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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its charter)
| Delaware | 42-0823980 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
201 N. Harrison Street, Suite 600, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
Registrant’s telephone number, including area code
| Title of Each Class | Name of Each Exchange On Which Registered | |
| Securities registered pursuant to Section 12(b) of the Act: Common Stock - $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: Class B Common Stock - $2.00 par value |
||
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter. Based on the closing price of the Registrant’s Common Stock on the New York Stock Exchange on March 31, 2006: approximately $1,450,973,000. For purposes of the foregoing calculation only, as required, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock and Class B Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 30, 2006. Common Stock, $2.00 par value, 39,674,685 shares and Class B Common Stock, $2.00 par value, 6,372,440 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2007 are incorporated by reference in Part III of this Form 10-K.
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| TABLE OF CONTENTS | PAGE | |
| 1 | ||
| 1 | ||
| 12 | ||
| 13 | ||
| 13 | ||
| 13 | ||
| 13 | ||
| Market for the Registrant’s Common Stock and Related Stockholder Matters |
14 | |
| 15 | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 | |
| 29 | ||
| 30 | ||
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
30 | |
| 30 | ||
| 33 | ||
| 33 | ||
| 33 | ||
| Security Ownership of Certain Beneficial Owners and Management |
33 | |
| 34 | ||
| 34 | ||
| Exhibits, Financial Statement Schedules and Reports on Form 8-K |
34 | |
| 35 | ||
| 36 | ||
| 39 | ||
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The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking, that is based largely on 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, energy costs, interest rates, labor costs, legislative and regulatory rulings and other results of operations or financial conditions, difficulties in integration of acquired businesses or maintaining employee and customer relationships and increased capital and other costs. The words “may,” “will,” “would,” “could,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “projects,” “considers” and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. The Company does not undertake to publicly update or revise its forward-looking statements.
PART I
References to 2006, 2005, 2004 and the like mean the fiscal years ended September 30.
The Company directly, and through its ownership of associated companies, publishes 56 daily newspapers in 23 states and more than 300 weekly, classified and specialty publications, along with associated and integrated online sites. The Company was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange in 1978. Before 2001, the Company also operated a number of network-affiliated and satellite television stations. In 2006, the Company sold the assets of its publishing and commercial printing operations in Seattle and Spokane, Washington and Portland, Oregon.
The Company is consistently focused on six key strategic priorities. They are to:
| · | Grow revenue creatively and rapidly; |
| · | Emphasize strong local news; |
| · | Accelerate our online innovation; |
| · | Increase circulation, readership and online audiences; |
| · | Nurture employee development and achievement; and |
| · | Exercise careful cost control. |
Certain aspects of these priorities are discussed below.
HOWARD AND SIOUX CITY ACQUISITIONS
In 2002, the Company acquired 15 daily newspapers and a 50% interest in the Sioux City, Iowa daily newspaper (SCN) by purchasing Howard Publications, Inc. (Howard). This acquisition was consistent with the strategy the Company announced in 2000 to buy daily newspapers with circulation of 30,000 or more. In 2002, the Company also acquired the remaining 50% of SCN. These acquisitions increased the Company’s circulation by more than 75% and increased its revenue by nearly 50%. In February 2004, two daily newspapers acquired in the Howard acquisition were exchanged for daily newspapers in Burley, Idaho and Elko, Nevada.
PULITZER ACQUISITION
In June 2005, the Company acquired Pulitzer Inc. (Pulitzer). Pulitzer published 14 daily newspapers and more than 100 weekly newspapers and specialty publications. Pulitzer also owns a 50% interest in TNI Partners, as described more fully below. The acquisition of Pulitzer increased the Company’s circulation by more than 50%, to more than 1.6 million daily and more than 1.9 million Sunday, and revenue by more than 60%.
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Pulitzer newspaper operations include St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (PD LLC), publishes the St. Louis Post-Dispatch, the only major daily newspaper serving the greater St. Louis metropolitan area. St. Louis newspaper operations also include the Suburban Journals, a group of 35 weekly papers and various niche publications that focus on providing local news and editorial content to the communities they serve. In 2006, the Suburban Journals had average unduplicated circulation of approximately 0.7 million, resulting in the delivery of approximately 1.1 million copies per week.
Pulitzer holds a 95% interest in the results of operations of PD LLC, and The Herald Company, Inc. (Herald) holds a 5% interest.
Pulitzer’s wholly-owned subsidiary, Pulitzer Newspapers, Inc. (PNI), and its subsidiaries published 12 daily newspapers, as well as more than 75 weekly newspapers, shoppers and niche publications, that serve markets in the Midwest, Southwest and West. In 2006, the Company sold the assets of The Daily News in Rhinelander, Wisconsin, the smallest of these newspapers.
In 2005 and 2006, the Company devoted substantial attention to the successful integration of Pulitzer into its business. The Company made significant and immediate changes to systems and other areas of operations. The Company also devoted resources and training to bring its successful selling strategies and tactics to Pulitzer. The Company believes the integration was successful, with minimal disruption to the business.
TNI Partners
As a result of the acquisition of Pulitzer, the Company owns a 50% interest in TNI Partners (TNI), the Tucson, Arizona newspaper partnership. TNI, acting as agent for the Company’s subsidiary, Star Publishing Company (Star Publishing), and the owner of the remaining 50%, Citizen Publishing Company (Citizen), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and circulation of the Arizona Daily Star and the Tucson Citizen and their related online operations. TNI collects all receipts and income and pays all operating expenses incident to the partnership’s operations and publication of the newspapers. Each newspaper is solely responsible for its own news and editorial content. Under the amended and restated joint operating agreement between Star Publishing and Citizen (the Agency Agreement), The Arizona Daily Star remains the separate property of Star Publishing. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. Results of TNI are accounted for using the equity method.
The Newspaper Preservation Act of 1970 permits joint operating agreements between newspapers under certain circumstances without violation of the Federal antitrust laws. Agency agreements generally allow newspapers operating in the same market to share certain printing and other facilities and to pool certain revenue and expenses in order to decrease aggregate expenses and thereby allow the continuing operation of multiple newspapers in the same market. Newspapers in several cities operate under joint operating or agency agreements.
An Agency Agreement has governed the joint operations of the Arizona Daily Star and Tucson Citizen since 1940. The Board of Directors of TNI presently consists of three directors chosen by Star Publishing and three chosen by Citizen. Budgetary, key personnel and other non-news and editorial policy matters, such as advertising and circulation policies and rates or prices, are determined by the Board of Directors of TNI. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Arizona Daily Star and the Tucson Citizen benefit from increases, and can be adversely affected by decreases, in each other’s circulation. The Agency Agreement expires in 2015, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each.
Due to the agency relationship existing in Tucson, the Arizona Daily Star and Tucson Citizen cannot be viewed as competitors for advertising or circulation revenue. The Arizona Daily Star and Tucson Citizen compete primarily against other media, suburban, neighborhood and national newspapers, and other publications.
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MADISON NEWSPAPERS
The Company owns 50% of the capital stock of Madison Newspapers, Inc. (MNI) and 17% of the nonvoting common stock of The Capital Times Company (TCT). TCT owns the remaining 50% of the capital stock of MNI. MNI publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, as well as the related online sites. MNI conducts business under the trade name Capital Newspapers. The Company has a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provides other services to MNI. The Wisconsin State Journal is classified as one of the Lee group of newspapers in the newspaper business and in the rating services. Results of MNI are accounted for using the equity method. Net income or loss of MNI (after income taxes) is allocated equally to the Company and TCT. In 2006, MNI sold the assets of its Shawano, Wisconsin daily newspaper.
ADVERTISING
More than 77% of the Company’s 2006 revenue was derived from advertising. The Company’s strategies are to increase its share of local advertising through increased sales pressure in its existing markets and, over time, to increase readership and circulation unit sales through internal expansion into existing and contiguous markets and enhancement of online offerings, augmented by selective acquisitions. Acquisition efforts are focused on newspapers with daily circulation of 30,000 or more, as noted above, and other publications and online businesses that expand the Company’s operating revenue.
Many of the Company’s businesses operate in geographic groups of publications, or “clusters”, which provide operational efficiencies and extend sales penetration. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance or human resources, management or production of the publications. Sales penetration can improve if the sales effort is successful in cross-selling advertising into multiple publications. A table under the caption “Daily Newspapers and Markets” in Item 1 identifies those groups of newspapers operating in clusters.
The Company’s newspapers and classified and specialty publications compete with newspapers having national or regional circulation, magazines, radio, network and cable television, other advertising media such as billboards, other classified and specialty publications, direct mail, yellow pages directories, as well as other information content providers such as online sites. Competition for advertising is based on audience size and composition, circulation levels, readership demographics, price and advertiser results. In addition, several of the Company’s daily and Sunday newspapers compete with other local daily or weekly newspapers. The Company estimates that it captures more than 50% of the total advertising dollars spent on print, broadcast and online advertising in substantially all of its markets, and approximately 30% in St. Louis.
The number of competitors in any given market varies, and cannot be estimated with any degree of certainty. However, all of the forms of competition noted above exist to some degree in the Company’s markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1.
The following broadly define major categories of advertising revenue:
Retail advertising is revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts.
National advertising is revenue earned from display advertising space, or for preprinted advertising inserted in the publication, to national accounts, if there is no local retailer representing the account in the market.
Classified advertising, which includes employment, automotive, real estate for sale or rent, and other categories, is revenue earned from sales of advertising space in the classified section of the publication or from publications consisting primarily of such advertising.
Online advertising consists of display, banner, classified or other advertising on websites associated and integrated with the Company’s print publications.
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Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.
Classified publications are periodic advertising publications available in racks or delivered free, by carriers or third-class mail, to all, or selected, households in a particular geographic area. Classified publications offer advertisers a cost-effective local advertising system and are particularly effective in larger markets with high media fragmentation.
The Company’s many geographic markets have differences in their advertising rate structures, some of which are highly complex. A single operation often has scores of rate alternatives.
The chart above compares newspaper advertising spending, as measured by the Newspaper Association of America (NAA), and the Company’s same property advertising revenue, for the last eleven fiscal quarters, the period for which comparable information is available. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information on same property comparisons. The advertising environment is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. The Company’s enterprises are generally located in midsize and smaller markets. These markets were more stable than major metropolitan markets during the most recent downturn in advertising spending but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.
ONLINE ADVERTISING AND SERVICES
The Company’s online activities include websites supporting each of its daily newspapers and certain of its other publications. Internet activities of the newspapers, except for TNI and MNI, are reported and managed as a part of the Company’s publishing operations.
In November 2006, the Company, in conjunction with seven other major publishing organizations, announced a strategic alliance with Yahoo! Inc. (Yahoo), whereby the publishing consortium will offer its classified employment advertising customer base the opportunity to also post job listings on Yahoo’s HotJobs national platform. In addition, the consortium and Yahoo plan to work together to provide new search, content and local applications across the newspapers’ online sites, further enhancing the value of these sites as a destination for online users.
The Company also owns 83% of an Internet service company, INN Partners, L.C. (doing business as TownNews.com) that provides online infrastructure for more than 1,500 daily and weekly newspapers and shoppers. In addition, the Company has minority investments in two online service companies, which provide integrated online classified solutions for the newspaper industry, integrate online editorial content and provide transactional and promotional opportunities.
Online businesses of the Company have experienced rapid growth over the last several years, which is expected to continue. Online advertising represented 4.7% of total advertising revenue in September
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2006, an increase from 3.3% in September 2005. Page views increased 45.4% between September 2005 and September 2006.
READERSHIP AND CIRCULATION
Based on independent research, the Company estimates that, on an average Sunday, its newspapers are read by up to 75% of adults in its markets. In the St. Louis market, Scarborough Research estimates the St. Louis Post Dispatch and STLToday.com reach 63% of adults. The Company’s extensive array of suburban newspapers and other publications further increases reach in St. Louis. Readership by young adults is also significant in the Company’s markets as summarized in the table below. The Company is reaching an increasingly larger share of the market through rapid online growth, as illustrated in the table below, as well as through additional specialty and niche publications.
| Print Plus Online Reach, Top 10 Lee Markets – Past Seven Days | ||||
| All Adults |
Age 18-34 |
|||||
| Print only |
50 | % | 37 | % | ||
| Print plus online |
11 | 12 | ||||
| 61 | 49 | |||||
| Online only |
6 | 8 | ||||
| Total reach |
67 | % | 57 | % | ||
| Source: | Lee Enterprises Tracking Survey, October 2006. |
| Markets: | St. Louis, Madison, Oceanside/Escondido, Northwest Indiana, Lincoln, |
| Davenport, | Billings, Bloomington, Sioux City, Waterloo |
After advertising, circulation is the Company’s largest source of revenue. According to national Editor & Publisher data, daily newspaper circulation unit sales have decreased 15% cumulatively through 2005 since their peak in 1985 and Sunday circulation unit sales have decreased 12% since their peak in 1990. The number of daily newspapers declined 13% from 1985 to 2005. For the six months ended September 2006, daily circulation, which includes Pulitzer, TNI and MNI, as measured by the Audit Bureau of Circulations (ABC), declined 0.2%, and Sunday circulation declined 0.5%, significantly outperforming the industry as a whole. The charts on page 6 depict the percentage change in daily and Sunday circulation unit sales of the Company’s newspapers over the last five years, compared to the corresponding six month period of the previous year. Such results are, in substantially all reporting periods, better than industry averages.
Growth in readership and circulation, as well as growth in online visitors, can, over time, also positively impact advertising revenue. The Company’s strategies to improve readership and circulation, as well as website visits, include continuous improvement of content and promotional efforts. Content can include focus on local news, features, scope of coverage, headline accuracy, presentation, writing style, tone, type style and reduction of factual errors. Promotional efforts include advertising, contests and other initiatives to increase awareness of the products. Customer service can also influence circulation. The Company’s enterprises are also focused on increasing the number of subscribers who pay for their subscriptions via automated payment mechanisms, such as credit cards or checking account withdrawals. Customers using these payment methods have historically higher retention. Other initiatives vary from location to location and are determined principally by the publishers at the local level in collaboration with senior management of the Company. Competition for circulation is generally based on the content, journalistic quality and price of the publication.
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Circulation competition exists in all markets, even from unpaid products, but is most significant in markets with competing daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population is sufficient to support more than one daily newspaper.
Changes in telemarketing regulations first effective in 2004 reduced the Company’s ability to obtain new subscribers using this channel. Other methods to attract and retain subscribers have been and remain in use. However, telemarketing has historically been the largest single source of new subscribers. Same property circulation starts obtained through the Company’s marketing efforts increased more than 10% in 2004, in spite of new telemarketing restrictions, but declined 2% in 2006 and 2005.
In 2004, several major newspaper publishers (not including the Company) announced significant downward adjustments to previously reported circulation totals. The Company did not experience any impact on its relationships with advertisers from such announcements by other publishers. Approximately 75% of the Company’s circulation is home delivery. Combined with small route sizes and the limited use of independent distributors, monitoring and inspection of the Company’s circulation is not as difficult as in some major metropolitan markets. Nonetheless, in 2004 the Company enhanced its existing procedures in several areas to further ensure the integrity of its reported circulation.
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DAILY NEWSPAPERS AND MARKETS
The Company, TNI and MNI publish the following daily newspapers and online sites:
| Paid Circulation (1) | ||||||||||||||
| Newspaper | Primary Website | Location | Daily | Sunday | ||||||||||
| St. Louis Post-Dispatch (2) |
stltoday.com | St. Louis, MO | 276,588 | 418,262 | ||||||||||
| Arizona Daily Star (2)(3) |
azstarnet.com | Tucson, AZ | 104,731 | 156,694 | ||||||||||
| Capital Newspapers (4) |
||||||||||||||
| Wisconsin State Journal |
madison.com | Madison, WI | 87,547 | 144,679 | (5 | ) | ||||||||
| The Capital Times |
madison.com | Madison, WI | 17,581 | - | (5 | ) | ||||||||
| Daily Citizen |
wiscnews.com/bdc | Beaver Dam, WI | 9,917 | - | ||||||||||
| Portage Daily Register |
wiscnews.com/pdr | Portage, WI | 4,927 | - | ||||||||||
| Baraboo News Republic |
wiscnews.com/bnr | Baraboo, WI | 4,234 | - | ||||||||||
| North County Times (6) |
nctimes.com | Oceanside and Escondido, CA |
87,010 | 90,425 | ||||||||||
| The Times (6) |
nwitimes.com | Munster, Valparaiso, and Crown Point, IN |
81,206 | 90,025 | ||||||||||
| Lincoln Group |
||||||||||||||
| Lincoln Journal Star |
journalstar.com | Lincoln, NE | 76,504 | 82,824 | ||||||||||
| Columbus Telegram |
columbustelegram.com | Columbus, NE | 8,861 | 9,733 | ||||||||||
| Fremont Tribune |
fremonttribune.com | Fremont, NE | 8,219 | - | ||||||||||
| Beatrice Daily Sun |
beatricedailysun.com | Beatrice, NE | 7,728 | - | ||||||||||
| Quad-Cities Group |
||||||||||||||
| Quad-City Times |
qctimes.com | Davenport, IA | 50,420 | 68,472 | ||||||||||
| Muscatine Journal |
muscatinejournal.com | Muscatine, IA | 7,597 | - | ||||||||||
| The Pantagraph (2) |
pantagraph.com | Bloomington, IL | 46,417 | 50,386 | ||||||||||
| Billings Gazette |
billingsgazette.com | Billings, MT | 45,969 | 52,954 | ||||||||||
| The Courier (6) |
wcfcourier.com | Waterloo and Cedar Falls, IA |
41,477 | 50,301 | ||||||||||
| Sioux City Journal (6) |
siouxcityjournal.com | Sioux City, IA | 40,626 | 41,894 | ||||||||||
| The Post-Star (6) |
poststar.com | Glens Falls, NY | 33,271 | 36,096 | ||||||||||
| Central Illinois Newspaper Group |
||||||||||||||
| Herald & Review |
herald-review.com | Decatur, IL | 32,874 | 44,519 | ||||||||||
| Journal Gazette (6) |
jg-tc.com | Mattoon, IL | 9,910 | - | ||||||||||
| Times-Courier (6) |
jg-tc.com | Charleston, IL | 6,603 | - | ||||||||||
| River Valley Newspaper Group |
||||||||||||||
| La Crosse Tribune |
lacrossetribune.com | La Crosse, WI | 31,941 | 41,415 | ||||||||||
| Winona Daily News |
winonadailynews.com | Winona, MN | 11,192 | 12,826 | ||||||||||
| The Daily Herald (2) |
heraldextra.com | Provo, UT | 31,779 | 39,842 | ||||||||||
| Casper Star-Tribune (6) |
casperstartribune.com | Casper, WY | 31,562 | 34,183 | ||||||||||
| Rapid City Journal |
rapidcityjournal.com | Rapid City, SD | 29,257 | 34,113 | ||||||||||
| Missoula Group |
||||||||||||||
| Missoulian |
missoulian.com | Missoula, MT | 29,116 | 33,584 | ||||||||||
| Ravalli Republic |
ravallinews.com | Hamilton, MT | 5,166 | (7 | ) | - | ||||||||
| The Journal Times |
journaltimes.com | Racine, WI | 28,375 | 30,612 | ||||||||||
| The Bismarck Tribune |
bismarcktribune.com | Bismarck, ND | 27,535 | 31,191 | ||||||||||
| The Southern Illinoisan |
thesouthern.com | Carbondale, IL | 26,810 | 36,592 | ||||||||||
| The Daily News (6) |
tdn.com | Longview, WA | 21,530 | 21,481 | ||||||||||
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| Paid Circulation (1) | |||||||||||||
| Newspaper | Primary Website | Location | Daily | Sunday | |||||||||
| Magic Valley Group |
|||||||||||||
| The Times-News (6) |
magicvalley.com | Twin Falls, ID | 20,504 | 23,646 | |||||||||
| Elko Daily Free Press (8) |
elkodaily.com | Elko, NV | 6,140 | (7 | ) | - | |||||||
| South Idaho Press (8) |
southidahopress.com | Burley, ID | 3,728 | (7 | ) | - | |||||||
| Central Coast Newspapers |
|||||||||||||
| Santa Maria Times (2) |
santamariatimes.com | Santa Maria, CA | 19,304 | 19,678 | |||||||||
| The Lompoc Record (2) |
lompocrecord.com | Lompoc, CA | 6,604 | 6,407 | |||||||||
| Globe Gazette |
globegazette.com | Mason City, IA | 18,689 | 23,327 | |||||||||
| The Times and Democrat (6) |
thetandd.com | Orangeburg, SC | 17,112 | 17,156 | |||||||||
| Mid-Valley News Group |
|||||||||||||
| Albany Democrat-Herald |
democratherald.com | Albany, OR | 17,094 | 17,745 | |||||||||
| Corvallis Gazette-Times |
gazettetimes.com | Corvallis, OR | 11,584 | 11,975 | |||||||||
| Napa Valley Register (2) |
napavalleyregister.com | Napa, CA | 16,937 | 17,357 | |||||||||
| The Sentinel (6) |
cumberlink.com | Carlisle, PA | 14,650 | 15,503 | |||||||||
| Independent Record |
helenair.com | Helena, MT | 14,439 | 15,031 | |||||||||
| The Montana Standard |
mtstandard.com | Butte, MT | 14,245 | 14,519 | |||||||||
| The Sentinel (2) |
hanfordsentinel.com | Hanford, CA | 13,759 | 13,141 | |||||||||
| The World (2) |
theworldlink.com | Coos Bay, OR | 12,388 | - | |||||||||
| The Citizen (6) |
auburnpub.com | Auburn, NY | 11,648 | 13,555 | |||||||||
| Arizona Daily Sun (2) |
azdailysun.com | Flagstaff, AZ | 11,319 | 12,469 | |||||||||
| Daily Chronicle (2) |
daily-chronicle.com | DeKalb, IL | 9,698 | 10,719 | |||||||||
| The Garden Island (2) |
kauaiworld.com | Lihue, HI | 9,404 | 9,639 | |||||||||
| The Ledger Independent (6) |
maysville-online.com | Maysville, KY | 8,564 | - | |||||||||
| Daily Journal (2) |
dailyjournalonline.com | Park Hills, MO | 8,117 | 8,335 | |||||||||
| The Chippewa Herald |
chippewa.com | Chippewa Falls, WI | 6,882 | 7,079 | |||||||||
| 1,637,289 | 1,910,384 | ||||||||||||
| (1) | Source: ABC: Six months ended September 2006, unless otherwise noted. |
| (2) | Acquired in 2005. |
| (3) | Owned by Star Publishing but published through TNI. |
| (4) | Owned by MNI, which is 50% owned by the Company. |
| (5) | Combined edition. |
| (6) | Acquired in 2002. |
| (7) | Source: Company statistics. |
| (8) | Acquired in 2004. |
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COMMERCIAL PRINTING
The Company offers commercial printing services through the following entities:
| Location | ||
| Selma Enterprises |
Selma, California | |
| William Street Press |
Decatur, Illinois | |
| Hawkeye Printing and Trico Communications |
Davenport, Iowa | |
| Platen Press |
Butte, Montana | |
| Farcountry Press |
Helena, Montana | |
| Journal Star Commercial Printing |
Lincoln, Nebraska | |
| Plaindealer Publishing |
Tekamah, Nebraska | |
| Triangle Press |
Chippewa Falls, Wisconsin | |
| Wingra Printing (1) |
Madison, Wisconsin | |
| (1) | Owned by MNI, which is 50% owned by the Company. |
Certain of the Company’s newspapers also directly provide commercial printing services. Commercial printing business is highly competitive and generally has lower operating margins than newspapers.
NEWSPRINT
The basic raw material of newspapers, and classified and specialty publications, is newsprint. The Company and its subsidiaries purchase newsprint from U.S. and Canadian producers. The Company believes it will continue to receive a supply of newsprint adequate for its needs and considers its relationships with newsprint producers to be good. Newsprint prices are volatile and fluctuate based upon factors that include both foreign and domestic production capacity and consumption. Between September 2005 and September 2006, the Resource Information Systems, Inc. 30 pound newsprint price index rose 7.8%. Price fluctuations can have a significant effect on the results of operations. The Company has not entered into derivative contracts for newsprint. For additional information regarding supply of newsprint, see “Contractual Obligations” under Item 7, included herein. For the quantitative impacts of these fluctuations, see “Quantitative And Qualitative Disclosures About Market Risk” under Item 7A, included herein.
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EXECUTIVE TEAM
The following table lists executive team members of the Company as of November 30, 2006:
| Name | Age | Service with the Company |
Named to Current Position |
Current Position | ||||
| Mary E. Junck |
59 | June 1999 | January 2002 | Chairman, President and Chief Executive Officer | ||||
| Joyce L. Dehli |
48 | August 1987 | February 2006 | Vice President – News | ||||
| Nancy L. Green |
64 | December 2000 | September 2002 | Vice President – Circulation | ||||
| Karen J. Guest |
53 | July 2006 | July 2006 | Vice President – Law and Chief Legal Officer | ||||
| Michael R. Gulledge |
46 | October 1982 | May 2005 | Vice President – Publishing | ||||
| Daniel K. Hayes |
61 | September 1969 | September 2005 | Vice President – Corporate Communications | ||||
| Brian E. Kardell |
43 | January 1991 | August 2003 | Vice President – Production and Chief Information Officer | ||||
| Vytenis P. Kuraitis |
58 | August 1994 | January 1997 | Vice President – Human Resources | ||||
| Linda Ritchie Lindus |
58 | April 2000 | October 2005 | Vice President – Publishing | ||||
| Kevin D. Mowbray |
44 | September 1986 | November 2004 | Vice President – Publishing | ||||
| Gregory P. Schermer |
52 | February 1989 | November 1997 | Vice President – Interactive Media | ||||
| Carl G. Schmidt |
50 | May 2001 | May 2001 | Vice President, Chief Financial Officer and Treasurer | ||||
| John VanStrydonck |
53 | March 1981 | June 2000 | Vice President – Publishing | ||||
| Greg R. Veon |
54 | April 1976 | November 1999 | Vice President – Publishing | ||||
Mary E. Junck was elected Chairman, President and Chief Executive Officer in January 2002. From January 2001 to January 2002 she served as President and Chief Executive Officer. From January 2000 to January 2001 she served as President and Chief Operating Officer. From May 1999 to January 2000 she served as Executive Vice President and Chief Operating Officer.
Joyce L. Dehli was appointed Vice President – News in February 2006. From April 2005 to February 2006, she served as Director of Editorial Development. From October 2004 to April 2005 she served as Editorial Training Manager. From August 2003 to October 2004 she served as Managing Editor of the Wisconsin State Journal. From April 2001 to August 2003 she served as Assistant Managing Editor of the Wisconsin State Journal.
Nancy L. Green was appointed Vice President – Circulation in September 2002 and named Publisher of The Courier in August 2004. From December 2000 to September 2002, she served as Director of Circulation Sales, Distribution and Marketing.
Karen J. Guest was appointed Vice President – Law and Chief Legal Officer in July 2006. From April 2003 until July 2006, she served as General Counsel to PAJ, Inc. Prior to April 2003, she served as Vice-President/General Counsel for United Advertising Publications, Inc.
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Michael R. Gulledge was elected a Vice President – Publishing in May 2005 and named Publisher of the Billings Gazette in October 2000. From February 2002 to May 2005 he served as a Group Publisher.
Daniel K. Hayes was appointed Vice President – Corporate Communications in September 2005. From 1998 to September 2005 he served as Director of Communications.
Brian E. Kardell was appointed Vice President – Production and Chief Information Officer in August 2003. From 2001 to August 2003, he served as Vice President – Information Systems and Chief Information Officer. From 1997 to 2001, he served as Director of Information Services and Chief Information Officer.
Vytenis P. Kuraitis was elected Vice President – Human Resources in 1997.
Linda Ritchie Lindus was elected a Vice President – Publishing in October 2005 and named Publisher of The Pantagraph in June 2005. From February 2002 to October 2005 she served as a Group Publisher. From July 2002 to June 2005 she also served as Publisher of the Herald & Review. From April 2000 to February 2002, she served as Publisher of The Southern Illinoisan.
Kevin D. Mowbray was elected a Vice President – Publishing in November 2004 and named Publisher of the St. Louis Post-Dispatch in May 2006. From November 2004 to May 2006 he served Publisher of The Times. From July 2002 to November 2004 he served as Vice President – Sales & Marketing. From 2000 to July 2002 he served as Publisher of The Bismarck Tribune.
Gregory P. Schermer was elected Vice President – Interactive Media in November 1997. He also serves on the Board of Directors of the Company. From 1989 to 2006, he served as Corporate Counsel of the Company.
Carl G. Schmidt was elected Vice President, Chief Financial Officer and Treasurer in May 2001.
John VanStrydonck was elected a Vice President – Publishing in June 2000 and named Publisher of the Missoulian in October 2002.
Greg R. Veon was elected a Vice President – Publishing in November 1999.
EMPLOYEES
At September 30, 2006, the Company had approximately 9,400 employees, including approximately 2,400 part-time employees, exclusive of MNI and TNI. Full-time equivalent employees at September 30, 2006 totaled approximately 8,300. The Company considers its relationships with its employees to be good.
Bargaining unit employees represent approximately 900, or 72%, of the total employees of the St. Louis Post-Dispatch. The St. Louis Post-Dispatch has contracts with substantially all bargaining unit employees with expiration dates ranging from November 2006 through January 2011. In 2006, the Company executed a new agreement, expiring in 2012, with the St. Louis Graphic Communications Local 38N, which represents approximately 100 employees in St. Louis. The St. Louis Post-Dispatch is currently in negotiations with the Graphic Communications International Union (GCIU) Local No. 6-505M, which represents approximately 13 employees and the Machinist District No. 9, which represents 12 employees. The GCIU contract expired in September 2002. All St. Louis Post-Dispatch labor contracts contain no-strike clauses.
Approximately 160 employees in eight additional locations are represented by collective bargaining units. Contracts at two of these locations are expired and negotiations are ongoing.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
The Company has a long, substantial history of progressive corporate governance practices. The Board of Directors has a lead independent director, and has had one for many years. Currently, seven of nine members of the Board of Directors are independent, as are all members of the Board’s Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by the Company’s independent registered public accounting firm and its affiliates.
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In addition, the Company’s revenue, including same property results, is reported to the public on a monthly basis, as is certain other statistical information, improving the timeliness of reporting of information to investors. The Company was also among the first to voluntarily record expense related to employee stock options.
At www.lee.net, one may access a wide variety of information, including news releases, Securities and Exchange Commission filings, financial statistics, annual reports, presentations, governance documents, newspaper profiles and online links. The Company makes available via its website, all filings made by the Company under the Securities Exchange Act of 1934, including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All such filings are available free of charge. The content of any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
OTHER MATTERS
In the opinion of management, compliance with present statutory and regulatory requirements respecting environmental quality will not necessitate significant capital outlays, materially affect the earning power of the business of the Company, or cause material changes in the Company’s business, whether present or intended.
ITEM 1A. RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
Risk exists that the Company’s past results may not be indicative of future results. A discussion of certain of the more significant of these risks follows. See also, “Forward-Looking Statements” on page 1, included herein.
OPERATING REVENUE
Advertising revenue in certain categories, or all categories, may decrease in the future. For example, automotive classified advertising revenue declined in 2006, primarily related to industry-wide issues affecting certain domestic auto manufacturers. Such decreases may not be compensated for by growth in advertising in other categories. In addition, major retail store chains have experienced significant merger and acquisition activity over the last several years, effectively reducing the number of brand names under which the merged entities operate. Such reductions may negatively impact future amounts of advertising revenue generated by the Company.
Circulation unit sales have been declining fractionally for several years. To date, declines in circulation unit sales have not substantially mitigated the Company’s ability to implement price increases for its products. However, the possibility exists that future price increases may be delayed or reduced as a result of future declines in circulation unit sales. The Company is reaching an increasingly larger share of the market through rapid online growth, as well as through additional specialty and niche publications.
See Item 1, “Advertising”, included herein, for additional information on the risks associated with advertising revenue.
OPERATING EXPENSES
Newsprint comprises a significant amount of the Company’s operating costs. See Item 1, “Newsprint” and Item 7A, “Commodities”, included herein, for additional information on the risks associated with newsprint costs.
INTEREST EXPENSE
The Company has substantial debt, the majority of which is subject to changes in market interest rates. See Item 7A, “Interest Rates”, included herein, for additional information on the risks associated with floating rate debt.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
The Company’s executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The lease expires in 2019.
All of the Company’s principal printing facilities (except Madison, Wisconsin, which is owned by MNI, Tucson, which is jointly owned by Star Publishing and Citizen, and leased land for the Helena, Montana and Lihue, Hawaii plants) are owned. All facilities are well maintained, in good condition, suitable for existing office and publishing operations and adequately equipped. With the exception of St. Louis, none of the Company’s facilities is individually significant to its business.
Information related to St. Louis facilities at September 30, 2006 is as follows:
| (Square Feet) | Owned | Leased | ||
| PD LLC |
753,819 | 56,107 | ||
| Suburban Journals |
127,335 | 41,330 | ||
The Baraboo News Republic, Beatrice Daily Sun, Corvallis Gazette-Times, Daily Citizen, Journal Gazette, The Lompoc Record, Muscatine Journal, Ravalli Republic, Times Courier and Winona Daily News, as well as many of the Company’s and MNI’s more than 300 other publications, are printed at other Company facilities to enhance operating efficiency. The Company’s newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.
The Company is involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While the Company is unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters will not have a material adverse effect on the Company’s Consolidated Financial Statements, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2006.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Common Stock of the Company is listed on the New York Stock Exchange. Class B Common Stock is not traded on an exchange but is readily convertible to Common Stock. Class B Common Stock was issued to stockholders of record of the Company in 1986 pursuant to a 100% stock dividend and is converted at sale, or at the option of the holder, into Common Stock. The table below includes the high and low prices of Common Stock for each quarter during the past three years, the closing price at the end of each quarter and dividends per common share.
| Quarter | ||||||||||||
| 1st | 2nd | 3rd | 4th | |||||||||
| STOCK PRICES |
||||||||||||
| 2006 |
||||||||||||
| High |
$ | 43.05 | $ | 37.43 | $ | 33.74 | $ | 27.61 | ||||
| Low |
36.36 | 32.26 | 26.95 | 22.98 | ||||||||
| Closing |
36.91 | 33.29 | 26.95 | 25.24 | ||||||||
| 2005 |
||||||||||||
| High |
$ | 48.85 | $ | 46.06 | $ | 43.68 | $ | 44.32 | ||||
| Low |
44.87 | 42.70 | 39.82 | 39.90 | ||||||||
| Closing |
46.08 | 43.40 | 40.09 | 42.48 | ||||||||
| 2004 |
||||||||||||
| High |
$ | 44.15 | $ | 46.94 | $ | 49.83 | $ | 48.78 | ||||
| Low |
38.67 | 43.35 | 45.05 | 44.65 | ||||||||
| Closing |
43.65 | 45.18 | 48.01 | 46.34 | ||||||||
| DIVIDENDS |
||||||||||||
| 2006 |
$ | 0.18 | $ | 0.18 | $ | 0.18 | $ | 0.18 | ||||
| 2005 |
0.18 | 0.18 | 0.18 | 0.18 | ||||||||
| 2004 |
0.18 | 0.18 | 0.18 | 0.18 | ||||||||
Common Stock and Class B Common Stock have identical rights with respect to cash dividends and upon liquidation. For a more complete description of the relative rights of Common Stock and Class B Common Stock, see Note 12 of the Notes to Consolidated Financial Statements, included herein.
At September 30, 2006, the Company had 7,172 holders of Common Stock, including participants in the Company’s employee stock purchase plans, and 1,485 holders of Class B Common Stock.
During the three months ended September 30, 2006, the Company purchased shares of Common Stock, as noted in the table below, in transactions with participants in its 1990 Long-Term Incentive Plan. The transactions resulted from the withholding of shares to fund the exercise price and/or taxes related to the exercise of stock options. The Company is not currently engaged in share repurchases related to a publicly announced plan or program.
| Month | Total Number of Shares Purchased |
Average Price Per Share | |||
| September |
835 | $ | 25.24 | ||
On November 15, 2006, the Board of Directors declared a dividend in the amount of $0.18 per share on the issued and outstanding Common Stock and Class B Common Stock of the Company, to be paid on January 2, 2007, to stockholders of record on December 1, 2006.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is as follows:
| (Thousands, Except Per Common Share Data) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
| (1) | (2) | |||||||||||||||||||
| OPERATING RESULTS |
||||||||||||||||||||
| Operating revenue |
$ | 1,128,648 | $ | 818,890 | $ | 643,277 | $ | 606,489 | $ | 476,585 | ||||||||||
| Operating expenses, excluding depreciation and amortization |
849,288 | 614,111 | 466,866 | 442,911 | 344,177 | |||||||||||||||
| Depreciation and amortization |
96,070 | 59,249 | 43,930 | 41,903 | 30,274 | |||||||||||||||
| Equity in earnings of associated companies |
20,739 | 12,784 | 8,523 | 8,053 | 9,057 | |||||||||||||||
| Operating income |
204,029 | 158,314 | 141,004 | 129,728 | 111,191 | |||||||||||||||
| Financial income |
6,054 | 2,824 | 1,066 | 1,120 | 6,007 | |||||||||||||||
| Financial expense |
(95,939 | ) | (38,038 | ) | (12,665 | ) | (16,535 | ) | (15,777 | ) | ||||||||||
| Income from continuing operations |
$ | 71,136 | $ | 70,862 | $ | 82,973 | $ | 73,022 | $ | 74,103 | ||||||||||
| Discontinued operations |
(304 | ) | 6,016 | 3,098 | 5,019 | 5,727 | ||||||||||||||
| Net income |
$ | 70,832 | $ | 76,878 | $ | 86,071 | $ | 78,041 | $ | 79,830 | ||||||||||
| EARNINGS (LOSS) PER COMMON SHARE |
|
|||||||||||||||||||
| Basic: |
||||||||||||||||||||
| Continuing operations |
$ | 1.57 | $ | 1.57 | $ | 1.85 | $ | 1.65 | $ | 1.68 | ||||||||||
| Discontinued operations |
(0.01 | ) | 0.13 | 0.07 | 0.11 | 0.13 | ||||||||||||||
| Net income |
$ | 1.56 | $ | 1.70 | $ | 1.92 | $ | 1.76 | $ | 1.81 | ||||||||||
| Diluted: |
||||||||||||||||||||
| Continuing operations |
$ | 1.56 | $ | 1.56 | $ | 1.84 | $ | 1.64 | $ | 1.67 | ||||||||||
| Discontinued operations |
(0.01 | ) | 0.13 | 0.07 | 0.11 | 0.13 | ||||||||||||||
| Net income |
$ | 1.56 | $ | 1.70 | $ | 1.91 | $ | 1.75 | $ | 1.80 | ||||||||||
| Weighted average common shares: |
||||||||||||||||||||
| Basic |
45,421 | 45,118 | 44,792 | 44,316 | 44,087 | |||||||||||||||
| Diluted |
45,546 | 45,348 | 45,092 | 44,513 | 44,351 | |||||||||||||||
| Dividends per common share |
$ | 0.72 | $ | 0.72 | $ | 0.72 | $ | 0.68 | $ | 0.68 | ||||||||||
| BALANCE SHEET INFORMATION (September 30) |
|
|||||||||||||||||||
| Total assets |
$ | 3,329,809 | $ | 3,445,200 | $ | 1,403,844 | $ | 1,421,377 | $ | 1,463,830 | ||||||||||
| Debt, including current maturities (3) |
1,525,000 | 1,688,000 | 213,600 | 305,200 | 409,300 | |||||||||||||||
| Stockholders’ equity |
990,625 | 936,410 | 876,843 | 802,156 | 742,774 | |||||||||||||||
| (1) | Includes four months of operations from the Pulitzer acquisition, which was consummated in June 2005. |
| (2) | Includes six months of operations from the Howard acquisition, which was consummated in April 2002. |
| (3) | Principal amount, excluding fair value adjustments in 2006 and 2005. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to the Company’s results of operations and financial condition as of, and for the three years ended, September 2006. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
NON-GAAP FINANCIAL MEASURES
Operating Cash Flow and Operating Cash Flow Margin
Operating cash flow, which is defined as operating income before depreciation, amortization, and equity in earnings of associated companies, and operating cash flow margin (operating cash flow divided by operating revenue) represent non-GAAP financial measures that are used in the analysis below. The Company believes that operating cash flow and the related margin percentage are useful measures of evaluating its financial performance because of their focus on the Company’s results from operations before depreciation and amortization. The Company also believes that these measures are several of the alternative financial measures of performance used by investors, lenders, rating agencies and financial analysts to estimate the value of a company and evaluate its ability to meet debt service requirements.
A reconciliation of operating cash flow and operating cash flow margin to operating income, the most directly comparable measure under accounting principles generally accepted in the United States of America (GAAP), is included in the table below:
| (Thousands) | 2006 | Percent of Revenue |
2005 | Percent of Revenue |
2004 | Percent of Revenue |
||||||||||||
| Operating cash flow |
$ | 279,360 | 24.8 | % | $ | 204,779 | 25.0 | % | $ | 176,411 | 27.4 | % | ||||||
| Depreciation and amortization |
96,070 | 8.5 | 59,249 | 7.2 | 43,930 | 6.8 | ||||||||||||
| Equity in earnings of |
20,739 | 1.8 | 12,784 | 1.6 | 8,523 | 1.3 | ||||||||||||
| Operating income |
$ | 204,029 | 18.1 | % | $ | 158,314 | 19.3 | % | $ | 141,004 | 21.9 | % | ||||||
Adjusted Income From Continuing Operations and Adjusted Earnings Per Common Share
The Company believes the use of the non-GAAP financial measures of adjusted income from continuing operations and adjusted earnings per common share provide meaningful supplemental information to investors and financial analysts with which to evaluate its financial performance by excluding expenses that may not be indicative of its core business operating results and are of a substantially non-recurring nature. The Company also believes that both management and investors benefit from referring to these non-GAAP financial measures in assessing the Company’s performance and in forecasting and analyzing future periods that are not likely to include the adjusted items. References to these non-GAAP measures should not, however, be considered a substitute for net income and earnings per common share presented in accordance with GAAP.
SAME PROPERTY COMPARISONS
Certain information below, as noted, is presented on a same property basis, which is exclusive of acquisitions and divestitures consummated in the current or prior year. The Company believes such comparisons provide meaningful information for an understanding of changes in its revenue and operating expenses. Same property comparisons exclude MNI. The Company owns 50% of the capital stock of MNI, which for financial reporting purposes is reported using the equity method of accounting. Same property comparisons also exclude corporate office costs.
CRITICAL ACCOUNTING POLICIES
The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s Consolidated Financial Statements, which have been prepared in accordance with
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GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of the Company’s accounting policies.
Goodwill and Other Intangible Assets
In assessing the recoverability of its goodwill and other nonamortized intangible assets, the Company makes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company analyzes its goodwill and other nonamortized intangible assets for impairment on an annual basis or more frequently if impairment indicators are present. See Note 6 of the Notes to Consolidated Financial Statements, included herein, for a more detailed explanation of the Company’s intangible assets.
The Company also periodically evaluates its determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact the cash flows of the Company. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.
Pension, Postretirement and Postemployment Benefit Plans
The Company evaluates its liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If the Company used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
Income Taxes
Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company files income tax returns with the Internal Revenue Service and various state tax jurisdictions. From time to time, the Company is subject to routine audits by those agencies, and those audits may result in proposed adjustments. The Company has considered the alternative interpretations that may be assumed by the various taxing agencies, believes its positions taken regarding its filings are valid, and that adequate tax liabilities have been recorded to resolve such matters.
Revenue Recognition
Advertising revenue is recorded when advertisements are placed in the publication or on the related online site. Circulation revenue is recorded as newspapers are distributed over the subscription term. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for newspapers or advance payments for advertising.
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Uninsured Risks
The Company is self-insured for health care, workers compensation and certain long-term disability costs of its employees, subject to stop loss insurance, which limits exposure to large claims. The Company accrues its estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts.
The Company’s reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 2005 the Company adopted Financial Accounting Standards Board (FASB) Statement 123-Revised, Accounting for Stock-Based Compensation (Statement 123R) and related FASB staff positions. Statement 123R amends Statement 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than a reduction of taxes paid.
Statement 123R also establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods and services (primarily accounting transactions in which an entity obtains employee services in share-based payment transactions, such as stock options). Statement 123R requires a public entity to measure the cost of employee services received in exchange for an equity instrument based on the grant date fair value of the award. In general, the cost will be recognized over the period during which an employee is required to provide the service in exchange for the award (usually the vesting period). The fair value based methods in Statement 123R are similar to the fair value based method in Statement 123 in most respects. The Company adopted Statement 123 in 2003.
In October 2005 the Company adopted FASB Statement 153, Exchanges of Nonmonetary Assets. This pronouncement amends APB Opinion 29, Accounting for Nonmonetary Transactions. Statement 153 eliminates the exception for nonmonetary exchanges of similar productive assets present in APB Opinion 29 and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance (i.e. transactions that are not expected to result in significant changes in the cash flows of the reported entity).
In October 2005 the Company adopted FASB Interpretation 47, Accounting for Conditional Asset Retirement Obligations. Interpretation 47 requires an entity to recognize a liability for a legal obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on a future event. The liability must be recognized if the fair value of the liability can be reasonably estimated.
The adoption of the statements and interpretation discussed above did not have a material impact on the Company’s financial position, results of operations, or cash flows.
In May 2005 the FASB issued Statement 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3, that changes the requirements for the accounting and reporting of a change in accounting principle. Statement 154 eliminates the requirement to include the cumulative effect of changes in accounting principles in the current period of change and instead, requires that changes in accounting principle be retrospectively applied. Statement 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the implementation of Statement 154 will have a material impact on its financial position, results of operations, or cash flows.
In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes, which is effective for fiscal years beginning after December 15, 2006. Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement 109. Interpretation 48 prescribes a comprehensive model for how a company should recognize, measure,
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present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company has not completed its evaluation of the effects of Interpretation 48 on its Consolidated Financial Statements.
In September 2006, the FASB issued Statement 157, Fair Value Measurements, which defines fair value, provides guidelines for measuring fair value and expands disclosure requirements. Statement 157 does not require any new fair value measurement but applies to the accounting pronouncements that require or permit fair value measurement. Statement 157 is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that the implementation of Statement 157 will have a material impact on its financial position, results of operation, or cash flows.
In September 2006, the FASB issued Statement 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, which amends statements 87, 88, 106 and 132(R). Statement 158 requires the recognition of the over-funded or under-funded status of a defined benefit postretirement plans as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Statement 158 is effective at the end of 2007. Had Statement 158 been adopted at September 30, 2006, the Company’s assets would have increased and liabilities would have decreased in the aggregate amount of $44,191,000, less the related income tax effect, and stockholders’ equity would have increased by $44,191,000, less the related income tax effect. Actual adjustments have not been determined as the related actuarial computations have not been performed.
Statement 158 will also require the Company to change its measurement date from June 30 to September 30, beginning in 2008. The change in measurement date will require a one-time adjustment to retained earnings, the effect of which cannot be determined at this time. None of the changes required will impact the Company’s results of operations or cash flows.
