| Item 1 | 1 | |||
| Item 1A |
11 | |||
| Item 1B |
12 | |||
| Item 2 |
12 | |||
| Item 3 |
12 | |||
| Item 4 |
12 | |||
| Part II |
||||
| Item 5 |
13 | |||
| Item 6 |
15 | |||
| Item 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||
| Item 7A |
31 | |||
| Item 8 |
32 | |||
| Item 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
32 | ||
| Item 9A |
32 | |||
| Item 9B |
35 | |||
| Part III |
||||
| Item 10 |
35 | |||
| Item 11 |
35 | |||
| Item 12 |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
35 | ||
| Item 13 |
Certain Relationships, Related Transactions and Director Independence |
36 | ||
| Item 14 |
36 | |||
| Part IV | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 41 | ||||
Table of Contents
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking, that is based largely on the Company’s current expectations, and is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those anticipated. Among such risks, trends and other uncertainties are changes in advertising demand, newsprint prices, energy costs, interest rates, labor costs, legislative and regulatory rulings and other results of operations or financial conditions, difficulties in integration of acquired businesses or maintaining employee and customer relationships, increased capital and other costs and other risks detailed from time to time in the Company’s publicly filed documents. The words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions generally identify forward-looking statements. Readers are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this report. The Company does not undertake to publicly update or revise its forward-looking statements.
PART I
References to 2007, 2006, 2005 and the like mean the fiscal years ended September 30.
Lee Enterprises, Incorporated, is a premier provider of local news, information and advertising in primarily midsize markets, with 51 daily newspapers and a joint interest in five others, rapidly growing online sites and more than 300 weekly newspapers and specialty publications in 23 states.
The Company is consistently focused on six key strategic priorities. They are to:
| · | Grow revenue creatively and rapidly; |
| · | Deliver strong local news and information; |
| · | Accelerate online innovation; |
| · | Continue expanding audiences; |
| · | Nurture employee development and achievement; and |
| · | Exercise careful cost control. |
Certain aspects of these priorities are discussed below.
The Company was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange in 1978. Before 2001, the Company also operated a number of network-affiliated and satellite television stations. In 2006, the Company sold the assets of its stand-alone publishing and commercial printing operations in Seattle and Spokane, Washington and Portland, Oregon.
HOWARD AND SIOUX CITY ACQUISITIONS
In 2002, the Company acquired 15 daily newspapers and a 50% interest in the Sioux City, Iowa, daily newspaper (SCN) by purchasing Howard Publications, Inc. (Howard). This acquisition was consistent with the strategy the Company announced in 2000 to buy daily newspapers with circulation of 30,000 or more. In 2002, the Company also acquired the remaining 50% of SCN. These acquisitions increased the Company’s circulation by more than 75% and increased its revenue by nearly 50%. In February 2004, two daily newspapers acquired in the Howard acquisition were exchanged for daily newspapers in Burley, Idaho, and Elko, Nevada.
PULITZER ACQUISITION
In June 2005, the Company acquired Pulitzer Inc. (Pulitzer). Pulitzer published 14 daily newspapers and more than 100 weekly newspapers and specialty publications. Pulitzer also owned a 50% interest in TNI Partners, as described more fully below. The acquisition of Pulitzer increased the Company’s circulation by more than 50% to more than 1.6 million daily and 1.9 million Sunday, and revenue by more than 60%.
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Pulitzer newspaper operations include St. Louis, Missouri, where its subsidiary, St. Louis Post-Dispatch LLC (PD LLC), publishes the St. Louis Post-Dispatch, the only major daily newspaper serving the greater St. Louis metropolitan area. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of 31 weekly newspapers and nine niche publications that focus on separate communities within the metropolitan area. In 2007, the Suburban Journals had average unduplicated circulation of approximately 0.7 million, resulting in the delivery of approximately 1.1 million copies per week.
Pulitzer holds a 95% interest in the results of operations of PD LLC, and The Herald Publishing Company, LLC (Herald) holds a 5% interest.
Pulitzer’s wholly-owned subsidiary, Pulitzer Newspapers, Inc. (PNI), and its subsidiaries publish 12 daily newspapers and operate the related websites as well as publish more than 75 weekly newspapers, shoppers and niche publications, that serve markets in the Midwest, Southwest and West. In 2006, the Company sold the assets of The Daily News in Rhinelander, Wisconsin, the smallest of these newspapers.
