NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 29, 2013
and their results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2013 Annual Report on Form 10-K.
Because of seasonal and other factors, the results of operations for the 13 weeks ended
December 29, 2013
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. See Note 2.
References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2014”, “2013” and the like refer to the fiscal years ended the last Sunday in September.
The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our
50%
interest in TNI Partners (“TNI”),
50%
interest in Madison Newspapers, Inc. (“MNI”), and
82.5%
interest in INN Partners, L.C.
On December 12, 2011, the Company and certain of its subsidiaries filed voluntary, prepackaged petitions in the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") for relief under Chapter 11 of the U.S. Bankruptcy Code (the "U.S. Bankruptcy Code") (collectively, the "Chapter 11 Proceedings"). Our interests in TNI and MNI were not included in the filings. During the Chapter 11 Proceedings, we, and certain of our subsidiaries, continued to operate as "debtors in possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the U.S. Bankruptcy Code. In general, as debtors-in-possession, we were authorized under the U.S. Bankruptcy Code to continue to operate as an ongoing business, but were not to engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.
On January 23, 2012, the Bankruptcy Court approved our Second Amended Joint Prepackaged Plan of Reorganization (the "Plan") under the U.S. Bankruptcy Code and on January 30, 2012 (the "Effective Date") the Company emerged from the Chapter 11 Proceedings. On the Effective Date, the Plan became effective and the transactions contemplated by the Plan were consummated. Implementation of the Plan resulted primarily in a comprehensive refinancing of our debt. The Chapter 11 Proceedings did not adversely affect employees, vendors, contractors, customers or any aspect of Company operations. Stockholders retained their interest in the Company, subject to modest dilution. See Notes 5 and 12.
2
DISCONTINUED OPERATIONS
In March 2013, we sold
The Garden Island
newspaper and digital operations in Lihue, HI for
$2,000,000
in cash, plus an adjustment for working capital. The transaction resulted in a loss of
$2,170,000
, after income taxes, and was recorded in discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the 13 weeks ended March 31, 2013. Operating results of
The Garden Island
have been classified as discontinued operations for all periods presented.
Assets and liabilities of the
The Garden Island
at February 28, 2013 are summarized as follows
:
|
|
|
|
|
|
(Thousands of Dollars)
|
February 28
2013
|
|
|
|
|
|
Current assets
|
433
|
|
|
Property and equipment, net
|
770
|
|
|
Goodwill
|
500
|
|
|
Other intangible assets, net
|
4,025
|
|
|
Current liabilities
|
(271
|
)
|
|
Assets, net
|
5,457
|
|
In October 2012, we sold the
North County Times
in Escondido, CA for
$11,950,000
in cash, plus an adjustment for working capital. The transaction resulted in a gain of
$1,167,000
, after income taxes, and was recorded in discontinued operations in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the 13 weeks ended December 30, 2012. Operating results of the
North County Times
have been classified as discontinued operations for all periods presented.
Assets and liabilities of the
North County Times
at September 30, 2012 are summarized as follows
:
|
|
|
|
|
|
(Thousands of Dollars)
|
September 30
2012
|
|
|
|
|
|
Current assets
|
2,093
|
|
|
Property and equipment, net
|
5,158
|
|
|
Goodwill
|
3,042
|
|
|
Other intangible assets, net
|
1,920
|
|
|
Current liabilities
|
(1,714
|
)
|
|
Assets, net
|
10,499
|
|
Results of discontinued operations consist of the following:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
(Thousands of Dollars)
|
December 30
2012
|
|
|
|
|
|
Operating revenue
|
804
|
|
|
Costs and expenses
|
(998
|
)
|
|
Gain on sale of the
North County Times
|
1,800
|
|
|
Gain from discontinued operations, before income taxes
|
1,606
|
|
|
Income tax expense
|
560
|
|
|
Net gain
|
1,046
|
|
3
INVESTMENTS IN ASSOCIATED COMPANIES
TNI Partners
In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and subscription activities of the
Arizona Daily Star
as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspapers and other media.
Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.
