Howard, offset by the change in goodwill
amortization.
EBITDA improved 22.1% to $110,131,000 from $90,183,000. EBITDA margin improved
to 29.5% from 27.4% in the prior year. The Company's efforts at controlling
expenses and lower newsprint prices all contributed to the improvement, offset
to some extent by lower margins of acquired businesses. Operating margin
increased to 23.2% from 20.1% for the same reasons, but was further impacted by
a higher level of amortization from acquisitions, offset by the goodwill
accounting change.
NONOPERATING INCOME AND INCOME TAXES
Financial income decreased $18,707,000 to $5,705,000 in 2002, due to a
significant decline in reinvestment rates in the Company's investment portfolio.
Further, the Company's invested balances decreased due to the acquisition of
Howard and tax payments related to the sale of broadcast operations in October
2000.
The effective income tax rates were 23.4% and 36.5% for the nine months ended
June 30, 2002 and 2001, respectively. The favorable resolution of tax issues
reduced income tax expense by approximately $10,000,000 in the current year. The
effective rate would have been 35.7% without the adjustment. The prior year
effective tax rate included the effect of goodwill amortization that was not
deductible for tax purposes.
DISCONTINUED OPERATIONS
In March 2000, the Board of Directors of the Company made a determination to
sell its broadcast properties. In May 2000 the Company entered into an agreement
to sell substantially all of its broadcasting operations, consisting of eight
network-affiliated and seven satellite television stations, to Emmis
Communications Corporation and consummated the transaction in October 2000. The
net proceeds of approximately $565,000,000 resulted in an after-tax gain for
financial reporting purposes of approximately $250,800,000. The results for the
broadcast properties have been classified as discontinued operations for all
periods presented.
In July 2001, the Company completed the sale of its last broadcasting property.
Net proceeds of the sale totaled approximately $7,600,000. The after-tax gain of
approximately $4,000,000 on the sale is reflected in discontinued operations.
A $4,000,000 reduction of income tax expense has been recorded in results from
discontinued operations in the quarter ended June 30, 2002, from changes in
estimates related to state taxes on the sale of broadcasting operations.
In July 2002, the Company acquired the remaining fifty percent interest in SCN.
The Company's Flathead group of weekly newspapers in Montana was transferred as
partial consideration for the purchase. The Company recognized an after-tax loss
of $2,688,000 on the transfer of the Flathead newspapers, which is recorded in
discontinued operations in the quarter ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $84,810,000
for the nine months ended June 30, 2002 and $70,855,000 for the same period in
2001. Increased income from continuing operations and changes in working capital
account for the change between years.
14
Cash required for investing activities totaled $486,480,000 during the nine
months ended June 30, 2002, and $293,074,000 in the same period of the prior
year. Acquisitions account for substantially all of the current year usage.
Investment purchases were responsible for the primary usage of funds in the
prior year.
The Company anticipates that funds necessary for capital expenditures, which are
expected to total approximately $11,000,000 in 2002, and other requirements will
be available from internally generated funds, or from availability under its
existing credit agreement and, if necessary, by accessing the capital markets.
Cash provided by financing activities totaled $240,473,000 during the nine
months ended June 30, 2002, and required $62,351,000 in the prior year.
The Company entered into a five year, $350,000,000 credit agreement in March
2002. The primary purposes of the agreement were to fund the acquisitions of
Howard and SCN, and to provide liquidity for other corporate purposes.
$264,000,000 was borrowed under this agreement in the quarter ended June 30,
2002. In July 2002 the Company borrowed $15,000,000 to consummate the
acquisition of SCN.
Under the terms of the Company's 1998 Note Purchase Agreement (1998 Agreement),
the Company was required to repay the outstanding balance of $161,800,000 on
October 1, 2002 unless the Company reinvested the net proceeds of the sale of
its broadcast operations or obtained a waiver or amendment of that provision of
the 1998 Agreement. The acquisition of Howard satisfies the conditions of the
Company's 1998 Agreement with regard to reinvestment of the net proceeds of the
sale of broadcast operations. If repayment had been required, a substantial
prepayment penalty would have also been required, based upon interest rates in
effect at that time. Other covenants under the 1998 agreement are not considered
restrictive to normal operations or historical amounts of stockholder dividends.
