UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
Lee Enterprises, Incorporated
(Exact name of Registrant as specified in its Charter)
Delaware 42-0823980
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 N. Main Street, Davenport, Iowa 52801
(Address of principal executive offices)
(563) 383-2100
(Registrant's telephone number, including area code)
Indicate by 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ]
As of December 31, 2002, 34,776,121 shares of Common Stock and 9,638,044 shares
of Class B Common Stock of the Registrant were outstanding.
LEE ENTERPRISES, INCORPORATED
TABLE OF CONTENTS PAGE
- -------------------------------------------------------------- ------------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income - 1
Three months ended December 31, 2002 and
2001
Consolidated Balance Sheets - 2
December 31, 2002 and September 30, 2002
Consolidated Statements of Cash Flows - 3
Three months ended December 31, 2002 and
2001
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Item 4. Controls and Procedures 12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
CERTIFICATIONS 13
EXHIBITS
99.6 Sarbanes-Oxley Act Section 906 Certification 15
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
- --------------------------------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenue:
Advertising $ 118,802 $ 71,677
Circulation 33,612 20,422
Other 18,133 15,261
- --------------------------------------------------------------------------------------------------------------------------------
170,547 107,360
- --------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Compensation 68,492 40,484
Newsprint and ink 14,450 9,777
Depreciation 4,410 3,983
Amortization of intangible assets 6,961 1,858
Other 38,357 25,631
- --------------------------------------------------------------------------------------------------------------------------------
132,670 81,733
- --------------------------------------------------------------------------------------------------------------------------------
Operating income, before equity in net
income of associated companies 37,877 25,627
Equity in net income of associated companies 2,218 2,177
- --------------------------------------------------------------------------------------------------------------------------------
Operating income 40,095 27,804
- --------------------------------------------------------------------------------------------------------------------------------
Nonoperating income (expense), net:
Financial income 340 2,767
Financial expense (4,690) (3,038)
Loss on sales of businesses - (40)
Other, net (344) (267)
- --------------------------------------------------------------------------------------------------------------------------------
(4,694) (578)
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 35,401 27,226
Income tax expense 12,923 9,612
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 22,478 17,614
Discontinued operations:
Loss on disposition, net of income tax effect (20) (37)
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 22,458 $ 17,577
- --------------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic:
Continuing operations $ 0.51 $ 0.40
Discontinued operations - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.40
- --------------------------------------------------------------------------------------------------------------------------------
Diluted:
Continuing operations $ 0.51 $ 0.40
Discontinued operations - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.40
- --------------------------------------------------------------------------------------------------------------------------------
Dividends per common share $ 0.17 $ 0.17
- --------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
December 31 September 30
(Thousands, except per share data) 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,455 $ 14,381
Accounts receivable, net 61,861 57,313
Receivable from associated companies - 1,500
Inventories 10,012 10,166
Other 10,234 10,798
Assets of discontinued operations - 7,723
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 108,562 101,881
- -----------------------------------------------------------------------------------------------------------------------------
Investments 28,367 28,776
Property and equipment, net 202,427 204,297
Goodwill 611,591 611,938
Other intangible assets 506,148 513,109
Other 3,762 3,829
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,460,857 $ 1,463,830
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 11,600 $ 14,600
Accounts payable 18,324 21,015
Compensation and other accrued liabilities 29,551 32,591
Income taxes payable 17,908 5,103
Dividends payable 7,550 7,533
Liabilities of discontinued operations - 157
Unearned revenue 28,478 27,750
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 113,411 108,749
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt, net of current maturities 370,200 394,700
Deferred items 216,518 216,612
Other 995 995
Stockholders' equity:
Serial convertible preferred stock, no par value; - -
authorized 500 shares: none issued
Common Stock, $2 par value; authorized 60,000 69,552 69,242
shares; issued and outstanding:
December 31, 2002 34,776 shares;
September 30, 2002 34,621 shares
Class B Common Stock, $2 par value; authorized 19,276 19,380
30,000 shares; issued and outstanding:
December 31, 2002 9,638 shares;
September 30, 2002 9,690 shares
Additional paid-in capital 70,864 67,084
Unearned compensation (3,778) (1,845)
Retained earnings 603,819 588,913
- -----------------------------------------------------------------------------------------------------------------------------
759,733 742,774
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,460,857 $ 1,463,830
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
LEE ENTERPRISES, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities:
Net income $ 22,458 $ 17,577
Results of discontinued operations (20) (37)
- -----------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 22,478 17,614
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities of continuing operations:
Depreciation and amortization 11,371 5,841
Stock compensation expense 1,122 890
Distributions in excess of current earnings of associated companies 409 1,950
Other, net 6,136 (1,779)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,516 24,516
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by (required for) investing activities:
Proceeds from sales of temporary cash investments, net - 23,110
Purchases of property and equipment (3,781) (2,406)
Proceeds from sales of assets 3,945 1,491
Other (75) (221)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 89 21,974
- -----------------------------------------------------------------------------------------------------------------------------
Cash provided by (required for) financing activities:
Payments on short-term debt (3,000) -
Payments on long-term debt (24,500) -
Common stock transactions - (207)
Dividends paid (7,533) -
Other 1,012 1,571
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (required for) financing activities (34,021) 1,364
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (required for) discontinued operations 4,490 (43,215)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,074 4,639
Cash and cash equivalents:
Beginning of period 14,381 272,169
- -----------------------------------------------------------------------------------------------------------------------------
End of period $ 26,455 $ 276,808
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of the Consolidated Financial
Statements.
