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 25, 2016
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 - $0.01 par value | New York Stock Exchange |
Preferred Share Purchase Rights | New York Stock Exchange |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 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. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a "smaller reporting company" under Rule 12b-2 under the Exchange Act. See the definition of “large accelerated filer", "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller Reporting Company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
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, 2016, such aggregate market value is approximately $93,233,000. 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 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 Registrant's classes of common stock, as of November 30, 2016. Common Stock, $0.01 par value, 55,562,832 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2017 are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS | PAGE | ||
Part I | |||
Item 1 | |||
Item 1A | |||
Item 1B | |||
Item 2 | |||
Item 3 | |||
Item 4 | Mine Safety Disclosures | ||
Part II | |||
Item 5 | |||
Item 6 | |||
Item 7 | |||
Item 7A | |||
Item 8 | |||
Item 9 | |||
Item 9A | |||
Item 9B | |||
Part III | |||
Item 10 | |||
Item 11 | |||
Item 12 | |||
Item 13 | |||
Item 14 | Principal Accounting Fees and Services | ||
Part IV | |||
Item 15 | |||
References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2016", "2015", "2014" and the like refer to the fiscal years ended the last Sunday in September.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our 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, which in some instances are beyond our control, are:
•Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
•Our ability to comply with the financial covenants in our credit facilities;
•Our ability to refinance our debt as it comes due;
•That the warrants issued in our refinancing will not be exercised;
•The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
•Change in advertising and subscription demand;
•Changes in technology that impact our ability to deliver digital advertising;
•Potential changes in newsprint, other commodities and energy costs;
•Interest rates;
•Labor costs;
•Legislative and regulatory rulings;
•Our ability to achieve planned expense reductions;
•Our ability to maintain employee and customer relationships;
•Our ability to manage increased capital costs;
•Our ability to maintain our listing status on the NYSE;
•Competition; and
•Other risks detailed from time to time in our publicly filed documents.
Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered 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. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.
PART I
ITEM 1. BUSINESS
Lee Enterprises, Incorporated is a leading provider of local news and information, and a major platform for print and digital advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 49 markets (including TNI Partners ("TNI") and Madison Newspapers ("MNI")), across 21 states, are principally midsize or small. Through our paid and unpaid print and digital platforms, we reach an overwhelming majority of adults in our markets.
Our products include:
• | 46 daily and 34 Sunday newspapers with print and digital subscribers totaling 0.8 million and 1.2 million, respectively, for the 13 weeks ended September 25, 2016. We estimate that more than three million people read our printed daily newspapers each day. |
• | Nearly 300 weekly newspapers and classified and niche publications. |
Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Community newspapers and their associated digital media are a valuable source of local news and information attracting readers and providing an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers that actively seek our content and serve as an attractive target for our advertisers.
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We do not face significant competition from other local daily newspapers in most of our markets, although there is significant competition for audience in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition.
Lee Enterprises, Incorporated was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange ("NYSE") in 1978. We have acquired and divested a number of businesses since inception.
In 2014, we completed a comprehensive refinancing of our debt (the "2014 Refinancing"). Final maturities of our debt have been extended to dates from March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.
We experienced significant net losses since 2007 primarily due to non-cash charges for impairment of intangible and other assets in 2013, 2011, 2009 and 2008 and reorganization costs in 2012. Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at September 25, 2016. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 3 and 4 of the Notes to Consolidated Financial Statements, included herein, for additional information.
STRATEGIC INITIATIVES
We are focused on several strategic initiatives:
Comprehensive Local News That Drives Frequency And Engagement
We drive frequency and engagement with our products by delivering valuable, intensely local, original news and information that, in many cases, we believe our audiences cannot otherwise readily obtain. Our large and talented news and editorial staff provide constant, real-time local news with significant breadth, depth and reliability. Our full access platforms provide our subscribers with in-depth and breaking news and information through continuous updates to our stories digitally on websites, mobile devices and tablets.
We believe the strength of our local brands is the result of the quality and size of our news gathering staff, which allow us to provide the most comprehensive coverage of local news in our markets. In most of our markets, we are the leading source of print and digital news and information. As the digital consumption of news has expanded, we have moved quickly to develop applications that address audience and digital advertising demands for mobile and tablet advertising platforms. As new digital technologies emerge, we expect to move rapidly to make our content available through them and monitize the audience.
We are focused on continually improving the functionality and the look and feel of all our news platforms, providing greater depth of coverage and reader engagement. We are arming our journalists with new tools to give them real-time information about audience engagement on our digital platforms, helping inform their decisions on both presentation and coverage.
We believe our journalists are at the forefront for information about the local community. We are engaging our readers by providing information that we believe stirs public awareness, advances ideas, inspires vision, creates debate and provokes action. Through our news leadership we strive to contribute to community betterment, promote education, foster commerce and help improve the quality of life in our markets.
Accelerate And Expand Digital Revenue Growth
Our digital businesses have experienced rapid growth since 2010. Digital advertising grew 5.6% and reached 25.3% of total advertising and marketing services revenue in the 13 weeks and year ended September 25, 2016. We are growing revenue by offering an expansive array of digital products, including video, digital couponing, behavioral targeting, audience retargeting, banner ads and social networking.
We provide digital marketing services to small and midsized businesses ("SMBs"), including search engine marketing ("SEM"), social media, audience extension, business profiles and website hosting and design. Lee Local offers small business solutions including search engine optimization (“SEO”), local online marketing, social media marketing, video advertising and web site design. Lee Local seeks to help small businesses maximize the return on marketing dollars
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by increasing audiences, expanding brands, and enhancing their web presence. We believe that these innovative solutions will continue to drive meaningful new opportunities for us to grow our digital marketing revenue.
Digital national revenue grew 20.4% in 2016, driven by our sweeps program and improved inventory management and pricing. Mobile advertising increased 19.6% and digital retail advertising that represents 60.5% of total digital advertising increased 9.6% in 2016.
INN Partners, L.C. ("TownNews.com"), of which we own 82.5%, provides digital infrastructure and digital publishing services for nearly 1,600 daily and weekly newspapers, along with universities, television stations and niche publications, as well as for us. We believe TownNews.com represents a powerful opportunity for us to drive additional digital revenue. In 2016, digital services revenue, which is primarily TownNews,com, increased to more than $14 million, or 13.7% over 2015.
We are also a member of the Local Media Consortium (the “Consortium”). The Consortium partners with companies like Google, Yahoo! and other technology companies and service providers to increase the potential share of new revenue and audience-building programs available to consortium members, as well as the quality of information and advertising services available from, Consortium members. The Consortium currently includes more than 1,600 local newspapers and hundreds of local broadcast outlets in the United States.
Our sales force is larger than any local competitor, and we believe they are the most highly trained and proficient sales force in our markets. We also continue to expand our array of digital products to address advertisers evolving needs, while seeking to increase our share of advertising and marketing services spending from existing customers and react to competition.
In 2016, no single advertiser accounted for more than 2% of advertising revenue and our top 10 advertisers represented 8.9% of advertising revenue.
Our local sales forces are one of our core strengths. We have strong relationships with businesses in our markets and offer a wide array of products to deliver the advertisers' message. In fact eighty percent of our advertising revenue now comes from local and regional businesses, and our sales executives pitch the power of our audiences directly to these local decision makers.
To address the evolving needs of local advertisers we are changing the way we sell local advertising to maximize our opportunities with small and medium-sized businesses. Local, controllable advertising accounts, in which our local sales teams have direct contact with the advertising decision makers are the core of our business. To address the needs of and better serve these local advertisers we developed the "Edison Project" which is directly aimed at these local advertisers.
With Edison, we are completely restructuring local sales teams and simplifying advertising packages to offer bigger ads and more frequency across our digital and print products.
In our test markets, results from the Edison Project have been very promising and we're expanding Edison into all Lee markets beginning in the first quarter of fiscal 2017, with full implementation expected by the end of the second fiscal quarter.
In addition, our successful Big Pitch initiative targets larger, local accounts such as the big local hardware store or regional hospital group. We pair creative advertising campaigns with our broad suite of products, both digital and print. Because of the success of this program we've added creative resources and accelerated the number of pitches developed providing greater creativity, faster speed to market, and more pitches closed.
Grow Audience Revenue And Engagement
Based on independent audience research conducted on our behalf, for the period January to June 2016, we reached 74% of all adults over the course of a seven-day period in 11 selected markets, which include most of our largest strategic business units. Half of the adults in these markets read our newspapers in print, with 19% being both newspaper readers and visitors to our newspaper digital platforms. Another 17% were exclusive digital users. The remaining 12% primarily used our newspapers to obtain advertising and other information.
Our audiences strength spans across all age groups. Among the 18-29 age group, 15% read our printed newspapers,
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while 23% accessed our publications by web, mobile or tablet. Another 11% primarily used our newspapers to obtain advertising and other information.
As media access and delivery vehicles continue to evolve, it is clear that our audiences are evolving and increasingly moving from one delivery platform to another throughout the day and accessing our content in print, on desktops and laptops, and on mobile devices. We seek to grow our audience and engagement on whatever platform they choose by, among other things, continually improving content and presentation to maximize the unique and evolving capabilities of each platform. Our digital audiences are massive. Unique visitors to our digital sites totaled 26.0 million in September 2016, while page views totaled 218.1 million in September 2016.
To serve our readers across all delivery platforms, in 2014, we began to phase in a new subscription model, which is now in place in substantially all of our markets. This model, known as full access, provides subscribers complete access to our print and digital products available in their market for a single subscription rate.
Transforming Our Business And Managing Our Costs
We are transforming our business model and reducing our costs to maintain our margins and cash flows. We have regionalized many staff functions; consolidated and/or selectively outsourced printing and ad production; discontinued unprofitable publications; reduced newsprint volume significantly; and continually seek to improve the efficiencies of our operation and reduce costs. We have reduced personnel while protecting our strengths in news, sales and digital products. In 2016, we reduced cash costs(1) excluding unusual matters 4.8%. We continue our focus on cost efficiencies while investing in revenue drivers.
Generate Strong Adjusted EBITDA(1) With A Commitment To Reduce Our Debt
Throughout the last economic downturn and subsequent recovery, and during a time of unprecedented transition for our industry, we have posted strong adjusted EBITDA. We require modest capital expenditures and pension contributions, and we continue to make significant debt reductions each year. Since 2009, we have dedicated substantially all of our free cash flow to debt repayment, and we intend to continue to use all our available cash to continue to reduce debt.
The principal amount of debt was reduced by $108.7 million in 2016 and totaled $617.2 million as of September 25, 2016. Since 2005, we have reduced debt by over $1 billion and we expect to continue to significantly reduce our debt in 2017. As a result of our debt reductions, interest expense was reduced by $8.2 million in 2016 compared to 2015, providing additional free cash flow for debt service.
In 2016, we received $30,646,000 due to an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our production facilities. The proceeds were used to make voluntary payments on our 1st Lien Term Loan and repurchase Notes (each as defined below) at a substantial discount.
(1) See "Non-GAAP Financial Measures: in Item 7, included herein, for additional information.
PULITZER
In 2005, we acquired Pulitzer Inc. (“Pulitzer”). We currently publish 9 daily newspapers that were acquired from Pulitzer and more than 60 weekly newspapers and specialty publications. Pulitzer also owned a 50% interest in TNI, as discussed more fully below. The acquisition was financed primarily with debt and our second lien term loan lenders have a first lien of the Pulitzer assets.
Pulitzer newspaper operations include Bloomington, IL and 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, a variety of specialty publications, and supports its related digital products. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
On August 28, 2016 we sold substantially all of the assets of our Provo, Utah newspaper operations, a former Pulitzer newspaper.
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TNI Partners
As a result of the acquisition of Pulitzer, we own a 50% interest in TNI, the Tucson, Arizona newspaper partnership. TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and Citizen Publishing Company (“Citizen”), the owner of the remaining 50%, a subsidiary of Gannett Co., Inc., (“Gannett”). TNI is responsible for printing, delivery, advertising and subscription activities of the Arizona Daily Star and, until May 2009, the Tucson Citizen, as well as their related digital products and specialty publications. In May 2009, Citizen discontinued print publication of the Tucson Citizen and in 2014 stopped publishing its digital product.
TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media. Under the amended and restated operating agreement between Star Publishing and Citizen, the Arizona Daily Star remains the separate property of Star Publishing. Results of TNI are accounted for using the equity method. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. TNI makes weekly distributions to Star Publishing and Citizen of all available cash.
The TNI agency agreement (“Agency Agreement”), has governed the operation since 1940. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Agency Agreement expires in 2040, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each. Star Publishing and Citizen also have a reciprocal right of first refusal to acquire the 50% interest in TNI owned by Citizen and Star Publishing, respectively, under certain circumstances.
MADISON NEWSPAPERS
We own 50% of the capital stock of MNI and 8.7% of the 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, and supports their related digital products. MNI conducts business under the trade name Capital Newspapers. We have a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provide other services to MNI. 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. MNI makes quarter dividend payments to the Company and TCT.
ADVERTISING AND MARKETING SERVICES
Approximately 61% of our 2016 revenue was derived from advertising and marketing services.
The following broadly define major categories of advertising and marketing services revenue:
Retail advertising is print or digital revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts or regional and national businesses with local retail operations.
Classified advertising, which includes employment, automotive, real estate for sale or rent, legal, obituaries and other categories, is revenue earned from sales of advertising space in these categories or from publications consisting primarily of such advertising. Classified publications offer advertisers a cost-effective local advertising vehicle and are particularly effective in larger markets with higher media fragmentation.
National advertising is revenue earned from print or digital display advertising space, or for preprinted advertising inserted in the publication for national accounts that do not have a local retailer representing the account in the market.
Digital advertising consists of display, banner, behavioral targeting, search, rich media, directories, classified or other advertising on websites or mobile devices associated and integrated with our print publications, other digital applications, or on third party websites accessed through the extended audience network. Digital advertising is reported in combination with print advertising in the retail, classified and national categories.
Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.
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Marketing services includes a robust suite of custom digital marketing services that include: SEO, SEM, web and mobile production, social media services and reputation monitoring and management. Our services also include media buying in audience extension networks (outside of those owned and operated by us) such as Centro DSP, Google Ad Exchange and Facebook.
The advertising environment is influenced by the state of the overall economy, including retail sales, unemployment rates, inflation, energy prices and consumer interest rates. Our enterprises are primarily located in midsize and small markets. Historically these markets have been more stable than major metropolitan markets because our focus is on local, rather than national, advertising. More than eighty percent of our advertising revenue is derived from local and regional businesses. We believe that local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer effective advertising channels through which they may reach their customers.
Several of our businesses operate in geographic groups of publications, or “clusters,” which provide operational efficiencies, extend sales penetration and provide broader audiences for advertisers. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance, human resources, management and/or production of the publications. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.
Our newspapers, classified and specialty publications, and digital products compete with newspapers having national or regional circulation, magazines, radio, network, cable and satellite television, other advertising media such as outdoor, mobile, and movie theater promotions, other classified and specialty publications, direct mail, directories, as well as national, regional and local advertising websites and content providers. Competition for advertising is based on audience size and composition, subscription levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of our daily and Sunday newspapers compete with other local daily or weekly newspapers. We believe we capture a substantial share of the total advertising dollars spent in each of our markets.
The number of competitors in any given market varies. However, all of the forms of competition noted above exist to some degree in our markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1, included herein.
SUBSCRIPTION
Approximately 32% of our 2016 revenue was derived from subscriptions to our printed and digital products.
Subscription revenue is derived from the delivery of our leading local news, information and advertising content in print and digitally, via desktop and mobile devices. In 2014, we began the rollout of our full access subscription model, which is now in place in substantially all of our markets. This model provides subscribers access to both the print and digital editions of our newspapers for one price. Digital only options are also available to subscribers.
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AUDIENCES
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 74% of adults in our larger markets. We also measure use of our daily newspapers for advertising, sports scores and entertainment listings ("print users").
Audience reach is summarized as follows:
All Adults | ||||||||||
(Percent, Past Seven Days) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||
Print only | 26.8 | 31.3 | 33.1 | 36.9 | 37.8 | |||||
Print and digital | 19.3 | 19.3 | 20.0 | 17.8 | 19.6 | |||||
Digital only | 16.6 | 12.5 | 12.1 | 10.5 | 9.4 | |||||
Total readership | 62.7 | 63.1 | 65.2 | 65.2 | 66.8 | |||||
Print users | 11.6 | 12.8 | 13.0 | 13.9 | 14.7 | |||||
Total reach | 74.3 | 75.9 | 78.2 | 79.1 | 81.5 | |||||
Total print reach | 57.7 | 63.4 | 66.1 | 68.6 | 72.1 | |||||
Total digital reach | 35.9 | 31.8 | 32.1 | 28.3 | 29.0 | |||||
Age 18-29 | ||||||||||
(Percent, Past Seven Days) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||
Print only | 15.3 | 19.5 | 20.3 | 30.7 | 29.4 | |||||
Print and digital | 16.2 | 20.2 | 18.3 | 15.6 | 20.5 | |||||
Digital only | 23.4 | 12.7 | 15.3 | 10.5 | 10.7 | |||||
Total readership | 54.9 | 52.4 | 53.9 | 56.8 | 60.6 | |||||
Print users | 11.2 | 19.5 | 19.5 | 22.0 | 23.7 | |||||
Total reach | 66.1 | 71.9 | 73.4 | 78.8 | 84.3 | |||||
Total print reach | 42.7 | 59.2 | 58.1 | 68.3 | 73.6 | |||||
Total digital reach | 39.6 | 32.9 | 33.6 | 26.1 | 31.2 | |||||
Source: | Lee Enterprises Audience Report, Thoroughbred Research. January-June 2012-2016. |
Markets: | 11 largest markets in 2012-2016. |
Margin of Error: | Total sample +/- 1.2%, Total digital sample +/- 1.3% |
After advertising, subscriptions and single copy sales are our largest source of revenue. For the 13 weeks ended September 2016, our daily circulation units, which include TNI and MNI, as measured by the Alliance for Audited Media ("AAM") were 0.8 million and Sunday circulation units were 1.2 million.
Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to grow audiences include continuous improvement of content and promotional efforts to expand our audience. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence subscriptions. The introduction in 2010, and continued improvement since, of mobile and tablet applications has positively impacted our digital audiences.
We have historically experienced higher retention of customers using credit cards or bank account withdrawals, ("easy pay"). Accordingly we focus on our enterprises on increasing the number of easy pay subscribers. Other initiatives vary from location to location and are determined principally by our centralized consumer sales and marketing group in collaboration with local management. Competition for subscriptions is generally based on the content, journalistic quality and price of the publication.
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Audience competition exists in all markets, from unpaid print and digital products, but is most significant in markets with competing local daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population may be sufficient to support more than one daily newspaper.
Our subscription sales channels continue to evolve through an emphasis on targeted telemarketing, direct mail and email to acquire new subscribers and retain current subscribers.
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DAILY NEWSPAPERS AND MARKETS
The Company, TNI and MNI publish the following daily newspapers and maintain the following primary digital sites:
Average Units (1) | ||||||||
Newspaper | Primary Website | Location | Daily (2) | Sunday | ||||
St. Louis Post-Dispatch (3) | stltoday.com | St. Louis, MO | 113,990 | 385,690 | ||||
Arizona Daily Star (5) (3) | azstarnet.com | Tucson, AZ | 53,593 | 105,839 | ||||
Capital Newspapers (4) | ||||||||
Wisconsin State Journal | madison.com | Madison, WI | 61,785 | 80,900 | ||||
Daily Citizen | wiscnews.com/bdc | Beaver Dam, WI | 5,883 | — | ||||
Portage Daily Register | wiscnews.com/pdr | Portage, WI | 3,023 | — | ||||
Baraboo News Republic | wiscnews.com/bnr | Baraboo, WI | 2,624 | — | ||||
The Times | nwitimes.com | Munster, Valparaiso, and Crown Point, IN | 58,026 | 67,773 | ||||
Central Illinois Newspaper Group | ||||||||
The Pantagraph (3) | pantagraph.com | Bloomington, IL | 24,608 | 28,585 | ||||
Herald & Review | herald-review.com | Decatur & Mattoon/Charleston, IL | 29,734 | 22,903 | ||||
Lincoln Group | ||||||||
Lincoln Journal Star | journalstar.com | Lincoln, NE | 42,821 | 49,394 | ||||
Columbus Telegram | columbustelegram.com | Columbus, NE | 4,796 | — | ||||
Fremont Tribune | fremonttribune.com | Fremont, NE | 4,698 | — | ||||
Beatrice Daily Sun | beatricedailysun.com | Beatrice, NE | 3,352 | — | ||||
Quad-City Times | qctimes.com | Davenport & Muscatine, IA | 38,939 | 37,473 | ||||
River Valley Newspaper Group | ||||||||
La Crosse Tribune | lacrossetribune.com | La Crosse, WI | 19,252 | 26,083 | ||||
Winona Daily News | winonadailynews.com | Winona, MN | 6,705 | 7,681 | ||||
The Chippewa Herald | chippewa.com | Chippewa Falls, WI | 3,501 | 3,448 | ||||
Billings Gazette | billingsgazette.com | Billings, MT | 28,741 | 32,627 | ||||
The Courier | wcfcourier.com | Waterloo and Cedar Falls, IA | 33,913 | 31,708 | ||||
Sioux City Journal | siouxcityjournal.com | Sioux City, IA | 23,350 | 26,092 | ||||
The Bismarck Tribune | bismarcktribune.com | Bismarck, ND | 21,192 | 24,214 | ||||
The Post-Star | poststar.com | Glens Falls, NY | 18,942 | 24,127 | ||||
Missoula Group | ||||||||
Missoulian | missoulian.com | Missoula, MT | 17,627 | 20,876 | ||||
Ravalli Republic | ravallinews.com | Hamilton, MT | 2,411 | (6) | 2,239 | (6) | ||
The Southern Illinoisan | thesouthern.com | Carbondale, IL | 14,096 | 22,060 | ||||
Rapid City Journal | rapidcityjournal.com | Rapid City, SD | 17,596 | 21,560 | ||||
Helena/Butte Group | ||||||||
Independent Record | helenair.com | Helena, MT | 11,275 | 11,613 | ||||
The Montana Standard | mtstandard.com | Butte, MT | 9,204 | 9,278 | ||||
The Journal Times | journaltimes.com | Racine, WI | 18,396 | 20,758 | ||||
Mid-Valley News Group | ||||||||
Albany Democrat-Herald | democratherald.com | Albany, OR | 9,599 | 9,770 | ||||
Corvallis Gazette-Times | gazettetimes.com | Corvallis, OR | 8,014 | 7,904 | ||||
Casper Star-Tribune | trib.com | Casper, WY | 14,913 | 15,921 | ||||
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Average Units (1) | ||||||||
Newspaper | Primary Website | Location | Daily (2) | Sunday | ||||
Magic Valley Group | ||||||||
The Times-News | magicvalley.com | Twin Falls, ID | 13,714 | 15,287 | ||||
Elko Daily Free Press | elkodaily.com | Elko, NV | 3,303 | (6) | — | |||
Globe Gazette | globegazette.com | Mason City, IA | 12,123 | 13,311 | ||||
The Daily News | tdn.com | Longview, WA | 15,025 | 12,637 | ||||
Santa Maria Times (3) | santamariatimes.com | Santa Maria, CA | 7,854 | 12,090 | ||||
Napa Valley Register (3) | napavalleyregister.com | Napa, CA | 9,367 | 9,557 | ||||
Arizona Daily Sun (3) | azdailysun.com | Flagstaff, AZ | 7,763 | 8,417 | ||||
The Citizen | auburnpub.com | Auburn, NY | 6,711 | 8,202 | ||||
The Times and Democrat | thetandd.com | Orangeburg, SC | 7,220 | 7,900 | ||||
The Sentinel | cumberlink.com | Carlisle, PA | 9,009 | — | ||||
The World (3) | theworldlink.com | Coos Bay, OR | 5,508 | — | ||||
The Sentinel (3) | hanfordsentinel.com | Hanford, CA | 4,992 | — | ||||
The Ledger Independent | maysville-online.com | Maysville, KY | 4,349 | — | ||||
Daily Journal (3) | dailyjournalonline.com | Park Hills, MO | 3,600 | — | ||||
837,137 | 1,183,917 | |||||||
(1) | Source: AAM: September 2016 Quarterly Executive Summary Data Report, unless otherwise noted. |
(2) | Not all newspapers are published Monday through Saturday |
(3) | Owned by Pulitzer, Inc. |
(4) | Owned by MNI. |
(5) | Owned by Star Publishing and published through TNI. |
(6) | Source: Company statistics. |
NEWSPRINT
The basic raw material of newspapers, and our other print publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. Price fluctuations can have a significant effect on our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
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EXECUTIVE TEAM
The following table lists our current executive team members:
Name | Age | Service With The Company | Named To Current Position | Current Position |
Mary E. Junck | 69 | June 1999 | February 2016 | Executive Chairman |
Kevin D. Mowbray | 54 | September 1986 | February 2016 | President and Chief Executive Officer |
Nathan E. Bekke | 47 | January 1992 | February 2015 | Vice President - Consumer Sales and Marketing |
Paul M. Farrell | 61 | October 2013 | October 2015 | Vice President - Sales and Marketing |
Robert P. Fleck | 54 | May 2016 | May 2016 | Vice President - Business Development |
Suzanna M. Frank | 46 | December 2003 | March 2008 | Vice President - Audience |
Astrid J. Garcia | 66 | December 2006 | December 2013 | Vice President - Human Resources |
James A. Green | 50 | March 2013 | March 2013 | Vice President - Digital |
Michael R. Gulledge | 56 | October 1982 | October 2015 | Vice President - Advertising Sales Leadership |
John M. Humenik | 53 | December 1998 | February 2015 | Vice President - News |
Ronald A. Mayo | 55 | May 2015 | June 2015 | Vice President - Chief Financial Officer and Treasurer |
Michele Fennelly White | 54 | June 1994 | June 2011 | Vice President - Information Technology and Chief Information Officer |
Mary E. Junck was elected Executive Chairman in February 2016. From 2002 - February 2106 she served as President and Chief Executive Officer. She was elected to the Board of Directors of the Company in 1999.
Kevin D. Mowbray was elected President and Chief Executive Officer in February 2016. From April 2015 - February 2016 he was Executive Vice President and Chief Operating Officer. From May 2013 to April 2015 he served as Vice President and Chief Operating Officer. From 2004 to May 2013 he served as a Vice President - Publishing and was Publisher of the St. Louis Post-Dispatch from 2006 until May 2013. He was elected to the Board of Directors of the Company in February 2016.
Nathan E. Bekke was appointed Vice President - Consumer Sales and Marketing in February 2015. From 2003 to February 2015, he served as Publisher of the Casper Star-Tribune.
Paul M. Farrell was appointed Vice President - Sales in October 2015. From October 2013 to October 2015, he served as Vice President - Digital Sales. From September 2012 to October 2013, he served as Publisher of the Connecticut Media Group of Hearst Media Services. From May 2007 to August 2012, he served as Vice President - Sales and Marketing of the Company.