Summarized results of TNI are as follows:
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
14 Weeks Ended
|
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
December 30
2012
|
|
|
|
|
|
|
Operating revenue
|
16,072
|
|
17,544
|
|
|
Operating expenses, excluding workforce adjustments, depreciation and amortization
|
12,371
|
|
13,637
|
|
|
Workforce adjustments
|
(87
|
)
|
—
|
|
|
Operating income
|
3,788
|
|
3,907
|
|
|
Company's 50% share of operating income
|
1,894
|
|
1,954
|
|
|
Less amortization of intangible assets
|
105
|
|
181
|
|
|
Equity in earnings of TNI
|
1,789
|
|
1,773
|
|
Star Publishing's 50% share of TNI depreciation and certain general and administrative expenses (income) associated with its share of the operation and administration of TNI are reported as operating expenses (benefit) in our Consolidated Statements of Operations and Comprehensive Income (Loss). These amoun
ts totaled $
8,000
and $
(168,000)
in the 13 weeks ended
December 29, 2013
and in the 14 weeks ended
December 30, 2012
, respectively.
Annual amortization of intangible assets is estimated to be
$418,000
in each of the 52 week periods ending December 2014, December 2015, December 2016, December 2017 and in the 53 week period ending December 2018.
Madison Newspapers, Inc.
We have a
50%
ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.
Summarized results of MNI are as follows:
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
December 30
2012
|
|
|
|
|
|
|
Operating revenue
|
17,312
|
|
18,558
|
|
|
Operating expenses, excluding workforce adjustments, depreciation and amortization
|
13,259
|
|
14,049
|
|
|
Depreciation and amortization
|
398
|
|
383
|
|
|
Operating income
|
3,655
|
|
4,126
|
|
|
Net income
|
2,259
|
|
2,543
|
|
|
Equity in earnings of MNI
|
1,130
|
|
1,272
|
|
|
|
4
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
|
|
|
|
Goodwill, gross amount
|
1,532,458
|
|
|
Accumulated impairment losses
|
(1,288,729
|
)
|
|
Goodwill, beginning of period
|
243,729
|
|
|
Goodwill, end of period
|
243,729
|
|
Identified intangible assets consist of the following:
|
|
|
|
|
|
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
September 29
2013
|
|
|
|
|
|
|
Nonamortized intangible assets:
|
|
|
|
Mastheads
|
27,038
|
|
27,038
|
|
|
Amortizable intangible assets:
|
|
|
|
Customer and newspaper subscriber lists
|
686,732
|
|
686,732
|
|
|
Less accumulated amortization
|
478,480
|
|
471,589
|
|
|
|
208,252
|
|
215,143
|
|
|
Noncompete and consulting agreements
|
28,524
|
|
28,524
|
|
|
Less accumulated amortization
|
28,522
|
|
28,521
|
|
|
|
2
|
|
3
|
|
|
|
235,292
|
|
242,184
|
|
Annual amortization of intangible assets for the 52 week periods ending December 2014, December 2015, December 2016, December 2017 and the 53 week period ending December 2018 is estimated to be
$27,581,000
,
$26,904,000
,
$25,745,000
,
$22,908,000
and
$16,653,000
, respectively.
As discussed more fully below (and certain capitalized terms used below defined), in January 2012, in conjunction with the effectiveness of the Plan, we refinanced all of our debt. The Plan refinanced our then-existing credit agreement and extended the April 2012 maturity in a structure of first and second lien debt with the existing lenders ("Lenders"). We also amended the Pulitzer Notes, and extended the April 2012 maturity with the existing Noteholders. In May 2013, we again refinanced the remaining balance of the Pulitzer Notes.
1
st
Lien Agreement
In January 2012, we entered into a credit agreement (the “1
st
Lien Agreement”) with a syndicate of lenders (the “1
st
Lien Lenders”). The 1
st
Lien Agreement consists of a term loan of
$689,510,000
, and a new
$40,000,000
revolving credit facility under which we have not drawn. The revolving credit facility also supports issuance of letters of credit.
Interest Payments
Debt under the 1
st
Lien Agreement bears interest, at our option, at either a base rate or an adjusted Eurodollar rate (“LIBOR”), plus an applicable margin. The base rate for the facility is the greater of (a) the prime lending rate of Deutsche Bank Trust Company Americas at such time; (b)
0.5%
in excess of the overnight federal funds rate at such time; or (c) 30 day LIBOR plus
1.0%
. LIBOR loans are subject to a minimum rate of
1.25%
. The applicable margin for term loan base rate loans is
5.25%
, and
6.25%
for LIBOR loans. The applicable margin for revolving credit facility base rate loans is
4.5%
, and is
5.5%
for LIBOR loans. At
December 29, 2013
, all borrowing under the 1
st
Lien Agreement is based on LIBOR at a total rate of
7.5%
.