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CONTINUING OPERATIONS
2006 vs. 2005
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
| Percent Change | ||||||||||||||
| (Thousands, Except Per Common Share Data) | 2006 | 2005 | Total | Same Property |
||||||||||
| Advertising revenue: |
||||||||||||||
| Retail |
$ | 463,991 | $ | 341,977 | 35.7 | % | 0.5 | % | ||||||
| National |
57,869 | 33,031 | 75.2 | (7.2 | ) | |||||||||
| Classified: |
||||||||||||||
| Daily newspapers: |
||||||||||||||
| Employment |
90,472 | 63,923 | 41.5 | 7.1 | ||||||||||
| Automotive |
60,953 | 49,320 | 23.6 | (10.2 | ) | |||||||||
| Real estate |
63,802 | 47,171 | 35.3 | 1.3 | ||||||||||
| All other |
39,253 | 29,200 | 34.4 | 1.8 | ||||||||||
| Other publications |
45,868 | 28,411 | 61.4 | 6.7 | ||||||||||
| Total classified |
300,348 | 218,025 | 37.8 | 1.1 | ||||||||||
| Online |
35,769 | 17,983 | 98.9 | 43.1 | ||||||||||
| Niche publications |
16,591 | 13,093 | 26.7 | 8.2 | ||||||||||
| Total advertising revenue |
874,568 | 624,109 | 40.1 | 1.7 | ||||||||||
| Circulation |
205,718 | 153,571 | 34.0 | (1.0 | ) | |||||||||
| Commercial printing |
17,265 | 14,766 | 16.9 | 0.3 | ||||||||||
| Online services and other |
31,097 | 26,444 | 17.6 | (1.3 | ) | |||||||||
| Total operating revenue |
1,128,648 | 818,890 | 37.8 | 1.1 | ||||||||||
| Compensation |
435,836 | 325,959 | 33.7 | 1.8 | ||||||||||
| Newsprint and ink |
120,191 | 79,331 | 51.5 | 8.7 | ||||||||||
| Other operating expenses |
280,018 | 190,768 | 46.8 | 5.5 | ||||||||||
| Early retirement program |
8,654 | 9,124 | NM | NM | ||||||||||
| Transition costs |
4,589 | 8,929 | NM | NM | ||||||||||
| 849,288 | 614,111 | 38.3 | 3.9 | |||||||||||
| Operating cash flow |
279,360 | 204,779 | 36.4 | (5.0 | ) | |||||||||
| Depreciation and amortization |
96,070 | 59,249 | 62.1 | (1.8 | ) | |||||||||
| Equity in earnings of associated companies |
20,739 | 12,784 | 62.2 | |||||||||||
| Operating income |
204,029 | 158,314 | 28.9 | |||||||||||
| Non-operating expense, net |
(91,922 | ) | (46,834 | ) | 96.3 | |||||||||
| Income from continuing operations before income taxes |
112,107 | 111,480 | 0.6 | |||||||||||
| Income tax expense |
39,740 | 40,458 | (1.8 | ) | ||||||||||
| Minority interest |
1,231 | 160 | NM | |||||||||||
| Income from continuing operations |
$ | 71,136 | $ | 70,862 | 0.4 | % | ||||||||
| Earnings per common share from continuing operations: |
||||||||||||||
| Basic |
$ | 1.57 | $ | 1.57 | - | % | ||||||||
| Diluted |
1.56 | 1.56 | - | |||||||||||
Sundays generate substantially more advertising and circulation revenue than any other day of the week. 2006 had the same number of Sundays as 2005.
In June 2005, the Company acquired Pulitzer. Pulitzer published fourteen daily newspapers (the smallest of which was sold in 2006), including the St. Louis Post-Dispatch, and more than 100 weekly newspapers and specialty publications. Pulitzer also owns a 50% interest in TNI. The acquisition of Pulitzer increased the Company’s circulation by more than 50% and revenue by more than 60%.
In total, acquisitions and divestitures accounted for $450,341,000 of operating revenue in 2006 and $147,643,000 of operating revenue in 2005.
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Table of Contents
Advertising Revenue
In 2006, total advertising revenue increased $250,459,000, or 40.1%, and same property advertising revenue increased $8,559,000, or 1.7%. Same property retail revenue increased $1,431,000, or 0.5%, in 2006. Continuing emphasis on rate discipline offset by a 1.0% decrease in retail advertising lineage contributed to the increase. Same property average retail rates, excluding preprint insertions, increased 1.2% in 2006. Rate discipline means adhering to standard rates rather than negotiating specific rates for individual customer situations.
Same property classified advertising revenue increased $1,907,000, or 1.1%, in 2006. Higher rate employment advertising at the daily newspapers increased 7.1% for the year on a same property basis. The Company’s increases in employment classified advertising compare favorably to national survey amounts. The September 2006 Help Wanted Index, as calculated by the Conference Board, decreased 18.9% from the prior year level. Same property average automotive advertising decreased 10.2%, due to a 3.6% decrease in average automotive rates and a 6.8% decrease in lineage. Same property real estate advertising increased 1.3% due to an increase in advertising of real estate for sale. Other daily newspaper classified advertising increased 1.8% on a same property basis. Same property classified advertising rates increased 1.1%, primarily due to an increase in employment rates offset by declines in automotive rates.
Advertising lineage, as reported on a same property basis for the Company’s daily newspapers only, consists of the following:
| (Thousands of Inches) |
2006 | 2005 | Percent Change | ||||
| Retail |
10,633 | 10,741 | (1.0 | )% | |||
| National |
492 | 580 | (15.2 | ) | |||
| Classified |
11,917 | 11,976 | (0.5 | ) | |||
| 23,042 | 23,297 | (1.1 | )% | ||||
Online advertising revenue increased 43.1% on a same property basis, due to rate increases, expanded use of the Company’s online business model and cross-selling with the Company’s print publications. Online classified advertising registered particularly strong growth. Advertising in niche publications increased 8.2% on a same property basis, due to new publications in existing markets and penetration of new and existing markets, offset by the loss of one significant publication in a larger market.
Circulation and Other Revenue
Circulation revenue increased $52,147,000, or 34.0% in 2006, and same property circulation revenue decreased $1,230,000, or 1.0%. The Company’s total average daily newspaper circulation units, including Pulitzer, TNI and MNI, as measured by the ABC, declined 0.2% for the six months ended September 2006, compared to the same period in the prior year, and Sunday circulation declined 0.5%, significantly outperforming the industry as a whole. For the six months ended March 2006, total average daily circulation units, including Pulitzer, TNI and MNI, declined 0.6% and Sunday circulation decreased 1.0%, again outperforming the industry. In spite of modest declines in circulation, the Company is reaching an increasingly larger share of the market through rapid online growth, as well as through additional specialty and niche publications.
Same property commercial printing revenue increased $45,000, or 0.3%, in 2006. Same property online services and other revenue decreased $314,000, or 1.3%, in 2006.
Operating Expenses and Results of Operations
Costs other than depreciation and amortization increased $235,177,000, or 38.3%, in 2006, and increased $17,728,000, or 3.9%, on a same property basis. In total, acquisitions and divestitures accounted for $345,467,000 of operating expenses, excluding depreciation and amortization, in 2006 and $155,404,000 in 2005.
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Compensation expense increased $109,877,000, or 33.7%, in 2006 due to costs of acquired businesses and a 1.8% increase in same property compensation expense. Normal salary adjustments and associated increases in payroll taxes and benefits account for the increase in same property costs. Same property full time equivalent employees declined 0.4% in 2006 from the prior year level.
Newsprint and ink costs increased $40,860,000, or 51.5%, in 2006 due to price increases and costs of acquired businesses, and increased 8.7% on a same property basis. Volume decreased 2.0% on a same property basis, due to migration to lighter weight paper and narrower page widths. Newsprint unit costs had been rising since late 2002 and, though prices now appear to be stabilizing, additional increases may negatively impact 2007 results.
Other operating costs, which are comprised of all operating expenses not considered to be compensation, newsprint, depreciation and amortization, increased $89,250,000, or 46.8%, in 2006 and increased 5.5% on a same property basis. Costs associated with new niche publications and expenses to increase circulation using sources other than telemarketing also contributed to the growth in costs. Changes in telemarketing regulations enacted in 2004 will continue to impact the Company’s ability to solicit new subscribers, and the cost of such solicitation, in the future.
In 2006, the St. Louis Post-Dispatch concluded an offering of early retirement incentives that resulted in an adjustment of staffing levels. 130 employees volunteered to take advantage of the offer, which included enhanced pension and insurance benefits, and lump-sum cash payments based on continuous service. The annual pretax savings from the program, net of positions filled, is estimated to be $6,600,000 to $7,000,000, with savings of $6,575,000 in 2006. The cost totaled $17,778,000 before income tax benefit, with $8,654,000 recognized in 2006, and $9,124,000 in 2005. Approximately $7,000,000 of the cost represents cash payments made, with the remainder due primarily to enhancements of pension and other postretirement benefits.
Transition costs related to the acquisition of Pulitzer, which are not included in same property comparisons, totaled $4,589,000 in 2006 and $8,929,000 in 2005. Transition costs are comprised of costs directly related to the acquisition of Pulitzer that are separately identifiable and non-recurring, but not capitalizable under GAAP.
Operating cash flow increased 36.4% to $279,360,000 in 2006 from $204,779,000 in 2005, and decreased 5.0% on a same property basis. Operating cash flow margin decreased to 24.8% from 25.0% in the prior year reflecting the overall lower margin of the Pulitzer newspapers, transition costs related to the Pulitzer acquisition and the St. Louis Post-Dispatch early retirement program.
Depreciation expense increased $10,149,000, or 42.7%, and amortization expense increased $26,672,000, or 75.1%, in 2006, due primarily to the acquisition of Pulitzer.
In 2006, the Company, based on its most recent analysis and in conjunction with its ongoing requirement to assess the estimated useful lives of intangible assets, concluded that the period of economic benefit of certain identified intangible assets related to the Pulitzer acquisition had decreased. As a result, the weighted-average useful life of customer lists was decreased from approximately 21 years to 17 years.
The change in estimated useful life of such assets resulted in recognition of additional amortization expense of $1,847,000 in the last four months of 2006, of which $469,000 is recorded in equity in earnings of TNI. The Company expects amortization to increase by approximately $5,544,000 in 2007 solely as a result of the change in useful life. $1,408,000 of this amount will reduce equity in earnings of TNI. This change in non-cash amortization expense has no impact on the Company’s cash flows or debt covenants.
In 2006, the Company also recorded a separate non-cash charge of $5,526,000 to reduce the value of nonamortized masthead intangible assets of Pulitzer, of which $4,939,000 is recorded in amortization expense and $587,000 is recorded in equity in earnings of TNI.
Equity in earnings in associated companies increased 62.2% in 2006 due to the inclusion of TNI for the full year, offset by a decrease in earnings of MNI. MNI results were reduced by the $1,002,000 loss on
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sale of its Shawano, Wisconsin daily newspaper. Operating income increased $45,715,000, or 28.9%. Operating income margin decreased to 18.1% in 2006 from 19.3% due to the inclusion of Pulitzer results, early retirement and transition costs and the reduction in value of intangible assets noted above.
Non-Operating Income and Expense
Financial expense increased $57,901,000, or 152.2%, to $95,939,000 due to the full year effect of increased debt and associated financing costs as a result of the Pulitzer acquisition and higher interest rates, partially offset by substantial debt reduction of $163,000,000 funded by cash generated from operations and sales of assets. In 2006 the Company wrote off certain other investments which resulted in a loss before income taxes of $2,037,000. In 2005, the Company refinanced its then existing debt as a result of the Pulitzer acquisition, which resulted in a one-time pretax loss from early extinguishment of debt of $11,181,000.
Overall Results
Income taxes were 35.4% of income from continuing operations before income taxes in 2006 and 36.3% in 2005. The Company believes, absent unusual tax settlements, that its effective income tax rate in 2007 will approximate the rate in 2006.
As a result of all of the above, income from continuing operations totaled $71,136,000 in 2006, an increase of 0.4% compared to $70,862,000 in 2005. Earnings per diluted common share from continuing operations were $1.56 in both 2006 and 2005. Excluding unusual costs, as detailed in the table below, diluted earnings per common share, as adjusted, were $1.84 in 2006, compared to $1.96 in 2005.
| 2006 | 2005 | |||||||||||||
| (Thousands, Except Per Share Data) | Amount | Per Share | Amount | Per Share | ||||||||||
| Income from continuing operations, as reported |
$ | 71,136 | $ | 1.56 | $ | 70,862 | $ | 1.56 | ||||||
| Adjustments to income from continuing operations: |
||||||||||||||
| Early retirement program |
8,654 | 9,124 | ||||||||||||
| Reduction in value of identified intangible assets |
5,526 | - | ||||||||||||
| Transition costs |
4,589 | 8,929 | ||||||||||||
| Loss on extinguishment of debt |
- | 11,181 | ||||||||||||
| 18,769 | 29,234 | |||||||||||||
| Income tax benefit of adjustments, net |
(6,316 | ) | (11,401 | ) | ||||||||||
| 12,453 | 0.27 | 17,833 | 0.39 | |||||||||||
| Income from continuing operations, as adjusted |
$ | 83,589 | $ | 1.84 | $ | 88,695 | $ | 1.96 | ||||||
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CONTINUING OPERATIONS
2005 vs. 2004
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
| Percent Change | ||||||||||||||
| (Thousands, Except Per Common Share Data) | 2005 | 2004 | Total | Same Property |
||||||||||
| Advertising revenue: |
||||||||||||||
| Retail |
$ | 341,977 | $ | 272,689 | 25.4 | % | 3.4 | % | ||||||
| National |
33,031 | 18,382 | 79.7 | 12.5 | ||||||||||
| Classified: |
||||||||||||||
| Daily newspapers: |
||||||||||||||
| Employment |
63,923 | 44,478 | 43.7 | 16.0 | ||||||||||
| Automotive |
49,320 | 40,852 | 20.7 | (4.3 | ) | |||||||||
| Real estate |
47,171 | 35,468 | 33.0 | 8.1 | ||||||||||
| All other |
29,200 | 24,290 | 20.2 | (0.4 | ) | |||||||||
| Other publications |
28,411 | 17,443 | 62.9 | 4.0 | ||||||||||
| Total classified |
218,025 | 162,531 | 34.1 | 5.5 | ||||||||||
| Online |
17,983 | 10,178 | 76.7 | 33.4 | ||||||||||
| Niche publications |
13,093 | 11,093 | 18.0 | 1.1 | ||||||||||
| Total advertising revenue |
624,109 | 474,873 | 31.4 | 5.0 | ||||||||||
| Circulation |
153,571 | 130,023 | 18.1 | (2.2 | ) | |||||||||
| Commercial printing |
14,766 | 13,739 | 7.5 | (0.8 | ) | |||||||||
| Online services and other |
26,444 | 24,642 | 7.3 | 9.8 | ||||||||||
| Total operating revenue |
818,890 | 643,277 | 27.3 | 3.6 | ||||||||||
| Compensation |
325,959 | 260,827 | 25.0 | 2.3 | ||||||||||
| Newsprint and ink |
79,331 | 58,153 | 36.4 | 8.0 | ||||||||||
| Other operating expenses |
190,768 | 147,886 | 29.0 | 1.2 | ||||||||||
| Early retirement program |
9,124 | - | NA | NA | ||||||||||
| Transition costs |
8,929 | - | NA | NA | ||||||||||
| 614,111 | 466,866 | 31.5 | 2.7 | |||||||||||
| Operating cash flow |
204,779 | 176,411 | 16.1 | 5.6 | ||||||||||
| Depreciation and amortization |
59,249 | 43,930 | 34.9 | (1.7 | ) | |||||||||
| Equity in earnings of associated companies |
12,784 | 8,523 | 50.0 | |||||||||||
| Operating income |
158,314 | 141,004 | 12.3 | |||||||||||
| Non-operating expense, net |
(46,834 | ) | (12,076 | ) | 287.8 | |||||||||
| Income from continuing operations before income taxes |
111,480 | 128,928 | (13.5 | ) | ||||||||||
| Income tax expense |
40,458 | 45,955 | (12.0 | ) | ||||||||||
| Minority interest |
160 | - | NA | |||||||||||
| Income from continuing operations |
$ | 70,862 | $ | 82,973 | (14.6 | )% | ||||||||
| Earnings per common share from continuing operations: |
||||||||||||||
| Basic |
$ | 1.57 | $ | 1.85 | (15.1 | )% | ||||||||
| Diluted |
1.56 | 1.84 | (15.2 | ) | ||||||||||
Sundays generate substantially more advertising and circulation revenue than any other day of the week. 2005 had the same number of Sundays as 2004.
In June 2005, the Company acquired Pulitzer. Pulitzer published fourteen daily newspapers (the smallest of which is classified in discontinued operations due to its sale in 2006), including the St. Louis Post-Dispatch, and more than 100 weekly newspapers and specialty publications. Pulitzer also owns a 50% interest in TNI. The acquisition of Pulitzer increased the Company’s circulation by more than 50% and revenue, on an annualized basis, by more than 60%.
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Table of Contents
In total, acquisitions and divestitures accounted for $160,606,000 of operating revenue in 2005 and $7,912,000 in 2004.
Advertising Revenue
In 2005, total advertising revenue increased $149,236,000, or 31.4%, and same property advertising revenue increased $23,639,000, or 5.0%. Same property retail revenue increased $9,109,000, or 3.4%, in 2005. Continuing emphasis on rate discipline and an increase in active accounts, offset by a 1.8% decrease in advertising lineage, contributed to the increase. Same property average retail rates, excluding preprint insertions, increased 4.1% in 2005.
Same property classified advertising revenue increased $8,791,000, or 5.5%, in 2005. Higher rate employment advertising at the daily newspapers increased 16.0% for the year on a same property basis. The Company’s increases in employment classified advertising compare favorably to national survey amounts. The September 2005 Help Wanted Index, as calculated by the Conference Board, increased 8.3% from the prior year level. Same property average automotive advertising decreased 4.3%, due to a 5.1% decrease in average automotive rates, offset by a 0.8% increase in lineage. Same property real estate advertising increased 8.1% due to an increase in advertising of real estate for sale. Other daily newspaper classified advertising decreased 0.4% on a same property basis. Same property classified advertising rates decreased 1.5%, primarily due to the decline in automotive rates.
Advertising lineage, as reported on a same property basis for the Company’s daily newspapers only, consists of the following:
| (Thousands of Inches) | 2005 | 2004 | Percent Change | ||||
| Retail |
10,463 | 10,656 | (1.8 | )% | |||
| National |
561 | 537 | 4.5 | ||||
| Classified |
11,687 | 10,942 | 6.8 | ||||
| 22,711 | 22,135 | 2.6 | % | ||||
Online advertising revenue increased 33.4% on a same property basis, due to expanded use of the Company’s online business model and cross-selling with the Company’s print publications. Online classified advertising registered particularly strong growth. Advertising in niche publications increased 1.1% on a same property basis, due to new publications in existing markets and penetration of new and existing markets, offset by the loss of one significant publication in a larger market.
Circulation and Other Revenue
Circulation revenue increased $23,548,000, or 18.1% in 2005, and same property circulation revenue decreased $2,819,000, or 2.2%. The Company’s total average daily newspaper circulation units, including Pulitzer, TNI and MNI, as measured by the ABC, declined 2.2% for the six months ended September 2005, compared to the same period in the prior year, and Sunday circulation declined 2.3%, significantly outperforming the industry as a whole. For the six months ended March 2005, total average daily circulation units, including MNI, declined 1.7% and Sunday circulation decreased 1.9%, again outperforming the industry.
Same property commercial printing revenue decreased $107,000, or 0.8%, in 2005. Same property online services and other revenue increased $2,205,000, or 9.8%, in 2005.
Operating Expenses and Results of Operations
Costs other than depreciation and amortization increased $147,245,000, or 31.5%, in 2005, and increased $11,645,000, or 2.7%, on a same property basis. In total, acquisitions and divestitures accounted for $133,757,000 of operating expenses, excluding depreciation and amortization, in 2005 and $6,782,000 in 2004.
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Table of Contents
Compensation expense increased $65,132,000, or 25.0%, in 2005 due to costs of acquired businesses and a 2.3% increase in same property compensation expense. Normal salary adjustments and associated increases in payroll taxes and benefits account for the increase in same property costs. Same property full time equivalent employees declined 0.4% in 2005 from the prior year level.
Newsprint and ink costs increased $21,178,000, or 36.4%, in 2005 due to price increases and costs of acquired businesses, and increased 8.0% on a same property basis. Volume decreased 0.1% on a same property basis.
Other operating costs, exclusive of depreciation and amortization, increased $42,882,000, or 29.0%, in 2005 and increased 1.2% on a same property basis. Transition costs related to the acquisition of Pulitzer, which are not included in same property comparisons, totaled $8,929,000 in 2005. Early retirement program costs totaled $9,124,000 in 2005.
Operating cash flow increased 16.1% to $204,779,000 in 2005 from $176,411,000 in 2004, and increased 5.6% on a same property basis. Operating cash flow margin decreased to 25.0% from 27.4% in the prior year reflecting the overall lower margin of the Pulitzer newspapers, transition costs and the St. Louis Post-Dispatch early retirement program.
Depreciation expense increased $4,613,000, or 24.1%, and amortization expense increased $10,706,000, or 43.2%, in 2005, due primarily to the acquisition of Pulitzer. Equity in earnings in associated companies increased 50.0% in 2005 due to increasing earnings of MNI and the inclusion of TNI. Operating income increased $17,310,000, or 12.3%. Operating income margin decreased to 19.3% in 2005 from 21.9% due to the inclusion of Pulitzer results and early retirement and transition costs noted above.
Non-Operating Income and Expense
Financial expense increased $25,373,000, or 200.3%, to $38,038,000 due to increased debt and associated financing costs as a result of the Pulitzer acquisition and higher interest rates, partially offset by debt reduction funded by cash generated from operations. In 2005, the Company refinanced its then existing debt as a result of the Pulitzer acquisition, which resulted in a one-time pretax loss from early extinguishment of debt of $11,181,000.
Overall Results
Income taxes were 36.3% of income from continuing operations before income taxes in 2005 and 35.6% in 2004. The favorable resolution of tax issues reduced income tax expense by approximately $1,200,000 in 2004. The effective rate would have been 36.6% in 2004 without this event.
As a result of all of the above, income from continuing operations totaled $70,862,000 in 2005, a decrease of 14.6% compared to $82,973,000 in 2004. Earnings per diluted common share decreased 15.2% to $1.56 in 2005 from $1.84 in 2004. Excluding unusual costs, as detailed in the table below, diluted earnings per common share, as adjusted, were $1.96 in 2005, an increase of 6.5% from $1.84 in 2004.
| 2005 | 2004 | ||||||||||||
| (Thousands, Except Per Share Data) | Amount | Per Share | Amount | Per Share | |||||||||
| Income from continuing operations, as reported |
$ | 70,862 | $ | 1.56 | $ | 82,973 | $ | 1.84 | |||||
| Adjustments to income from continuing operations: |
|||||||||||||
| Early retirement program |
9,124 | - | |||||||||||
| Transition costs |
8,929 | - | |||||||||||
| Loss on extinguishment of debt |
11,181 | - | |||||||||||
| 29,234 | - | ||||||||||||
| Income tax benefit of adjustments, net |
(11,401 | ) | - | ||||||||||
| 17,833 | 0.39 | - | - | ||||||||||
| Income from continuing operations, as adjusted |
$ | 88,695 | $ | 1.96 | $ | 82,973 | $ | 1.84 | |||||
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Table of Contents
DISCONTINUED OPERATIONS
Revenue from discontinued operations in 2006, 2005 and 2004 was $41,104,000 $42,297,000 and $43,477,000, respectively. Income from discontinued operations before income taxes was $7,803,000 in 2006, $9,911,000 in 2005 and $5,454,000 in 2004.
In September 2006, the Company sold several stand-alone publishing and commercial printing operations in the Pacific Northwest, a twice-weekly newspaper in Oregon, and a daily newspaper in Rhinelander, Wisconsin. The transactions resulted in an after tax loss of $5,204,000, which is recorded in discontinued operations in 2006. Proceeds from the sales totaled $54,148,000 of which $33,198,000 was received in 2006.
In February 2004, the Company exchanged its daily newspapers in Freeport, Illinois and Corning, New York for two daily newspapers and eight weekly and specialty publications in Nevada and Idaho. The transaction resulted in an after tax loss of $228,000, which is recorded in discontinued operations in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $197,161,000 in 2006, $151,686,000 in 2005 and $121,709,000 in 2004. Decreased income from continuing operations in 2006 and 2005 was more than offset by an increase in depreciation and amortization. Losses related to financing activities influenced 2005 results and changes in operating assets and liabilities accounted for the bulk of the remainder of the change in all years.
Cash required for investing activities totaled $42,683,000 in 2006, $1,272,309,000 in 2005, and $27,164,000 in 2004. Capital spending totaled $32,544,000 and accounted for substantially all of the usage of funds in 2006. Pulitzer and other acquisitions accounted for substantially all of the usage of funds in 2005 offset by proceeds from sales of securities. Capital spending and acquisitions accounted for substantially all of the usage of funds in 2004.
The Company anticipates that funds necessary for capital expenditures, which are expected to total approximately $32,000,000 in 2007, and other requirements, will be available from internally generated funds, availability under its existing Credit Agreement or, if necessary, by accessing the capital markets.
In 2006, the Company entered into an amended and restated credit agreement (the Credit Agreement) with a syndicate of financial institutions. The Credit Agreement provides for aggregate borrowing of up to $1,435,000,000 and consists of a $950,000,000 A Term Loan, $35,000,000 B Term Loan and $450,000,000 revolving credit facility. The Credit Agreement also provides the Company with the right, with the consent of the administrative agent, to request at certain times prior to June 2012 that one or more lenders provide incremental term loan commitments of up to $500,000,000, subject to certain requirements being satisfied at the time of the request. The Credit Agreement matures in June 2012 and amends and replaces a $1,550,000,000 credit agreement (the Old Credit Agreement) consummated in 2005. Interest rate margins under the Credit Agreement are generally lower than under the Old Credit Agreement. Other conditions of the Credit Agreement are substantially the same as the Old Credit Agreement.
The Credit Agreement contains customary affirmative and negative covenants for financing of its type. These financial covenants include a maximum total leverage ratio (5.75:1 at September 30, 2006) and minimum interest expense coverage ratio of 2.5:1. None of the covenants included in the Credit Agreement is considered by the Company to be restrictive to normal operations or historical amounts of stockholder dividends. At September 30, 2006, the Company is in compliance with such covenants.
The Credit Agreement requires the Company to apply the net proceeds from asset sales to repayment of the A Term Loan to the extent such proceeds exceed the amount used to purchase assets (other than inventory and working capital) within one year of the asset sales. The Company expects repayments in 2007 to meet or exceed required repayments related to its 2006 sales transactions.
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Table of Contents
In 2005, upon consummation of the Old Credit Agreement, the Company borrowed $1,462,000,000. The proceeds were used to consummate the acquisition of Pulitzer, to repay existing indebtedness of the Company, as discussed more fully below, and to pay related fees and expenses.
In connection with the execution of the Old Credit Agreement, the Company redeemed all of the $52,000,000 outstanding indebtedness under its then existing credit agreement and the existing senior notes of the Company under the Note Purchase Agreement, dated as of March 18, 1998 totaling $102,000,000. Refinancing of existing debt of the Company resulted in a pretax loss of $11,181,000.
In 2005, the Company executed interest rate swaps in the notional amount of $350,000,000 with a forward starting date of November 30, 2005. The interest rate swaps have terms of 2 to 5 years, carry interest rates from 4.2% to 4.4% (plus the applicable LIBOR margin) and effectively fix the Company’s interest rate on debt in the amount, and for the time periods, of such instruments.
In 2005, the Company filed a Form S-3 shelf registration statement (Shelf) with the SEC, which has been declared effective. The Shelf gives the Company the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $500,000,000.
The Shelf enables the Company to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Net proceeds from the sale of any securities may be used for general corporate purposes, including repayment or refinancing of debt, working capital, capital expenditures, acquisitions or the repurchase of common stock, subject to conditions of existing debt agreements.
Cash required by financing activities totaled $191,930,000 in 2006, provided $1,112,035,000 during 2005, and required $105,854,000 in 2004. Debt reduction and dividends accounted for the majority of the usage of funds in 2006 and 2004. Cash dividend payments in 2004 were influenced primarily by timing. The annual dividend was $0.72 per share in 2006, 2005 and 2004. Borrowing to fund the Pulitzer acquisition and refinance existing debt accounted for substantially all of the funds provided in 2005.
Cash provided by discontinued operations totaled $38,547,000, $8,121,000 and $8,255,000 in 2006, 2005 and 2004, respectively. Cash proceeds from the sales of discontinued operations and cash generated from operations were the primary sources of funds in 2006. Cash generated from operations was the primary source of funds in 2005. Cash generated from operations offset by tax payments related to nondeductible goodwill and basis differences in identified intangible assets associated with the exchange of the Company’s daily newspapers in Corning, New York and Freeport, Illinois in February 2004, offset by changes in working capital of sold properties was the primary source of funds in 2004.
Cash and cash equivalents increased $1,095,000 in 2006, and decreased $467,000 in 2005 and $3,054,000 in 2004.
SEASONALITY
The Company’s largest source of publishing revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the first and third fiscal quarters. Advertising revenue is lowest in the second fiscal quarter.
Quarterly results of operations are summarized in Note 21 to the Consolidated Financial Statements, included herein.
INFLATION
The Company has not been significantly impacted by general inflationary pressures over the last several years. The Company anticipates that changing costs of newsprint, its basic raw material, may impact future operating costs. Price increases (or decreases) for the Company’s products are implemented when deemed appropriate by management. The Company continuously evaluates price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.
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CONTRACTUAL OBLIGATIONS
The following table summarizes the more significant of the Company’s contractual obligations.
| (Thousands of Dollars) | Payments (or Commitments) Due by Year | ||||||||||||||
| Nature of Obligation | Total | Less Than 1 |
1-3 | 3-5 | More Than 5 | ||||||||||
| Long-term debt (principal amount) |
$ | 1,525,000 | $ | 35,375 | $ | 519,750 | $ | 427,500 | $ | 542,375 | |||||
| Lease obligations |
19,968 | 3,668 | 5,323 | 3,236 | 7,741 | ||||||||||
| Financial expense (1) |
67,740 | 24,633 | 43,107 | - | - | ||||||||||
| Capital expenditure commitments |
10,812 | 10,812 | - | - | - | ||||||||||
| $ | 1,623,520 | $ | 74,488 | $ | 568,180 | $ | 430,736 | $ | 550,116 | ||||||
| Newsprint (metric tons) |
49,350 | 49,350 | - | - | - | ||||||||||
| (1) | Financial expense excludes interest on floating rate debt. Based on interest rates and floating rate debt at September 30, 2006, including debt subject to interest rate swaps described below, annual interest on floating rate debt is approximately $72,000,000. |
The table above excludes future cash requirements for pension, postretirement and postemployment obligations. The periods in which these obligations will be settled in cash are not readily determinable and are subject to numerous future events and assumptions. The Company’s estimate of cash requirements for these obligations in 2007 is approximately $3,130,000.
A substantial amount of the Company’s deferred income tax liabilities is related to acquisitions and will not result in future cash payments. See Note 14 of the Notes to Consolidated Financial Statements, included herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.
INTEREST RATES
Restricted Cash and Investments
Interest rate risk in the Company’s restricted cash and investments is managed by investing only in securities with maturities no later than May 2010, after which time all restrictions on such funds lapse. Only U.S. Government and related securities are permitted.
Debt
The Company’s debt structure and interest rate risk are managed through the use of fixed and floating rate debt. The Company’s primary exposure is to the London Interbank Offered Rate (LIBOR). A 100 basis point increase to LIBOR would decrease income from continuing operations before income taxes on an annualized basis by approximately $8,690,000, based on floating rate debt outstanding at September 30, 2006, after consideration of the interest rate swaps described below, and excluding debt of MNI. Such interest rates may also decrease.
In 2005, the Company executed interest rate swaps in the notional amount of $350,000,000 with a forward starting date of November 30, 2005. The interest rate swaps have terms of 2 to 5 years, carry interest rates from 4.2% to 4.4% (plus the applicable LIBOR margin) and effectively fix the Company’s interest rate on debt in the amounts, and for the time periods, of such instruments. Interest-earning assets, including those in employee benefit plans, also function as a natural hedge against fluctuations in interest rates on debt.
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At September 30, 2006, after consideration of the interest rate swaps described above, approximately 57% of the principal amount of the Company’s debt is subject to floating 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 and energy costs.
A $10 per metric ton newsprint price increase would result in an annualized reduction in income from continuing operations before income taxes of approximately $1,730,200 based on expected consumption in 2007, excluding consumption of MNI and TNI. Such prices may also decrease.
SENSITIVITY TO CHANGES IN VALUE
The estimate that follows is intended to measure the maximum potential impact on fair value of fixed rate debt of the Company in one year from adverse changes in market interest rates under normal market conditions. The calculation is not intended to represent the actual loss in fair value that the Company expects to incur. The estimate does not consider favorable changes in market rates. The position included in the calculation is fixed rate debt, the principal amount of which totals $306,000,000 at September 30, 2006.
The estimated maximum potential one-year loss in fair value from a 100 basis point movement in interest rates on market risk sensitive investment instruments outstanding at September 30, 2006, is approximately $7,368,000. There is no impact on reported results from such changes in interest rates.
Changes in the value of interest rate swaps from movements in interest rates are not determinable, due to the number of variables involved in the pricing of such instruments. However, increases in interest rates would generally result in increases in the fair value of such instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
In order to ensure that the information that must be disclosed in filings with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner, the Company has disclosure controls and procedures in place. The Company’s chief executive officer, Mary E. Junck, and chief financial officer, Carl G. Schmidt, have reviewed and evaluated disclosure controls and procedures as of September 30, 2006, and have concluded that such controls and procedures are effective.
There have been no changes in internal control over financial reporting that have materially affected or are reasonably likely to materially affect such controls, during the year ended September 30, 2006.
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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Lee Enterprises, Incorporated (the Company) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of the Company’s Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America.
Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework. Based on the assessment and those criteria, we believe that the Company maintained effective internal control over financial reporting as of September 30, 2006.
Deloitte & Touche LLP, the Company’s independent registered public accounting firm, issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. Their report appears on the following page.
| /s/ Mary E. Junck |
/s/ Carl G. Schmidt | |||
| Mary E. Junck |
Carl G. Schmidt | |||
| Chairman, President and Chief Executive Officer December 14, 2006 |
Vice President, Chief Financial Officer | |||
| December 14, 2006 | ||||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
Lee Enterprises, Incorporated and subsidiaries
Davenport, Iowa
We have audited management’s assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Lee Enterprises, Incorporated and subsidiaries (the Company) maintained effective internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and board of directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of September 30, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Financial Statements as of and for the year ended September 30, 2006 of the Company and our report dated December 14, 2006 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Davenport, Iowa
December 14, 2006
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None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this Item, except for certain information included under the caption “Executive Team” in Part I of this Form 10-K, is included in the Company’s Proxy Statement to be filed in January 2007, which is incorporated herein by reference, under the captions “Proposal 1 – Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”.
The Company has a Code of Business Conduct and Ethics (Code) that applies to all of its employees, including its principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of the Company’s Board of Directors and is annually affirmed by its directors and executive officers. The Company maintains a corporate governance page on its website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance.” A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by the Company from, a provision of the Code will be posted on the Company’s website.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2007, which is incorporated herein by reference, under the captions, “Compensation of Directors” and “Executive Compensation”; provided, however, that the subsection entitled “Executive Compensation – Report of the Executive Compensation Committee of the Board of Directors on Executive Compensation” shall not be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2007, which is incorporated herein by reference, under the caption “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information”.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
Further information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2007, which is incorporated herein by reference, under the caption “Directors’ Meetings and Committees of the Board of Directors”.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information with respect to this Item is included in the Company’s Proxy Statement to be filed in January 2007, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this Annual Report on Form 10-K:
FINANCIAL STATEMENTS
Consolidated Balance Sheets – September 30, 2006 and 2005
Consolidated Statements of Income and Comprehensive Income – Years ended September 30, 2006, 2005 and 2004
Consolidated Statements of Stockholders’ Equity – Years ended September 30, 2006, 2005 and 2004
Consolidated Statements of Cash Flows – Years ended September 30, 2006, 2005 and 2004
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements.
EXHIBITS
See Exhibit Index.
REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the three months ended September 30, 2006:
| Date of Report | Item | Disclosure(s) | ||
| July 20, 2006 |
2 | Earnings for the three months and nine months ended June 30, 2006 | ||
| September 8, 2006 |
1 | Definitive agreements to sell selected publishing and commercial printing operations | ||
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 14th day of December 2006.
| LEE ENTERPRISES, INCORPORATED | ||||
| /s/ Mary E. Junck |
/s/ Carl G. Schmidt | |||
| Mary E. Junck |
Carl G. Schmidt | |||
| Chairman, President and Chief Executive Officer |
Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their respective capacities on the 14th day of December 2006.
| Signature | ||||
| /s/ Richard R. Cole |
Director | |||
| Richard R. Cole |
||||
| /s/ Nancy S. Donovan |
Director | |||
| Nancy S. Donovan |
||||
| /s/ Mary E. Junck |
Chairman, President, and Chief Executive Officer, and Director | |||
| Mary E. Junck |
||||
| /s/ William E. Mayer |
Director | |||
| William E. Mayer |
||||
| /s/ Herbert W. Moloney III |
Director | |||
| Herbert W. Moloney III |
||||
| /s/ Andrew E. Newman |
Director | |||
| Andrew E. Newman |
||||
| /s/ Gordon D. Prichett |
Director | |||
| Gordon D. Prichett |
||||
| /s/ Gregory P. Schermer |
Vice President - Interactive Media, | |||
| Gregory P. Schermer |
and Director | |||
| /s/ Mark B. Vittert |
Director | |||
| Mark B. Vittert |
||||
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Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by the Company with the Securities and Exchange Commission, as indicated. Exhibits marked with a plus (+) are management contracts or compensatory plan contracts or arrangements filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. All other documents listed are filed with this Annual Report on Form 10-K.
| Number | Description | |
| 2.1 * | Agreement and Plan of Merger dated as of January 29, 2005 among Lee Enterprises, Incorporated, LP Acquisition Corp. and Pulitzer Inc. (Exhibit 2.1 to Form 8-K filed on February 3, 2005) | |
| 2.2 * | Acquisition Agreement by and among Lee Enterprises, Incorporated, Howard Publications, Inc., Howard Energy Co., Inc. and the stockholders of Howard Publications, Inc. named therein dated February 11, 2002 and First Amendment thereto dated March 29, 2002 (Exhibit 2.1 to Form 8-K filed on April 2, 2002) | |
| 2.3 | Asset Purchase Agreement dated September 6, 2006 by and among Lee Enterprises, Incorporated, Lee Procurement Solutions Co. and Sound Publishing, Inc. | |
| 2.4 | Asset Purchase Agreement dated September 5, 2006 by and among Lee Enterprises, Incorporated, Lee Procurement and Target Media Partners Operating Company, LLC | |
| 3.1.2a * | Restated Certificate of Incorporation of Lee Enterprises, Incorporated, as amended, as of March 3, 2005 (Exhibit 3.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2005) | |
| 3.2 * | Lee Enterprises, Incorporated Amended and Restated By-Laws as of January 23, 2002 (Exhibit 3 to Form 10-Q for Fiscal Quarter Ended March 31, 2002) | |
| 4 * | Rights Agreement, dated as of May 7, 1998, between Lee Enterprises, Incorporated and The First Chicago Trust Company of New York, which includes the form of Certificate of Designation of the Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C (Exhibit 1.1 to Current Report on Form 8-A dated May 26, 1998, filed on May 26, 1998) | |
| 10.1 * | Amended and Restated Credit Agreement, dated as of December 21, 2005, by and among Lee Enterprises, Incorporated, the lenders from time to time party thereto, Deutsche Bank Trust Company Americas, as Administrative Agent, Deutsche Bank Securities Inc. and SunTrust Capital Markets, Inc., as Joint Lead Arrangers, Deutsche Bank Securities Inc., as Book Running Manager, SunTrust Bank, as Syndication Agent and Bank of America, N.A., The Bank of New York and The Bank of Tokyo-Mitsubishi, Ltd., Chicago Branch, as Co-Documentation Agents (Exhibit 10 to Form 10-Q for Fiscal Quarter Ended December 31, 2005) | |
| 10.2 * | Amended and Restated Agreement and Plan of Merger by and among Pulitzer Publishing Company, Pulitzer Inc. and Hearst-Argyle Television, Inc. dated as of May 25, 1998 (Exhibit 10.1 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.3 * | Amended and Restated Joint Operating Agreement, dated December 22, 1988, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.4 * | Partnership Agreement, dated December 22, 1988, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.3 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
36
Table of Contents
| Number | Description | |
| 10.5 * | Lease Agreement between Ryan Companies US, Inc. and Lee Enterprises, Incorporated dated May 2003 (Exhibit 10.7 to Form 10-K for the Fiscal Year Ended September 30, 2003) | |
| 10.6 * | Joint Venture Agreement, dated as of May 1, 2000, among Pulitzer Inc., Pulitzer Technologies, Inc., The Herald Company, Inc. and St. Louis Post-Dispatch LLC (Exhibit 10.4 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.7 * | St. Louis Post-Dispatch LLC Note Agreement, dated as of May 1, 2000, as amended on November 23, 2004 (Exhibit 10.8 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.8 * | Pulitzer Inc. Guaranty Agreement, dated as of May 1, 2000 as amended on August 7, 2000, November 23, 2004 and June 3, 2005 (Exhibit 10.9 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.9 * | Non-Confidentiality Agreement, dated as of May 1, 2000 (Exhibit 10.10 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.10 +* | Form of Director Compensation Agreement of Lee Enterprises, Incorporated for non-employee director deferred compensation (Exhibit 10.7 to Form 10-K for the Fiscal Year Ended September 30, 2004) | |
| 10.11.1a +* | Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (effective as of October 1, 1999, as amended November 16, 2006) (Appendix B to Schedule 14A Definitive Proxy Statement for 2006) | |
| 10.11.2a +* | Forms of related Incentive Stock Option Agreement, Non-Qualified Stock Option Agreement, Accelerated Ownership Stock Option Agreement and Restricted Stock Agreement related to Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (effective as of October 1, 1999, as amended November 16, 2005). (Exhibit 10.15.1a to Form 10-K for the Fiscal Year Ended September 30, 2005) | |
| 10.11.3a +* | Form of Key Executive Restricted Stock Agreement related to Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (Exhibit 10.2 to Form 8-K filed on November 26, 2004) | |
| 10.12 +* | Lee Enterprises, Incorporated 1996 Stock Plan for Non-Employee Directors, effective February 1, 1996 (Exhibit C to Schedule 14A Definitive Proxy Statement for 1996) | |
| 10.13 +* | Lee Enterprises, Incorporated Supplementary Benefit Plan (Exhibit 10.4 to Form 10-K for the Fiscal Year Ended September 30, 2002) | |
| 10.14 +* | Amended and Restated Pulitzer Inc. Supplemental Executive Benefit Pension Plan (restated as of June 3, 2005) (Exhibit 10.15 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) | |
| 10.15 +* | Form of Employment Agreement for Lee Enterprises, Incorporated Executive Officers Group (Exhibit 10 to Form 10-K for the Fiscal Year Ended September 30, 1998) | |
| 10.16 +* | Form of Indemnification Agreement for Lee Enterprises, Incorporated Directors and Executive Officers Group (Exhibit 10 to Form 10-K for the Fiscal Year Ended September 30,1998) | |
| 10.17 +* | Lee Enterprises, Incorporated 2005 Incentive Compensation Program (Appendix A to Schedule 14A Definitive Proxy Statement for 2005) | |
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Table of Contents
| Number | Description | |
| 10.18 +* | Cancellation Agreement dated November 19, 2004 between Lee Enterprises, Incorporated and Mary E. Junck (Exhibit 10.1 to Form 8-K filed on November 26, 2004) | |
| 21 | Subsidiaries and associated companies | |
| 23 | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm | |
| 24 | Power of Attorney | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
38
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| CONSOLIDATED FINANCIAL STATEMENTS | PAGE | |
| 40 | ||
| 42 | ||
| 43 | ||
| 44 | ||
| 45 | ||
| 74 | ||
39
Table of Contents
| September 30 | ||||||
| (Thousands, Except Per Share Data) | 2006 | 2005 | ||||
| ASSETS |
||||||
| Current assets: |
||||||
| Cash and cash equivalents |
$ | 8,638 | $ | 7,543 | ||
| Accounts receivable, less allowance for doubtful accounts: |
||||||
| 2006 $11,313; 2005 $9,365 |
115,353 | 118,529 | ||||
| Income taxes receivable |
- | 19,439 | ||||
| Receivable from associated companies |
1,563 | 1,563 | ||||
| Receivable from sales of discontinued operations |
20,700 | - | ||||
| Inventories |
19,271 | 21,576 | ||||
| Deferred income taxes |
11,079 | 5,092 | ||||
| Assets of discontinued operations |
342 | 65,506 | ||||
| Other |
7,466 | 6,702 | ||||
| Total current assets |
184,412 | 245,950 | ||||
| Investments: |
||||||
| Associated companies |
198,266 | 203,731 | ||||
| Restricted cash and investments |
96,060 | 81,060 | ||||
| Other |
20,825 | 23,539 | ||||
| Total investments |
315,151 | 308,330 | ||||
| Property and equipment: |
||||||
| Land and improvements |
31,778 | 31,437 | ||||
| Buildings and improvements |
181,517 | 177,067 | ||||
| Equipment |
301,162 | 283,533 | ||||
| Construction in process |
13,260 | 13,885 | ||||
| 527,717 | 505,922 | |||||
| Less accumulated depreciation |
200,465 | 175,699 | ||||
| Property and equipment, net |
327,252 | 330,223 | ||||
| Goodwill |
1,498,830 | 1,499,622 | ||||
| Other intangible assets |
980,912 | 1,038,963 | ||||
| Other |
23,252 | 22,112 | ||||
| Total assets |
$ | 3,329,809 | $ | 3,445,200 | ||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
40
Table of Contents
| September 30 | |||||||
| 2006 | 2005 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||
| Current liabilities: |
|||||||
| Current maturities of long-term debt |
$ | 35,375 | $ | 10,000 | |||
| Accounts payable |
38,129 | 31,261 | |||||
| Compensation and other accrued liabilities |
58,457 | 71,052 | |||||
| Income taxes payable |
22,634 | - | |||||
| Dividends payable |
6,581 | 6,407 | |||||
| Unearned revenue |
38,624 | 37,767 | |||||
| Liabilities of discontinued operations |
523 | 4,451 | |||||
| Total current liabilities |
200,323 | 160,938 | |||||
| Long-term debt, net of current maturities |
1,510,459 | 1,706,024 | |||||
| Pension obligations |
38,420 | 33,236 | |||||
| Postretirement and postemployment benefit obligations |
100,231 | 95,237 | |||||
| Other retirement and compensation |
27,364 | 26,836 | |||||
| Deferred income taxes |
454,315 | 480,609 | |||||
| Minority interest |
6,274 | 5,109 | |||||
| Other |
1,798 | 801 | |||||
| Total liabilities |
2,339,184 | 2,508,790 | |||||
| Stockholders’ equity: |
|||||||
| Serial convertible preferred stock, no par value; |
- | - | |||||
| Common Stock, $2 par value; authorized |
78,974 | 76,818 | |||||
| 2006 39,487 shares; |
|||||||
| 2005 38,409 shares |
|||||||
| Class B Common Stock, $2 par value; authorized |
12,788 | 14,168 | |||||
| 2006 6,394 shares; |
|||||||
| 2005 7,084 shares |
|||||||
| Additional paid-in capital |
123,738 | 115,464 | |||||
| Unearned compensation |
- | (5,505 | ) | ||||
| Retained earnings |
771,947 | 733,961 | |||||
| Accumulated other comprehensive income |
3,178 | 1,504 | |||||
| Total stockholders’ equity |
990,625 | 936,410 | |||||
| Total liabilities and stockholders’ equity |
$ | 3,329,809 | $ | 3,445,200 | |||
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
| (Thousands, Except Per Common Share Data) | 2006 | 2005 | 2004 | |||||||||
| Operating revenue: |
||||||||||||
| Advertising |
$ | 874,568 | $ | 624,109 | $ | 474,873 | ||||||
| Circulation |
205,718 | 153,571 | 130,023 | |||||||||
| Other |
48,362 | 41,210 | 38,381 | |||||||||
| Total operating revenue |
1,128,648 | 818,890 | 643,277 | |||||||||
| Operating expenses: |
||||||||||||
| Compensation |
435,836 | 325,959 | 260,827 | |||||||||
| Newsprint and ink |
120,191 | 79,331 | 58,153 | |||||||||
| Depreciation |
33,903 | 23,754 | 19,141 | |||||||||
| Amortization of intangible assets |
62,167 | 35,495 | 24,789 | |||||||||
| Other operating expenses |
280,018 | 190,768 | 147,886 | |||||||||
| Early retirement program |
8,654 | 9,124 | - | |||||||||
| Transition costs |
4,589 | 8,929 | - | |||||||||
| Total operating expenses |
945,358 | 673,360 | 510,796 | |||||||||
| Equity in earnings of associated companies |
20,739 | 12,784 | 8,523 | |||||||||
| Operating income |
204,029 | 158,314 | 141,004 | |||||||||
| Non-operating income (expense): |
||||||||||||
| Financial income |
6,054 | 2,824 | 1,066 | |||||||||
| Financial expense |
(95,939 | ) | (38,038 | ) | (12,665 | ) | ||||||
| Loss on early extinguishment of debt |
- | (11,181 | ) | - | ||||||||
| Other, net |
(2,037 | ) | (439 | ) | (477 | ) | ||||||
| Total non-operating expense, net |
(91,922 | ) | (46,834 | ) | (12,076 | ) | ||||||
| Income from continuing operations before income taxes |
112,107 | 111,480 | 128,928 | |||||||||
| Income tax expense |
39,740 | 40,458 | 45,955 | |||||||||
| Minority interest |
1,231 | 160 | - | |||||||||
| Income from continuing operations |
71,136 | 70,862 | 82,973 | |||||||||
| Discontinued operations: |
||||||||||||
| Income from discontinued operations, net of income tax effect |
4,900 | 6,016 | 3,347 | |||||||||
| Loss on disposition, net of income tax effect |
(5,204 | ) | - | (249 | ) | |||||||
| Net income |
70,832 | 76,878 | 86,071 | |||||||||
| Other comprehensive income, net |
1,674 | 1,504 | - | |||||||||
| Comprehensive income |
$ | 72,506 | $ | 78,382 | $ | 86,071 | ||||||
| Earnings (loss) per common share: |
||||||||||||
| Basic: |
||||||||||||
| Continuing operations |
$ | 1.57 | $ | 1.57 | $ | 1.85 | ||||||
| Discontinued operations |
(0.01 | ) | 0.13 | 0.07 | ||||||||
| Net income |
$ | 1.56 | $ | 1.70 | $ | 1.92 | ||||||
| Diluted: |
||||||||||||
| Continuing operations |
$ | 1.56 | $ | 1.56 | $ | 1.84 | ||||||
| Discontinued operations |
(0.01 | ) | 0.13 | 0.07 | ||||||||
| Net income |
$ | 1.56 | $ | 1.70 | $ | 1.91 | ||||||
| Dividends per common share |
$ | 0.72 | $ | 0.72 | $ | 0.72 | ||||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Amount | Shares | ||||||||||||||||||||||
| (Thousands) | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | |||||||||||||||||
| Common Stock: |
$ | 76,818 | $ | 74,056 | $ | 70,994 | 38,409 | 37,028 | 35,497 | ||||||||||||||
| Balance, beginning of year |
|||||||||||||||||||||||
| Conversion from Class B |
1,380 | 2,210 | 1,870 | 690 | 1,105 | 935 | |||||||||||||||||
| Shares issued |
884 | 580 | 1,228 | 442 | 290 | 614 | |||||||||||||||||
| Shares reacquired |
(108 | ) | (28 | ) | (36 | ) | (54 | ) | (14 | ) | (18 | ) | |||||||||||
| Balance, end of year |
78,974 | 76,818 | 74,056 | 39,487 | 38,409 | 37,028 | |||||||||||||||||
| Class B Common Stock: |
|||||||||||||||||||||||
| Balance, beginning of year |
14,168 | 16,378 | 18,248 | 7,084 | 8,189 | 9,124 | |||||||||||||||||
| Conversion to Common Stock |
(1,380 | ) | (2,210 | ) | (1,870 | ) | (690 | ) | (1,105 | ) | (935 | ) | |||||||||||
| Balance, end of year |
12,788 | 14,168 | 16,378 | 6,394 | 7,084 | 8,189 | |||||||||||||||||
| Additional paid-in capital: |
|||||||||||||||||||||||
| Balance, beginning of year |
115,464 | 100,537 | 78,697 | ||||||||||||||||||||
| Reclassification from unearned compensation |
(5,505 | ) | - | - | |||||||||||||||||||
| Stock option expense |
2,678 | 2,807 | 3,285 | ||||||||||||||||||||
| Amortization of restricted stock |
5,425 | - | - | ||||||||||||||||||||
| Income tax benefit (expense) of |
(33 | ) | 749 | 2,509 | |||||||||||||||||||
| Shares issued |
5,709 | 11,371 | 16,046 | ||||||||||||||||||||
| Balance, end of year |
123,738 | 115,464 | 100,537 | ||||||||||||||||||||
| Unearned compensation: |
|||||||||||||||||||||||
| Balance, beginning of year |
(5,505 | ) | (3,913 | ) | (2,457 | ) | |||||||||||||||||
| Reclassification to additional paid-in-capital |
5,505 | - | - | ||||||||||||||||||||
| Restricted stock issued |
- | (6,215 | ) | (4,327 | ) | ||||||||||||||||||
| Restricted stock canceled |
- | 45 | 164 | ||||||||||||||||||||
| Amortization |
- | 4,578 | 2,707 | ||||||||||||||||||||
| Balance, end of year |
- | (5,505 | ) | (3,913 | ) | ||||||||||||||||||
| Retained earnings: |
|||||||||||||||||||||||
| Balance, beginning of year |
733,961 | 689,785 | 636,674 | ||||||||||||||||||||
| Net income |
70,832 | 76,878 | 86,071 | ||||||||||||||||||||
| Cash dividends |
(32,846 | ) | (32,702 | ) | (32,449 | ) | |||||||||||||||||
| Shares reacquired |
- | - | (511 | ) | |||||||||||||||||||
| Balance, end of year |
771,947 | 733,961 | 689,785 | ||||||||||||||||||||
| Accumulated other comprehensive income: |
|||||||||||||||||||||||
| Balance, beginning of year |
1,504 | - | - | ||||||||||||||||||||
| Unrealized gain on interest rate exchange agreements |
2,527 | 2,707 | - | ||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities |
121 | (230 | ) | - | |||||||||||||||||||
| Deferred income taxes, net |
(974 | ) | (973 | ) | - | ||||||||||||||||||
| Balance, end of year |
3,178 | 1,504 | - | ||||||||||||||||||||
| Total stockholders’ equity |
$ | 990,625 | $ | 936,410 | $ | 876,843 | 45,881 | 45,493 | 45,217 | ||||||||||||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
| (Thousands) | 2006 | 2005 | 2004 | |||||||||
| Cash provided by operating activities: |
||||||||||||
| Net income |
$ | 70,832 | $ | 76,878 | $ | 86,071 | ||||||
| Results of discontinued operations |
(304 | ) | 6,016 | 3,098 | ||||||||
| Income from continuing operations |
71,136 | 70,862 | 82,973 | |||||||||
| Adjustments to reconcile income from continuing operations |
||||||||||||
| Depreciation and amortization |
96,070 | 59,249 | 43,930 | |||||||||
| Stock compensation expense |
7,693 | 7,879 | 5,874 | |||||||||
| Amortization of debt fair value adjustment |
(7,190 | ) | (2,385 | ) | - | |||||||
| Loss on early extinguishment of debt |
- | 11,181 | - | |||||||||
| Distributions less than earnings of associated companies |
(482 | ) | (1,288 | ) | (965 | ) | ||||||
| Change in operating assets and liabilities, net of acquisitions: |
||||||||||||
| Decrease (increase) in receivables |
5,547 | (5,681 | ) | (3,975 | ) | |||||||
| Decrease (increase) in inventories and other |
2,859 | (3,897 | ) | (631 | ) | |||||||
| Increase (decrease) in accounts payable, accrued expenses and unearned revenue |
(7,904 | ) | 5,519 | 2,633 | ||||||||
| Increase (decrease) in pension, postretirement and post employment benefits |
10,178 | 6,939 | (194 | ) | ||||||||
| Change in income taxes receivable or payable |
42,060 | (595 | ) | (15,597 | ) | |||||||
| Increase (decrease) in deferred income taxes |
(29,178 | ) | 165 | 8,390 | ||||||||
| Other |
6,372 | 3,738 | (729 | ) | ||||||||
| Net cash provided by operating activities of continuing operations |
197,161 | 151,686 | 121,709 | |||||||||
| Cash required for investing activities of continuing operations: |
||||||||||||
| Purchases of marketable securities |
(70,415 | ) | (13,038 | ) | - | |||||||
| Sales of marketable securities |
68,043 | 67,199 | - | |||||||||
| Purchases of property and equipment |
(32,544 | ) | (24,096 | ) | (18,462 | ) | ||||||
| Acquisitions, net |
(4,245 | ) | (1,299,738 | ) | (8,909 | ) | ||||||
| Increase in restricted cash |
(11,916 | ) | (6,847 | ) | - | |||||||
| Other |
8,394 | 4,211 | 207 | |||||||||
| Net cash required for investing activities of continuing operations |
(42,683 | ) | (1,272,309 | ) | (27,164 | ) | ||||||
| Cash provided by (required for) financing activities of continuing operations: |
||||||||||||
| Payments on long-term debt |
(218,000 | ) | (338,600 | ) | (185,600 | ) | ||||||
| Purchases of common stock |
(1,260 | ) | (548 | ) | (956 | ) | ||||||
| Proceeds from long-term debt |
55,000 | 1,507,000 | 94,000 | |||||||||
| Financing costs |
(2,814 | ) | (28,855 | ) | - | |||||||
| Cash dividends paid |
(32,671 | ) | (32,361 | ) | (26,383 | ) | ||||||
| Other, primarily issuance of common stock |
7,815 | 5,399 | 13,085 | |||||||||
| Net cash provided by (required for) financing activities of continuing operations |
(191,930 | ) | 1,112,035 | (105,854 | ) | |||||||
| Net cash provided by (required for) discontinued operations: |
||||||||||||
| Operating activities |
5,517 | 8,808 | 8,179 | |||||||||
| Investing activities |
33,030 | (687 | ) | 76 | ||||||||
| Net increase (decrease) in cash and cash equivalents |
1,095 | (467 | ) | (3,054 | ) | |||||||
| Cash and cash equivalents: |
||||||||||||
| Beginning of year |
7,543 | 8,010 | 11,064 | |||||||||
| End of year |
$ | 8,638 | $ | 7,543 | $ | 8,010 | ||||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company directly, and through its ownership of associated companies, publishes 56 daily newspapers in 23 states and more than 300 weekly, classified and specialty publications, along with associated and integrated online sites. The Company currently operates in a single reporting segment, as its enterprises have similar economic characteristics, products, customers and distribution.