Robert P. Fleck was appointed Vice President - Business Development in May 2016. Prior to joining the Company, he was with The Tribune Company. His 24-year career with Tribune included Executive Vice President of Tribune Publishing Company; General Manager and Senior Vice President for TRIBUNE365; and Senior Vice President of the Chicago Tribune Media Group.
Suzanna M. Frank was appointed Vice President - Audience in March 2008. From 2003 to March 2008 she served as Director of Research and Marketing of the Company.
Astrid J. Garcia was appointed Vice President - Human Resources in December 2013. From 2006 to November 2013 she served as Vice President of Human Resources, Labor Relations and Operations of the St. Louis Post-Dispatch.
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James A. Green was appointed Vice President - Digital in March 2013. From June 2011 to March 2013, he served as Executive Vice President and General Manager of Travidia, Inc., a developer of newspaper digital shopping media and marketing programs. From 2004 to June 2011 he served as Chief Marketing Officer of Travidia, Inc.
Michael R. Gulledge was elected Vice President - Sales and Marketing in September 2012 and named Publisher of the Billings Gazette in 2000. From 2005 to September 2012 he served as a Vice President - Publishing.
John M. Humenik was appointed Vice President - News in February 2015. He is also president and publisher of the Wisconsin State Journal and president of Madison Newspapers Inc., a position he has held since 2013. He was publisher and editor of the Arizona Daily Star from 2005 to 2010 and additionally served president of Tucson Newspapers Inc until 2013.
Ronald A. Mayo was elected Vice President, Chief Financial Officer and Treasurer in June 2015. Prior to joining the Company, he was Chief Financial Officer of Halifax Media Group from July 2014 to January 2015 and previously served MediaNews Group, Inc, most recently as Vice President and Chief Financial Officer.
Michele Fennelly White was appointed Vice President - Information Technology and Chief Information Officer in June 2011. From 1999 to June 2011, she served as Director of Technical Support.
Ms. Junck and Messrs. Mowbray, Farrell, Green, Gulledge, and Mayo have been designated by the Board of Directors as executive officers for US Securities and Exchange Commission ("SEC") reporting purposes.
EMPLOYEES
At September 25, 2016, we had approximately 3,976 employees, including approximately 1,062 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2016 totaled approximately 3,666. We consider our relationships with our employees to be good.
Bargaining units represent 372, or 66%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates through September 2018.
Approximately 35 employees in three additional locations are represented by collective bargaining units.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
We have a long, substantial history of sound corporate governance practices. Our Board of Directors has a lead independent director, and has had one for many years. Currently, six of nine members of our 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 our independent registered public accounting firm and its affiliates.
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"), 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 Annual Report is not incorporated by reference unless expressly noted.
ITEM 1A. RISK FACTORS
Risk exists that our past results may not be indicative of future results. A discussion of our risk factors follows. See also, “Forward-Looking Statements”, included herein. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations.
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DEBT AND LIQUIDITY
We May Have Insufficient Earnings Or Liquidity To Meet Our Future Debt Obligations
We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 5 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied substantially all principal and interest payments due under our debt facilities with our cash flows and asset sales.
As of September 25, 2016, our debt consists of the following:
• | $400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”) due March 2022, pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $385,000,000 is currently outstanding as of September 25, 2016; |
• | $250,000,000 first lien term loan (the "1st Lien Term Loan") due March 2019 and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”), of which $101,304,000 is outstanding at September 25, 2016; and |
• | $150,000,000 12.0% second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”) due December 2022, of which $130,863,000 is outstanding at September 25, 2016. |
Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows from operations. Cash generated from future asset sales could serve as an additional source of repayment. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.
At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and has exceeded $153,000,000 in each year from 2011 through 2016, but there can be no assurance that such results will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our continuing cash flows and certain asset sales, which will allow us to maintain an adequate level of liquidity.
At September 25, 2016, the principal amount of our outstanding debt totals $617,167,000. At September 25, 2016 and September 27, 2015 our debt, net of cash, is 3.9 times and 4.4 times our adjusted EBITDA, respectively.
Final maturities of our debt are March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.
There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lenders to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate the repayment of all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, if necessary. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.
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ECONOMIC CONDITIONS
General Economic Conditions May Continue To Impact Our Revenue And Operating Results
It is difficult to estimate the level of economic growth or contraction as current and future conditions in the economy have an inherent degree of uncertainty. Adverse changes may occur to our business as a result of weak global economic conditions, declining oil prices, wavering consumer confidence, unemployment, declines in stock markets, contraction of credit availability, changes in interest rates, declines in real estate values, or other factors affecting economic conditions in general. These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, or increase costs associated with publishing and distributing our publications.
OPERATING REVENUE
Our Revenue May Not Return To Historical Levels
A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic activity, both locally and nationally. Newspaper publishing is both capital and labor intensive and, as a result, newspapers may not be able to quickly reduce cost. Accordingly, changes in advertising and circulation revenue could have a disproportionate effect on our results of operations.
Operating revenue in most categories has decreased since 2007 and may decrease in the future. Such decreases may not be offset by growth in advertising in other categories, such as digital revenue which has been rising since 2010. Historically, newspaper publishing has been viewed as a cost-effective method of delivering various forms of advertising. There can be no guarantee that this historical perception will guide future decisions on the part of advertisers. Web sites and applications for mobile devices distributing news and other content continue to gain popularity. As a result, audience attention and advertising spending are shifting and may continue to shift from traditional print media to digital media. As media audiences increasingly move to consume news and information digitally, we expect that advertisers will allocate greater portions of their future budgets to digital media advertising, which can offer more measurable returns than traditional print media through pay for performance and keyword-targeted advertising. If our efforts to adapt to evolving technological developments in the media industry are unsuccessful, or if we fail to correctly anticipate shifts in audience demand and digital media trends, we may be unable to provide the services, media and content that audiences and potential audiences in our markets prefer and we may be unable to provide the returns on ad spending that our advertisers seek. This increased competition and shift to the digital consumption of news and information has had, and may continue to have, an adverse effect on our business and financial results. The digital media industry has greater competitive challenges than print because barriers to entry can be low and geographic location is less relevant.
Technological developments also pose additional challenges that could adversely affect our revenue and competitive position. New delivery platforms may lead to pricing restrictions and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites and other digital platforms proliferates.
The rates we charge for advertising are, in part, related to the size of the audience of our publications and digital products. There is significant competition for readers and viewers from other media. Our business may be adversely affected to the extent individuals decide to obtain news, entertainment, classified listings and local shopping information from digital or other media, to the exclusion of our outlets for such information.
Retail Advertising
Many advertisers, including major retail store chains, automobile manufacturers and dealers, banks and telecommunications companies, have experienced significant merger and acquisition activity over the last several years, and some have gone out of business, effectively reducing the number of brand names under which the merged entities operate. Changes in the economy and consumer shopping habits such as the increasing use of online shopping, drive advertising spending and retailers approach to advertising and marketing their goods and services.
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Classified Advertising
Classified advertising is the category that has been most significantly impacted by changing advertising trends and the increase in digital/classified advertising competitors. All categories of classified advertising have generally declined since 2007.
See "Advertising and Marketing Services” in Item 1, included herein, for additional information on the risks associated with advertising revenue.
Subscription Revenue
Advertising and subscription revenue is affected by readership of our print publications and digital products. Although our aggregate print and digital audience is relatively stable, subscription sales have nonetheless been declining for many years, reflecting general trends in the newspaper industry, including consumer migration toward digital platforms and other media for news and information. The possibility exists that future subscription price increases may be difficult to accomplish or maintain and as a result subscription sales may decline, and price decreases may be necessary to retain or grow subscription volume. We believe we are maintaining our share of audience in our local markets through digital audience growth and strong print newspaper readership.
As audience attention increasingly focuses on digital media, print circulation of our newspapers may be adversely affected, which may decrease subscription revenue and exacerbate declines in print advertising. We face increasing competition from other digital news sources which can impact subscription revenue. This competition has increased as a result of the continued development of new digital media technologies. To maintain our subscription base, we may be required to incur additional costs that we may not be able to recover through subscription and advertising revenue. We may not be able to achieve a profitable balance between subscription levels and advertising revenue. In addition, if we are not successful in growing our digital businesses, including digital subscription revenue, to offset declines in revenue from our print products, our business, financial condition and prospects will be adversely affected.
In 2014, we began the transition of our subscriptions to full access, including the printed edition, desktop, mobile and tablet. Our ability to build a subscriber base on our digital platforms through these packages depends on market acceptance, consumer habits, pricing, an adequate digital infrastructure, terms of delivery platforms and other factors. In addition, the metered model and/or the price increases may result in fewer page views or unique visitors to our digital platforms if viewers are unwilling to pay to gain access to our digital content after reaching the maximum number of free articles in a month. Stagnation, or a decline in traffic levels, may adversely affect our advertiser base and advertising rates and result in a decline in digital revenue.
See "Audiences” in Item 1, included herein, for additional information on the risks associated with subscription revenue.
If We Are Not Successful In Growing Our Digital Business, Our Business, Financial Condition, Results Of Operations And Prospects Could Be Adversely Affected
Our future performance depends to a significant degree upon the development and management of our digital business. The growth of our digital business over the long term depends on various factors, including, among other things, the ability to:
• | Continue to increase digital audiences; |
• | Attract advertisers to our digital platforms; |
• | Maintain or increase the advertising rates on our digital platforms; |
• |
• | Exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services; |
• | Invest funds and resources in digital opportunities; and |
• | Partner with, or use services from, providers that can assist us in effectively growing our digital business. |
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• | Create digital content that is useful and attractive to audiences in our markets. |
In addition, we expect that our digital business will continue to increase as a percentage of our total revenue. In 2016, total digital revenue (including revenue from advertising and marketing services and digital services, mainly TownNews.com) comprised 16.4% of total revenue, as compared to 14.5% in 2015. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited, to the following:
• | Continuing training of our sales force to more effectively sell digital advertising, combined digital and print advertising packages versus our historical print advertising business; |
• | Attracting and retaining employees with skill sets and the knowledge base needed to successfully operate our digital business; and |
• | Managing the transition to a digital business from a historically print-focused business. |
OPERATING EXPENSES
We May Not Be Able To Reduce Future Expenses To Offset Potential Revenue Declines
We reduced cash costs(1) of our continuing operations (compensation, newsprint and ink, other operating expenses and workforce adjustments) significantly since 2011. Such expense reductions are not expected to significantly impact our ability to deliver advertising, news or other content to our customers. As a result of the significantly reduced cost structure to date, future cost reductions may not be as significant.
Newsprint comprises approximately five percent of our operating costs. See “Newsprint” in Item 1, and “Commodities” in Item 7A, included herein, for additional information on the risks associated with changes in newsprint costs.
In addition, the technological developments and changes we need to make to our business, may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities, and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. As a result, our digital business could suffer if we are unable to make these investments.
(1) See Non-GAAP Financial Measures: in Item 7, included herein, for additional information.
We May Incur Additional Non-Cash Impairment Charges
We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance. See “Critical Accounting Policies” in Item 7, included herein, for additional information on the risks associated with such assets.
Sustained Increases In Costs Of Employee Health And Welfare Benefits May Reduce Our Profitability
In recent years, we experienced significant increases in the cost of employee medical benefits because of economic factors beyond our control, including increases in health care costs. At least some of these factors may continue to put upward pressure on the cost of providing medical benefits. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.
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Sustained Increases In Funding Requirements Of Our Pension and Postretirement Obligations
May Reduce The Cash Available For Our Business
Pension liabilities, net of plan assets, totaled $55.1 million at September 25, 2016. The Company does not expect to be required to make pension contributions in 2017. At September 25, 2016 the assets of one of our postretirement medical plans exceeded plan liabilities by $9.1 million.
Our pension and postretirement plans invest in a variety of equity and debt securities. Future volatility and disruption in the securities markets could cause declines in the asset values of our pension and postretirement plans. In addition, a decrease in the discount rates or changes to mortality estimates and other assumptions used to determine the liability could increase the benefit obligation of the plans. Unfavorable changes to the plan assets and/or the benefit obligations could increase the level of required contributions above what is currently estimated, which could reduce the cash available for our business. Legislation passed in 2012, 2014 and 2015 temporarily reduced funding requirements for our pension plans, but those payments will eventually need to be restored unless discount rates and/or plan assets increase.
We Expect To Be Subject To Withdrawal Liability In Connection With One Multiemployer Pension Plan And May Be Subject To Additional Withdrawal Liabilities In Connection With Other Multiemployer Pension Plans, Which May Reduce The Cash Available For Our Business
Pursuant to our collective bargaining obligations, we contribute to three multiemployer pension plans on behalf of certain of our employees. Based on the most recent communications from the plans’ administrators, two of these plans are currently in “critical” status, as that term is used in relation to such plans under the PPA. For plans that are in critical status, benefit reductions may apply and/or we could be required to make additional contributions.
One of our enterprise's bargaining units withdrew from representation, and as a result we could be subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount of such liability, if any, will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. The withdrawal liability is expected to be funded over a 20 year period.
If, we were to withdraw from one of these plans or trigger a partial withdrawal due to declines in contribution base units, and the plan had unfunded vested benefits at the time of our withdrawal or partial withdrawal, we could incur a significant plan withdrawal liability, which could reduce the cash available for our business.
EQUITY CAPITAL
A Decrease In Our Stock Price May Limit The Ability To Trade Our Stock
Or For The Company To Raise Equity Capital
Under the NYSE listing standards, if our common stock fails to maintain an adequate per share price and our total market capitalization falls below $50.0 million, our common stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE notified us that our common stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our common stock was allowed to continue to be listed during a cure period. In February 2012, after completing our debt refinancing, the NYSE notified us that we were again in compliance with the minimum closing price standard. In January 2013, the NYSE notified us that we had returned to full compliance with all continued listing standards. However, there can be no assurance that we will continue to be able to meet these listing standards, and the removal of our common stock from the NYSE could adversely affect our ability to raise equity capital.
OTHER
Cybersecurity Risks Could Harm Our Ability To Operate Effectively
In the 13-weeks ended September 25, 2016, 17.5% of our revenue was obtained from digital sources, including advertising and one of our businesses, TownNews.com, that provides digital infrastructure and digital publishing services for us and other companies.
We use computers and digital technology in substantially all aspects of our business operations. Such uses give rise to cybersecurity risks, including the misappropriation of personally identifiable information that we store and manage
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and disabling or taking over of our websites. We have preventive systems and processes in place to protect against the risk of cyber incidents. However, the techniques used to obtain unauthorized access and to disable systems and websites change frequently and may be difficult to detect for long periods of time. There can be no assurance that we, or the security systems we implement, will protect against all of these rapidly changing risks. Prolonged system outages or a cyber incident that goes undetected could reduce our print and/or digital revenue, increase our operating costs, disrupt our operations, harm our reputation, lead to legal exposure to customers and/or subject us to liability under laws and regulations that protect personal data. We maintain insurance coverage against certain of such risks, but cannot guarantee that such coverage will be applicable or sufficient with respect to any given incident.
We May Not Be Able To Protect Our Intellectual Property Rights, Which May Adversely Affect Our Business
Our business depends on our intellectual property, including our valuable brands and content. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position.
Unauthorized parties may attempt to copy or otherwise obtain and use our content or infringe upon, dilute, reproduce, misappropriate or otherwise violate our intellectual property. There can be no assurance that the steps we have taken to protect our proprietary rights will be successful in any given case.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The initial lease term expires April 30, 2019.
All of our principal printing facilities are owned, except Madison, Wisconsin (which is owned by MNI), Tucson (which is jointly owned by Star Publishing and Citizen), St. Louis (as described below) and leased land for the Helena, Montana plant. All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped. With the exception of St. Louis, none of our facilities is individually significant to our business.
Information related to St. Louis facilities at September 25, 2016 is as follows:
(Square Feet) | Owned | Leased | ||
PD LLC | 665,000 | 2,500 | ||
Suburban Journals | 9,000 | 4,000 | ||
Nearly 43% of our daily newspapers, as well as many of our nearly 300 other publications, are printed at other Company facilities, or such printing is outsourced, to enhance operating efficiency. We are continuing to evaluate additional insourcing and outsourcing opportunities in order to more effectively manage our operating and capital costs.
Our newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.
ITEM 3. LEGAL PROCEEDINGS
We are 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 we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on the NYSE. In March 2011, in accordance with sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. The table below includes the high and low prices of Common Stock for each calendar quarter during the past three years and the closing price at the end of each quarter.
Quarter Ended | |||||||||||
(Dollars) | December | March | June | September | |||||||
2016 | |||||||||||
High | 2.54 | 2.20 | 2.43 | 3.92 | |||||||
Low | 1.43 | 1.15 | 1.69 | 1.74 | |||||||
Closing | 1.68 | 1.80 | 1.91 | 3.75 | |||||||
2015 | |||||||||||
High | 3.93 | 3.73 | 3.55 | 3.40 | |||||||
Low | 3.07 | 2.74 | 2.78 | 1.36 | |||||||
Closing | 3.68 | 3.17 | 3.33 | 2.08 | |||||||
2014 | |||||||||||
High | 3.92 | 5.42 | 4.78 | 4.72 | |||||||
Low | 2.60 | 3.30 | 3.81 | 3.24 | |||||||
Closing | 3.47 | 4.47 | 4.45 | 3.38 | |||||||
At September 25, 2016, we had 6,350 holders of record of our Common Stock.
Our debt agreements generally limit our ability to pay dividends and repurchase Common Stock unless in each case no default has occurred and we have satisfied certain financial measurements. See Note 4 of the Notes to Consolidated Financial Statements, included herein.
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PERFORMANCE PRESENTATION
The following graph compares the percentage change in the cumulative total return of the Company, the Standard & Poor's ("S&P") 500 Stock Index, and a peer group index, in each case for the five years ended September 30, 2016 (with September 30, 2011 as the measurement point). Total return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer's share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.
Copyright© 2016 Standard & Poor's, a division of S&P Global. All rights reserved.
The value of $100 invested on September 30, 2011 in stock of the Company, the Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
September 30 | |||||||||||||||||
(Dollars) | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||
Lee Enterprises, Incorporated | 100.00 | 189.74 | 338.46 | 433.33 | 266.67 | 480.77 | |||||||||||
Peer Group Index | 100.00 | 163.87 | 216.20 | 208.59 | 198.19 | 211.93 | |||||||||||
S&P 500 Stock Index | 100.00 | 130.20 | 155.39 | 186.05 | 184.91 | 213.44 | |||||||||||
The S&P 500 Stock Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The New Peer Group Index is comprised of three U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The Peer Group Index includes A.H. Belo Corp., The McClatchy Company and The New York Times Company.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||
OPERATING RESULTS (1) | ||||||||||||||
Operating revenue | 614,364 | 648,543 | 660,877 | 677,774 | 709,580 | |||||||||
Operating expenses, excluding depreciation, amortization, and impairment of intangible and other assets | 476,413 | 501,760 | 505,822 | 517,047 | 546,863 | |||||||||
Depreciation and amortization | 43,441 | 45,563 | 48,511 | 55,527 | 65,191 | |||||||||
Loss (gain) on sales of assets, net | (3,139 | ) | 106 | (1,338 | ) | 110 | (52 | ) | ||||||
Impairment of intangible and other assets (2) | 2,185 | — | 2,980 | 171,094 | 1,388 | |||||||||
Equity in earnings of associated companies | 8,533 | 8,254 | 8,297 | 8,685 | 7,231 | |||||||||
Operating income (loss) | 103,997 | 109,368 | 113,199 | (57,319 | ) | 103,421 | ||||||||
Financial income | 400 | 337 | 385 | 300 | 236 | |||||||||
Interest expense | (64,233 | ) | (72,409 | ) | (79,724 | ) | (89,447 | ) | (83,078 | ) | ||||
Debt financing and administration costs | (5,947 | ) | (5,433 | ) | (22,927 | ) | (646 | ) | (2,823 | ) | ||||
Gain on insurance settlement | 30,646 | — | — | — | — | |||||||||
Other, net | (6,668 | ) | 6,049 | 3,028 | 7,889 | (2,533 | ) | |||||||
Income (loss) from continuing operations | 36,019 | 24,318 | 7,671 | (76,478 | ) | (13,381 | ) | |||||||
Discontinued operations, net of income taxes | — | — | — | (1,246 | ) | (2,918 | ) | |||||||
Net income (loss) | 36,019 | 24,318 | 7,671 | (77,724 | ) | (16,299 | ) | |||||||
Income (loss) attributable to Lee Enterprises, Incorporated | 34,961 | 23,316 | 6,795 | (78,317 | ) | (16,698 | ) | |||||||
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated | 34,961 | 23,316 | 6,795 | (77,071 | ) | (13,780 | ) | |||||||
EARNINGS (LOSS) PER COMMON SHARE | ||||||||||||||
Basic: | ||||||||||||||
Continuing operations | 0.66 | 0.44 | 0.13 | (1.49 | ) | (0.28 | ) | |||||||
Discontinued operations | — | — | — | (0.02 | ) | (0.06 | ) | |||||||
0.66 | 0.44 | 0.13 | (1.51 | ) | (0.34 | ) | ||||||||
Diluted: | ||||||||||||||
Continuing operations | 0.64 | 0.43 | 0.13 | (1.49 | ) | (0.28 | ) | |||||||
Discontinued operations | — | — | — | (0.02 | ) | (0.06 | ) | |||||||
0.64 | 0.43 | 0.13 | (1.51 | ) | (0.34 | ) | ||||||||
Weighted average common shares: | ||||||||||||||
Basic | 53,198 | 52,640 | 52,273 | 51,833 | 49,261 | |||||||||
Diluted | 54,224 | 53,931 | 53,736 | 51,833 | 49,261 | |||||||||
BALANCE SHEET INFORMATION (End of Year) | ||||||||||||||
Total assets | 689,126 | 747,825 | 811,275 | 827,705 | 1,061,136 | |||||||||
Debt, including current maturities (3) | 617,167 | 725,872 | 804,750 | 847,500 | 945,850 | |||||||||
Debt, net of cash and restricted cash (3) | 600,183 | 714,738 | 787,605 | 829,938 | 931,930 | |||||||||
Stockholders' deficit | (128,485 | ) | (159,393 | ) | (178,253 | ) | (170,350 | ) | (114,633 | ) | ||||
(1 | ) | 2012 includes 53 weeks of business operations. All other years include 52 weeks. |
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(2 | ) | The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows: |
(Thousands of Dollars) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||
Continuing operations: | ||||||||||||||
Goodwill | — | — | — | — | — | |||||||||
Non-amortized intangible assets | 818 | — | 1,936 | 1,567 | — | |||||||||
Amortizable intangible assets | — | — | — | 169,041 | — | |||||||||
Property, equipment and other assets | 1,367 | — | 1,044 | 486 | 1,388 | |||||||||
2,185 | — | 2,980 | 171,094 | 1,388 | ||||||||||
Discontinued operations | — | — | — | — | 3,606 | |||||||||
(3 | ) | Principal amount of debt, excluding fair value adjustments. See Note 4 of the Notes to Consolidated Financial Statements, included herein. | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion includes comments and analysis relating to our results of operations and financial condition as of, and for 2016, 2015 and 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
NON-GAAP FINANCIAL MEASURES
We use the following non-GAAP financial performance measure for purpose of evaluating our performance and liquidity. We believe that each of the non-GAAP measures provides additional useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance and liquidity of our businesses. The non-GAAP financial measures we use are as follows:
Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates, unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and understand how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus nonoperating expenses (net), income tax expenses (benefit), depreciation, amortization, loss (gain) on sale of assets, impairment charges, workforce adjustment costs, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI curtailment gains.
Adjusted Earnings and Adjusted Earnings Per Diluted Common Share are non-GAAP financial performance measures that we believe offer a useful metric to evaluate overall performance of the Company by providing financial statement users the operating performance of the Company on a per share basis excluding unusual and infrequent transactions. It is defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature.
Cash Costs is a non-GAAP financial performance measure of operating expenses that are settled in cash and is useful to investors in understanding the components of the Company's cash operating costs. Generally, the Company provides forward-looking guidance to Cash Costs, which can be used by financial statement users to asses the Company's ability to manage and control its operating cost structure. Cash Costs is defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded. Cash Costs
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are also presented excluding workforce adjustments, which are paid in cash.
A table reconciling adjusted EBITDA to net income (loss), the most directly comparable measure under GAAP, is set forth below under the caption "Non-GAAP Financial Measures".
Reconciliations of adjusted earnings and adjusted earnings per diluted common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 7, included herein, under the caption “Overall Results”.
The subtotals of operating expenses representing cash costs can be found in tables in Item 7, included herein, under the captions “2016 vs. 2015” and “2015 vs. 2014”.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
The table below reconciles the non-GAAP financial performance measure of adjusted EBITDA to net income, the most directly comparable GAAP measure:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||
Net Income | 36,019 | 24,318 | 7,671 | |||
Adjusted to exclude | ||||||
Income tax expense | 22,176 | 13,594 | 6,290 | |||
Non-operating expenses, net | 45,802 | 71,456 | 99,238 | |||
Equity in earnings of TNI and MNI | (8,533 | ) | (8,254 | ) | (8,297 | ) |
Loss (gain) on sale of assets, net | (3,139 | ) | 106 | (1,338 | ) | |
Impairment of intangible and other assets | 2,185 | — | 2,980 | |||
Depreciation and amortization | 43,441 | 45,563 | 48,511 | |||
Workforce adjustments | 1,825 | 3,304 | 1,265 | |||
Stock compensation | 2,306 | 1,971 | 1,481 | |||
Add: | ||||||
Ownership share of TNI and MNI EBITDA (50%) | 11,705 | 11,246 | 11,236 | |||
Adjusted EBITDA | 153,787 | 163,304 | 169,037 | |||
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis.
We base our 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 our accounting policies.
Goodwill and Other Intangible Assets
In assessing the recoverability of goodwill and other non-amortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections, stock price and other industry or market considerations. This assessment is made as of the first day of our fourth fiscal quarter of each year.
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We analyze goodwill and other non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.
Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach and a market approach weighted equally.
Under the income approach, fair value is determined by estimating future cash flows discounted to their present value. The market approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the publishing industry. Determining the fair value is judgmental in nature and involves significant estimates and assumptions including estimates of future revenue, cash costs, operating margins, discount rates, valuation multiples of entities engaged in the same or similar lines of business and future economic and market conditions.
There are significant inherent uncertainties and judgments involved in estimating fair value. An extension or deepening of the industry downturn could have a negative impact on the cash flow analysis. While we believe we have used reasonable estimates and assumptions to estimate the fair value of our reporting unit, it is possible that material changes could occur due to factors impacting our industry. If actual results are not consistent with our estimates and assumptions, such as future revenue, operating margins, EBITDA, growth rates and discount rates, we may be required to reassess the fair value of goodwill in the future.
Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.
We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.
The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. 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.
In 2016, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2015 , we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was significantly in excess of its carrying value. As a result no goodwill impairment was recorded. In 2014, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%.
In 2016 and 2014, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. We also recorded pretax, non-cash charges to reduce the carrying value of property, equipment and other assets in 2016 and 2014. We recorded deferred income tax benefits related to these charges.
