LEE ENTERPRISES INC - 10-Q Quarterly Report

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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, 2004

[ ] 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 incorporation or organization)		(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)

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, 2004, 38,166,692 shares of Common Stock and 7,201,097 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 - Three months ended December 31, 2004 and 2003	1

		Consolidated Balance Sheets - December 31, 2004 and September 30, 2004	2

		Consolidated Statements of Cash Flows - Three months ended December 31, 2004 and 2003	3

		Notes to Consolidated Financial Statements	4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12

	Item 4.	Controls and Procedures	13

PART II	OTHER INFORMATION

	Item 2(e).	Issuer Purchases of Equity Securities	14

	Item 6.	Exhibits and Reports on Form 8-K	14

SIGNATURES			14

EXHIBITS

	31	Rule 13a-14(a)/15d-14(a) Certifications

	32	Section 1350 Certification

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)	2004			2003

Operating revenue:
Advertising	$	139,793		$	128,930
Circulation		32,452			32,980
Other		11,839			11,074
		184,084			172,984
Operating expenses:
Compensation		71,729			68,384
Newsprint and ink		16,827			15,680
Depreciation		4,945			4,559
Amortization of intangible assets		6,561			6,756
Other operating expenses		41,119			38,018
		141,181			133,397
Operating income, before equity in net income of associated companies		42,903			39,587
Equity in net income of associated companies		2,593			2,292
Operating income		45,496			41,879
Nonoperating income (expense), net:
Financial income		278			298
Financial expense		(2,839	)		(3,537	)
Other, net		—			(28	)
		(2,561	)		(3,267	)
Income from continuing operations before income taxes		42,935			38,612
Income tax expense		15,924			14,215
Income from continuing operations		27,011			24,397
Discontinued operations:
Income from discontinued operations, net of income tax effect		—			82
Net income	$	27,011		$	24,479

Earnings per common share:
Basic:
Continuing operations	$	0.60		$	0.55
Discontinued operations		—			—
Net income	$	0.60		$	0.55

Diluted:
Continuing operations	$	0.60		$	0.54
Discontinued operations		—			—
Net income	$	0.60		$	0.55

Dividends per common share	$	0.18		$	0.18

The accompanying Notes are an integral part of the Consolidated Financial Statements.

LEE ENTERPRISES, INCORPORATED

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(Thousands, Except Per Share Data)	December 31 2004			September 30 2004

ASSETS
Current assets:
Cash and cash equivalents	$	12,891		$	8,010
Accounts receivable, net		67,994			62,749
Receivable from associated companies		—			1,563
Inventories		10,052			10,772
Other		9,340			9,763
Total current assets		100,277			92,857
Investments		33,496			33,091
Property and equipment, net		196,841			198,021
Goodwill		623,968			622,396
Other intangible assets		451,840			455,791
Other		1,540			1,688
	$	1,407,962		$	1,403,844

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	11,600		$	11,600
Accounts payable		20,242			19,191
Compensation and other accrued liabilities		27,849			37,030
Income taxes payable		11,136			3,768
Dividends payable		6,342			6,066
Unearned revenue		28,031			27,826
Total current liabilities		105,200			105,481
Long-term debt, net of current maturities		185,000			202,000
Deferred items		218,954			219,058
Other		555			462
		509,709			527,001
Stockholders’ equity:
Serial convertible preferred stock, no par value; authorized 500 shares: none issued		—			—
Common Stock, $2 par value; authorized 60,000 shares; issued and outstanding:		76,334			74,056
December 31, 2004 38,167 shares;
September 30, 2004 37,028 shares
Class B Common Stock, $2 par value; authorized 30,000 shares; issued and outstanding:		14,402			16,378
December 31, 2004 7,201 shares;
September 30, 2004 8,189 shares
Additional paid-in capital		108,051			100,537
Unearned compensation		(9,164	)		(3,913	)
Retained earnings		708,630			689,785
		898,253			876,843
	$	1,407,962		$	1,403,844

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)	2004			2003

Cash provided by operating activities:
Net income	$	27,011		$	24,479
Results of discontinued operations		—			82
Income from continuing operations		27,011			24,397
Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation and amortization		11,506			11,315
Stock compensation expense		1,637			1,325
Distributions less than current earnings of associated companies		95			396
Other, net		(3,045	)		(7,603	)
Net cash provided by operating activities		37,204			29,830
Cash required for investing activities:
Purchases of property and equipment		(3,415	)		(4,093	)
Acquisitions, net		(4,518	)		—
Proceeds from sales of assets		126			129
Other		(523	)		(400	)
Net cash required for investing activities		(8,330	)		(4,364	)
Cash required for financing activities:
Payments on notes payable		—			—
Proceeds from long-term debt		5,000			11,000
Payments on long-term debt		(22,000	)		(41,000	)
Common stock transactions		896			5,478
Cash dividends paid		(7,889	)		(2,200	)
Net cash required for financing activities		(23,993	)		(26,722	)

Net cash provided by discontinued operations		—			245
Net increase (decrease) in cash and cash equivalents		4,881			(1,011	)

Cash and cash equivalents:
Beginning of period		8,010			11,064
End of period	$	12,891		$	10,053

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 financial 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, 2004 and its 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 2004 Annual Report on Form 10-K and Form 10-K/A.