Principal Payments
At
December 29, 2013
, the balance outstanding under the term loan is
$603,000,000
. We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1
st
Lien Agreement at any time, in whole or in part, without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.
We are required to repay principal amounts, on a quarterly basis until maturity, under the 1
st
Lien Agreement. Principal payments are required quarterly beginning in June 2012, and total
$12,750,000
in 2014,
$13,500,000
in 2015 and
$3,375,000
in 2016, prior to the final maturity.
In addition to the scheduled payments, we are required to make mandatory prepayments under the 1
st
Lien Agreement under certain other conditions, such as from the net proceeds from asset sales. The 1
st
Lien Agreement also requires us to accelerate future payments in the amount of our quarterly excess cash flow, as defined. The acceleration of such payments due to future asset sales or excess cash flow does not change the due dates of other 1
st
Lien Agreement payments prior to the December 2015 maturity.
2014 payments made, or required to be made for the remainder of the year, under the 1
st
Lien Agreement, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
13 Weeks Ending
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
March 30
2014
|
|
June 29
2014
|
|
September 28
2014
|
|
|
|
|
|
|
Mandatory
|
3,000
|
|
3,000
|
|
3,375
|
|
3,375
|
|
Voluntary
|
3,350
|
|
—
|
|
—
|
|
—
|
|
Asset sales
|
150
|
|
—
|
|
—
|
|
—
|
|
Excess cash flow
|
—
|
|
—
|
|
—
|
|
—
|
|
|
6,500
|
|
3,000
|
|
3,375
|
|
3,375
|
|
2013 payments made under the 1
st
Lien Agreement are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2012
|
|
March 31
2013
|
|
June 30
2013
|
|
September 29
2013
|
|
|
|
|
|
|
Mandatory
|
2,500
|
|
2,500
|
|
3,000
|
|
3,000
|
|
Voluntary
|
9,750
|
|
15,350
|
|
2,260
|
|
6,000
|
|
Asset sales
|
7,750
|
|
—
|
|
240
|
|
—
|
|
Excess cash flow
|
—
|
|
—
|
|
—
|
|
—
|
|
|
20,000
|
|
17,850
|
|
5,500
|
|
9,000
|
|
Security
The 1
st
Lien Agreement is fully and unconditionally guaranteed on a joint and several basis by all of our existing and future, direct and indirect subsidiaries in which we hold a direct or indirect interest of more than 50% (the “Credit Parties”); provided however, that our wholly-owned subsidiary Pulitzer Inc. (“Pulitzer”) and its subsidiaries are not Credit Parties. The 1
st
Lien Agreement is secured by first priority security interests in the stock and other equity interests owned by the Credit Parties in their respective subsidiaries.
The Credit Parties have also granted a first priority security interest on substantially all of their tangible and intangible assets, and granted mortgages covering certain real estate, as collateral for the payment and performance of their obligations under the 1
st
Lien Agreement. Assets of Pulitzer and its subsidiaries, TNI and our ownership interest in, and assets of, MNI are excluded.
The revolving credit facility has a super-priority security interest over all of the collateral securing the term loan under the 1
st
Lien Agreement, superior to that of the term loan lenders.
Covenants and Other Matters
The 1
st
Lien Agreement contains customary affirmative and negative covenants for financing of its type. These financial covenants include a maximum total leverage ratio, as defined. The total leverage ratio is designed to assess the leverage of the Company, excluding Pulitzer, and does not reflect our overall leverage position due to the lower leverage of Pulitzer. It is based primarily on the sum of the principal amount of debt under the 1
st
Lien Agreement, plus debt under the 2
nd
Lien Agreement, as discussed more fully below, which totals
$778,000,000
at
December 29, 2013
, plus letters of credit and certain other factors, divided by a measure of trailing 12 month operating results, which includes distributions from MNI and other elements, but excludes the operating results of Pulitzer.
Our actual total leverage ratio at
December 29, 2013
under the 1
st
Lien Agreement was
6.22
:1. Our maximum total leverage ratio covenant will decrease, in stages, from
9.9
:1 at
December 29, 2013
to
9.1
:1 in December 2015. On a consolidated basis, using the definitions in the 1
st
Lien Agreement, our leverage ratio is
5.02
:1 at
December 29, 2013
. This consolidated measure is not the subject of a covenant in any of our debt agreements.