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A summary of impairment charges is included in the table below:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Continuing operations: | ||||||||
Non-amortized intangible assets | 818 | — | 1,936 | |||||
Property, equipment and other assets | 1,367 | — | 1,044 | |||||
2,185 | — | 2,980 | ||||||
Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.
Pension, Postretirement and Postemployment Benefit Plans
We evaluate our 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, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If we 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.
Increases in market interest rates, which may impact plan assumptions, generally result in lower service costs for current employees, higher interest expense and lower liabilities. Actual returns on plan assets that are lower than the plan assumptions will generally result in decreases in a plan's funded status and may necessitate additional contributions.
Income Taxes
Deferred income taxes are provided using the asset and 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. We currently have recorded valuation allowances that we will maintain until, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will 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. Our income tax expense recorded in the future may be increased or decreased to the extent our valuation allowances change. An increase in the valuation allowance could result in additional income tax expense, while a decrease in the valuation allowance could result in a reduction to income tax expense, in such period and could have a significant impact on our future earnings.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.
Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified.
We file income tax returns with the Internal Revenue Service (“IRS”) and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our 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 (Loss) in the periods in which such matters are ultimately determined.
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Revenue Recognition
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term as the product is delivered or made available or as newspapers are individually sold. 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 print or digital products or advance payments for advertising.
Uninsured Risks
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits exposure to large claims. We accrue our 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.
Our accrued 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.
An increasing frequency of large claims, deterioration in overall claim experience or changes in federal or state laws affecting our liability for such claims could increase the volatility of expenses for such self-insured risks.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2016, the Financial Accounting Standards Board ("FASB") issued a new standard to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. The adoption of the new standard is required in 2019. The adoption of this standard may reclassify certain cash receipts within the Consolidated Statements of Cash Flows.
In March 2016, the FASB issued a new standard with improvements to the accounting for employee share-based payments. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of the new standard is required in 2018. We have not determined the potential effects on the Consolidated Financial Statements.
In February 2016, the FASB issued a new standard for the accounting treatment of leases. The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The new standards primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the new standard is largely unchanged from the previous accounting standard. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The adoption of this new standard is required in the first quarter of fiscal year 2020 with early adoption permitted. We have not determined the potential effects on the Consolidated Financial Statements.
In April 2015, the FASB issued a new standard for the presentation of debt issuance costs. The new standard will streamline the balance sheet presentation of debt related valuations. Debt issuance costs are currently recognized as deferred charges and presented as an asset while debt discounts and premiums are treated as adjustments to the related debt. Under the new standard, debt issuance costs will be recognized as reductions to the related debt. The adoption of the new standard is required in 2017. The adoption of this standard will serve to reclassify certain amounts within our Consolidated Balance Sheets.
In August 2014, the FASB issued a new going concern standard. The new standard changes the period that companies use to evaluate their ability to meet obligations to a look-forward period of one year from the financial statement issuance date, from one year from the balance sheet date. The new standard also changes disclosure requirements. The
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adoption of the new standard is required in 2017. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements, taken as a whole.
In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of these requirements is required in 2019. We have not yet determined the potential impact on our Consolidated Financial Statements.
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CONTINUING OPERATIONS
2016 vs. 2015
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data) | 2016 | 2015 | Percent Change | |||||
Advertising and marketing services revenue: | ||||||||
Retail | 239,136 | 262,079 | (8.8 | ) | ||||
Classified | 100,582 | 116,480 | (13.6 | ) | ||||
National | 22,114 | 22,422 | (1.4 | ) | ||||
Niche publications and other | 11,631 | 11,118 | 4.6 | |||||
Total advertising and marketing services revenue | 373,463 | 412,099 | (9.4 | ) | ||||
Subscription | 194,002 | 194,474 | (0.2 | ) | ||||
Digital services | 14,240 | 12,522 | 13.7 | |||||
Commercial printing | 12,269 | 11,875 | 3.3 | |||||
Other | 20,390 | 17,573 | 16.0 | |||||
Total operating revenue | 614,364 | 648,543 | (5.3 | ) | ||||
Compensation | 229,752 | 239,028 | (3.9 | ) | ||||
Newsprint and ink | 26,110 | 30,263 | (13.7 | ) | ||||
Other operating expenses | 218,726 | 229,165 | (4.6 | ) | ||||
Workforce adjustments | 1,825 | 3,304 | (44.8 | ) | ||||
Cash costs | 476,413 | 501,760 | (5.1 | ) | ||||
137,951 | 146,783 | (6.0 | ) | |||||
Depreciation | 17,291 | 18,418 | (6.1 | ) | ||||
Amortization | 26,150 | 27,145 | (3.7 | ) | ||||
Loss (gain) on sales of assets, net | (3,139 | ) | 106 | NM | ||||
Impairment of intangible and other assets | 2,185 | — | NM | |||||
Equity in earnings of associated companies | 8,533 | 8,254 | 3.4 | |||||
Operating income | 103,997 | 109,368 | (4.9 | ) | ||||
Non-operating expense, net | (45,802 | ) | (71,456 | ) | (35.9 | ) | ||
Income from continuing operations before income taxes | 58,195 | 37,912 | 53.5 | |||||
Income tax expense | 22,176 | 13,594 | 63.1 | |||||
Net income | 36,019 | 24,318 | 48.1 | |||||
Net income attributable to non-controlling interests | (1,058 | ) | (1,002 | ) | 5.6 | |||
Income attributable to Lee Enterprises, Incorporated | 34,961 | 23,316 | 49.9 | |||||
Other comprehensive loss, net | (6,503 | ) | (6,445 | ) | 0.9 | |||
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated | 28,458 | 16,871 | 68.7 | |||||
Earnings per common share: | ||||||||
Basic | 0.66 | 0.44 | 47.7 | |||||
Diluted | 0.64 | 0.43 | 48.8 | |||||
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Advertising and Marketing Services Revenue
In 2016 advertising and marketing services revenue decreased $38,636,000, or 9.4% compared to 2015. Retail advertising decreased 8.8%. The decrease in advertising and marketing services revenue is due to reduced advertising volume primarily from large retailers, big box stores and classifieds. Digital retail advertising on a stand-alone basis, which is the largest digital advertising category, increased 9.6%, partially offsetting print declines.
Classified revenue decreased $15,898,000, or 13.6% in 2016 as we continue to experience a reduction in print and digital advertising in automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased 5.5%.
National advertising decreased $308,000, or 1.4%. Digital national advertising on a stand-alone basis increased 20.4% as a result of improved inventory management of available ad positions offered on the national advertising exchanges and improved pricing. Revenue in niche publications and other increased $513,000, or 4.6% mainly attributed to increases in creative service charges.
On a stand alone basis, digital advertising and marketing services revenue increased 5.6%, to $86,279,000 in 2016, representing 23.1% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 19.6% in 2016. Total digital revenue, including advertising and marketing services and all other digital business, totaled $100,519,000 in 2016, an increase of 6.6% from a year ago, representing 16.4% of total operating revenue. Print advertising, including preprints and print marketing services revenue decreased 13.1%.
Subscription and Other Revenue
Subscription revenue decreased $472,000, or 0.2% in 2016. Subscription revenue was virtually flat as price increases and the addition of premium content days with higher single day pricing almost completely offset revenue declines from print subscription units loses.
Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.8 million in the September 2016 quarter. Sunday circulation totaled 1.2 million.
Digital services revenue increased $1,718,000, or 13.7% in 2016, largely due to TownNews.com, which generates the majority of its revenue from content management services but is expanding into digital ad agency services for web, mobile and social products at our properties as well as 1,600 other newspapers, and media operations. Commercial printing revenue increased 3.3% in 2016, due to new customers offset by decreased volume for existing customers at several of our larger markets. Other revenue increased $2,817,000, or 16.0% in 2016, due to an increase in revenue for delivery of third party newspapers.
Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of 26.0 million unique visitors in the quarter ended September 2016, with 218.1 million page views. Research in our larger markets indicates we continue to reach over 74% of all adults in the market through the combination of digital audience growth and strong print newspaper readership.
Operating Expenses
Operating expenses decreased 5.2% in 2016. Cash costs decreased by $25,347,000, or 5.1% in 2016.
Compensation expense decreased $9,276,000, or 3.9% in 2016, driven by a decline of 7.9% in average full-time equivalent employees. Costs associated with our self-insured medical plan increased $4.0 million in 2016 due to higher claims costs compared to 2015, offsetting some of the costs due to the reduction in full-time equivalent employees.
Newsprint and ink costs decreased $4,153,000, or 13.7% in 2015, primarily as a result of reduction in newsprint volume of 10.7%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.
Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others, decreased $10,439,000, or 4.6% in 2016. Cost reductions were primarily related to the impact of both subscriber delivery cost and a decrease in postage costs primarily related to a reduction in direct
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mail advertising volumes.
Excluding workforce adjustments, cash costs decreased 4.8% in 2016.
Reductions in staffing resulted in workforce adjustment costs totaling $1,825,000 and $3,304,000 in 2016 and 2015, respectively.
For fiscal year 2017, we expect cash costs excluding workforce adjustments on a same property basis, to decrease between 2.5% to 3.5%.
Results of Operations
Depreciation expense decreased $1,127,000, or 6.1%, and amortization expense decreased $995,000, or 3.7% in 2016. Sales of operating assets including the sale of the Provo Daily Herald in August 2016, resulted in a net gain of $3,139,000 in 2016 compared to a net loss of $106,000 in 2015.
In 2016, we recorded a $818,000 non-cash charge to reduce the carrying values of certain non-amortized intangible assets to fair value. We also recorded $1,367,000 pre-tax, non-cash charges for assets considered other than temporarily impaired in 2016.
Equity in earnings of TNI and MNI increased $279,000 in 2016.
The factors noted above resulted in operating income of $103,997,000 in 2016 compared to $109,368,000 in 2015.
Nonoperating Income and Expenses
Interest expense decreased $8,176,000, or 11.3%, to $64,233,000 in 2016 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, increased to 9.7% in 2016 compared to 9.4% in 2015, as our Notes and 2nd Lien Term Loan balances are now a greater percentage of our outstanding debt due to reduction on the 1st Lien Term Loan, our lowest cost of debt.
In 2016, we recognized a $30,646,000 gain on an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our production facilities.
We recognized $5,947,000 of debt financing and administrative costs in 2016 compared to $5,433,000 in 2015.
As more fully discussed in Note 4 of the Notes to the Consolidated Financial Statements, included herein, we recorded a liability for the Warrants, issued in connection with the Warrant Agreement. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expenses). Due to the fluctuation in the price of our Common Stock, we recorded non-operating expenses related to the increase in the value of the Warrants of $7,520,000 in 2016 and non-operating income related to the decrease in the value of the Warrants of $6,568,000, in 2015.
Overall Results
We recognized income tax expense at 38.1% of income before income taxes in 2016 and 35.9% in 2015. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the differences between the expected federal income tax rate to the actual tax rates.
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As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $34,961,000 in 2016 compared to $23,316,000 in 2015. We recorded earnings per diluted common share of $0.64 in 2016 and $0.43 in 2015. Excluding unusual matters, as detailed in the table below, adjusted earnings per diluted common share were $0.42 in 2016, compared to $0.31 in 2015. Per share amounts may not add due to rounding.
2016 | 2015 | |||||||
(Thousands of Dollars, Except Per Share Data) | Amount | Per Share | Amount | Per Share | ||||
Income attributable to Lee Enterprises, Incorporated, as reported | 34,961 | 0.64 | 23,316 | 0.43 | ||||
Adjustments: | ||||||||
Warrants fair value adjustment | 7,519 | (6,568 | ) | |||||
Gain on insurance settlement | (30,646 | ) | — | |||||
(23,127 | ) | (6,568 | ) | |||||
Income tax effect of adjustments, net | 10,726 | — | ||||||
(12,401 | ) | (0.23 | ) | (6,568 | ) | (0.12 | ) | |
Income attributable to Lee Enterprises, Incorporated, as adjusted | 22,560 | 0.42 | 16,748 | 0.31 | ||||
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2015 vs. 2014
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data) | 2015 | 2014 | Percent Change | |||||
Advertising and marketing services revenue: | ||||||||
Retail | 262,079 | 282,044 | (7.1 | ) | ||||
Classified | 116,480 | 126,277 | (7.8 | ) | ||||
National | 22,422 | 24,867 | (9.8 | ) | ||||
Niche publications and other | 11,118 | 10,059 | 10.5 | |||||
Total advertising and marketing services revenue | 412,099 | 443,247 | (7.0 | ) | ||||
Subscription | 194,474 | 176,826 | 10.0 | |||||
Digital services | 12,522 | 10,181 | 23.0 | |||||
Commercial printing | 11,875 | 12,050 | (1.5 | ) | ||||
Other | 17,573 | 18,573 | (5.4 | ) | ||||
Total operating revenue | 648,543 | 660,877 | (1.9 | ) | ||||
Compensation | 239,028 | 243,054 | (1.7 | ) | ||||
Newsprint and ink | 30,263 | 37,994 | (20.3 | ) | ||||
Other operating expenses | 229,165 | 223,509 | 2.5 | |||||
Workforce adjustments | 3,304 | 1,265 | NM | |||||
Cash costs | 501,760 | 505,822 | (0.8 | ) | ||||
146,783 | 155,055 | (5.3 | ) | |||||
Depreciation | 18,418 | 20,920 | (12.0 | ) | ||||
Amortization | 27,145 | 27,591 | (1.6 | ) | ||||
Loss (gain) on sales of assets, net | 106 | (1,338 | ) | NM | ||||
Impairment of intangible and other assets | — | 2,980 | NM | |||||
Equity in earnings of associated companies | 8,254 | 8,297 | (0.5 | ) | ||||
Operating income | 109,368 | 113,199 | (3.4 | ) | ||||
Non-operating expense, net | (71,456 | ) | (99,238 | ) | (28.0 | ) | ||
Income from continuing operations before income taxes | 37,912 | 13,961 | NM | |||||
Income tax expense | 13,594 | 6,290 | NM | |||||
Net income | 24,318 | 7,671 | NM | |||||
Net income attributable to non-controlling interests | (1,002 | ) | (876 | ) | 14.4 | |||
Income attributable to Lee Enterprises, Incorporated | 23,316 | 6,795 | NM | |||||
Other comprehensive loss, net | (6,445 | ) | (17,497 | ) | (63.2 | ) | ||
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated | 16,871 | (10,702 | ) | NM | ||||
Earnings per common share: | ||||||||
Basic | 0.44 | 0.13 | NM | |||||
Diluted | 0.43 | 0.13 | NM | |||||
Total operating revenue decreased $12,334,000, or 1.9% in 2015 compared to the prior year. Excluding the impact of the subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue for 2015 decreased 3.7%. This reclassification increases both print subscription revenue and other operating expenses, with no impact on operating cash flow or operating income. Certain delivery expenses were previously reported as a reduction of revenue. A table below under the heading Operating Expenses details the impact of the reclassification on revenue and cash costs. Unless otherwise noted, the comparisons below are presented on an as reported basis.
Advertising and Marketing Services Revenue
In 2015 advertising and marketing services revenue decreased $31,148,000, or 7.0%, compared to 2014. Retail advertising decreased 7.1%. The decrease in retail advertising revenue is due to reduced advertising volume primarily
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from large retail and big box stores. Digital retail advertising on a stand-alone basis increased 5.6%, partially offsetting print declines.
Classified revenue decreased $9,797,000, or 7.8% in 2015 as we continue to experience a reduction in print advertising from automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis increased 7.0%, partially offsetting print declines.
National advertising decreased $2,445,000 or 9.8%. Digital national advertising on a stand-alone basis increased 16.9% due to improved management of available ad positions offered on the national advertising exchanges and improved pricing. Advertising in niche publications and other increased $1,059,000, or 10.5%.
On a stand-alone basis, digital advertising and marketing services revenue increased 6.9%, to $81,735,000 in 2015, representing 19.8% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 24.8% in 2015. Total digital revenue for 2015, including advertising and marketing services and all other digital business, totaled $94 million, an increase of 8.8% from a year ago, representing 14.5% of total operating revenue. Print advertising, including preprints and print marketing services revenue decreased 9.9%
Subscription and Other Revenue
Subscription revenue increased $17,648,000, or 10.0% in 2015. Excluding the impact of the subscription-related expense reclassification, subscription revenue increased 3.6% or $6,055,000. The increase in subscription revenue in 2016 is primarily due to the effect of our full access subscription model, price increases and the addition of premium content days with higher single day pricing, in part offset by a decline in print units.
Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.9 million in the September 2015 quarter. Sunday circulation totaled 1.3 million.
Digital services revenue increased $2,341,000, or 23.0% in 2015, largely due to TownNews.com. Commercial printing revenue decreased $175,000, or 1.5% in 2015 due to decreased volume for existing customers at several of our large markets. Other revenue decreased $1,000,000, or 5.4%.
Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 24.9 million unique visitors in the month of September 2015, with 221.4 million page views. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong print newspaper readership.
Operating Expenses
Operating expenses decreased 1.5%, and cash cost decreased $4,062,000, or 0.8% in 2015. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 3.1%. Also excluding workforce adjustments and the subscription-related expense reclassification, cash costs decreased 3.6% in 2015 or $17,694,000.
Compensation expense decreased $4,026,000, or 1.7% in 2015, driven by a decline in average full-time equivalent employees of 4.2%, partially offset by company-wide compensation increases in January 2015.
Newsprint and ink costs decreased $7,731,000, or 20.3% in 2015, primarily as a result of lower newsprint prices and a reduction in newsprint volume of 12.3%%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.
Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of good sold, facility expenses among others, increased $5,656,000, or 2.5% in 2015, due to the subscription-related expense reclassification. Excluding the impact of the subscription-related expenses reclassification, other operating expenses decreased 2.7%.
Reductions in staffing resulted in workforce adjustment costs totaling $3,304,000 and $1,265,000 in 2015 and 2014, respectively.
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Certain results, excluding the impact of the subscription-related expense reclassification, are as follows:
(Thousands of Dollars) | 2015 | 2014 | Percent Change | |||
Subscription revenue, as reported | 194,474 | 176,826 | 10.0 | |||
Adjustment for subscription-related expense reclassification | (18,300 | ) | (6,707 | ) | NM | |
Subscription revenue, as adjusted | 176,174 | 170,119 | 3.6 | |||
Total operating revenue, as reported | 648,543 | 660,877 | (1.9 | ) | ||
Adjustment for subscription-related expense reclassification | (18,300 | ) | (6,707 | ) | NM | |
Total operating revenue, as adjusted | 630,243 | 654,170 | (3.7 | ) | ||
Other cash costs, as reported | 229,165 | 223,509 | 2.5 | |||
Adjustment for subscription-related expense reclassification | (18,300 | ) | (6,707 | ) | NM | |
Other cash costs, as adjusted | 210,865 | 216,802 | (2.7 | ) | ||
Total cash costs excluding workforce adjustments | 498,456 | 504,557 | (1.2 | ) | ||
Adjustment for subscription-related expense reclassification | (18,300 | ) | (6,707 | ) | NM | |
Total cash cost excluding workforce adjustments, as adjusted | 480,156 | 497,850 | (3.6 | ) | ||
Total cash costs, as reported | 501,760 | 505,822 | (0.8 | ) | ||
Adjustment for subscription-related expense reclassification | (18,300 | ) | (6,707 | ) | NM | |
Total cash costs, as adjusted | 483,460 | 499,115 | (3.1 | ) | ||
The subscription-related expense reclassification described above also increased revenue and cash costs of MNI by $5,791,000 in 2015. Such amounts for MNI are not included in the table above.
Results of Operations
Depreciation expense decreased $2,502,000, or 12.0% in 2015 and amortization expense decreased $446,000, or 1.6% in 2015.
In 2014, we recorded a $1,936,000 non-cash charge to reduce the carrying values of certain non-amortized intangible assets to fair value. We also recorded $1,044,000 pre-tax, non-cash charges to reduce the carrying value of property and equipment in 2014. Sales of operating assets resulted in a net loss of $106,000 in 2015 compared to a net gain of $1,338,000 in 2014.
Equity in earnings in associated companies decreased $43,000 in 2015.
The factors noted above resulted in operating income of $109,368,000 in 2015 compared to $113,199,000 in 2014.
Nonoperating Income and Expenses
Interest expense decreased $7,315,000 or 9.2%, to $72,409,000 in 2015 due to lower debt balances.
We recognized $5,433,000 of debt financing and administrative costs in 2015 compared to $22,927,000 in 2014. The decrease is related to the costs charged to expense at the closing of the 2014 Refinancing. Also in 2014, we recorded a $2,300,000 loss related to a litigation settlement.
Due to the decrease in the price of our Common Stock, we recorded non-operating income related to the decrease in the value of the Warrants of $6,568,000 and $6,122,000, in 2015 and 2014, respectively.
Overall Results
We recognized income tax expense at 35.9% of income before income taxes in 2015 and 45.1% in 2014. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.
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As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $23,316,000 in 2015 compared to $6,795,000 in 2014. We recorded earnings per diluted common share of $0.43 in 2015 and $0.13 in 2014. Excluding unusual matters, as detailed in the table below, adjusted earnings per diluted common share were $0.31 in 2015, compared to $0.26 in 2014. Per share amounts may not add due to rounding.
2015 | 2014 | |||||||
(Thousands of Dollars, Except Per Share Data) | Amount | Per Share | Amount | Per Share | ||||
Income attributable to Lee Enterprises, Incorporated, as reported | 23,316 | 0.43 | 6,795 | 0.13 | ||||
Adjustments: | ||||||||
Warrants fair value adjustment | (6,568 | ) | (6,122 | ) | ||||
Expenses related to the 2014 Refinancing | — | 20,591 | ||||||
10,180 | 14,469 | |||||||
Income tax effect of adjustments, net | — | (7,380 | ) | |||||
10,180 | (0.12 | ) | 7,089 | 0.13 | ||||
Income attributable to Lee Enterprises, Incorporated, as adjusted | 16,748 | 0.31 | 13,884 | 0.26 | ||||
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LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operating activities was $79,190,000, $74,476,000 and $82,075,000 in 2016, 2015 and 2014, respectively. We recorded net income of $36,019,000, $24,318,000 and $7,671,000 in 2016, 2015 and 2014, respectively. Non-cash debt financing and administration costs charged to expense totaled $5,947,000, $5,433,000, and $22,927,000 in 2016, 2015 and 2014, respectively. Changes in operating assets and liabilities accounted for the bulk of the change in cash provided by operating activities in 2016 and 2015.
Pension liabilities, net of plan assets, totaled $55.1 million as of September 25, 2016. No contributions to pension plans are expected in 2017.
Investing Activities
Cash required for investing activities totaled $34,508,000, $208,000 and $9,284,000 in 2016, 2015 and 2014, respectively. Capital spending totaled $7,091,000 in 2016, $9,707,000 in 2015 and $13,661,000 in 2014. In 2016 we received proceeds of $30,646,000 related to an insurance settlement. We received $9,878,000, $8,871,000 and $4,485,000 in proceeds from sales of assets in 2016, 2015 and 2014, respectively.
We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000 in 2017, and other requirements, will be available from internally generated funds, or available under our Revolving Facility.
Financing Activities
Cash required for financing activities for continued operations totaled $107,848,000 in 2016, $79,838,000 in 2015 and $73,649,000 in 2014. We paid $422,000, $733,000 and $31,587,000 of debt financing and administrative costs in 2016, 2015 and 2014, respectively. The increase in such costs in 2014 was due to the 2014 Refinancing. Debt reduction accounted for the majority of the remaining usage of funds in all years.
Debt is summarized as follows:
Interest Rates (%) | |||||
(Thousands of Dollars) | September 25 2016 | September 27 2015 | September 25 2016 | ||
Revolving Facility | — | — | 5.65 | ||
1st Lien Term Loan | 101,304 | 180,872 | 7.25 | ||
Notes | 385,000 | 400,000 | 9.50 | ||
2nd Lien Term Loan | 130,863 | 145,000 | 12.00 | ||
617,167 | 725,872 | ||||
Less current maturities of long-term debt | 25,070 | 25,000 | |||
Total long-term debt | 592,097 | 700,872 | |||
At September 25, 2016, our weighted average cost of debt, excluding amortization of debt financing costs, is 9.7%.
Aggregate maturities of debt total $25,070,000 in 2017, $25,000,000 in 2018 $51,234,000 in 2019, $0 in 2020 and $515,863,000 thereafter. In addition to mandatory paydowns, the first lien and 2nd lien term loans require excess cash flow payments based on calculations defined in the credit agreements. See Note 4 of the Notes to the Consolidated Financial Statements.
Liquidity
At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000.
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At September 25, 2016, the principal amount of our outstanding debt totals $617,167,000. For the last twelve months ending September 25, 2016, the principal amount of our debt, net of cash, is 3.9 times our adjusted EBITDA, compared to a ratio of 4.4 times at September 27, 2015.
The 2014 Refinancing significantly extended our debt maturity profile with final maturity of the majority of our debt in 2022. As a result, refinancing risk has been substantially reduced for the next several years.
There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.
In 2014, we filed a Form S-3 shelf registration statement ("Shelf") with the SEC, which has been declared effective. The Shelf gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, 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 $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.
Other Matters
Cash and cash equivalents increased $5,850,000 in 2016 and decreased $5,570,000 and $858,000 in 2015 and 2014, respectively.
SEASONALITY
Our 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 December and June quarters. Advertising and marketing services revenue is lowest in the March quarter.
Quarterly results of operations are summarized in Note 18 of the Notes to Consolidated Financial Statements, included herein.
INFLATION
Price increases (or decreases) for our products are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.
CHANGES IN LAWS AND REGULATIONS
Energy Costs
Energy costs can be volatile, and may increase in the future as a result of carbon emissions and other regulations being developed by the United States Environmental Protection Agency.
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Health Care Costs
The Affordable Care Act was enacted into law in 2010.
We expect the Affordable Care Act will continue to evolve. More recently, certain provisions applicable to employers were delayed. We expect our future health care costs to increase based on analysis published by the United States Department of Health and Human Services, input from independent advisors and our understanding of various provisions of the Affordable Care Act that differ from our previous medical plans, such as:
•Certain preventive services provided without charge to employees;
•Automatic enrollment of new employees;
•Higher maximum age for dependent coverage;
•Elimination of lifetime benefit caps; and
•Free choice vouchers for certain lower income employees.
Administrative costs are also likely to increase as a result of new compliance reporting and mandatory fees per participant. New costs being imposed on other medical care businesses, such as health insurers, pharmaceutical companies and medical device manufacturers, may be passed on to us in the form of higher costs. We may be able to mitigate certain of these future cost increases through changes in plan design.
We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability.
Pension Plans
In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that resulted in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").
In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.
Income Taxes
Certain states in which we operate are considering changes to their corporate income tax rates. Until such changes are enacted, the impact of such changes cannot be determined.
Wage Laws
In 2016, the Department of Labor ("DOL") published its final rule updating overtime regulations and minimum pay regulations for exempt employees. Among other things, the final rule establishes a minimum weekly rate for all exempt employees of $913 per week, more than double the previous limit. The final rule was scheduled to be effective beginning December 1, 2016. However, recently a federal district court issued a preliminary injunction on the rule becoming final. Until a final ruling is issued, the Company cannot determine what impact this rule will have.