Because of seasonal and other factors, the results of operations for the three months ended December 31, 2004 are not necessarily indicative of the results to be expected for the full year.

Certain amounts as previously reported have been reclassified to conform with the current period presentation.

2	Acquisitions and Divestitures

In October 2004, the Company purchased two specialty publications at a cost of $309,000, made final working capital payments of $301,000 related to a specialty publication purchased in July 2004 and exchanged an Internet service provider business for a weekly newspaper. In December 2004, the Company purchased eight specialty publications at a cost of $3,908,000. All acquisitions are accounted for as a purchase and, accordingly, the results of operations since the respective dates of acquisition are included in the Consolidated Financial Statements.

On January 29, 2005, the Company and LP Acquisition Corp., a wholly-owned subsidiary (the Purchaser), entered into an Agreement and Plan of Merger (the Merger Agreement) with Pulitzer Inc. (Pulitzer). The Merger Agreement provides for the Purchaser to be merged with and into Pulitzer (the Merger), with Pulitzer as the surviving corporation. Each share of Pulitzer’s Common Stock and Class B Common Stock outstanding immediately prior to the effective time of the Merger will be converted into the right to receive from the surviving corporation in cash, without interest, an amount equal to $64 per share. The total value of the transaction, including assumption of $306,000,000 of existing debt of Pulitzer, is approximately $1.46 billion. Pulitzer publishes fourteen daily newspapers, including the St. Louis Post-Dispatch, and approximately 100 weekly newspapers and specialty publications.

The Merger will effect a change of control of Pulitzer. At the effective time of the Merger and as a result of the Merger, Pulitzer will become a wholly-owned subsidiary of the Company, the directors of the Purchaser will become the directors of the surviving corporation, and the officers of the Purchaser will become the officers of the surviving corporation.

Consummation of the Merger is subject to customary conditions, including the adoption of the Merger Agreement by the required vote of Pultizer’s stockholders and the expiration or termination of any waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

The Merger Agreement includes customary representations, warranties and covenants by Pultizer, including covenants (i) to cause a stockholders’ meeting to be called and held as soon as reasonably practicable to vote on the adoption of the Merger Agreement, (ii) to cease immediately any discussions and negotiations with respect to an alternate acquisition proposal, (iii) not to solicit any alternate acquisition proposal and, with certain exceptions, not to enter into discussions concerning or furnish information in connection with any alternate acquisition proposal, and (iv) subject to certain exceptions, for Pulitzer’s board of directors not to withdraw or modify its recommendation that the stockholders vote to adopt the Merger Agreement. The Merger Agreement contains certain termination rights for both Pulitzer and the Company and further provides that, upon termination of the Merger Agreement under specified circumstances, Pulitzer may be required to pay the Company a fee of up to $55,000,000.

In connection with the Merger, Deutsche Bank Trust Company Americas, Deutsche Bank Securities Inc., SunTrust Bank and SunTrust Capital Markets, Inc. have provided the Company a Senior Secured Financing Commitment Letter dated January 29, 2005 (the Commitment Letter). The Commitment Letter contemplates, on the terms and conditions provided therein, an aggregate of $1.55 billion of bank senior secured financing, substantially all of the proceeds of which will be used to fund the Merger and refinance existing debt. The Commitment Letter contains a $450,000,000 Revolving Loan for a term of seven years, an $800,000,000 Term Loan A for a term of seven years and a $300,000,000 Term Loan B for a term of eight years. Interest rates float based on LIBOR and, in the case of the Revolving Loan and Term Loan A, based on the Company’s leverage ratio, as defined in the Commitment Letter. The Commitment Letter contains other customary terms and covenants.

Results of Freeport, Illinois and Corning, New York, which were exchanged for two daily newspapers in Burley, Idaho and Elko, Nevada and eight weekly and specialty publications in February 2004, have been classified as discontinued operations for all periods presented.

Results from discontinued operations consist of the following:


(Thousands)		Three Months Ended December 31 2003

Operating revenue		$2,517

Income from, and gain on sale of, discontinued operations		134
Income tax expense		52
		$ 82

3	Investments 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, and other Wisconsin locations. MNI conducts its business under the trade name Capital Newspapers.

Summarized financial information of MNI is as follows:


	Three Months Ended December 31
(Thousands)	2004		2003

Operating revenue	$	31,903	$	30,415
Operating expenses, excluding depreciation and amortization		21,881		21,309
Depreciation and amortization		1,310		1,488
Operating income		8,712		7,618
Net income