LEE ENTERPRISES, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 Basis of Presentation
The Consolidated Financial Statements included herein are unaudited. In the
opinion of management, these statements contain all adjustments (consisting
of only normal recurring items) necessary to present fairly the financial
position of Lee Enterprises, Incorporated and subsidiaries (the Company) as
of December 31, 2002 and the results of operations and cash flows for the
periods presented. These Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's 2002 Annual Report on Form 10-K.
Because of seasonal and other factors, the results of operations for the
three months ended December 31, 2002 are not necessarily indicative of the
results to be expected for the full year.
Effective October 1, 2002, the Company adopted the fair value provisions of
FASB Statement 123, Accounting for Stock-Based Compensation, as amended by
FASB Statement 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, and all prior periods have been restated. See Note 5.
Certain amounts as previously reported have been reclassified to conform
with the current period presentation.
2 Acquisitions
In April 2002, the Company acquired the stock of Howard Publications, Inc.
(Howard), a privately owned company comprised of 15 daily newspapers, 50%
of the stock of Sioux City Newspapers, Inc. (SCN), and related specialty
publications. The transaction was valued at approximately $696,800,000
after taking into account $50,000,000 of cash on the Howard balance sheet
to be retained by the Company, and other adjustments. Certain
non-publishing businesses of Howard were not included in the transaction.
The Company paid the purchase price and expenses related to the transaction
from $433,000,000 of available funds, including proceeds from the sale of
its broadcast properties, and revolving loans under the terms of a five
year, $350,000,000 credit agreement.
In July 2002, the Company acquired the remaining 50% interest in SCN from a
privately owned company. The transaction was valued at $57,000,000 and was
funded in part with approximately $42,000,000 in cash and temporary cash
investments. The remainder of the purchase price was funded by the
Company's credit agreement. $3,000,000 of the purchase price was paid in
November 2002. The Company's Flathead group of weekly newspapers in Montana
was transferred as partial consideration for the purchase.
The pro forma consolidated statement of income information for the three
months ended December 31, 2001, set forth below, presents the results of
operations as if the acquisitions of Howard and SCN had occurred at the
beginning of the period and is not necessarily indicative of future results
or actual results that would have been achieved had the acquisitions
occurred as of the beginning of the period.
- --------------------------------------------------------------------------------
Three Months
Ended
December 31
(Thousands, except per common share data) 2001
- --------------------------------------------------------------------------------
Operating revenue $166,701
Income from continuing operations 19,857
Earnings per common share:
Basic $ 0.45
Diluted 0.45
- --------------------------------------------------------------------------------
3 Investment in Associated Companies
The Company has a 50% ownership interest in Madison Newspapers, Inc. (MNI), a company that publishes daily and Sunday
newspapers and other publications in Madison, Wisconsin, other daily newspapers and various other publications in Wisconsin
and also holds interests in internet service ventures.
Summarized financial information of MNI is as follows:
-----------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
-----------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Operating revenue $ 29,207 $ 26,470
Operating expenses, excluding depreciation
and amortization 20,465 18,325
Depreciation and amortization 1,363 1,004
Operating income 7,379 7,141
Net income 4,436 4,356
-----------------------------------------------------------------------------------------------------------------------
Debt of MNI totaled $32,344,000 at December 31, 2002 and September 30, 2002.