The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined.
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CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations at September 25, 2016:
(Thousands of Dollars) | Payments (or Commitments) Due (Years) | |||||||||||||
Nature of Obligation | Total | Less Than 1 | 1-3 | 3-5 | More Than 5 | |||||||||
Debt (Principal Amount) (1) | 617,167 | 25,070 | 76,234 | — | 515,863 | |||||||||
Interest expense (2)(3) | 300,960 | 58,490 | 110,457 | 104,557 | 27,456 | |||||||||
Operating lease obligations | 12,392 | 3,065 | 3,918 | 1,633 | 3,776 | |||||||||
Capital expenditure commitments | 479 | 479 | — | — | — | |||||||||
930,998 | 87,104 | 190,609 | 106,190 | 547,095 | ||||||||||
(1) | Maturities of long-term debt are limited to mandatory payments and, accordingly, exclude excess cash flow, asset sale and other payments under the 1st Lien Credit Facility, Notes and the 2nd Lien Term Loan. While excess cash flow payments are based on actual performance, we expect to make substantial voluntary and excess cash flow payments on the debt currently outstanding, in the next five years. See Note 5 of the Notes to the Consolidated Financial Statements, included herein. |
(2) | Interest expense includes an estimate of interest expense for the Notes, 1st Lien Credit Facility, and 2nd Lien Term Loan until their maturities in March 2022, March 2019, and December 2022, respectively. Interest expense under the Notes is estimated using the 9.5% contractual rate applied to the outstanding balance as reduced by future contractual maturities of such debt. Interest expense under the 1st Lien Term Loan is estimated based on the 30 day minimum LIBOR level of 1.0% as increased by our applicable margin of 6.25% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the Revolving Facility is estimated based on the current 30 day LIBOR level as increased by our applicable margin of 5.5% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the 2nd Lien Term Loan is estimated using the 12.0% contractual rate applied to the outstanding balance during each period. Changes in interest rates in excess of the minimum LIBOR level, use of borrowing rates not based on LIBOR, use of interest rate hedging instruments, and/or principal payments in excess of contractual maturities or based on other requirements of the Notes, 1st Lien Credit Facility or 2nd Lien Term Loan could significantly change this estimate. See Note 5 of the Notes to Consolidated Financial Statements, included herein. |
(3) | Interest expense excludes non-cash present value adjustments and amortization of debt financing costs previously paid. See Note 5 of the Notes to Consolidated Financial Statements, included herein. |
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. We estimate no cash requirements for these obligations in 2017. See Notes 5 and 6 of the Notes to the Consolidated Financial Statements, included herein.
Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. A substantial amount of our deferred income tax liabilities will not result in future cash payments. See Note 10 of the Notes to the Consolidated Financial Statements, included herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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 ON DEBT
Our debt structure, which is predominantly fixed rate, significantly reduces the potential impact of an increase in interest rates. At September 25, 2016, 16.4% of the principal amount of our debt is subject to floating interest rates. Our primary exposure is to LIBOR. A 100 basis point increase to LIBOR would, if in excess of LIBOR minimums discussed more fully below, decrease income before income taxes on an annualized basis by approximately $1,013 based on $101,304,000 of floating rate debt outstanding at September 25, 2016.
Our debt under the 1st Lien Term Loan is subject to minimum interest rate levels of 1.0%. Based on the difference between interest rates in October 2016 and our 1.0% minimum rate, LIBOR would need to increase approximately 47 basis points for one month borrowing before our borrowing cost would begin to be impacted by an increase in interest rates.
We regularly evaluate alternatives to hedge our interest rate risk, but have no hedging instruments in place.
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COMMODITIES
Several price increases have been implemented from all North American newsprint producers in the first nine months of 2016. Facing constant North American and worldwide demand decline, U.S. and Canadian producers continue to manage supply capacity via temporary and permanent production capacity reduction.
Price change announcements are influenced primarily by the balance between supply capacity and demand, domestic and export, and the producer's ability to mitigate input cost pressures taking the U. S. dollar to Canadian dollar exchange rate into consideration. The extent to which a current announced price increases are successful or future price changes occur is subject to negotiations with each newsprint producer at the time newsprint is ordered. Average cost per metric ton was approximately 15% higher at the end of September 2016 compared to the same period a year ago.
Long term supply strategy takes potential capacity closures into consideration and aligns the Company with suppliers most likely to continue to supply the North American newsprint market and our print locations.
A $10 per tonne price increase for 30 pound newsprint would result in an annualized reduction in income before income taxes of approximately $483,000, based on anticipated consumption in 2017, excluding consumption of TNI and MNI and the impact of LIFO accounting. Such prices may also decrease. We manage significant newsprint inventories, which will temporarily mitigate the impact of future price changes.
SENSITIVITY TO CHANGES IN VALUE
At September 25, 2016, the fair value of floating rate debt, which consists primarily of our 1st Lien Term Loan, is $101,240,000, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and $130,863,000 principal amount under the 2nd Lien Term Loan. At September 25, 2016, based on an average of private market price quotations, the fair values were $399,437,000 and $136,833,000 for the Notes and 2nd Lien Term Loan, respectively.
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
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 25, 2016, the end of the period covered by this annual report (the “Evaluation Date”). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. 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.
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Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of the Evaluation Date, using the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting is effective as of the Evaluation Date.
Our independent registered public accounting firm, KPMG LLP, has issued a report on the Company's internal control over financial reporting. KPMG’s report on the audit of internal control over financial reporting appears in this Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended September 25, 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lee Enterprises, Incorporated:
We have audited Lee Enterprises, Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of September 25, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that 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, Lee Enterprises, Incorporated and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 25, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lee Enterprises, Incorporated and subsidiaries as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014, and our report dated December 9, 2016 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
December 9, 2016
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ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to this Item, except for certain information related to our executive officers included under the caption “Executive Team” in Part I of this Annual Report, is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the captions “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Our executive officers are those elected officers whose names and certain information are set forth under the caption “Executive Team” in Part 1 of this Annual Report.
We have a Code of Business Conduct and Ethics ("Code") that applies to all of our employees, including our principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of our Board of Directors and is annually affirmed by our directors and executive officers. We maintain a corporate governance page on our website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance” under the "About" tab. 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 us from, a provision of the Code will be posted on our website.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the captions, “Compensation of Non-Employee Directors”, “Executive Compensation” and “Compensation Discussion and Analysis”; provided, however, that the subsection entitled “Executive Compensation - Executive Compensation Committee Report” shall not be deemed to be incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the captions “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information”.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, 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 our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report:
FINANCIAL STATEMENTS
Consolidated Statements of Income and Comprehensive Income (Loss) - Years ended September 25, 2016, September 27, 2015 and September 28, 2014
Consolidated Balance Sheets - September 25, 2016 and September 27, 2015
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended September 25, 2016, September 27, 2015 and September 28, 2014
Consolidated Statements of Cash Flows - Years ended September 25, 2016, September 27, 2015 and September 28, 2014
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted as they are not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements, included herein.
EXHIBITS
See Exhibit Index, included herein.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 9th day of December 2016.
LEE ENTERPRISES, INCORPORATED
/s/ Kevin D. Mowbray | /s/ Ronald A. Mayo | |
Kevin D. Mowbray | Ronald A. Mayo | |
President and Chief Executive Officer | Vice President, Chief Financial Officer and Treasurer | |
(Principal Executive 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 9th day of December 2016.
Signature | ||
/s/ Richard R. Cole | Director | |
Richard R. Cole | ||
/s/ Nancy S. Donovan | Director | |
Nancy S. Donovan | ||
/s/ Leonard J. Elmore | Director | |
Leonard J. Elmore | ||
/s/ Mary E. Junck | Executive Chairman and Director | |
Mary E. Junck | ||
/s/ Brent Magid | Director | |
Brent Magid | ||
/s/ William E. Mayer | Director | |
William E. Mayer | ||
/s/ Herbert W. Moloney III | Director | |
Herbert W. Moloney III | ||
/s/ Kevin D. Mowbray | President and Chief Executive Officer, and Director | |
Kevin D. Mowbray | ||
/s/ Gregory P. Schermer | Director | |
Gregory P. Schermer | ||
/s/ Ronald A. Mayo | Vice President, Chief Financial Officer and Treasurer | |
Ronald A. Mayo | ||
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CONSOLIDATED FINANCIAL STATEMENTS | PAGE |
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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Thousands of Dollars, Except Per Common Share Data) | 2016 | 2015 | 2014 | |||||
Operating revenue: | ||||||||
Advertising and marketing services | 373,463 | 412,099 | 443,247 | |||||
Subscription | 194,002 | 194,474 | 176,826 | |||||
Other | 46,899 | 41,970 | 40,804 | |||||
Total operating revenue | 614,364 | 648,543 | 660,877 | |||||
Operating expenses: | ||||||||
Compensation | 229,752 | 239,028 | 243,054 | |||||
Newsprint and ink | 26,110 | 30,263 | 37,994 | |||||
Other operating expenses | 218,726 | 229,165 | 223,509 | |||||
Depreciation | 17,291 | 18,418 | 20,920 | |||||
Amortization of intangible assets | 26,150 | 27,145 | 27,591 | |||||
Impairment of intangible and other assets | 2,185 | — | 2,980 | |||||
Loss (gain) on sales of assets, net | (3,139 | ) | 106 | (1,338 | ) | |||
Workforce adjustments | 1,825 | 3,304 | 1,265 | |||||
Total operating expenses | 518,900 | 547,429 | 555,975 | |||||
Equity in earnings of associated companies | 8,533 | 8,254 | 8,297 | |||||
Operating income | 103,997 | 109,368 | 113,199 | |||||
Non-operating income (expense): | ||||||||
Financial income | 400 | 337 | 385 | |||||
Interest expense | (64,233 | ) | (72,409 | ) | (79,724 | ) | ||
Debt financing and administrative costs | (5,947 | ) | (5,433 | ) | (22,927 | ) | ||
Gain on insurance settlement | 30,646 | — | — | |||||
Other, net | (6,668 | ) | 6,049 | 3,028 | ||||
Total non-operating expense, net | (45,802 | ) | (71,456 | ) | (99,238 | ) | ||
Income before income taxes | 58,195 | 37,912 | 13,961 | |||||
Income tax expense | 22,176 | 13,594 | 6,290 | |||||
Net income | 36,019 | 24,318 | 7,671 | |||||
Net income attributable to non-controlling interests | (1,058 | ) | (1,002 | ) | (876 | ) | ||
Income attributable to Lee Enterprises, Incorporated | 34,961 | 23,316 | 6,795 | |||||
Other comprehensive loss, net of income taxes | (6,503 | ) | (6,445 | ) | (17,497 | ) | ||
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated | 28,458 | 16,871 | (10,702 | ) | ||||
Earnings per common share: | ||||||||
Basic: | 0.66 | 0.44 | 0.13 | |||||
Diluted: | 0.64 | 0.43 | 0.13 | |||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | 16,984 | 11,134 | |||
Accounts receivable, less allowance for doubtful accounts: | |||||
2016 $4,327; 2015 $4,194 | 51,334 | 58,899 | |||
Income taxes receivable | — | 413 | |||
Inventories | 4,252 | 3,914 | |||
Other | 4,683 | 8,304 | |||
Total current assets | 77,253 | 82,664 | |||
Investments: | |||||
Associated companies | 29,716 | 35,069 | |||
Other | 9,488 | 9,083 | |||
Total investments | 39,204 | 44,152 | |||
Property and equipment: | |||||
Land and improvements | 21,028 | 22,257 | |||
Buildings and improvements | 174,164 | 179,731 | |||
Equipment | 279,770 | 290,127 | |||
Construction in process | 823 | 997 | |||
475,785 | 493,112 | ||||
Less accumulated depreciation | 347,223 | 349,343 | |||
Property and equipment, net | 128,562 | 143,769 | |||
Goodwill | 243,729 | 243,729 | |||
Other intangible assets, net | 158,354 | 185,962 | |||
Medical plan assets, net | 14,063 | 13,421 | |||
Other | 27,961 | 34,128 | |||
Total assets | 689,126 | 747,825 | |||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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(Thousands of Dollars and Shares, Except Per Share Data) | September 25 2016 | September 27 2015 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
Current liabilities: | |||||
Current maturities of long-term debt | 25,070 | 25,000 | |||
Accounts payable | 18,143 | 20,113 | |||
Compensation and other accrued liabilities | 23,884 | 27,055 | |||
Accrued interest | 2,895 | 4,184 | |||
Income taxes payable | 665 | — | |||
Unearned revenue | 28,361 | 28,929 | |||
Total current liabilities | 99,018 | 105,281 | |||
Long-term debt, net of current maturities | 592,097 | 700,872 | |||
Pension obligations | 55,148 | 52,522 | |||
Postretirement and postemployment benefit obligations | 10,717 | 11,060 | |||
Deferred income taxes | 38,308 | 22,137 | |||
Income taxes payable | 5,016 | 4,856 | |||
Warrants and other | 16,363 | 9,680 | |||
Total liabilities | 816,667 | 906,408 | |||
Equity (deficit): | |||||
Stockholders' equity (deficit): | |||||
Serial convertible preferred stock, no par value; authorized 500 shares; none issued | — | — | |||
Common Stock, authorized 120,000 shares; issued and outstanding: | 558 | 547 | |||
September 25, 2016; 55,771 shares; $0.01 par value | |||||
September 27, 2015; 54,679 shares; $0.01 par value | |||||
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued | — | — | |||
Additional paid-in capital | 249,740 | 247,302 | |||
Accumulated deficit | (356,005 | ) | (390,966 | ) | |
Accumulated other comprehensive loss | (22,778 | ) | (16,276 | ) | |
Total stockholders' deficit | (128,485 | ) | (159,393 | ) | |
Non-controlling interests | 944 | 810 | |||
Total deficit | (127,541 | ) | (158,583 | ) | |
Total liabilities and deficit | 689,126 | 747,825 | |||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Amount | Shares | ||||||||||||||||
(Thousands of Dollars and Shares) | 2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||
Common Stock: | |||||||||||||||||
Balance, beginning of year | 547 | 537 | 524 | 54,679 | 53,747 | 52,434 | |||||||||||
Shares issued | 11 | 10 | 13 | 1,092 | 932 | 1,313 | |||||||||||
Balance, end of year | 558 | 547 | 537 | 55,771 | 54,679 | 53,747 | |||||||||||
Additional paid-in capital: | |||||||||||||||||
Balance, beginning of year | 247,302 | 245,323 | 242,537 | ||||||||||||||
Stock compensation | 2,306 | 1,971 | 1,481 | ||||||||||||||
Shares issued | 132 | 8 | 1,305 | ||||||||||||||
Balance, end of year | 249,740 | 247,302 | 245,323 | ||||||||||||||
Accumulated deficit: | |||||||||||||||||
Balance, beginning of year | (390,966 | ) | (414,282 | ) | (421,077 | ) | |||||||||||
Net income | 36,019 | 24,318 | 7,671 | ||||||||||||||
Net income attributable to non-controlling interests | (1,058 | ) | (1,002 | ) | (876 | ) | |||||||||||
Balance, end of year | (356,005 | ) | (390,966 | ) | (414,282 | ) | |||||||||||
Accumulated other comprehensive income (loss): | |||||||||||||||||
Balance, beginning of year | (16,276 | ) | (9,831 | ) | 7,666 | ||||||||||||
Change in pension and postretirement benefits | (11,001 | ) | (10,973 | ) | (29,591 | ) | |||||||||||
Deferred income taxes, net | 4,499 | 4,528 | 12,094 | ||||||||||||||
Balance, end of year | (22,778 | ) | (16,276 | ) | (9,831 | ) | |||||||||||
Total stockholders' deficit | (128,485 | ) | (159,393 | ) | (178,253 | ) | 55,771 | 54,679 | 53,747 | ||||||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Cash provided by operating activities: | ||||||||
Net income | 36,019 | 24,318 | 7,671 | |||||
Adjustments to reconcile income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 43,441 | 45,563 | 48,511 | |||||
Net (gain) loss on sales of assets | (3,139 | ) | 106 | (1,338 | ) | |||
Insurance settlement | (30,646 | ) | — | — | ||||
Impairment of intangible and other assets | 2,185 | — | 2,980 | |||||
Distributions greater than earnings of MNI | 3,777 | 2,084 | 1,366 | |||||
Stock compensation expense | 2,306 | 1,971 | 1,481 | |||||
Amortization of debt fair value adjustment | — | — | 2,394 | |||||
Deferred income tax expense | 20,669 | 12,764 | 6,425 | |||||
Debt financing and administrative costs | 5,947 | 5,433 | 22,927 | |||||
Gain on extinguishment of debt | (1,250 | ) | — | — | ||||
Pension contributions | (4,604 | ) | (3,577 | ) | (1,435 | ) | ||
Changes in operating assets and liabilities: | ||||||||
Decrease in receivables | 6,933 | 3,444 | 872 | |||||
Decrease in inventories and other | 617 | 3,122 | 217 | |||||
Decrease in accounts payable, compensation and other accrued liabilities and unearned revenue | (8,327 | ) | (9,587 | ) | (5,315 | ) | ||
Decrease in pension, postretirement and postemployment benefit obligations | (4,757 | ) | (3,627 | ) | (4,643 | ) | ||
Change in income taxes receivable or payable | 1,238 | (34 | ) | 5,854 | ||||
Other, net | 8,781 | (7,504 | ) | (5,892 | ) | |||
Net cash provided by operating activities | 79,190 | 74,476 | 82,075 | |||||
Cash provided by (required for) investing activities: | ||||||||
Purchases of property and equipment | (7,091 | ) | (9,707 | ) | (13,661 | ) | ||
Decrease (increase) in restricted cash | — | 441 | (441 | ) | ||||
Insurance settlement | 30,646 | — | — | |||||
Proceeds from sales of assets | 9,878 | 8,871 | 4,485 | |||||
Distributions greater than earnings of TNI | 1,575 | 637 | 333 | |||||
Other, net | (500 | ) | (450 | ) | — | |||
Net cash provided by (required for) investing activities | 34,508 | (208 | ) | (9,284 | ) | |||
Cash provided by (required for) financing activities: | ||||||||
Proceeds from long-term debt | 5,000 | 5,000 | 805,000 | |||||
Payments on long-term debt | (112,455 | ) | (83,878 | ) | (847,750 | ) | ||
Debt financing and administrative costs paid | (422 | ) | (733 | ) | (31,587 | ) | ||
Common stock transactions, net | 29 | (227 | ) | 688 | ||||
Net cash required for financing activities | (107,848 | ) | (79,838 | ) | (73,649 | ) | ||
Net increase (decrease) in cash and cash equivalents | 5,850 | (5,570 | ) | (858 | ) | |||
Cash and cash equivalents: | ||||||||
Beginning of year | 11,134 | 16,704 | 17,562 | |||||
End of year | 16,984 | 11,134 | 16,704 | |||||
The accompanying Notes are an integral part of the Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
References to "we", "our", "us" and the like throughout the Consolidated Financial Statements refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2016", "2015", "2014" and the like refer to the fiscal years ended the last Sunday in September.
Lee Enterprises, Incorporated is a leading provider of local news and information and a major platform for advertising, Primarily in midsize markets, with 48 daily newspapers and a joint interest in four others, rapidly growing digital products and nearly 300 weekly newspapers and specialty publications in 21 states. We currently operate in a single operating segment.
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 50% interest in TNI, 50% interest in MNI and 82.5% interest in TownNews.com. TNI and MNI are accounted for under the equity method. Results of TownNews.com are consolidated.
Fiscal Year
All of our enterprises use period accounting with the fiscal year ending on the last Sunday in September.
Subsequent Events
We have evaluated subsequent events through December 9, 2016. No events have occurred subsequent to September 25, 2016 that require disclosure or recognition in these financial statements, except as included herein.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our 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.
Principles of Consolidation
All significant intercompany transactions and balances have been eliminated.
Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of, and reductions in the value of, intangible assets.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents.
Outstanding checks in excess of funds on deposit are included in accounts payable and are classified as financing activities in the Consolidated Statements of Cash Flows.
Accounts Receivable
We evaluate our 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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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 25, 2016 and September 27, 2015 are less than replacement cost by $1,900,000 and $1,780,000, respectively.
The components of newsprint inventory by cost method are as follows:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
First-in, first-out | 1,064 | 786 | |||
Last-in, first-out | 1,627 | 1,547 | |||
2,691 | 2,333 | ||||
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.
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 preprint insertion 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 insertion equipment | 3 - 28 |
Other | 3 - 17 |
We capitalize interest as a component of the cost of constructing major facilities. At September 25, 2016 and September 27, 2015, capitalized interest was not significant.
We recognize 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.
Goodwill and Other Intangible Assets
Intangible assets include covenants not to compete, consulting agreements, customer lists, newspaper subscriber lists and mastheads. Intangible assets subject to amortization are being amortized using the straight-line method as follows:
Years | ||
Customer lists | 15 - 23 | |
Newspaper subscriber lists | 12 - 33 | |
Non-compete and consulting agreements | 15 | |
In assessing the recoverability of goodwill and other non-amortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections,
53
stock price and other industry or market considerations. This assessment is made on the first day of our fourth fiscal quarter of each year.
We analyze goodwill and other non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.
Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach and a market approach weighted equally.
Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.
We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.
The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
We also periodically evaluate the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. 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.
Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in impairment charges in the future. See Note 3.
Non-controlling Interest
Non-controlling interest in earnings of TownNews.com is recognized in the Consolidated Financial Statements.
Revenue Recognition
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term or as newspapers are individually sold. 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 print or digital products or advance payments for advertising.
Advertising Costs
A substantial amount of our advertising and promotion consists of advertising placed in our own publications and digital platforms, using available space. The incremental cost of such advertising is not significant and is not measured separately by us. External advertising costs are not significant and are expensed as incurred.
Pension, Postretirement and Postemployment Benefit Plans
We evaluate our liabilities 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, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan
54
assets and other factors. If we 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.
We use a fiscal year end measurement date for all our pension and postretirement obligations in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 715, Retirement Plans.
Income Taxes
Deferred income taxes are provided using the asset and 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 our opinion, it is more likely than not 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.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Fair Value of Financial Instruments
We utilize FASB ASC Topic 820, Fair Value Measurements and Disclosures, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable, which consists of the following levels:
Level 1 - Quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
Investments measured at net asset value, as a practical expedient for fair value, are excluded from the fair value hierarchy.
Valuation methodologies used for pension and postretirement assets measured at fair value are as follows:
Cash and cash equivalents consist of short term deposits valued based on quoted prices in active markets. Such investments are classified as Level 1.
Treasury Inflation-Protected Securities ("TIPS") consist of low yield mutual funds and are valued by quoted market prices. Such investments are classified as Level 1.
Equity securities are valued based on the closing market price in an active market and are classified as Level 1. Certain investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. Such investments are classified as Level 2.
Debt securities consist of corporate bonds and government securities that are valued based upon quoted market prices. Such investments are classified as Level 1. Certain investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. Such investments are classified as Level 2.
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Hedge funds consist of a long/short equity fund and a diversified fund of funds. These funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments, which is determined using multiple approaches including by quoted market prices and by private market quotations. Such investments are classified as Level 2 and Level 3.
Stock Compensation and Warrants
We have several active stock-based compensation plans. We account for grants under those plans under the fair value expense recognition provisions of FASB ASC Topic 718, Compensation-Stock Compensation. We determine the fair value of stock options using the Black-Scholes option pricing formula. Key inputs to this formula include expected term, expected volatility and the risk-free interest rate.
The expected term represents the period that our stock-based awards are expected to be outstanding, and is determined based on historical experience of similar awards, giving consideration to contractual terms of the awards, vesting schedules and expectations of future employee behavior. The volatility factor is calculated using historical market data for our Common Stock. The time frame used is equal to the expected term. We base the risk-free interest rate on the yield to maturity at the time of the stock option grant on zero-coupon U.S. government bonds having a remaining term equal to the option's expected term. When estimating forfeitures, we consider voluntary termination behavior as well as actual option forfeitures.
We amortize as compensation expense the value of stock options and restricted Common Stock using the straight-line method over the vesting or restriction period, which is generally one to three years.
We also have 6,000,000 warrants outstanding to purchase shares of our Common Stock. Warrants are recorded at fair value determined using the Black-Scholes option pricing formula. See Notes 4, 8 and 11.
Uninsured Risks
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits our losses in the event of large claims. We accrue our 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 performance bonds totaling $5,107,000 at September 25, 2016 are outstanding in support of our insurance program.
Our accrued 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.
2 INVESTMENTS IN ASSOCIATED COMPANIES
TNI Partners
In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising and subscription activities of the Arizona Daily Star, as well as the related digital platforms 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 newspaper and other media.
Income or loss of TNI is allocated equally to Star Publishing and Citizen.
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Summarized financial information of TNI is as follows:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
ASSETS | |||||
Current assets | 5,107 | 5,761 | |||
Investments and other assets | 12 | 33 | |||
Total assets | 5,119 | 5,794 | |||
LIABILITIES AND MEMBERS' EQUITY | |||||
Current liabilities | 6,484 | 4,787 | |||
Members' equity | (1,365 | ) | 1,007 | ||
Total liabilities and members' equity | 5,119 | 5,794 | |||
Summarized results of TNI are as follows:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Operating revenue | 52,761 | 55,926 | 57,892 | |||||
Operating expenses | 41,804 | 45,413 | 47,229 | |||||
Operating income | 10,957 | 10,513 | 10,663 | |||||
Company's 50% share | 5,478 | 5,256 | 5,331 | |||||
Less amortization of intangible assets | 418 | 418 | 418 | |||||
Equity in earnings of TNI | 5,060 | 4,838 | 4,913 | |||||
TNI makes weekly distributions of its earnings. We received $6,636,000, $5,475,000 and $5,246,000 in distributions in 2016, 2015 and 2014, respectively.
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 (benefit) in our Consolidated Statements of Income and Comprehensive Income (Loss). These amounts totaled $149,000, $(254,000),and $(60,000), in 2016, 2015 and 2014, respectively. Fees for editorial services provided to TNI by Star Publishing totaled $5,599,000, $5,492,000, and $5,908,000 in 2016, 2015 and 2014, respectively.
At September 25, 2016, the carrying value of the Company's 50% investment in TNI is $15,933,000. The difference between our carrying value and our 50% share of the members' equity of TNI relates principally to goodwill of $12,366,000 and other identified intangible assets of $4,554,000, certain of which are being amortized over their estimated useful lives through 2020. See Note 3.
Annual amortization of intangible assets is estimated to be $418,000 in 2017, 2018, 2019, and $280,000 in 2020.
Madison Newspapers, Inc.