In 2005 and 2006, the Company devoted substantial attention to the successful integration of Pulitzer into its business. The Company made significant and immediate changes to systems and other areas of operations. The Company also devoted resources and training to bring its successful selling strategies and tactics to Pulitzer. The Company believes the integration was successful, with minimal disruption to its business.
TNI Partners
As a result of the acquisition of Pulitzer, the Company owns a 50% interest in TNI Partners (TNI), the Tucson, Arizona, newspaper partnership. TNI, acting as agent for the Company’s subsidiary, Star Publishing Company (Star Publishing), and the owner of the remaining 50%, Citizen Publishing Company (Citizen), a subsidiary of Gannett Co., Inc., is responsible for printing, delivery, advertising and circulation of the Arizona Daily Star and the Tucson Citizen as well as their related online operations and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership’s operations and publication of the newspapers and other media. Each newspaper is solely responsible for its own news and editorial content. Under the amended and restated joint operating agreement between Star Publishing and Citizen (the Agency Agreement), the Arizona Daily Star remains the separate property of Star Publishing. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. Results of TNI are accounted for using the equity method.
The Newspaper Preservation Act of 1970 permits joint operating agreements between newspapers under certain circumstances without violation of the Federal antitrust laws. Agency agreements generally allow newspapers operating in the same market to share certain printing and other facilities and to pool certain revenue and expenses in order to decrease aggregate expenses and thereby allow the continuing operation of multiple newspapers in the same market. Newspapers in several cities operate under joint operating or agency agreements.
An agency agreement has governed the joint operations of the Arizona Daily Star and Tucson Citizen since 1940. The Board of Directors of TNI consists of three directors chosen by Star Publishing and three chosen by Citizen. Budgetary, key personnel and other non-news and editorial policy matters, such as advertising and circulation policies and rates or prices, are determined by the Board of Directors of TNI. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Arizona Daily Star and the Tucson Citizen benefit from increases, and can be adversely affected by decreases, in each other’s circulation. The Agency Agreement expires in 2015, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each.
Due to the agency relationship existing in Tucson, the Arizona Daily Star and Tucson Citizen cannot be viewed as competitors for advertising or circulation revenue. The Arizona Daily Star and Tucson Citizen compete primarily against other media, suburban, neighborhood and national newspapers, and other publications.
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MADISON NEWSPAPERS
The Company owns 50% of the capital stock of Madison Newspapers, Inc. (MNI) and 17% of the nonvoting common stock of The Capital Times Company (TCT). TCT owns the remaining 50% of the capital stock of MNI. MNI publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, as well as related online operations. MNI conducts business under the trade name Capital Newspapers. The Company has a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provides other services to MNI. The Wisconsin State Journal is classified as one of the Lee group of newspapers in the newspaper business and in the rating services. Results of MNI are accounted for using the equity method. Net income or loss of MNI (after income taxes) is allocated equally to the Company and TCT. In 2006, MNI sold the assets of its Shawano, Wisconsin, daily newspaper.
ADVERTISING
More than 77% of the Company’s 2007 revenue was derived from advertising. The Company’s strategies are to increase its share of local advertising through increased sales activities in its existing markets and, over time, to increase its print and online audiences through internal expansion into existing and contiguous markets and enhancement of online offerings, augmented by selective acquisitions. Acquisition efforts are focused on newspapers with daily circulation of 30,000 or more, as noted above and other publications and online businesses that increase the Company’s operating revenue.
Several of the Company’s businesses operate in geographic groups of publications, or “clusters” which provide operational efficiencies and extend sales penetration. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance or human resources, management or production of the publications. Sales penetration can improve if the sales effort is successful in cross-selling advertising into multiple publications and online. A table under the caption “Daily Newspapers and Markets” in Item 1 identifies those groups of the Company’s newspapers operating in clusters.
The Company’s newspapers and classified and specialty publications compete with newspapers having national or regional circulation, magazines, radio, network and cable television, other advertising media such as billboards, other classified and specialty publications, direct mail, yellow pages directories, as well as other information content providers such as online sites. Competition for advertising is based on audience size and composition, circulation levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of the Company’s daily and Sunday newspapers compete with other local daily or weekly newspapers. The Company estimates that it captures a substantial share of the total advertising dollars spent on print, broadcast and online advertising in all of its markets.