4 Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill are as follows:
----------------------------------------------------------------------------------------------------------------------
Three Months
Ended
December 31
(Thousands) 2002
----------------------------------------------------------------------------------------------------------------------
Goodwill, beginning of period $611,938
Goodwill adjustments related to acquisitions (347)
----------------------------------------------------------------------------------------------------------------------
Goodwill, end of period $611,591
----------------------------------------------------------------------------------------------------------------------
Identified intangible assets related to continuing operations consist of the following:
----------------------------------------------------------------------------------------------------------------------
December 31 September 30
(Thousands) 2002 2002
----------------------------------------------------------------------------------------------------------------------
Unamortizable intangible assets:
Mastheads $ 26,022 $ 26,022
Amortizable intangible assets:
Noncompete convenants and consulting agreements 28,406 28,406
Less accumulated amortization (22,515) (21,967)
----------------------------------------------------------------------------------------------------------------------
5,891 6,439
----------------------------------------------------------------------------------------------------------------------
Customer and newspaper subscriber lists 525,224 525,224
Less accumulated amortization (50,989) (44,576)
----------------------------------------------------------------------------------------------------------------------
474,235 480,648
----------------------------------------------------------------------------------------------------------------------
$506,148 $513,109
----------------------------------------------------------------------------------------------------------------------
Annual amortization of intangible assets related to continuing operations for the five years ending December 2007 is
estimated to be $27,713,000, $27,041,000, $24,232,000, $23,218,000 and $23,164,000, respectively.
5 Stock Ownership Plans
A summary of activity related to the Company's stock option plan is as follows:
----------------------------------------------------------------------------------------------------------------------
Weighted Average
Exercise Price
(Thousands, except per common share data) Shares
----------------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 2002 1,049 $ 29.04
Granted 300 32.51
Exercised (39) 26.33
Cancelled (8) 30.79
----------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2002 1,302 $ 29.91
----------------------------------------------------------------------------------------------------------------------
At December 31, 2002, the Company has three stock-based employee compensation plans. Prior to October 1, 2002, the Company
accounted for those plans under the recognition and measurement provisions of APB Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations. Accordingly, no compensation cost had been recognized for grants under the stock
option or stock purchase plans. Effective October 1, 2002, the Company adopted the fair value recognition provisions of FASB
Statement 123, Accounting for Stock-Based Compensation, for stock-based employee compensation, as amended by FASB Statement
148, Accounting for Stock-Based Compensation - Transition and Disclosure. All prior periods presented have been restated to
reflect the compensation cost that would have been recognized had the recognition provisions of Statements 123 and 148 been
applied to all awards granted to employees after October 1, 1995. The cumulative effect of the adoption of Statements 123 and
148 decreased non-current deferred income tax liabilities and increased stockholders' equity by $1,518,000 at September 30,
2002.
The impact of the adoption of Statements 123 and 148 on both income from continuing operations and diluted earnings per
common share is as follows:
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Three Months Ended Year Ended
----------------------------------------------------------------------------------------------------
(Thousands, except per December 31 March 31 June 30 September 30 September 30
common share data) 2001 2002 2002 2002 2002
-----------------------------------------------------------------------------------------------------------------------
Income from continuing
operations:
As reported $18,037 $13,226 $30,756 $19,010 $81,029
Additional stock
compensation expense
(net of income tax
expense) (423) (560) (568) (594) (2,145)
-----------------------------------------------------------------------------------------------------------------------
As adjusted $17,614 $12,666 $30,188 $18,416 $78,884
-----------------------------------------------------------------------------------------------------------------------
Diluted earnings per
common share:
As reported $ 0.41 $ 0.30 $ 0.69 $ 0.43 $ 1.83
Additional stock
compensation expense (0.01) (0.01) (0.01) (0.01) (0.05)
-----------------------------------------------------------------------------------------------------------------------
As adjusted $ 0.40 $ 0.29 $ 0.68 $ 0.42 $ 1.78
-----------------------------------------------------------------------------------------------------------------------
Options to purchase 1,164,889 shares of common stock with a weighted average exercise price of $28.50 per share were
outstanding at December 31, 2001.
6 Income Taxes
The provision for income taxes includes deferred taxes and is based upon estimated annual effective tax rates
in the tax jurisdictions in which the Company operates.