| 1 | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
In June 2005, the Company acquired Pulitzer Inc. (Pulitzer). The acquisition has a significant impact on the Consolidated Financial Statements.
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned, except for its 50% interest in Madison Newspapers, Inc., (MNI), 83% interest in INN Partners, L.C., (INN), and Pulitzer’s (together with another subsidiary) 95% interest in St. Louis Post-Dispatch LLC (PD LLC) and STL Distribution Services LLC (DS LLC), a distribution company serving the St. Louis market, and 50% interest in the results of operations of TNI Partners (TNI).
Certain amounts as previously reported have been reclassified to conform with the current year presentation.
References to 2006, 2005, 2004 and the like mean the fiscal year ended September 30.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, revenue and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned, or majority-owned, subsidiaries. All significant intercompany transactions have been eliminated.
Investments in MNI and TNI are accounted for using the equity method and are reported at cost plus the Company’s share of undistributed earnings since acquisition, less, for TNI, amortization of intangible assets.
Minority interest in earnings of PD LLC, DS LLC and INN is recognized in the Consolidated Financial Statements.
Cash and Cash Equivalents
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.
Accounts Receivable
The Company evaluates its allowance for doubtful accounts receivable based on historical credit experience, payment trends and other economic factors. Delinquency is determined based on timing of payments in relation to billing dates. Accounts considered to be uncollectible are written off.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Newsprint inventories are priced at the lower of cost or market, with cost being determined by the first-in, first-out or last-in, first-out methods. Newsprint inventories at September 30, 2006 and 2005 are less than replacement cost by $4,556,000 and $3,731,000, respectively.
The components of newsprint inventory by cost method are as follows:
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| First-in, first-out |
$ | 10,099 | $ | 11,118 | ||
| Last-in, first-out |
5,193 | 5,681 | ||||
| $ | 15,292 | $ | 16,799 | |||
Other inventories consisting of ink, plates and film are priced at the lower of cost or market, with cost being determined by the first-in, first-out method.
Restricted Cash and Investments
Until May 1, 2010, PD LLC is restricted from making distributions (except under specified circumstances), capital expenditures and member loan repayments unless it has set aside out of its cash flow a reserve equal to the product of $15,000,000 and the number of years since May 1, 2000, but not in excess of $150,000,000 (the Reserve). PD LLC is not required to maintain the Reserve after May 1, 2010. Investments in the Reserve are limited to U.S. Government and related securities and are recorded at fair value, with unrealized gains and losses reported, net of applicable income taxes, in accumulated other comprehensive income. The cost basis used to determine realized gains and losses is specific identification. See Note 19.
Other Investments
Other investments primarily consist of marketable securities held in trust under a deferred compensation arrangement and investments for which no established market exists. Marketable securities are classified as trading securities and carried at fair value with gains and losses reported in earnings. Non-marketable securities are carried at cost.
Property and Equipment
Property and equipment are carried at cost. Equipment, except for printing presses and mailroom equipment, is depreciated primarily by declining-balance methods. The straight-line method is used for all other assets. The estimated useful lives are as follows:
| Years | ||
| Buildings and improvements |
5 – 54 | |
| Printing presses and mailroom equipment |
2 – 28 | |
| Other |
1 – 14 | |
The Company capitalizes interest as a component of the cost of constructing major facilities. At September 30, 2006, capitalized interest was not significant.
Beginning in 2006, the Company recognizes the fair value of a liability for a legal obligation to perform an asset retirement activity, when such activity is a condition of a future event, and the fair value of the liability can be estimated.
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Goodwill and Other Intangible Assets
Intangible assets include covenants not to compete, consulting agreements, customer lists, newspaper subscriber lists, mastheads and other. Intangible assets subject to amortization are being amortized as follows:
| Years | ||
| Noncompete and consulting agreements |
2 – 15 | |
| Customer lists |
3 – 23 | |
| Newspaper subscriber lists |
7 – 33 | |
| Other |
10 | |
In assessing the recoverability of its goodwill and other nonamortized intangible assets, the Company makes assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company analyzes its goodwill and other nonamortized intangible assets for impairment on an annual basis, or more frequently if impairment indicators are present.
The Company also periodically evaluates its determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact the cash flows of the Company. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.
Revenue Recognition
Advertising revenue is recorded when advertisements are placed in the publication or on the related online site. Circulation revenue is recorded as newspapers are distributed over the subscription term. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for newspapers or advance payments for advertising.
Advertising Costs
Advertising costs are expensed as incurred.
Pension, Postretirement and Postemployment Benefit Plans
The Company evaluates its liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If the Company used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
Income Taxes
Deferred income taxes are provided using the liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Exchange Agreements
The Company accounts for interest rate exchange agreements, which are comprised of floating-to-fixed rate interest rate swaps, as cash flow hedges. The Company expects that the fair value of these agreements will significantly offset changes in the cash flows of the associated floating rate debt. The fair value of such instruments is recorded in accumulated other comprehensive income, net of applicable income tax expense or benefit.
Stock Compensation
The Company has four stock-based compensation plans. The Company accounts for grants under those plans under the fair value expense recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation, as amended by Statement 123–Revised. The adoption of Statement 123–Revised resulted in a reclassification of unearned compensation to additional paid-in capital. The Company amortizes as compensation expense the value of stock options and restricted Common Stock by the straight-line method over the vesting or restriction period, which is generally one to three years.
Uninsured Risks
The Company is self-insured for health care, workers compensation and certain long-term disability costs of its employees, subject to stop loss insurance, which limits exposure to large claims. The Company accrues its estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts. Letters of credit and a self-insurer bond totaling $7,495,000 at September 30, 2006 are outstanding in support of the Company’s insurance program.
The Company’s reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.
Discontinued Operations
In accordance with the provisions of FASB Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operations and related losses on properties sold, or identified as held for sale, have been presented as discontinued operations in the Consolidated Statements of Income and Comprehensive Income for all years presented. Gains are recognized when realized.
| 2 | ACQUISITIONS AND DIVESTITURES |
All acquisitions are accounted for as a purchase and, accordingly, the results of operations since the respective dates of acquisition are included in the Consolidated Financial Statements.
Acquisition of Pulitzer
On June 3, 2005, the Company and LP Acquisition Corp., an indirect, wholly-owned subsidiary of the Company (the Purchaser), consummated an Agreement and Plan of Merger (the Merger Agreement) dated as of January 29, 2005 with Pulitzer. The Merger Agreement provided for the Purchaser to be merged with and into Pulitzer (the Merger), with Pulitzer as the surviving corporation. Each share of Pulitzer’s Common Stock and Class B Common Stock outstanding immediately prior to the effective time of the Merger was converted into the right to receive from the Company or the Purchaser in cash, without interest, an amount equal to $64 per share. Pulitzer published fourteen daily newspapers, including the St. Louis Post-Dispatch, and more than 100 weekly newspapers and specialty publications. Pulitzer also owns a 50% interest in TNI. See Note 4. The Merger was consistent with the Company’s announced strategy to buy newspapers with circulation of 30,000 or more.
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Table of Contents
The Merger effected a change of control of Pulitzer. At the effective time of the Merger and as a result of the Merger, Pulitzer became an indirect, wholly-owned subsidiary of the Company.
The unaudited pro forma condensed consolidated income statement information for 2005 and 2004, set forth below, presents the results of operations as if the acquisition of Pulitzer had occurred at the beginning of each year and is not necessarily indicative of future results or actual results that would have been achieved had the acquisition occurred as of the beginning of such year. Pro forma results for 2005 include $29,544,000 of early retirement, transition and debt extinguishment costs related to the acquisition. The amounts in the table below are adjusted for the divestitures of the Pacific Northwest Properties and the daily newspaper in Rhinelander, Wisconsin, described below. Other acquisitions described below are excluded as the amounts are not significant.
| (Thousands, Except Per Common Share Data) (Unaudited) | 2005 | 2004 | ||||
| Operating revenue |
$ | 1,121,081 | $ | 1,080,365 | ||
| Income from continuing operations |
67,345 | 87,386 | ||||
| Earnings per common share from continuing operations: |
||||||
| Basic |
$ | 1.49 | $ | 1.95 | ||
| Diluted |
1.49 | 1.94 | ||||
The $1,461,585,000 purchase price of Pulitzer, all of which was paid in cash, included approximately $11,200,000 of fees and expenses and is allocated as follows. The purchase price includes assets and liabilities of the Rhinelander, Wisconsin daily newspaper, which was sold in 2006.
| (Thousands) | |||
| Current assets |
$ | 305,432 | |
| Restricted cash and investments |
73,560 | ||
| Property and equipment |
140,532 | ||
| Long-term investments |
207,937 | ||
| Goodwill |
922,396 | ||
| Intangible and other assets |
623,827 | ||
| Total assets acquired |
2,273,684 | ||
| Current liabilities |
55,125 | ||
| Long-term debt |
337,512 | ||
| Pension, postretirement and postemployment benefits |
118,480 | ||
| Deferred income taxes |
274,394 | ||
| Other long-term liabilities |
26,588 | ||
| $ | 1,461,585 | ||
Incremental goodwill was recorded as a result of the Company’s acquisition of Pulitzer as the purchase price exceeding the fair value of tangible and identified intangible assets acquired. Such goodwill is not deductible for income tax purposes. Future tax deductible goodwill recorded by Pulitzer as a result of prior transactions is approximately $585,500,000.
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired intangible assets consist of the following:
| (Thousands) | Amount | Weighted-Average Amortization Period (Years) | |||
| Amortizable intangible assets: |
|||||
| Customer lists |
$ | 516,730 | 18 | ||
| Newspaper subscriber lists |
49,902 | 9 | |||
| 566,632 | 17 | ||||
| Nonamortized intangible assets: |
|||||
| Mastheads |
53,118 | ||||
| $ | 619,750 | ||||
In 2006 and 2005, the Company incurred transition costs of $4,589,000 and $8,929,000, respectively, in connection with the acquisition of Pulitzer.
Other Acquisitions
In 2004, the Company exchanged its daily newspapers in Freeport, Illinois and Corning, New York and cash totaling $2,215,000 for daily newspapers in Burley, Idaho and Elko, Nevada and eight weekly and specialty publications. In 2004 the Company also purchased five specialty publications at a cost of $6,694,000.
In 2005, the Company purchased two specialty publications at a cost of $309,000, made a final working capital payment of $301,000 related to a specialty publication purchased in 2004 and exchanged an internet service provider business for a weekly newspaper. In 2005, the Company also purchased eight specialty publications at a cost of $3,908,000 and received final working capital payments of $78,000 from purchased specialty publications. In 2005, INN purchased an Internet advertisement design business at a cost of $200,000.
In 2006, the Company purchased a web-hosting business and national advertising network at a cost of $3,800,000 from PowerOne Media, LLC (PowerOne), in which the Company and MNI own minority interests and purchased a minority interest in INN in exchange for the forgiveness of certain notes receivable with a carrying value of $75,000. In 2006, the Company also purchased a weekly newspaper at a cost of $412,000. These other acquisitions did not have a material effect on the Consolidated Financial Statements.
In November 2006, the Company purchased a minority interest in an online employment application from PowerOne at a cost of $118,000.
| 3 | DISCONTINUED OPERATIONS |
In 2006, the Company sold several stand alone publishing and commercial printing operations in Seattle and Spokane, Washington, and Portland, Oregon, a twice weekly newspaper in Oregon (the Pacific Northwest Properties), and the daily newspaper in Rhinelander, Wisconsin. The Company received $33,198,000 in September 2006 and recorded a receivable of $20,700,000, which was collected in October 2006. The transactions resulted in an after tax loss of $5,204,000, which is recorded in discontinued operations.
The 2004 exchange transaction (see Note 2) resulted in an after tax loss of $228,000, which is recorded in discontinued operations. Tax expense of $2,812,000 recorded in results of discontinued operations in 2004 is related primarily to nondeductible goodwill and basis differences in identified intangible assets associated with the 2004 exchange transaction. Results for the Pacific Northwest Properties, Rhinelander, Freeport and Corning are recorded in discontinued operations for all years presented.
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Table of Contents
In October 2006, the Company sold a weekly newspaper in Oregon.
Results of discontinued operations consist of the following:
| (Thousands) | 2006 | 2005 | 2004 | |||||||
| Operating revenue |
$ | 41,104 | $ | 42,297 | $ | 43,477 | ||||
| Income from discontinued operations |
$ | 7,803 | $ | 9,911 | $ | 5,454 | ||||
| Gain (loss) on sale of discontinued operations |
(7,854 | ) | - | 2,584 | ||||||
| Income tax expense, net |
253 | 3,895 | 4,940 | |||||||
| $ | (304 | ) | $ | 6,016 | $ | 3,098 | ||||
Assets and liabilities of discontinued operations consist of the following:
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| Current assets |
$ | 88 | $ | 4,438 | ||
| Property and equipment, net |
113 | 10,269 | ||||
| Goodwill |
- | 47,420 | ||||
| Intangible and other assets |
141 | 3,379 | ||||
| Total assets |
$ | 342 | $ | 65,506 | ||
| Current liabilities |
523 | 3,176 | ||||
| Deferred income taxes |
- | 1,275 | ||||
| Total liabilities |
$ | 523 | $ | 4,451 | ||
Income tax expense related to discontinued operations differs from the amounts computed by applying the U.S. federal income tax rate as follows:
| 2006 | 2005 | 2004 | |||||
| Computed “expected” income tax expense |
(35.0 | )% | 35.0% | 35.0% | |||
| State income taxes, net of federal tax benefit |
(3.9 | ) | 4.3 | 4.0 | |||
| Other, primarily goodwill basis differences |
(457.2 | ) | - | 22.5 | |||
| (496.1 | )% | 39.3% | 61.5% |
| 4 | INVESTMENTS IN ASSOCIATED COMPANIES |
TNI Partners
In Tucson, Arizona, TNI, acting as agent for the Company’s subsidiary, Star Publishing Company (Star Publishing), and Citizen Publishing Company (Citizen), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and circulation of the Arizona Daily Star and Tucson Citizen, as well as the related online sites and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership’s operations and publication of the newspapers. Each newspaper is solely responsible for its own news and editorial content. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized financial information of TNI is as follows:
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| ASSETS |
||||||
| Current assets |
$ | 14,810 | $ | 13,782 | ||
| Investments and other assets |
10 | 20 | ||||
| Total assets |
$ | 14,820 | $ | 13,802 | ||
| LIABILITIES AND MEMBERS’ EQUITY |
||||||
| Current liabilities |
$ | 7,211 | $ | 8,021 | ||
| Members’ equity |
7,609 | 5,781 | ||||
| Total liabilities and members’ equity |
$ | 14,820 | $ | 13,802 | ||
Summarized results of TNI (2005 from the June 3, 2005 date of acquisition) are as follows:
| (Thousands) | 2006 | 2005 | ||||
| Operating revenue |
$ | 121,223 | $ | 36,986 | ||
| Operating expenses, excluding depreciation and amortization |
83,485 | 26,218 | ||||
| Operating income |
$ | 37,738 | $ | 10,768 | ||
| Company’s 50% share of operating income |
$ | 18,869 | $ | 5,384 | ||
| Less amortization of intangible assets |
5,987 | 1,644 | ||||
| Equity in earnings of TNI |
$ | 12,882 | $ | 3,740 | ||
Star Publishing’s 50% share of TNI depreciation and certain general and administrative expenses associated with its share of the operation and administration of TNI are reported as operating expenses in the Company’s Consolidated Statements of Income and Comprehensive Income. These amounts totaled $2,049,000 and $672,000 in 2006 and 2005, respectively.
At September 30, 2006, the carrying value of the Company’s 50% investment in TNI is $173,762,000. The difference between the Company’s carrying value and its 50% share of the members’ equity of TNI relates principally to goodwill of $85,240,000, and other identified intangible assets, some of which are being amortized over their estimated useful lives through 2025, of $85,005,000. See Note 6.
In January 2007, defined pension benefits for certain TNI employees will be frozen at then current levels. As a result, TNI will recognize a curtailment gain of approximately $2,000,000 in 2007.
Madison Newspapers, Inc.
The Company has a 50% ownership interest in MNI, a company that publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, as well as the related online sites. Net income or loss of MNI (after income taxes) is allocated equally to the Company and The Capital Times Company (TCT). MNI conducts its business under the trade name Capital Newspapers.
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Summarized financial information of MNI is as follows:
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| ASSETS |
||||||
| Current assets |
$ | 24,238 | $ | 19,888 | ||
| Investments and other assets |
36,506 | 43,514 | ||||
| Property and equipment, net |
12,126 | 14,652 | ||||
| Total assets |
$ | 72,870 | $ | 78,054 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||
| Current liabilities, excluding debt |
$ | 13,184 | $ | 13,773 | ||
| Debt, including current maturities |
8,014 | 13,273 | ||||
| Other liabilities |
2,660 | 2,960 | ||||
| Stockholders’ equity |
49,012 | 48,048 | ||||
| Total liabilities and stockholders’ equity |
$ | 72,870 | $ | 78,054 | ||
Summarized results of MNI are as follows:
| (Thousands) | 2006 | 2005 | 2004 | ||||||
| Operating revenue |
$ | 121,541 | $ | 122,021 | $ | 118,287 | |||
| Operating expenses, excluding depreciation and amortization |
91,572 | 87,429 | 85,084 | ||||||
| Operating income |
25,129 | 29,504 | 28,101 | ||||||
| Net income |
15,714 | 18,088 | 17,046 | ||||||
| Company’s 50% share of net income |
$ | 7,857 | $ | 9,044 | $ | 8,523 | |||
Accounts receivable from associated companies consist of dividends due from MNI. Fees for editorial, marketing and information technology services provided to MNI by the Company are included in other revenue and totaled $10,425,000, $10,164,000, and $9,994,000 in 2006, 2005, and 2004, respectively.
In September 2006, MNI sold its Shawano, Wisconsin daily newspaper and commercial printing operation. MNI recognized an after tax loss of $1,002,000 on the sale.
Certain other information relating to the Company’s investment in MNI is as follows:
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| Company’s share of: |
||||||
| Stockholders’ equity |
$ | 24,506 | $ | 24,024 | ||
| Undistributed earnings |
24,256 | 23,774 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| 5 | MARKETABLE SECURITIES AVAILABLE-FOR-SALE |
Marketable securities, which are comprised of debt securities issued by the U.S. government and agencies, and which include certain of the Company’s restricted cash and investments, are classified as available-for-sale securities at September 30, 2006, and 2005, and consist of the following:
| September 30 | ||||||||
| (Thousands) | 2006 | 2005 | ||||||
| Amortized cost |
$ | 77,419 | $ | 74,443 | ||||
| Gross unrealized gains |
52 | - | ||||||
| Gross unrealized losses |
(161 | ) | (230 | ) | ||||
| Fair value |
$ | 77,310 | $ | 74,213 | ||||
Proceeds from the sale of such securities total $68,043,000 in 2006, resulting in no gross realized gains or losses, and $67,199,000 in 2005, resulting in gross realized gains of $84,000 and gross realized losses of $10,000.
The amortized cost and fair value of marketable securities as of September 30, 2006, by contractual maturity, are as follows. Contractual maturities may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties.
| (Thousands) | Amortized Cost |
Fair Value | ||||
| Due in one year or less |
$ | 53,322 | $ | 53,189 | ||
| Due after one year through five years |
$ | 24,097 | 24,121 | |||
| $ | 77,419 | $ | 77,310 | |||
| 6 | GOODWILL AND OTHER INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill related to continuing operations are as follows:
| (Thousands) | 2006 | 2005 | ||||||
| Goodwill, beginning of year, as previously reported |
$ | 622,396 | ||||||
| Goodwill included in assets of discontinued operations |
(46,541 | ) | ||||||
| Goodwill, beginning of year, as reclassified |
$ | 1,499,622 | 575,855 | |||||
| Goodwill related to acquisitions |
(792 | ) | 925,626 | |||||
| Goodwill related to dispositions |
- | (1,859 | ) | |||||
| Goodwill, end of year |
$ | 1,498,830 | $ | 1,499,622 | ||||
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Identified intangible assets related to continuing operations consist of the following:
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| Nonamortized intangible assets: |
||||||
| Mastheads |
$ | 73,746 | $ | 78,670 | ||
| Amortizable intangible assets: |
||||||
| Customer and newspaper subscriber lists |
1,073,125 | 1,069,018 | ||||
| Less accumulated amortization |
166,240 | 109,253 | ||||
| 906,885 | 959,765 | |||||
| Noncompete and consulting agreements |
28,678 | 28,664 | ||||
| Less accumulated amortization |
28,397 | 28,136 | ||||
| 281 | 528 | |||||
| $ | 980,912 | $ | 1,038,963 | |||
In 2006, the Company, based on its most recent analysis and in conjunction with its ongoing requirement to assess the estimated useful lives of intangible assets, concluded that the period of economic benefit of certain identified intangible assets related to the Pulitzer acquisition had decreased. As a result, the weighted-average useful life of customer lists was decreased from approximately 21 years to 18 years. The change in estimated useful life of such assets resulted in recognition of additional amortization expense of $1,847,000 in 2006, of which $469,000 is recorded in equity in earnings of TNI. This change in non-cash amortization expense has no impact on the Company’s cash flows or debt covenants.
In 2006, the Company also recorded a separate non-cash charge of $5,526,000 to reduce the value of nonamortized masthead intangible assets of Pulitzer, of which $4,939,000 is recorded in amortization expense and $587,000 is recorded in equity in earnings of TNI. The Company uses a royalty approach to value such assets. Lower than expected revenue growth resulted in the change in value.
Annual amortization of intangible assets related to continuing operations for the five years ending September 2011 is estimated to be $60,250,000, $59,705,000, $59,179,000, $59,098,000, and $58,074,000, respectively.
| 7 | DEBT |
Credit Agreement
In December 2005, the Company entered into an amended and restated credit agreement (Credit Agreement) with a syndicate of financial institutions. The Credit Agreement provides for aggregate borrowing of up to $1,435,000,000 and consists of a $950,000,000 A Term Loan, $35,000,000 B Term Loan and $450,000,000 revolving credit facility. The Credit Agreement also provides the Company with the right, with the consent of the administrative agent, to request at certain times prior to June 2012 that one or more lenders provide incremental term loan commitments of up to $500,000,000, subject to certain requirements being satisfied at the time of the request. The Credit Agreement matures in June 2012 and amends and replaces a $1,550,000,000 credit agreement (the Old Credit Agreement) consummated in June 2005. Interest rate margins under the Credit Agreement are generally lower than under the Old Credit Agreement. Other conditions of the Credit Agreement are substantially the same as the Old Credit Agreement.
The Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by substantially all of the Company’s existing and future, direct and indirect subsidiaries in which the Company holds a direct or indirect interest of more than 50%; provided however, that Pulitzer and its subsidiaries will not be required to enter into such guaranty for so long as their doing so would violate the terms of the Pulitzer Notes described more fully below. The Credit Agreement is secured by first priority security interests in the stock and other equity interests owned by the Company and each guarantor in their respective
55
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiaries. Both the guaranties and the collateral that secures them will be released in their entirety at such time as the Company achieves a total leverage ratio of less than 4:25:1 for two consecutive quarterly periods.
Debt under the A Term Loan and revolving credit facility bear interest, at the Company’s option, at either a base rate or an adjusted Eurodollar rate (LIBOR), plus an applicable margin. The base rate for the facility is the greater of the prime lending rate of Deutsche Bank Trust Company Americas at such time and 0.5% in excess of the overnight federal funds rate at such time. The margin applicable is a percentage determined according to the following: For revolving loans and A Term Loans, maintained as base rate loans: 0%, and maintained as Eurodollar loans: 0.625% to 1% (0.875% at September 30, 2006) depending, in each instance, upon the Company’s leverage ratio at such time. All loans at September 30, 2006 are Eurodollar-based.
The Company may voluntarily prepay principal amounts outstanding or reduce commitments under the Credit Agreement at any time, in whole or in part, without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments. The Company is required to repay principal amounts, on a quarterly basis until maturity, under the A Term Loan beginning in September 2006. In addition to the scheduled payments noted above, the Company is required to make mandatory prepayments under the A Term Loan under certain other conditions. Total A Term Loan payments in 2006 total $24,000,000. The Company repaid the B Term Loan in full in 2006.
The Credit Agreement contains customary affirmative and negative covenants for financing of its type. These financial covenants include a maximum total leverage ratio (5.75:1 at September 30, 2006) and minimum interest expense coverage ratio of 2.5:1. None of the covenants included in the Credit Agreement is considered by the Company to be restrictive to normal operations or historical amounts of stockholder dividends. At September 30, 2006, the Company is in compliance with such covenants.
The Credit Agreement requires the Company to apply the net proceeds from asset sales to repayment of the A Term Loan to the extent such proceeds exceed the amount used to purchase assets (other than inventory and working capital) within one year of the asset sales. The Company expects repayments in 2007 to meet or exceed required repayments related to its 2006 sales transactions.
In 2005, upon consummation of the Old Credit Agreement, the Company borrowed $1,462,000,000. The proceeds were used to consummate the acquisition of Pulitzer, to repay certain existing indebtedness of the Company, as discussed more fully below, and to pay related fees and expenses.
In connection with the execution of the Old Credit Agreement, the Company redeemed, as of June 3, 2005, all of the $52,000,000 outstanding indebtedness under its then existing credit agreement and, as of June 6, 2005, the existing senior notes of the Company under the Note Purchase Agreement dated as of March 18, 1998 totaling $102,000,000. Refinancing of existing debt of the Company resulted in a pretax loss of $11,181,000.
Pulitzer Notes
In conjunction with its formation, PD LLC borrowed $306,000,000 (Pulitzer Notes) from a group of institutional lenders (the Lenders). The aggregate principal amount of the Pulitzer Notes is payable in April 2009 and bears interest at an annual rate of 8.05%. The Pulitzer Notes are guaranteed by Pulitzer pursuant to a Guaranty Agreement dated May 1, 2000 (Guaranty Agreement) with the Lenders. In turn, pursuant to an Indemnity Agreement dated May 1, 2000 (Indemnity Agreement) between The Herald Company, Inc. (Herald) and Pulitzer, Herald agreed to indemnify Pulitzer for any payments that Pulitzer may make under the Guaranty Agreement.
The terms of the Pulitzer Notes, as amended, contain certain covenants and conditions including the maintenance, by Pulitzer, of EBITDA, as defined in the Guaranty Agreement, minimum net worth and limitations on the incurrence of other debt. At September 30, 2006, the Company is in compliance with such covenants. In addition, the Pulitzer Notes and the Operating Agreement with Herald (Operating
56
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Agreement) require that PD LLC maintain a minimum reserve balance, consisting of cash and investments in U.S. government securities, totaling approximately $96,060,000 at September 30, 2006. The Pulitzer Notes and the Operating Agreement provide for a $3,750,000 quarterly increase in the minimum reserve balance through May 1, 2010, when the amount will total $150,000,000. See Note 19.
The purchase price allocation of Pulitzer (see Note 2) resulted in an increase in the value of the Pulitzer Notes in the amount of $31,512,000, which is recorded as debt in the Consolidated Balance Sheets. This amount will be accreted over the remaining life of the Pulitzer Notes, until April 2009, as a reduction in interest expense using the interest method. This accretion will not increase the principal amount due to, or reduce the amount of interest to be paid to, the Lenders.
Debt consists of the following:
| September 30 | Interest Rate(s) | ||||||||
| (Thousands) | 2006 | 2005 | September 30, 2006 | ||||||
| Credit Agreement: |
|||||||||
| A Term Loan |
$ | 926,000 | $ | - | 6.24 – 6.28 | % | |||
| Revolving credit facility |
293,000 | - | 6.21 – 6.24 | ||||||
| Old Credit Agreement |
- | 1,382,000 | |||||||
| Pulitzer Notes: |
|||||||||
| Principal amount |
306,000 | 306,000 | 8.05 | ||||||
| Unaccreted fair value adjustment |
20,834 | 28,024 | |||||||
| 1,545,834 | 1,716,024 | ||||||||
| Less current maturities |
35,375 | 10,000 | |||||||
| $ | 1,510,459 | $ | 1,706,024 | ||||||
Aggregate maturities of debt during the five years ending September 30, 2011 are $35,375,000, $71,250,000, $448,500,000, $166,250,000, and $261,250,000, respectively.
| 8 | INTEREST RATE EXCHANGE AGREEMENTS |
In 2005, the Company executed interest rate swaps in the notional amount of $350,000,000 with a forward starting date of November 30, 2005. The interest rate swaps have terms of two to five years, carry interest rates from 4.2% to 4.4% (plus the applicable LIBOR margin) and effectively fix the Company’s interest rate on debt in the amounts, and for the time periods, of such instruments. At September 30, 2006, the Company recorded an asset of $5,234,000 and $2,707,000 in 2006 and 2005, respectively, related to the fair value of such instruments. The change in this fair value is recorded in other comprehensive income, net of income taxes.
At September 30, 2006, after consideration of the interest rate swaps described above, approximately 57% of the principal amount of the Company’s debt is subject to floating interest rates.
In 2005, the Company terminated fixed-to-floating rate interest rate swaps with a notional amount of $150,000,000 previously executed by Pulitzer. The swaps were accounted for as fair value hedges. The Company received cash of $2,100,000 upon termination.
| 9 | PENSION PLANS |
The Company and its subsidiaries have several noncontributory defined benefit pension plans that together cover a significant number of St. Louis Post-Dispatch and selected other employees. Benefits under the plans are generally based on salary and years of service. The Company’s liability and related expense for benefits under the plans are recorded over the service period of active employees based upon annual actuarial calculations. Plan funding strategies are influenced by tax regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, and cash.
The Company uses a June 30 measurement date for all of its pension obligations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cost components of the Company’s pension plans (2005 from the June 3, 2005 date of acquisition) are as follows:
| (Thousands) | 2006 | 2005 | ||||||
| Service cost for benefits earned during the year |
$ | 5,532 | $ | 2,229 | ||||
| Interest cost on projected benefit obligation |
9,191 | 2,950 | ||||||
| Expected return on plan assets |
(12,637 | ) | (4,212 | ) | ||||
| Curtailment |
(102 | ) | - | |||||
| Cost for special termination benefits (see Note 19) |
4,523 | 4,650 | ||||||
| Net periodic pension cost |
$ | 6,507 | $ | 5,617 | ||||
|
$605,000 and $202,000 of net periodic pension cost in 2006 and 2005, respectively, is allocated to TNI.
Changes in benefit obligations and plan assets (2005 from the June 3, 2005 date of acquisition) are as follows:
|
| |||||||
| (Thousands) | 2006 | 2005 | ||||||
| Benefit obligation, beginning of year |
$ | 186,480 | $ | - | ||||
| Fair value of benefit obligation acquired |
- | 181,259 | ||||||
| Service cost |
5,532 | 2,229 | ||||||
| Interest cost |
9,191 | 2,950 | ||||||
| Actuarial gain |
(27,959 | ) | (3,884 | ) | ||||
| Benefits paid |
(9,493 | ) | (724 | ) | ||||
| Curtailment |
(102 | ) | - | |||||
| Special termination benefits |
4,523 | 4,650 | ||||||
| Benefit obligation, end of year |
168,172 | 186,480 | ||||||
| Fair value of plan assets, beginning of year: |
157,285 | - | ||||||
| Fair value of plan assets acquired |
- | 156,448 | ||||||
| Actual gain on plan assets |
13,972 | 1,561 | ||||||
| Benefits paid |
(9,493 | ) | (724 | ) | ||||
| Fair value of plan assets, June 30 measurement date |
161,764 | 157,285 | ||||||
| Funded status – benefit obligation in excess of plan assets |
6,408 | 29,195 | ||||||
| Contributions made after measurement date |
(845 | ) | - | |||||
| Unrecognized net actuarial gain |
30,526 | 1,233 | ||||||
| Net accrued benefit liability recognized |
$ | 36,089 | $ | 30,428 | ||||
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are $70,811,000, $67,011,000 and $64,436,000, respectively, at September 30, 2006.
Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
| September 30 | ||||||
| 2006 | 2005 | |||||
| Discount rate |
5.75 | % | 5.0 | % | ||
| Rate of compensation increase |
4.0 | 4.0 | ||||
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Weighted-average assumptions used to determine net periodic benefit cost are as follows:
| 2006 | 2005 | |||||
| Discount rate |
5.0 | % | 5.0 | % | ||
| Expected long-term return on plan assets |
8.5 | 8.5 | ||||
| Rate of compensation increase |
4.0 | 4.0 | ||||
The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns and current market conditions.
Plan Assets
The weighted-average asset allocation of the Company’s pension assets is as follows:
| Actual Allocation | ||||||
| September 30 | ||||||
| Asset Class | Policy Allocation | 2006 | 2005 | |||
| Equity securities |
65% to 70% | 70% | 71% | |||
| Debt securities |
30% to 35% | 30% | 29% | |||
An investment policy outlines the governance structure for decision making, sets investment objectives and restrictions, and establishes criteria for selecting and evaluating investment managers. The use of derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment committee, consisting of Company executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy.
The pension trust holds no Company securities, directly or through separate accounts.
Cash Flows
Based on its forecast at September 30, 2006, the Company expects to make contributions of $130,000 to its pension trust in 2007.
The Company anticipates future benefit payments, which reflect future service, to be paid from the pension trust as follows:
| (Thousands) | |||
| 2007 |
$ | 10,661 | |
| 2008 |
10,578 | ||
| 2009 |
10,733 | ||
| 2010 |
10,877 | ||
| 2011 |
11,079 | ||
| 2012-2016 |
62,284 | ||
2007 Curtailment
In January 2007, defined pension benefits for certain of the Company’s employees will be frozen at then current levels. As a result, the Company will recognize a curtailment gain of approximately $2,800,000 in 2007.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Plans
The Company is obligated under an unfunded plan to provide certain fixed retirement payments to certain former employees. The plan is frozen and no additional benefits are being accrued. The accrued liability under the plan is $2,853,000 and $3,006,000 at September 30, 2006 and 2005, respectively.
Certain of the Company’s employees participate in multi-employer retirement plans sponsored by their respective bargaining units. The amount charged to operating expense, representing the Company’s required contributions to these plans, is approximately $679,000 in 2006 and $228,000 in 2005.
| 10 | POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS |
The Company provides retiree medical and life insurance benefits under postretirement plans at several of its operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, PD LLC provides postemployment disability benefits to certain employee groups prior to retirement at the St. Louis Post-Dispatch. The Company’s liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. The Company accrues postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
The Company uses a June 30 measurement date for all of its postretirement obligations.
The net periodic postretirement benefit cost components for the Company’s postretirement plans (2005 from the June 3, 2005 date of acquisition) are as follows:
| (Thousands) | 2006 | 2005 | ||||||
| Service cost for benefits earned during the year |
$ | 3,377 | $ | 1,107 | ||||
| Interest cost on projected benefit obligation |
6,588 | 2,196 | ||||||
| Expected return on plan assets |
(2,071 | ) | (690 | ) | ||||
| Cost for special termination benefits |
660 | 450 | ||||||
| Net periodic postretirement benefit cost |
$ | 8,554 | $ | 3,063 | ||||
Changes in benefit obligations and plan assets (2005 from the June 3, 2005 date of acquisition) are as follows:
| (Thousands) | 2006 | 2005 | ||||||
| Benefit obligation, beginning of year |
$ | 134,977 | $ | - | ||||
| Fair value of benefit obligation acquired |
- | 133,687 | ||||||
| Service cost |
3,377 | 1,107 | ||||||
| Interest cost |
6,588 | 2,196 | ||||||
| Actuarial gain |
(12,418 | ) | (1,977 | ) | ||||
| Benefits paid, net of premiums received |
(6,051 | ) | (486 | ) | ||||
| Cost for special termination benefits |
660 | 450 | ||||||
| Benefit obligation, end of year |
127,133 | 134,977 | ||||||
| Fair value of plan assets, beginning of year |
44,187 | - | ||||||
| Fair value of plan assets acquired |
- | 43,757 | ||||||
| Actual return on plan assets |
1,602 | 430 | ||||||
| Employer contributions |
6,051 | 486 | ||||||
| Benefits paid |
(6,051 | ) | (486 | ) | ||||
| Fair value of plan assets, June 30 measurement date |
45,789 | 44,187 | ||||||
| Funded status |
81,344 | 90,790 | ||||||
| Unrecognized net actuarial gain |
13,665 | 1,717 | ||||||
| Funding changes made after measurement date |
1,123 | (1,416 | ) | |||||
| Net accrued benefit cost recognized |
$ | 96,132 | $ | 91,091 | ||||
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Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
| September 30 | ||||||
| 2006 | 2005 | |||||
| Discount rate |
5.75 | % | 5.0 | % | ||
| Expected long-term return on plan assets |
5.0 | 5.0 | ||||
The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns and current market conditions.
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
| 2006 | 2005 | |||||
| Discount rate |
5.0 | % | 5.0 | % | ||
| Expected long-term return on plan assets |
5.0 | 5.0 | ||||
Assumed health care cost trend rates are as follows:
| September 30, 2006 | |||
| Healthcare cost trend rates |
9.0 – 9.5 | % | |
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
4.5 – 5.0 | % | |
| Year that the rate reaches the ultimate trend rate |
2011 | ||
Administrative costs related to indemnity plans are assumed to increase at the healthcare cost trend rates noted above.
Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement health care plans. A one percentage point change in assumed health care cost trend rates would have the following annualized effects on reported amounts for 2006:
| One Percentage Point |
|||||||
| (Thousands) | Increase | Decrease | |||||
| Effect on net periodic postretirement benefit cost |
$ | 1,432 | $ | (1,063 | ) | ||
| Effect on accumulated postretirement benefit obligation |
14,843 | (10,127 | ) | ||||
Plan Assets
The weighted-average asset allocation of the Company’s postretirement fund at September 30, 2006 and 2005, is as follows:
| Asset Class | Policy Allocation | Actual Allocation | ||||
| Debt securities |
100 | % | 100 | % | ||
An investment policy outlines the governance structure for decision making, sets investment objectives and restrictions, and establishes criteria for selecting and evaluating investment managers. The use of derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment committee, consisting of Company executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The postretirement fund holds no Company securities, directly or through separate accounts.
The Company’s postemployment benefit obligation, representing certain disability benefits at the St. Louis Post-Dispatch, is $4,099,000 and $4,146,000 at September 30, 2006 and 2005, respectively.
Cash Flows
Based on its forecast at September 30, 2006, the Company expects to contribute $3,000,000 to its postretirement plans in 2007.
In December 2003 the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans (Subsidy) that provide a benefit that is at least actuarially equivalent (as that term is defined in the Act) to Medicare Part D. The Company concluded that it qualifies for the Subsidy under the Act since the prescription drug benefits provided under the Company’s postretirement health care plans generally require lower premiums from covered retirees and have lower deductibles than the benefits provided in Medicare Part D and, accordingly, are actuarially equivalent to or better than, the benefits provided under the Act.