We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital sites. Net income or loss of MNI (after income taxes) is allocated equally to us 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:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
ASSETS | |||||
Current assets | 12,320 | 18,255 | |||
Investments and other assets | 33,364 | 34,209 | |||
Total assets | 45,684 | 52,464 | |||
LIABILITIES AND MEMBERS' EQUITY | |||||
Current liabilities | 8,391 | 8,100 | |||
Other liabilities | 9,500 | 9,235 | |||
Stockholders' equity | 27,793 | 35,129 | |||
Total liabilities and stockholders' equity | 45,684 | 52,464 | |||
Summarized results of MNI are as follows:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Operating revenue | 65,172 | 67,264 | 67,478 | |||||
Operating expenses, excluding workforce adjustments, depreciation and amortization | 52,646 | 54,795 | 55,393 | |||||
Workforce adjustments | 39 | 459 | 244 | |||||
Depreciation and amortization | 1,684 | 1,630 | 1,626 | |||||
Operating income | 10,803 | 10,380 | 10,215 | |||||
Net income | 6,947 | 6,832 | 6,768 | |||||
Equity in earnings of MNI | 3,473 | 3,416 | 3,384 | |||||
MNI makes quarterly distributions of its earnings. We received $7,250,000, $5,500,000 and $4,750,000 in distributions in 2016, 2015 and 2014, respectively.
Fees for editorial services provided to MNI by us are included in other revenue in the Consolidated Statements of Operations and Comprehensive Income and totaled $7,099,000, $7,242,000 and $7,050,000, in 2016, 2015 and 2014, respectively.
At September 25, 2016, the carrying value of the Company's 50% investment in MNI is $13,896,000.
3 GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill related to continuing operations are as follows:
(Thousands of Dollars) | 2016 | 2015 | |||
Goodwill, gross amount | 1,532,458 | 1,532,458 | |||
Accumulated impairment losses | (1,288,729 | ) | (1,288,729 | ) | |
Goodwill, end of year | 243,729 | 243,729 | |||
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Identified intangible assets related to continuing operations consist of the following:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Non-amortized intangible assets: | |||||
Mastheads | 23,644 | 25,102 | |||
Amortizable intangible assets: | |||||
Customer and newspaper subscriber lists | 687,182 | 687,182 | |||
Less accumulated amortization | 552,472 | 526,322 | |||
134,710 | 160,860 | ||||
Non-compete and consulting agreements | 28,524 | 28,524 | |||
Less accumulated amortization | 28,524 | 28,524 | |||
— | — | ||||
158,354 | 185,962 | ||||
In 2016, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2015, we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was significantly in excess of its carrying value. As a result no goodwill impairment was recorded. In 2014, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%.
In 2016 and 2014, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. We also recorded pretax charges to reduce the carrying value of other assets in 2016 and 2014 in Impairment of intangible and other assets in the Consolidated Statements of Income and Comprehensive Income (Loss). We recorded deferred income tax benefits related to these charges.
A summary of the pretax impairment charges is included in the table below:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Continuing operations: | ||||||||
Non-amortized intangible assets | 818 | — | 1,936 | |||||
Property, equipment and other assets | 1,367 | — | 1,044 | |||||
2,185 | — | 2,980 | ||||||
Annual amortization of intangible assets for the years ending September 2017 to September 2021 is estimated to be $25,030,000, $16,653,000, $15,972,000, $15,206,000, and $14,042,000, respectively.
4 DEBT
On March 31, 2014, we completed a comprehensive refinancing of our debt (the “2014 Refinancing”), which includes the following:
• | $400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”) due March 2022, pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”). |
• | $250,000,000 first lien term loan (the "1st Lien Term Loan") due March 2019 and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”). |
• | $150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”) due December 2022 and bears interest at a fixed annual rate of 12.0%. |
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The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan enabled us to repay in full, including accrued interest, and terminate, on March 31, 2014: (i) the remaining principal balance of $593,000,000 under our previous 1st lien agreement and (ii) the remaining principal balance of $175,000,000 under our previous 2nd lien agreement. We also used the proceeds of the refinancing to pay fees and expenses totaling $30,931,000 related to the 2014 Refinancing.
Notes
The Notes are senior secured obligations of the Company and mature on March 15, 2022. At September 25, 2016 the principal balance of the Notes is $385,000,000.
Interest
The Notes require payment of interest semiannually on March 15 and September 15 of each year, at a fixed annual rate of 9.5%.
Redemption
We may redeem some, or all, of the principal amount of the Notes at any time on or after March 15, 2018 as follows:
Period Beginning | Percentage of Principal Amount | |
March 15, 2018 | 104.75 | |
March 15, 2019 | 102.38 | |
March 15, 2020 | 100.00 | |
We may redeem up to 35% of the Notes prior to March 15, 2017 at 109.5% of the principal amount using the proceeds of certain future equity offerings.
We may repurchase Notes in the open market at any time. In 2016 we purchased $15,000,000 principal amount of Notes in privately negotiated transactions. The transactions resulted in a gain on extinguishment of debt totaling $1,250,000, which is recorded in Other, net non-operating income (expense) in our Consolidated Statements of Income and Comprehensive Income.
If we sell certain of our assets or experience specific types of changes of control, we must, subject to certain exceptions, offer to purchase the Notes at 101% of the principal amount. Any redemption of the Notes must also satisfy any accrued and unpaid interest thereon.
Covenants and Other Matters
The Indenture and 1st Lien Credit Facility contains restrictive covenants as discussed more fully below. However, certain of these covenants will cease to apply if the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and there is no default or event of default under the Indenture.
1st Lien Credit Facility
The 1st Lien Credit Facility consists of the $250,000,000 1st Lien Term Loan that matures in March 2019 and the $40,000,000 Revolving Facility that matures in December 2018. The 1st Lien Credit Facility documents the primary terms of the 1st Lien Term Loan and the Revolving Facility. The Revolving Facility may be used for working capital and general corporate purposes (including letters of credit). At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under the Revolving Facility.
Interest
Interest on the 1st Lien Term Loan, which has a principal balance of $101,304,000 at September 25, 2016, accrues, at our option, at either (A) LIBOR plus 6.25% (with a LIBOR floor of 1.0%) or (B) 5.25% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0% (with a floor of 2.0%). Interest is payable quarterly.
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The 1st Lien Term Loan was funded with an original issue discount of 2.0%, or $5,000,000, which is being amortized as interest expense over the life of the 1st Lien Term Loan.
Interest on the Revolving Facility, which has a principal balance of zero at September 25, 2016, accrues, at our option, at either (A) LIBOR plus 5.5%, or (B) 4.5% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0%.
Principal Payments
Quarterly principal payments of $6,250,000 are required under the 1st Lien Term Loan, with additional payments required to be made based on 90% of excess cash flow of Lee Legacy ("Lee Legacy Excess Cash Flow"), as defined, or from proceeds of asset sales, which are not reinvested, as defined, from our subsidiaries other than Pulitzer Inc. ("Pulitzer") and its subsidiaries (collectively, the "Pulitzer Subsidiaries"). For excess cash flow calculation purposes Lee Legacy constitutes the business of the Company, including MNI, but excluding Pulitzer and TNI. We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1st Lien Credit Facility at any time without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.
Quarterly, the Company is required to prepare a Lee Legacy Excess Cash Flow calculation, which is generally determined as the cash earnings of our subsidiaries other than the Pulitzer Subsidiaries and is adjusted for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments or refunds. Any excess cash flow as calculated is required to be paid to the 1st Lien lenders 45 days after the end of the quarter.
2016 payments made under the 1st Lien Term Loan are summarized by quarter and fiscal year as follows:
(Thousands of Dollars) | December 27 2015 | March 27 2016 | June 26 2016 | September 25 2016 | 2016 | |||||
Mandatory | 6,250 | 6,250 | 6,250 | 6,250 | 25,000 | |||||
Voluntary | 5,000 | 27,000 | 3,000 | 6,000 | 41,000 | |||||
Excess cash flow | — | 1,135 | 6,441 | 5,992 | 13,568 | |||||
11,250 | 34,385 | 15,691 | 18,242 | 79,568 | ||||||
In January 2016, we used $20,000,000 of the proceeds received from an insurance settlement to reduce outstanding debt under our 1st Lien Term Loan. The majority of the remaining proceeds was used to repurchase Notes at a substantial discount.
Covenants and Other Matters
The 1st Lien Credit Facility requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including a maximum total leverage ratio, which is only applicable to the Revolving Facility.
The 1st Lien Credit Facility restricts us from paying dividends on our Common Stock. These restrictions no longer apply if Lee Legacy leverage is below 3.25x before and after such payments. Further, the 1st Lien Credit Facility restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur indebtedness, (ii) enter into mergers, acquisitions and asset sales, (iii) incur or create liens and (iv) enter into transactions with certain affiliates. The 1st Lien Credit Facility contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 1st Lien Credit Facility also contains cross-default provisions tied to the terms of each of the Indenture and 2nd Lien Term Loan.
2nd Lien Term Loan
The 2nd Lien Term Loan, which has a balance of $130,863,000 at September 25, 2016, bears interest at a fixed annual rate of 12.0%, payable quarterly, and matures in December 2022.
Principal Payments
There are no scheduled mandatory amortization payments required under the 2nd Lien Term Loan.
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Quarterly, we are required to prepare a calculation of excess cash flow of the Pulitzer Subsidiaries ("Pulitzer Excess Cash Flow"). Pulitzer Excess Cash Flow is generally determined as the cash earnings of the Pulitzer Subsidiaries adjusted for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments. Pulitzer Excess Cash Flow also includes a deduction for interest costs incurred under the 2nd Lien Term Loan. Changes to settlement of certain intercompany costs between the Company and Pulitzer have been affected, with the net result being a reduction in the excess cash flows of Pulitzer from historically reported levels.
Under the 2nd Lien Term Loan, subject to certain other conditions, Pulitzer Excess Cash Flow must be used, (a) prior to March 31, 2017, to make an offer to the 2nd Lien Lenders to prepay amounts under the 2nd Lien Term Loan at par (which offer the 2nd Lien Lenders may accept or reject; if rejected, we may use the Pulitzer Excess Cash Flow to prepay amounts under the 1st Lien Credit Facility or repurchase Notes in the open market), and (b) after March 31, 2017, to pay such amounts under the 2nd Lien Term Loan at par. Pulitzer Excess Cash Flow payments are required to be offered and/or paid 45 days after the end of the quarter.
Pulitzer Excess Cash Flow and the related payments on the 2nd Lien Term Loan made in 2016 are as follows:
For the Period Ending (Thousands of Dollars) | Pulitzer Excess Cash Flow | Payment Date | Payment Amount (not rejected) | |
September 27, 2015 | 5,143 | Q1 2016 | 3,326 | |
December 27, 2015 | 2,864 | Q2 2016 | 1,867 | |
March 27, 2016 | 2,730 | Q3 2016 | 525 | |
June 26, 2016 | 1,583 | Q4 2016 | 299 | |
There was no Pulitzer Excess Cash Flow for the quarter ended September 25, 2016.
Subject to certain other conditions in the 2nd Lien Term Loan, the balance of the 2nd Lien Term Loan will be repaid at par from proceeds from asset sales by the Pulitzer Subsidiaries that are not reinvested. We repaid $8,119,000 and $5,000,000 of the 2nd Lien Term Loan, at par, due to the sale of assets at our Pulitzer properties in 2016 and 2015, respectively.
Voluntary payments under the 2nd Lien Term Loan are subject to call premiums as follows:
Period Beginning | Percentage of Principal Amount |
March 31, 2014 | 112 |
March 31, 2017 | 106 |
March 31, 2018 | 103 |
March 31, 2019 | 100 |
Covenants and Other Matters
The 2nd Lien Term Loan requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including the negative covenants under the 1st Lien Credit Facility discussed above. The 2nd Lien Term Loan contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 2nd Lien Term Loan also contains cross-default provisions tied to the terms of the Indenture and 1st Lien Credit Facility.
In connection with the 2nd Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.1% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.
The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018 as well as other provisions requiring the Warrants to be measured at fair value and included in other liabilities in our Consolidated Balance Sheets. We remeasure the fair value of the liability each reporting period, with changes
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reported in other, net non-operating income (expense). The initial fair value of the Warrants was $16,930,000. See Note 8.
In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.
Security
The Notes and the 1st Lien Credit Facility are fully and unconditionally guaranteed on a joint and several first-priority basis by each of the Company's material domestic subsidiaries, excluding MNI, the Pulitzer Subsidiaries and TNI (the "Lee Legacy Assignors"), pursuant to a first lien guarantee and collateral agreement dated as of March 31, 2014 (the "1st Lien Guarantee and Collateral Agreement").
The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in all property and assets, including certain real estate, of the Lee Legacy Assignors, other than the capital stock of MNI and any property and assets of MNI (the “Lee Legacy Collateral”), on a first-priority basis, equally and ratably with all of the Lee Legacy Assignors' existing and future obligations. The Lee Legacy Collateral includes, among other things, equipment, inventory, accounts receivables, depository accounts, intellectual property and certain of their other tangible and intangible assets.
Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Lee Legacy Assignors (excluding the capital stock of MNI). The Notes and 1st Lien Credit Facility are subject to a Pari Passu Intercreditor Agreement dated March 31, 2014.
The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are also secured, subject to permitted liens, by a second-priority security interest in the property and assets of the Pulitzer Subsidiaries that become subsidiary guarantors (the "Pulitzer Assignors") other than assets of or used in the operations or business of TNI (collectively, the “Pulitzer Collateral”). In June 2015 the Pulitzer Assignors became a party to the 1st Lien Guarantee and Collateral Agreement on a second lien basis.
Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities, and limitations in the various agreements, by second-priority security interests in the capital stock of, and other equity interests in, the Pulitzer Assignors and Star Publishing’s interest in TNI.
The 2nd Lien Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Pulitzer Assignors, pursuant to a Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 (the “2nd Lien Guarantee and Collateral Agreement”) among the Pulitzer Assignors and the 2nd Lien collateral agent.
Under the 2nd Lien Guarantee and Collateral Agreement, the Pulitzer Assignors have granted (i) first-priority security interests, subject to certain priorities and limitations in the various agreements, in the Pulitzer Collateral and (ii) have granted first-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan.
Also, under the 2nd Lien Guarantee and Collateral Agreement, the Lee Legacy Assignors have granted (i) second-priority security interests, subject to certain priorities and limitations in the various agreements, in the Lee Legacy Collateral, and (ii) have granted second-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan. Assets of, or used in the operations or business of, MNI are excluded.
The rights of each of the collateral agents with respect to the Lee Legacy Collateral and the Pulitzer Collateral are subject to customary intercreditor and intercompany agreements.
Other
In connection with the 2014 Refinancing, we capitalized $37,819,000 of debt financing costs. Amortization of debt financing costs totaled $5,541,000, $4,693,000 and $2,145,000 in 2016, 2015 and 2014 respectively. Amortization of
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such costs is estimated to total $4,176,000 in 2017, $4,245,000 in 2018, $4,044,000 in 2019, $4,040,000 in 2020 and $4,217,000 in 2021. At September 25, 2016 we have $26,271,000 of unamortized debt financing costs recorded in other long term assets in our Consolidated Balance Sheets.
Debt is summarized as follows:
Interest Rates (%) | |||||
(Thousands of Dollars) | September 25 2016 | September 27 2015 | September 25 2016 | ||
Revolving Facility | — | — | 5.65 | ||
1st Lien Term Loan | 101,304 | 180,872 | 7.25 | ||
Notes | 385,000 | 400,000 | 9.50 | ||
2nd Lien Term Loan | 130,863 | 145,000 | 12.00 | ||
617,167 | 725,872 | ||||
Less current maturities of long-term debt | 25,070 | 25,000 | |||
Total long-term debt | 592,097 | 700,872 | |||
At September 25, 2016, our weighted average cost of debt, excluding amortization of debt financing costs, is 9.7%.
Aggregate minimum required maturities of debt excluding amounts required to be paid from excess cash flow requirements at September 25, 2016 total $25,070,000 for 2017, $25,000,000 in 2018, $51,234,000 in 2019, zero in 2020, zero in 2021 and $515,863,000 thereafter.
Liquidity
At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000 subject to a reduction for any amounts the Company may elect to use to repay our 1st Lien Term Loan and/or the Notes.
The 2014 Refinancing significantly improved our debt maturity profile. Final maturities of our debt have been extended to dates from December 2018 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.
There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.
5 PENSION PLANS
We have several non-contributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, substantially all benefits are frozen and only a small amount of additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.
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The net periodic cost (benefit) components of our pension plans are as follows:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Service cost for benefits earned during the year | 197 | 232 | 156 | |||||
Interest cost on projected benefit obligation | 6,061 | 8,122 | 7,996 | |||||
Expected return on plan assets | (8,698 | ) | (9,863 | ) | (9,932 | ) | ||
Amortization of net loss | 2,397 | 1,682 | 423 | |||||
Amortization of prior service benefit | (136 | ) | (136 | ) | (136 | ) | ||
Net periodic pension cost (benefit) | (179 | ) | 37 | (1,493 | ) | |||
Net periodic pension benefit of $56,000 is allocated to TNI in 2016, 2015 and 2014
Changes in benefit obligations and plan assets are as follows:
(Thousands of Dollars) | 2016 | 2015 | |||
Benefit obligation, beginning of year | 193,751 | 199,197 | |||
Service cost | 197 | 232 | |||
Interest cost | 6,061 | 8,122 | |||
Actuarial loss (gain) | 13,630 | (2,543 | ) | ||
Benefits paid | (11,481 | ) | (11,257 | ) | |
Benefit obligation, end of year | 202,158 | 193,751 | |||
Fair value of plan assets, beginning of year: | 143,288 | 151,013 | |||
Actual return on plan assets | 14,819 | 1,817 | |||
Benefits paid | (11,481 | ) | (11,257 | ) | |
Administrative expenses paid | (2,099 | ) | (1,862 | ) | |
Employer contributions | 4,604 | 3,577 | |||
Fair value of plan assets, end of year | 149,131 | 143,288 | |||
Funded status - benefit obligation in excess of plan assets | 53,027 | 50,463 | |||
Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Pension obligations | 53,027 | 50,463 | |||
Accumulated other comprehensive loss (before income taxes) | (54,862 | ) | (47,515 | ) | |
Amounts recognized in accumulated other comprehensive income (loss) are as follows:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Unrecognized net actuarial loss | (55,241 | ) | (48,031 | ) | |
Unrecognized prior service benefit | 379 | 516 | |||
(54,862 | ) | (47,515 | ) | ||
We expect to recognize $2,947,000 and $137,000 of unrecognized net actuarial loss and unrecognized prior service benefit, respectively, in net periodic pension cost in 2017.
The accumulated benefit obligation for the plans total $202,158,000 at September 25, 2016 and $193,751,000 at September 27, 2015. 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 $202,158,000, $202,158,000 and $149,131,000, respectively, at September 25, 2016.
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Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
(Percent) | September 25 2016 | September 27 2015 | |
Discount rate | 3.5 | 4.2 | |
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
(Percent) | 2016 | 2015 | 2014 | |||||
Discount rate | 4.2 | 4.2 | 4.7 | |||||
Expected long-term return on plan assets | 6.3 | 6.8 | 7.0 | |||||
For 2016, the expected long-term return on plan assets is 5.5%. The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns, current market conditions and composition of plan assets.
Plan Assets
The primary objective of our investment strategy is to satisfy our pension obligations at a reasonable cost. Assets are actively invested to balance real growth of capital through appreciation and reinvestment of dividend and interest income and safety of invested funds.
Our 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 certain of our executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the appropriate policy allocation.
The weighted-average asset allocation of our pension assets is as follows:
(Percent) | Policy Allocation | Actual Allocation | ||
Asset Class | September 25 2016 | September 25 2016 | September 27 2015 | |
Equity securities | 50 | 50 | 46 | |
Debt securities | 35 | 33 | 37 | |
TIPS | 5 | 4 | 4 | |
Hedge fund investments | 10 | 11 | 11 | |
Cash and cash equivalents | — | 2 | 2 | |
Plan assets include no Company securities. Assets include cash and cash equivalents and receivables from time to time due to the need to reallocate assets within policy guidelines.
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Fair Value Measurements
The fair value hierarchy of pension assets at September 25, 2016 is as follows:
(Thousands of Dollars) | NAV | Level 1 | Level 2 | |||
Cash and cash equivalents | — | 2,757 | — | |||
Domestic equity securities | — | 9,669 | 49,809 | |||
International equity securities | — | 6,773 | 7,755 | |||
TIPS | — | 6,883 | — | |||
Debt securities | 14,558 | 25,612 | 9,648 | |||
Hedge fund investments | 17,531 | — | — | |||
The fair value hierarchy of pension assets at September 27, 2015 is as follows:
(Thousands of Dollars) | NAV | Level 1 | Level 2 | |||
Cash and cash equivalents | — | 2,407 | — | |||
Domestic equity securities | — | 8,153 | 44,470 | |||
International equity securities | — | 6,286 | 7,389 | |||
TIPS | — | 6,450 | — | |||
Debt securities | 17,246 | 31,196 | 4,124 | |||
Hedge fund investments | 17,344 | — | — | |||
There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.
Cash Flows
Based on our forecast at September 25, 2016, we do not expect to make contributions to our pension trust in 2017.
We anticipate future benefit payments to be paid from the pension trust as follows:
(Thousands of Dollars) | ||
2017 | 11,803 | |
2018 | 11,735 | |
2019 | 11,757 | |
2020 | 11,728 | |
2021 | 11,735 | |
2022-2026 | 58,487 | |
Other Plans
We are obligated under an unfunded plan to provide 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 $2,232,000 and $2,337,000 at September 25, 2016 and September 27, 2015, respectively, of which $113,000 and $278,000 is included in compensation and other accrued liabilities in the Consolidated Balance Sheet at September 25, 2016 and September 27, 2015 , respectively.
6 POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
We provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, St. Louis Post Dispatch LLC ("PD LLC") provides postemployment disability benefits to certain employee groups prior to retirement. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it
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becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.
The net periodic postretirement benefit cost (benefit) components for our postretirement plans are as follows:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Service cost for benefits earned during the year | 63 | 76 | 596 | |||||
Interest cost on projected benefit obligation | 623 | 922 | 911 | |||||
Expected return on plan assets | (1,322 | ) | (1,445 | ) | (1,483 | ) | ||
Amortization of net actuarial gain | (1,093 | ) | (1,386 | ) | (1,819 | ) | ||
Amortization of prior service benefit | (1,459 | ) | (1,459 | ) | (1,459 | ) | ||
Net periodic postretirement benefit | (3,188 | ) | (3,292 | ) | (3,254 | ) | ||
Changes in benefit obligations and plan assets are as follows:
(Thousands of Dollars) | 2016 | 2015 | |||
Benefit obligation, beginning of year | 23,812 | 25,506 | |||
Service cost | 63 | 76 | |||
Interest cost | 623 | 922 | |||
Actuarial loss (gain) | (773 | ) | (1,149 | ) | |
Benefits paid, net of premiums received | (1,434 | ) | (1,541 | ) | |
Medicare Part D subsidies | 220 | (2 | ) | ||
Benefit obligation, end of year | 22,511 | 23,812 | |||
Fair value of plan assets, beginning of year | 30,123 | 32,881 | |||
Actual return on plan assets | 1,085 | (547 | ) | ||
Employer contributions | 563 | 745 | |||
Benefits paid, net of premiums and Medicare Part D subsidies received | (1,213 | ) | (1,544 | ) | |
Benefits paid for active employees | (1,510 | ) | (1,412 | ) | |
Allocation to active medical plans | (4,925 | ) | — | ||
Fair value of plan assets at measurement date | 24,123 | 30,123 | |||
Funded status - benefit obligation less than plan assets | (1,612 | ) | (6,311 | ) | |
The accumulated benefit obligation for plans with benefit obligations in excess of plan assets included in the table above was $7,527,000 at September 25, 2016. These plans are unfunded.
Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Non-current assets | 9,138 | 13,420 | |||
Postretirement benefit obligations | 7,527 | 7,109 | |||
Accumulated other comprehensive income (before income tax benefit) | 19,026 | 22,551 | |||
Amounts recognized in accumulated other comprehensive income are as follows:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Unrecognized net actuarial gain | 11,089 | 13,155 | |||
Unrecognized prior service benefit | 7,937 | 9,396 | |||
19,026 | 22,551 | ||||
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We expect to recognize $1,016,000 and $1,459,000 of unrecognized net actuarial gain and unrecognized prior service benefit, respectively, in net periodic postretirement benefit in 2017.
Assumptions
Weighted-average assumptions used to determine post retirement benefit obligations are as follows:
(Percent) | September 25 2016 | September 27 2015 | |
Discount rate | 3.1 | 3.7 | |
Expected long-term return on plan assets | 4.5 | 4.5 | |
The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns, current market conditions and composition of plan assets.
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
(Percent) | 2016 | 2015 | 2014 | |||||
Discount rate | 3.7 | 3.7 | 4.0 | |||||
Expected long-term return on plan assets | 4.5 | 4.5 | 4.5 | |||||
Assumed health care cost trend rates are as follows:
(Percent) | September 25 2016 | September 27 2015 | |
Health care cost trend rates | 9.0 | 9.0 | |
Rate to which the cost trend rate is assumed to decline (the “Ultimate Trend Rate”) | 4.5 | 4.5 | |
Year in which the rate reaches the Ultimate Trend Rate | 2025 | 2025 | |
Administrative costs related to indemnity plans are assumed to increase at the health care cost trend rates noted above.
Assumed health care cost trend rates have an effect on the amounts reported for the postretirement plans. A one percentage point change in assumed health care cost trend rates would have the following annualized effects on reported amounts for 2016:
One Percentage Point | |||||
(Thousands of Dollars) | Increase | Decrease | |||
Effect on net periodic postretirement benefit | 20 | (18 | ) | ||
Effect on postretirement benefit obligation | 697 | (629 | ) | ||
Plan Assets
Assets of the retiree medical plan are invested in a master trust. The master trust also pays benefits of active employee medical plans for the same union employees. In 2016, it was determined that the assets of the retiree medical plan should be allocated among all plans that it funds and as a result, we allocated $4,925,000 of the retiree medical plan assets to the active medical plans during the year. The fair value of master trust assets allocated to the retiree medical plan is $24,123,000 at September 25, 2016. The fair value of master trust assets allocated to the active employee medical plans at September 25, 2016 is $4,925,000.
The primary objective of our investment strategy is to satisfy our postretirement obligations at a reasonable cost. Assets are actively invested to balance real growth of capital through appreciation and reinvestment of dividend and interest income and safety of invested funds.
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Our 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 certain of our executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the appropriate policy allocation.
The weighted-average asset allocation of our postretirement assets is as follows:
(Percent) | Policy Allocation | Actual Allocation | ||
Asset Class | September 25 2016 | September 25 2016 | September 27 2015 | |
Equity securities | 20 | 22 | 19 | |
Debt securities | 70 | 65 | 68 | |
Hedge fund investment | 10 | 11 | 10 | |
Cash and cash equivalents | — | 2 | 3 | |
Plan assets include no Company securities. Assets include cash and cash equivalents and receivables from time to time due to the need to reallocate assets within policy guidelines.