7 Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
-----------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
-----------------------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001
-----------------------------------------------------------------------------------------------------------------------
Income applicable to common stock:
Continuing operations $ 22,478 $ 17,614
Discontinued operations (20) (37)
-----------------------------------------------------------------------------------------------------------------------
Net income $ 22,458 $ 17,577
-----------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 44,370 44,086
Less non-vested restricted stock 149 110
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Basic average common shares 44,221 43,976
Dilutive stock options and restricted stock 132 265
-----------------------------------------------------------------------------------------------------------------------
Diluted average common shares 44,353 44,241
-----------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic:
Continuing operations $ 0.51 $ 0.40
Discontinued operations - -
-----------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.40
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Diluted:
Continuing operations $ 0.51 $ 0.40
Discontinued operations - -
-----------------------------------------------------------------------------------------------------------------------
Net income $ 0.51 $ 0.40
-----------------------------------------------------------------------------------------------------------------------
8 Impact of Recently Issued Accounting Standards
In July 2002, the FASB issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities.
Statement 146 requires companies to recognize liabilities and costs associated with exit or disposal activities
initiated after December 2002 when they are incurred, rather than when management commits to a plan to exit an
activity. Statement 146 will affect only the timing of the recognition of future restructuring costs and is
not expected to have a material effect on the Company's Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion includes comments and analysis relating to the Company's results of operations and financial
condition as of and for the three months ended December 31, 2002. This discussion should be read in conjunction with
the Consolidated Financial Statements and related Notes thereto and the 2002 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "Safe Harbor" for forward-looking statements. This
report contains information that may be deemed forward-looking and that is based largely on the Company's current
expectations and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially
from those anticipated. Among such risks, trends and other uncertainties are changes in advertising demand, newsprint
prices, interest rates, labor costs, legislative and regulatory rulings and other results of operations or financial
conditions, difficulties in integration of acquired businesses or maintaining employee and customer relationships and
increased capital and other costs. The words "may," "will," "would," "could," "believes," "expects," "anticipates,"
"intends," "plans," "projects," "considers" and similar expressions generally identify forward-looking statements.
Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of
this report. The Company does not undertake to publicly update or revise its forward-looking statements.
CONTINUING OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 2002
Operating results, as reported in the Consolidated Financial Statements, are summarized below:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(Thousands, except per common share data) 2002 2001 Percent Change
- -----------------------------------------------------------------------------------------------------------------------------
Operating revenue $ 170,547 $ 107,360 58.9%
Income before interest, taxes, depreciation
and amortization (EBITDA) (1) 49,248 31,468 56.5
Operating income 40,095 27,804 44.2
Nonoperating expense, net (4,694) (578) NM
Income from continuing operations 22,478 17,614 27.6
Earnings per common share:
Basic $ 0.51 $ 0.40 27.5%
Diluted 0.51 0.40 27.5
- -----------------------------------------------------------------------------------------------------------------------------
(1) EBITDA is not a financial performance measurement under accounting principles generally accepted in the United States
(GAAP), and should not be considered in isolation or as a substitute for GAAP performance measurements. EBITDA is also
not reflected in the Consolidated Statements of Cash Flows, but it is a common and meaningful alternative performance
measurement for comparison to other companies in the newspaper publishing industry. EBITDA excludes equity in net
income of associated companies and nonoperating items, primarily interest, gains and losses on sales of businesses and
losses related to other ventures. EBITDA as presented may not be comparable to similarly titled measures of other companies.
Operating Revenue
Revenue, as reported in the Consolidated Financial Statements, consists of the following:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Percent Change
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 Total Same Property
- -----------------------------------------------------------------------------------------------------------------------------
Advertising revenue:
Retail $ 75,841 $ 45,943 65.1% 3.6%
National 4,072 2,671 52.5 (1.1)
Classified:
Employment 8,750 5,090 71.9 (5.1)
Automotive 10,110 5,312 90.3 2.2
Real estate 7,173 3,850 86.3 7.8
All other 12,856 8,811 45.9 3.7
- -----------------------------------------------------------------------------------------------------------------------------
Total classified 38,889 23,063 68.6 1.5
- -----------------------------------------------------------------------------------------------------------------------------
Total advertising 118,802 71,677 65.7 2.7
- -----------------------------------------------------------------------------------------------------------------------------
Circulation 33,612 20,422 64.6 0.7
Other:
Commercial printing 5,659 5,874 (3.7) (6.2)
Online 2,481 1,474 68.3 42.7
Niche publications and other 9,993 7,913 26.2 8.9
- -----------------------------------------------------------------------------------------------------------------------------
Total operating revenue $ 170,547 $ 107,360 58.9% 2.7%
- -----------------------------------------------------------------------------------------------------------------------------
All categories of revenue were substantially impacted by the acquisition of Howard, which the Company purchased in April
2002. In total, acquisitions accounted for $63,040,000 of revenue growth in the current year quarter. Businesses sold
in the year ended September 2002, but still included in continuing operations, did not impact the current year quarter but
accounted for $2,135,000 of revenue in the prior year quarter.