Cash required for discontinued operations totaled $43,162,000 during the nine
months ended June 30, 2002, primarily for income tax payments related to the
gain on sale of discontinued operations. Cash provided by discontinued
operations totaling $435,976,000 in the prior year primarily reflects net
proceeds from the sale of such operations.
OTHER FACTORS
The Company has not been significantly impacted by inflationary pressures over
the last several years. The Company anticipates that changing costs of
newsprint, its basic raw material, may impact future operating costs. Price
increases (or decreases) for the Company's products are implemented when deemed
appropriate by management. The Company continuously evaluates price increases,
productivity improvements and cost reductions to mitigate the impact of
inflation.
MARKET RISK MANAGEMENT
The Company is exposed to market risk stemming from changes in interest rates
and commodity prices. Changes in these factors could cause fluctuations in
earnings and cash flows. In the normal course of business, exposure to certain
of these market risks is managed as described below.
INTEREST RATES
Interest rate risk in the Company's investment portfolio is managed by investing
only in securities with a maturity at date of acquisition of 180 days or less.
Only high-quality investments are considered. In April 2002, the Company
liquidated substantially all of its investment portfolio in conjunction with the
acquisition of Howard.
The Company's debt structure and interest rate risk are managed through the use
of fixed and floating rate debt. The Company's primary exposure is to United
States interest rates.
COMMODITIES
Certain materials used by the Company are exposed to commodity price changes.
The Company manages this risk through instruments such as purchase orders and
non-cancelable supply contracts. The Company is also involved in continuing
programs to mitigate the impact of cost increases through identification of
sourcing and operating efficiencies. Primary commodity price exposures are
newsprint and, to a lesser extent, ink.
15
A $10 per ton newsprint price increase would result in an annualized reduction
in income from continuing operations before income taxes of approximately
$790,000, excluding MNI.
SENSITIVITY TO CHANGES IN VALUE
The estimate that follows is intended to measure the maximum potential impact on
fair value of fixed-rate debt of the Company in one year from adverse changes in
market interest rates under normal market conditions. The calculations are not
intended to represent actual losses in fair value that the Company expects to
incur. The estimates do not consider favorable changes in market rates. The
position included in the calculations is fixed-rate debt, which totals
$161,800,000 at June 30, 2002.
The estimated maximum potential one-year loss in fair value from a 100 basis
point movement in interest rates on market risk sensitive instruments
outstanding at June 30, 2002 is approximately $6,900,000. There is no impact on
operating results from such changes in interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to this item is included in Management's Discussion and
Analysis of Financial Condition and Results of Operations under the heading
"Market Risk Management."
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 99.1
Statement Under Oath of Chief Executive Officer
Exhibit 99.2
Statement Under Oath of Chief Financial Officer
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the three months
ended June 30, 2002.
Date of Report: April 1, 2002
Item 2. The Company reported the completion of the acquisition of all of
the outstanding capital stock of Howard.
Date of Report: June 6, 2002
Item 5. The Company announced that it entered into an agreement to
acquire the remaining fifty percent interest in SCN from the
operating partner, Hagadone Investment Co.
.. Date of Report: June 14, 2002
Item 5. The Company submitted a Form 8-K/A, amending its report on
Form 8-K dated April 1, 2002 and containing combined financial
statements of the Newspaper Properties of Howard Publications,
Inc. as of March 31, 2002 and April 30, 2001 and for the eleven
months ended March 31, 2002 and each of the years ended April 30,
2001 and 2000 and pro forma financial information related to the
acquisitions of Howard and SCN.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEE ENTERPRISES, INCORPORATED
/s/ Carl G. Schmidt DATE: August 14, 2002
- -----------------------------------------------------
Carl G. Schmidt
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
17