The Company anticipates future benefit payments, which reflect future services, to be paid either with future contributions to the plan or directly from plan assets, as follows:
| (Thousands) | Gross Payments |
Less Medicare Part D Subsidy |
Net Payments | |||||||
| 2007 |
$ | 7,863 | $ | (622 | ) | $ | 7,241 | |||
| 2008 |
8,072 | (648 | ) | 7,424 | ||||||
| 2009 |
8,340 | (679 | ) | 7,661 | ||||||
| 2010 |
8,544 | (704 | ) | 7,840 | ||||||
| 2011 |
8,608 | (718 | ) | 7,890 | ||||||
| 2012-2016 |
45,750 | (3,955 | ) | 41,795 | ||||||
2007 Curtailment
In January 2007, defined postretirement medical benefits for certain of the Company’s employees will be modified. As a result, the Company will recognize a curtailment gain of approximately $1,200,000 in 2007.
| 11 | OTHER RETIREMENT PLANS |
Substantially all the Company’s employees are eligible to participate in a qualified defined contribution retirement plan. The Company also has other retirement and compensation plans for executives and others. Retirement and compensation plan costs, including interest on deferred compensation costs, charged to continuing operations are $25,112,000 in 2006, $22,022,000 in 2005, and $18,044,000 in 2004.
In conjunction with the acquisition of Pulitzer, an existing supplemental executive benefit retirement plan (SERP) was amended and converted into an individual account plan. An account was established for each participant and was credited with an amount representing the present value of the participant’s accrued benefit under the SERP, plus adjustments for certain individuals subject to existing transition agreements. Interest is credited to each account at an annual rate of 5.75%. The SERP, as amended, will be liquidated on or about May 1, 2008, or earlier upon a change of control of the Company, at which time each participant will receive a lump sum payment equal to the balance in his account. Retired participants will continue to receive annuity payments until the liquidation of the SERP. At September 30, 2006 and 2005, the Company’s liability under the SERP totals $18,527,000 and $19,054,000, respectively.
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| 12 | COMMON STOCK, CLASS B COMMON STOCK, AND PREFERRED SHARE 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. Class B Common Stock is at all times convertible into shares of Common Stock on a share-for-share basis. Common Stock and Class B Common Stock have identical rights with respect to cash dividends and upon liquidation. All outstanding Class B Common Stock converts to Common Stock when the shares of Class B Common Stock outstanding total less than 5,600,000 shares.
In 1998, the Board of Directors adopted a Shareholder Rights Plan (Plan). Under the Plan, the Board declared a dividend of one Preferred Share Purchase Right (Right) for each outstanding share of Common Stock and Class B Common Stock (collectively Common Shares) of the Company. Rights are attached to, and automatically trade with, the Company’s Common Shares.
Rights become exercisable only in the event that any person or group of affiliated persons becomes a holder of 20% or more of the Company’s outstanding Common Shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 20% of the Company’s outstanding Common Shares. Once the Rights become exercisable, they entitle all other stockholders to purchase, by payment of a $150 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 20% position is acquired and prior to the acquisition of a 50% position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of Common Stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration in May 2008.
| 13 | STOCK OWNERSHIP PLANS |
Total stock compensation expense is $7,693,000, $7,879,000, and $5,874,000, in 2006, 2005, and 2004, respectively.
Stock Options
The Company has reserved 2,237,305 shares of Common Stock for issuance to employees under an incentive and nonstatutory stock option and restricted stock plan approved by stockholders. Options are granted at a price equal to the fair market value on the date of the grant and are exercisable, upon vesting, over a ten-year period.
A summary of stock option activity is as follows:
| (Thousands of Shares) | 2006 | 2005 | 2004 | ||||||
| Under option, beginning of year |
981 | 921 | 1,177 | ||||||
| Granted |
177 | 140 | 245 | ||||||
| Exercised |
(113 | ) | (76 | ) | (481 | ) | |||
| Canceled |
(106 | ) | (4 | ) | (20 | ) | |||
| Under option, end of year |
939 | 981 | 921 | ||||||
| Exercisable, end of year |
627 | 608 | 368 | ||||||
Weighted average prices of stock options are as follows:
| 2006 | 2005 | 2004 | |||||||
| Granted |
$ | 39.56 | $ | 47.64 | $ | 44.25 | |||
| Exercised |
32.94 | 30.28 | 27.14 | ||||||
| Under option, end of year |
37.96 | 37.76 | 35.65 | ||||||
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The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model. The table below outlines the weighted average assumptions for options granted.
| 2006 | 2005 | 2004 | ||||||||||
| Dividend yield |
1.7 | % | 1.5 | % | 1.7 | % | ||||||
| Volatility |
21.7 | % | 24.3 | % | 25.3 | % | ||||||
| Risk-free interest rate |
4.4 | % | 3.6 | % | 3.0 | % | ||||||
| Expected life (years) |
4.7 | 4.7 | 4.2 | |||||||||
| Estimated fair value |
$ | 8.74 | $ | 11.00 | $ | 9.35 | ||||||
A summary of stock options outstanding at September 30, 2006 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||
| Range of Exercise Prices |
Number Outstanding |
Weighted Average Remaining Life (Years) |
Weighted Average Exercise Price |
Number Exercisable |
Weighted Average Exercise Price | |||||||||
| $20 to 25 |
1,300 | 0.1 | $ | 21.50 | 1,300 | $ | 21.50 | |||||||
| 25 to 30 |
74,825 | 3.3 | 27.73 | 74,825 | 27.73 | |||||||||
| 30 to 35 |
221,891 | 6.1 | 32.51 | 221,891 | 32.51 | |||||||||
| 35 to 40 |
337,920 | 7.0 | 37.36 | 182,150 | 35.50 | |||||||||
| 40 to 45 |
166,610 | 6.9 | 43.22 | 103,370 | 43.21 | |||||||||
| 45 to 50 |
136,472 | 8.0 | 47.63 | 43,286 | 47.61 | |||||||||
| 939,018 | 6.6 | $ | 37.96 | 626,822 | $ | 35.59 | ||||||||
Total unrecognized compensation expense for unvested stock options at September 30, 2006 is $1,660,000, which will be recognized over a weighted average period of 1.1 years.
The exercise of stock options in 2006, 2005 and 2004 resulted in cash proceeds of $3,711,000, $2,289,000 and $10,419,000, respectively, and income tax benefits of $215,000, $427,000 and $3,092,000, respectively.
The intrinsic value of stock options exercised in 2006, 2005, and 2004 is $552,000, $1,094,000, and $7,929,000, respectively. The aggregate intrinsic value of options outstanding and exercisable at September 30, 2006, is $4,900.
Restricted Common Stock
Restricted Common Stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment, generally within three years of the grant date for reasons other than normal retirement, death or disability.
A summary of restricted Common Stock activity follows:
| (Thousands of Shares) | 2006 | 2005 | 2004 | ||||||
| Outstanding, beginning of year |
279 | 219 | 164 | ||||||
| Granted |
165 | 116 | 100 | ||||||
| Vested |
(88 | ) | (54 | ) | (37 | ) | |||
| Forfeited |
(21 | ) | (2 | ) | (8 | ) | |||
| Outstanding, end of year |
335 | 279 | 219 | ||||||
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Weighted average grant date fair values of restricted Common Stock are as follows:
| 2006 | 2005 | 2004 | |||||||
| Outstanding, beginning of year |
$ | 44.98 | $ | 38.00 | $ | 32.13 | |||
| Granted |
40.73 | 47.59 | 43.29 | ||||||
| Vested |
41.79 | 35.53 | 26.37 | ||||||
| Forfeited |
42.03 | 39.90 | 37.60 | ||||||
| Outstanding, end of year |
43.91 | 44.98 | 38.00 | ||||||
The fair value of restricted Common Stock vested in 2006, 2005 and 2004 is $3,466,000, $2,565,000 and $1,607,000, respectively.
Total unrecognized compensation expense for unvested restricted Common Stock as of September 30, 2006 is $5,732,000, which will be recognized over a weighted average period of 1.4 years.
At September 30, 2006, 1,298,287 shares are available for granting of stock options or issuance of restricted Common Stock.
In November 2006, 307,130 stock options were granted at an exercise price of $28.72 per share and 193,640 shares of restricted Common Stock were issued.
In November 2004, 40,000 shares of restricted Common Stock granted to an officer of the Company in November 2003 and 35,000 shares of restricted Common Stock granted in November 2002, were cancelled and reissued. The reissued shares of restricted Common Stock are identical to the cancelled shares with respect to voting rights, dividends, and timing of vesting. The value per share to the recipient upon vesting is unchanged. Vesting of the cancelled shares was not dependent upon future performance of the Company. The reissued shares vest only if specified performance criteria are met and additional shares may be issued if the performance criteria are exceeded. As the specified performance was exceeded, 15,000 additional shares of restricted Common Stock were issued in November 2005. The Company believes the reissued shares meet the criteria for performance-based compensation under Section 162(m) of the Internal Revenue Code. Due to increases in the price of the Company’s Common Stock from the original grant dates to November 2004, the reissued shares have a fair market value in excess of the cancelled shares in the amount of $706,000, which is being amortized over the remaining vesting period of the reissued shares as a modification of an award.
Stock Purchase Plans
The Company has 541,000 shares of Common Stock available for issuance pursuant to the Company’s Employee Stock Purchase Plan (ESPP). April 28, 2007 is the exercise date for the current offering. The purchase price is the lower of 85% of the fair market value at the date of grant or the exercise date, which is one year from the date of grant. The Company also has 106,000 shares of Common Stock available for issuance under the Company’s Supplemental Employee Stock Purchase Plan (SPP). Under the SPP, an offering period is each three-month calendar quarter, unless changed, and the last business day of each calendar quarter is the exercise date for such quarterly offering period. The purchase price is 85% of the market price on the last business day of each calendar quarter during the offering period. The weighted-average fair values of purchase rights granted under the ESPP in 2006, 2005, and 2004, computed using the Black-Scholes option-pricing model, are $6.53, $8.43, and $9.28, respectively. The weighted-average fair values of purchase rights granted under the SPP in 2006 and 2005, also computed using the Black-Scholes option-pricing model, are $6.27 and $7.33, respectively.
In 2006, 2005, and 2004 employees purchased 131,000, 89,000 and 88,000 shares, respectively, under the ESPP at a price of $26.11 in 2006, $35.11 in 2005, and $30.25 in 2004. The market value on the purchase date was $30.80 in 2006, $41.51 in 2005, and $47.78 in 2004. Employees purchased 23,000 and 5,600 shares, respectively, at a weighted average price of $25.67 in 2006 and $36.11 in 2005 under
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the SPP. The weighted average market values on the purchase dates in 2006 and 2005 are $30.20 and $42.48, respectively.
| 14 | INCOME TAXES |
Income tax expense (benefit) consists of the following:
| (Thousands) | 2006 | 2005 | 2004 | |||||||
| Current: |
||||||||||
| Federal |
$ | 61,270 | $ | 35,979 | $ | 36,048 | ||||
| State |
9,175 | 5,851 | 5,868 | |||||||
| Deferred |
(30,452 | ) | 2,523 | 8,979 | ||||||
| $ | 39,993 | $ | 44,353 | $ | 50,895 | |||||
| Continuing operations |
$ | 39,740 | $ | 40,458 | $ | 45,955 | ||||
| Discontinued operations |
253 | 3,895 | 4,940 | |||||||
| $ | 39,993 | $ | 44,353 | $ | 50,895 | |||||
Income tax expense related to continuing operations differs from the amounts computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows:
| 2006 | 2005 | 2004 | ||||
| Computed “expected” income tax expense |
35.0% | 35.0% | 35.0% | |||
| State income taxes, net of federal tax benefit |
3.0 | 3.3 | 3.1 | |||
| Net income of associated companies taxed at dividend rates |
(2.0) | (2.1) | (1.8) | |||
| Domestic production deduction |
(0.8) | - | - | |||
| Resolution of tax issues |
(0.3) | - | (0.9) | |||
| Other |
0.5 | 0.3 | 0.4 | |||
| 35.4% | 36.5% | 35.8% | ||||
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Substantial deferred income tax liabilities were recorded in 2005 as a result of acquisitions. Net deferred income tax liabilities consist of the following components:
| September 30 | ||||||||
| (Thousands) | 2006 | 2005 | ||||||
| Deferred income tax liabilities: |
||||||||
| Property and equipment |
$ | (55,504 | ) | $ | (56,822 | ) | ||
| Equity in undistributed earnings of affiliates |
(2,073 | ) | (2,556 | ) | ||||
| Investment in Tucson newspaper partnership |
(67,593 | ) | (68,482 | ) | ||||
| Identified intangible assets |
(412,967 | ) | (439,519 | ) | ||||
| (538,137 | ) | (567,379 | ) | |||||
| Deferred income tax assets: |
||||||||
| Accrued compensation |
15,719 | 14,494 | ||||||
| Allowance for doubtful accounts and losses on loans |
5,334 | 5,100 | ||||||
| Pension and postretirement benefits |
65,265 | 55,636 | ||||||
| Long-term debt and interest rate exchange agreements |
2,707 | 9,031 | ||||||
| State operating loss carryforwards |
12,291 | 10,965 | ||||||
| Other |
5,876 | 7,601 | ||||||
| 107,192 | 102,827 | |||||||
| Valuation allowance |
(12,291 | ) | (10,965 | ) | ||||
| Net deferred income tax liabilities |
$ | (443,236 | ) | $ | (475,517 | ) | ||
Net deferred income tax liabilities are classified as follows:
| September 30 | ||||||||
| (Thousands) | 2006 | 2005 | ||||||
| Current assets |
$ | 11,079 | $ | 5,092 | ||||
| Non-current liabilities |
(454,315 | ) | (480,609 | ) | ||||
| Net deferred income tax liabilities |
$ | (443,236 | ) | $ | (475,517 | ) | ||
At September 30, 2006, the Company has approximately $292,106,000 of operating loss carryforwards for state tax purposes that expire between 2007 and 2026.
| 15 | FAIR VALUE OF FINANCIAL INSTRUMENTS |
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the short maturity of those instruments. The carrying value of other investments, consisting of debt and equity securities in a deferred compensation trust, is carried at fair value based upon quoted market prices. Investments totaling $7,406,000, consisting primarily of the Company’s 17% ownership of the nonvoting common stock of TCT and 4.9% interest in Cardinals Holdings LLC, are carried at cost. The fair value of floating rate debt approximates the carrying amount. The fair value of the Company’s fixed rate debt follows and 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.
| September 30 | ||||||
| (Thousands) | 2006 | 2005 | ||||
| Carrying amount |
$ | 326,834 | $ | 334,024 | ||
| Fair value |
321,234 | 331,436 | ||||
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| 16 | EARNINGS PER COMMON SHARE |
The following table sets forth the computation of basic and diluted earnings per common share:
| (Thousands, Except Per Common Share Data) | 2006 | 2005 | 2004 | |||||||
| Income (loss) applicable to common stock: |
||||||||||
| Continuing operations |
$ | 71,136 | $ | 70,862 | $ | 82,973 | ||||
| Discontinued operations |
(304 | ) | 6,016 | 3,098 | ||||||
| Net income |
$ | 70,832 | $ | 76,878 | $ | 86,071 | ||||
| Weighted average Common Shares |
45,763 | 45,394 | 45,010 | |||||||
| Less non-vested restricted Common Stock |
342 | 276 | 218 | |||||||
| Basic average common shares |
45,421 | 45,118 | 44,792 | |||||||
| Dilutive stock options and restricted Common Stock |
125 | 230 | 300 | |||||||
| Diluted average common shares |
45,546 | 45,348 | 45,092 | |||||||
| Earnings (loss) per common share: |
||||||||||
| Basic: |
||||||||||
| Continuing operations |
$ | 1.57 | $ | 1.57 | $ | 1.85 | ||||
| Discontinued operations |
(0.01 | ) | 0.13 | 0.07 | ||||||
| Net income |
$ | 1.56 | $ | 1.70 | $ | 1.92 | ||||
| Diluted: |
||||||||||
| Continuing operations |
$ | 1.56 | $ | 1.56 | $ | 1.84 | ||||
| Discontinued operations |
(0.01 | ) | 0.13 | 0.07 | ||||||
| Net income |
$ | 1.56 | $ | 1.70 | $ | 1.91 | ||||
|
For 2006, 2005 and 2004, the
Company had 842,500, 177,500 and 23,400 weighted average shares,
17 OTHER INFORMATION
Compensation and other accrued liabilities related to continuing operations consist of the following: | ||||||||||
| September 30 | ||||||||||
| (Thousands) | 2006 | 2005 | ||||||||
| Compensation |
|
$ | 23,670 | $ | 33,883 | |||||
| Retirement and stock purchase plans |
|
11,856 | 14,107 | |||||||
| Interest |
|
7,584 | 8,968 | |||||||
| Other |
|
15,347 | 14,094 | |||||||
| $ | 58,457 | $ | 71,052 | |||||||
|
Cash payments are as follows:
|
||||||||||
| (Thousands) | 2006 | 2005 | 2004 | |||||||
| Interest |
$ | 101,018 | $ | 28,879 | $ | 11,489 | ||||
| Income taxes, net of refunds |
28,403 | 42,187 | 56,228 | |||||||
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| 18 | VALUATION AND QUALIFYING ACCOUNTS |
Valuation and qualifying account information related to continuing operations is as follows:
| (Thousands) | 2006 | 2005 | 2004 | |||||||||
| ALLOWANCE FOR DOUBTFUL ACCOUNTS |
||||||||||||
| Balance, beginning of year |
$ | 9,365 | $ | 6,153 | $ | 5,138 | ||||||
| Additions charged to expense |
7,260 | 2,470 | 3,597 | |||||||||
| Reserves of businesses acquired or sold |
- | 5,008 | 31 | |||||||||
| Deductions from reserves |
(5,312 | ) | (4,266 | ) | (2,613 | ) | ||||||
| Balance, end of year |
$ | 11,313 | $ | 9,365 | $ | 6,153 | ||||||
| 19 | COMMITMENTS AND CONTINGENT LIABILITIES |
Newsprint
The Company has contracts for the annual purchase of 197,400 metric tons of newsprint, at market prices, from six suppliers. The commitments represent substantially all of the Company’s annual volume, inclusive of MNI, and expire at various dates through December 2006 and are in various stages of renewal. Contracts with a single supplier represent approximately 59% of the total requirements.
Operating Leases
The Company has operating lease commitments for certain of its office, production, and distribution facilities. Management expects that in the normal course of business, existing leases will be renewed or replaced by other leases. Minimum lease payments during the five years ending September 2011 and thereafter are $3,668,000, $2,876,000, $2,447,000, $1,907,000, $1,329,000 and $7,741,000, respectively. Total operating lease expense is $5,380,000, $3,513,000, and $2,600,000, in 2006, 2005 and 2004, respectively.
Capital Commitments
At September 30, 2006, the Company had construction and equipment purchase commitments totaling approximately $10,812,000.
St. Louis Post-Dispatch Early Retirement Program
In 2006, the St. Louis Post-Dispatch concluded an offering of early retirement incentives that resulted in an adjustment of staffing levels. 130 employees volunteered to take advantage of the offer, which includes enhanced pension and insurance benefits and lump-sum cash payments based on continuous service. The cost totaled $17,778,000 before income tax benefit, with $9,124,000 recognized in 2005, and $8,654,000 recognized in 2006. Approximately $7,000,000 of the cost represents cash payments made, with the remainder due primarily to enhancements of pension and other post retirement benefits.
PD LLC Operating Agreement
On May 1, 2000, Pulitzer and Herald completed the transfer of their respective interests in the assets and operations of the St. Louis Post-Dispatch and certain related businesses to a new joint venture (the Venture), known as PD LLC. Pulitzer is the managing member of PD LLC. Under the terms of the operating agreement governing PD LLC (the Operating Agreement), Pulitzer and another subsidiary hold a 95% interest in the results of operations of PD LLC and Herald holds a 5% interest. Herald’s 5% interest is reported as minority interest in the Consolidated Statements of Income and Comprehensive Income. Also, under the terms of the Operating Agreement, Herald received on May 1, 2000 a cash distribution of
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$306,000,000 from PD LLC (the Initial Distribution). This distribution was financed by the Pulitzer Notes. Pulitzer’s entry into the Venture was treated as a purchase for accounting purposes.
During the first ten years of its term, PD LLC is restricted from making distributions (except under specified circumstances), capital expenditures and member loan repayments unless it has set aside out of its cash flow a reserve equal to the product of $15,000,000 and the number of years since May 1, 2000, but not in excess of $150,000,000 (the Reserve). PD LLC is not required to maintain the Reserve after May 1, 2010. On May 1, 2010, Herald will have a one-time right to require PD LLC to redeem Herald’s interest in PD LLC, together with Herald’s interest, if any, in DS LLC, another limited liability company in which Pulitzer is the managing member and which is engaged in the business of delivering publications and products in the greater St. Louis metropolitan area. The May 1, 2010 redemption price for Herald’s interest will be determined pursuant to a formula yielding an amount which will result in the present value to May 1, 2000 of the after tax cash flows to Herald (based on certain assumptions) from PD LLC, including the Initial Distribution and the special distribution described below, if any, and from DS LLC, being equal to $275,000,000.
In the event the transactions effected in connection with either the formation of the Venture and the Initial Distribution or the organization of DS LLC are recharacterized by the IRS as a taxable sale by Herald, with the result in either case that the tax basis of PD LLC’s assets increases and Herald is required to recognize taxable income as a result of such recharacterization, Herald generally will be entitled to receive a special distribution from PD LLC in an amount that corresponds, approximately, to the present value of the after tax benefit to the members of PD LLC of the tax basis increase. The adverse financial effect of any such special distribution to Herald on PD LLC (and thus Pulitzer and the Company) will be partially offset by the current and deferred tax benefits arising as a consequence of the treatment of the transactions effectuated in connection with the formation of the Venture and the Initial Distribution or the organization of DS LLC as a taxable sale by Herald. In 2005, the Company was advised that the IRS, in the course of examining the 2000 consolidated federal income tax return in which Herald was included, requested certain information and documents relating to the transactions effectuated in connection with the formation of the Venture and the Initial Distribution. The Company participated in the formulation of Herald’s response to this IRS request for information and documents. In 2006, the IRS concluded its examination without adjustment related to the Venture or the Initial Distribution and the Company considers the matter closed. The related statute of limitations expires in December 2007.
Upon termination of PD LLC and DS LLC, which will be on May 1, 2015 (unless Herald exercises the redemption right described above), Herald will be entitled to the liquidating value of its interests in PD LLC and DS LLC, to be paid in cash by Pulitzer. That amount would be equal to the amount of Herald’s capital accounts, after allocating the gain or loss that would result from a cash sale of PD LLC and DS LLC’s assets for their fair market value at that time. Herald’s share of such gain or loss generally will be 5%, but will be reduced (but not below 1%) to the extent that the present value to May 1, 2000 of the after tax cash flows to Herald from PD LLC and from DS LLC, including the Initial Distribution, the special distribution described above, if any, and the liquidation amount (based on certain assumptions), exceeds $325,000,000.
The actual amount payable to Herald either on May 1, 2010, or upon the termination of PD LLC and DS LLC on May 1, 2015 will depend on such variables as future cash flows, the amounts of any distributions to Herald prior to such payment, PD LLC’s and DS LLC’s rate of growth and market valuations of newspaper properties. While the amount of such payment cannot be predicted with certainty, the Company currently estimates (assuming a 5% annual growth rate in Herald’s capital accounts, no special distribution as described above and consistent newspaper property valuation multiples) that the amount of such payment would not exceed $100,000,000. The Company further believes that it will be able to finance such payment either from available cash reserves or by accessing the capital markets. The redemption of Herald’s interest in PD LLC either on May 1, 2010 or upon termination of PD LLC in 2015 is expected to generate significant tax benefits to the Company as a consequence of the resulting increase in the tax basis of the assets owned by PD LLC and DS LLC and the related depreciation and amortization deductions.
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Income Taxes
The Company files income tax returns with the Internal Revenue Service (IRS) and various state tax jurisdictions. From time to time, the Company is subject to routine audits by those agencies, and those audits may result in proposed adjustments. The primary issues in audits currently in process or being contested relate to the appropriate determination of gains, and allocation to the various taxing authorities thereof, on businesses sold in 2001. The Company may also be subject to claims for transferee income tax liability related to businesses acquired in 2000. The Company has considered the alternative interpretations that may be assumed by the various taxing agencies, believes its positions taken regarding its filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Income and Comprehensive Income in the periods in which such matters are ultimately determined. The Company does not believe the final resolution of such matters will be material to its consolidated financial position.
In June 2006, the Company received a notice of deficiency asserting transferee liability for federal income taxes and penalties, excluding interest, totaling $25,200,000 related to the acquisition of assets by the Company in 2000. In August 2006, the IRS rescinded the notice of deficiency and issued a letter, which allows the Company to initially pursue this matter at the IRS Appeals level. The Company does not believe the IRS position on this matter has merit and intends to vigorously contest the matter.
Litigation
The Company is involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While the Company is unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters will not have a material adverse effect on the Company’s Consolidated Financial Statements, taken as a whole.
| 20 | IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS |
In October 2005 the Company adopted Financial Accounting Standards Board (FASB) Statement 123-Revised, Accounting for Stock-Based Compensation (Statement 123R) and related FASB staff positions. Statement 123R amends Statement 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than a reduction of taxes paid.
Statement 123R also establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods and services (primarily accounting transactions in which an entity obtains employee services in share-based payment transactions, such as stock options). Statement 123R requires a public entity to measure the cost of employee services received in exchange for an equity instrument based on the grant date fair value of the award. In general, the cost will be recognized over the period during which an employee is required to provide the service in exchange for the award (usually the vesting period). The fair value based methods in Statement 123R are similar to the fair value based method in Statement 123 in most respects. The Company adopted Statement 123 in 2003.
In October 2005 the Company adopted FASB Statement 153, Exchanges of Nonmonetary Assets. This pronouncement amends APB Opinion 29, Accounting for Nonmonetary Transactions. Statement 153 eliminates the exception for nonmonetary exchanges of similar productive assets present in APB Opinion 29 and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance (i.e. transactions that are not expected to result in significant changes in the cash flows of the reported entity).
In October 2005 the Company adopted FASB Interpretation 47, Accounting for Conditional Asset Retirement Obligations. Interpretation 47 requires an entity to recognize a liability for a legal obligation to perform an asset retirement activity in which the timing and/or method of the settlement are conditional on
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a future event. The liability must be recognized if the fair value of the liability can be reasonably estimated.
The adoption of the statements and interpretation discussed above did not have a material impact on the Company’s financial position, results of operations, or cash flows.
In May 2005 the FASB issued Statement 154, Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3, that changes the requirements for the accounting and reporting of a change in accounting principle. Statement 154 eliminates the requirement to include the cumulative effect of changes in accounting principles in the current period of change and instead, requires that changes in accounting principle be retrospectively applied. Statement 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. The Company does not anticipate that the implementation of Statement 154 will have a material impact on its financial position, results of operations, or cash flows.
In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes, which is effective for fiscal years beginning after December 15, 2006. Interpretation 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement 109. Interpretation 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return. The Company has not completed its evaluation of the effects of Interpretation 48 on its Consolidated Financial Statements.
In September 2006, the FASB issued Statement 157, Fair Value Measurements, which defines fair value, provides guidelines for measuring fair value and expands disclosure requirements. Statement 157 does not require any new fair value measurement but applies to the accounting pronouncements that require or permit fair value measurement. Statement 157 is effective for fiscal years beginning after November 15, 2007. The Company does not anticipate that the implementation of Statement 157 will have a material impact on its financial position, results of operation, or cash flows.
In September 2006, the FASB issued Statement 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, which amends statements 87, 88, 106 and 132(R). Statement 158 requires the recognition of the over-funded or under-funded status of a defined benefit postretirement plans as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Statement 158 is effective at the end of 2007. Had Statement 158 been adopted at September 30, 2006, the Company’s assets would have increased and liabilities would have decreased in the aggregate amount of $44,191,000, less the related income tax effect, and stockholders’ equity would have increased by $44,191,000, less the related income tax effect. Actual adjustments have not been determined as the related actuarial computations have not been performed.
Statement 158 will also require the Company to change its measurement date from June 30 to September 30, beginning in 2008. The change in measurement date will require a one-time adjustment to retained earnings, the effect of which cannot be determined at this time. None of the changes required will impact the Company’s results of operations or cash flows.
72
Table of Contents
| 21 | QUARTERLY FINANCIAL DATA (UNAUDITED) |
| Quarter | |||||||||||||
| (Thousands, Except Per Common Share Data) | 1st | 2nd | 3rd | 4th | |||||||||
| 2006 |
|||||||||||||
| Operating revenue |
$ | 292,245 | $ | 266,190 | $ | 290,544 | $ | 279,669 | |||||
| Income from continuing operations |
$ | 21,394 | $ | 13,438 | $ | 21,319 | $ | 14,985 | |||||
| Discontinued operations |
1,370 | 997 | 1,398 | (4,069 | ) | ||||||||
| Net income |
$ | 22,764 | $ | 14,435 | $ | 22,717 | $ | 10,916 | |||||
| Earnings (loss) per common share: |
|||||||||||||
| Basic: |
|||||||||||||
| Income from continuing operations |
$ | 0.47 | $ | 0.30 | $ | 0.47 | $ | 0.33 | |||||
| Discontinued operations |
0.03 | 0.02 | 0.03 | (0.09 | ) | ||||||||
| Net income |
$ | 0.50 | $ | 0.32 | $ | 0.50 | $ | 0.24 | |||||
| Diluted: |
|||||||||||||
| Income from continuing operations |
$ | 0.47 | $ | 0.30 | $ | 0.47 | $ | 0.33 | |||||
| Discontinued operations |
0.03 | 0.02 | 0.03 | (0.09 | ) | ||||||||
| Net income |
$ | 0.50 | $ | 0.32 | $ | 0.50 | $ | 0.24 | |||||
| 2005 |
|||||||||||||
| Operating revenue |
$ | 173,733 | $ | 159,066 | $ | 206,912 | $ | 279,180 | |||||
| Income from continuing operations |
$ | 25,782 | $ | 16,845 | $ | 16,825 | $ | 11,410 | |||||
| Discontinued operations |
1,229 | 1,219 | 1,872 | 1,696 | |||||||||
| Net income |
$ | 27,011 | $ | 18,064 | $ | 18,697 | $ | 13,106 | |||||
| Earnings per common share: |
|||||||||||||
| Basic: |
|||||||||||||
| Income from continuing operations |
$ | 0.57 | $ | 0.37 | $ | 0.37 | $ | 0.25 | |||||
| Discontinued operations |
0.03 | 0.03 | 0.04 | 0.04 | |||||||||
| Net income |
$ | 0.60 | $ | 0.40 | $ | 0.41 | $ | 0.29 | |||||
| Diluted: |
|||||||||||||
| Income from continuing operations |
$ | 0.57 | $ | 0.37 | $ | 0.37 | $ | 0.25 | |||||
| Discontinued operations |
0.03 | 0.03 | 0.04 | 0.04 | |||||||||
| Net income |
$ | 0.60 | $ | 0.40 | $ | 0.41 | $ | 0.29 | |||||
73
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
Lee Enterprises, Incorporated and subsidiaries
Davenport, Iowa
We have audited the accompanying Consolidated Balance Sheets of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of September 30, 2006 and 2005, and the related Consolidated Statements of Income and Comprehensive Income, Stockholders’ Equity, and Cash Flows for each of the three years in the period ended September 30, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present fairly, in all material respects, the financial position of Lee Enterprises, Incorporated and subsidiaries at September 30, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2006, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Davenport, Iowa
December 14, 2006
74
EXHIBIT 2.3
ASSET PURCHASE AGREEMENT
by
and
among
LEE ENTERPRISES, INCORPORATED,
LEE PROCUREMENT SOLUTIONS CO.
and
SOUND PUBLISHING, INC.
Dated September 6, 2006
TABLE OF CONTENTS
| Page | ||||
| ARTICLE 1 DEFINITIONS |
4 | |||
| 1.1 |
Certain Definitions |
4 | ||
| 1.2 |
Other Definitions |
6 | ||
| ARTICLE 2 SALE OF THE ACQUIRED ASSETS; CLOSING |
8 | |||
| 2.1 |
Purchase and Sale of the Acquired Assets |
8 | ||
| 2.2 |
Assumption of Liabilities |
8 | ||
| 2.3 |
Consideration for the Acquired Assets |
10 | ||
| 2.4 |
Further Assurances |
12 | ||
| 2.5 |
Nontransferable Business Contracts |
13 | ||
| 2.6 |
Closing |
13 | ||
| 2.7 |
Closing Obligations |
13 | ||
| ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF LEE |
14 | |||
| 3.1 |
Organization; Qualification; Authority |
14 | ||
| 3.2 |
Corporate Authority Relative to this Agreement; No Violation |
15 | ||
| 3.3 |
Business Financial Statements |
16 | ||
| 3.4 |
No Undisclosed Liabilities |
16 | ||
| 3.5 |
Compliance with Law; Permits |
17 | ||
| 3.6 |
Environmental Laws and Regulations |
17 | ||
| 3.7 |
Employee Benefit Plans |
18 | ||
| 3.8 |
Absence of Certain Changes or Events |
19 | ||
| 3.9 |
Investigations; Litigation |
19 | ||
| 3.10 |
Tax Matters |
19 | ||
| 3.11 |
Labor Matters |
20 | ||
| 3.12 |
Title to Acquired Assets |
20 | ||
| 3.13 |
Intellectual Property |
20 | ||
| 3.14 |
Real Property |
20 | ||
| 3.15 |
Material Contracts |
21 | ||
| 3.16 |
Transactions with Affiliates |
22 | ||
| 3.17 |
Finders or Brokers |
22 | ||
| 3.18 |
No Additional Representations |
22 | ||
| ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER |
22 | |||
| 4.1 |
Organization |
22 | ||
| 4.2 |
Corporate Authority Relative to this Agreement; No Violation |
22 | ||
| 4.3 |
Investigations; Litigation |
23 | ||
| 4.4 |
Finders or Brokers |
23 | ||
| 4.5 |
Solvency |
23 | ||
| 4.6 |
Available Funds |
24 | ||
-i-
TABLE OF CONTENTS
(Continued)
| Page | ||||
| ARTICLE 5 COVENANTS |
24 | |||
| 5.1 |
Conduct of the Business by Lee |
24 | ||
| 5.2 |
Access to Information; Confidentiality |
26 | ||
| 5.3 |
Mutual Best Efforts |
26 | ||
| 5.4 |
Tax Matters |
28 | ||
| 5.5 |
Public Announcements |
29 | ||
| 5.6 |
Transaction Costs |
29 | ||
| 5.7 |
Retention of and Access to Records |
29 | ||
| 5.8 |
Notifications |
30 | ||
| 5.9 |
Payments |
30 | ||
| 5.10 |
Cooperation in Post-Closing Litigation |
30 | ||
| 5.11 |
Updating of Lee Disclosure Schedules |
30 | ||
| 5.12 |
Additional Covenants of Lee |
31 | ||
| ARTICLE 6 EMPLOYMENT MATTERS |
32 | |||
| 6.1 |
Acquired Employees |
32 | ||
| 6.2 |
Welfare Plans |
32 | ||
| 6.3 |
Severance and Participation Agreement Liabilities |
33 | ||
| 6.4 |
Savings Plans |
33 | ||
| 6.5 |
Vacation |
34 | ||
| 6.6 |
General |
34 | ||
| ARTICLE 7 CONDITIONS PRECEDENT TO OBLIGATIONS |
34 | |||
| 7.1 |
Conditions to Each Party’s Obligation |
34 | ||
| 7.2 |
Conditions to Obligations of Buyer |
34 | ||
| 7.3 |
Conditions to Obligations of Lee |
35 | ||
| ARTICLE 8 TERMINATION |
35 | |||
| 8.1 |
Termination |
35 | ||
| 8.2 |
Effect of Termination |
36 | ||
| ARTICLE 9 INDEMNIFICATION; REMEDIES |
36 | |||
| 9.1 |
Survival |
36 | ||
| 9.2 |
Indemnification By Buyer |
36 | ||
| 9.3 |
Indemnification By Lee |
37 | ||
| 9.4 |
Notice and Defense of Claims |
37 | ||
| 9.5 |
Procedure for Indemnification — Third Party Claims |
38 | ||
| 9.6 |
Procedure for Indemnification — Other Claims |
38 | ||
| 9.7 |
Limitations on Indemnification |
38 | ||
| 9.8 |
Exclusive Remedy |
39 | ||
-ii-
TABLE OF CONTENTS
(Continued)
| Page | ||||
| ARTICLE 10 GENERAL PROVISIONS |
40 | |||
| 10.1 |
Expenses |
40 | ||
| 10.2 |
Notices |
40 | ||
| 10.3 |
References |
41 | ||
| 10.4 |
Interpretation |
41 | ||
| 10.5 |
Counterparts |
41 | ||
| 10.6 |
Entire Agreement; Third-Party Beneficiaries |
41 | ||
| 10.7 |
Governing Law |
41 | ||
| 10.8 |
Assignment |
42 | ||
| 10.9 |
Nondisclosure |
42 | ||
| 10.10 |
Amendments; Waiver |
42 | ||
| 10.11 |
Enforcement |
42 | ||
| 10.12 |
Severability |
42 | ||
EXHIBITS:
| EXHIBIT A |
Bill of Sale | |
| EXHIBIT B |
Assignment and Assumption Agreement | |
| EXHIBIT C |
Nickel Ads’ Assignment | |
| EXHIBIT D |
Real Property Deed | |
| EXHIBIT E |
Transition Services Agreement | |
| SCHEDULES: | ||
| SCHEDULE A |
Acquired Assets | |
| SCHEDULE B |
Acquired Publications | |
| SCHEDULE C |
Intellectual Property and Other Intangibles | |
| SCHEDULE D |
Excluded Assets | |
| SCHEDULE E |
Allocation of Purchase Price | |
| SCHEDULE F |
New Welfare Plans | |
-iii-
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (“Agreement”) is made as of September 6, 2006, by and among SOUND PUBLISHING, INC., a Washington corporation (“Buyer”), LEE ENTERPRISES, INCORPORATED, a Delaware corporation (“Lee Enterprises”), and LEE PROCUREMENT SOLUTIONS CO., an Iowa corporation (“Lee Procurement” and, together with Lee Enterprises, “Lee”).
RECITALS
WHEREAS, Lee Enterprises owns all the Assets listed on Schedule A hereto, which it uses to conduct the business of operating the newspapers and publications listed on Schedule B hereto (the “Acquired Publications”), and is subject to certain liabilities relating to the business and operations of the Acquired Publications (collectively, the “Business”), and Lee Procurement is the owner of certain Intellectual Property (as defined below) and other intangibles listed on Schedule C hereto;
WHEREAS, at the Closing (as defined below), Lee desires to sell to Buyer, and Buyer desires to purchase from Lee, the Acquired Assets (as defined below), and in connection therewith, Buyer has agreed to assume certain liabilities relating to the Business, all upon the terms and subject to the conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows.
ARTICLE 1
DEFINITIONS
1.1 Certain Definitions. For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1.1:
“Acquired Assets”—the Assets set forth on Schedule A hereto.
“ADEA” — the Age Discrimination in Employment Act of 1967, as amended.
“Affiliates” — as to any Person, any other Person which, directly or indirectly, Controls, or is controlled by, or is under common control with, such Person.
“Ancillary Agreements” — the Bill of Sale, Assignment and Assumption Agreement, Transition Services Agreement, Real Property Deeds and the instruments described in clauses (iii) through (ix) of Section 2.7(a) and clause (ii) and (vi) of Section 2.7(b).
-4-
“Assets” — all properties, assets, rights (contractual or otherwise) and claims, whether personal, tangible or intangible.
“Business Day” — any day other than a Saturday, Sunday or a day on which the banks in New York or California are authorized by law or executive order to be closed.
“Closing Date” — the date and time as of which the Closing actually takes place.
“Control” (including, with its correlative meanings, “controlled by” and “under common control with”) — the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of a Person, whether through the ownership of securities or partnership or other ownership interests, by Contract or otherwise.
“Effective Time” shall mean the close of business on September 23, 2006.
“ERISA” — all compensation or employee benefit plans, programs, policies, agreements or other arrangements, whether or not “employee benefit plans” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.
“Excluded Assets” — the Assets set forth on Schedule D hereto, whether such Assets are Assets of the Acquired Publications, Lee Enterprises or Lee Procurement.
“GAAP” — United States generally accepted accounting principles.
“Governmental Entity” — any Federal, state or local government or any court, administrative agency, bureau, commission, department or other authority of any domestic or foreign government or any arbitrator in any case that has jurisdiction over an applicable party or any of its properties or Assets.
“Income Taxes” — any income, franchise or similar Taxes.
“IRC” — the Internal Revenue Code of 1986, as amended, or any successor law.
“IRS” — the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury.
“Knowledge” — (i) with respect to Buyer, such knowledge that is known by or reasonably should have been known by David Black, President of Black Press Ltd., Robert Grainger, Chief Operating Officer (US and Alberta) with Black Press Ltd., or Manfred Tempelmayer, President of Buyer; and (ii) with respect to Lee, such knowledge that is known by or reasonably should have been known by Greg Moore, General Manager of the Seattle Group, or the actual knowledge of Carl Schmidt, Vice President, CFO and Treasurer, or John VanStrydonck, Vice President—Publishing.
“Liability” — any direct or indirect debt, obligation or liability of any kind or nature, whether accrued or fixed, absolute or contingent, determined or determinable, matured or unmatured, and whether due or to become due, asserted or unasserted or known or unknown.
-5-
“Person” — an individual, a corporation, a partnership, a limited liability company or partnership, an association, a trust or any other entity, group (as such term is used in Section 13 of the Securities and Exchange Act of 1934, as amended) or organization, including a Governmental Entity, and any permitted successors and assigns of such person.
“Prime Rate” — the rate of interest publicly announced from time to time by Bank of America, National Association, as its “prime rate” of interest per annum.
“Proceeding” — any action, inquiry, proceeding, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Entity.
“Representative” — with respect to a particular Person, any director, officer, employee, agent, consultant or other representative of such Person, including legal counsel, accountants, financial advisors and lenders.
“SEC” — the United States Securities and Exchange Commission.
“Subsidiary” — any corporation, limited liability company or partnership, association, trust or other form of legal entity of which (i) more than 50% of the outstanding voting securities are on the date hereof directly or indirectly owned by any party; or (ii) such party or any subsidiary of such party is a general partner (excluding partnerships in which such party or any subsidiary of such party does not have a majority of the voting interests in such partnership).
1.2 Other Definitions. The following terms are defined in the sections indicated:
| Term |
Section | |
| Acquired Publications |
Recitals | |
| Agreement |
Preamble | |
| Assignment and Assumption Agreement |
2.7(a)(ii) | |
| Assumed Contract |
2.5 | |
| Assumed Liabilities |
2.2(b) | |
| Average Working Capital |
2.3(b)(i) | |
| Bank Commitment Letter |
4.6 | |
| Base Compensation |
6.3(b) | |
| Benefit Plan(s) |
3.7(a) | |
| Bill of Sale |
2.7(a)(i) | |
| Business |
Recitals | |
| Business Balance Sheet |
3.3 | |
| Business Employee(s) |
3.7(a) | |
| Business Financial Statements |
3.3 | |
| Business Material Adverse Effect |
3.1 | |
| Business Material Contract |
3.15(a) | |
| Buyer |
Preamble | |
| Buyer Approvals |
4.2(b) | |
| Buyer Disclosure Schedules |
Article 4 | |
| Buyer Indemnified Parties |
9.3 |
-6-
| Term |
Section | |
| Buyer Severance Amount |
6.3(b) | |
| Closing |
2.6 | |
| Effective Time Working Capital |
2.3(b)(ii) | |
| Commission Compensation |
6.3(b) | |
| Confidentiality Agreement |
5.2(b) | |
| Contract |
2.5 | |
| Eligible Hired Employee |
6.3(b) | |
| End Date |
8.1(c) | |
| Environmental Law |
3.6(b) | |
| Excluded Liabilities |
2.2(c) | |
| Final Bonus Notice |
2.3 A(i) | |
| Hazardous Substance |
3.6(c) | |
| Hired Employees |
6.1(a) | |
| Indemnified Party |
9.4 | |
| Indemnifying Party |
9.4 | |
| Independent Accountant |
0 | |
| Intellectual Property |
3.13 | |
| Laws |
3.5(a) | |
| Lee |
Preamble | |
| Lee Approvals |
3.2(b) | |
| Lee Disclosure Schedules |
Article 3 | |
| Lee Enterprises |
Preamble | |
| Lee Indemnified Parties |
9.2 | |
| Lee Permits |
3.5(b) | |
| Lee Procurement |
Preamble | |
| Lien |
3.2(c) | |
| Losses |
9.2 | |
| Material Contract |
3.15(a) | |
| New Welfare Plans |
6.2 | |
| Notice of Disagreement |
0 | |
| Old Plans |
6.2 | |
| Permitted Lien |
3.2(c) | |
| Purchase Price |
2.3(a) | |
| Real Property Deed |
2.7(a)(vii) | |
| Regulatory Law |
5.3(d) | |
| Section 5.1 Contracts |
5.1(b)(iv) | |
| Statement of Working Capital |
2.3(b)(ii) | |
| Tax Contest |
5.4 | |
| Taxes |
3.10(b) | |
| Tax Return |
3.10(b) | |
| Termination Date |
5.1(a) | |
| Transfer Taxes |
5.6 | |
| Transition Services Agreement |
2.7(a)(viii) | |
| Updated Schedules |
5.11 | |
| Working Capital |
2.3(b)(i) |
-7-
ARTICLE 2
SALE OF THE ACQUIRED ASSETS; CLOSING
2.1 Purchase and Sale of the Acquired Assets. Subject to the terms and conditions of this Agreement, at the Closing, but effective as of the Effective Time, Lee Enterprises and Lee Procurement will sell, convey, transfer, assign and deliver to Buyer all of their right, title and interest in and to the Acquired Assets.
2.2 Assumption of Liabilities.
(a) Assumption. Upon the terms and subject to the conditions set forth herein, at the Closing and effective as of the Effective Time, Buyer shall assume from Lee (and therefore agree to pay, perform and discharge), and Lee shall irrevocably convey, transfer and assign to Buyer, all of the Assumed Liabilities.
(b) Definition of Assumed Liabilities. For all purposes of and under this Agreement, the term “Assumed Liabilities” includes those Liabilities expressly assumed hereunder in connection with the operation of the Business and Assets, hereinafter described as follows:
(i) Liabilities of Lee and its Affiliates under all Contracts listed on Schedules 3.14 and 3.15 of the Lee Disclosure Schedules, subject to the provisions of Section 2.5, including leases of real property, the Assignment Resulting in Change of Ownership regarding Seattle, Washington, Portland, Oregon, and Eugene, Oregon markets and pricing therefor set forth in Exhibit A under the Media Audit Lease Agreement dated March 2, 2006 between Lee Enterprises and International Demographics, Inc., the Equipment Lease Agreement dated April 25, 2006 between Lee Enterprises and Bank of the West (with Addendum) involving equipment located at 3701 148th Street, SW, Lynnwood, Washington supplied by Kodak Graphic Communications Company and Southern Lithoplate and referred to in Section 3.4 of the Lee Disclosure Schedules, all of which have been previously disclosed to Buyer), included in or otherwise related to the Acquired Assets (other than Liabilities and obligations relating to breaches occurring prior to the Closing Date);
(ii) All current Liabilities of Lee reflected in the Statement of Working Capital (as provided in Section 2.3(b)(ii)), as of the Effective Time to the extent such Liabilities are reflected on the Business Balance Sheet or incurred after June 30, 2006 related to the Business and in connection with the operation of the Business;
(iii) Liabilities for Transfer Taxes that are the responsibility of Buyer pursuant to Section 5.6 hereof;
(iv) Liabilities of Buyer relating to the Participation Agreement between Lee Enterprises and Sue Quirk dated March 1, 2006 solely with respect to Section 2 thereof, captioned Severance Protection, and Participation Agreement between Lee Enterprises and Steve Ludvigsen dated May 11, 2006 solely with respect to Section 2 thereof, captioned Severance Protection, each as set forth in Section 6.3 of the Lee Disclosure Schedules, and any other such agreement entered into between the date hereof and the Closing Date in accordance with
-8-
Section 5.1(b(i)(B); twelve-twelfths (12/12) of the accrued bonuses of the employees of the Business for the fiscal year ended September 23, 2006; the Buyer Severance Amount; and the Hired Employees under Article 6 (excluding, however, all earned and unused vacation and leave of absence time of all Hired Employees as of the Effective Time) and all liabilities and obligations of Lee for the payroll of the Business for the two (2) week pay period ended September 23, 2006.