Sundays generate substantially more advertising and circulation revenue than any other day of the week. The quarter ended
December 31, 2002 had the same number of Sundays as the same period last year.
Revenue - Same Property
The following discussion of revenue is presented on an operating basis, which includes 100% of the revenue and expenses of MNI,
which is owned 50% by the Company and accounted for in the Consolidated Financial Statements using the equity method. It is also
exclusive of acquisitions and divestitures. The Company believes such comparisons provide the most meaningful information for
an understanding of changes in its revenue.
For the quarter ended December 31, 2002, total revenue increased $3,588,000, or 2.7%, and total advertising revenue
increased $2,361,000, or 2.7%. Retail revenue increased $1,965,000, or 3.6%. Average retail rate, excluding preprint
insertions, increased 3.5%.
Classified advertising revenue increased approximately 1.5% for the quarter ended December 31, 2002, the first such increase
since the quarter ended December 2000. Higher margin employment advertising at the daily newspapers decreased 5.1% for the
quarter, but was more than offset by revenue increases in automotive and real estate of 2.2% and 7.8%, respectively. Automakers
continue to offer incentives and real estate interest rates remain favorable. Classified rates increased 1.1%.
Advertising lineage, as reported on a same property operating basis for daily newspapers only, consists of the following:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(Thousands of Inches) 2002 2001 Percent Change
- -----------------------------------------------------------------------------------------------------------------------------
Retail 2,003 2,023 (1.0)%
National 85 96 (11.5)
Classified 1,594 1,597 (0.2)
- -----------------------------------------------------------------------------------------------------------------------------
3,682 3,716 (0.9)%
- -----------------------------------------------------------------------------------------------------------------------------
Circulation revenue increased $176,000, or 0.7%, in the current year quarter. The Company's unaudited average daily
newspaper circulation units increased 1.5% and Sunday circulation was flat for the three months ended December 2002,
compared to the same period in the prior year. The Company remains focused on growing circulation units and revenue through
a number of initiatives.
Commercial printing revenue declined $487,000, or 6.2%. Online revenue increased $678,000, or 42.7%, due to growth in
advertising revenue and cross-selling with the Company's newspapers.
Operating Expenses and Results of Operations
The following table sets forth the Company's operating expenses and results of operations, as reported in the Consolidated
Financial Statements:
- -----------------------------------------------------------------------------------------------------------------------------
Three Months Ended
December 31
- -----------------------------------------------------------------------------------------------------------------------------
(Thousands) 2002 2001 Percent Change
- -----------------------------------------------------------------------------------------------------------------------------
Compensation $ 68,492 $ 40,484 69.2%
Newsprint and ink 14,450 9,777 47.8
Other operating expenses 38,357 25,631 49.7
- -----------------------------------------------------------------------------------------------------------------------------
121,299 75,892 59.8
- -----------------------------------------------------------------------------------------------------------------------------
EBITDA 49,248 31,468 56.5
Depreciation and amortization 11,371 5,841 94.7
- -----------------------------------------------------------------------------------------------------------------------------
Operating income, before equity in net income
of associated companies 37,877 25,627 47.8
Equity in net income of associated companies 2,218 2,177 1.9
- -----------------------------------------------------------------------------------------------------------------------------
Operating income $ 40,095 $ 27,804 44.2%
- -----------------------------------------------------------------------------------------------------------------------------
Costs other than depreciation and amortization increased $45,407,000, or 59.8%.
All categories of expenses were substantially impacted by the acquisition of
Howard, which the Company purchased in April 2002. On a same property basis,
such costs increased 3.0%. In total, acquisitions accounted for $43,484,000 of
operating costs, excluding depreciation and amortization, in the current year
quarter. Businesses sold did not impact operating expenses in the current year
quarter, but accounted for $1,717,000 of operating expenses other than
depreciation and amortization in the prior year quarter. Compensation expense
increased $28,008,000, or 69.2%, in the current year quarter due to costs of
acquired businesses and a 7.5% increase in same property compensation expense.