The number of competitors in any given market varies, and cannot be estimated with any degree of certainty. However, all of the forms of competition noted above exist to some degree in the Company’s markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1.
The following broadly define major categories of advertising revenue:
Retail advertising is revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts.
National advertising is revenue earned from display advertising space, or for preprinted advertising inserted in the publication, to national accounts, if there is no local retailer representing the account in the market.
Classified advertising, which includes employment, automotive, real estate for sale or rent, and other categories, is revenue earned from sales of advertising space in the classified section of the publication or from publications consisting primarily of such advertising.
Online advertising consists of display, banner, classified or other advertising on websites associated and integrated with the Company’s print publications.
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Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.
Classified publications are periodic advertising publications available in racks or delivered free, by carriers or third-class mail, to all, or selected, households in a particular geographic area. Classified publications offer advertisers a cost-effective local advertising vehicle and are particularly effective in larger markets with high media fragmentation.
The Company’s many geographic markets have differences in their advertising rate structures, some of which are highly complex. A single operation often has scores of rate alternatives.
The advertising environment is influenced by the state of the overall economy, including unemployment rates, inflation, energy prices and consumer interest rates. The Company’s enterprises are generally located in midsize and smaller markets. These markets are more stable than major metropolitan markets during the current downturn in advertising spending but may not experience increases in such spending as significant as those in major metropolitan markets in periods of economic improvement.
The Company’s year over year advertising results in 2007, 2006 and 2005 compare favorably to national statistics published by the Newspaper Association of America.
ONLINE ADVERTISING AND SERVICES
The Company’s online activities include websites supporting each of its daily newspapers and certain of its other publications. Internet activities of the newspapers, except for TNI and MNI, are reported and managed as a part of the Company’s publishing operations.
In November 2006, the Company, in conjunction with several other major publishing organizations, announced a strategic alliance with Yahoo! Inc. (Yahoo), in which the publishing consortium offers its classified employment advertising customer base the opportunity to also post job listings on Yahoo’s HotJobs national platform. In addition, the consortium and Yahoo have begun working together to provide new search, content and local applications across the newspapers’ online sites, further enhancing the value of these sites as a destination for online users. The Yahoo consortium currently includes more than 20 companies and approximately 400 daily newspapers across the United States.
In November 2007, the Company, along with several other major publishing organizations, announced a strategic alliance with Zillow.com in which the publishing consortium will offer its classified real estate advertising customer base the opportunity to also post listings in Zillow.com’s national platform. In November 2007, the Company also announced it was acquiring a 10% interest in Kaango, LLC, the company that operates Kaango.com, an advanced online classified advertising site.
The Company also owns 82.5% of an Internet service company, INN Partners, L.C. (doing business as TownNews.com), which provides online infrastructure and online publishing services for more than 1,500 daily and weekly newspapers and shoppers. In addition, the Company has a minority investment in a company which provides online editorial content and transactional and promotional opportunities.
Online businesses of the Company have experienced rapid growth over the last several years. Online advertising represented 7.4% of total advertising revenue in the month of September 2007, an increase from 4.7% in September 2006. Online page views increased 21.7% between September 2006 and September 2007.
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AUDIENCES
Based on independent research, the Company estimates that, in an average week, its newspapers and online sites reach approximately 71% of adults in its markets. In the St. Louis market, Scarborough Research estimates the St. Louis Post Dispatch and STLToday.com reach 60% of adults, ranking second for combined reach in the 25 most populated U.S. markets. The Company’s extensive array of suburban newspapers and other publications further increases reach in St. Louis. Readership by young adults is also significant in the Company’s markets as summarized in the table below. The Company is reaching an increasingly larger share of the market through rapid online growth, as illustrated in the table below, as well as through additional specialty and niche publications.