(c) Definition of Excluded Liabilities. Notwithstanding anything to the contrary set forth in this Section 2.2 or elsewhere in this Agreement, Buyer shall not assume, and Lee agrees that Buyer shall not be liable or otherwise responsible for, the following Liabilities, except to the extent included in the Statement of Working Capital (the Liabilities referred to in clauses (i) through (vii) of this Section 2.2(c), collectively, the “Excluded Liabilities”):
(i) Liabilities under any Benefit Plan which is retained by Lee (other than such liability accrued on the applicable Business Financial Statements or included in the Statement of Working Capital), which retained Benefit Plans are set forth on Section 2.2(c)(i) of the Lee Disclosure Schedules (excluding the Liabilities described in clause (iv) of Section 2.2(b);
(ii) Liabilities of the Business in respect of transaction costs payable by Lee pursuant to Section 5.6 hereof;
(iii) Liabilities of the Business occurring prior to the Closing Date for any amounts owed to Lee pursuant to any note or account payable with any division of Lee or any Affiliate thereof;
(iv) Liabilities of Lee with respect to indebtedness for borrowed money (but excluding any equipment lease considered a capitalized lease primarily for the benefit of the Business set forth on Section 3.15 of the Lee Disclosure Schedules);
(v) Liabilities of Lee owed to Buyer (or, pursuant to Article 9, any Buyer Indemnified Parties) as a result of any breach of this Agreement by Lee;
(vi) Liabilities for Taxes of Lee, except as otherwise provided in this Agreement;
(vii) Liabilities of Lee not arising out of or relating to the operation of the Business;
(viii) Participation Agreement between Lee Enterprises and Greg Moore dated May 24, 2006;
(ix) Participation Agreement between Lee Enterprises and Sue Quirk dated March 1, 2006 other than with respect to Section 2 thereof, captioned Severance Protection;
(x) Participation Agreement between Lee Enterprises and Steve Ludvigsen dated May 11, 2006 other than with respect to Section 2 thereof, captioned Severance Protection; and
-9-
(xi) Liabilities of Lee for any earned and unused vacation and leave of absence time of all Hired Employees for the fiscal year ending September 23, 2006.
2.3 Consideration for the Acquired Assets.
(a) Purchase Price. Subject to the adjustments in Section 2.3(b), the aggregate consideration (the “Purchase Price”) for the Acquired Assets will be (i) $27,500,000 (U.S.) in cash and (ii) the Assumed Liabilities assumed by Buyer pursuant to Section 2.2 hereof.
(b) Working Capital Adjustment.
(i) For all purposes of and under this Agreement, the term “Average Working Capital” means $1,572,207, based on the average Working Capital of the Business for the twelve (12) months ended July 31, 2006 after taking into account (x) the value as of the applicable periods of the current assets of the Business included in the Acquired Assets, minus (y) the value as of the applicable periods of the current liabilities of the Business and included in the Assumed Liabilities. “Working Capital” means accounts receivable (net of the reserve on the applicable Business Financial Statements), plus inventory (net of the reserve on the Financial Statements and on a specific identification method basis), plus prepaid expenses, minus accounts payable, accrued payroll and commissions (but excluding an accrual for twelve-twelfths (12/12) of the earned bonuses of the Hired Employees through September 23, 2006 and any participation agreement listed in Schedule 3.7(a) of the Lee Disclosure Schedules), accrued payroll taxes, unearned income and accrued expenses.
(ii) As promptly as practicable, but in any event within sixty (60) calendar days following the Closing, Lee shall cause to be prepared and delivered to the Buyer a statement (the “Statement of Working Capital”) setting forth the Working Capital as of the Effective Time (the “Effective Time Working Capital”). The Effective Time Working Capital will reflect the principle that all expense and revenue arising from the operation of the Business prior to the close of business as of the Effective Time shall be for the account of Lee.
(iii) The Statement of Working Capital will be prepared, to the extent practicable, in accordance with GAAP and past practice, except that (A) no cash or cash equivalents shall be included as current assets, (B) no transfer costs and expenses or Transfer Taxes incurred in connection with the transactions contemplated hereby that are the responsibility of a party hereto pursuant to Section 5.6 hereof will be included, (C) no Excluded Liabilities will be included, (D) no Excluded Assets will be included, (E) no Tax asset or Tax liability relating to Income Taxes will be included, (F) the Severance Amount of each Eligible Hired Employee and the Participation Agreements between Lee Enterprises and Sue Quirk and Steve Ludvigsen, and any other such agreement pursuant to Section 5.1 (b)(i)(B) shall not be included, (G) no intercompany charge paid by the Business to Lee Procurement for newsprint and other services shall be included as a current liability, (H) no accrual for bonuses of the Hired Employees of the Business for the fiscal year ended September 23, 2006 shall be included as a current liability, and (I) the Business Financial Statements are summary in nature and do not include the statement of cash flows and notes and related disclosures required by GAAP.
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(iv) Subject to Section 2.3(b)(iv) hereof, within twenty (20) calendar days following delivery of the Statement of Working Capital pursuant to Section 2.3(b)(ii) hereof, (A) Lee shall pay to Buyer the amount, if any, that the Effective Time Working Capital reflected in the Statement of Working Capital is less than the Average Working Capital, or (B) Buyer shall pay to Lee the amount, if any, that the Effective Time Working Capital reflected in the Statement of Working Capital exceeds the Average Working Capital, in either case, plus interest calculated at the Prime Rate from the Closing Date until the date of such payment. Any and all payments made pursuant to this Section 2.3(b)(iii) shall be made by wire transfer of immediately available funds to an account designated in writing by the party to receive such payment.
(v) If Buyer disagrees in good faith with the Statement of Working Capital, then Buyer shall notify Lee in writing (the “Notice of Disagreement”) of such disagreement within fifteen (15) calendar days following delivery of the Statement of Working Capital. If Lee has not received a Notice of Disagreement within such fifteen (15) day period, Buyer shall be deemed to have accepted the Statement of Working Capital. Any Notice of Disagreement shall set forth in reasonable detail the adjustments Buyer proposes to make to the Statement of Working Capital and the basis therefor and shall be consistent with the provisions of Section 2.3(b)(ii). Thereafter, Lee and Buyer shall attempt in good faith to resolve and finally determine the amount of the Effective Time Working Capital. If Lee and Buyer are unable to resolve the disagreement within thirty (30) calendar days following delivery of the Notice of Disagreement, then Lee and Buyer shall select a mutually acceptable, nationally recognized independent accounting firm that does not then have a present relationship with Lee or Buyer (the “Independent Accountant”), to resolve the disagreement and make a determination with respect thereto. If Lee and Buyer are unable, within ten (10) calendar days, to select a mutually acceptable Independent Accountant, then each of Lee and Buyer shall select a nationally recognized independent accounting firm and these two firms will choose a nationally recognized independent accounting firm which will serve as the Independent Accountant. The determination of the Independent Accountant to resolve the disagreement between Lee and Buyer as to the Statement of Working Capital will be made, and written notice thereof given to Lee and Buyer, within thirty (30) calendar days after the selection of the Independent Accountant. The determination by the Independent Accountant shall be final, binding and conclusive upon Lee and Buyer. The scope of the Independent Accountant’s engagement (which will not be an audit) shall be limited to the resolution of the disputed items described in the Notice of Disagreement, and the recalculation, if any, of the Statement of Working Capital in light of such resolution. If an Independent Accountant is engaged pursuant to this Section 2.3(b)(iv), the fees and expenses of the Independent Accountant shall be borne equally by Lee and Buyer. Within ten (10) calendar days after delivery of a notice of determination by the Independent Accountant as described above, any payment required by Section 2.3(b)(iii) hereof shall be made, based on such determination.
(c) Allocation of Purchase Price to the Acquired Assets. As soon as practicable after the Closing Date and at least sixty (60) days prior to the due date for filing of Internal Revenue Service Form 8594 by either party, Lee shall provide Buyer with a draft of Internal Revenue Service Form 8594 allocating the consideration payable under Section 2.3(a) which shall not be materially different from the allocation set forth on Schedule E (except for the adjustment to the Purchase Price provided in Section 2.3(b)(iii)). Buyer shall review such
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Form 8594 and provide any comments with respect thereto to Lee at least thirty (30) days prior to the due date of such Form 8594 for either party. Each of Buyer and Lee shall report the allocation (and any adjustments thereto) for Tax purposes and file its Tax Returns (including Form 8594) in a manner consistent with any mutually-agreed allocations determined pursuant to Schedule E, as adjusted pursuant to Section 2.3(b)(iii).
2.3A Bonus Adjustment.
(i) As promptly as practicable, but in any event within sixty (60) calendar days following the Closing, Lee shall cause to be prepared and delivered to the Buyer a notice of the recipients of the accrued bonuses for the fiscal year ended September 23, 2006 and the amounts thereof payable to each recipient (the “Final Bonus Notice”).
(ii) On or before the date set for payment of such accrued bonuses Lee will pay to the Buyer an amount equal to eleven-twelfths (l l/12ths) of such accrued amount.
(iii) On the payment referred to in Section 2.3A(ii) being made, Buyer shall pay twelve-twelfths (12/12) of the accrued bonuses for the fiscal year ended September 23, 2006 to each of the employees of the Business and in the amounts, subject to required withholding, as set forth in the Final Bonus Notice.
(iv) If at the time the payment referred to in section 2.3A(ii) is due, the parties have resolved any and all issues relating to Working Capital then (A) if any payment is due to Lee by Buyer in accordance with Section 2.3(b)(iv) Lee shall be entitled to set off against the amount so payable any amount payable under Section 2.3A(ii) without in any way affecting the obligation of the Buyer to pay twelve-twelfths (12/12) of the accrued bonuses for the fiscal year ended September 23, 2006 to each of the employees of the Business as provided in Section 2.3A(iii) hereof.
(v) The Buyer will within 5 Business Days of making the payments referred to in Section 2.3A(iii) deliver to Lee a confirmation of the payments.
2.4 Further Assurances. At and after the Closing, and without further consideration therefor, (a) Lee Enterprises and Lee Procurement shall execute and deliver to Buyer such further instruments and certificates of conveyance and transfer as Buyer may reasonably request in order to more effectively convey and transfer the Acquired Assets to Buyer and to put Buyer in operational control of the Business, or to aid, assist, collect and reduce to possession any of the Acquired Assets and exercise rights with respect thereto, and (b) Buyer shall execute and deliver to Lee such further instruments and certificates of assumption, novation and release as Lee may reasonably request in order to effectively make Buyer responsible for all Assumed Liabilities and release Lee therefrom to the fullest extent permitted under applicable Law. The parties hereby waive compliance with the provisions of any applicable bulk sales Law of any jurisdiction in connection with the transactions contemplated hereby and no representation, warranty or covenant contained in this Agreement shall be deemed to have been breached as a result of such non-compliance.
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2.5 Nontransferable Business Contracts. To the extent that transfer or assignment hereunder by Lee to Buyer of any agreement, contract, binding understanding, instrument or legally binding commitment or understanding (a “Contract”) included in the Acquired Assets (an “Assumed Contract”) is not permitted or is not permitted without the consent of another Person, this Agreement shall not be deemed to constitute an undertaking to assign the same if such consent is not given or if such an undertaking otherwise would constitute a breach thereof or cause a loss of benefits thereunder. Lee shall use commercially reasonable efforts to obtain any and all such third party consents under all Assumed Contracts; provided, however, that Lee shall not be required to pay or incur any cost or expense to obtain any third party consent. If any such third party consent is not obtained before the Closing, Lee shall, for a period of one (1) year after the Closing and at Buyer’s expense, use commercially reasonable efforts to: (a) obtain such consent, (b) cooperate with Buyer in any reasonable arrangement designed to provide Buyer the benefits of the applicable Assumed Contract and (c) enforce any rights of Lee under or with respect to the applicable Assumed Contract against all other Persons (including termination thereof in accordance with the terms thereof upon the election of Buyer). In addition, if any such third party consent is not obtained before the Closing, Buyer shall perform the obligations of Lee under such Assumed Contract to the extent that such obligation would have been an Assumed Liability but for the fact that such consent has not been so obtained.
2.6 Closing. The purchase and sale (the “Closing”) provided for in this Agreement, except to the extent that Buyer and Lee agree on another time and place, will take place at the offices of Lane & Waterman LLP, 220 N. Main Street, Suite 600, Davenport, IA 52801, at 10:00 a.m. (local time), on September 25, 2006.
2.7 Closing Obligations. At the Closing:
(a) Lee Enterprises and Lee Procurement, as applicable, will deliver to Buyer duly executed copies of:
(i) a bill of sale for the Acquired Assets substantially in the form attached hereto as Exhibit A (the “Bill of Sale”);
(ii) an instrument of assignment and assumption substantially in the form attached hereto as Exhibit B (the “Assignment and Assumption Agreement”);
(iii) certificates pursuant to clauses (a) and (b) of Section 7.2;
(iv) instruments of assignment to Buyer of all registrations and applications for Intellectual Property and other intangibles included in the Acquired Assets and reasonably requested by Buyer; provided, however, Lee Procurement’s assignment of the Nickel Ads’ trademark and service mark shall be in the form attached hereto as Exhibit C;
(v) instruments of assignment to Buyer of all rights of Lee Enterprises and Lee Procurement to the domain names and website addresses included in the Acquired Assets and reasonably requested by Buyer;
(vi) a certificate of Lee Enterprises and Lee Procurement that each is not a foreign Person subject to withholding under Section 1445 of the IRC;
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(vii) a real property deed, or deeds, as the case may be, substantially in the form attached hereto as Exhibit D (the “Real Property Deed”);
(viii) a Transition Services Agreement substantially in the form attached hereto as Exhibit E (the “Transition Services Agreement”); and
(ix) all other instruments or documents as Buyer may reasonably request to effect the conveyance and assignment of the Acquired Assets as contemplated hereby.
(b) Buyer will deliver to Lee:
(i) the cash portion of the Purchase Price by wire transfer in immediately available funds to the account specified by Lee;
(ii) duly executed copies of the certificates pursuant to clauses (a) and (b) of Section 7.3;
(iii) a duly executed counterpart of the Bill of Sale;
(iv) a duly executed counterpart of the Assignment and Assumption Agreement;
(v) a duly executed counterpart of the Transition Services Agreement; and
(vi) duly executed counterparts of all other instruments and certificates of assumption, novation and release as Lee may reasonably request in order to effectively make Buyer responsible for all Assumed Liabilities and release Lee Enterprises or Lee Procurement, as applicable, therefrom to the fullest extent permitted under applicable Law.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF LEE
Except as disclosed in the disclosure schedules delivered by Lee to Buyer immediately prior to the execution of this Agreement (it being agreed that any information set forth in one section of such disclosure schedules shall be deemed to apply to each other section thereof to which its relevance is reasonably apparent) (the “Lee Disclosure Schedules”), Lee represents and warrants to Buyer as follows:
3.1 Organization; Qualification; Authority. Each of Lee Enterprises and Lee Procurement is a legal entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. Each of Lee Enterprises and Lee Procurement has the corporate power and authority to carry on the Business and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where qualification as a foreign corporation is required to carry on the Business, except where the failure to be so organized, validly existing, qualified or in good standing, or to have such power or authority, would not have, individually or in the aggregate, a Business Material Adverse Effect. As used in this Agreement, any reference to any facts, circumstances, events or changes having a “Business
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Material Adverse Effect” means such facts, circumstances, events or changes that are, or would reasonably be expected to become, materially adverse to the business, financial condition or continuing operations of the Business taken as a whole, but shall not include facts, circumstances, events or changes (a) generally affecting the newspaper or classified publications industry in the United States or the economy or the financial or securities markets in the United States or elsewhere in the world, including regulatory and political conditions or developments (including any outbreak or escalation of hostilities or acts of war or terrorism) or (b) resulting from (i) the announcement or the existence of, or compliance with, this Agreement or the transactions contemplated hereby, including the effect of the announcement of, or the existence of the plan to sell, the Business; or (ii) any litigation arising from allegations of a breach of fiduciary duty or other violation of applicable Law relating to this Agreement or the transactions contemplated hereby; or (iii) changes in applicable Law, GAAP or accounting standards.
3.2 Corporate Authority Relative to this Agreement; No Violation.
(a) Each of Lee Enterprises and Lee Procurement has all requisite corporate power and authority to enter into this Agreement and the Ancillary Agreements to be executed and delivered by such corporation and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements to be executed and delivered by each of Lee Enterprises and Lee Procurement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Board of Directors of such corporation, and no other corporate proceedings on the part of each of Lee Enterprises and Lee Procurement are necessary to authorize the consummation of the transactions contemplated hereby and thereby. This Agreement has been, and the Ancillary Agreements to be executed and delivered by each of Lee Enterprises and Lee Procurement will, as of the Closing, have been, duly and validly executed and delivered by each of Lee Enterprises and Lee Procurement, and (assuming this Agreement constitutes, and as of the Closing the Ancillary Agreements to be executed and delivered by Buyer will constitute the valid and binding agreement of Buyer) this Agreement constitutes, and as of the Closing, the Ancillary Agreements to be executed and delivered by each of Lee Enterprises and Lee Procurement will constitute, the valid and binding agreements of such corporation, enforceable against each of Lee Enterprises and Lee Procurement in accordance with their terms.
(b) Other than in connection with or in compliance with (i) the Delaware General Corporation Law and Iowa Business Corporation Act and other federal and state competition Laws (collectively, the “Lee Approvals”), no authorization, consent or approval of, or filing with, any Governmental Entity is necessary under applicable Law for the consummation by each of Lee Enterprises or Lee Procurement of the transactions contemplated by this Agreement and the Ancillary Agreements to which such corporation is a party, except for such authorizations, consents, approvals or filings that, if not obtained or made, would not have, individually or in the aggregate, a Business Material Adverse Effect or materially impair or delay the consummation of the transactions contemplated hereby or thereby.
(c) The execution and delivery by each of Lee Enterprises and Lee Procurement of this Agreement and the Ancillary Agreements to be executed and delivered by such corporation do not, and, except as described in Section 3.2(b), the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and
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thereof will not (i) result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to the loss of a material benefit under any loan, guarantee of indebtedness or credit agreement, note, bond, mortgage, indenture, lease, agreement, contract, instrument, permit, concession, franchise, right or license binding upon (x) Lee or (y) the Business or the Acquired Assets or, to the Knowledge of Lee, result in the creation of any liens, claims, mortgages, encumbrances, pledges, security interests, equities or charges of any kind (each, a “Lien”), other than any such Lien (A) for Taxes or governmental assessments, charges or claims of payment not yet due, being contested in good faith or for which adequate accruals or reserves have been established, (B) which is a carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other similar lien arising in the ordinary course of business, (C) which is disclosed on the Business Balance Sheet or notes thereto or securing liabilities reflected on such balance sheet or (D) which was incurred in the ordinary course of business since the date of the Business Balance Sheet and is immaterial in amount (each of the foregoing, a “Permitted Lien”), upon any of the properties or Assets included in the Acquired Assets; (ii) conflict with or result in any violation of any provision of the articles or certificate of incorporation or by-laws or other equivalent organizational document, in each case as amended, of Lee Enterprises and Lee Procurement; or (iii) conflict with or violate any applicable Laws, other than, in the case of clauses (i) and (iii), any such violation, conflict, default, termination, cancellation, acceleration, right, loss or Lien that would not have, individually or in the aggregate, a Business Material Adverse Effect and would not materially impair or delay the consummation of the transactions contemplated hereby.
3.3 Business Financial Statements. Section 3.3 of the Lee Disclosure Schedules contains (i) the unaudited balance sheet of the Business as at September 30, 2005; and (ii) the unaudited balance sheet of the Business as at June 30, 2006 (the June 30, 2006 balance sheet as referred to as the “Business Balance Sheet”), and the related unaudited statements of income for the twelve-month period ended September 30, 2005 and nine-month period ended June 30, 2006 (collectively, the “Business Financial Statements”). Except as disclosed in Section 3.3 of the Lee Disclosure Schedules, the Business Financial Statements fairly present in all material respects the financial position of the Business as at September 30, 2005 and June 30, 2006 and the results of operations for the twelve months ended September 30, 2005, and the nine months ended June 30, 2006 in accordance with GAAP, except that the Business Financial Statements are summary in nature and do not include the notes and related disclosures required by GAAP.
3.4 No Undisclosed Liabilities. Except as disclosed in Section 3.4 of the Lee Disclosure Schedules or except (a) as reflected, reserved against or otherwise disclosed in the Business Balance Sheet (or the notes thereto), (b) for liabilities permitted by or incurred pursuant to this Agreement, (c) for liabilities and obligations incurred in the ordinary course of business since June 30, 2006 and (d) for liabilities or obligations which have been discharged or paid in full in the ordinary course of business, as of the date hereof, Lee has no liabilities or obligations arising out of or relating to the operation of the Business, and there are no liabilities or obligations of the Business, of any nature, in each case, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on the Business Balance Sheet (or in the notes thereto), other than those which would not have, individually or in the aggregate, a Business Material Adverse Effect.
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3.5 Compliance with Law; Permits.
(a) With respect to the Business, Lee is in compliance with and is not in default under or in violation of any applicable federal, state, local or foreign constitution, law, statute, ordinance, rule, regulation, judgment, order, injunction, decree or agency requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity (collectively, “Laws” and each, a “Law”), except where such non-compliance, default or violation would not have, individually or in the aggregate, a Business Material Adverse Effect.
(b) With respect to the Business, Lee is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for each entity to own, lease and operate its properties and Assets and to carry on the Business as it is now being conducted (the “Lee Permits”), except where the failure to have any of Lee Permits would not have, individually or in the aggregate, a Business Material Adverse Effect. All Lee Permits are in full force and effect, except where the failure to be in full force and effect would not have, individually or in the aggregate, a Business Material Adverse Effect.
3.6 Environmental Laws and Regulations.
(a) Except as identified in any Phase I Environmental Site Assessment identified in Section 3.6 of the Lee Disclosure Schedules, or as would not, individually or in the aggregate, have a Business Material Adverse Effect, (i) Lee has conducted the Business in material compliance with all applicable Environmental Laws; (ii) to the Knowledge of Lee, no Hazardous Substance is present in, on, under or about any of the properties used in connection with the operation of the Business in amounts exceeding the levels permitted by applicable Environmental Laws and for which Lee would reasonably be expected to be liable for investigation and remediation; (iii) Lee has not received any notices, demand letters or requests for information from any Governmental Entity indicating that Lee may be in violation of, or liable under, any Environmental Law relating to the operation of the Business; (iv) no Hazardous Substance has been disposed of, released or transported in violation of any applicable Environmental Law, or in a manner giving rise to any liability under Environmental Law, from any of the properties used in connection with the operation of the Business during the time such properties were owned by Lee; and (v) none of the properties that are used in connection with the operation of the Business and currently owned by Lee are subject to any liabilities relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or written claim asserted or arising under any Environmental Law and, to the Knowledge of Lee, there is no basis therefor. It is agreed and understood that this Section 3.6 contains Lee’s entire representation and warranty relating to environmental matters, and no other representation or warranty contained in this Agreement shall be construed to include any representation or warranty regarding environmental matters.
(b) As used herein, “Environmental Law” means any Law relating to (x) the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), (y) worker safety or (z) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as in effect at the date hereof.
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(c) As used herein, “Hazardous Substance” means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any Governmental Entity or any Environmental Law, including any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or byproduct thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde, foam insulation or polychlorinated biphenyls or toxic mold.
3.7 Employee Benefit Plans.
(a) Section 3.7(a) of the Lee Disclosure Schedules lists all material benefit plans provided to the Business Employees (each a “Benefit Plan” and collectively, the “Benefit Plans”). Lee’s current employees who provide services primarily with respect to the Business are each a “Business Employee” and collectively, the “Business Employees.”
(b) Other than as disclosed on Section 3.7(a) of the Lee Disclosure Schedules, Lee has no commitment to establish any new Benefit Plan (except to the extent required by Law or to conform any such Benefit Plan to the requirements of any applicable Law, or as required by this Agreement) or to modify any Benefit Plan for the benefit of the Business Employees.
(c) Each material Benefit Plan has been maintained and administered in compliance with its terms and with applicable Law, including ERISA and the IRC to the extent applicable thereto, except for such non-compliance which would not have, individually or in the aggregate, a Business Material Adverse Effect.
(d) Any Benefit Plan intended to be qualified under Section 401(a) of the IRC and each trust intended to qualify under Section 501(a) of the IRC:
(i) has either applied for, prior to the expiration of the requisite period under applicable Treasury Regulations or IRS pronouncements, or obtained a favorable determination, notification, advisory and/or opinion letter, as applicable, as to its qualified status from the IRS or still has a remaining period of time under applicable Treasury Regulations or IRS pronouncements in which to apply for such letter and to make any amendments necessary to obtain a favorable determination;
(ii) incorporates or has been amended to incorporate all provisions required to comply with the Tax Reform Act of 1986 and subsequent legislation; and
(iii) has had no event, condition or circumstance that has adversely affected or is likely to adversely affect such qualified status.
(e) All contributions to the Lee Enterprises Retirement Account Plan or the Lee Enterprises Supplementary Benefit Plan that will have been required to be made with respect to periods prior to the Closing Date under such plans will have been made or accrued prior to the Closing.
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3.8 Absence of Certain Changes or Events. Since June 30, 2006, except as otherwise contemplated, required or permitted by this Agreement or as described in Section 3.8 of the Lee Disclosure Schedules, the Business has been conducted, in all material respects, in the ordinary course of business consistent with past practice and there has not been (i) any event, development or state of circumstances that has had, individually or in the aggregate, a Business Material Adverse Effect; (ii) any material change in accounting methods, principles or practices with respect to the Business; (iii) any agreement by Lee, with respect to the Business, to acquire, any business or corporation, partnership, association or other business organization or division thereof; or (vii) any sale, lease, license or other disposition of any material properties or Assets of the Business or any material properties or Assets included in the Acquired Assets, other than in the ordinary course of business.
3.9 Investigations; Litigation. As of the date hereof, (a) there is no investigation or review pending or, to the Knowledge of Lee, threatened by any Governmental Entity with respect to the Business and (b) except as described in Section 3.9 of the Lee Disclosure Schedules, there are no claims or Proceedings pending or, to the Knowledge of Lee, threatened against or affecting the Business, at law or in equity before, and there are no orders, judgments or decrees of, any Governmental Entity or arbitrator, which would have, individually or in the aggregate, a Business Material Adverse Effect and, to the Knowledge of Lee, there is no basis therefor.
3.10 Tax Matters.
(a) Except as would not have, individually or in the aggregate, a Business Material Adverse Effect, (i) Lee has prepared and timely filed (taking into account any extension of time within which to file) all Tax Returns with respect to the Business required to be filed by Lee and all such filed Tax Returns are accurate and complete in all material respects, and all Taxes shown thereon have been paid when due; (ii) Lee has accrued on the Business Balance Sheet all unpaid Taxes for all periods ending on or prior to the date thereof, and will accrue and pay all Taxes, except as otherwise provided in this Agreement, due on or prior to the Closing Date but effective as of the Effective Time; (iii) except as set forth in Section 3.10 of the Lee Disclosure Schedules, there are not pending or, to the Knowledge of Lee, threatened in writing, any audits, examinations, investigations or other proceedings in respect of U.S. federal or state Taxes with respect to the Business; and (iv) there are no Liens for Taxes on any of the Acquired Assets other than Permitted Liens.
(b) As used in this Agreement, (i) “Taxes” means any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, business and occupation, capital stock, payroll, employment, unemployment, social security, workers’ compensation or net worth, taxes in the nature of excise, withholding, ad valorem or value added, and any obligations with respect to such amounts arising as a result of being a member of an affiliated, consolidated, combined or unitary group for any period or under any agreements or arrangements with any other Person and including any liability for taxes of a predecessor entity; and (ii) “Tax Return” means any return,
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report or similar filing (including the attached schedules) required to be filed with respect to Taxes, including any information return, claim for refund, amended return or declaration of estimated Taxes.
3.11 Labor Matters. Except for such matters which would not have, individually or in the aggregate, a Business Material Adverse Effect, (a) as of the date hereof, (i) there are no strikes or lockouts with respect to any Business Employees; (ii) to the Knowledge of Lee, there is no union organizing effort pending or threatened against the Business; (iii) there is no unfair labor practice, labor dispute (other than routine individual grievances) or labor arbitration proceeding pending or, to the Knowledge of Lee, threatened against the Business; and (iv) there is no slowdown or work stoppage in effect or, to the Knowledge of Lee, threatened by any Business Employees, and (b) the Business is in compliance with all applicable Laws respecting (i) employment and employment practices; (ii) terms and conditions of employment and wages and hours; and (iii) unfair labor practices and, to the Knowledge of Lee, there is no basis therefor.
3.12 Title to Acquired Assets. Except as set forth in Section 3.12 of the Lee Disclosure Schedules, Lee owns good title to or has valid leasehold interests in all of the Acquired Assets, and at the Closing good title to or valid leasehold interests in (and consents to the assignment thereof) such Acquired Assets shall be transferred to Buyer, free and clear of any and all Liens except (i) for Permitted Liens; and (ii) any restriction on assignment of a Contract which is contained therein or which arises by operation of Law.
3.13 Intellectual Property. Except as would not have, individually or in the aggregate, a Business Material Adverse Effect, either Lee Enterprises or Lee Procurement owns, or is licensed or otherwise possesses legally enforceable rights to use, all registered and unregistered material trademarks, trade names, service marks, service names, logos, assumed names, domain names and copyrights used in the Business as currently conducted which are included in the Acquired Assets (collectively, the “Intellectual Property”). Except as would not have, individually or in the aggregate, a Business Material Adverse Effect or except as otherwise describe in Section 3.13 of the Lee Disclosure Schedules, (a) as of the date hereof, there are no pending or, to the Knowledge of Lee, threatened claims by any Person alleging infringement of any material Intellectual Property rights of any Person by Lee Enterprises or Lee Procurement for their use of the Intellectual Property in the Business, (b) to the Knowledge of Lee, the conduct of the Business does not infringe any Intellectual Property rights of any Person, (c) to the Knowledge of Lee, neither Lee Enterprises nor Lee Procurement has made any claim of a violation or infringement by others of its rights to or in connection with the Intellectual Property of the Business, and (d) to the Knowledge of Lee, no Person is infringing any Intellectual Property of the Business.
3.14 Real Property. Section 3.14 of the Lee Disclosure Schedules sets forth a list of material real property currently owned or leased by Lee and used in the operation of the Business. Except as would not have, individually or in the aggregate, a Business Material Adverse Effect, Lee owns and has valid title to all of its owned real property and has valid leasehold interests in all of its leased properties used in the operation of the Business, except for properties and Assets that have been disposed of in the ordinary course of business since June 30, 2006, free and clear of all Liens (except for Permitted Liens and all other title exceptions,
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defects, encumbrances and other matters, whether or not of record, which do not materially and adversely affect the continued use of the property for the purposes for which the property is currently being used by Lee in the Business as of the date hereof, excluding therefrom mortgages, deeds of trust, judgment liens, Tax liens for delinquent taxes and other monetary liens). Buyer acknowledges that Lee has not investigated whether the landlord to any leased premises has marketable title to such property. To the Knowledge of Lee, there are no material latent defects in the improvements to the owned real property. To the Knowledge of Lee, there are no material encroachments on the owned real property and the are no encroachments by any improvements on the property adjacent to any owned real property described in Schedule 3.14 of the Lee Disclosure Schedules other than (A) easements, rights of way and other similar restrictions which would be shown by a current title report, including the title report previously furnished to the Buyer, (B) conditions that may be shown by a current survey, title report or visual site inspection, and (C) zoning, building and other similar restrictions imposed by applicable Law. Except as would not have, individually or in the aggregate, a Business Material Adverse Effect, each of Lee’s material lease agreements involving real property related to the operation of the Business to which Lee is a party is valid and enforceable and Lee is not in default under any such agreement, and no circumstances exist which, with notice, the passage of time or both, would reasonably be expected to constitute a default of Lee under any such agreement.
3.15 Material Contracts.
(a) Except for this Agreement or as listed in Section 3.15 of the Lee Disclosure Schedules, as of the date hereof, with respect to the Business, Lee is not a party to or bound by any (i) “Material Contract” (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC); (ii) any contract containing any covenant materially limiting the right of Lee to engage in the Business; (iii) any mortgages, indentures, financial guarantees, loans or credit agreements, security agreements or other Contracts relating to the borrowing of money or extension of credit, other than accounts receivable and payable in the ordinary course of business; or (iv) any material settlement agreement with material continuing obligations of, or material restrictions on, the Business (each Contract of the type described in this Section 3.15 being referred to herein as a “Business Material Contract”).
(b) Lee is not in breach of or default under the terms of any Business Material Contract where such breach or default would have, individually or in the aggregate, a Business Material Adverse Effect. To the Knowledge of Lee, no other party to any Business Material Contract is in breach of or default under the terms thereof where such breach or default would have, individually or in the aggregate, a Business Material Adverse Effect. Each Business Material Contract is a valid and binding obligation of Lee and, to the Knowledge of Lee, of each other party thereto, and is in full force and effect, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws, now or hereafter in effect, relating to creditors’ rights generally, and (ii) equitable remedies of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
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3.16 Transactions with Affiliates. Section 3.16 of the Lee Disclosure Schedules sets forth a complete and accurate list of all Contracts in connection with the Business to which Lee on the one hand, and any of its Affiliates on the other hand, is a party.
3.17 Finders or Brokers. Lee has not employed any investment banker, broker or finder in connection with the transactions contemplated by this Agreement who might be entitled to any fee or any commission in connection with or upon consummation of the transactions contemplated hereby, except for Lazard Fréres & Co. LLC, whose fees will be the sole responsibility of Lee.
3.18 No Additional Representations. Other than the representations and warranties expressly set forth in Article 3, Lee shall not be deemed to have made any other representation or warranty in connection with this Agreement or the Ancillary Agreements or the transactions contemplated hereby or thereby.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as disclosed in the disclosure schedules delivered to Lee by Buyer immediately prior to the time of execution of this Agreement (the “Buyer Disclosure Schedules”), Buyer represents and warrants to Lee as follows:
4.1 Organization. Buyer is a legal entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization.
4.2 Corporate Authority Relative to this Agreement; No Violation.
(a) Buyer has all requisite corporate power and authority to enter into this Agreement and the Ancillary Agreements to be executed and delivered by Buyer and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements to be executed and delivered by Buyer and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary to authorize the consummation of the transactions contemplated hereby and thereby. This Agreement has been, and the Ancillary Agreements to be executed and delivered by Buyer will, as of the Closing, have been, duly and validly executed and delivered by Buyer, and (assuming this Agreement constitutes, and as of the Closing the Ancillary Agreements to be executed and delivered by Lee Enterprises or Lee Procurement will constitute, the valid and binding agreement of such corporations), this Agreement constitutes, and as of the Closing, the Ancillary Agreements to be executed and delivered by Buyer will constitute, the valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms.
(b) Other than in connection with or in compliance with (i) the Washington General Corporation Law and other federal and state competition Laws (collectively, the “Buyer Approvals”), no authorization, consent or approval of, or filing with, any Governmental Entity is necessary under applicable Law for the consummation by Buyer of the transactions contemplated
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by this Agreement and the Ancillary Agreements, except for such authorizations, consents, approvals or filings, that, if not obtained or made, would not materially impair or delay the consummation of the transactions contemplated hereby.
(c) The execution and delivery by Buyer of this Agreement and the Ancillary Agreements to be executed and delivered by Buyer do not, and, except as described in Section 4.2(b), the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and thereof will not (i) result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to the loss of a material benefit under any loan, guarantee of indebtedness or credit agreement, note, bond, mortgage, indenture, lease, agreement, Contract, instrument, permit, concession, franchise, right or license binding upon Buyer or any of its Subsidiaries or result in the creation of any Lien, other than any such Lien (A) for Taxes or governmental assessments, charges or claims of payment not yet due, being contested in good faith or for which adequate accruals or reserves has been established, (B) which is a carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other similar lien arising in the ordinary course of business, (C) which is disclosed on the most recent consolidated balance sheet of Buyer or notes thereto or securing liabilities reflected on such balance sheet or (D) which was incurred in the ordinary course of business since the date of the most recent consolidated balance sheet of Buyer and is immaterial in amount, upon any of the properties or Assets of Buyer or any of its Subsidiaries; (ii) conflict with or result in any violation of any provision of the articles or certificate of incorporation or by-laws or other equivalent organizational document, in each case as amended, of Buyer or any of its Subsidiaries; or (iii) conflict with or violate any applicable Laws, other than, in the case of clauses (i) and (iii), any such violation, conflict, default, termination, cancellation, acceleration, loss or Lien that would not materially impair or delay the consummation of the transactions contemplated hereby.
4.3 Investigations: Litigation. As of the date hereof, (a) there is no investigation or review pending or, to the Knowledge of Buyer, threatened by any Governmental Entity with respect to Buyer or any of Buyer’s Affiliates, and (b) there are no claims or Proceedings pending or, to the Knowledge of Buyer, threatened against or affecting Buyer or any of Buyer’s Affiliates at law or in equity before, and there are no orders, judgments or decrees of, or before, any Governmental Entity or arbitrator, which would materially impair or delay the consummation of the transactions contemplated hereby.
4.4 Finders or Brokers. Neither Buyer nor any of its Subsidiaries has employed any investment banker, broker or finder in connection with the transactions contemplated by this Agreement who might be entitled to any fee or any commission in connection with or upon consummation of the transactions contemplated hereby.
4.5 Solvency. Immediately after giving effect to the transactions contemplated by this Agreement (including any financing in connection with the transactions contemplated hereby) and excluding the effect of any inaccuracy of the representations and warranties contained in Article 3, (a) none of Buyer or any of its Subsidiaries, taken as a whole, will have incurred debts beyond its ability to pay such debts as they mature or become due and the then present fair salable value of the Assets of Buyer and each of its Subsidiaries, taken as a whole,
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will exceed the amount that will be required to pay its respective probable liabilities (including the probable amount of all contingent liabilities) and its respective debts as they become absolute and matured, (b) the Assets of Buyer and each of its Subsidiaries, taken as a whole, at a fair valuation, will exceed its respective debts (including the probable amount of all contingent liabilities) and (c) none of Buyer or any of its Subsidiaries, taken as a whole, will have unreasonably small capital to carry on its business as presently conducted or as proposed to be conducted. No transfer of property is being made and no obligation is being incurred in connection with the transactions contemplated hereby with the intent to hinder, delay or defraud creditors of Lee or the Business.
4.6 Available Funds. Buyer will have available at the Closing all funds necessary for the payment of the Purchase Price. Buyer has delivered to Lee complete and correct copies of a fully executed commitment letter (the “Bank Commitment Letter”), from Bank of America, pursuant to which such financial institution has committed, upon the terms and subject to the conditions set forth therein, to arrange credit facilities in the amount of up to $27,500,000 million in connection with the transactions contemplated by this Agreement. The Bank Commitment Letter is in the form delivered to Lee, is in full force and effect and is a legal, valid and binding obligation of Buyer and, to the Knowledge of Buyer, the other parties thereto. All commitment fees required to be paid thereunder have been, or will be once due, paid in full. There is no existing default or breach on the part of Buyer or any event which, with or without notice, lapse of time or both would constitute a default or breach on the part of Buyer under the Bank Commitment Letter. The obligation of the financing sources to fund the commitments under the Bank Commitment Letter is not subject to any conditions other than as set forth in the Bank Commitment Letter.1
ARTICLE 5
COVENANTS
5.1 Conduct of the Business by Lee.
(a) From and after the date hereof and prior to the Closing or the date, if any, on which this Agreement is earlier terminated pursuant to Section 8.1 (the “Termination Date”), and except (i) as may be required by applicable Law; (ii) as may be agreed in writing by Buyer (which consent shall not be unreasonably withheld, delayed or conditioned); (iii) as may be contemplated or required by this Agreement; or (iv) as set forth in Section 5.1 of the Lee Disclosure Schedules, Lee covenants and agrees with Buyer that (A) (1) prior to the Closing, the Business shall be conducted in the ordinary course of business and (B) Lee Enterprises and Lee Procurement shall use commercially reasonable efforts to preserve intact their relationships with significant customers, suppliers, licensors and licensees of the Business and others with which they have business dealings related to the Business.
(b) Lee agrees with Buyer, that (x) between the date hereof and the Closing or
| 1 | If applicable - section to be tailored to Buyer financing. |
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the Termination Date, without the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned) and except as may be contemplated or required by this Agreement, Lee Enterprises and Lee Procurement will use commercially reasonable efforts to require that the Business:
(i) except as required by (x) existing Contracts or Benefit Plans, or (y) as otherwise required by applicable Law, shall not (A) increase the compensation or other benefits payable or provided to any Business Employee except as in accordance with the ordinary course of business and consistent with past practice, (B) enter into any employment, consulting, special retirement, change of control, stay bonus (excluding any Participation Agreement, whether or not then executed, previously disclosed to Buyer) separation, severance or retention agreement with any Business Employee (except in order to retain an employee for the benefit of the Business after consulting with Buyer and obtaining Buyer’s written consent to enter into such agreement, which shall not be unreasonably withheld, delayed or conditioned), (C) except as permitted pursuant to clause (A) above, establish, adopt, enter into or amend any Benefit Plan, collective bargaining agreement, plan, trust, fund, policy or arrangement for the benefit of any Business Employees, except, in each case, as would not result in a material increase in cost, or (D) hire, promote, demote or otherwise change the employment status (e.g., part-time, full-time, leave), title or other material term or material condition of employment of any Business Employee who is (or would become after such hiring, promotion, demotion or change) a publisher or manager of the Business;
(ii) shall not materially change financial accounting policies or procedures or any of its methods of reporting income, deductions or other material items for financial accounting purposes, except as required by GAAP, SEC rule or policy or applicable Law;
(iii) shall not sell, lease, license, transfer, exchange or swap, mortgage or otherwise encumber (including securitizations), or subject to any Lien (other than Permitted Liens) or otherwise dispose of any material portion of the Acquired Assets other than in the ordinary course;
(iv) shall not modify, amend, terminate or waive any rights in a manner adverse to the Business under (A) any Contract containing any covenant limiting the right of Lee, with respect to the Business, to engage or compete with any Person in any material line of business, (B) any Contract or group of related Contracts with a Person or entities (or group of affiliated Persons or entities) under which such modification, amendment, termination or waiver of any right would have a Business Material Adverse Effect, (C) any mortgages, indentures, financial guarantees, loans or credit agreements or security agreements or other Contracts relating to the borrowing of money or extension of credit, other than accounts receivable and payable in the ordinary course of business (except for the equipment lease described in Section 3.15(b) of the Lee Disclosure Schedules), or (D) any material settlement agreement which contains continuing material obligations of the Acquired Publications or the Business (all contracts of the type described in this Section 5.1 (b)(iv) being referred to herein as “Section 5.1 Contracts”);
(v) shall not enter into any Section 5.1 Contracts or Business Material Contracts (except for the equipment lease described in Section 3.15(l)(c) of the Lee Disclosure
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Schedules), other than, in each case, in the ordinary course of business and in compliance with the other restrictions set forth in this Section 5.1;
(vi) shall not enter into any new line of business material to the Business;
(vii) shall not acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the Assets of, or by any other manner, any business or any Person or division thereof, or otherwise acquire or agree to acquire any Assets which are material, individually or in the aggregate, to the Business, except in the ordinary course of business;
(viii) shall not engage in bargaining with any recognized labor union representing any Business Employee, except bargaining that is done after notice to and consultation with Buyer; and
(ix) shall not, and shall not permit any of its Subsidiaries to, agree to take any of the foregoing actions relating to the Business.
5.2 Access to Information; Confidentiality.
(a) Lee shall afford reasonable access to Buyer and its Representatives, during normal business hours, throughout the period prior to the earlier of (i) the Closing; and (ii) the Termination Date, to the properties, employees, contracts, commitments, books and records of the Business, and any report, schedule or other document filed or received by Lee pursuant to the requirements of applicable Laws. Notwithstanding the foregoing, Lee shall not be required to afford such access if it would unreasonably disrupt the operations of Lee or the Business, would cause a violation of any agreement to which Lee or the Business or Buyer or any of its Subsidiaries is a party, would cause a significant risk, in the reasonable judgment of Lee, of a loss of privilege to the disclosing party, or any of its Subsidiaries or would constitute a violation of any applicable Law, nor shall Buyer or any of its Representatives be permitted to perform any invasive onsite environmental procedure with respect to any property of Lee.
(b) The parties acknowledge that Lee and Guarantor under the Guaranty at the end of this Agreement have previously executed a letter agreement concerning confidential information related to the Business dated as of May 12, 2006 (the “Confidentiality Agreement”), which Confidentiality Agreement will continue in full force and effect in accordance with its terms and Buyer agrees to abide by its terms and conditions as if a party thereto. Each of Guarantor, Buyer and Lee will hold, and will cause its respective Representatives to hold, any Evaluation Material (as defined in the Confidentiality Agreement) confidential in accordance with the terms of the Confidentiality Agreement.
5.3 Mutual Best Efforts.
(a) Subject to the terms and conditions set forth in this Agreement, each of the parties hereto shall use its commercially reasonable efforts (subject to, and in accordance with, applicable Law) to take or cause to be taken all actions, and to do or cause to be done and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this
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Agreement in a prompt manner, including (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals, including Lee Approvals and the Buyer Approvals, from Governmental Entities and the making of all necessary registrations and filings and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Entity; (ii) the obtaining of all necessary consents, approvals or waivers from third parties; (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated by this Agreement; and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement.
(b) Subject to the terms and conditions herein provided and without limiting the foregoing, Lee and Buyer shall (i) promptly (and, unless a later date is agreed to by the parties hereto, in any event within fourteen (14) days of the date of this Agreement) make any required submissions in connection with this Agreement; (ii) in the case of Buyer, use best efforts to offer to take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective the transactions contemplated hereby, including taking all such further action as reasonably may be necessary to resolve such objections, if any, as the United States Federal Trade Commission, the Antitrust Division of the United States Department of Justice, state antitrust enforcement authorities or competition authorities of any jurisdiction or any other Person may assert under Regulatory Law with respect to the transactions contemplated hereby, and to avoid or eliminate each and every impediment under any Law that may be asserted by any Governmental Entity with respect to the transactions contemplated hereby so as to enable the Closing to occur as soon as expeditiously possible, including (x) proposing, negotiating, committing to and effecting, by consent decree, hold separate order or otherwise, the sale, divestiture or disposition of such Assets or businesses of Buyer or its Subsidiaries or Affiliates or of the Business and (y) otherwise taking or committing to take actions that after the Closing Date would limit the freedom of Buyer or its Subsidiaries’ or Affiliates’ freedom of action with respect to, or its ability to retain, one or more of its or its Subsidiaries’ businesses, product lines or Assets, in each case as may be required in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding which would otherwise have the effect of preventing or materially delaying the Closing; and (iii) subject to applicable legal limitations, the preservation of the attorney-client privilege and the instructions of any Governmental Entity, keep each other apprised of the status of matters relating to the completion of the transactions contemplated thereby, including promptly furnishing the other with copies of notices or other communications between Lee or Buyer, as the case may be, or any of their respective Subsidiaries, and any third party and/or any Governmental Entity with respect to such transactions. Lee and Buyer shall permit counsel for the other party reasonable opportunity to review in advance, and consider in good faith the views of the other party in connection with, any proposed written communication to any Governmental Entity. Each of Lee and Buyer agrees not to participate in any substantive meeting or discussion, either in person or by telephone, with any Governmental Entity in connection with Buyer’s proposed purchase of the Acquired Assets unless it consults with the other party in advance and, to the extent not prohibited by such Governmental Entity, gives the other party the opportunity to attend and participate.
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(c) In furtherance and not in limitation of the covenants of the parties contained in this Section 5.3, if any administrative or judicial Proceeding, including any Proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Regulatory Law, each of Lee and Buyer shall cooperate in all respects with each other and shall use their respective best efforts to contest and resist any such Proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, nothing in this Section 5.3 shall limit a party’s right to terminate this Agreement pursuant to Section 8.1(b) so long as such party has, prior to such termination, complied with its obligations under this Section 5.3.