Higher medical expenses, normal salary adjustments, higher incentive
compensation from increasing revenue, and one-time cost reductions in the prior
year quarter, contributed to the increase in same property costs. Same property
full time equivalent employees remained unchanged year over year. Exclusive of
non-recurring cost reductions in the prior year, same property compensation
expense increased 4.5% in the current year quarter. Newsprint and ink costs
increased $4,673,000, or 47.8%, in the current year quarter as volume increases
related to acquired businesses more than offset price decreases and same
property volume declines. Same property newsprint and ink expense decreased by
13.5% in the quarter and volume declined 0.2%. Other operating costs, exclusive
of depreciation and amortization, increased $12,726,000, or 49.7%, in the
current year quarter. On a same property basis, other operating costs increased
3.4%. The increase in depreciation and amortization expense in 2002 is primarily
due to the acquisitions of Howard and SCN.
EBITDA improved 56.5% to $49,248,000 in the current year quarter from
$31,468,000 in the prior year. EBITDA margin declined to 28.9% from 29.3% in the
prior year. Lower newsprint prices were offset by lower margins of acquired
businesses and other cost increases as noted above. Operating income increased
44.2% to $40,095,000. Operating margin decreased to 23.5% from 25.9% for the
same reasons, but was further impacted by a higher level of amortization expense
from acquisitions.
Nonoperating Income and Expense
Financial income decreased $2,427,000 to $340,000. The Company's invested
balances were substantially reduced in April 2002 by the acquisition of Howard.
Financial expense increased due to debt from the acquisitions of Howard and SCN,
offset by lower interest rates and debt reduction from operating cash flow.
Overall Results
The effective income tax rates were 36.5% and 35.3% for the quarters ended
December 31, 2002 and 2001, respectively. The prior year tax rate was lower
primarily due to tax-exempt interest income.
As a result of all of the above, earnings per diluted common share from
continuing operations increased 27.5% to $0.51 per share from $0.40 per share in
the prior year quarter. The adoption of FASB Statements 123 and 148 reduced the
prior year's quarterly results by $0.01 per share.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $41,516,000
for the three months ended December 31, 2002 and $24,516,000 for the same period
in 2001. Increased income from continuing operations and changes in working
capital account for the change between years.
Cash provided by investing activities totaled $89,000 for the three months ended
December 31, 2002, and $21,974,000 in the same period of the prior year.
Proceeds from the sale of temporary cash investments were responsible for the
primary source of funds in the prior year.
The Company anticipates that funds necessary for capital expenditures, which are
expected to total approximately $19,000,000 in 2003, and other requirements,
will be available from internally generated funds, availability under its
existing credit agreement or, if necessary, by accessing the capital markets.
Cash required by financing activities totaled $34,021,000 during the three
months ended December 31, 2002, and provided $1,364,000 in the prior year. Debt
repayments totaling $27,500,000 and dividends were the primary uses of funds in
the current year period.
Cash provided by discontinued operations totaling $4,490,000 in the current year
primarily reflects net proceeds from the sale of businesses. Cash required for
discontinued operations totaled $43,215,000 during the three months ended
December 31, 2001, primarily for income tax payments related to the gain on sale
of discontinued operations.
INFLATION
The Company has not been significantly impacted by inflationary pressures over
the last several years. The Company anticipates that changing costs of
newsprint, its basic raw material, may impact future operating costs. Price
increases (or decreases) for the Company's products are implemented when deemed
appropriate by management. The Company continuously evaluates price increases,
productivity improvements and cost reductions to mitigate the impact of
inflation.
In January 2003, several newsprint manufacturers announced price increases of
$50 per metric ton, effective for deliveries in March 2003. The final extent of
changes in current prices, if any, is subject to negotiation between such
manufacturers and the Company.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to bad debts, investments, intangible
assets, remaining useful lives of long-lived assets and income taxes. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
See Note 1 to the Consolidated Financial Statements, included in the 2002 Annual
Report on Form 10-K, for a description of the Company's accounting policies used
in the preparation of its Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk stemming from changes in interest rates
and commodity prices. Changes in these factors could cause fluctuations in
earnings and cash flows. In the normal course of business, exposure to certain
of these market risks is managed as described below.
Interest Rates
Interest rate risk in the Company's investment portfolio is managed by investing
only in securities with maturity at date of acquisition of 180 days or less.