| PRINT PLUS ONLINE REACH – PAST SEVEN DAYS |
| All Adults | Age 18-34 | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
| Print only |
50.2 | % | 49.9 | % | 40.3 | % | 37.1 | % | ||||
| Print and online |
16.1 | 11.1 | 17.9 | 11.7 | ||||||||
| Online only |
4.7 | 5.7 | 8.2 | 8.1 | ||||||||
| Total reach |
71.0 | % | 66.7 | % | 66.4 | % | 56.9 | % | ||||
| Source: | Lee Enterprises Tracking Survey, Wilkerson & Associates. October 2007 and 2006. |
| Margin of error +/-2.8% |
| Markets: | St. Louis, MO, Madison, WI, Oceanside/Escondido, CA, Northwest Indiana, |
| Lincoln, NE, Davenport, IA, Billings, MT, Bloomington, IL, Sioux City, IA, Waterloo, IA |
After advertising, print circulation is the Company’s largest source of revenue. According to the Newspaper Association of America data, nationwide daily newspaper circulation unit sales have decreased 17% cumulatively through 2006 since their peak in 1984 and Sunday circulation unit sales have decreased 15% since their peak in 1990. The number of daily newspapers declined 15% from 1984 to 2006. For the six months ended September 2007, the Company’s daily circulation, which includes Pulitzer, TNI and MNI, as measured by the Audit Bureau of Circulations (ABC), or other independent organizations, declined 1.7%, and Sunday circulation declined 0.7%, significantly outperforming the industry as a whole. Since September 2001, the Company’s daily and Sunday circulation have declined cumulatively by 4.4% and 3.6%, respectively. These changes represent average annual declines of 0.7% and 0.6%, respectively. Such results are, in substantially all reporting periods, better than industry averages.
Growth in print and online audiences can, over time, also positively impact advertising revenue. The Company’s strategies to improve audiences include continuous improvement of content and promotional efforts. Content can include focus on local news, features, scope of coverage, headline accuracy, presentation, writing style, tone, type style and reduction of factual errors. Promotional efforts include advertising, contests and other initiatives to increase awareness of the products. Customer service can also influence print circulation. The Company’s enterprises are also focused on increasing the number of subscribers who pay for their subscriptions via automated payment mechanisms, such as credit cards or checking account withdrawals. Customers using these payment methods have historically higher retention. Other initiatives vary from location to location and are determined principally by management at the local level in collaboration with senior management of the Company. Competition for print circulation is generally based on the content, journalistic quality and price of the publication.
Audience competition exists in all markets, even from unpaid products, but is most significant in markets with competing daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population is sufficient to support more than one daily newspaper.
Changes in telemarketing regulations first effective in 2004 reduced the Company’s ability to obtain new subscribers using this channel. Other methods to attract and retain subscribers have been and remain in use. However, telemarketing has historically been the largest single source of new subscribers. Same property circulation starts obtained through the Company’s marketing efforts declined 1% in 2007 and 2% in 2006 and 2005.
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DAILY NEWSPAPERS AND MARKETS
The Company, TNI and MNI publish the following daily newspapers and online sites:
| Paid Circulation (1) | |||||||||||||||
| Newspaper | Primary Website | Location | Daily | Sunday | |||||||||||
| St. Louis Post-Dispatch (2) |
stltoday.com | St. Louis, MO | 265,111 | 420,222 | |||||||||||
| Arizona Daily Star (2)(3) |
azstarnet.com | Tucson, AZ | 100,910 | 151,995 | |||||||||||
| Capital Newspapers (4) |
|||||||||||||||
| Wisconsin State Journal |