The 1
st
Lien Agreement also includes a minimum interest expense coverage ratio, as defined, which is based on the sum of interest expense, as defined, incurred under the 1
st
Lien Agreement and 2
nd
Lien Agreement, divided by the same measure of trailing 12 month operating results discussed above. The interest expense coverage ratio is similarly designed to assess the interest coverage of the Company, excluding Pulitzer, and does not reflect our overall interest coverage position. Our actual interest expense coverage ratio at
December 29, 2013
was
1.71
:1. Our minimum interest expense coverage ratio covenant is
1.08
:1 at
December 29, 2013
.
The 1
st
Lien Agreement requires us to suspend stockholder dividends and share repurchases through December 2015. The 1
st
Lien Agreement also limits capital expenditures to
$20,000,000
per year, with a provision for carryover of unused amounts from the prior year. Further, the 1
st
Lien Agreement restricts our ability to make additional investments, acquisitions, dispositions and mergers without the consent of the 1
st
Lien Lenders and limits our ability to incur additional debt. Such covenants require that substantially all of our future cash flows are required to be directed toward debt reduction or accumulation of cash collateral and that the cash flows of the Credit Parties are largely segregated from those of Pulitzer.
2
nd
Lien Agreement
In January 2012, we entered into a second lien term loan (the “2
nd
Lien Agreement”) with a syndicate of lenders (the “2
nd
Lien Lenders”). The 2
nd
Lien Agreement consists of a term loan of
$175,000,000
.
The 2
nd
Lien Agreement bears interest at
15.0%
per annum, payable quarterly.
Principal Payments and Redemption
The 2
nd
Lien Agreement requires no principal amortization, except in March 2017 if required for income tax purposes.
From January 30, 2013 until January 30, 2014, the 2
nd
Lien Agreement may be redeemed at
102%
of the principal amount, at
101%
thereafter until January 30, 2015 and at
100%
thereafter until the April 2017 final maturity. Terms of the 1
st
Lien Agreement also restrict principal payments under the 2
nd
Lien Agreement.
Security
The 2
nd
Lien Agreement is fully and unconditionally guaranteed on a joint and several basis by the Credit Parties and by Pulitzer and its subsidiaries, other than TNI (collectively, the "2
nd
Lien Credit Parties"). The 2
nd
Lien Agreement is secured by second priority security interests in the stock and other equity interests owned by the 2
nd
Lien Credit Parties.
The 2
nd
Lien Credit Parties have also granted a second priority security interest on substantially all of their tangible and intangible assets, and granted second lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2
nd
Lien Agreement. Assets of TNI and our ownership interest in, and assets of, MNI are excluded. However, assets of Pulitzer and its
subsidiaries, excluding TNI, become subject to a first priority security interest of the 2
nd
Lien Lenders upon repayment in full of the Pulitzer Notes and any successor debt.
The 2
nd
Lien Lenders were granted a second priority security interest in our ownership interest in TNI under the New Pulitzer Notes, as discussed more fully below.
Covenants and Other Matters
The 2
nd
Lien Agreement has no affirmative financial covenants. Restrictions on capital expenditures, permitted investments, indebtedness and other provisions are similar to, but generally less restrictive than, those provisions under the 1st Lien Agreement.
2
nd
Lien Lenders shared in the issuance of
6,743,640
shares of our Common Stock valued at
$9,576,000
based on the closing stock price of
$1.42
on the date of issuance, an amount equal to
13%
of outstanding shares on a pro forma basis as of January 30, 2012. 2
nd
Lien Lenders also received
$8,750,000
in the form of non-cash fees, which were added to and included in the principal amount of the second lien term loan.
Subsequent Event
In January 2014, we reached an agreement to refinance the 2
nd
Lien Agreement with a new
$200,000,000
facility (the “New 2
nd
Lien Agreement”). The size of the facility may be reduced by up to
$75,000,000
with the proceeds of a refinancing of the 1
st
Lien Agreement. The New 2
nd
Lien Agreement, which is subject to customary closing conditions, will bear interest at
12.0%
per annum, payable quarterly, and mature in December 2022. Collateral under the New 2
nd
Lien Agreement will be substantially identical to the existing facility.
Under the New 2
nd
Lien Agreement, excess cash flows of Pulitzer may be used, first, to reduce the outstanding amount of the New Pulitzer Notes, second, to pay obligations under the New 2
nd
Lien Agreement, and third, for a three year period, to pay amounts under the 1
st
Lien Agreement. Voluntary prepayments under the New 2
nd
Lien Agreement otherwise will be subject to call premiums that step down to zero over a five-year period. Collateral under the new agreement will be substantially identical to the existing 2
nd
Lien Agreement.