Fair Value Measurements
The fair value hierarchy of postretirement assets at September 25, 2016 is as follows:
(Thousands of Dollars) | NAV | Level 1 | Level 2 | |||
Cash and cash equivalents | — | 518 | — | |||
Domestic equity securities | — | 3,342 | 1,572 | |||
International equity securities | — | 695 | 898 | |||
Debt securities | — | 18,840 | — | |||
Hedge fund investment | 3,182 | — | — | |||
The fair value hierarchy of postretirement assets at September 27, 2015 is as follows:
(Thousands of Dollars) | NAV | Level 1 | Level 2 | |||
Cash and cash equivalents | — | 790 | — | |||
Domestic equity securities | — | 2,896 | 1,372 | |||
International equity securities | — | 645 | 857 | |||
Debt securities | — | 13,910 | 6,581 | |||
Hedge fund investment | 3,072 | — | — | |||
There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.
Cash Flows
Based on our forecast at September 25, 2016, we do not expect to contribute to our postretirement plans in 2017.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Modernization 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 at least actuarially equivalent (as that term is defined in the Modernization Act) to Medicare Part D. We concluded we qualify for the Subsidy under the Modernization Act since the prescription drug benefits provided under our 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 Modernization Act.
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We anticipate future benefit payments to be paid either with future contributions to the plan or directly from plan assets, as follows:
(Thousands of Dollars) | Gross Payments | Less Medicare Part D Subsidy | Net Payments | |||||
2017 | 3,600 | (200 | ) | 3,400 | ||||
2018 | 1,870 | (210 | ) | 1,660 | ||||
2019 | 1,910 | (210 | ) | 1,700 | ||||
2020 | 1,880 | (210 | ) | 1,670 | ||||
2021 | 1,790 | (200 | ) | 1,590 | ||||
2022-2026 | 7,910 | (870 | ) | 7,040 | ||||
Postemployment Plan
Our postemployment benefit obligation, representing certain disability benefits, is $3,190,000 at September 25, 2016 and $3,951,000 at September 27, 2015.
7 OTHER RETIREMENT PLANS
Substantially all of our employees are eligible to participate in a qualified defined contribution retirement plan. We also have a non-qualified plan for employees whose incomes exceed qualified plan limits.
Retirement and compensation plan costs, including costs related to stock based compensation and interest on deferred compensation costs, charged to continuing operations are $4,616,000 in 2016, $4,125,000 in 2015 and $3,963,000 in 2014.
Multiemployer Pension Plans
We contribute to three multiemployer defined benefit pension plans under the terms of collective-bargaining agreements ("CBAs"). The risks of participating in these multiemployer plans are different from our company-sponsored plans in the following aspects:
• | We do not manage the plan investments or any other aspect of plan administration; |
• | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; |
• | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and |
• | If we choose to stop participating in one or more multiemployer plans, we may be required to fund over time an amount based on the unfunded status of the plan at the time of withdrawal, referred to as "withdrawal liability". |
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Information related to these plans is outlined in the table below:
(Thousands of Dollars) | Zone Status September 30 | Funding Improvement Plan/Rehabilitation Plan Status | Contributions | ||||||||
Pension Plan | 2016 | 2015 | Status | 2016 | 2015 | 2014 | Surcharge Imposed | Expiration Dates of CBAs | |||
GCIU- Employer Retirement Fund 91-6024903/001 | Red | Red | Implemented | 138 | 145 | 265 | No | 1/13/2017 | |||
8/31/2017 | |||||||||||
CWA/ITU Negotiated Pension Plan 13-6212879/001 | Red | Red | Implemented | 108 | 122 | 133 | No | 5/12/2017 | |||
12/31/2017 | |||||||||||
4/1/2017 | |||||||||||
8/31/2017 | |||||||||||
District No. 9, International Association of Machinists and Aerospace Workers Pension Trust 43-0736847/001 | Green | Green | N/A | 31 | 34 | 37 | N/A | 2/28/2017 | |||
Multiemployer plans in red zone status are generally less well funded than plans in green zone status.
One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.
8 COMMON STOCK, CLASS B COMMON STOCK AND PREFERRED SHARE PURCHASE RIGHTS
Common Stock
The par value of our Common Stock was changed from $2.00 per share to $0.01 per share effective January 30, 2012. Holders of our previous 2nd lien agreement shared in the issuance of 6,743,640 shares of our Common Stock, an amount equal to 13% of outstanding shares on a pro forma basis as of January 30, 2012.
In connection with the currently outstanding 2nd Lien Term Loan, we entered into the Warrant Agreement. Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of Warrants to purchase, in cash, 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions. The Warrants represent, when fully exercised, approximately 10.1% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.
The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018, as well as other provisions requiring the Warrants be measured at fair value and classified as other liabilities in our Consolidated Balance Sheets. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. At September 25, 2016, the fair value of the Warrants is $11,760,000.
In connection with the issuance of the Warrants, we entered into the Registration Rights Agreement. The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to file and maintain the effectiveness for certain specified periods of a shelf registration statement covering the shares of Common Stock upon exercise of the Warrants.
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Class B Common Stock
In 1986, one share of Class B Common Stock was issued as a dividend for each share of Common Stock held by stockholders of record at the time. The transfer of Class B Common Stock was restricted. As originally anticipated, the number of outstanding Class B shares decreased over time through trading and reached the sunset level of 5,600,000 shares in March 2011. In March 2011, in accordance with the sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. As a result, all stockholders have one vote per share on all future matters. Class B shares formerly had ten votes per share.
Preferred Share Purchase Rights
In 1998, the Board of Directors adopted a Shareholder Rights Plan (the “Rights Plan”). Under the Rights Plan, the Board of Directors declared a dividend of one Preferred Share Purchase Right (“Right”) for each outstanding share of our Common Stock and Class B Common Stock (collectively “Common Shares”). Rights are attached to, and automatically trade with, our Common Shares. In 2008, the Board of Directors approved an amendment to the Rights Plan. The amendment increased the beneficial ownership threshold to 25% from 20% for stockholders purchasing Common Stock for passive investment only and decreased the threshold to 15% for all other investors. In addition, the amendment extended the expiration of the Rights Plan to May 31, 2018 from May 31, 2008.
Rights become exercisable only in the event that any person or group of affiliated persons other than a passive investor becomes a holder of 15% or more of our 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 15% of our 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 15% 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.
9 STOCK OWNERSHIP PLANS
Total non-cash stock compensation expense is $2,306,000, $1,971,000 and $1,481,000, in 2016, 2015 and 2014, respectively.
At September 25, 2016, we have reserved 4,460,214 shares of Common Stock for issuance to employees under an incentive and nonstatutory stock option and restricted stock plan approved by stockholders. At September 25, 2016, 2,762,549 shares are available for granting of non-qualified stock options or issuance of restricted Common Stock.
Stock Options
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) | 2016 | 2015 | 2014 | |||||
Under option, beginning of year | 1,871 | 2,333 | 2,769 | |||||
Granted | — | — | 15 | |||||
Exercised | (74 | ) | (289 | ) | (342 | ) | ||
Canceled | (99 | ) | (173 | ) | (109 | ) | ||
Under option, end of year | 1,698 | 1,871 | 2,333 | |||||
Exercisable, end of year | 1,692 | 1,840 | 1,786 | |||||
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Weighted average prices of stock options are as follows:
(Dollars) | 2016 | 2015 | 2014 | |||||
Granted | — | — | 2.99 | |||||
Exercised | 1.17 | 1.27 | 2.01 | |||||
Cancelled | 8.78 | 5.02 | 10.98 | |||||
Under option, end of year | 2.42 | 2.71 | 2.70 | |||||
The following assumptions were used to estimate the fair value of option awards:
2014 | ||||||
Volatility (Percent) | 91 | |||||
Risk-free interest rate (Percent) | 1.24 | |||||
Expected term (Years) | 4.5 | |||||
Estimated fair value (Dollars) | 2.02 | |||||
A summary of stock options outstanding at September 25, 2016 is as follows:
(Dollars) | Options Outstanding | Options Exercisable | ||||||||||
Range of Exercise Prices | Number Outstanding (Thousands) | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable (Thousands) | Weighted Average Exercise Price | |||||||
1 - 5 | 1,659 | 4.5 | 1.80 | 1,653 | 1.80 | |||||||
25 - 50 | 39 | 0.1 | 28.72 | 39 | 28.72 | |||||||
1,698 | 4.4 | 2.42 | 1,692 | 2.42 | ||||||||
Total unrecognized compensation expense for unvested stock options at September 25, 2016 is $1,000, which will be recognized over a weighted average period of 0.1 years.
The aggregate intrinsic value of stock options outstanding at September 25, 2016 is $3,227,000.
Restricted Common Stock
A summary of restricted Common Stock activity follows:
(Thousands of Shares) | 2016 | 2015 | 2014 | |||||
Outstanding, beginning of year | 1,546 | 1,291 | 500 | |||||
Granted | 1,018 | 786 | 817 | |||||
Vested | (63 | ) | (500 | ) | — | |||
Forfeited | (39 | ) | (31 | ) | (26 | ) | ||
Outstanding, end of year | 2,462 | 1,546 | 1,291 | |||||
Weighted average grant date fair values of restricted Common Stock are as follows:
(Dollars) | 2016 | 2015 | 2014 | |||||
Outstanding, beginning of year | 3.62 | 2.72 | 1.31 | |||||
Granted | 1.49 | 3.62 | 3.61 | |||||
Vested | 3.39 | 1.31 | — | |||||
Forfeited | 3.31 | 3.62 | 3.61 | |||||
Outstanding, end of year | 2.74 | 3.62 | 2.72 | |||||
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Total unrecognized compensation expense for unvested restricted Common Stock at September 25, 2016 is $2,260,000, which will be recognized over a weighted average period of 1.4 years.
In December 2016, we issued 832,500 shares of restricted Common Stock to employees. The grant date fair value was $3.35 per share. All restrictions lapse in December 2019 with respect to these shares.
Stock Purchase Plans
We have 270,000 shares of Common Stock available for issuance pursuant to our Employee Stock Purchase Plan. We also have 8,700 shares of Common Stock available for issuance under our Supplemental Employee Stock Purchase Plan. There has been no activity under these plans in 2016, 2015 or 2014.
10 INCOME TAXES
Income tax expense consists of the following:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Current: | ||||||||
Federal | 1,241 | 720 | 451 | |||||
State | 379 | (92 | ) | (571 | ) | |||
Deferred | 20,556 | 12,966 | 6,410 | |||||
22,176 | 13,594 | 6,290 | ||||||
Income tax expense 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:
(Percent of Income (Loss) Before Income Taxes) | 2016 | 2015 | 2014 | |||||
Computed “expected” income tax expense (benefit) | 35.0 | 35.0 | 35.0 | |||||
State income tax expense (benefit), net of federal tax impact | 3.8 | (7.1 | ) | 11.0 | ||||
Net income of associated companies taxed at dividend rates | (2.6 | ) | (5.2 | ) | (9.3 | ) | ||
Resolution of tax matters | 3.2 | 0.5 | 3.6 | |||||
Non-deductible expenses | 1.0 | 2.8 | 7.9 | |||||
Valuation allowance | (7.7 | ) | 15.9 | (4.5 | ) | |||
Warrant valuation | 5.0 | (6.1 | ) | (15.1 | ) | |||
CODI tax attribute reduction | — | — | 18.3 | |||||
Other | 0.4 | 0.1 | (1.8 | ) | ||||
38.1 | 35.9 | 45.1 | ||||||
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Net deferred income tax liabilities consist of the following components:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Deferred income tax liabilities: | |||||
Property and equipment | (33,549 | ) | (35,593 | ) | |
Identified intangible assets | (43,745 | ) | (51,380 | ) | |
Long-term debt | (16,158 | ) | (15,176 | ) | |
(93,452 | ) | (102,149 | ) | ||
Deferred income tax assets: | |||||
Investments | 12,138 | 17,521 | |||
Accrued compensation | 6,391 | 4,551 | |||
Allowance for doubtful accounts and losses on loans | 1,273 | 1,184 | |||
Pension and postretirement benefits | 6,505 | 5,719 | |||
Net operating loss carryforwards | 52,604 | 81,228 | |||
Accrued expenses | 577 | 572 | |||
Other | 3,634 | 1,720 | |||
83,122 | 112,495 | ||||
Valuation allowance | (27,978 | ) | (32,483 | ) | |
Net deferred income tax liabilities | (38,308 | ) | (22,137 | ) | |
All deferred taxes are categorized as non-current because the Company elected to early adopt ASU 2015-17. See Note 16, Impact of Recently Adopted Accounting Standards.
A reconciliation of 2016 and 2015 changes in gross unrecognized tax benefits is as follows:
(Thousands of Dollars) | 2016 | 2015 | |||
Balance, beginning of year | 11,799 | 13,520 | |||
Increases (decreases) in tax positions for prior years | 46 | (1,861 | ) | ||
Increases in tax positions for the current year | 1,600 | 1,098 | |||
Lapse in statute of limitations | (914 | ) | (958 | ) | |
Balance, end of year | 12,531 | 11,799 | |||
Approximately $8,025,000 and $7,475,000 of the gross unrecognized tax benefit balances for 2016 and 2015 respectively, relate to state net operating losses which are netted against deferred taxes on our balance sheet. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $8,213,000 at September 25, 2016. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was, net of tax, $317,000 at September 25, 2016 and $330,000 at September 27, 2015. There were no amounts provided for penalties at September 25, 2016 or September 27, 2015.
No significant income tax audits are currently in progress and the Company has not received any notices of intent to audit. Certain of the Company's state income tax returns for the year ended September 30, 2012 are open for examination. The Federal and remaining state returns are open beginning with the September 29, 2013 year.
At September 25, 2016, we had approximately $57,392,000 of state net operating loss ("NOL") tax benefits that expire between 2017 and 2036. At September 25, 2016 and September 27, 2015 the Company had deferred income tax assets related to state NOL carryforwards of $37,305,000 and $34,623,000, respectively, a portion of which are offset by a valuation allowances. In 2016, the Company reduced its state valuation allowance by $3,655,000 based on projected future earnings in the carryforward periods. In 2015, the Company recorded an additional valuation allowance of $6,043,000 due to increases in cumulative losses and other deferred tax assets not realizable within their carryforward periods.
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We reported a Federal NOL of approximately $165,489,000 for our 2014 year. We reported taxable income on our 2015 tax return which reduced the Federal NOL to $136,630,000. We expect to record taxable income in 2016 which will further reduce the Federal NOL to $58,618,000 resulting in a deferred income tax asset balance of $20,615,000 at September 25, 2016. A valuation allowance is not required for the Federal NOL at September 25, 2016 based on our projection of future earnings during the carryforward period.
11 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 equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling $6,359,000, including our 17% ownership of the non-voting common stock of TCT and a private equity investment, are carried at cost. As of September 25, 2016, the approximate fair value of our private equity investment is $8,164,000, which is a level 3 fair value measurement.
The fair value of floating rate debt, which consists of our 1st Lien Term Loan, is $101,240,000, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and, $130,863,000 principal amount under the 2nd Lien Term Loan. At September 25, 2016, based on an average of private market price quotations, the fair values were $399,437,000 and $136,833,000 for the Notes and 2nd Lien Term Loan, respectively.
As discussed more fully in Notes 4 and 8, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value and we will remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. The fair value of the Warrants at September 25, 2016, September 27, 2015 and September 28, 2014 are $11,760,000, $4,240,000 and $10,808,000, respectively. In other, net in the Consolidated Statements of Income and Comprehensive Income (Loss), we recognized expense of $7,520,000 in 2016 and income of $6,568,000 and $6,122,000 in 2015 and 2014, respectively, for adjustments in the fair value of the Warrants.
The following assumptions were used to estimate the fair value of the Warrants:
2016 | 2015 | 2014 | ||||||
Volatility (Percent) | 63 | 61 | 55 | |||||
Risk-free interest rate (Percent) | 1.25 | 1.75 | 2.34 | |||||
Expected term (Years) | 5.5 | 6.5 | 7.5 | |||||
Estimated fair value (Dollars) | 1.96 | 0.71 | 1.80 | |||||
In 2016 and 2014, we reduced the carrying value of equipment and other assets no longer in use by $1,367,000 and $1,044,000, respectively, based on estimates of the related fair value in the current market. Based on age, condition and marketability we estimated the assets had no value.
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12 EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per common share:
(Thousands of Dollars and Shares, Except Per Common Share Data) | 2016 | 2015 | 2014 | |||||
Income attributable to Lee Enterprises, Incorporated: | 34,961 | 23,316 | 6,795 | |||||
Weighted average Common Stock | 55,493 | 54,430 | 53,438 | |||||
Less non-vested restricted Common Stock | (2,295 | ) | (1,790 | ) | (1,165 | ) | ||
Basic average Common Stock | 53,198 | 52,640 | 52,273 | |||||
Dilutive stock options and restricted Common Stock | 1,026 | 1,291 | 1,463 | |||||
Diluted average Common Stock | 54,224 | 53,931 | 53,736 | |||||
Earnings per common share: | ||||||||
Basic: | 0.66 | 0.44 | 0.13 | |||||
Diluted | 0.64 | 0.43 | 0.13 | |||||
For 2016, 2015 and 2014, we had 7,577,000, 6,620,000 and 3,121,000 weighted average shares, respectively, not considered in the computation of diluted earnings (loss) per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock.
13 ALLOWANCE FOR DOUBTFUL ACCOUNTS
Valuation and qualifying account information related to the allowance for doubtful accounts receivable related to continuing operations is as follows:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Balance, beginning of year | 4,194 | 4,526 | 4,501 | |||||
Additions charged to expense | 1,195 | 1,307 | 1,754 | |||||
Deductions from reserves | (1,062 | ) | (1,639 | ) | (1,729 | ) | ||
Balance, end of year | 4,327 | 4,194 | 4,526 | |||||
14 OTHER INFORMATION
Compensation and other accrued liabilities consist of the following:
(Thousands of Dollars) | September 25 2016 | September 27 2015 | |||
Compensation | 12,290 | 12,454 | |||
Retirement plans | 4,135 | 3,459 | |||
Other | 7,459 | 11,142 | |||
23,884 | 27,055 | ||||
Cash payments are as follows:
(Thousands of Dollars) | 2016 | 2015 | 2014 | |||||
Interest | 65,410 | 72,937 | 81,363 | |||||
Debt financing and reorganization costs | 422 | 733 | 31,587 | |||||
Income tax payments (refunds), net | 269 | 485 | (6,022 | ) | ||||
Accumulated other comprehensive income (loss), net of deferred income taxes at September 25, 2016 and September 27, 2015, is related to pension and postretirement benefits.
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15 COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases
We have operating lease commitments for certain of our office, production and distribution facilities. Management expects that in the normal course of business, existing leases will be renewed or replaced. Minimum lease payments during the five years ending September 2021 and thereafter are $3,065,000, $2,535,000, $1,383,000, $878,000, $755,000 and $3,776,000, respectively. Total operating lease expense is $3,792,000, $3,415,000 and $3,735,000, in 2016, 2015 and 2014, respectively.
Capital Expenditures
At September 25, 2016, we had construction and equipment purchase commitments totaling approximately $479,000.
Income Taxes
Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 10.
We file income tax returns with the Internal Revenue Service ("IRS") and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies, and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our 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 (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
We have various income tax examinations ongoing and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.
Legal Proceedings
We are 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 we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
Multiemployer Pension Plans
One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.
16 IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS
In November 2015, the Financial Accounting Standards Board ("FASB") issued an amendment to Accounting Standards Codification Standard 740: Income Taxes related to the classification of net deferred tax assets and liabilities. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. To simplify the presentation of deferred income taxes, the amendment requires that deferred income tax liabilities and assets be classified as noncurrent in our Consolidated Balance Sheets. We elected to adopt this standard in 2016 and have applied this standard retrospectively. As a result, we have reclassified $15,659,000 of current assets to a reduction of the long-term deferred tax liability in the September 27, 2015 Consolidated Balance Sheet.
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In May 2015, FASB issued Accounting Standards Update ("ASU") 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate NAV per Share (or Its Equivalent) (“ASU 2015-07”). Under the guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. The new guidance is effective in 2017, however early adoption is permitted. We have elected to early adopt ASU 2015-07 retrospectively for the investments eligible for the NAV practical expedient.
17 QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended | |||||||||||
(Thousands of Dollars, Except Per Common Share Data) | December | March | June | September | |||||||
2016 | |||||||||||
Operating revenue | 168,405 | 146,835 | 150,946 | 148,178 | |||||||
Net income | 11,508 | 19,483 | 4,367 | 661 | |||||||
Income attributable to Lee Enterprises, Incorporated | 11,237 | 19,228 | 4,092 | 404 | |||||||
Earnings per common share: | |||||||||||
Basic | 0.21 | 0.36 | 0.08 | 0.01 | |||||||
Diluted | 0.21 | 0.36 | 0.08 | 0.01 | |||||||
2015 | |||||||||||
Operating revenue | 177,210 | 156,557 | 158,677 | 156,099 | |||||||
Net income | 10,007 | 2,042 | 2,135 | 10,134 | |||||||
Income attributable to Lee Enterprises, Incorporated | 9,753 | 1,800 | 1,882 | 9,881 | |||||||
Earnings (loss) per common share: | |||||||||||
Basic | 0.19 | 0.03 | 0.04 | 0.18 | |||||||
Diluted | 0.18 | 0.03 | 0.03 | 0.18 | |||||||
Results of operations for the September quarter of 2016 include pre-tax non-cash impairment charges of $2,382,000.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lee Enterprises, Incorporated:
We have audited the accompanying consolidated balance sheets of Lee Enterprises, Incorporated and subsidiaries (the Company) as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated balance sheets of Madison Newspapers, Inc., and Subsidiary (MNI), a 50% owned investee company, as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the 52 week periods ended September 25, 2016, September 27, 2015, and September 28, 2014. The Company’s investment in MNI at September 25, 2016 and September 27, 2015 was $13,927,000 and $17,561,000, respectively, and its equity in earnings of MNI was $3,612,000 for the 52-week period ended September 25, 2016, $3,416,000 for the 52-week period ended September 27, 2015, and $3,384,000 for the 52-week period ended September 28, 2014. The consolidated financial statements of MNI for the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014 were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for MNI for the 52-week periods ended September 27, 2016, September 25, 2015, and September 28, 2014, is based solely on the report of the other auditors.
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, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lee Enterprises, Incorporated and subsidiaries as of September 25, 2016 and September 27, 2015, and the results of their operations and their cash flows for each of 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lee Enterprises, Incorporated and subsidiaries’ internal control over financial reporting as of September 25, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 9, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
December 9, 2016
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EXHIBIT INDEX
Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by us with the SEC, 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 |
3.1 * | Amended and Restated Certificate of Incorporation of Lee Enterprises, Incorporated effective as of January 30, 2012 (Exhibit 3.1 to Form 8-K filed on February 3, 2012) |
3.2 * | Amended and Restated By-Laws of Lee Enterprises, Incorporated effective as of February 17, 2016 (Exhibit 3.1 to Form 8-K filed February 23, 2016) |
4.1 * | The description of the Lee Enterprises, Incorporated’s (the “Company”) preferred stock purchase rights contained in its report on Form 8-K, filed on May 7, 1998, and related Rights Agreement, dated as of May 7, 1998 (“Rights Agreement”), between the Company and The First Chicago Trust Company of New York (“First Chicago”), as amended by Amendment No. 1 to the Rights Agreement dated January 1, 2008 between the Company and Wells Fargo Bank, N.A. (as successor rights agent to First Chicago) contained in the Company's report on Form 8-K filed on January 11, 2008 as Exhibit 4.2, and the related 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, included as Exhibit 1.1 to the Company's registration statement on Form 8-A filed on May 26, 1998 (File No. 1-6227), as supplemented by Form 8-A/A, Amendment No. 1, filed on January 11, 2008. |
4.2 * | Indenture dated as of March 31, 2014 among Lee Enterprises, Incorporated, certain subsidiaries from time to time parties thereto, U.S. Bank National Association, as Trustee, and Deutsche Bank Trust Company Americas, as Collateral Agent (Exhibit 4.1 to Form 8-K filed on April 4, 2014) |
4.3 * | Warrant Agreement dated as of March 31, 2014 between Lee Enterprises, Incorporated and Wells Fargo Bank, National Association (Exhibit 4.2 to Form 8-K filed on April 4, 2014) |
4.4 * | Registration Rights Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, Mudrick Capital Management, LP, Hawkeye Capital Management, LLC, Cohanzick Management, LLC, Aristeia Capital, L.L.C., CVC Credit Partners, LLC, Franklin Mutual Advisors, LLC and Wingspan Master Fund, LP (Exhibit 4.3 to Form 8-K filed on April 4, 2014) |
10.1 * | Purchase Agreement dated March 21, 2014 among Lee Enterprises, Incorporated, certain subsidiaries party thereto from time to time, U.S. Bank National Association, as Trustee, and Deutsche Bank Trust Company Americas, as Collateral Agent, involving a $400,000,000 aggregate principal amount of 9.5% Senior Secured Notes, pursuant to an Indenture dated as of March 31, 2014 (Exhibit 10.1 to Form 8-K filed on March 27, 2014) |
10.2 * | Joinder Agreement dated as of June 25, 2015, made by each Subsidiary Guarantor a party thereto in favor of U.S. Bank National Association, as Trustee and Deutsche Bank Trust Company Americas, as collateral agent (Exhibit 10.1 to Form 8-K filed on July 1, 2015) |
10.3 * | First Lien Credit Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and JPMorgan Securities LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers and as Joint Bookrunners (Exhibit 10.1 to Form 8-K filed on April 4, 2014) |
10.4 * | Second Lien Loan Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Lenders from time to time parties thereto, Wilmington Trust, National Association, as Administrative Agent and Collateral Agent, and JPMorgan Securities LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers and as Joint Bookrunners (Exhibit 10.2 to Form 8-K filed on April 4, 2014) |
10.5 * | Security Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors and Deutsche Bank Trust Company Americas, as Collateral Agent (Exhibit 10.3 to Form 8-K filed on April 4, 2014) |
10.6 * | Pari Passu Intercreditor Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the other Grantors from time to time parties thereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association and Deutsche Bank Trust Company Americas (Exhibit 10.4 to Form 8-K filed on April 4, 2014) |
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Number | Description |
10.7 * | Joinder Agreement dated as of June 25, 2015, made by each Subsidiary Guarantor a party thereto in favor of JPMorgan Chase Bank, N.A., as collateral agent for the benefit of the Secured Creditors referred to in the First Lien Guarantee and Collateral Agreement dated as of March 31, 2014 referred to therein (Exhibit 10.2 to Form 8-K filed on July 1, 2015) |
10.8 * | Pulitzer Pari Passu Intercreditor Agreement dated as of June 25, 2015 among Lee Enterprises, Incorporated, the other Grantors party thereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association and Deutsche Bank Trust Company Americas (Exhibit 10.3 to Form 8-K filed on July 1, 2015) |
10.9 * | Junior Intercreditor Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the other Grantors from time to time parties thereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Deutsche Bank Trust Company Americas and Wilmington Trust, National Association (Exhibit 10.5 to Form 8-K filed on April 4, 2014) |
10.10 * | Pulitzer Junior Intercreditor Agreement dated as of June 25, 2015 among Lee Enterprises, Incorporated, the other Grantors party hereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Deutsche Bank Trust Company Americas and Wilmington Trust, National Association (Exhibit 10.4 to Form 8-K filed on July 1, 2015) |
10.11 * | First Lien Guarantee and Collateral Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (Exhibit 10.6 to Form 8-K filed on April 4, 2014) |
10.12 * | Intercompany Subordination Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors, Pulitzer, Pulitzer Subsidiaries and JPMorgan Chase Bank, N.A. (Exhibit 10.7 to Form 8-K filed on April 4, 2014) |
10.13* | Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors, Pulitzer, Pulitzer Subsidiaries and Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (Exhibit 10.8 to Form 8-K filed on April 4, 2014) |
10.14 * | Second Amendment to Intercreditor Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, The Bank of New York Mellon Trust Company, N.A., Wilmington Trust, National Association, Pulitzer and the Pulitzer Subsidiaries (Exhibit 10.9 to Form 8-K filed on April 4, 2014) |
10.15 * | Intercompany Subordination Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors, Pulitzer, Pulitzer Subsidiaries and Wilmington Trust, National Association (Exhibit 10.10 to Form 8-K filed on April 4, 2014) |
10.16 * | Operating Agreement of St. Louis Post-Dispatch LLC, dated as of May 1, 2000, as amended by Amendment No. 1 to Operating Agreement of St. Louis Post-Dispatch LLC, dated as of June 1, 2001 (Exhibit 10.5 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) |
10.17* | Amendment Number Two to Operating Agreement of St. Louis Post-Dispatch LLC, effective February 18, 2009, between Pulitzer Inc. and Pulitzer Technologies, Inc. (Exhibit 10.13 to Form 10-Q for the Fiscal Quarter Ended March 29, 2009) |
10.18* | 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) |
10.19* | Amended and Restated Partnership Agreement, dated as of November 30, 2009, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009) |
10.20* | Amended and Restated Management Agreement, dated as of November 30, 2009, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.1 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009) |
10.21* | License Agreement (Star), as amended and restated November 30, 2009, between Star Publishing Company and TNI Partners (Exhibit 10.3 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009) |
10.22* | License Agreement (Citizen), as amended and restated November 30, 2009, between Citizen Publishing Company and TNI Partners (Exhibit 10.4 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009) |
10.23 * | 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) |
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Number | Description |
10.24 * | License Agreement, dated as of May 1, 2000, by and between Pulitzer Inc. and St. Louis Post-Dispatch LLC (Exhibit 10.7 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) |
10.25* | Non-Confidentiality Agreement, dated as of May 1, 2000 (Exhibit 10.10 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005) |
10.26 +* | 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) |
10.27.1 +* | Amended and Restated Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (effective October 1, 1999, as amended effective February 17, 2016) (Exhibit 10.1 to Form 8-K filed on February 23, 2016) |
10.27.2 +* | Forms of related Restricted Stock Agreement, Incentive Stock Option Agreement and, Non-Qualified Stock Option Agreement related to Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (Effective October 1, 1999, as amended effective February 17, 2016) (Exhibits 10.2, 10.3 and 10.4 to Form 8-K filed on February 23, 2016) |
10.28 +* | Amended and Restated Lee Enterprises, Incorporated 1996 Stock Plan for Non-Employee Directors Effective February 17, 2010 (Appendix A to Schedule 14A Definitive Proxy Statement for 2014) |
10.29 +* | Lee Enterprises, Incorporated Supplementary Benefit Plan, Amended and Restated as of January 1, 2008 (Exhibit 10.25 to Form 10-K for the Fiscal Year Ended September 28, 2008) |
10.30 +* | Lee Enterprises, Incorporated Outside Directors Deferral Plan, Amended and Restated as of January 1, 2008 (Exhibit 10.26 to Form 10-K for the Fiscal Year Ended September 28, 2008) |
10.31.1 + | Form of Amended and Restated Employment Agreement between Lee Enterprises, Incorporated and its Executive Chairman |
10.31.2 + | Form of Amended and Restated Employment Agreement between Lee Enterprises, Incorporated and its President and Chief Operating Officer |
10.31.3 + | Form of Employment Agreement between Lee Enterprises, Incorporated and Certain of its Senior Executive Officers |
10.32 +* | Form of Indemnification Agreement for Lee Enterprises, Incorporated Directors and Executive Officers Group (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended March 30, 2008) |
10.33 +* | Lee Enterprises, Incorporated Amended and Restated Incentive Compensation Program (Appendix B to Schedule 14A Definitive Proxy Statement for 2014) |
21 | Subsidiaries and associated companies |
23.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm |
23.2 | Consent of Baker Tilly Virchow Krause LLP, Independent Registered Public Accounting Firm |
23.3 | Report of Baker Tilly Virchow Krause 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 |
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EXHIBIT 10.31.1 - Form of Amended and Restated Employment Agreement - Executive Chairman
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) is made by and between LEE ENTERPRISES, INCORPORATED, a Delaware corporation (the “Company”) and _____ (the “Executive”), effective as of _______ ___, 20__.