madison.com | Madison, WI | 87,708 | 141,234 | (5 | ) | |||||||||
| The Capital Times |
madison.com | Madison, WI | 16,565 | - | (5 | ) | |||||||||
| Daily Citizen |
wiscnews.com/bdc | Beaver Dam, WI | 9,888 | - | |||||||||||
| Portage Daily Register |
wiscnews.com/pdr | Portage, WI | 4,900 | - | |||||||||||
| Baraboo News Republic |
wiscnews.com/bnr | Baraboo, WI | 4,303 | - | |||||||||||
| North County Times (6) |
nctimes.com | Oceanside and Escondido, CA |
86,852 | 90,000 | |||||||||||
| The Times (6) |
nwitimes.com | Munster, Valparaiso, and |
83,054 | 90,768 | |||||||||||
| Lincoln Group |
|||||||||||||||
| Lincoln Journal Star |
journalstar.com | Lincoln, NE | 76,848 | 82,835 | |||||||||||
| Columbus Telegram |
columbustelegram.com | Columbus, NE | 8,946 | 9,840 | |||||||||||
| Fremont Tribune |
fremonttribune.com | Fremont, NE | 8,264 | - | |||||||||||
| Beatrice Daily Sun |
beatricedailysun.com | Beatrice, NE | 7,708 | - | |||||||||||
| Quad-Cities Group |
|||||||||||||||
| Quad-City Times |
qctimes.com | Davenport, IA | 49,990 | 68,562 | |||||||||||
| Muscatine Journal |
muscatinejournal.com | Muscatine, IA | 7,248 | - | |||||||||||
| The Pantagraph (2) |
pantagraph.com | Bloomington, IL | 46,639 | 50,486 | |||||||||||
| Billings Gazette |
billingsgazette.com | Billings, MT | 45,054 | 52,217 | |||||||||||
| Sioux City Journal (6) |
siouxcityjournal.com | Sioux City, IA | 40,638 | 41,919 | |||||||||||
| The Courier (6) |
wcfcourier.com | Waterloo and Cedar Falls, IA |
39,794 | 50,405 | |||||||||||
| Central Illinois Newspaper Group |
|||||||||||||||
| Herald & Review |
herald-review.com | Decatur, IL | 32,609 | 47,309 | |||||||||||
| Journal Gazette (6) |
jg-tc.com | Mattoon, IL | 9,668 | - | |||||||||||
| Times-Courier (6) |
jg-tc.com | Charleston, IL | 6,166 | - | |||||||||||
| River Valley Newspaper Group |
|||||||||||||||
| La Crosse Tribune |
lacrossetribune.com | La Crosse, WI | 31,862 | 41,105 | |||||||||||
| Winona Daily News |
winonadailynews.com | Winona, MN | 11,243 | 12,827 | |||||||||||
| The Post-Star (6) |
poststar.com | Glens Falls, NY | 31,381 | 34,650 | |||||||||||
| The Daily Herald (2) |
heraldextra.com | Provo, UT | 31,252 | 38,811 | |||||||||||
| Casper Star-Tribune (6) |
trib.com | Casper, WY | 29,942 | 32,336 | |||||||||||
| Missoula Group |
|||||||||||||||
| Missoulian |
missoulian.com | Missoula, MT | 29,161 | 33,154 | |||||||||||
| Ravalli Republic |
ravallinews.com | Hamilton, MT | 5,239 | (7 | ) | - | |||||||||
| Rapid City Journal |
rapidcityjournal.com | Rapid City, SD | 28,856 | 33,670 | |||||||||||
| The Journal Times |
journaltimes.com | Racine, WI | 28,287 | 30,471 | |||||||||||
| The Bismarck Tribune |
bismarcktribune.com | Bismarck, ND | 26,809 | 30,613 | |||||||||||
| The Southern Illinoisan |
thesouthern.com | Carbondale, IL | 25,869 | 36,631 | |||||||||||
| The Daily News (6) |
tdn.com | Longview, WA | 21,905 | 21,639 | |||||||||||
| Magic Valley Group |
|||||||||||||||
| The Times-News (6) |
magicvalley.com | Twin Falls, ID | 20,526 | 23,844 | |||||||||||
| Elko Daily Free Press (8) |
elkodaily.com | Elko, NV | 6,070 | (7 | ) | - | |||||||||
| South Idaho Press (8) |
southidahopress.com | Burley, ID | 3,807 | (7 | ) | - | |||||||||
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| Paid Circulation (1) | ||||||||||||
| Newspaper | Primary Website | Location | Daily | Sunday | ||||||||
| Central Coast Newspapers |
||||||||||||
| Santa Maria Times (2) |
santamariatimes.com | Santa Maria, CA | 19,589 | 19,700 | ||||||||
| The Lompoc Record (2) |
lompocrecord.com | Lompoc, CA | 5,641 | 5,737 | ||||||||
| Globe Gazette |
globegazette.com | Mason City, IA | 18,444 | 22,611 | ||||||||
| The Times and Democrat (6) |
thetandd.com | Orangeburg, SC | 17,113 | 17,201 | ||||||||
| Mid-Valley News Group |
||||||||||||
| Albany Democrat-Herald |
democratherald.com | Albany, OR | 17,027 | 17,675 | ||||||||
| Corvallis Gazette-Times |
gazettetimes.com | Corvallis, OR | 11,768 | 11,951 | ||||||||