Only high-quality investments are considered. In April 2002, the Company
liquidated substantially its entire investment portfolio in conjunction with the
acquisition of Howard.
The Company's debt structure and interest rate risk are managed through the use
of fixed and floating rate debt. The Company's primary exposure is to the London
Interbank Offered Rate (LIBOR). A one percent increase to LIBOR would decrease
income from continuing operations before income taxes on an annualized basis by
approximately $2,200,000, based on floating rate debt outstanding at December
31, 2002, excluding MNI.
Commodities
Certain materials used by the Company are exposed to commodity price changes.
The Company manages this risk through instruments such as purchase orders and
non-cancelable supply contracts. The Company is also involved in continuing
programs to mitigate the impact of cost increases through identification of
sourcing and operating efficiencies. Primary commodity price exposures are
newsprint and, to a lesser extent, ink.
A $10 per metric ton newsprint price increase would result in an annualized
reduction in income from continuing operations before income taxes of
approximately $1,115,000, excluding MNI, based on anticipated consumption in
2003.
Sensitivity to Changes in Value
The estimate that follows is intended to measure the maximum potential impact on
fair value of fixed-rate debt of the Company in one year from adverse changes in
market interest rates under normal market conditions. The calculations are not
intended to represent actual losses in fair value that the Company expects to
incur. The estimates do not consider favorable changes in market rates. The
position included in the calculations is the Company's fixed-rate debt, which
totals $161,800,000 at December 31, 2002, excluding MNI.
The estimated maximum potential one-year loss in fair value from a 100 basis
point movement in interest rates on market risk sensitive instruments
outstanding at December 31, 2002 is approximately $6,860,000. There is no impact
on operating results from such changes in interest rates.
Item 4. Controls and Procedures
In order to ensure that the information that must be disclosed in filings with
the Securities and Exchange Commission is recorded, processed, summarized and
reported in a timely manner, the Company has disclosure controls and procedures
in place. The Chief Executive Officer, Mary E. Junck, and Chief Financial
Officer, Carl G. Schmidt, have reviewed and evaluated disclosure controls and
procedures as of December 31, 2002, and have concluded that such controls and
procedures are appropriate and that no changes are required.
There have been no significant changes in internal controls, or in other factors
that could affect internal controls, since December 31, 2002.
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 99.6 Sarbanes-Oxley Act Section 906 Certification
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December 31,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEE ENTERPRISES, INCORPORATED
/s/ Carl G. Schmidt DATE: February 13, 2003
- ------------------------------------
Carl G. Schmidt
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mary E. Junck, certify that:
1. I have reviewed this quarterly report on Form 10-Q (Quarterly Report) of
Lee Enterprises, Incorporated (Registrant);
2. Based on my knowledge, this Quarterly 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 Quarterly Report;
3. Based on my knowledge, the Consolidated Financial Statements, and other
financial information included in this Quarterly 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
Quarterly 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-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures 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
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the Evaluation Date); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit
Committee of Registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Mary E. Junck
--------------------------------------
Mary E. Junck
Chairman, President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Carl G. Schmidt, certify that:
1. I have reviewed this quarterly report on Form 10-Q (Quarterly Report) of
Lee Enterprises, Incorporated (Registrant);
2. Based on my knowledge, this Quarterly 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 Quarterly Report;
3. Based on my knowledge, the Consolidated Financial Statements, and other
financial information included in this Quarterly 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
Quarterly 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-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures 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
Quarterly Report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the Evaluation Date); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the Audit
Committee of Registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Carl G. Schmidt
-------------------------------------------
Carl G. Schmidt
Vice President, Chief Financial Officer and Treasurer
EXHIBIT 99.6
The following statement is being made to the Securities and Exchange Commission
solely for purposes of Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1349), 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. 1349), each of the undersigned hereby certifies that to our
knowledge:
(i) this quarterly report on Form 10-Q for the period ended December 31, 2002
(Quarterly 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 Quarterly Report fairly presents, in all
material respects, the financial condition and results of operations of Lee
Enterprises, Incorporated for the periods presented in the Quarterly
Report.
Dated as of this 13th day of February, 2003
/s/ Mary E. Junck /s/ Carl G. Schmidt
- ------------------------------ --------------------------------
Mary E. Junck Carl G. Schmidt
Chairman, President and Vice President, Chief Financial Officer
Chief Executive Officer and Treasurer