RECITAL:
The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1.Certain Definitions. (a) The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment was (i) at the request of a third party who has taken steps reasonably calculated to effect such Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control (such a termination of employment, an “Anticipatory Termination”) and if such Change of Control is consummated, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.
(b) The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), the Change of Control Period shall be automatically extended so as to terminate two (2) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.
(c) “Common Stock” shall mean the common stock, par value $0.01 per share, of the Company.
2. Change of Control. For the purpose of this Agreement, a “Change of Control” shall mean:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d‑3 promulgated under the Exchange Act) (“Beneficial Ownership”) of 15% or more of the Common Stock; provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any acquisition by a Person of Beneficial Ownership of less than 25% of the Common Stock if such Person reports, or is required to report such Beneficial Ownership on Schedule 13G under the Exchange Act or Schedule 13D of the Exchange Act (or any comparable or successor report), which Schedule 13D does not state any present intention to (or reserve the right to) hold such Common Stock with the purpose or effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect, or (v) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Common Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the Common Stock or, with respect to an entity other than the Company, the then outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Common Stock, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of the Common Stock or, with respect to an entity other than the Company, the then outstanding shares of common stock of the corporation resulting from such Business Combination (or, for a non-corporate entity, equivalent securities) or the combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second (2nd) anniversary of such date (the “Employment Period”).
4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date, (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location and (C) the Executive shall not be required to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a
monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s highest bonus under the Company’s annual incentive plan, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (or for such lesser number of full fiscal years prior to the Effective Date for which the Executive was eligible to earn such a bonus, and annualized in the case of any pro rata bonus earned for a partial fiscal year) (the “Recent Annual Bonus”). (If the Executive has not been eligible to earn such a bonus for any period prior to the Effective Date, the “Recent Annual Bonus” shall mean the Executive’s target annual bonus for the year in which the Effective Date occurs.) Unless the Executive shall elect to defer the receipt of such Annual Bonus pursuant to an arrangement that meets the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations promulgated thereunder (“Section 409A”), each such Annual Bonus shall be paid in a single sum on or before the 15th day of the third month following the end of the fiscal year in which the services are rendered that give rise to the Annual Bonus. To elect to defer receipt of an Annual Bonus in accordance with the preceding sentence, the Executive is required to make her election to defer an Annual Bonus by no later than the last day of the Company’s fiscal year prior to the fiscal year in which the services are rendered which give rise to the Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred
during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.
(b) Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean:
(i) the willful and continued failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive’s delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive’s duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, or if the Company is not the ultimate parent corporation of the affiliated companies and is not publicly-traded, the board of directors of the ultimate parent of the Company (the “Applicable Board”) or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Applicable Board (excluding the Executive, if the Executive is a member of the Applicable Board) at a meeting of the Applicable Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Applicable Board), finding that, in the good faith opinion of the Applicable Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive’s employment may be terminated during the Employment Period by the Executive for Good Reason or by the Executive voluntarily without Good Reason, in accordance with the notice requirements of Section 5(d). For purposes of this Agreement, “Good Reason” means actions taken by the Company resulting in a material negative change in the employment relationship. For these purposes, a “material negative change in the employment relationship” shall include, without limitation:
(i) the assignment to the Executive of duties materially inconsistent with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or a material diminution in such position, authority, duties or responsibilities or a material diminution in the budget over which the Executive retains authority;
(ii) a material diminution in the authorities, duties or responsibilities of the person to whom the Executive is required to report, including a requirement that the Executive report to an officer or employee instead of reporting directly to the Applicable Board;
(iii) a reduction of five (5) percent or greater of (A) any element of the compensation and benefits required to be provided to the Executive in accordance with any of the provisions of Section 4(b); (B) the Executive’s aggregate annual cash compensation, which for this purpose shall include, without limitation, Base Salary and Annual Bonus; or (C) the benefits, in the aggregate, required to be provided to the Executive in accordance with the provisions of this Agreement;
(iv) the Company’s requiring the Executive (A) to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof resulting in a material increase in the Executive’s commute to and from the Executive’s primary residence (for this purpose an increase in the Executive’s commute by 30 miles or more shall be deemed material) or (B) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date;
(v) any other action or inaction that constitutes a material breach by the Company of this Agreement; or
(vi) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.
In order to invoke a termination for Good Reason, the Executive shall provide written notice to the Company of the existence of one or more of the conditions described in clauses (i) through (vi) within 90 days following the Executive’s knowledge of the initial existence of such condition or conditions, and the Company shall have 30 days following receipt of such written notice (the “Cure Period”) during which it may remedy the condition. In the event that the Company fails to remedy the condition constituting Good Reason during the applicable Cure Period, the Executive must terminate employment, if at all, within 90 days following such Cure Period in order for such termination as a result of such condition to constitute a termination for Good Reason. The Executive’s mental or physical incapacity following the occurrence of an event described above in
clauses (i) through (v) shall not affect the Executive’s ability to terminate employment for Good Reason.
(d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.
(e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive resigns without Good Reason, the date on which the Executive notifies the Company of such termination and (iv) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 5 constitutes a “separation from service” within the meaning of Section 409A of the Code, and notwithstanding anything contained herein to the contrary, the date on which such separation from service takes place shall be the “Date of Termination.”
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Executive’s business expenses that are reimbursable pursuant to Section 4(b)(v) but have not been reimbursed by the Company as of the Date of Termination; (3) the Executive’s Annual Bonus for the fiscal year immediately preceding the fiscal year in which the Date of Termination occurs, if such bonus has been determined but not paid as of the Date of Termination (at the time such Annual Bonus would otherwise have been paid),
but excluding any such Annual Bonus or portion thereof that has been earned but deferred; (4) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in subclauses (1), (2), (3) and (4), the “Accrued Obligations”) and (5) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the “Highest Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 (the “Pro Rata Bonus”); and
B. the amount equal to the product of (1) three and (2) the sum of (x) the Executive’s Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the product of (1) three and (2) the average annual amount of the Company’s contributions on behalf of Executive under all defined contribution plans maintained by the Company or any of the affiliated companies during the three-year period immediately preceding the Change of Control.
(ii) for three years after the Executive’s Date of Termination or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy (the “Benefit Continuation Period”), the Company shall provide health care and life insurance benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies providing health care and life insurance benefits and at the benefit level described in Section 4(b)(iv) of this Agreement if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that, the health care benefits provided during the Benefit Continuation Period shall be provided in such a manner that such benefits (and the costs and premiums thereof) are excluded from the Executive’s income for federal income tax purposes and, if the Company reasonably determines that providing continued coverage under one or more of its health care benefit plans contemplated herein could be taxable to the Executive, the Company shall provide such benefits at the level required hereby through the purchase of individual insurance coverage; provided, further, however, that if the Executive becomes reemployed with another employer and is eligible to receive health care and life insurance benefits under another employer provided plan, the health care and life insurance benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. Following the end of the Benefit Continuation Period, the Executive shall be eligible for continued health coverage as required by Section 4980B of the Code or other applicable law (“COBRA Coverage”), as if the Executive’s employment with the Company had terminated as of the end of such period, and the Company shall take such actions as are necessary to cause such COBRA Coverage not to be offset by the provision
of benefits under this Section 6(a)(ii) and to cause the period of COBRA Coverage to commence at the end of the Benefit Continuation Period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree welfare benefits pursuant to the retiree welfare benefit plans, the Executive shall be considered to have remained employed until the end of the Benefit Continuation Period and to have retired on the last day of such period.
(iii) beginning on the Executive’s Date of Termination until the end of the Executive’s second taxable year following the taxable year of such Date of Termination, the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in her sole discretion, provided, that the cost of such outplacement services shall not exceed 10% of the Executive’s Annual Base Salary; and
(iv) to the extent not theretofore paid or provided, the Company shall pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”) in accordance with the terms of the underlying plans or agreements.
(b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits. Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits in accordance with the terms of the underlying plans or agreements. Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other
benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) her Annual Base Salary through the Date of Termination and (y) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
8. Full Settlement; Legal Fees. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred (within 10 days following the Company’s receipt of an invoice from the Executive), at any time from the Effective Date of this Agreement through the Executive’s remaining lifetime (or, if longer, through the 20th anniversary of the Effective Date), to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable
federal rate provided for in Section 7872(f)(2)(A) of the Code (“Interest”). In order to comply with Section 409A of the Code, in no event shall the payments by the Company under this Section 8 be made later than the end of the calendar year next following the calendar year in which such fees and expenses were incurred, provided, that the Executive shall have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company is obligated to pay in any other calendar year, and the Executive’s right to have the Company pay such legal fees and expenses may not be liquidated or exchanged for any other benefit.
9. Cap on Payments. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount (the “Cap Reduction”), only if the imposition of the Cap Reduction would result in the Executive receiving a larger Payment (net of all taxes on such Payment) than if the Cap Reduction had not been imposed. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (1) Section 6(a)(i)(B), (2) Section 6(a)(i)(C), (3) Section 6(a)(i)(A)(5) and (4) Section 6(a)(ii). For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 9(a).
(b) All determinations required to be made under this Section 9 shall be made by Deloitte Tax, LLP, or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Executive.
(c) Definitions. The following terms shall have the following meanings for purposes of this Section 9.
(i) “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(ii) “Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2), as determined by the
Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.
(iii) A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.
(iv) The “Safe Harbor Amount” means 2.99 times the Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code.
10. Non-Competition, Non-Solicitation and Confidential Information. In consideration of the Payments to be made hereunder:
(a) During the Restriction Period, Executive shall not Compete with the Company, or any of its affiliated companies, regardless of whether Executive is physically located inside or outside the Restricted Area (e.g., Executive cannot be employed by a Competitor whose place of business is outside the Restricted Area but who actually is engaged in a Restricted Business primarily targeted to Persons located inside the Restricted Area); provided Executive is permitted to own up to one percent (1%) of the outstanding capital stock or other equity interests of any publicly-traded Person that is a Competitor.
(b) Unless approved by the President of the Company in advance, during the Restriction Period, Executive shall not, directly or indirectly, solicit the employment of, assist in the soliciting of the employment of, or hire any employee of the Company or any of its affiliated companies, or induce any Person who is an employee, agent or contractor of the Company to terminate such relationship, or to join with the Executive or any other Person for the purpose of leaving the employ or such other relationship with the Company or any of its affiliated companies and undertaking any form of business. The preceding sentence shall not prevent Executive’s employer from hiring any employee of the Company who contacts Executive’s employer of her own initiative in response to advertisements or other general solicitations of employment from Executive’s employer.
(c) During the Restriction Period, Executive shall not, directly or indirectly, solicit Customers for any purpose related to the Restricted Business.
(d) The restrictions set forth in Sections 10(b) and 10(c) shall not apply to general advertising or other general solicitations not intended to target employees or Customers of the Company.
(e) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it, provided, that nothing in this Agreement prohibits the Executive from reporting possible violations of law to any governmental agency or entity or making other disclosures that are protected under the whistleblower provisions of federal, state, or local laws or regulations. In no event shall an asserted violation of the provisions of this Section 10(e) constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
(f) In the event of Executive’s actual or threatened breach of this Section 10, the Company shall be entitled to an injunction restraining Executive therefrom, and shall not be deemed to be the exclusive remedy for any such breach, but shall be in addition to all other remedies at law or in equity. Executive agrees to waive any requirement for the securing or posting of any bond in connection with such remedy. If, at the time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical 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.
(g) For purposes of this Section 10, the following terms shall have the respective meanings set forth below:
(i) “Compete” means to, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any Competitor, or otherwise directly or indirectly engage in any Restricted Business primarily targeted to the Restricted Area.
(ii) “Competitor” means any Person (other than the Company or its affiliated companies) who undertakes any Restricted Business in the Restricted Area, regardless of whether or not the Competitor is physically located inside or outside the Restricted Area.
(iii) “Customer” means any Person who was a customer of, had a contractual relationship with, or was a prospective customer of the Company or its affiliated companies, at any time within the twenty-four (24) month period ending on the Effective Date.
(iv) “Restricted Area” means an area within a fifty (50) mile radius of any Restricted Business owned as of the Effective Date.
(v) “Restricted Business” shall mean any paid or free distribution newspaper, classified advertising or specialty publication business (including any such publication distributed through the Internet) or commercial printing business that Competes with the Company, or any of its affiliated companies, in the Restricted Area.
(vi) “Restriction Period” means the period commencing on the Effective Date and ending on the date that is the first (1st) anniversary of the Effective Date.
11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.
(b) This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives. Except as provided in Section 11(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
Lee Enterprises, Incorporated
201 N. Harrison Street, Ste. 600
Davenport, Iowa 52801-1939
Attention: General Counsel
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)‑(vi) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
(g) Notwithstanding any provision in this Agreement to the contrary, in the event of an Anticipatory Termination, any payments that are deferred compensation within the meaning of Section 409A of the Code that the Company shall be required to pay pursuant to Section 6(a)(i) of this Agreement shall be paid on the date of the Change of Control.
(h) Within the time period permitted by the applicable Treasury Regulations, the Company may, in consultation with the Executive, modify the Agreement, in the least restrictive manner necessary and without any diminution in the value of the payments to the Executive, in order to cause the provisions of the Agreement to comply with the requirements of Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code.
(i) Notwithstanding any other provision of this Agreement, if at the time of the Executive’s termination of employment, the Executive is a “specified employee,” as determined in accordance with Section 409A, any payments and benefits provided under this Agreement that constitute “nonqualified deferred compensation” subject to Section 409A that are provided to the Executive on account of the Executive’s separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of the Executive’s Date of Termination (“Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date with interest and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. If the Executive dies before the Specified Employee Payment Date, any delayed payments shall be paid in accordance with Section 6(b).
13. Survivorship. Upon the expiration or other termination of this Agreement or the Executive’s employment, the respective rights and obligations of the parties hereto shall survive to the extent necessary to carry out the intentions of the parties under this Agreement.
14. Amendment and Restatement. This Agreement amends and restates that certain Amended and Restated Employment Agreement dated January 10, 2008 by and between the Company and the Executive (the “Previous Agreement”) in its entirety, constitutes the entire agreement, and supersedes the Previous Agreement and all other prior agreements and understandings, whether written and oral, among the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
_________________________________________
LEE ENTERPRISES, INCORPORATED
By: _____________________________________
President and Chief Executive Officer
EXHIBIT 10.31.2 - Form of Amended and Restated Employment Agreement - President and Chief Executive Officer
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (“Agreement”) is made by and between LEE ENTERPRISES, INCORPORATED, a Delaware corporation (the “Company”) and _______ (the “Executive”), effective as of ________ ___, 20__.
RECITAL:
The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1.Certain Definitions. (a) The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment was (i) at the request of a third party who has taken steps reasonably calculated to effect such Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control (such a termination of employment, an “Anticipatory Termination”) and if such Change of Control is consummated, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.
(b) The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), the Change of Control Period shall be automatically extended so as to terminate two (2) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.
(c) “Common Stock” shall mean the common stock, par value $0.01 per share, of the Company.
2. Change of Control. For the purpose of this Agreement, a “Change of Control” shall mean:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d‑3 promulgated under the Exchange Act) (“Beneficial Ownership”) of 15% or more of the Common Stock; provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any acquisition by a Person of Beneficial Ownership of less than 25% of the Common Stock if such Person reports, or is required to report such Beneficial Ownership on Schedule 13G under the Exchange Act or Schedule 13D of the Exchange Act (or any comparable or successor report), which Schedule 13D does not state any present intention to (or reserve the right to) hold such Common Stock with the purpose or effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect, or (v) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Common Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the Common Stock or, with respect to an entity other than the Company, the then outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Common Stock, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of the Common Stock or, with respect to an entity other than the Company, the then outstanding shares of common stock of the corporation resulting from such Business Combination (or, for a non-corporate entity, equivalent securities) or the combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second (2nd) anniversary of such date (the “Employment Period”).
4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date, (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location and (C) the Executive shall not be required to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a
monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s highest bonus under the Company’s annual incentive plan, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (or for such lesser number of full fiscal years prior to the Effective Date for which the Executive was eligible to earn such a bonus, and annualized in the case of any pro rata bonus earned for a partial fiscal year) (the “Recent Annual Bonus”). (If the Executive has not been eligible to earn such a bonus for any period prior to the Effective Date, the “Recent Annual Bonus” shall mean the Executive’s target annual bonus for the year in which the Effective Date occurs.) Unless the Executive shall elect to defer the receipt of such Annual Bonus pursuant to an arrangement that meets the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations promulgated thereunder (“Section 409A”), each such Annual Bonus shall be paid in a single sum on or before the 15th day of the third month following the end of the fiscal year in which the services are rendered that give rise to the Annual Bonus. To elect to defer receipt of an Annual Bonus in accordance with the preceding sentence, the Executive is required to make his or her election to defer an Annual Bonus by no later than the last day of the Company’s fiscal year prior to the fiscal year in which the services are rendered which give rise to the Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred
during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.
(b) Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean:
(i) the willful and continued failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive’s delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive’s duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, or if the Company is not the ultimate parent corporation of the affiliated companies and is not publicly-traded, the board of directors of the ultimate parent of the Company (the “Applicable Board”) or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Applicable Board (excluding the Executive, if the Executive is a member of the Applicable Board) at a meeting of the Applicable Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Applicable Board), finding that, in the good faith opinion of the Applicable Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive’s employment may be terminated during the Employment Period by the Executive for Good Reason or by the Executive voluntarily without Good Reason, in accordance with the notice requirements of Section 5(d). For purposes of this Agreement, “Good Reason” means actions taken by the Company resulting in a material negative change in the employment relationship. For these purposes, a “material negative change in the employment relationship” shall include, without limitation:
(i) the assignment to the Executive of duties materially inconsistent with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or a material diminution in such position, authority, duties or responsibilities or a material diminution in the budget over which the Executive retains authority;
(ii) a material diminution in the authorities, duties or responsibilities of the person to whom the Executive is required to report, including a requirement that the Executive report to an officer or employee instead of reporting directly to the Applicable Board;
(iii) a reduction of five (5) percent or greater of (A) any element of the compensation and benefits required to be provided to the Executive in accordance with any of the provisions of Section 4(b); (B) the Executive’s aggregate annual cash compensation, which for this purpose shall include, without limitation, Base Salary and Annual Bonus; or (C) the benefits, in the aggregate, required to be provided to the Executive in accordance with the provisions of this Agreement;
(iv) the Company’s requiring the Executive (A) to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof resulting in a material increase in the Executive’s commute to and from the Executive’s primary residence (for this purpose an increase in the Executive’s commute by 30 miles or more shall be deemed material) or (B) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date;
(v) any other action or inaction that constitutes a material breach by the Company of this Agreement; or
(vi) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.
In order to invoke a termination for Good Reason, the Executive shall provide written notice to the Company of the existence of one or more of the conditions described in clauses (i) through (vi) within 90 days following the Executive’s knowledge of the initial existence of such condition or conditions, and the Company shall have 30 days following receipt of such written notice (the “Cure Period”) during which it may remedy the condition. In the event that the Company fails to remedy the condition constituting Good Reason during the applicable Cure Period, the Executive must terminate employment, if at all, within 90 days following such Cure Period in order for such termination as a result of such condition to constitute a termination for Good Reason. The Executive’s mental or physical incapacity following the occurrence of an event described above in
clauses (i) through (v) shall not affect the Executive’s ability to terminate employment for Good Reason.
(d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.
(e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive resigns without Good Reason, the date on which the Executive notifies the Company of such termination and (iv) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 5 constitutes a “separation from service” within the meaning of Section 409A of the Code, and notwithstanding anything contained herein to the contrary, the date on which such separation from service takes place shall be the “Date of Termination.”
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Executive’s business expenses that are reimbursable pursuant to Section 4(b)(v) but have not been reimbursed by the Company as of the Date of Termination; (3) the Executive’s Annual Bonus for the fiscal year immediately preceding the fiscal year in which the Date of Termination occurs, if such bonus has been determined but not paid as of the Date of Termination (at the time such Annual Bonus would otherwise have been paid),
but excluding any such Annual Bonus or portion thereof that has been earned but deferred; (4) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in subclauses (1), (2), (3) and (4), the “Accrued Obligations”) and (5) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the “Highest Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 (the “Pro Rata Bonus”); and
B. the amount equal to the product of (1) two and (2) the sum of (x) the Executive’s Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the product of (1) two and (2) the average annual amount of the Company’s contributions on behalf of Executive under all defined contribution plans maintained by the Company or any of the affiliated companies during the three-year period immediately preceding the Change of Control.
(ii) for two years after the Executive’s Date of Termination or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy (the “Benefit Continuation Period”), the Company shall provide health care and life insurance benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies providing health care and life insurance benefits and at the benefit level described in Section 4(b)(iv) of this Agreement if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that, the health care benefits provided during the Benefit Continuation Period shall be provided in such a manner that such benefits (and the costs and premiums thereof) are excluded from the Executive’s income for federal income tax purposes and, if the Company reasonably determines that providing continued coverage under one or more of its health care benefit plans contemplated herein could be taxable to the Executive, the Company shall provide such benefits at the level required hereby through the purchase of individual insurance coverage; provided, further, however, that if the Executive becomes reemployed with another employer and is eligible to receive health care and life insurance benefits under another employer provided plan, the health care and life insurance benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. Following the end of the Benefit Continuation Period, the Executive shall be eligible for continued health coverage as required by Section 4980B of the Code or other applicable law (“COBRA Coverage”), as if the Executive’s employment with the Company had terminated as of the end of such period, and the Company shall take such actions as are necessary to cause such COBRA Coverage not to be offset by the provision
of benefits under this Section 6(a)(ii) and to cause the period of COBRA Coverage to commence at the end of the Benefit Continuation Period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree welfare benefits pursuant to the retiree welfare benefit plans, the Executive shall be considered to have remained employed until the end of the Benefit Continuation Period and to have retired on the last day of such period.
(iii) beginning on the Executive’s Date of Termination until the end of the Executive’s second taxable year following the taxable year of such Date of Termination, the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his or her sole discretion, provided, that the cost of such outplacement services shall not exceed 10% of the Executive’s Annual Base Salary; and
(iv) to the extent not theretofore paid or provided, the Company shall pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”) in accordance with the terms of the underlying plans or agreements.