(d) For purposes of this Agreement, “Regulatory Law” means the Sherman Act of 1890, the Clayton Antitrust Act of 1914, the Federal Trade Commission Act of 1914 and all other federal or state statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other Laws, including any antitrust, competition or trade regulation Laws, that are designed or intended to (i) prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening competition through merger or acquisition; (ii) preserve or promote diversity of media ownership; or (iii) protect the national security or the national economy of any nation.
(e) Buyer will use all reasonable efforts to fully satisfy, on a timely basis, all terms, conditions, representations and warranties set forth in the Bank Commitment Letter. Buyer will use all reasonable efforts to (i) enter into definitive agreements with respect to the financing contemplated by the Bank Commitment Letter on terms and conditions no less favorable to Lee in the aggregate than the Bank Commitment Letter as soon as commercially reasonable but in any event at or prior to the Closing; and (ii) to fully satisfy, on a timely basis, all the terms, conditions, representations and warranties set forth in such definitive agreements. Buyer will furnish correct and complete copies of such definitive agreements to Lee promptly upon their execution. Buyer shall keep Lee informed in reasonable detail with respect to all material activity concerning the status of the financing contemplated by the Bank Commitment Letter. Buyer shall not amend, alter or waive, or agree to amend, alter or waive, the Bank Commitment Letter in a manner that would reasonably be expected to materially impair or delay the consummation of the transactions contemplated hereby without the prior written consent of Lee (which consent shall not be unreasonably withheld, delayed or conditioned).
5.4 Tax Matters. The parties to this Agreement shall provide assistance to each other as reasonably requested in preparing and filing Tax Returns and responding to any audit, claim, dispute or controversy (“Tax Contest”) relating to the Business prior to the Closing Date, provide reasonably detailed notice of any Tax Contest sufficient to apprise the other party of the nature of the claim, make available to each other as reasonably requested all relevant information, records, and documents, including workpapers, relating to Taxes of the Business or the Acquired Assets and retain any books and records that could reasonably be expected to be necessary or useful in connection with any preparation by any other party of any Tax Return or for any Tax Contest. Lee and Buyer shall make their respective officers, employees, agents and representatives available on a basis mutually convenient to Lee and Buyer to provide explanations of any
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documents or information provided hereunder. Lee and the Buyer shall retain all Tax Returns, schedules and work papers, records and other documents in its possession relating to Tax matters of the Acquired Assets for each taxable period first ending after the Closing Date and for all prior taxable periods until the later of (i) the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions except to the extent notified by the other party in writing of such extensions for the respective Tax periods; or (ii) six years following the due date (without extension) for such Tax Returns.
5.5 Public Announcements. Buyer and Lee will consult with and provide each other the opportunity to review and comment upon any press release or, to the extent practicable, other public statement made by Buyer or Lee prior to the issuance of such press release or, to the extent practicable, other public statement relating to this Agreement or the transactions contemplated herein and shall not issue any such press release or, to the extent practicable, other public statement prior to such consultation, except as may be required by applicable Law or by obligations pursuant to any listing agreement with any national securities exchange or market. Buyer and Lee agree to issue a joint press release announcing this Agreement.
5.6 Transaction Costs. Buyer shall pay all transaction costs and expenses (including legal, accounting and other professional fees and expenses and other fees described in Section 4.4 hereof) that it incurs in connection with the negotiation, execution and performance of this Agreement and the consummation of the transactions contemplated hereby. Lee shall pay all transaction costs and expenses (including legal, accounting and other professional fees and expenses and other fees described in Section 3.17 hereof) that it incurs in connection with the negotiation, execution and performance of this Agreement and the consummation of the transactions contemplated hereby. Notwithstanding the foregoing and anything to the contrary contained in this Agreement, Buyer shall be responsible for any transfer Taxes (including all federal, state or local transfer, excise, sales, use, business and occupation (if any, solely with respect to the purchase of the Acquired Assets) and deed Taxes, but excluding Income Taxes) and the fees and costs of recording or filing all applicable conveyancing instruments associated with the transactions contemplated by this Agreement (collectively, the “Transfer Taxes”). Lee and Buyer shall cooperate in the preparation, execution and filing of all Tax Returns regarding any Transfer Taxes that become payable as a result of the transactions contemplated by this Agreement.
5.7 Retention of and Access to Records. From and after the Closing, Buyer shall preserve, in accordance with the normal document retention policy of the Business, all books and records transferred by Lee to Buyer pursuant to this Agreement. In addition to the foregoing, from and after the Closing, each party shall afford to the other party hereto, and its Representatives, during normal business hours and upon the execution and delivery of a confidentiality and non-disclosure agreement in customary form and substance (which shall include appropriate exceptions for disclosure relating to Tax matters), reasonable access to the employees, books, records and other data relating to the Business, the Acquired Assets, the Assumed Liabilities and the Business Employees in its possession, and the right to make copies and extracts therefrom, to the extent that such access may be reasonably required by the requesting party (a) to facilitate the investigation, litigation and final disposition of any claims which may have been or may be made against any such party or Person or its Affiliates, (b) for the preparation of Tax Returns and audits and (c) for any other reasonable business purpose.
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5.8 Notifications. Prior to the Closing, Lee will promptly deliver notice to Buyer in writing of any specific event or circumstance of which Lee has Knowledge, or of which it receives notice, that (a) Lee believes has had a Business Material Adverse Effect or (b) would result in the conditions set forth in Section 7.2(a) or Section 7.2(b) not being satisfied; provided, however, that the delivery of any notice by Lee pursuant to this Section 5.8 shall not limit or otherwise affect the remedies available hereunder to Buyer. Prior to the Closing, Buyer will promptly deliver notice to Lee in writing of any amendment or termination of the Bank Commitment Letter or any specific event or circumstance of which Lee has Knowledge, or of which it receives notice, that (i) Buyer believes would materially impair or delay the consummation of the transactions contemplated hereby; or (ii) would result in the conditions set forth in Section 7.3(a) or Section 7.3(b) not being satisfied; provided, however, that the delivery of any notice by Buyer pursuant to this Section 5.8 shall not limit or otherwise affect the remedies available hereunder to Lee.
5.9 Payments. Following the Closing, if Lee or any of its Subsidiaries receive a payment of accounts receivable belonging to the Business, it will promptly turn such payment over to Buyer and if Buyer or any of its Subsidiaries receive a payment of accounts receivable belonging to the business of Lee or its Subsidiaries, it will promptly turn such payment over to Lee.
5.10 Cooperation in Post-Closing Litigation. For a period of three (3) years following the Closing, each of Lee and Buyer will cooperate with the other in the investigation, defense or prosecution of any claim or Proceeding which is pending, instituted or threatened either (a) against Buyer and which relates to or arises out of the Assumed Liabilities or (b) against Lee and which relates to or arises out of the Excluded Liabilities. The party seeking such cooperation will reimburse the party providing such cooperation for all reasonable expenses (including salaries of employees who are required to be absent from their employment or devote substantial amounts of time in satisfaction of the obligations set forth in this Section 5.10) incurred by the party providing such cooperation in connection with such cooperation.
5.11 Updating of Lee Disclosure Schedules. Lee shall have the right from time to time after the date hereof to deliver written updates of the Lee Disclosure Schedules (for purposes of this Section 5.11, the “Updated Schedules”) to reflect changes in the Business that occur or arise after the date hereof until the date of the Closing; provided, however, that such Updated Schedules shall reflect matters consistent with the covenants applicable to Lee pursuant to the terms hereof. Such Updated Schedules shall be promptly furnished to Buyer. Buyer shall have five (5) Business Days after receipt of any Updated Schedules within which to accept or object to such Updated Schedules. In the event Lee delivers Updated Schedules to Buyer prior to the Closing and Buyer does not object within five (5) Business Days after receipt of such Updated Schedules, the disclosure in the Updated Schedules shall be deemed to amend and supplement the representations and warranties of Lee and the applicable section of the Lee Disclosure Schedules thereto, and in such event Buyer shall not have the right to be indemnified for any matter contained in the Updated Schedules. If Buyer objects to any Updated Schedules, Lee shall have thirty (30) days in which to satisfy Buyer’s objection. If the objection cannot reasonably be cured within thirty (30) days despite good faith efforts to do so, Lee shall have a reasonable period of time necessary to cure the objection. If Lee does not cure an objection of Buyer to the Updated Schedules, and the objection is material to the Business, Buyer may elect
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to close and pursue the remedies, if any, under Article 9 of this Agreement or pursue its remedies under Article 8 hereof; provided that if such objection is not material to the Business, such objection shall not relieve Buyer of the obligation to close under this Agreement, but Buyer shall retain its rights under Article 9 with respect to such objection if such objection constitutes a breach of this Agreement by Lee.
5.12 Additional Covenants of Lee.
(a) Lee and its Affiliates agree to refrain for a period of four (4) years from the Closing Date from publishing a general interest classified shopper publication that is distributed exclusively through rack distribution in the following counties in Oregon: Multnomah, Clackamas, Hood River, Wasco, Tillamook, Yanhill and Washington, and all counties in Washington situated primarily west of the Cascade Range (excluding therefrom the Washington counties of Clark, Skamania, Cowlitz, Wahkiakum, Pacific and Lewis).
(b) Notwithstanding the provisions of Section 5.12(a) above, nothing shall prohibit Lee and its Affiliates from publishing, after the Closing Date, at least a six-day a week major daily paid circulation newspaper that does not consist primarily of advertising (including the publishing of related publications, whether distributed as part of the newspaper or independently so long as they are affiliated with the newspaper) and is published primarily in any of the metropolitan areas of Seattle, Tacoma, Olympia, Bremerton, Everett, Bellingham, Wenatchee or Spokane, Washington or Portland, Oregon.
(c) Lee and its Affiliates agree to refrain for a period of four (4) years from the Closing Date from soliciting any employee of the Business or encouraging such employee to leave such employment; provided, however. Lee shall be permitted to place general solicitation notices of available positions within Lee and its Affiliates in internal and external print and electronic media and shall be entitled to solicit any person whose employment is terminated by Buyer or its Affiliates during such period.
(d) If, at the time of enforcement of this Section 5.12, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographic area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law.
(e) Lee acknowledges that in the event of any violation of the covenants contained in this Section 5.12, Buyer’s damages will be difficult to ascertain and Buyer’s remedies at law will be inadequate. Accordingly, Lee agrees that, in addition to such remedies as Buyer may have at law, Buyer shall be entitled to specific performance of such covenants and to an injunction to prevent any continuing violation thereof.
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ARTICLE 6
EMPLOYMENT MATTERS
6.1 Acquired Employees.
(a) Lee shall, after notifying Buyer of its intent thereto and after first allowing Buyer to be present at and to participate during or in connection with such notification (if Buyer desires), provide all Business Employees with notification of the sale of the Business and the termination of each such employee’s employment with Lee on the Closing Date as a result thereof. Lee shall pay final wages to each Business Employee for work performed up to the Closing Date within such time period as required by applicable state Law. Buyer shall, or shall cause one or more of its Affiliates to, offer employment to, and employ all of the Business Employees employed by Lee on the Closing Date (each a “Hired Employee” and collectively, the “Hired Employees”). Such employment will be effective as of the Closing on terms and conditions substantially equivalent in the aggregate to those currently received by such Business Employee (excluding any Benefit Plan or plan comparable thereto not currently offered to the employees of Buyer and its Affiliates). Prior to the Closing, neither Lee nor its Representatives shall induce or encourage any of the Business Employees to decline Buyer’s offers of employment or become employed by Lee.
(b) Except as otherwise provided in this Article 6, the Hired Employees shall cease active participation in the Benefit Plans effective as of the Closing and shall commence participation in benefit plans maintained by Buyer (or its Affiliates) in accordance with the terms of Buyer’s (or its Affiliates’) plans.
6.2 Welfare Plans. For all purposes (including vesting, eligibility to participate and level of benefits) under the employee welfare benefit plans of Buyer and its Affiliates providing benefits to any Hired Employees after the Closing listed in Schedule F hereto (the “New Welfare Plans”), each Hired Employee shall, subject to applicable Law and applicable IRC requirements, be credited with his or her years of service with Lee or its Affiliates before the Closing to the same extent as such Hired Employee was entitled to credit for such service under any similar employee benefit plan immediately prior to the Closing, provided that the foregoing shall not apply to the extent that its application would result in a duplication of benefits. In addition, and without limiting the generality of the foregoing, (i) each Hired Employee shall be immediately eligible to participate, without any waiting time, in any and all New Welfare Plans if such Hired Employee participated immediately before the Closing in a comparable type of welfare benefit plan of Lee Enterprises (such plans, collectively, the “Old Plans”); and (ii) for purposes of each New Welfare Plan providing medical, dental, pharmaceutical and/or vision benefits to any Hired Employee, Buyer or its Affiliates shall cause all pre-existing condition exclusions and actively-at-work requirements of such New Welfare Plan to be waived for such Hired Employee and his or her covered dependents, unless such conditions would not have been waived under the comparable plans of Lee in which such Hired Employee participated immediately prior to the Closing, and Buyer shall cause any eligible expenses incurred by such employee and his or her covered dependents during the portion of the plan year of the Old Plan ending on the Closing Date to be taken into account under such New Welfare Plan for purposes of satisfying all
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deductible, coinsurance and maximum out-of-pocket requirements applicable to such employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such New Welfare Plan.
6.3 Severance and Participation Agreement Liabilities.
(a) Effective as of the Closing Date, Buyer shall assume, pay or otherwise discharge, and shall indemnify and hold Lee harmless against any liability, claim or obligation (including reasonable attorney’s fees) relating to or arising out of the Benefit Plans covering Business Employees set forth in Section 6.3 of the Lee Disclosure Schedules. Buyer agrees that it shall have no right or ability to amend any term or condition of any Participation Agreement as set forth in Section 6.3 of the Lee Disclosure Schedules, and any other such agreement entered into between the date hereof and the Closing Date in accordance with Section 5.1(b)(i)(B) without the mutual consent of the benefited employee.
(b) Buyer shall pay, within five (5) days of termination of employment (and for those executing ADEA releases, within five (5) days after the ADEA waiting periods expire), in a lump-sum cash payment to each Eligible Hired Employee, severance in an amount equal to at least the Buyer Severance Amount (as hereinafter defined). For purposes hereof, (i) “Eligible Hired Employee” means each of Lee’s employees regularly scheduled to work twenty (20) or more hours per week who is employed by Lee solely in connection with the operation of the Business prior to the Closing Date (other than as listed in Section 6.3 of the Lee Disclosure Schedules) and who is terminated by Lee effective as of the Closing and who is terminated by Buyer or one of its Affiliates without cause within six (6) months of the Closing Date and who delivers to Buyer a release of claims reasonably acceptable to Buyer; and (ii) “Buyer Severance Amount” means with respect to each Eligible Hired Employee, an amount equal to (A) one week of his or her base cash compensation, determined immediately prior to the Closing Date and excluding any overtime, bonuses and commissions (“Base Compensation”) and, for those whose compensation is based solely on commissions or sales incentive pay, one week of his or her commissions and sales incentive pay earned or which he or she is eligible to earn (determined by calculating his or her commissions and sales incentive pay for the twelve (12) months ended June 30, 2006 divided by fifty-two (52) (“Commission Compensation”)), multiplied by (B) his or her years of continuous service (rounded to the nearest one-fifth year) with the Business or with any other publication or division owned (directly or indirectly) by Lee up to a maximum of twelve (12) years.
No other provision of this Section 6.3 describing Buyer’s liability or responsibility shall be interpreted to limit the liability or responsibility that Buyer has under this Section 6.3(b), except to the extent that such other provision specifically makes Lee liable or responsible. For purposes of this Section 6.3(b), references to Buyer shall include Buyer and its Affiliates.
6.4 Savings Plans. Buyer shall take all steps necessary to permit each such Hired Employee who has received an eligible rollover distribution (as defined in Section 402(c)(4) of the IRC) from the Lee Enterprises Retirement Account Plan to roll over such distribution as part of any lump sum cash distribution into an account under a 401(k) savings plan maintained by Buyer or its Affiliates. Buyer shall credit the service of each Hired Employee with Lee or its Affiliates for purposes of eligibility and vesting under Buyer’s savings plan.
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6.5 Vacation and Last Payroll. On the Closing Date, but effective as of the Effective Time, Seller shall be responsible for all earned vacation and leave of absence time of each Hired Employee. Pursuant to Section 2.2(b)(iv), Buyer shall pay and shall deliver on behalf of the Business to each Hired Employee their payroll check for the two (2) week pay period ended September 23, 2006, which will be delivered to such employee on September 29, 2006.
6.6 General. Nothing in this Article 6 or elsewhere in this Agreement shall be construed as (a) conferring any legal rights upon any Hired Employee for continuation of employment by Buyer or its Affiliates, (b) requiring Buyer to implement, or limiting the rights of Buyer to amend or discontinue, any fringe benefit plan, program or practice or any other employee benefit plan of any nature whatsoever, except as expressly provided otherwise in this Article 6 or (c) conferring upon any Hired Employee any rights or remedies under this Agreement (including under this Article 6).
ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATIONS
7.1 Conditions to Each Party’s Obligation. The respective obligation of each party to effect the transactions contemplated by this Agreement is subject to the satisfaction or waiver, on or prior to the Closing Date, of the following conditions:
(a) No Injunction. No temporary or permanent injunction or other order issued by any court of competent jurisdiction prohibiting consummation of the transactions contemplated under this Agreement shall be in effect.
(b) No Proceedings. At the Closing, there shall not be pending any Proceeding in which any Governmental Entity of competent jurisdiction seeks to make any of the material transactions contemplated hereby illegal or otherwise restrain in any material respect or prohibit consummation of any of the material transactions contemplated hereby.
7.2 Conditions to Obligations of Buyer. The obligations of Buyer to purchase the Acquired Assets and to take the other actions required to be taken by Buyer at the Closing are subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):
(a) Accuracy of Representations. The representations and warranties of Lee (subject to the qualifications in the preamble paragraph to Article 3) set forth in this Agreement (i) which are qualified by a “Business Material Adverse Effect” qualification shall be true and correct in all respects as so qualified at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date, and (ii) which are not qualified by a “Business Material Adverse Effect” qualification shall be true and correct at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date, except for such failures to be true and correct as would not have, in the aggregate, a Business Material Adverse Effect; provided, however, that with respect to clauses (i) and (ii) hereof, representations and warranties that are made as of a particular date or period shall be true and correct (in the manner set forth in clauses (i) or (ii), as applicable) only as of such date or period,
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and Buyer shall have received a certificate to such effect, signed on behalf of Lee by its chief executive officer or its chief financial officer.
(b) Lee Performance. All of the covenants and obligations that Lee is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects. Buyer shall have received a certificate to such effect, signed on behalf of Lee, by its chief executive officer or its chief financial officer.
7.3 Conditions to Obligations of Lee. The obligations of Lee to sell the Acquired Assets and to take the other actions required to be taken by Lee at the Closing are subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Lee, in whole or in part):
(a) Accuracy of Representations. The representations and warranties of Buyer set forth in this Agreement (i) which are qualified by the words “materially impair or delay the consummation of the transactions contemplated hereby” shall be true and correct in all respects as so qualified at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date; and (ii) which are not qualified by the words “materially impair or delay the consummation of the transactions contemplated hereby” shall be true and correct at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date, except for such failures to be true and correct as would not materially impair or delay the consummation of the transactions contemplated hereby; provided, however, that, with respect to clauses (i) and (ii) hereof, representations and warranties that are made as of a particular date or period shall be true and correct (in the manner set forth in clauses (i) and (ii) as applicable) only as of such date or period, and Lee shall have received a certificate to such effect, signed on behalf of Buyer by its chief executive officer or its chief financial officer.
(b) Buyer’s Performance. All of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been performed and complied with in all material respects. Lee shall have received a certificate to such effect, signed on behalf of Buyer, by its chief executive officer or its chief financial officer.
ARTICLE 8
TERMINATION
8.1 Termination. This Agreement may be terminated at any time prior to the Closing Date:
(a) by mutual written consent of Lee and Buyer;
(b) by Lee or Buyer if any Governmental Entity shall have issued an order, decree or ruling permanently enjoining or prohibiting the consummation of the transactions contemplated under this Agreement and such order, decree or ruling shall have become final and
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nonappealable (but only if the party seeking to terminate pursuant to this clause (b) shall have used best efforts to oppose and remove such order, decree or ruling);
(c) by Lee or Buyer if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before the later of September 30, 2006, or such later date as Lee and Buyer may agree upon (the “End Date”);
(d) by Lee, if Buyer shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would result in a failure of a condition set forth in Section 7.3(a) or 7.3(b) and cannot be cured by the End Date, provided that Lee shall have given Buyer written notice, delivered at least fifteen (15) days prior to such termination, notifying Buyer of such breach or failure to perform;
(e) by Buyer, if Lee Enterprises or Lee Procurement shall have breached or failed to perform in any material respect any of their representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would result in a failure of a condition set forth in Section 7.2(a) or 7.2(b) and cannot be cured by the End Date, provided Buyer shall have given Lee written notice, delivered at least fifteen (15) days prior to such termination, notifying Lee of such breach or failure to perform; and
(f) by Buyer, if entitled to do so under Section 5.11.
8.2 Effect of Termination. If this Agreement is terminated under Section 8.1, this Agreement shall immediately become void and have no effect, without any liability or obligation on the part of Lee or Buyer, other than the provisions of Section 3.17. Section 4.4. Section 5.2(b), this Section 8.2 and Article 10. Notwithstanding the foregoing, nothing in this section shall relieve Buyer or Lee for any willful breach of such party’s representations, warranties, covenants or agreements in this Agreement.
ARTICLE 9
INDEMNIFICATION; REMEDIES
9.1 Survival. All representations and warranties contained herein, and all representations and warranties contained in the certificates delivered pursuant to this Agreement and any other certificate or document delivered pursuant to this Agreement shall survive the Closing on the last day of the eighteenth (18th) month following the anniversary of the Closing Date, except that the representations and warranties contained in Sections 3.2(a), 3.2(b), 3.12, 3.17, 4.2(a), 4.2(b), 4.4 and 4.5 shall terminate on the fifth anniversary of the Closing Date.
9.2 Indemnification By Buyer. Subject to the limitations set forth herein, from and after the Closing, Buyer shall indemnify, defend and hold harmless Lee Enterprises and Lee Procurement and their respective Affiliates and Representatives (collectively, the “Lee Indemnified Parties”), from and against all judgments, settlements, demands, claims, actions or causes of action, deficiencies, assessments, Liabilities, losses, damages, interest, fines, penalties,
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costs and expenses (including reasonable legal, accounting and other costs and expenses incurred in connection with investigating, defending, settling or satisfying any and all demands, claims, causes of action, Proceedings, deficiencies, assessments, judgments or appeals, and in seeking indemnification therefor pursuant to this Section 9.2) (collectively, “Losses”) arising out of, resulting from, related to or associated with:
(a) Any breach of any representation or warranty made by the Buyer contained in this Agreement; or
(b) Any non-fulfillment or breach of any covenant or agreement of the Buyer in this Agreement; or
(c) Any Assumed Liabilities; or
(d) Any Liability to the extent relating to and arising out of the operation of the Business following the Closing, excluding, however, all Excluded Liabilities.
9.3 Indemnification By Lee. Subject to the limitations set forth herein, from and after the Closing, Lee shall indemnify, defend and hold harmless Buyer and its Affiliates and their respective stockholders, officers, directors, employees, Affiliates, agents and Representatives (collectively, the “Buyer Indemnified Parties”), from and against all Losses arising out of, resulting from, related to or associated with:
(a) Any breach of any representation or warranty made by Lee contained in this Agreement (without regard to the materiality thereof); or
(b) Any nonfulfillment or breach of any covenant or agreement of Lee in this Agreement; or
(c) Any Excluded Liabilities.
9.4 Notice and Defense of Claims. Each party entitled to indemnification under this Article 9 (the “Indemnified Party”) shall give notice to the party required to provide such indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claims as to which indemnity is sought, and shall permit the Indemnifying Party to assume the defense of any such claim or Proceeding resulting therefrom and to consent to the entry of any judgment or the entry into any settlement with respect thereto; provided, however, that the Indemnified Party may participate in such defense at such party’s expense; provided, further, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article 9 except to the extent that the Indemnifying Party has been adversely affected by such failure. The Indemnified Party shall furnish such information regarding itself or the claim in question as the Indemnifying Party may reasonably request in writing and shall otherwise cooperate with the Indemnifying Party to such extent as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom.
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9.5 Procedure for Indemnification — Third Party Claims.
(a) Promptly after receipt by an Indemnified Party under Section 9.2 or Section 9.3 of notice of the commencement of any Proceeding against it, such Indemnified Party will, if a claim is to be made against an Indemnifying Party under such Section, give notice to the Indemnifying Party of the commencement of such claim, but the failure to notify the Indemnifying Party will not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party, except to the extent that the Indemnifying Party demonstrates that the defense of such action is prejudiced by the Indemnified Party’s failure to give such notice.
(b) If any Proceeding referred to in Section 9.5(a) is brought against an Indemnified Party and it gives notice to the Indemnifying Party of the commencement of such Proceeding, the Indemnifying Party will be entitled to participate in such Proceeding and, to the extent that it wishes (unless (x) the Indemnifying Party is also a party to such Proceeding and the Indemnified Party determines in good faith that joint representation would be inappropriate, or (y) the Indemnifying Party fails to provide reasonable assurance to the Indemnified Party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the Indemnified Party and, after notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such Proceeding, the Indemnifying Party will not, as long as it diligently conducts such defense, be liable to the Indemnified Party under this Article 9 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the Indemnified Party in connection with the defense of such Proceeding, other than reasonable costs of investigation. If the Indemnifying Party assumes the defense of a Proceeding, (i) it will be conclusively established for purposes of this Agreement that the claims made in that Proceeding are within the scope of and subject to indemnification, regardless of the amount; (ii) no compromise or settlement of such claims may be effected by the Indemnifying Party without the Indemnified Party’s consent unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party; and (iii) the Indemnified Party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an Indemnifying Party of the commencement of any Proceeding and the Indemnifying Party does not, within thirty (30) days after the Indemnified Party’s notice is given, give notice to the Indemnified Party of its election to assume the defense of such Proceeding, the Indemnifying Party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the Indemnified Party of such Proceeding, in each case, with the consent of the Indemnifying Party (not to be unreasonably withheld, delayed or conditioned).
9.6 Procedure for Indemnification — Other Claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought.
9.7 Limitations on Indemnification.
(a) No claim for indemnification under Section 9.2(a) or Section 9.3(a) for breach of any representation or warranty shall be valid unless made within the applicable survival period as set forth Section 9.1.
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(b) No party shall be obligated to indemnify any other party or parties under Section 9.2(a) or Section 9.3(a) unless the claimant’s aggregate amount of Losses as to which a right of indemnification is provided under Section 9.2(a) or Section 9.3(a) shall exceed $500,000, in which event all Losses above $500,000 shall be indemnifiable; provided that Buyer’s right to recover under Section 9.3(a) for breach of any representation or warranty contained in Sections 3.2(a), 3.2(b), 3.12 or 3.17 shall not be subject to such limitation.
(c) No individual breach of any such representation or warranty shall be deemed to have occurred unless the actual Loss incurred as a result thereof is in excess of $2,000. In no event shall the aggregate liability of Lee pursuant to Section 9.3 (a) exceed $10,500,000; provided that Buyer’s right to recover under Section 9.3(a) for breach of any representation or warranty contained in Sections 3.2(a), 3.2(b), 3.12 or 3.17 shall not be subject to such limitation. In no event shall the aggregate liability of Lee or Buyer pursuant to this Agreement exceed the Purchase Price.
(d) If Buyer acquires Knowledge prior to Closing that any representation, warranty, covenant or agreement of Lee contained in this Agreement or the Lee Disclosure Schedules (including Updated Schedules pursuant to Section 5.11) or any of the Schedules attached hereto has been breached, is false or requires modification or amendment to be correct, Buyer shall provide Lee with written notice as soon as practicable, but in any event within five (5) Business Days after acquiring such Knowledge. Buyer shall have no right or remedy after the Closing with respect to such inaccuracy or breach and shall be deemed to have waived its rights to indemnification in respect thereof and any Loss in respect thereof shall be disregarded for purposes of the deductible contained in Section 9.7(b).
(e) No party shall be liable under Article 9 for any (i) Loss relating to any matter to the extent that there is included in the calculation of Effective Time Working Capital a specific liability or reserve relating to such matter, but only to the extent of such reserve, (ii) consequential or punitive Loss (other than a consequential or punitive Loss payable in connection with a third-party claim), or (iii) Loss based on a claim for lost profits (other than lost profits payable in connection with a third-party claim).
9.8 Exclusive Remedy. Subject to the applicability of Article 8 hereof, except for remedies that cannot be waived as a matter of Law including claims under applicable state and federal securities laws and except for covenants contained herein which by their terms are to be performed at or after the Closing and Section 10.1, the indemnification obligations under this Article 9 shall be the sole and the exclusive remedy of the parties hereto with respect to any breach of any representation, warranty, covenant or agreement under this Agreement by any party hereto or any certificate delivered in connection herewith, except that, subject to Article 8 hereof, nothing herein or in any such certificate shall be construed or interpreted as limiting or impairing the rights or remedies that the parties hereto may have at equity for injunctive relief or specific performance of this Agreement.
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ARTICLE 10
GENERAL PROVISIONS
10.1 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereunder, including all fees and expenses of agents, representatives, counsel and accountants incurred prior to Closing. In the event of termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by another party.
10.2 Notices. All notices, requests, claims and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally or by overnight courier to the parties at the following addressed (or at such other address for a party as shall be specified by notice from such party):
| If to Lee, to: | ||
| Lee Enterprises, Incorporated | ||
| 201 N. Harrison Street, Ste. 600 | ||
| Davenport, IA 52801-1939 | ||
| Attention: |
Mary E. Junck, | |
| Chairman, President & CEO and | ||
| Karen J. Guest, Esq. | ||
| Vice President and Chief Legal Officer | ||
| Phone: |
(563)323-2100 | |
| Telecopy: |
(563)323-9608 | |
| with a copy to: | ||
| Lane & Waterman LLP | ||
| 220 N. Main Street, Ste. 600 | ||
| Davenport, IA 52801-1939 | ||
| Attention: |
C. Dana Waterman III, Esq. | |
| Edmund H. Carroll, Esq. | ||
| Phone: |
(563) 324-3246 | |
| Telecopy: |
(563)324-1616 | |
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| (a) | If to Buyer, to: |
| Sound Publishing, Inc. |
| c/o Black Press Ltd. |
| 818 Broughton Street |
| Victoria, B.C. V8W 1E4 |
| Attention: David Black, President |
| Phone: (250)480-3220 |
| Telecopy: (250)480-3219
with a copy to: |
| Patterson Adams, Barristers & Solicitors |
| 402-707 Fort Street |
| Victoria, British Columbia, V8W 2T6 |
| Attention: Les Jamieson |
| Phone: (250)360-1991 |
| Telecopy: (250)360-2979 |
10.3 References. For purposes of this Agreement, references in this Agreement to specific Laws or to specific provisions of Laws shall include all rules and regulations promulgated thereunder. Any statute defined or referred to herein or in any agreement or instrument referred to herein shall mean such statute as from time to time amended, modified or supplemented, including by succession of comparable successor statutes.
10.4 Interpretation. When a reference is made in this Agreement to a Section, Exhibit or Disclosure Schedule or other Schedule, such reference shall be to a Section of, or an Exhibit or Schedule to or related to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the word “include,” “includes” or “including” is used in this Agreement, it shall be deemed to be followed by the words “without limitation.”
10.5 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
10.6 Entire Agreement; Third-Party Beneficiaries. This Agreement and the other agreements referred to herein constitute the entire agreement (and supersede each prior agreement and understanding, whether written or oral) among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto. The rights of Buyer Indemnified Parties and Lee Indemnified Parties under Article 9 may be asserted by Buyer and Lee, respectively.
10.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware regardless of any Laws that might otherwise govern under applicable principles of conflicts of laws thereof.
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10.8 Assignment. Neither this Agreement nor any right, interest or obligation hereunder shall be assigned, in whole or in part, by operation of law or otherwise, by any party without the prior written consent of the other party. Subject to the preceding sentence of this Section 10.8, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective legal successors and permitted assigns.
10.9 Nondisclosure. Except as may be required by applicable Law or the requirements of the New York Stock Exchange, for a period of three (3) years following the Closing, Lee will (and will cause its Subsidiaries to) take commercially reasonable steps comparable to those steps Lee takes with regard to its own similar confidential information to protect the confidentiality of all confidential information related to the Business in the possession of Lee and its Subsidiaries (other than information which is or becomes known to the public other than through a breach of this Section by Lee).
10.10 Amendments; Waiver. This Agreement may not be amended or modified except by written agreement of the parties. No breach of any covenant, agreement, representation or warranty made herein shall be deemed waived unless expressly waived in writing by the party who might assert such breach.
10.11 Enforcement. The parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with its terms or were otherwise breached. Each party shall be entitled to injunctive relief to prevent any breach of this Agreement and to enforce this Agreement specifically in any court of the State of Delaware or any court of the United States located in the State of Delaware (in addition to any other remedy to which such party is entitled at law or in equity). In addition, each party hereby:
(a) submits itself to the personal jurisdiction of (i) the courts of the State of Delaware, and (ii) the United States District Court for the District of Delaware with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute;
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction or venue by motion or other request for leave from any such court; and
(c) agrees that it will not bring any action relating to this Agreement (or any transactions contemplated by this Agreement) in any court order than such courts referred to above.
10.12 Severability. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable Law, but if any provision is held invalid, illegal or unenforceable under applicable Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
[SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
| SOUND PUBLISHING, INC. | ||
| By: | /s/ David Black | |
| Name: | David Black | |
| Title: | Director | |
| LEE ENTERPRISES INCORPORATED | ||
| By: | /s/ Carl G. Schmidt | |
| Name: | Carl G. Schmidt | |
| Title: | Vice President Chief Financial Officer and Treasurer | |
| LEE PROCUREMENT SOLUTIONS CO. | ||
| By: | /s/ Carl G. Schmidt | |
| Name: | Carl G. Schmidt | |
| Title: | President | |
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EXHIBIT 2.4
ASSET PURCHASE AGREEMENT
by
and
among
LEE ENTERPRISES, INCORPORATED,
LEE PROCUREMENT SOLUTIONS CO.
and
TARGET MEDIA PARTNERS OPERATING COMPANY, LLC
Dated September 5, 2006
TABLE OF CONTENTS
| Page | ||||
| ARTICLE 1 DEFINITIONS |
1 | |||
| 1.1 |
Certain Definitions | 1 | ||
| 1.2 |
Other Definitions | 3 | ||
| ARTICLE 2 SALE OF THE ACQUIRED ASSETS; CLOSING |
5 | |||
| 2.1 |
Purchase and Sale of the Acquired Assets | 5 | ||
| 2.2 |
Assumption of Liabilities | 5 | ||
| 2.3 |
Consideration for the Acquired Assets | 7 | ||
| 2.4 |
Further Assurances | 9 | ||
| 2.5 |
Nontransferable Business Contracts | 9 | ||
| 2.6 |
Closing | 10 | ||
| 2.7 |
Closing Obligations | 10 | ||
| ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF LEE |
12 | |||
| 3.1 |
Organization; Qualification; Authority | 12 | ||
| 3.2 |
Corporate Authority Relative to this Agreement; No Violation | 13 | ||
| 3.3 |
Business Financial Statements | 14 | ||
| 3.4 |
No Undisclosed Liabilities | 14 | ||
| 3.5 |
Compliance with Law; Permits | 15 | ||
| 3.6 |
Environmental Laws and Regulations | 15 | ||
| 3.7 |
Employee Benefit Plans | 16 | ||
| 3.8 |
Absence of Certain Changes or Events | 17 | ||
| 3.9 |
Investigations; Litigation | 17 | ||
| 3.10 |
Tax Matters | 18 | ||
| 3.11 |
Labor Matters | 19 | ||
| 3.12 |
Title to Acquired Assets | 19 | ||
| 3.13 |
Intellectual Property | 19 | ||
| 3.14 |
Real Property | 20 | ||
| 3.15 |
Material Contracts | 21 | ||
| 3.16 |
Transactions with Affiliates | 21 | ||
| 3.17 |
Finders or Brokers | 21 | ||
| 3.18 |
No Additional Representations | 21 | ||
| ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER |
22 | |||
| 4.1 |
Organization | 22 | ||
| 4.2 |
Corporate Authority Relative to this Agreement; No Violation | 22 | ||
| 4.3 |
Investigations; Litigation | 23 | ||
| 4.4 |
Finders or Brokers | 23 | ||
| 4.5 |
Solvency | 23 | ||
| 4.6 |
Available Funds | 24 | ||
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TABLE OF CONTENTS
(Continued)
| Page | ||||
| ARTICLE 5 COVENANTS |
24 | |||
| 5.1 |
Conduct of the Business by Lee | 24 | ||
| 5.2 |
Access to Information; Confidentiality | 26 | ||
| 5.3 |
Mutual Efforts | 26 | ||
| 5.4 |
Tax Matters | 28 | ||
| 5.5 |
Public Announcements | 29 | ||
| 5.6 |
Transaction Costs | 29 | ||
| 5.7 |
Retention of and Access to Records | 29 | ||
| 5.8 |
Notifications | 30 | ||
| 5.9 |
Payments | 30 | ||
| 5.10 |
Cooperation in Post-Closing Litigation | 30 | ||
| 5.11 |
Updating of Lee Disclosure Schedules | 30 | ||
| ARTICLE 6 EMPLOYMENT MATTERS |
31 | |||
| 6.1 |
Acquired Employees | 31 | ||
| 6.2 |
Welfare Plans | 31 | ||
| 6.3 |
Severance and Participation Agreement Liabilities | 32 | ||
| 6.4 |
Savings Plans | 33 | ||
| 6.5 |
Vacation | 33 | ||
| 6.6 |
General | 33 | ||
| ARTICLE 7 CONDITIONS PRECEDENT TO OBLIGATIONS |
33 | |||
| 7.1 |
Conditions to Each Party’s Obligation | 33 | ||
| 7.2 |
Conditions to Obligations of Buyer | 34 | ||
| 7.3 |
Conditions to Obligations of Lee | 34 | ||
| ARTICLE 8 TERMINATION |
35 | |||
| 8.1 |
Termination | 35 | ||
| 8.2 |
Effect of Termination | 36 | ||
| ARTICLE 9 INDEMNIFICATION; REMEDIES |
36 | |||
| 9.1 |
Survival | 36 | ||
| 9.2 |
Indemnification By Buyer | 36 | ||
| 9.3 |
Indemnification By Lee | 37 | ||
| 9.4 |
Notice of Claims | 37 | ||
| 9.5 |
Procedure for Indemnification — Third Party Claims | 37 | ||
| 9.6 |
Procedure for Indemnification — Other Claims | 38 | ||
| 9.7 |
Limitations on Indemnification | 38 | ||
| 9.8 |
Exclusive Remedy | 39 | ||
| ARTICLE 10 GENERAL PROVISIONS |
40 | |||
| 10. 1 |
Expenses | 40 | ||
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TABLE OF CONTENTS
(Continued)
| Page | ||||
| 10.2 |
Notices | 40 | ||
| 10.3 |
References | 41 | ||
| 10.4 |
Interpretation | 41 | ||
| 10.5 |
Counterparts | 41 | ||
| 10.6 |
Entire Agreement; Third-Party Beneficiaries | 41 | ||
| 10.7 |
Governing Law | 41 | ||
| 10.8 |
Assignment | 41 | ||
| 10.9 |
Nondisclosure | 42 | ||
| 10.10 |
Amendments; Waiver | 42 | ||
| 10.11 |
Enforcement | 42 | ||
| 10.12 |
Severability | 42 |
EXHIBITS:
| EXHIBIT A |
Bill of Sale | |
| EXHIBIT B |
Assignment and Assumption Agreement | |
| EXHIBIT C |
Nickel Ads’ Assignment | |
| EXHIBIT D |
Transition Services Agreement | |
| SCHEDULES: | ||
| SCHEDULE A |
Acquired Assets | |
| SCHEDULE B |
Acquired Publications | |
| SCHEDULE C |
Intellectual Property and Other Intangibles | |
| SCHEDULE D |
Excluded Assets | |
| SCHEDULE E |
Current Assets | |
| SCHEDULE F |
Current Liabilities | |
| SCHEDULE G |
Allocation of Purchase Price | |
| SCHEDULE H |
New Welfare Plans | |
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (“Agreement”) is made as of September 5, 2006, by and among TARGET MEDIA PARTNERS OPERATING COMPANY, LLC, a Delaware limited liability company (“Buyer”), LEE ENTERPRISES, INCORPORATED, a Delaware corporation (“Lee Enterprises”), and LEE PROCUREMENT SOLUTIONS CO., an Iowa corporation (“Lee Procurement” and, together with Lee Enterprises, “Lee”).
RECITALS
WHEREAS, Lee Enterprises owns all the Assets listed on Schedule A hereto, which it uses to conduct the business of operating the newspapers and publications listed on Schedule B hereto (the “Acquired Publications”), and is subject to certain liabilities relating to the business and operations of the Acquired Publications (collectively, the “Business”), and Lee Procurement is the owner of certain Intellectual Property (as defined below) and other intangibles listed on Schedule C hereto;
WHEREAS, at the Closing (as defined below), Lee desires to sell to Buyer, and Buyer desires to purchase from Lee, the Acquired Assets (as defined below), and in connection therewith, Buyer has agreed to assume certain liabilities relating to the Business, all upon the terms and subject to the conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows.
ARTICLE 1
DEFINITIONS
1.1 Certain Definitions. For purposes of this Agreement, the following terms have the meanings specified or referred to in this Section 1.1:
“Acquired Assets” — the Assets set forth on Schedule A hereto.
“ADEA” — the Age Discrimination in Employment Act of 1967, as amended.
“Affiliates” — as to any Person, any other Person which, directly or indirectly, Controls, or is controlled by, or is under common control with, such Person.
“Allowable Lost Profits” — profits which were reasonably certain to have been realized but for the occurrence of the breach and which can be ascertained and measured with reasonable certainty, less any damage which the indemnifying party proves could have been reasonably avoided.
“Ancillary Agreements” — the Bill of Sale, Assignment and Assumption Agreement, Transition Services Agreement, Real Property Deeds and the instruments described in clauses (iii), (iv), (v), (vi), (vii), (ix), (x), (xi) and (xiii) of Section 2.7(a) and clauses (ii) and (vi) of Section 27(b).
“Assets” — all properties, assets, rights (contractual or otherwise) and claims, whether personal, tangible or intangible.
“Business Day” — any day other than a Saturday, Sunday or a day on which the banks in New York or California are authorized by law or executive order to be closed.
“Closing Date” — the date and time as of which the Closing actually takes place.
“Consequential Damages” — damages that do not arise as an immediate, natural, and probable result of the breach, but arise from the interposition of an additional cause, without which there would have been no harmful result, and which could have been reasonably prevented by cover or otherwise.
“Control” (including, with its correlative meanings, “controlled by” and “under common control with”) — the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of a Person, whether through the ownership of securities or partnership or other ownership interests, by Contract or otherwise.
“Effective Time” shall mean the close of business on September 30, 2006; provided, however, that if the Closing does not occur on October 2, 2006, the “Effective Time” shall be as agreed by the parties or, if the parties do not agree, shall be close of business on the Business Day before the Closing Date.
“ERISA” — all compensation or employee benefit plans, programs, policies, agreements or other arrangements, whether or not “employee benefit plans” within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended.
“Excluded Assets” — the Assets set forth on Schedule D hereto, whether such Assets are Assets of the Acquired Publications, Lee Enterprises or Lee Procurement.
“GAAP” — United States generally accepted accounting principles.
“Governmental Entity” — any Federal, state or local government or any court, administrative agency, bureau, commission, department or other authority of any domestic or foreign government or any arbitrator in any case that has jurisdiction over an applicable party or any of its properties or Assets.
“Income Taxes” — any income, franchise or similar Taxes.
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“IRC” — the Internal Revenue Code of 1986, as amended, or any successor law.
“IRS” — the United States Internal Revenue Service or any successor agency, and, to the extent relevant, the United States Department of the Treasury.
“Knowledge” — (i) with respect to Buyer, the actual knowledge (without duty to investigate) of any of James Sington, John Humphreville, Mark Schiffmacher or Susan Humphreville; and (ii) with respect to Lee, the actual knowledge (without duty to investigate) of any of the individuals listed on Section 10.3(a) of the Lee Disclosure Schedules.
“Liability” — any direct or indirect debt, obligation or liability of any kind or nature, whether accrued or fixed, absolute or contingent, determined or determinable, matured or unmatured, and whether due or to become due, asserted or unasserted or known or unknown.
“Person” — an individual, a corporation, a partnership, a limited liability company or partnership, an association, a trust or any other entity, group (as such term is used in Section 13 of the Securities and Exchange Act of 1934, as amended) or organization, including a Governmental Entity, and any permitted successors and assigns of such person.
“Prime Rate” — the rate of interest publicly announced from time to time by Bank of America, National Association, as its “prime rate” of interest per annum.
“Proceeding” — any action, inquiry, proceeding, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Entity.
“Representative” — with respect to a particular Person, any director, officer, employee, agent, consultant or other representative of such Person, including legal counsel, accountants, financial advisors and lenders.
“SEC” — the United States Securities and Exchange Commission.
“Subsidiary” — any corporation, limited liability company or partnership, association, trust or other form of legal entity of which (i) more than 50% of the outstanding voting securities are on the date hereof directly or indirectly owned by any party; or (ii) such party or any subsidiary of such party is a general partner (excluding partnerships in which such party or any subsidiary of such party does not have a majority of the voting interests in such partnership).
1.2 Other Definitions. The following terms are defined in the sections indicated:
| Term |
Section | |
| Acquired Publications |
Recitals | |
| Agreement |
Preamble | |
| Assignment and Assumption Agreement |
2.7(a)(ii) | |
| Assumed Contract |
2.5 |
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| Term |
Section | |
| Assumed Liabilities |
2.2(b) | |
| Benefit Plan(s) |
3.7(a) | |
| Bill of Sale |
2.7(a)(i) | |
| Business |
Recitals | |
| Business Balance Sheet |
3.3 | |
| Business Employee(s) |
3.7(a) | |
| Business Financial Statements |
3.3 | |
| Business Material Adverse Effect |
3.1 | |
| Business Material Contract |
3.15(a) | |
| Buyer |
Preamble | |
| Buyer Approvals |
4.2(b) | |
| Buyer Disclosure Schedules |
Article 4 | |
| Buyer Indemnified Parties |
9.3 | |
| Buyer Severance Amount |
6.3(b) | |
| Closing |
2.6 | |
| Closing Working Capital |
2.3(b)(ii) | |
| Confidentiality Agreement |
5.2(b) | |
| Contract |
2.5 | |
| Credit Agreement |
4.6 | |
| Eligible Hired Employee |
6.3(b) | |
| End Date |
8.1(c) | |
| Environmental Law |
3.6(b) | |
| Excluded Liabilities |
2.2(c) | |
| Hazardous Substance |
3.6(c) | |
| Hired Employees() |
6.1(a) | |
| HSR Act |
3.2(b) | |
| Indemnified Party |
9.4 | |
| Indemnifying Party |
9.4 | |
| Independent Accountant |
2.3(b)(iv) | |
| Intellectual Property |
3.13 | |
| Laws |
3.5(a) | |
| Lee |
Preamble | |
| Lee Approvals |
3.2(b) | |
| Lee Disclosure Schedules |
Article 3 | |
| Lee Enterprises |
Preamble | |
| Lee Indemnified Parties |
9.2 | |
| Lee Permits |
3.5(b) | |
| Lee Procurement |
Preamble | |
| Lien |
3.2(c) | |
| Losses |
9.2 | |
| Material Contract |
3.15(a) | |
| New Welfare Plans |
6.2 |
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| Term |
Section | |
| Notice of Disagreement |
2.3(b)(iv) | |
| Objectionable Item |
5.11 | |
| Old Plans |
6.2 | |
| Permitted Lien |
3.2(c) | |
| Purchase Price |
2.3(a) | |
| Regulatory Law |
5.3(d) | |
| Section 5.1 Contracts |
5.1(b)(iv) | |
| Statement of Working Capital |
2.3(b)(ii) | |
| Tax Contest |
5.4 | |
| Taxes |
3.10(b) | |
| Tax Return |
3.10(b) | |
| Termination Date |
5.1 (a) | |
| Transfer Taxes |
5.6 | |
| Transition Services Agreement |
2.7(a)(vii) | |
| Updated Schedules |
5.11 | |
| Working Capital |
2.3(b)(i) |
ARTICLE 2
SALE OF THE ACQUIRED ASSETS; CLOSING
2.1 Purchase and Sale of the Acquired Assets. Subject to the terms and conditions of this Agreement, at the Closing, but effective as of the Effective Time, Lee Enterprises and Lee Procurement will sell, convey, transfer, assign and deliver to Buyer all of their right, title and interest in and to the Acquired Assets.