(b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits. Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits in accordance with the terms of the underlying plans or agreements. Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other
benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his or her Annual Base Salary through the Date of Termination and (y) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
8. Full Settlement; Legal Fees. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred (within 10 days following the Company’s receipt of an invoice from the Executive), at any time from the Effective Date of this Agreement through the Executive’s remaining lifetime (or, if longer, through the 20th anniversary of the Effective Date), to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable
federal rate provided for in Section 7872(f)(2)(A) of the Code (“Interest”). In order to comply with Section 409A of the Code, in no event shall the payments by the Company under this Section 8 be made later than the end of the calendar year next following the calendar year in which such fees and expenses were incurred, provided, that the Executive shall have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company is obligated to pay in any other calendar year, and the Executive’s right to have the Company pay such legal fees and expenses may not be liquidated or exchanged for any other benefit.
9. Cap on Payments. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount (the “Cap Reduction”), only if the imposition of the Cap Reduction would result in the Executive receiving a larger Payment (net of all taxes on such Payment) than if the Cap Reduction had not been imposed. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (1) Section 6(a)(i)(B), (2) Section 6(a)(i)(C), (3) Section 6(a)(i)(A)(5) and (4) Section 6(a)(ii). For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 9(a).
(b) All determinations required to be made under this Section 9 shall be made by Deloitte Tax, LLP, or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Executive.
(c) Definitions. The following terms shall have the following meanings for purposes of this Section 9.
(i) “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(ii) “Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2), as determined by the
Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.
(iii) A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.
(iv) The “Safe Harbor Amount” means 2.99 times the Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code.
10. Non-Competition, Non-Solicitation and Confidential Information. In consideration of the Payments to be made hereunder:
(a) During the Restriction Period, Executive shall not Compete with the Company, or any of its affiliated companies, regardless of whether Executive is physically located inside or outside the Restricted Area (e.g., Executive cannot be employed by a Competitor whose place of business is outside the Restricted Area but who actually is engaged in a Restricted Business primarily targeted to Persons located inside the Restricted Area); provided Executive is permitted to own up to one percent (1%) of the outstanding capital stock or other equity interests of any publicly-traded Person that is a Competitor.
(b) Unless approved by the President of the Company in advance, during the Restriction Period, Executive shall not, directly or indirectly, solicit the employment of, assist in the soliciting of the employment of, or hire any employee of the Company or any of its affiliated companies, or induce any Person who is an employee, agent or contractor of the Company to terminate such relationship, or to join with the Executive or any other Person for the purpose of leaving the employ or such other relationship with the Company or any of its affiliated companies and undertaking any form of business. The preceding sentence shall not prevent Executive’s employer from hiring any employee of the Company who contacts Executive’s employer of his or her own initiative in response to advertisements or other general solicitations of employment from Executive’s employer.
(c) During the Restriction Period, Executive shall not, directly or indirectly, solicit Customers for any purpose related to the Restricted Business.
(d) The restrictions set forth in Sections 10(b) and 10(c) shall not apply to general advertising or other general solicitations not intended to target employees or Customers of the Company.
(e) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it, provided, that nothing in this Agreement prohibits the Executive from reporting possible violations of law to any governmental agency or entity or making other disclosures that are protected under the whistleblower provisions of federal, state, or local laws or regulations. In no event shall an asserted violation of the provisions of this Section 10(e) constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
(f) In the event of Executive’s actual or threatened breach of this Section 10, the Company shall be entitled to an injunction restraining Executive therefrom, and shall not be deemed to be the exclusive remedy for any such breach, but shall be in addition to all other remedies at law or in equity. Executive agrees to waive any requirement for the securing or posting of any bond in connection with such remedy. If, at the time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical 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.
(g) For purposes of this Section 10, the following terms shall have the respective meanings set forth below:
(i) “Compete” means to, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any Competitor, or otherwise directly or indirectly engage in any Restricted Business primarily targeted to the Restricted Area.
(ii) “Competitor” means any Person (other than the Company or its affiliated companies) who undertakes any Restricted Business in the Restricted Area, regardless of whether or not the Competitor is physically located inside or outside the Restricted Area.
(iii) “Customer” means any Person who was a customer of, had a contractual relationship with, or was a prospective customer of the Company or its affiliated companies, at any time within the twenty-four (24) month period ending on the Effective Date.
(iv) “Restricted Area” means an area within a fifty (50) mile radius of any Restricted Business owned as of the Effective Date.
(v) “Restricted Business” shall mean any paid or free distribution newspaper, classified advertising or specialty publication business (including any such publication distributed through the Internet) or commercial printing business that Competes with the Company, or any of its affiliated companies, in the Restricted Area.
(vi) “Restriction Period” means the period commencing on the Effective Date and ending on the date that is the first (1st) anniversary of the Effective Date.
11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.
(b) This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives. Except as provided in Section 11(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
Lee Enterprises, Incorporated
201 N. Harrison Street, Ste. 600
Davenport, Iowa 52801-1939
Attention: General Counsel
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)‑(vi) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
(g) Notwithstanding any provision in this Agreement to the contrary, in the event of an Anticipatory Termination, any payments that are deferred compensation within the meaning of Section 409A of the Code that the Company shall be required to pay pursuant to Section 6(a)(i) of this Agreement shall be paid on the date of the Change of Control.
(h) Within the time period permitted by the applicable Treasury Regulations, the Company may, in consultation with the Executive, modify the Agreement, in the least restrictive manner necessary and without any diminution in the value of the payments to the Executive, in order to cause the provisions of the Agreement to comply with the requirements of Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code.
(i) Notwithstanding any other provision of this Agreement, if at the time of the Executive’s termination of employment, the Executive is a “specified employee,” as determined in accordance with Section 409A, any payments and benefits provided under this Agreement that constitute “nonqualified deferred compensation” subject to Section 409A that are provided to the Executive on account of the Executive’s separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of the Executive’s Date of Termination (“Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date with interest and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. If the Executive dies before the Specified Employee Payment Date, any delayed payments shall be paid in accordance with Section 6(b).
13. Survivorship. Upon the expiration or other termination of this Agreement or the Executive’s employment, the respective rights and obligations of the parties hereto shall survive to the extent necessary to carry out the intentions of the parties under this Agreement.
14. Amendment and Restatement. This Agreement amends and restates that certain Amended and Restated Employment Agreement dated January 10, 2008 by and between the Company and the Executive (the “Previous Agreement”) in its entirety, constitutes the entire agreement, and supersedes the Previous Agreement and all other prior agreements and understandings, whether written and oral, among the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
_________________________________________
LEE ENTERPRISES, INCORPORATED
By: _____________________________________
Executive Chairman
EXHIBIT 10.31.3 - Form of Employment Agreement - Executive Officers
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (“Agreement”) is made by and between LEE ENTERPRISES, INCORPORATED, a Delaware corporation (the “Company”) and ____ (the “Executive”), effective as of ________ ___, 20__.
RECITAL:
The Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1.Certain Definitions. (a) The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment was (i) at the request of a third party who has taken steps reasonably calculated to effect such Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control (such a termination of employment, an “Anticipatory Termination”) and if such Change of Control is consummated, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.
(b) The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), the Change of Control Period shall be automatically extended so as to terminate two (2) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.
(c) “Common Stock” shall mean the common stock, par value $0.01 per share, of the Company.
2. Change of Control. For the purpose of this Agreement, a “Change of Control” shall mean:
(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d‑3 promulgated under the Exchange Act) (“Beneficial Ownership”) of 15% or more of the Common Stock; provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, (iv) any acquisition by a Person of Beneficial Ownership of less than 25% of the Common Stock if such Person reports, or is required to report such Beneficial Ownership on Schedule 13G under the Exchange Act or Schedule 13D of the Exchange Act (or any comparable or successor report), which Schedule 13D does not state any present intention to (or reserve the right to) hold such Common Stock with the purpose or effect of changing or influencing the control of the Company, nor in connection with or as a participant in any transaction having such purpose or effect, or (v) any acquisition pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners, respectively, of the Common Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the Common Stock or, with respect to an entity other than the Company, the then outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Common Stock, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of the Common Stock or, with respect to an entity other than the Company, the then outstanding shares of common stock of the corporation resulting from such Business Combination (or, for a non-corporate entity, equivalent securities) or the combined voting power of the then outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second (2nd) anniversary of such date (the “Employment Period”).
4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date, (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location and (C) the Executive shall not be required to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a
monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s highest bonus under the Company’s annual incentive plan, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (or for such lesser number of full fiscal years prior to the Effective Date for which the Executive was eligible to earn such a bonus, and annualized in the case of any pro rata bonus earned for a partial fiscal year) (the “Recent Annual Bonus”). (If the Executive has not been eligible to earn such a bonus for any period prior to the Effective Date, the “Recent Annual Bonus” shall mean the Executive’s target annual bonus for the year in which the Effective Date occurs.) Unless the Executive shall elect to defer the receipt of such Annual Bonus pursuant to an arrangement that meets the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the regulations promulgated thereunder (“Section 409A”), each such Annual Bonus shall be paid in a single sum on or before the 15th day of the third month following the end of the fiscal year in which the services are rendered that give rise to the Annual Bonus. To elect to defer receipt of an Annual Bonus in accordance with the preceding sentence, the Executive is required to make his or her election to defer an Annual Bonus by no later than the last day of the Company’s fiscal year prior to the fiscal year in which the services are rendered which give rise to the Annual Bonus.
(iii) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred
during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.
(b) Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean:
(i) the willful and continued failure of the Executive to perform substantially the Executive’s duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive’s delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive’s duties, or
(ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board, or if the Company is not the ultimate parent corporation of the affiliated companies and is not publicly-traded, the board of directors of the ultimate parent of the Company (the “Applicable Board”) or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Applicable Board (excluding the Executive, if the Executive is a member of the Applicable Board) at a meeting of the Applicable Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Applicable Board), finding that, in the good faith opinion of the Applicable Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.
(c) Good Reason. The Executive’s employment may be terminated during the Employment Period by the Executive for Good Reason or by the Executive voluntarily without Good Reason, in accordance with the notice requirements of Section 5(d). For purposes of this Agreement, “Good Reason” means actions taken by the Company resulting in a material negative change in the employment relationship. For these purposes, a “material negative change in the employment relationship” shall include, without limitation:
(i) the assignment to the Executive of duties materially inconsistent with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or a material diminution in such position, authority, duties or responsibilities or a material diminution in the budget over which the Executive retains authority;
(ii) a material diminution in the authorities, duties or responsibilities of the person to whom the Executive is required to report, including a requirement that the Executive report to an officer or employee instead of reporting directly to the Applicable Board;
(iii) a reduction of five (5) percent or greater of (A) any element of the compensation and benefits required to be provided to the Executive in accordance with any of the provisions of Section 4(b); (B) the Executive’s aggregate annual cash compensation, which for this purpose shall include, without limitation, Base Salary and Annual Bonus; or (C) the benefits, in the aggregate, required to be provided to the Executive in accordance with the provisions of this Agreement;
(iv) the Company’s requiring the Executive (A) to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof resulting in a material increase in the Executive’s commute to and from the Executive’s primary residence (for this purpose an increase in the Executive’s commute by 30 miles or more shall be deemed material) or (B) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date;
(v) any other action or inaction that constitutes a material breach by the Company of this Agreement; or
(vi) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement.
In order to invoke a termination for Good Reason, the Executive shall provide written notice to the Company of the existence of one or more of the conditions described in clauses (i) through (vi) within 90 days following the Executive’s knowledge of the initial existence of such condition or conditions, and the Company shall have 30 days following receipt of such written notice (the “Cure Period”) during which it may remedy the condition. In the event that the Company fails to remedy the condition constituting Good Reason during the applicable Cure Period, the Executive must terminate employment, if at all, within 90 days following such Cure Period in order for such termination as a result of such condition to constitute a termination for Good Reason. The Executive’s mental or physical incapacity following the occurrence of an event described above in
clauses (i) through (v) shall not affect the Executive’s ability to terminate employment for Good Reason.
(d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.
(e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, (iii) if the Executive resigns without Good Reason, the date on which the Executive notifies the Company of such termination and (iv) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. The Company and the Executive shall take all steps necessary (including with regard to any post-termination services by the Executive) to ensure that any termination described in this Section 5 constitutes a “separation from service” within the meaning of Section 409A of the Code, and notwithstanding anything contained herein to the contrary, the date on which such separation from service takes place shall be the “Date of Termination.”
6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
A. the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Executive’s business expenses that are reimbursable pursuant to Section 4(b)(v) but have not been reimbursed by the Company as of the Date of Termination; (3) the Executive’s Annual Bonus for the fiscal year immediately preceding the fiscal year in which the Date of Termination occurs, if such bonus has been determined but not paid as of the Date of Termination (at the time such Annual Bonus would otherwise have been paid),
but excluding any such Annual Bonus or portion thereof that has been earned but deferred; (4) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in subclauses (1), (2), (3) and (4), the “Accrued Obligations”) and (5) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the “Highest Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 (the “Pro Rata Bonus”); and
B. the amount equal to the sum of (x) the Executive’s Annual Base Salary and (y) the Highest Annual Bonus; and
C. an amount equal to the average annual amount of the Company’s contributions on behalf of Executive under all defined contribution plans maintained by the Company or any of the affiliated companies during the three-year period immediately preceding the Change of Control.
(ii) for one year after the Executive’s Date of Termination or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy (the “Benefit Continuation Period”), the Company shall provide health care and life insurance benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies providing health care and life insurance benefits and at the benefit level described in Section 4(b)(iv) of this Agreement if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families; provided, however, that, the health care benefits provided during the Benefit Continuation Period shall be provided in such a manner that such benefits (and the costs and premiums thereof) are excluded from the Executive’s income for federal income tax purposes and, if the Company reasonably determines that providing continued coverage under one or more of its health care benefit plans contemplated herein could be taxable to the Executive, the Company shall provide such benefits at the level required hereby through the purchase of individual insurance coverage; provided, further, however, that if the Executive becomes reemployed with another employer and is eligible to receive health care and life insurance benefits under another employer provided plan, the health care and life insurance benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. Following the end of the Benefit Continuation Period, the Executive shall be eligible for continued health coverage as required by Section 4980B of the Code or other applicable law (“COBRA Coverage”), as if the Executive’s employment with the Company had terminated as of the end of such period, and the Company shall take such actions as are necessary to cause such COBRA Coverage not to be offset by the provision
of benefits under this Section 6(a)(ii) and to cause the period of COBRA Coverage to commence at the end of the Benefit Continuation Period. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree welfare benefits pursuant to the retiree welfare benefit plans, the Executive shall be considered to have remained employed until the end of the Benefit Continuation Period and to have retired on the last day of such period.
(iii) beginning on the Executive’s Date of Termination until the end of the Executive’s second taxable year following the taxable year of such Date of Termination, the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his or her sole discretion, provided, that the cost of such outplacement services shall not exceed 10% of the Executive’s Annual Base Salary; and
(iv) to the extent not theretofore paid or provided, the Company shall pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”) in accordance with the terms of the underlying plans or agreements.
(b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits. Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits in accordance with the terms of the underlying plans or agreements. Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other
benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families.
(d) Cause; Other than for Good Reason. If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his or her Annual Base Salary through the Date of Termination and (y) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the Pro Rata Bonus and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
8. Full Settlement; Legal Fees. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred (within 10 days following the Company’s receipt of an invoice from the Executive), at any time from the Effective Date of this Agreement through the Executive’s remaining lifetime (or, if longer, through the 20th anniversary of the Effective Date), to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable
federal rate provided for in Section 7872(f)(2)(A) of the Code (“Interest”). In order to comply with Section 409A of the Code, in no event shall the payments by the Company under this Section 8 be made later than the end of the calendar year next following the calendar year in which such fees and expenses were incurred, provided, that the Executive shall have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company is obligated to pay in any other calendar year, and the Executive’s right to have the Company pay such legal fees and expenses may not be liquidated or exchanged for any other benefit.
9. Cap on Payments. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount (the “Cap Reduction”), only if the imposition of the Cap Reduction would result in the Executive receiving a larger Payment (net of all taxes on such Payment) than if the Cap Reduction had not been imposed. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (1) Section 6(a)(i)(B), (2) Section 6(a)(i)(C), (3) Section 6(a)(i)(A)(5) and (4) Section 6(a)(ii). For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 9(a).
(b) All determinations required to be made under this Section 9 shall be made by Deloitte Tax, LLP, or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any determination by the Accounting Firm shall be binding upon the Company and the Executive.
(c) Definitions. The following terms shall have the following meanings for purposes of this Section 9.
(i) “Excise Tax” shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(ii) “Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2), as determined by the
Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.
(iii) A “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.
(iv) The “Safe Harbor Amount” means 2.99 times the Executive’s “base amount,” within the meaning of Section 280G(b)(3) of the Code.
10. Non-Competition, Non-Solicitation and Confidential Information. In consideration of the Payments to be made hereunder:
(a) During the Restriction Period, Executive shall not Compete with the Company, or any of its affiliated companies, regardless of whether Executive is physically located inside or outside the Restricted Area (e.g., Executive cannot be employed by a Competitor whose place of business is outside the Restricted Area but who actually is engaged in a Restricted Business primarily targeted to Persons located inside the Restricted Area); provided Executive is permitted to own up to one percent (1%) of the outstanding capital stock or other equity interests of any publicly-traded Person that is a Competitor.
(b) Unless approved by the President of the Company in advance, during the Restriction Period, Executive shall not, directly or indirectly, solicit the employment of, assist in the soliciting of the employment of, or hire any employee of the Company or any of its affiliated companies, or induce any Person who is an employee, agent or contractor of the Company to terminate such relationship, or to join with the Executive or any other Person for the purpose of leaving the employ or such other relationship with the Company or any of its affiliated companies and undertaking any form of business. The preceding sentence shall not prevent Executive’s employer from hiring any employee of the Company who contacts Executive’s employer of his or her own initiative in response to advertisements or other general solicitations of employment from Executive’s employer.
(c) During the Restriction Period, Executive shall not, directly or indirectly, solicit Customers for any purpose related to the Restricted Business.
(d) The restrictions set forth in Sections 10(b) and 10(c) shall not apply to general advertising or other general solicitations not intended to target employees or Customers of the Company.
(e) The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the
Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it, provided, that nothing in this Agreement prohibits the Executive from reporting possible violations of law to any governmental agency or entity or making other disclosures that are protected under the whistleblower provisions of federal, state, or local laws or regulations. In no event shall an asserted violation of the provisions of this Section 10(e) constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.
(f) In the event of Executive’s actual or threatened breach of this Section 10, the Company shall be entitled to an injunction restraining Executive therefrom, and shall not be deemed to be the exclusive remedy for any such breach, but shall be in addition to all other remedies at law or in equity. Executive agrees to waive any requirement for the securing or posting of any bond in connection with such remedy. If, at the time of enforcement of this Section 10, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical 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.
(g) For purposes of this Section 10, the following terms shall have the respective meanings set forth below:
(i) “Compete” means to, directly or indirectly, own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any Competitor, or otherwise directly or indirectly engage in any Restricted Business primarily targeted to the Restricted Area.
(ii) “Competitor” means any Person (other than the Company or its affiliated companies) who undertakes any Restricted Business in the Restricted Area, regardless of whether or not the Competitor is physically located inside or outside the Restricted Area.
(iii) “Customer” means any Person who was a customer of, had a contractual relationship with, or was a prospective customer of the Company or its affiliated companies, at any time within the twenty-four (24) month period ending on the Effective Date.
(iv) “Restricted Area” means an area within a fifty (50) mile radius of any Restricted Business owned as of the Effective Date.
(v) “Restricted Business” shall mean any paid or free distribution newspaper, classified advertising or specialty publication business (including any such publication distributed through the Internet) or commercial printing business that Competes with the Company, or any of its affiliated companies, in the Restricted Area.
(vi) “Restriction Period” means the period commencing on the Effective Date and ending on the date that is the first (1st) anniversary of the Effective Date.
11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.
(b) This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives. Except as provided in Section 11(c), without the prior written consent of the Executive this Agreement shall not be assignable by the Company.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Iowa, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
If to the Company:
Lee Enterprises, Incorporated
201 N. Harrison Street, Ste. 600
Davenport, Iowa 52801-1939
Attention: General Counsel
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)‑(vi) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
(g) Notwithstanding any provision in this Agreement to the contrary, in the event of an Anticipatory Termination, any payments that are deferred compensation within the meaning of Section 409A of the Code that the Company shall be required to pay pursuant to Section 6(a)(i) of this Agreement shall be paid on the date of the Change of Control.
(h) Within the time period permitted by the applicable Treasury Regulations, the Company may, in consultation with the Executive, modify the Agreement, in the least restrictive manner necessary and without any diminution in the value of the payments to the Executive, in order to cause the provisions of the Agreement to comply with the requirements of Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code.
(i) Notwithstanding any other provision of this Agreement, if at the time of the Executive’s termination of employment, the Executive is a “specified employee,” as determined in accordance with Section 409A, any payments and benefits provided under this Agreement that constitute “nonqualified deferred compensation” subject to Section 409A that are provided to the Executive on account of the Executive’s separation from service shall not be paid until the first payroll date to occur following the six-month anniversary of the Executive’s Date of Termination (“Specified Employee Payment Date”). The aggregate amount of any payments that would otherwise have been made during such six-month period shall be paid in a lump sum on the Specified Employee Payment Date with interest and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. If the Executive dies before the Specified Employee Payment Date, any delayed payments shall be paid in accordance with Section 6(b).
13. Survivorship. Upon the expiration or other termination of this Agreement or the Executive’s employment, the respective rights and obligations of the parties hereto shall survive to the extent necessary to carry out the intentions of the parties under this Agreement.
[Remainder of Page Intentionally Left Blank – Signature Page Follows]
IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
_________________________________________
LEE ENTERPRISES, INCORPORATED
By: _____________________________________
President and Chief Executive Officer
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 | % |
Lee Procurement Solutions Co. | Iowa | 100 | % |
Lee Consolidated Holdings Co. | South Dakota | 100 | % |
Lee Foundation | Iowa | 100 | % |
Accudata, Inc. | Iowa | 100 | % |
Amplified Digital, LLC | Delaware | 100 | % |
Fairgrove LLC | Delaware | 100 | % |
Flagstaff Publishing Co. | Washington | 100 | % |
Hanford Sentinel, Inc. | Washington | 100 | % |
Journal-Star Printing Co. | Nebraska | 100 | % |
K. Falls Basin Publishing, Inc. | Oregon | 100 | % |
Napa Valley Publishing Co. | Washington | 100 | % |
Pantagraph Publishing Co. | Delaware | 100 | % |
Pulitzer Inc. | Delaware | 100 | % |
Pulitzer Missouri Newspapers, Inc. | Delaware | 100 | % |
Pulitzer Newspapers, Inc. | Delaware | 100 | % |
Pulitzer Network Systems LLC | Delaware | 100 | % |
Pulitzer Technologies, Inc. | Delaware | 100 | % |
Santa Maria Times, Inc. | Nevada | 100 | % |
Sioux City Newspapers, Inc. | Iowa | 100 | % |
Southwestern Oregon Publishing Co. | Oregon | 100 | % |
St. Louis Post-Dispatch LLC | Delaware | 100 | % |
STL Distribution Services LLC | Delaware | 100 | % |
Star Publishing Company | Arizona | 100 | % |
Suburban Journals of Greater St. Louis LLC | Delaware | 100 | % |
Ynez Corporation | California | 100 | % |
INN Partners, L.C. d/b/a TownNews.com | Iowa | 82.5 | % |
Community Distribution Partners, LLC | Montana | 50 | % |
Madison Newspapers, Inc. d/b/a Capital Newspapers | Wisconsin | 50 | % |
TNI Partners | Arizona | 50 | % |
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Lee Enterprises, Incorporated:
We consent to the incorporation by reference in the registration statements (No. 333-06435, No. 333-132768. Post-Effective Amendment No. 1 to 333-132768, No. 333-195862, and No. 333-204985) on Form S-8 and (No. 333-192940, Amendment No.1 to 333-192940, No. 333-197450, and Amendment No. 1 to 333-197450) on Form S-3 of Lee Enterprises, Incorporated and subsidiaries of our reports dated December 9, 2016, with respect to the consolidated balance sheets of Lee Enterprises, Incorporated as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014, and the effectiveness of internal control over financial reporting as of September 25, 2016, which reports appear in the September 25, 2016 annual report on Form 10‑K of Lee Enterprises, Incorporated.
/s/ KPMG LLP
Chicago, Illinois
December 9, 2016
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on (No. 333-06435, No. 333-132768, Post-Effective Amendment No. 1 to 333-132768, No. 333-195862, and No. 333-204985) on Form S-8 and (No. 333-192940, Amendment No.1 to 333-192940, No. 333-197450 and Amendment No, 1 to 333-197450) on Form S-3 of Lee Enterprises, Incorporated and subsidiaries of our report dated November 28, 2016, relating to our audits of the consolidated financial statements of Madison Newspapers, Inc. and subsidiary for the years ended September 25, 2016, September 28, 2015, and September 28, 2014, which appears in Exhibit 23.3 of this annual report on Form 10‑K for the year ended September 25, 2016.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
Madison, Wisconsin
December 9, 2016
EXHIBIT 23.3
Report of Independent Registered Public Accounting Firm
Board of Directors
Madison Newspapers, Inc.
Madison, Wisconsin
We have audited the accompanying consolidated balance sheet of Madison Newspapers, Inc. and Subsidiary (the "Company") as of September 25, 2016, September 27, 2015 and September 28, 2014, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 25, 2016, September 27 2015, and September 28, 2014, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP
Madison, Wisconsin
November 28, 2016
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of Lee Enterprises, Incorporated, a Delaware corporation (the “Company”), hereby severally constitute and appoint each of Kevin D. Mowbray and Ronald A. Mayo, and each of them, to be our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Company’s Annual Report on Form 10-K for the fiscal year ended September 25, 2016 (and any amendments thereto); granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or his or her substitute or substitutes, shall lawfully do or cause to be done by virtue hereof.
Dated: December 9, 2016
/s/ Kevin D. Mowbray | /s/ Ronald A. Mayo | |
Kevin D. Mowbray | Ronald A. Mayo | |
President and Chief Executive Officer | Vice President, Chief Financial Officer and | |
(Principal Executive Officer) | Treasurer | |
Director | (Principal Financial and Accounting Officer) | |
/s/ Richard R. Cole | /s/ Nancy S. Donovan | |
Richard R. Cole | Nancy S. Donovan | |
Director | Director | |
/s/ Leonard J. Elmore | /s/ Mary E. Junck | |
Leonard J. Elmore | Mary E. Junck | |
Director | Director | |
/s/ Brent Magid | /s/ William E. Mayer | |
Brent Magid | William E. Mayer | |
Director | Director | |
/s/ Herbert W. Moloney III | /s/ Gregory P. Schermer | |
Herbert W. Moloney III | Gregory P. Schermer | |
Director | Director | |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Kevin D. Mowbray, 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 9, 2016
/s/ Kevin D. Mowbray | |
Kevin D. Mowbray | |
President and Chief Executive Officer | |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Ronald A. Mayo, 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 9, 2016
/s/ Ronald A. Mayo | |
Ronald A. Mayo | |
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 25, 2016 ("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. | |
Date: December 9, 2016
/s/ Kevin D. Mowbray | /s/ Ronald A. Mayo | |
Kevin D. Mowbray | Ronald A. Mayo | |
President and Chief Executive Officer | Vice President, Chief Financial 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.