2.2 Assumption of Liabilities.
(a) Assumption. Upon the terms and subject to the conditions set forth herein, at the Closing and effective as of the Effective Time, Buyer shall assume from Lee (and therefore agree to pay, perform and discharge), and Lee shall irrevocably convey, transfer and assign to Buyer, all of the Assumed Liabilities.
(b) Definition of Assumed Liabilities. For all purposes of and under this Agreement, the term “Assumed Liabilities” shall mean, refer to and include all of the Liabilities of Lee that arose out of or relate to the operation of the Business or the Acquired Assets (but excluding the Excluded Liabilities), including:
(i) Liabilities of Lee and its Affiliates under all Contracts (including leases of real property, the Assignment Resulting in Change of Ownership regarding that portion of the Spokane, Washington market and pricing therefor set forth in Appendix A under the Media Audit Lease Agreement dated March 2, 2006 between Lee Enterprises and International Demographics, Inc., the Linen Service Agreement with American Linen dated February 15, 2006
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and the Equipment Lease Agreement dated April 25, 2006 between Lee Enterprises and Bank of the West with Addendum to the extent of the “Additional Commitment” involving equipment located at 13026 West McFarlane Road, Building 2, Airway Heights, Washington supplied by Kodak Graphic Communications Company and Southern Lithoplate and referred to in Section 3.4 of the Lee Disclosure Schedules, all of which have been previously disclosed to Buyer) included in or otherwise related to the Acquired Assets (other than Liabilities and obligations relating to breaches occurring prior to the Closing Date);
(ii) All current Liabilities of Lee reflected in the Statement of Working Capital (as provided in Section 2.3(b)(ii)), as of the Effective Time to the extent such Liabilities are reflected on the Business Balance Sheet or incurred after June 30, 2006 in the ordinary course of the Business and in connection with the operation of the Business and disclosed, but not including Excluded Liabilities or any Liabilities related to the Excluded Assets;
(iii) Liabilities for Transfer Taxes that are the responsibility of Buyer pursuant to Section 5.6 hereof;
(iv) Liabilities of Buyer relating to the Hired Employees under Article 6, including (a) the Participation Agreement between Lee Enterprises and Judy Olson dated April 30, 2006, and any other such agreement pursuant to Section 5.1 (b)(i)(B) and (b) the Buyer Severance Amount for any Eligible Hired Employee pursuant to Section 6.3(b) hereof.
(c) Definition of Excluded Liabilities. Notwithstanding anything to the contrary set forth in this Section 2.2 or elsewhere in this Agreement, Buyer shall not assume, and Lee agrees that Buyer shall not be liable or otherwise responsible for, the following Liabilities, except to the extent provided in this Agreement or otherwise agreed to by the parties in writing and included in the Statement of Working Capital as provided in Section 2.3(b)(ii) (the Liabilities referred to in clauses (i) through (vii) of this Section 2.2(c), collectively, the “Excluded Liabilities”):
(i) Liabilities under any Benefit Plan which is retained by Lee, which retained Benefit Plans are set forth on Section 2.2(c)(i) of the Lee Disclosure Schedules (excluding the Liabilities described in clause (iv) of Section 2.2(b);
(ii) Liabilities of the Business in respect of transaction costs payable by Lee pursuant to Section 5.6 hereof;
(iii) Liabilities of the Business occurring prior to the Closing Date for any amounts owed to Lee pursuant to any note or account payable with any division of Lee or any Affiliate thereof;
(iv) Liabilities of Lee with respect to indebtedness for borrowed money (but excluding the equipment lease referred to in Section 2.2(b)(i) hereof);
(v) Liabilities of Lee owed to Buyer (or, pursuant to Article 9, any Buyer Indemnified Parties) as a result of any breach of this Agreement by Lee;
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(vi) Liabilities for Taxes of Lee, except as otherwise provided in this Agreement;
(vii) Liabilities of Lee not arising out of or relating to the operation of the Business;
(viii) Liabilities arising prior to the Closing Date the existence of which would constitute a breach of the warranty set forth in Section 3.4;
(ix) Tort Liabilities arising prior to the Closing Date;
(x) Liabilities under all employment agreements arrangements or other Contracts between Lee and any Business Employee, including any obligation to make payments to any Business Employee as set forth in any employment agreement or other Contract between Lee and any such Business Employee, except as specifically provided in this Section 2.2;
(xi) Liabilities under the Equipment Lease dated April 25, 2006 between Lee Enterprises and Bank of the West except to the extent of the “Additional Commitment” involving equipment located at 13026 West McFarlane Road, Building 2, Airway Heights, Washington supplied by Kodak Graphic Communications Company and Southern Lithoplate and referred to in Section 3.4 of the Lee Disclosure Schedules; and
(xii) Liabilities associated with corporate allocations to health and welfare which are Excluded Assets.
2.3 Consideration for the Acquired Assets.
(a) Purchase Price. Subject to the adjustments in Section 2.3(b), the aggregate consideration (the “Purchase Price”) for the Acquired Assets will be (i) Eighteen million five hundred thousand ($18,500,000.00) in cash and (ii) the Assumed Liabilities assumed by Buyer pursuant to Section 2.2 hereof.
(b) Working Capital Adjustment.
(i) For all purposes of and under this Agreement, the term “Working Capital” shall mean (x) the value of the current assets of the categories described on Schedule E hereto of the Business and included in the Acquired Assets, minus (y) the value of the current liabilities of the categories described on Schedule F hereto of the Business and included in the Assumed Liabilities.
(ii) As promptly as practicable, but in any event within sixty (60) calendar days following the Closing, Lee shall cause to be prepared and delivered to the Buyer a statement (the “Statement of Working Capital”) setting forth the Working Capital as of the
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Effective Time (the “Closing Working Capital”). The Closing Working Capital will reflect the principle that all expense and revenue arising from the operation of the Business prior to the close of business as of the Effective Time shall be for the account of Lee and those arising after the close of business after the Effective Time shall be for the account of Buyer. The Statement of Working Capital will be prepared, to the extent practicable, in accordance with GAAP and past practice, except that (A) no cash or cash equivalents shall be included as current assets, (B) no transfer costs and expenses or Transfer Taxes incurred in connection with the transactions contemplated hereby that are the responsibility of a party hereto pursuant to Section 5.6 hereof will be included, (C) no Excluded Liabilities will be included, (D) no Excluded Assets will be included, (E) no Tax asset or Tax liability relating to Income Taxes will be included, (F) the Severance Amount of each Eligible Hired Employee and the Participation Agreement between Lee Enterprises and Judy Olson dated April 30, 2006, and any other such agreement pursuant to Section 5.1(b)(i)(B) shall not be included, (G) no intercompany charge payable by the Business to Lee Procurement for newsprint and other services shall be included as a current liability, and (H) the Business Financial Statements are summary in nature and do not include the statement of cash flows and notes and related disclosures required by GAAP.
(iii) Subject to Section 2.3(b)(iv) hereof, within twenty (20) calendar days following delivery of the Statement of Working Capital pursuant to Section 2.3(b)(ii) hereof, (A) Lee shall pay to Buyer the amount, if any, by which $0 exceeds the Closing Working Capital reflected in the Statement of Working Capital, or (B) Buyer shall pay to Lee the lesser of (a) $875,000 or (b) the amount, if any, by which the Closing Working Capital reflected in the Statement of Working Capital exceeds $0. Any and all payments made pursuant to this Section 2.3(b)(iii) shall be made by wire transfer of immediately available funds to an account designated in writing by the party to receive such payment. Any payment made pursuant to this Section 2.3(b)(iii) shall be deemed to be an adjustment to the Purchase Price and included in the allocation of the Purchase Price set forth in Schedule G pursuant to Section 2.3(c) hereof and allocated to purchase of working capital.
(iv) If Buyer disagrees with the Statement of Working Capital, then Buyer shall notify Lee in writing (the “Notice of Disagreement”) of such disagreement within fifteen (15) calendar days following delivery of the Statement of Working Capital. If Lee has not received a Notice of Disagreement within such fifteen (15) day period, Buyer shall be deemed to have accepted the Statement of Working Capital. Any Notice of Disagreement shall set forth in reasonable detail the adjustments Buyer proposes to make to the Statement of Working Capital and the basis therefor and shall be consistent with the provisions of Section 2.3(b)(ii). Thereafter, Lee and Buyer shall attempt in good faith to resolve and finally determine the amount of the Closing Working Capital. If Lee and Buyer are unable to resolve the disagreement within thirty (30) calendar days following delivery of the Notice of Disagreement, then Lee and Buyer shall select a mutually acceptable, nationally recognized independent accounting firm that does not then have a present relationship with Lee or Buyer (the “Independent Accountant”), to resolve the disagreement and make a determination with respect thereto. If Lee and Buyer are unable, within ten (10) calendar days, to select a mutually acceptable Independent Accountant, then each of Lee and Buyer shall select a nationally
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recognized independent accounting firm and these two firms will choose a nationally recognized independent accounting firm which will serve as the Independent Accountant. The determination of the Independent Accountant to resolve the disagreement between Lee and Buyer as to the Statement of Working Capital will be made, and written notice thereof given to Lee and Buyer, within thirty (30) calendar days after the selection of the Independent Accountant. The determination by the Independent Accountant shall be final, binding and conclusive upon Lee and Buyer. The scope of the Independent Accountant’s engagement (which will not be an audit) shall be limited to the resolution of the disputed items described in the Notice of Disagreement, and the recalculation, if any, of the Statement of Working Capital in light of such resolution. If an Independent Accountant is engaged pursuant to this Section 2.3(b)(iv), the fees and expenses of the Independent Accountant shall be borne equally by Lee and Buyer. Within ten (10) calendar days after delivery of a notice of determination by the Independent Accountant as described above, any payment required by Section 2.3(b)(iii) hereof shall be made, based on such determination.
(c) Allocation of Purchase Price to the Acquired Assets. As soon as practicable after the Closing Date and no later than sixty (60) days thereafter, Lee shall provide Buyer with a draft of Internal Revenue Service Form 8594 allocating the consideration payable under Section 2.3(a) which shall not be materially different from the allocation set forth on Schedule G (except for the adjustment to the Purchase Price provided in Section 2.3(b)(iii)). Buyer shall review such Form 8594 and provide any comments with respect thereto to Lee not more than thirty (30) days after the date Lee’s draft is provided to Buyer. Each of Buyer and Lee shall report the allocation (and any adjustments thereto) for Tax purposes and file its Tax Returns (including Form 8594) in a manner consistent with any mutually-agreed allocations determined pursuant to Schedule G, as adjusted pursuant to Section 2.3(b)(iii).
2.4 Further Assurances. At and after the Closing, and without further consideration therefor, (a) Lee Enterprises and Lee Procurement shall execute and deliver to Buyer such further instruments and certificates of conveyance and transfer as Buyer may reasonably request in order to more effectively convey and transfer the Acquired Assets to Buyer and to put Buyer in operational control of the Business, or to aid, assist, collect and reduce to possession any of the Acquired Assets and exercise rights with respect thereto, and (b) Buyer shall execute and deliver to Lee such further instruments and certificates of assumption, novation and release as Lee may reasonably request in order to effectively make Buyer responsible for all Assumed Liabilities and release Lee therefrom to the fullest extent permitted under applicable Law. The parties hereby waive compliance with the provisions of any applicable bulk sales Law of any jurisdiction in connection with the transactions contemplated hereby and no representation, warranty or covenant contained in this Agreement shall be deemed to have been breached as a result of such non-compliance.
2.5 Nontransferable Business Contracts. To the extent that transfer or assignment hereunder by Lee to Buyer of any agreement, contract, binding understanding, instrument or legally binding commitment or understanding (a “Contract”) included in the Acquired Assets (an “Assumed Contract”) is not permitted or is not permitted without the consent of another Person,
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this Agreement shall not be deemed to constitute an undertaking to assign the same if such consent is not given or if such an undertaking otherwise would constitute a breach thereof or cause a loss of benefits thereunder. Lee shall use reasonable efforts to obtain any and all such third party consents under all Assumed Contracts; provided, however, that Lee shall not be required to pay or incur any cost or expense (excluding reasonable internal staff time and reasonable expenses for postage, stationery, telephone calls and similar costs) to obtain any third party consent. If any such third party consent is not obtained before the Closing, Lee shall, for a period of one (1) year after the Closing without obligation of Lee to pay or incur any cost or expense related thereto (excluding reasonable internal staff time and reasonable expenses for postage, stationery, telephone calls and similar costs), use reasonable efforts to: (a) obtain such consent, (b) cooperate with Buyer in any reasonable arrangement designed to provide Buyer the benefits of the applicable Assumed Contract and (c) enforce any rights of Lee under or with respect to the applicable Assumed Contract against all other Persons (including termination thereof in accordance with the terms thereof upon the election of Buyer). In addition, if any such third party consent is not obtained before the Closing, Buyer shall perform the obligations of Lee under such Assumed Contract to the extent that such obligation would have been an Assumed Liability but for the fact that such consent has not been so obtained.
2.6 Closing. The purchase and sale (the “Closing”) provided for in this Agreement, except to the extent that Buyer and Lee agree on another time and place, will take place at the offices of Lane & Waterman LLP, 220 N. Main Street, Suite 600, Davenport, IA 52801, at 10:00 a.m. (local time), on October 2, 2006 or not later than two (2) Business Days following the satisfaction and fulfillment or, if permissible pursuant to the terms hereof, waiver of the conditions contained in Article 7 (with a pre-Closing to be held on September 29, 2006 at a time and place mutually agreeable to the parties).
2.7 Closing Obligations. At the Closing:
(a) Lee Enterprises and Lee Procurement, as applicable, will deliver to Buyer duly executed copies of:
(i) a bill of sale for the Acquired Assets substantially in the form attached hereto as Exhibit A (the “Bill of Sale”);
(ii) an instrument of assignment and assumption substantially in the form attached hereto as Exhibit B (the “Assignment and Assumption Agreement”);
(iii) certificates pursuant to clauses (a) and (b) of Section 7.2;
(iv) instruments of assignment to Buyer of all registrations and applications for Intellectual Property and other intangibles included in the Acquired Assets and reasonably requested by Buyer; provided, however, Lee Procurement’s assignment of the Nickel Ads’ trademark and service mark shall be in the form attached hereto as Exhibit C; and further provided, Lee Procurement shall assign to Buyer, its successors, assigns and other legal representatives, its rights in each business associated with Hispanos Unidos and Home Buyer’s
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Guide in the current distribution territory of each such publication, but in no other territory, and the goodwill associated with such business, together with the sole and exclusive right to use each of such mark in the current distribution territory in connection with such business and the assignment shall otherwise be in the form set forth in Exhibit C as applicable;
(v) instruments of assignment to Buyer of all rights of Lee Enterprises and Lee Procurement to the domain names and website addresses included in the Acquired Assets and reasonably requested by Buyer;
(vi) a certificate of Lee Enterprises and Lee Procurement that each is not a foreign Person subject to withholding under Section 1445 of the IRC;
(vii) a Transition Services Agreement substantially in the form attached hereto as Exhibit D (the “Transition Services Agreement”);
(viii) instrument of assignment of all of the rights of Lee Enterprises solely with respect to the Business under all confidentiality agreements executed by all other potential buyers as they relate to the Acquired Assets without warranty as to enforceability and without the obligation to obtain such potential buyers’ consent to the assignment thereof;
(ix) UCC-2s, good standing certificates, and all other instruments or documents as Buyer, its counsel, or its banks may reasonably request to affect the conveyance and assignment of the Acquired Assets as contemplated hereby free and clear of all Liens;
(x) instrument of assignment of all of the rights of Lee Enterprises solely with respect to the unexpired restrictive covenants involving George L. Griffin, Sr. under the Asset Purchase Agreement referred to in Section 3.15 of the Lee Disclosure Schedules without warranty as to enforceability and without obligation to obtain the consent of George L. Griffin, Sr. to such assignment;
(xi) an instrument of assignment of all of the rights of Lee pursuant to the Phase I Environmental Site Assessment, Lee Northwest Publishing, Airway Heights, Washington dated November 15, 2001, prepared by Landau Associates, Inc., without warranty as to enforceability and without obligation to obtain the consent of Landau Associates, Inc. and a reliance letter issued by Landau in favor of Buyer and its lender and counsel; and
(xii) such other good and sufficient instruments of conveyance, transfer, and assignment as shall be effective to vest in Buyer good and marketable title in and to the Acquired Assets, free and clear of all mortgages, liens, restrictions, encumbrances, claims, and obligations, of any nature whatsoever, except as permitted in this Agreement, in form and substance, and executed and delivered in a manner, reasonably satisfactory to Buyer.
(b) Buyer will deliver to Lee:
(i) the sum of $ 18,500,000 by wire transfer in immediately available funds to the account specified by Lee;
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(ii) duly executed copies of the certificates pursuant to clauses (a) and (b) of Section 7.3;
(iii) a duly executed counterpart of the Bill of Sale;
(iv) a duly executed counterpart of the Assignment and Assumption Agreement and such documentation necessary related to the assignment and assumption of the contracts set forth in Sections 2.2(b)(i) and (iv) hereof;
(v) a duly executed counterpart of the Transition Services Agreement; and
(vi) duly executed counterparts of all other instruments and certificates of assumption, novation and release as Lee may reasonably request in order to effectively make Buyer responsible for all Assumed Liabilities and release Lee Enterprises or Lee Procurement, as applicable, therefrom to the fullest extent permitted under applicable Law.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF LEE
Except as disclosed in the disclosure schedules delivered by Lee to Buyer immediately prior to the execution of this Agreement (it being agreed that any information set forth in one section of such disclosure schedules shall be deemed to apply to each other section thereof to which its relevance is reasonably apparent) (the “Lee Disclosure Schedules”), Lee represents and warrants to Buyer as follows:
3.1 Organization; Qualification; Authority. Each of Lee Enterprises and Lee Procurement is a legal entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization. Each of Lee Enterprises and Lee Procurement has the corporate power and authority to carry on the Business and is qualified to do business and is in good standing as a foreign corporation in each jurisdiction where qualification as a foreign corporation is required to carry on the Business, except where the failure to be so organized, validly existing, qualified or in good standing, or to have such power or authority, would not have, individually or in the aggregate, a Business Material Adverse Effect. As used in this Agreement, any reference to any facts, circumstances, events or changes having a “Business Material Adverse Effect” means such facts, circumstances, events or changes that are, or would reasonably be expected to become, materially adverse to the business, financial condition or continuing operations of the Business taken as a whole, but shall not include facts, circumstances, events or changes (a) generally affecting the newspaper or classified publications industry in the United States or the economy or the financial or securities markets in the United States or elsewhere in the world, including regulatory and political conditions or developments (including any outbreak or escalation of hostilities or acts of war or terrorism) or (b) resulting
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from (i) the announcement or the existence of, or compliance with, this Agreement or the transactions contemplated hereby, including the effect of the announcement of, or the existence of the plan to sell, the Business; or (ii) any litigation arising from allegations of a violation of applicable Law relating to this Agreement or the transactions contemplated hereby; or (iii) changes in applicable Law, GAAP or accounting standards.
3.2 Corporate Authority Relative to this Agreement; No Violation.
(a) Each of Lee Enterprises and Lee Procurement has all requisite corporate power and authority to enter into this Agreement and the Ancillary Agreements to be executed and delivered by such corporation and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements to be executed and delivered by each of Lee Enterprises and Lee Procurement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Boards of Directors of such corporations, and no other corporate proceedings on the part of each of Lee Enterprises and Lee Procurement are necessary to authorize the consummation of the transactions contemplated hereby and thereby. This Agreement has been, and the Ancillary Agreements to be executed and delivered by each of Lee Enterprises and Lee Procurement will, as of the Closing, have been, duly and validly executed and delivered by each of Lee Enterprises and Lee Procurement, and (assuming this Agreement constitutes, and as of the Closing the Ancillary Agreements to be executed and delivered by Buyer will constitute the valid and binding agreement of Buyer) this Agreement constitutes, and as of the Closing, the Ancillary Agreements to be executed and delivered by each of Lee Enterprises and Lee Procurement will constitute, the valid and binding agreements of such corporation, enforceable against each of Lee Enterprises and Lee Procurement in accordance with their terms.
(b) Other than in connection with or in compliance with (i) the Delaware General Corporation Law and Iowa Business Corporation Act; and (ii) the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and other federal and state competition Laws (collectively, the “Lee Approvals”), no authorization, consent or approval of, or filing with, any Governmental Entity or other Person is necessary under applicable Law for the consummation by each of Lee Enterprises or Lee Procurement of the transactions contemplated by this Agreement and the Ancillary Agreements to which such corporation is a party, except for such authorizations, consents, approvals or filings that, if not obtained or made, would not have, individually or in the aggregate, a Business Material Adverse Effect or materially impair or delay the consummation of the transactions contemplated hereby or thereby.
(c) The execution and delivery by each of Lee Enterprises and Lee Procurement of this Agreement and the Ancillary Agreements to be executed and delivered by such corporation do not, and, except as described in Section 3.2(b), the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and thereof will not (i) result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to the loss of a material benefit under any loan, guarantee of indebtedness or credit
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agreement, note, bond, mortgage, indenture, lease, agreement, contract, instrument, permit, concession, franchise, right or license binding upon (x) Lee or (y) to the Knowledge of Lee, the Business or the Acquired Assets or result in the creation of any liens, claims, mortgages, encumbrances, pledges, security interests, equities or charges of any kind (each, a “Lien”), other than any such Lien (A) for Taxes or governmental assessments, charges or claims of payment not yet due, being contested in good faith and for which adequate accruals or reserves have been established on the Business Balance Sheet, (B) which is a carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other similar lien arising in the ordinary course of business, (C) which is disclosed on the Business Balance Sheet or securing liabilities reflected on such balance sheet or (D) which was incurred in the ordinary course of business since the date of the Business Balance Sheet and is immaterial in amount and is disclosed on the Statement of Working Capital as provided in Section 2.3(b)(ii) (each of the foregoing, a “Permitted Lien”), upon any of the properties or Assets included in the Acquired Assets; (ii) conflict with or result in any violation of any provision of the articles or certificate of incorporation or by-laws or other equivalent organizational document, in each case as amended, of Lee Enterprises and Lee Procurement; or (iii) conflict with or violate in any material respect any applicable Laws.
3.3 Business Financial Statements. Section 3.3 of the Lee Disclosure Schedules contains (i) the unaudited balance sheet of the Business as at September 30, 2005; and (ii) the unaudited balance sheet of the Business as at June 30, 2006 (the June 30, 2006 balance sheet is referred to as the “Business Balance Sheet”), and the related unaudited statements of income for the twelve-month period ended September 30, 2005 and nine-month period ended June 30, 2006 (collectively, the “Business Financial Statements”). Except as disclosed in Section 3.3 of the Lee Disclosure Schedules, the Business Financial Statements have been prepared from the books and records of the Business and fairly present in all material respects the financial position of the Business as at September 30, 2005 and June 30, 2006 and the results of operations for the twelve months ended September 30, 2005, and the nine months ended June 30, 2006 in accordance with GAAP consistently applied, except that the Business Financial Statements are summary in nature, do not include an accrual for vacation and leave of absence time, and do not include the notes and related disclosures required by GAAP. Any interim financial statement shall be prepared substantially in a manner consistent with the Business Financial Statements.
The accounts receivable of the Business have arisen from bona fide transactions in the ordinary course of business. Subject to Lee Enterprises’ allowance for doubtful accounts policy listed in Section 3.3 of the Lee Disclosure Schedules, all such receivables as of the date hereof are currently due, and not subject to any express performance obligations by the Seller prior to collection. Said accounts receivable, to the Knowledge of Seller, are subject to no defenses, counterclaims or rights of setoffs.
3.4 No Undisclosed Liabilities. Except as disclosed in Section 3.4 of the Lee Disclosure Schedules or except (a) as reflected, reserved against or otherwise disclosed in the Business Balance Sheet (or the notes thereto), (b) for liabilities permitted by or incurred pursuant to this Agreement, (c) for liabilities and obligations incurred in the ordinary course of business since June 30, 2006 and disclosed in the Statement of Working Capital as provided in Section 2.3(b)(ii)
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and (d) for liabilities or obligations which have been discharged or paid in full in the ordinary course of business, as of the date hereof, Lee has no liabilities or obligations arising out of or relating to the operation of the Business, and there are no liabilities or obligations of the Business, of any nature, in each case, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on the Business Balance Sheet (or in the notes thereto), other than those which would not have, individually or in the aggregate, a Business Material Adverse Effect.
3.5 Compliance with Law; Permits.
(a) With respect to the Business, Lee is in compliance with and is not in default under or in violation of any applicable federal, state, local or foreign constitution, law, statute, ordinance, rule, regulation, judgment, order, injunction, decree or agency requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Entity (collectively, “Laws” and each, a “Law”), except where such non-compliance, default or violation would not have, individually or in the aggregate, a Business Material Adverse Effect (provided that Lee has disclosed on the Disclosure Schedules any such non-compliance, default or violation of which it has Knowledge irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
(b) With respect to the Business, Lee is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for each entity to own, lease and operate its properties and Assets and to carry on the Business as it is now being conducted (the “Lee Permits”), except where the failure to have any of Lee Permits would not have, individually or in the aggregate, a Business Material Adverse Effect (provided Lee has disclosed on the Disclosure Schedules any such failure to have such Lee Permits of which it has Knowledge irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect). To the Knowledge of Lee, all Lee Permits are in full force and effect.
3.6 Environmental Laws and Regulations.
(a) Except as identified in any Phase I Environmental Site Assessment identified in Section 3.6 of the Lee Disclosure Schedules, or as would not, individually or in the aggregate, have a Business Material Adverse Effect, (i) Lee has conducted the Business in material compliance with all applicable Environmental Laws; (ii) to the Knowledge of Lee, no Hazardous Substance is present in, on, under or about any of the properties used in connection with the operation of the Business in amounts exceeding the levels permitted by applicable Environmental Laws and for which Lee or Buyer would reasonably be expected to be liable for investigation and remediation; (iii) Lee has not received any notices, demand letters or requests for information from any Governmental Entity indicating that Lee may be in violation of, or liable under, any Environmental Law relating to the operation of the Business; (iv) no Hazardous Substance has been disposed of, released or transported by Lee in violation of any applicable Environmental Law, or in a manner giving rise to any liability under Environmental Law, from
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any of the properties used in connection with the operation of the Business during the time such properties were owned, rented, or leased by Lee; and (v) none of the properties that are used in connection with the operation of the Business and currently owned, rented, or leased by Lee are subject to any liabilities of Lee relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or written claim asserted or arising under any Environmental Law. It is agreed and understood that this Section 3.6 contains Lee’s entire representation and warranty relating to environmental matters, and no other representation or warranty contained in this Agreement shall be construed to include any representation or warranty regarding environmental matters.
(b) As used herein, “Environmental Law” means any Law relating to (x) the protection, preservation or restoration of the environment (including air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), (y) worker safety from environmental hazards and Hazardous Substances or (z) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as in effect at the date hereof.
(c) As used herein, “Hazardous Substance” means any substance presently listed, defined, designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any Governmental Entity or any Environmental Law, including any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or byproduct thereof, radon, radioactive material, asbestos or asbestos containing material, urea formaldehyde, foam insulation or polychlorinated biphenyls or toxic mold.
3.7 Employee Benefit Plans.
(a) Section 3.7(a) of the Lee Disclosure Schedules lists all material benefit plans provided to the Business Employees (each a “Benefit Plan” and collectively, the “Benefit Plans”). Lee’s current employees who provide services primarily with respect to the Business are each a “Business Employee” and collectively, the “Business Employees”.
(b) Other than as disclosed on Section 3.7(a) of the Lee Disclosure Schedules, Lee has no commitment to establish any new Benefit Plan (except to the extent required by Law or to conform any such Benefit Plan to the requirements of any applicable Law, or as required by this Agreement) or to modify any Benefit Plan for the benefit of the Business Employees.
(c) Each Benefit Plan has been maintained and administered in compliance with its terms and with applicable Law, including ERISA and the IRC to the extent applicable thereto, except for such non-compliance which would not have, individually or in the aggregate, a Business Material Adverse Effect, and Lee has no Knowledge of any material non-compliance and has received no notice from any governmental agency with respect to same.
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(d) Any Benefit Plan intended to be qualified under Section 401(a) of the IRC and each trust intended to qualify under Section 501(a) of the IRC:
(i) has either applied for, prior to the expiration of the requisite period under applicable Treasury Regulations or IRS pronouncements, or obtained a favorable determination, notification, advisory and/or opinion letter, as applicable, as to its qualified status from the IRS or still has a remaining period of time under applicable Treasury Regulations or IRS pronouncements in which to apply for such letter and to make any amendments necessary to obtain a favorable determination;
(ii) incorporates or has been amended to incorporate all provisions required to comply with the Tax Reform Act of 1986 and subsequent legislation; and
(iii) has had no event, condition or circumstance that has adversely affected or is likely to adversely affect such qualified status; and
(iv) is not a Multi-employer Plan or Defined Benefit Pension Plan within the meaning of the IRC or ERISA.
(e) All contributions to the Lee Enterprises Retirement Account Plan or the Lee Enterprises Supplementary Benefit Plan that will have been required to be made with respect to periods and/or benefits accrued and/or amounts withheld prior to the Closing Date under such plans will have been made prior to the Closing or will be made or accrued promptly after the Closing Date and any accruals or amounts withheld and not paid will be included in the Statement of Working Capital as provided in Section 2.3(b)(ii).
3.8 Absence of Certain Changes or Events. Since June 30, 2006, except as otherwise contemplated, required or permitted by this Agreement or as described in Section 3.8 of the Lee Disclosure Schedules, the Business has been conducted, in all material respects, in the ordinary course of business consistent with past practice and there has not been (i) any event, development or state of circumstances that has had, individually or in the aggregate, a Business Material Adverse Effect; (ii) any material change in accounting methods, principles or practices with respect to the Business; (iii) any agreement by Lee, with respect to the Business, to acquire, any business or corporation, partnership, association or other business organization or division thereof; or (vii) any sale, lease, license or other disposition of any material properties or Assets of the Business or any material properties or Assets included in the Acquired Assets, other than in the ordinary course of business.
3.9 Investigations; Litigation. As of the date hereof, (a) there is no investigation or review pending or, to the Knowledge of Lee, threatened by any Governmental Entity with respect to the Business and (b) except as described in Section 3.9 of the Lee Disclosure Schedules, there are no claims or Proceedings pending or, to the Knowledge of Lee, threatened against or affecting the Business, at law or in equity before, and there are no orders, judgments or decrees, writs or injunctions of, any Governmental Entity or arbitrator affecting the Business or the Acquired Assets, which would have, individually or in the aggregate, a Business Material
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Adverse Effect (provided Lee has disclosed on the Disclosure Schedules any such investigation, review, claim, Proceeding, order, judgment, decree, writ or injunction of which it has Knowledge irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
Lee is not in default with respect to or subject to any judgment, order, writ, injunction, or decree of any Governmental Entity affecting the Business or the Acquired Assets, and there are no unsatisfied judgments against Lee or the Acquired Assets either of which would have, individually or in the aggregate, a Business Material Adverse Effect (provided Lee has disclosed on the Disclosure Schedules any such default or judgment of which it has Knowledge, irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
3.10 Tax Matters.
(a) (i) Lee has prepared and timely filed (taking into account any extension of time within which to file) all material Tax Returns with respect to the Business required to be filed by Lee and all such filed Tax Returns are accurate and complete in all material respects, and all Taxes shown thereon have been paid when due; (ii) Lee has accrued on the Business Balance Sheet all material unpaid Taxes for all periods ending on or prior to the date thereof, and will accrue and pay all Taxes, except as otherwise provided in this Agreement, due on or prior to the Closing, but effective as of the Effective Time; (iii) except as set forth in Section 3.10 of the Lee Disclosure Schedules, there are not pending or, to the Knowledge of Lee, threatened in writing, any audits, examinations, investigations or other proceedings in respect of U.S. federal or state Taxes with respect to the Business; and (iv) there are no Liens for Taxes on any of the Acquired Assets other than Permitted Liens.
(b) As used in this Agreement, (i) “Taxes” means any and all domestic or foreign, federal, state, local or other taxes of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including taxes on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, business and occupation, capital stock, payroll, employment, unemployment, social security, workers’ compensation or net worth, taxes in the nature of excise, withholding, ad valorem or value added, and any obligations with respect to such amounts arising as a result of being a member of an affiliated, consolidated, combined or unitary group for any period or under any agreements or arrangements with any other Person and including any liability for taxes of a predecessor entity; and (ii) “Tax Return” means any return, report or similar filing (including the attached schedules) required to be filed with respect to Taxes, including any information return, claim for refund, amended return or declaration of estimated Taxes.
(c) There are no liens for Taxes (other than for current Taxes not yet due and payable) on the Acquired Assets.
(d) The transaction contemplated herein is not subject to the tax withholding
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provisions of Section 3406 of the Internal Revenue Code, or of Subchapter A of Chapter 3 of the Internal Revenue Code or of any other provision of law.
(e) All Taxes which Lee has been required to collect and withhold have been paid to the proper taxing authority.
3.11 Labor Matters. As of the date hereof, (a)(i) there are no strikes or lockouts with respect to any Business Employees; (ii) to the Knowledge of Lee, there is no union organizing effort pending or threatened against the Business; (iii) there is no unfair labor practice, labor dispute (other than routine individual grievances) or labor arbitration proceeding pending or, to the Knowledge of Lee, threatened against the Business; and (iv) there is no slowdown or work stoppage in effect or, to the Knowledge of Lee, threatened by any Business Employees, and (b) to the Knowledge of Lee, the Business is in material compliance with all applicable Laws respecting (i) employment and employment practices; (ii) terms and conditions of employment and wages and hours; and (iii) unfair labor practices. Lee is not a party to any labor agreement with respect to the Business’s employees, and, to the Knowledge of Lee, there are no unions under local statutes, custom, or practice. Lee is not a party to any written contract of employment with any of the Hired Employees (except for the Participation Agreement between Lee Enterprises and Judy Olson dated April 30, 2006) and, to the Knowledge of Lee, is not a party to any oral contract of employment with any Hired Employee providing for other than at-will employment.
3.12 Assets. Except as set forth in Section 3.12 of the Lee Disclosure Schedules, Lee owns good title to or has valid leasehold interests in all of the Acquired Assets, and at the Closing good title to or valid leasehold interests in (and consents to the assignment thereof) such Acquired Assets shall be transferred to Buyer, free and clear of any and all Liens except (i) for Permitted Liens; and (ii) any restriction on assignment of a Contract which is contained therein or which arises by operation of Law. The tangible personal property included in the Acquired Assets is in good condition and repair (ordinary wear and tear excepted) for property of comparable type, age and usage, except for tangible personal property that is obsolete, depleted or worn out and no longer used in the operation of the Business. The Acquired Assets (together with cash on hand and services to be provided pursuant to the Transition Services Agreement and items 14 and 15 of Schedule D hereto) constitute all of the assets, properties and rights necessary for the conduct of the operations of the Business by Lee in the manner consistent with past practice.
3.13 Intellectual Property. To the Knowledge of Lee, either Lee Enterprises or Lee Procurement owns, or is licensed or otherwise possesses legally enforceable rights to use, all material registered and unregistered material trademarks, trade names, service marks, service names, logos, assumed names, domain names and copyrights used in the Business as currently conducted which are included in the Acquired Assets (collectively, the “Intellectual Property”). Except as would not have, individually or in the aggregate, a Business Material Adverse Effect or except as otherwise described in Section 3.13 of the Lee Disclosure Schedules, (a) as of the date hereof, there are no pending or, to the Knowledge of Lee, threatened claims by any Person
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alleging infringement of any material Intellectual Property rights of any Person by Lee Enterprises or Lee Procurement for their use of the Intellectual Property in the Business, (b) to the Knowledge of Lee, the conduct of the Business does not infringe any Intellectual Property rights of any Person, (c) to the Knowledge of Lee, neither Lee Enterprises nor Lee Procurement has made any claim of a violation or infringement by others of its rights to or in connection with the Intellectual Property of the Business, and (d) to the Knowledge of Lee, no Person is infringing any Intellectual Property of the Business (provided Lee has disclosed any such claim of a violation or infringement of which, to the Knowledge of Lee, it has received written notice, on the Disclosure Schedules irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
Except as otherwise described in Section 3.13 of the Lee Disclosure Schedules, no other Person (i) has the right to use any trademarks included in the Intellectual Property either in identical form or in such near resemblance thereto as to be likely to cause confusion with the trademarks or to cause a mistake or to deceive, or (ii) has notified Seller that it is claiming any ownership of or right to use such Intellectual Property which would have, individually or in the aggregate, a Business Material Adverse Effect (provided Lee has disclosed any such claim of ownership or right to use of which, to the Knowledge of Lee, it has received written notice, on the Disclosure Schedules irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
All of the Intellectual Property rights are valid and enforceable rights of Lee and will not cease to be valid and in full force and in effect by reason of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated by this Agreement and the failure to have such valid and enforceable rights would not have, individually or in the aggregate, a Business Material Adverse Effect (provided Lee has disclosed on the Disclosure Schedules any such failure of which it has Knowledge, irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
3.14 Real Property. Section 3.14 of the Lee Disclosure Schedules sets forth a list of material real property currently owned or leased by Lee and used in the operation of the Business. Lee owns and has valid title to all of its owned real property and has valid leasehold interests in all of its leased properties used in the operation of the Business, except for properties and Assets that have been disposed of in the ordinary course of business since June 30, 2006, free and clear of all Liens (except for Permitted Liens and all other title exceptions, defects, encumbrances and other matters, whether or not of record, which do not materially and adversely affect the continued use of the property for the purposes for which the property is currently being used by Lee in the Business as of the date hereof, excluding therefrom mortgages, deeds of trust, judgment liens, Tax liens for delinquent taxes and other monetary liens). Buyer acknowledges that Lee has not investigated whether the landlord to any leased premises has marketable title to such property. Except as would not have, individually or in the aggregate, a Business Material Adverse Effect, each of Lee’s material lease agreements involving real property related to the operation of the Business to which Lee is a party is valid and enforceable and Lee is not in default under any such agreement, and no circumstances exist which, with notice, the passage of
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time or both, would reasonably be expected to constitute a default of Lee under any such agreement (provided Lee has disclosed on the Disclosure Schedules any such default of which it has Knowledge, irrespective of whether it has had or may reasonably be expected to have a Business Material Adverse Effect).
3.15 Material Contracts.
(a) Except for this Agreement or as listed in Section 3.15 of the Lee Disclosure Schedules, as of the date hereof, with respect to the Business, Lee is not a party to or bound by any (i) “Material Contract” (as such term is defined in Item 601(b)(10) of Regulation S-K of the SEC); (ii) any contract containing any covenant materially limiting the right of Lee to engage in the Business; (iii) any mortgages, indentures, financial guarantees, loans or credit agreements, security agreements or other Contracts relating to the borrowing of money or extension of credit, other than accounts receivable and payable in the ordinary course of business; or (iv) any material settlement agreement with material continuing obligations of, or material restrictions on, the Business (each Contract of the type described in this Section 3.15 being referred to herein as a “Business Material Contract”). Except as disclosed on Section 3.15 of the Lee Disclosure Schedules, the Business has no lease considered a capitalized lease under GAAP primarily for the benefit of the Business.
(b) To its Knowledge, Lee is not in breach of or in default under the terms of any Business Material Contract. To the Knowledge of Lee, no other party to any Business Material Contract is in breach of or in default under the terms thereof where such breach or default would have, individually or in the aggregate, a Business Material Adverse Effect. Each Business Material Contract is a valid and binding obligation of Lee and, to the Knowledge of Lee, of each other party thereto, and is in full force and effect, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws, now or hereafter in effect, relating to creditors’ rights generally, and (ii) equitable remedies of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
3.16 Transactions with Affiliates. Section 3.16 of the Lee Disclosure Schedules sets forth a complete and accurate list of all Contracts in connection with the Business to which Lee on the one hand, and any of its Affiliates on the other hand, is a party.
3.17 Finders or Brokers. Lee has not employed any investment banker, broker or finder in connection with the transactions contemplated by this Agreement who might be entitled to any fee or any commission in connection with or upon consummation of the transactions contemplated hereby, except for Lazard Freres & Co. LLC, whose fees will be the sole responsibility of Lee.
3.18 Full Disclosure. To the Knowledge of Lee, none of the representations and warranties made by the Lee in this Agreement or the Schedules or Exhibits hereto contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading.
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3.19 No Additional Representations. Other than the representations and warranties expressly set forth in Article 3, Lee shall not be deemed to have made any other representation or warranty in connection with this Agreement or the Ancillary Agreements or the transactions contemplated hereby or thereby.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF BUYER
Except as disclosed in the disclosure schedules delivered to Lee by Buyer immediately prior to the time of execution of this Agreement or thereafter prior to the Closing (the “Buyer Disclosure Schedules”), Buyer represents and warrants to Lee as follows:
4.1 Organization. Buyer is a legal entity duly organized, validly existing and in good standing under the Laws of its jurisdiction of organization.
4.2 Corporate Authority Relative to this Agreement; No Violation.
(a) Buyer has all requisite corporate power and authority to enter into this Agreement and the Ancillary Agreements to be executed and delivered by Buyer and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Ancillary Agreements to be executed and delivered by Buyer and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer are necessary to authorize the consummation of the transactions contemplated hereby and thereby. This Agreement has been, and the Ancillary Agreements to be executed and delivered by Buyer will, as of the Closing, have been, duly and validly executed and delivered by Buyer, and (assuming this Agreement constitutes, and as of the Closing the Ancillary Agreements to be executed and delivered by Lee Enterprises or Lee Procurement will constitute, the valid and binding agreement of such corporations), this Agreement constitutes, and as of the Closing, the Ancillary Agreements to be executed and delivered by Buyer will constitute, the valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms.
(b) Other than in connection with or in compliance with (i) the Delaware General Corporation Law; (ii) the HSR Act and other federal and state competition Laws (collectively, the “Buyer Approvals”); and (iii) the qualification of Buyer to do business in jurisdictions with respect to the Business where it is not currently so qualified, no authorization, consent or approval of, or filing with, any Governmental Entity is necessary under applicable Law for the consummation by Buyer of the transactions contemplated by this Agreement and the Ancillary Agreements, except for such authorizations, consents, approvals or filings, that, if not obtained or made, would not materially impair or delay the consummation of the transactions contemplated hereby.
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(c) The execution and delivery by Buyer of this Agreement and the Ancillary Agreements to be executed and delivered by Buyer do not, and, except as described in Section 4.2(b), the consummation of the transactions contemplated hereby and thereby and compliance with the provisions hereof and thereof will not (i) result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any material obligation or to the loss of a material benefit under any loan, guarantee of indebtedness or credit agreement, note, bond, mortgage, indenture, lease, agreement, Contract, instrument, permit, concession, franchise, right or license binding upon Buyer or any of its Subsidiaries or result in the creation of any Lien, other than any such Lien (A) for Taxes or governmental assessments, charges or claims of payment not yet due, being contested in good faith or for which adequate accruals or reserves has been established, (B) which is a carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other similar lien arising in the ordinary course of business, (C) which is disclosed on the most recent consolidated balance sheet of Buyer or notes thereto or securing liabilities reflected on such balance sheet, (D) which was incurred in the ordinary course of business since the date of the most recent consolidated balance sheet of Buyer and is immaterial in amount, upon any of the properties or Assets of Buyer or any of its Subsidiaries, or (E) a lien on the Acquired Assets in favor of Buyer’s lenders; (ii) conflict with or result in any violation of any provision of the articles or certificate of incorporation or by-laws or other equivalent organizational document, in each case as amended, of Buyer or any of its Subsidiaries; or (iii) conflict with or violate any applicable Laws, other than, in the case of clauses (i) and (iii), any such violation, conflict, default, termination, cancellation, acceleration, loss or Lien that would not materially impair or delay the consummation of the transactions contemplated hereby.
4.3 Investigations; Litigation. As of the date hereof, (a) there is no investigation or review pending or, to the Knowledge of Buyer, threatened by any Governmental Entity with respect to Buyer or any of Buyer’s Affiliates, and (b) there are no claims or Proceedings pending or, to the Knowledge of Buyer, threatened against or affecting Buyer or any of Buyer’s Affiliates at law or in equity before, and there are no orders, judgments or decrees of, or before, any Governmental Entity or arbitrator, which would materially impair or delay the consummation of the transactions contemplated hereby.
4.4 Finders or Brokers. Neither Buyer nor any of its Subsidiaries has employed any investment banker, broker or finder in connection with the transactions contemplated by this Agreement who might be entitled to any fee or any commission in connection with or upon consummation of the transactions contemplated hereby.
4.5 Solvency. Immediately after giving effect to the transactions contemplated by this Agreement (including any financing in connection with the transactions contemplated hereby) and excluding the effect of any inaccuracy of the representations and warranties contained in Article 3, (a) none of Buyer or any of its Subsidiaries, taken as a whole, will have incurred debts beyond its ability to pay such debts as they mature or become due and the then present fair salable value of the Assets of Buyer and its Subsidiaries, taken as a whole, will exceed the amount that will be required to pay its respective probable liabilities (including the
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probable amount of all contingent liabilities) and its respective debts as they become absolute and matured, (b) the Assets of Buyer and its Subsidiaries, taken as a whole, at a fair valuation, will exceed its respective debts (including the probable amount of all contingent liabilities) and (c) Buyer will not have unreasonably small capital to carry on its business as presently conducted or as proposed to be conducted. No transfer of property is being made and no obligation is being incurred by Buyer or any of its Subsidiaries in connection with the transactions contemplated hereby with the intent to hinder, delay or defraud creditors of Lee or the Business.
4.6 Available Funds. Buyer will have available at the Closing all funds necessary for the payment of the Purchase Price. Buyer has cash and a sufficient portion of the $50,000,000 Revolving Loan Commitment under its Second Amended and Restated Credit Agreement dated as of July 13, 2005 (the “Credit Agreement”) available pursuant to the terms thereof to enable Buyer to pay the entire Purchase Price. Buyer has received consents of the requisite lenders thereunder to the Transaction. To the Knowledge of Buyer, the Credit Agreement is in full force and effect, all fees and interest payments are current, all acts required to be performed by Buyer to date have been performed, and Buyer is not in Default under the terms thereof and no event has occurred which, with the passage of time, would give rise an Event of Default thereunder, and Buyer is in compliance with all covenants in the Credit Agreement on a proforma basis, after taking into account the transactions contemplated hereby.
ARTICLE 5
COVENANTS
5.1 Conduct of the Business by Lee.
(a) From and after the date hereof and prior to the Closing or the date, if any, on which this Agreement is earlier terminated pursuant to Section 8.1 (the “Termination Date”), and except (i) as may be required by applicable Law; (ii) as may be agreed in writing by Buyer (which consent shall not be unreasonably withheld, delayed or conditioned); (iii) as may be contemplated or required by this Agreement; or (iv) as set forth in Section 5.1 of the Lee Disclosure Schedules, Lee covenants and agrees with Buyer that (A) prior to the Closing, the Business shall be conducted in the ordinary course of business and (B) Lee Enterprises and Lee Procurement shall use commercially reasonable efforts to preserve intact their relationships with significant customers, suppliers, licensors and licensees of the Business and others with which they have business dealings related to the Business.
(b) Lee agrees with Buyer, that between the date hereof and the Closing or the Termination Date, without the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned) and except as may be contemplated or required by this Agreement, Lee Enterprises and Lee Procurement will use commercially reasonable efforts to require that the Business:
(i) except as required by (x) existing Contracts or Benefit Plans, or
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(y) as otherwise required by applicable Law, shall not (A) increase the compensation or other benefits payable or provided to any Business Employee, (B) enter into any employment, consulting, special retirement, change of control, stay bonus, separation, severance or retention agreement with any Business Employee (except in order to retain an employee for the benefit of the Business after consulting with Buyer and obtaining Buyer’s written consent to enter into such agreement, which shall not be unreasonably withheld, delayed or conditioned), (C) except as permitted pursuant to clause (A) above, establish, adopt, enter into or amend any Benefit Plan, collective bargaining agreement, plan, trust, fund, policy or arrangement for the benefit of any Business Employees, except, in each case, as would not result in a material increase in cost, or (D) hire, promote, demote or otherwise change the employment status (e.g., part-time, full-time leave), title or other material term or material condition of employment of any Business Employee who is (or would become after such hiring, promotion, demotion or change) a publisher or manager of the Business;
(ii) shall not materially change financial accounting policies or procedures or any of its methods of reporting income, deductions or other material items for financial accounting purposes, except as required by GAAP, SEC rule or policy or applicable Law;
(iii) shall not sell, lease, license, transfer, exchange or swap, mortgage or otherwise encumber (including securitizations), or subject to any Lien (other than Permitted Liens) or otherwise dispose of any material portion of the Acquired Assets other than in the ordinary course;
(iv) shall not modify, amend, terminate or waive any rights in a manner adverse to the Business under (A) any Contract containing any covenant limiting the right of Lee, with respect to the Business, to engage or compete with any Person in any material line of business, (B) any Contract or group of related Contracts with a Person or entities (or group of affiliated Persons or entities) under which such modification, amendment, termination or waiver of any right would have a Business Material Adverse Effect, (C) any mortgages, indentures, financial guarantees, loans or credit agreements or security agreements or other Contracts relating to the borrowing of money or extension of credit, other than accounts receivable and payable in the ordinary course of business (except for the equipment lease described in Section 3.15 of the Lee Disclosure Schedules), or (D) any material settlement agreement which contains continuing material obligations of the Acquired Publications or the Business (all contracts of the type described in this Section 5.1(b)(iv) being referred to herein as “Section 5.1 Contracts”);
(v) shall not enter into any Section 5.1 Contracts or Business Material Contracts or any lease considered a capitalized lease under GAAP primarily for the benefit of the Business (except for the equipment lease described in Section 3.15(1) of the Lee Disclosure Schedules), other than, in each case, in the ordinary course of business and in compliance with the other restrictions set forth in this Section 5.1;
(vi) shall not enter into any new line of business material to the Business;
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(vii) shall not acquire or agree to acquire by merging or consolidating with, or by purchasing any equity interest in or a portion of the Assets of, or by any other manner, any business or any Person or division thereof, or otherwise acquire or agree to acquire any Assets which are material, individually or in the aggregate, to the Business, except in the ordinary course of business;
(viii) shall not engage in bargaining with any recognized labor union representing any Business Employee, except bargaining that is done after notice to and consultation with Buyer; and
(ix) shall not, and shall not permit any of its Subsidiaries to, agree to take any of the foregoing actions relating to the Business.
5.2 Access to Information; Confidentiality.
(a) Lee shall afford reasonable access to Buyer and its Representatives, during normal business hours, throughout the period prior to the earlier of (i) the Closing; and (ii) the Termination Date, to the properties, employees, contracts, commitments, books and records of the Business, and any report, schedule or other document filed or received by Lee pursuant to the requirements of applicable Laws. Notwithstanding the foregoing, Lee shall not be required to afford such access if it would unreasonably disrupt the operations of Lee or the Business, would cause a violation of any agreement to which Lee or the Business or Buyer or any of its Subsidiaries is a party, would cause a significant risk, in the reasonable judgment of Lee, of a loss of privilege to the disclosing party, or any of its Subsidiaries or would constitute a violation of any applicable Law, nor shall Buyer or any of its Representatives be permitted to perform any invasive onsite environmental procedure with respect to any property of Lee, except as may be otherwise required hereunder.
(b) The parties acknowledge that Lee and Buyer have previously executed a letter agreement concerning confidential information related to the Business dated as of May 15, 2006 (the “Confidentiality Agreement”), which Confidentiality Agreement will continue in full force and effect in accordance with its terms and each of Buyer and Lee will hold, and will cause its respective Representatives to hold, any Evaluation Material (as defined in the Confidentiality Agreement) confidential in accordance with the terms of the Confidentiality Agreement.
5.3 Mutual Efforts.
(a) Subject to the terms and conditions set forth in this Agreement, each of the parties hereto shall use its commercially reasonable efforts (subject to, and in accordance with, applicable Law) to take or cause to be taken all actions, and to do or cause to be done and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable under applicable Laws to consummate and make effective the transactions contemplated by this Agreement in a prompt manner, including (i) the obtaining of all necessary actions or nonactions, waivers, consents and approvals, including Lee Approvals and the Buyer Approvals, from Governmental Entities and the making of all necessary registrations and filings and the taking of
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all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Entity; (ii) the obtaining of all necessary consents, approvals or waivers from third parties; (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated by this Agreement; and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement.
(b) Subject to the terms and conditions herein provided and without limiting the foregoing, Lee and Buyer shall (i) promptly (and, unless a later date is agreed to by the parties hereto, in any event within fourteen (14) days of the date of this Agreement) make any required submissions under the HSR Act in connection with this Agreement; (ii) in the case of Buyer, use commercially reasonable efforts to offer to take, or cause to be taken, all other actions and do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective the transactions contemplated hereby, including taking all such further action as reasonably may be necessary to resolve such objections, if any, as the United States Federal Trade Commission, the Antitrust Division of the United States Department of Justice, state antitrust enforcement authorities or competition authorities of any jurisdiction or any other Person may assert under Regulatory Law with respect to the transactions contemplated hereby, and to avoid or eliminate each and every impediment under any Law that may be asserted by any Governmental Entity with respect to the transactions contemplated hereby so as to enable the Closing to occur as soon as expeditiously possible, including (x) proposing, negotiating, committing to and effecting, by consent decree, hold separate order or otherwise, the sale, divestiture or disposition of such Assets or businesses of Buyer or its Subsidiaries or Affiliates or of the Business and (y) otherwise taking or committing to take actions that after the Closing Date would limit the freedom of Buyer or its Subsidiaries’ or Affiliates’ freedom of action with respect to, or its ability to retain, one or more of its or its Subsidiaries’ businesses, product lines or Assets, in each case as may be required in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order or other order in any suit or proceeding which would otherwise have the effect of preventing or materially delaying the Closing; and (iii) subject to applicable legal limitations, the preservation of the attorney-client privilege and the instructions of any Governmental Entity, keep each other apprised of the status of matters relating to the completion of the transactions contemplated thereby, including promptly furnishing the other with copies of notices or other communications between Lee or Buyer, as the case may be, or any of their respective Subsidiaries, and any third party and/or any Governmental Entity with respect to such transactions. Lee and Buyer shall permit counsel for the other party reasonable opportunity to review in advance, and shall consider in good faith the views of the other party in connection with, any proposed written communication to any Governmental Entity. Each of Lee and Buyer agrees not to participate in any substantive meeting or discussion, either in person or by telephone, with any Governmental Entity in connection with Buyer’s proposed purchase of the Acquired Assets unless it consults with the other party in advance and, to the extent not prohibited by such Governmental Entity, gives the other party the opportunity to attend and participate.
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(c) In furtherance and not in limitation of the covenants of the parties contained in this Section 5.3, if any administrative or judicial Proceeding, including any Proceeding by a private party, is instituted (or threatened to be instituted) challenging any transaction contemplated by this Agreement as violative of any Regulatory Law, each of Lee and Buyer shall cooperate in all respects with each other and shall use their respective commercially reasonable efforts to contest and resist any such Proceeding and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by this Agreement. Notwithstanding the foregoing or any other provision of this Agreement, nothing in this Section 5.3 shall limit a party’s right to terminate this Agreement pursuant to Section 8.1(b) so long as such party has, prior to such termination, complied with its obligations under this Section 5.3.
(d) For purposes of this Agreement, “Regulatory Law” means the Sherman Act of 1890, the Clayton Antitrust Act of 1914, the HSR Act, the Federal Trade Commission Act of 1914 and all other federal or state statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other Laws, including any antitrust, competition or trade regulation Laws, that are designed or intended to (i) prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or lessening competition through merger or acquisition; (ii) preserve or promote diversity of media ownership; or (iii) protect the national security or the national economy of any nation.
(e) Notwithstanding anything to the contrary in this Section 5.3, this Section 5.3 shall not require any party to take any action which in such party’s good faith business judgment: (i) is not likely to be cost-effective; (ii) would be substantially detrimental to such party; or (iii) is otherwise unreasonable under the circumstances.
5.4 Tax Matters. The parties to this Agreement shall provide assistance to each other as reasonably requested in preparing and filing Tax Returns and responding to any audit, claim, dispute or controversy (“Tax Contest”) relating to the Business prior to the Closing Date, provide reasonably detailed notice of any Tax Contest sufficient to apprise the other party of the nature of the claim, make available to each other as reasonably requested all relevant information, records, and documents, including work papers, relating to Taxes of the Business or the Acquired Assets and retain any books and records that could reasonably be expected to be necessary or useful in connection with any preparation by any other party of any Tax Return or for any Tax Contest. Lee and Buyer shall make their respective officers, employees, agents and representatives available on a basis mutually convenient to Lee and Buyer to provide explanations of any documents or information provided hereunder. Lee and the Buyer shall retain all Tax Returns, schedules and work papers, records and other documents in its possession relating to Tax matters of the Acquired Assets for each taxable period first ending after the Closing Date and for all prior taxable periods until the later of (i) the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, without regard to extensions except to the extent notified by the other party in writing of such extensions for the respective Tax periods; or (ii) six years following the due date (without extension) for such Tax Returns.
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5.5 Public Announcements. Buyer and Lee will consult with and provide each other the opportunity to review and comment upon any press release or, to the extent practicable, other public statement made by Buyer or Lee or their agents or representatives prior to the issuance of such press release or, to the extent practicable, other public statement relating to this Agreement or the transactions contemplated herein and shall not issue any such press release or, to the extent practicable, other public statement prior to such consultation, except as may be required by applicable Law or by obligations pursuant to any listing agreement with any national securities exchange or market. Buyer and Lee agree to issue a joint press release announcing this Agreement. Neither party shall allow any agent of such party, including Lazard Fréres & Co. LLC, to issue any press release except as approved by both Parties.
5.6 Transaction Costs. Buyer shall pay all transaction costs and expenses (including legal, accounting and other professional fees and expenses and other fees described in Section 4.4 hereof) that it incurs in connection with the negotiation, execution and performance of this Agreement and the consummation of the transactions contemplated hereby. Lee shall pay all transaction costs and expenses (including legal, accounting and other professional fees and expenses and other fees described in Section 3.17 hereof) that it incurs in connection with the negotiation, execution and performance of this Agreement and the consummation of the transactions contemplated hereby. Notwithstanding the foregoing and anything to the contrary contained in this Agreement, Lee and Buyer shall share and be equally responsible for any transfer Taxes (including all federal, state or local transfer, excise, sales, use, business and occupation (if any, solely with respect to the purchase of the Acquired Assets) and deed Taxes, but excluding Income Taxes) and the fees and costs of recording or filing all applicable conveyancing instruments associated with the transactions contemplated by this Agreement (collectively, the “Transfer Taxes”). Lee and Buyer shall cooperate in the preparation, execution and filing of all Tax Returns regarding any Transfer Taxes that become payable as a result of the transactions contemplated by this Agreement.
5.7 Retention of and Access to Records. From and after the Closing, Buyer shall preserve, in accordance with the normal document retention policy of Buyer, all books and records transferred by Lee to Buyer pursuant to this Agreement. In addition to the foregoing, from and after the Closing, each party shall afford to the other party hereto, and its Representatives, during normal business hours and upon the execution and delivery of a confidentiality and non-disclosure agreement in customary form and substance (which shall include appropriate exceptions for disclosure relating to Tax matters), reasonable access to the employees, books, records and other data relating to the Business, the Acquired Assets, the Assumed Liabilities and the Business Employees in its possession, and the right to make copies and extracts therefrom, to the extent that such access may be reasonably required by the requesting party (a) to facilitate the investigation, litigation and final disposition of any claims which may have been or may be made against any such party or Person or its Affiliates, (b) for the preparation of Tax Returns and audits and (c) for any other reasonable business purpose.
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5.8 Notifications. Prior to the Closing, Lee will promptly deliver notice to Buyer in writing of any specific event or circumstance of which Lee has Knowledge, or of which it receives notice, that (a) Lee believes has had a Business Material Adverse Effect or (b) would result in the conditions set forth in Section 7.2(a) or Section 7.2(b) not being satisfied; provided, however, that the delivery of any notice by Lee pursuant to this Section 5.8 shall not limit or otherwise affect the remedies available hereunder to Buyer. Prior to the Closing, Buyer will promptly deliver notice to Lee in writing of any amendment to its Credit Agreement or any specific event or circumstance of which Buyer has Knowledge, or of which it receives notice, that (i) Buyer believes would materially impair or delay the consummation of the transactions contemplated hereby; or (ii) would result in the conditions set forth in Section 7.3(a) or Section 7.3(b) not being satisfied; provided, however, that the delivery of any notice by Buyer pursuant to this Section 5.8 shall not limit or otherwise affect the remedies available hereunder to Lee.
5.9 Payments. Following the Closing, if Lee or any of its Subsidiaries receive a payment of accounts receivable belonging to the Business, it will promptly turn such payment over to Buyer and if Buyer or any of its Subsidiaries receive a payment of accounts receivable belonging to the business of Lee or its Subsidiaries, it will promptly turn such payment over to Lee.
5.10 Cooperation in Post-Closing Litigation. For a period of three (3) years following the Closing, each of Lee and Buyer will cooperate with the other in the investigation, defense or prosecution of any claim or Proceeding which is pending, instituted or threatened either (a) against Buyer and which relates to or arises out of the Assumed Liabilities or (b) against Lee and which relates to or arises out of the Excluded Liabilities. The party seeking such cooperation will reimburse the party providing such cooperation for all reasonable expenses (including salaries of employees who are required to be absent from their employment or devote substantial amounts of time in satisfaction of the obligations set forth in this Section 5.10) incurred by the party providing such cooperation in connection with such cooperation.
5.11 Updating of Lee Disclosure Schedules. Lee shall have the right from time to time after the date hereof to deliver written updates of the Lee Disclosure Schedules (for purposes of this Section 5.11, the “Updated Schedules”) to reflect changes in the Business that occur or arise after the date hereof until the date of the Closing; provided, however, that such Updated Schedules shall substantially reflect matters consistent with the covenants applicable to Lee pursuant to the terms hereof. Such Updated Schedules shall be promptly furnished to Buyer. Buyer shall have five (5) Business Days after receipt of any Updated Schedules within which to accept or object to such Updated Schedules. In the event Lee delivers Updated Schedules to Buyer prior to the Closing and Buyer does not object within five (5) Business Days after receipt of such Updated Schedules, the disclosure in the Updated Schedules shall be deemed to amend and supplement the representations and warranties of Lee and the applicable section of the Lee Disclosure Schedules thereto, and in such event Buyer shall not have the right to be indemnified for any matter contained in the Updated Schedules. If Buyer objects to any item (an
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“Objectionable Item”) in the Updated Schedules, Lee shall have thirty (30) days in which to satisfy Buyer’s objection. If the Objectionable Item cannot reasonably be cured within thirty (30) days despite good faith efforts to do so, Lee shall have a reasonable period of time necessary to cure the Objectionable Item. If Lee does not cure an Objectionable Item, and the Objectionable Item is material to the Business, Buyer may elect to close and pursue the remedies, if any, under Article 9 of this Agreement or pursue its remedies under Article 8 hereof; provided that if Objectionable Item is not material to the Business, such objection shall not relieve Buyer of the obligation to close under this Agreement, but Buyer shall retain its rights under Article 9 with respect to the Objectionable Item if the existence of the Objectionable Item constitutes a breach of this Agreement by Lee.
ARTICLE 6
EMPLOYMENT MATTERS
6.1 Acquired Employees.
(a) Lee shall, after notifying Buyer of its intent thereto and after first allowing Buyer to be present at and to participate during or in connection with such notification (if Buyer desires), provide all Business Employees with notification of the sale of the Business and the termination of each such employee’s employment with Lee on the Closing Date as a result thereof. Lee shall pay final wages to each Business Employee for work performed up to the Closing Date within such time period as required by applicable state Law. Buyer shall, or shall cause one or more of its Affiliates to, offer employment to, and employ all of the Business Employees employed by Lee on the Closing Date (each a “Hired Employee” and collectively, the “Hired Employees”), provided, however, that each Hired Employee shall be employed on an “at will” basis and may be discharged, subject to the provisions of Section 6.3, at any time with or without cause and with or without notice. Such employment will be effective as of the Closing on terms and conditions substantially equivalent in the aggregate to those currently received by such Business Employee (excluding any Benefit Plan or plan comparable thereto not currently offered to the employees of Buyer and its Affiliates). Prior to the Closing, neither Lee nor its Representatives shall induce or encourage any of the Business Employees to decline Buyer’s offers of employment or become employed by Lee.
(b) Except as otherwise provided in this Article 6, the Hired Employees shall cease active participation in the Benefit Plans effective as of the Closing and shall commence participation in benefit plans maintained by Buyer (or its Affiliates) in accordance with the terms of Buyer’s (or its Affiliates’) plans.
6.2 Welfare Plans. For all purposes (including vesting, eligibility to participate and level of benefits) under the employee welfare benefit plans of Buyer and its Affiliates providing benefits to any Hired Employees after the Closing listed on Schedule H (the “New Welfare Plans”), each Hired Employee shall, subject to applicable Law and applicable IRC requirements, be credited with his or her years of service with Lee or its Affiliates before the
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Closing to the same extent as such Hired Employee was entitled to credit for such service under any similar employee benefit plan immediately prior to the Closing, provided that the foregoing shall not apply to the extent that its application would result in a duplication of benefits. In addition, and without limiting the generality of the foregoing, (i) each Hired Employee shall become eligible to participate, to the extent permissible by the IRC and the New Welfare Plans, without any waiting time, in any and all New Welfare Plans if such Hired Employee participated immediately before the Closing in a comparable type of welfare benefit plan of Lee Enterprises (such plans, collectively, the “Old Plans”); and (ii) for purposes of each New Welfare Plan providing medical, dental, pharmaceutical and/or vision benefits to any Hired Employee, Buyer or its Affiliates shall cause all pre-existing condition exclusions and actively-at-work requirements of such New Welfare Plan to be waived for such Hired Employee and his or her covered dependents, unless such conditions would not have been waived under the comparable plans of Lee in which such Hired Employee participated immediately prior to the Closing or under the existing comparable plans of the Buyer, and Buyer shall cause any eligible expenses incurred by such employee and his or her covered dependents during the portion of the plan year of the Old Plan ending on the Closing Date to be taken into account under such New Welfare Plan for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements applicable to such employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such New Welfare Plan.
6.3 Severance and Participation Agreement Liabilities.
(a) Effective as of the Closing Date, Buyer shall assume, pay or otherwise discharge, and shall indemnify and hold Lee harmless against any liability, claim or obligation (including reasonable attorney’s fees) relating to or arising out of the Benefit Plans covering Business Employees set forth in Section 6.3 of the Lee Disclosure Schedules. Buyer agrees that it shall have no right or ability to amend any term or condition of any such agreements set forth in Section 6.3 of the Lee Disclosure Schedules without the consent of the benefited employee.
(b) Buyer shall pay, within five (5) days of termination of employment (and for those executing ADEA releases, within five (5) days after the ADEA waiting periods expire), in a lump-sum cash payment to each Eligible Hired Employee, severance in an amount equal to at least the Buyer Severance Amount (as hereinafter defined). For purposes hereof, (i) “Eligible Hired Employee” means each of Lee’s employees regularly scheduled to work twenty (20) or more hours per week (A) who is employed by Lee solely in connection with the operation of the Business prior to the Closing Date (other than as listed in Section 6.3 of the Lee Disclosure Schedules) and who is terminated by Lee effective as of the Closing, or (B) who is terminated by Buyer or one of its Affiliates without cause within six (6) months of the Closing Date and who delivers to Buyer a release of claims reasonably acceptable to Buyer; and (ii) “Buyer Severance Amount” means with respect to each Eligible Hired Employee, an amount equal to (A) one week of his or her base cash compensation, determined as of July 31, 2006 and excluding any overtime, bonuses and commissions and, for those whose compensation is based solely on commissions or sales incentive pay, one week of his or her commissions and sales incentive pay earned or which he or she is eligible to earn (determined by calculating his or her commissions
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and sales incentive pay for the twelve (12) months ended July 31, 2006 divided by fifty-two (52)), multiplied by (B) his or her years of continuous service (rounded to the nearest one-fifth year) with the Business or with any other publication or division owned (directly or indirectly) by Lee up to a maximum of twelve (12) years.
No other provision of this Section 6.3 describing Buyer’s liability or responsibility shall be interpreted to limit the liability or responsibility that Buyer has under this Section 6.3(b), except to the extent that such other provision specifically makes Lee liable or responsible. For purposes of this Section 6.3(b), references to Buyer shall include Buyer and its Affiliates.
6.4 Savings Plans. Buyer shall take all steps necessary to permit each such Hired Employee who has received an eligible rollover distribution (as defined in Section 402(c)(4) of the IRC) from the Lee Enterprises Retirement Account Plan to roll over such distribution as part of any lump sum cash distribution into an account under a 401(k) savings plan maintained by Buyer or its Affiliates. Buyer shall credit the service of each Hired Employee with Lee or its Affiliates for purposes of eligibility and vesting under Buyer’s savings plan.
6.5 Vacation. Except as may otherwise be required by Law, on the Closing Date, but effective as of the Effective Time, Buyer shall assume Lee’s liability for all earned, but unpaid vacation and leave of absence time of Hired Employees to the extent such liability is not already an Assumed Liability, provided that such liability is reflected in the Statement of Working Capital.
6.6 General. Nothing in this Article 6 or elsewhere in this Agreement shall be construed as (a) conferring any legal rights upon any Hired Employee for continuation of employment by Buyer or its Affiliates, (b) requiring Buyer to implement, or limiting the rights of Buyer to amend or discontinue, any fringe benefit plan, program or practice or any other employee benefit plan of any nature whatsoever, except as expressly provided otherwise in this Article 6 or (c) conferring upon any Hired Employee any rights or remedies under this Agreement (including under this Article 6), as a third party beneficiary or otherwise.
6.7 Reimbursements. If Lee pays wages, salaries or benefit payments for any Hired Employee for a period after the Effective Time, Buyer shall promptly reimburse Lee for such payments. If Buyer pays wages, salaries or benefit payments for any Hired Employee for a period prior to the Effective Time, Lee shall promptly reimburse Buyer for such payments.
ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATIONS
7.1 Conditions to Each Party’s Obligation. The respective obligation of each party to effect the transactions contemplated by this Agreement is subject to the satisfaction or waiver, on or prior to the Closing Date, of the following conditions:
(a) HSR Act. The waiting period (and each extension thereof, if any) under
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the HSR Act applicable to the transactions contemplated under this Agreement shall have terminated or expired.
(b) No Injunction. No temporary or permanent injunction or other order issued by any court of competent jurisdiction prohibiting consummation of the transactions contemplated under this Agreement shall be in effect.
(c) No Proceedings. At the Closing, there shall not be pending any Proceeding in which any Governmental Entity of competent jurisdiction seeks to make any of the material transactions contemplated hereby illegal or otherwise restrain in any material respect or prohibit consummation of any of the material transactions contemplated hereby.
7.2 Conditions to Obligations of Buyer. The obligations of Buyer to purchase the Acquired Assets and to take the other actions required to be taken by Buyer at the Closing are subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):
(a) Accuracy of Representations. The representations and warranties of Lee (subject to the qualifications in the preamble paragraph to Article 3) set forth in this Agreement (i) which are qualified by a “Business Material Adverse Effect” qualification or other materiality qualification shall be true and correct in all respects as so qualified at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date, and (ii) which are not qualified by a “Business Material Adverse Effect” qualification or other materiality qualification shall be true and correct in all material respects at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date; provided, however, that with respect to clauses (i) and (ii) hereof, representations and warranties that are made as of a particular date or period shall be true and correct (in the manner set forth in clauses (i) or (ii), as applicable) only as of such date or period, and Buyer shall have received a certificate to such effect, signed on behalf of Lee by its chief executive officer or its chief financial officer.
(b) Lee Performance. All of the covenants and obligations that Lee is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been duly performed and complied with in all material respects. Buyer shall have received a certificate to such effect, signed on behalf of Lee, by its chief executive officer or its chief financial officer.
(c) Consents. All consents and waivers necessary to the consummation of the transactions contemplated hereby and for the operation of the Business by Buyer shall have been obtained, and Buyer shall have obtained or been granted the right to use all Lee Permits necessary to its operation of the Business, except where the failure to obtain such consent, waiver or right would not have, individually or in the aggregate, a Business Material Adverse Effect.
7.3 Conditions to Obligations of Lee. The obligations of Lee to sell the Acquired
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Assets and to take the other actions required to be taken by Lee at the Closing are subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Lee, in whole or in part):
(a) Accuracy of Representations. The representations and warranties of Buyer set forth in this Agreement (i) which are qualified by the words “materially impair or delay the consummation of the transactions contemplated hereby” shall be true and correct in all respects as so qualified at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date; and (ii) which are not qualified by the words “materially impair or delay the consummation of the transactions contemplated hereby” shall be true and correct at and as of the date of this Agreement and at and as of the Closing Date as though made at and as of the Closing Date, except for such failures to be true and correct as would not materially impair or delay the consummation of the transactions contemplated hereby; provided, however, that, with respect to clauses (i) and (ii) hereof, representations and warranties that are made as of a particular date or period shall be true and correct (in the manner set forth in clauses (i) and (ii) as applicable) only as of such date or period, and Lee shall have received a certificate to such effect, signed on behalf of Buyer by its chief executive officer or its chief financial officer.
(b) Buyer’s Performance. All of the covenants and obligations that Buyer is required to perform or to comply with pursuant to this Agreement at or prior to the Closing shall have been performed and complied with in all material respects. Lee shall have received a certificate to such effect, signed on behalf of Buyer, by its chief executive officer or its chief financial officer.
ARTICLE 8
TERMINATION
8.1 Termination. This Agreement may be terminated at any time prior to the Closing Date:
(a) by mutual written consent of Lee and Buyer;
(b) by Lee or Buyer if any Governmental Entity shall have issued an order, decree or ruling permanently enjoining or prohibiting the consummation of the transactions contemplated under this Agreement and such order, decree or ruling shall have become final and nonappealable (but only if the party seeking to terminate pursuant to this clause (b) shall have, subject to Section 5.3(e), used commercially reasonable efforts to oppose and remove such order, decree or ruling);
(c) by Lee or Buyer if the Closing has not occurred (other than through the failure of any party seeking to terminate this Agreement to comply fully with its obligations under this Agreement) on or before the later of October 2, 2006, or such later date as Lee and Buyer may agree upon (the “End Date”);
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(d) by Lee, if Buyer shall have breached or failed to perform in any material respect any of its representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would result in a failure of a condition set forth in Section 7.3(a) or 7.3(b) and cannot be cured by the End Date, provided that Lee shall have given Buyer written notice, delivered at least thirty (30) days prior to such termination, notifying Buyer of such breach or failure to perform;
(e) by Buyer, if Lee Enterprises or Lee Procurement shall have breached or failed to perform in any material respect any of their representations, warranties, covenants or other agreements contained in this Agreement, which breach or failure to perform would result in a failure of a condition set forth in Section 7.2(a) or 7.2(b) and cannot be cured by the End Date, provided Buyer shall have given Lee written notice, delivered at least thirty (30) days prior to such termination, notifying Lee of such breach or failure to perform; and
(f) by Buyer, if entitled to do so under Section 5.11.
8.2 Effect of Termination. If this Agreement is terminated under Section 8.1, this Agreement shall immediately become void and have no effect, without any liability or obligation on the part of Lee or Buyer, other than the provisions of Section 3.17, Section 4.4, Section 5.2(b), this Section 8.2 and Article 10. Notwithstanding the foregoing, nothing in this section shall relieve Buyer or Lee for any willful breach of such party’s representations, warranties, covenants or agreements in this Agreement.
ARTICLE 9
INDEMNIFICATION; REMEDIES
9.1 Survival. All representations and warranties contained herein, and all representations and warranties contained in the certificates delivered pursuant to this Agreement and any other certificate or document delivered pursuant to this Agreement shall survive the Closing and terminate on the last day of the twenty-third (23rd) month following the anniversary of the Closing Date, except that the representations and warranties contained in Sections 3.2(a), 3.2(b), 3.6, 3.12, 3.17, 4.2(a), 4.2(b), 4.4 and 4.5 shall terminate on the fifth anniversary of the Closing Date.
9.2 Indemnification By Buyer. Subject to the limitations set forth herein, from and after the Closing, Buyer shall indemnify, defend and hold harmless Lee Enterprises and Lee Procurement and their respective Affiliates and Representatives (collectively, the “Lee Indemnified Parties”), from and against all judgments, settlements, demands, claims, actions or causes of action, deficiencies, assessments, Liabilities, losses, damages, interest, fines, penalties, costs and expenses (including reasonable legal, accounting and other costs and expenses incurred in connection with investigating, defending, settling or satisfying any and all demands, claims,
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causes of action, Proceedings, deficiencies, assessments, judgments or appeals, and in seeking indemnification therefor pursuant to this Section 9.2) (collectively, “Losses”) arising out of, resulting from, related to or associated with:
(a) Any breach of any representation or warranty made by the Buyer contained in this Agreement; or
(b) Any non-fulfillment or breach of any covenant or agreement of the Buyer in this Agreement; or
(c) Any Assumed Liabilities; or
(d) Any Liability to the extent relating to and arising out of the operation of the Business following the Closing, excluding, however, all Excluded Liabilities.
9.3 Indemnification By Lee. Subject to the limitations set forth herein, from and after the Closing, Lee shall indemnify, defend and hold harmless Buyer and its Affiliates and their respective stockholders, officers, directors, employees, Affiliates, agents and Representatives (collectively, the “Buyer Indemnified Parties”), from and against all Losses arising out of, resulting from, related to or associated with:
(a) Any breach of any representation or warranty made by Lee contained in this Agreement (without regard to the materiality thereof); or
(b) Any nonfulfillment or breach of any covenant or agreement of Lee in this Agreement; or
(c) Any Excluded Liabilities.
9.4 Notice of Claims. Each party entitled to indemnification under this Article 9 (the “Indemnified Party”) shall give notice to the party required to provide such indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claims as to which indemnity is sought, and shall permit the Indemnifying Party to assume the defense of any third party claim or Proceeding resulting therefrom pursuant to Section 9.5; provided, however, that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Article 9 except to the extent that the Indemnifying Party has been adversely affected by such failure. The Indemnified Party shall furnish such information regarding itself or the claim in question as the Indemnifying Party may reasonably request in writing and shall otherwise cooperate with the Indemnifying Party to such extent as shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom.
9.5 Procedure for Indemnification — Third Party Claims.
(a) Promptly after receipt by an Indemnified Party under Section 9.2 or
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Section 9.3 of notice of the commencement of any Proceeding against it, such Indemnified Party will, if a claim is to be made against an Indemnifying Party under such Section, give notice to the Indemnifying Party of the commencement of such claim, but the failure to notify the Indemnifying Party will not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party, except to the extent that the Indemnifying Party demonstrates that the defense of such action is prejudiced by the Indemnified Party’s failure to give such notice.
(b) If any Proceeding referred to in Section 9.5(a) is brought against an Indemnified Party and it gives notice to the Indemnifying Party of the commencement of such Proceeding, the Indemnifying Party will be entitled to participate in such Proceeding and, to the extent that it wishes (unless (x) the Indemnifying Party is also a party to such Proceeding and the Indemnified Party determines in good faith that joint representation would be inappropriate, or (y) the Indemnifying Party fails to provide reasonable assurance to the Indemnified Party of its financial capacity to defend such Proceeding and provide indemnification with respect to such Proceeding), to assume the defense of such Proceeding with counsel satisfactory to the Indemnified Party and, after notice from the Indemnifying Party to the Indemnified Party of its election to assume the defense of such Proceeding, the Indemnifying Party will not, as long as it diligently conducts such defense, be liable to the Indemnified Party under this Article 9 for any fees of other counsel or any other expenses with respect to the defense of such Proceeding, in each case subsequently incurred by the Indemnified Party in connection with the defense of such Proceeding. If the Indemnifying Party assumes the defense of a Proceeding, (i) no compromise or settlement of such claims may be effected by the Indemnifying Party without the Indemnified Party’s consent unless the sole relief provided is monetary damages that are paid in full by the Indemnifying Party; and (ii) the Indemnified Party will have no liability with respect to any compromise or settlement of such claims effected without its consent. If notice is given to an Indemnifying Party of the commencement of any Proceeding and the Indemnifying Party does not, within thirty (30) days after the Indemnified Party’s notice is given, give notice to the Indemnified Party of its election to assume the defense of such Proceeding, the Indemnifying Party will be bound by any determination made in such Proceeding or any compromise or settlement effected by the Indemnified Party.
9.6 Procedure for Indemnification — Other Claims. The term “Losses” is not limited to matters asserted by third parties, but includes Losses incurred or sustained by a party in the absence of third party claims. A claim for indemnification for any matter not involving a third-party claim may be asserted by notice to the party from whom indemnification is sought.
9.7 Limitations on Indemnification.
(a) No claim for indemnification under Section 9.2(a) or Section 9.3(a) for breach of any representation or warranty shall be valid unless made within the applicable survival period as set forth Section 9.1.
(b) No party shall be obligated to indemnify any other party or parties under Section 9.2(a) or Section 9.3(a) unless the claimant’s aggregate amount of Losses as to which a
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right of indemnification is provided under Section 9.2(a) or Section 9.3(a) shall exceed $180,000, in which event all Losses above $180,000 shall be indemnifiable; provided that Buyer’s right to recover under Section 9.3(a) for breach of any representation or warranty contained in Sections 3.2(a), 3.2(b), 3.12 or 3.17 shall not be subject to such limitation.
(c) No individual breach of any such representation or warranty shall be deemed to have occurred unless the actual Loss incurred as a result thereof is in excess of $2,000. In no event shall the aggregate liability of Lee pursuant to Section 9.3(a) exceed $1,800,000; provided that Buyer’s right to recover under Section 9.3(a) for breach of any representation or warranty contained in Sections 3.2(a), 3.2(b), 3.6, 3.12 or 3.17 shall not be subject to such limitation. In no event shall the aggregate liability of Lee or Buyer pursuant to this Agreement exceed the Purchase Price.
(d) If Buyer acquires Knowledge prior to Closing that any representation, warranty, covenant or agreement of Lee contained in this Agreement or the Lee Disclosure Schedules (including Updated Schedules pursuant to Section 5.11) or any of the Schedules attached hereto has been breached, is false or requires modification or amendment to be correct, Buyer shall provide Lee with written notice as soon as practicable, but in any event prior to the Closing. If Buyer fails to give such notice, Buyer shall have no right or remedy after the Closing with respect to such inaccuracy or breach and shall be deemed to have waived its rights to indemnification in respect thereof and any Loss in respect thereof shall be disregarded for purposes of the deductible contained in Section 9.7(b).
(e) No party shall be liable under Article 9 for any (i) Loss relating to any matter to the extent that there is included in the calculation of Closing Working Capital a specific liability or reserve relating to such matter, but only to the extent of such reserve, (ii) Consequential Damages or punitive Loss (other than a consequential or punitive Loss payable in connection with a third-party claim), or (iii) Loss based on a claim for lost profits which are not Allowable Lost Profits (other than lost profits payable in connection with a third-party claim).
(f) This Section 9.7 shall have no application to Lee’s indemnification obligations with respect to Excluded Liabilities. Lee’s obligation to indemnify an Indemnified Party against an Excluded Liability shall be without limitation as to time or amount.
9.8 Exclusive Remedy. Subject to the applicability of Article 8 hereof, except for remedies that cannot be waived as a matter of Law including claims under applicable state and federal securities laws and except for covenants contained herein which by their terms are to be performed at or after the Closing and Section 10.1, the indemnification obligations under this Article 9 shall be the sole and the exclusive remedy of the parties hereto with respect to any breach of any representation, warranty, covenant or agreement under this Agreement by any party hereto or any certificate delivered in connection herewith, except that, subject to Article 8 hereof, nothing herein or in any such certificate shall be construed or interpreted as limiting or impairing the rights or remedies that the parties hereto may have: (i) at equity for injunctive relief or specific performance of this Agreement; (ii) at law for fraud or intentional torts.
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ARTICLE 10
GENERAL PROVISIONS
10.1 Expenses. Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereunder, including all fees and expenses of agents, representatives, counsel and accountants incurred prior to Closing. Buyer will pay the HSR Act filing fee for the transactions contemplated hereby. In the event of termination of this Agreement, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by another party.
10.2 Notices. All notices, requests, claims and other communications under this Agreement shall be in writing and shall be deemed given if delivered personally or by overnight courier to the parties at the following addressed (or at such other address for a party as shall be specified by notice from such party):
| (a) | If to Lee, to | |
| Lee Enterprises, Incorporated | ||
| 201 N. Harrison Street, Ste. 600 | ||
| Davenport, IA 52801-1939 | ||
| Attention: Mary E. Junck, | ||
| Chairman, President & CEO and | ||
| Karen J. Guest, Esq. | ||
| Vice President and Chief Legal Officer | ||
| Phone: (563) 323-2100 | ||
| Telecopy: (563) 323-9608 | ||
| with a copy to: | ||
| Lane & Waterman LLP | ||
| 220 N. Main Street, Ste. 600 | ||
| Davenport, IA 52801-1939 | ||
| Attention: C. Dana Waterman III, Esq. | ||
| Edmund H. Carroll, Esq. | ||
| Phone: (563) 324-3246 | ||
| Telecopy: (563)324-1616 | ||
| (b) | If to Buyer, to: | |
| Target Media Partners | ||
| 5900 Wilshire Boulevard | ||
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| Suite 550 | ||
| Los Angeles, CA 90036 | ||
| Attention: Susan Humphreville | ||
| Phone: (323) 930-3123 | ||
| Telecopy: (323) 930-2836 | ||
| with a copy to: | ||
| Jared Laskin | ||
| 2230 West Chapman Avenue | ||
| Suite 224 | ||
| Orange, CA 92868 | ||
| Phone: (714) 281-2361 | ||
| Telecopy: (714) 281-2368 | ||
10.3 References. For purposes of this Agreement, references in this Agreement to specific Laws or to specific provisions of Laws shall include all rules and regulations promulgated thereunder. Any statute defined or referred to herein or in any agreement or instrument referred to herein shall mean such statute as from time to time amended, modified or supplemented, including by succession of comparable successor statutes.
10.4 Interpretation. When a reference is made in this Agreement to a Section, Exhibit or Disclosure Schedule or other Schedule, such reference shall be to a Section of, or an Exhibit or Schedule to or related to, this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the word “include,” “includes” or “including” is used in this Agreement, it shall be deemed to be followed by the words “without limitation.”
10.5 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to each other party.
10.6 Entire Agreement; Third-Party Beneficiaries. This Agreement and the other agreements referred to herein constitute the entire agreement (and supersede each prior agreement and understanding, whether written or oral) among the parties regarding the subject matter of this Agreement. This Agreement is not intended to confer any rights or remedies on any Person other than the parties hereto. The rights of Buyer Indemnified Parties and Lee Indemnified Parties under Article 9 may be asserted by Buyer and Lee, respectively.
10.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware regardless of any Laws that might otherwise govern under applicable principles of conflicts of laws thereof.
10.8 Assignment. Neither this Agreement nor any right, interest or obligation
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hereunder shall be assigned, in whole or in part, by operation of law or otherwise, by any party without the prior written consent of the other party. Subject to the preceding sentence of this Section 10.8, this Agreement will be binding upon, inure to the benefit of, and be enforceable by, the parties and their respective legal successors and permitted assigns.
10.9 Nondisclosure. Except as may be required by applicable Law or the requirements of the New York Stock Exchange, for a period of three (3) years following the Closing, Lee will (and will cause its Subsidiaries to) take commercially reasonable steps comparable to those steps Lee takes with regard to its own similar confidential information to protect the confidentiality of all confidential information related to the Business in the possession of Lee and its Subsidiaries (other than information which is or becomes known to the public other than through a breach of this Section by Lee). Except as may be required by applicable Law or the requirements of the New York Stock Exchange, Lee agrees to keep confidential the provisions of Section 6.3(b).
10.10 Amendments: Waiver. This Agreement may not be amended or modified except by written agreement of the parties. No breach of any covenant, agreement, representation or warranty made herein shall be deemed waived unless expressly waived in writing by the party who might assert such breach.
10.11 Enforcement. The parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with its terms or were otherwise breached. Each party shall be entitled to injunctive relief to prevent any breach of this Agreement and to enforce this Agreement specifically in any court of the State of Delaware or any court of the United States located in the State of Delaware (in addition to any other remedy to which such party is entitled at law or in equity). In addition, each party hereby:
(a) submits itself to the personal jurisdiction of (i) the courts of the State of Delaware, and (ii) the United States District Court for the District of Delaware with respect to any dispute arising out of this Agreement or any transaction contemplated hereby to the extent such courts would have subject matter jurisdiction with respect to such dispute;
(b) agrees that it will not attempt to deny or defeat such personal jurisdiction or venue by motion or other request for leave from any such court; and
(c) agrees that it will not bring any action relating to this Agreement (or any transactions contemplated by this Agreement) in any court order than such courts referred to above.
10.12 Severability. Each provision of this Agreement will be interpreted so as to be effective and valid under applicable Law, but if any provision is held invalid, illegal or unenforceable under applicable Law in any jurisdiction, then such invalidity, illegality or unenforceability will not affect any other provision, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been included herein.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
| TARGET MEDIA PARTNERS OPERATING COMPANY, LLC | ||
| By: | /s/ Susan M. Humphreville | |
| Name: | Susan M. Humphreville | |
| Title: | Chief Financial Officer | |
| LEE ENTERPRISES, INCORPORATED | ||
| By: | /s/ Carl G. Schmidt | |
| Name: | Carl G. Schmidt | |
| Title: | Vice President | |
| Chief Financial Officer and Treasurer | ||
| LEE PROCUREMENT SOLUTIONS CO. | ||
| By: | /s/ Carl G. Schmidt | |
| Name: | Carl G. Schmidt | |
| Title: | President | |
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EXHIBIT 21
LEE ENTERPRISES, INCORPORATED
AND SUBSIDIARIES
SUBSIDIARIES AND ASSOCIATED COMPANIES
| State of Organization |
Percentage of Voting Securities Owned | |||
| Lee Enterprises, Incorporated |
Delaware | Parent | ||
| Lee Publications, Inc. |
Delaware | 100% | ||
| Accudata, Inc. |
Iowa | 100% | ||
| INN Partners, L.C. d/b/a TownNews.com |
Iowa | 82.5% | ||
| Lee Procurement Solutions Co. |
Iowa | 100% | ||
| Sioux City Newspapers, Inc. |
Iowa | 100% | ||
| Target Marketing Systems, Inc. |
Iowa | 100% | ||
| Journal-Star Printing Co. |
Nebraska | 100% | ||
| K. Falls Basin Publishing, Inc. |
Oregon | 100% | ||
| Lee Consolidated Holdings Co. |
South Dakota | 100% | ||
| LINT Co. |
South Dakota | 100% | ||
| Madison Newspapers, Inc. |
Wisconsin | 50% | ||
| Flagstaff Publishing Co. |
Washington | 100% | ||
| Hanford Sentinel, Inc. |
Washington | 100% | ||
| Kauai Publishing Co. |
Delaware | 100% | ||
| Napa Valley Publishing Co. |
Washington | 100% | ||
| Northern Illinois Publishing Co. |
Delaware | 100% | ||
| Northern Lakes Publishing Co. |
Delaware | 100% | ||
| Pantagraph Publishing Co. |
Delaware | 100% | ||
| Pulitzer Inc. |
Delaware | 100% | ||
| Pulitzer Missouri Newspapers, Inc. |
Delaware | 100% | ||
| Pulitzer Newspapers, Inc. |
Delaware | 100% | ||
| Lee Foundation |
Iowa | 100% | ||
| Pulitzer Technologies, Inc. |
Delaware | 100% | ||
| Pulitzer Utah Newspapers, Inc. |
Delaware | 100% | ||
| Santa Maria Times, Inc. |
Nevada | 100% | ||
| Southwestern Oregon Publishing Co. |
Oregon | 100% | ||
| Star Publishing Company |
Arizona | 100% | ||
| Ynez Corporation |
California | 100% | ||
| Fairgrove LLC |
Delaware | 95% | ||
| Homechoice, LLC |
Utah | 100% | ||
| HSTAR LLC |
Delaware | 100% | ||
| NLPC LLC |
Delaware | 100% | ||
| NVPC LLC |
Delaware | 100% | ||
| Pulitzer Network Systems LLC |
Delaware | 100% | ||
| SHTP LLC |
Delaware | 100% | ||
| SOPC LLC |
Delaware | 100% | ||
| St. Louis Post-Dispatch LLC |
Delaware | 95% | ||
| STL Distribution Services LLC |
Delaware | 95% | ||
| Suburban Journals of Greater St. Louis LLC |
Delaware | 100% | ||
| TNI Partners |
Arizona | 50% | ||
| Community Distribution Partners, LLC |
Montana | 50% |
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements No. 333-06435, No. 333-105219, No. 333-125833, No. 333-132767, No. 333-132768 and Post-Effective Amendment No. 1 to No. 333-132768 on Form S-8 and Registration Statement No. 333-127213 on Form S-3 of our report dated December 14, 2006, relating to the financial statements of Lee Enterprises, Incorporated and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Lee Enterprises, Incorporated for the year ended September 30, 2006.
/S/ DELOITTE & TOUCHE LLP
Davenport, Iowa
December 14, 2006
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned directors of Lee Enterprises, Incorporated, hereby severally constitute Mary E. Junck and Carl G. Schmidt, 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, 2006 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.
| Signature |
Date | |||
| /s/ Richard R. Cole Richard R. Cole, Director |
November 15, 2006 | |||
| /s/ Nancy S. Donovan Nancy S. Donovan, Director |
November 15, 2006 | |||
| /s/ William E. Mayer William E. Mayer, Director |
November 15, 2006 | |||
| /s/ Herbert W. Moloney III Herbert W. Moloney III, Director |
November 15, 2006 | |||
| /s/ Andrew E. Newman Andrew E. Newman, Director |
November 18, 2006 | |||
| /s/ Gordon D. Prichett Gordon D. Prichett, Director |
November 15, 2006 | |||
| /s/ Gregory P. Schermer Gregory P. Schermer, Director |
November 15, 2006 | |||
| /s/ Mark B. Vittert Mark B. Vittert, Director |
November 15, 2006 | |||
.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mary E. Junck, certify that:
| 1. | I have reviewed this annual report on Form 10-K (Annual Report) of Lee Enterprises, Incorporated (Registrant); |
| 2. | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; |
| 3. | Based on my knowledge, the Consolidated Financial Statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Annual Report based on such evaluation; and |
| d) | disclosed in this Annual Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of Registrant’s Board of Directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: December 14, 2006
| /s/ Mary E. Junck |
| Mary E. Junck Chairman, President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Carl G. Schmidt, certify that:
| 1. | I have reviewed this annual report on Form 10-K (Annual Report) of Lee Enterprises, Incorporated (Registrant); |
| 2. | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; |
| 3. | Based on my knowledge, the Consolidated Financial Statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Annual Report; |
| 4. | The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this Annual Report based on such evaluation; and |
| d) | disclosed in this Annual Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
| 5. | The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of Registrant’s Board of Directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: December 14, 2006
| /s/ Carl G. Schmidt |
| Carl G. Schmidt Vice President, Chief Financial Officer and Treasurer |
EXHIBIT 32
The following statement is being furnished to the Securities and Exchange Commission solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), which carries with it certain criminal penalties in the event of a knowing or willful misrepresentation.
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: Lee Enterprises, Incorporated
Ladies and Gentlemen:
In accordance with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350), each of the undersigned hereby certifies that to our knowledge:
| (i) | this annual report on Form 10-K for the period ended September 30, 2006 (Annual Report), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and |
| (ii) | the information contained in this Annual Report fairly presents, in all material respects, the financial condition and results of operations of Lee Enterprises, Incorporated for the periods presented in the Annual Report. |
Dated as of this 14th day of December 2006.
| /s/ Mary E. Junck | /s/ Carl G. Schmidt | |||
| Mary E. Junck | Carl G. Schmidt | |||
| Chairman, President and | Vice President, Chief Financial Officer | |||
| Chief Executive Officer |
and Treasurer | |||
A signed original of this written statement required by Section 906 has been provided to Lee Enterprises, Incorporated and will be retained by Lee Enterprises, Incorporated and furnished to the Securities and Exchange Commission upon request.