In conjunction with the closing of the New 2nd Lien Agreement, the lenders will receive warrants for the purchase of
6,000,000
shares of our Common Stock, which represents approximately
10.1%
of shares outstanding on a fully diluted basis. The exercise price of the warrants will be the lower of (1)
$4.19
or (2) the volume-weighted average trading price of our Common Stock for the ten days prior to closing.
Pulitzer Notes
In conjunction with its formation in 2000, St. Louis Post-Dispatch LLC ("PD LLC") borrowed
$306,000,000
(the “Pulitzer Notes”) from a group of institutional lenders (the “Noteholders”). The Pulitzer Notes were guaranteed by Pulitzer pursuant to a Guaranty Agreement with the Noteholders. The aggregate principal amount of the Pulitzer Notes was payable in April 2009.
In February 2009, the Pulitzer Notes and the Guaranty Agreement were amended (the “Notes Amendment”). Under the Notes Amendment, PD LLC repaid
$120,000,000
of the principal amount of the debt obligation. The remaining debt balance of
$186,000,000
was refinanced by the Noteholders until April 2012.
In January 2012, in connection with the Plan, we entered into an amended Note Agreement and Guaranty Agreement, which amended the Pulitzer Notes and extended the maturity with the Noteholders. After consideration of unscheduled principal payments totaling
$15,145,000
(
$10,145,000
in December 2011 and
$5,000,000
in January 2012), offset by
$3,500,000
of non-cash fees paid to the Noteholders in the form of additional Pulitzer Notes debt, the amended Pulitzer Notes had a balance of
$126,355,000
in January 2012.
The Pulitzer Notes carried an interest rate at
10.55%
, which increased
0.75%
to
11.3%
in January 2013 and was to increase in January of each year thereafter. Due to the increasing interest rate, interest on the Pulitzer Notes was charged to expense using a calculated effective interest rate during the period.
In May 2013, we refinanced the
$94,000,000
remaining balance of the Pulitzer Notes (the
“
New Pulitzer Notes
”
) with BH Finance LLC ("Berkshire") a subsidiary of Berkshire Hathaway Inc. The New Pulitzer Notes bear
interest at a fixed rate of
9.0%
, payable quarterly. Pulitzer is a co-borrower under the the New Pulitzer Notes, which eliminates the former Guaranty Agreement made by Pulitzer under the Pulitzer Notes.
Principal Payments
At
December 29, 2013
, the balance of the New Pulitzer Notes is
$55,000,000
. We may voluntarily prepay principal amounts outstanding under the New Pulitzer Notes at any time, in whole or in part, without premium or penalty (except as noted below), upon proper notice, and subject to certain limitations as to minimum amounts of prepayments. The New Pulitzer Notes provide for mandatory scheduled prepayments totaling
$6,400,000
annually, beginning in 2014.
In addition to the scheduled payments, we are required to make mandatory prepayments under the New Pulitzer Notes under certain other conditions, such as from the net proceeds from asset sales. The New Pulitzer Notes also require us to accelerate future payments in the amount of our quarterly excess cash flow, as defined. The acceleration of such payments due to future asset sales or excess cash flow does not change the due dates of other New Pulitzer Notes payments prior to the final maturity in April 2017.
The New Pulitzer Notes are subject to a 5% redemption premium if 100% of the remaining balance of the New Pulitzer Notes is again refinanced by lenders, the majority of which are not holders of the New Pulitzer Notes at the time of such refinancing. This redemption premium is not otherwise applicable to any of the types of payments noted above.
2014 payments made, or required to be made for the remainder of the year, under the New Pulitzer Notes are summarized below.
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
13 Weeks Ending
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
March 30
2014
|
|
June 29
2014
|
|
September 28
2014
|
|
|
|
|
|
|
Mandatory
|
6,400
|
|
—
|
|
—
|
|
—
|
|
Voluntary
|
1,600
|
|
—
|
|
—
|
|
—
|
|
Asset sales
|
—
|
|
—
|
|
—
|
|
—
|
|
Excess cash flow
|
—
|
|
—
|
|
—
|
|
—
|
|
|
8,000
|
|
—
|
|
—
|
|
—
|
|
2013 payments made under the New Pulitzer Notes or Pulitzer Notes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
(Thousands of Dollars)
|
December 30
2012
|
|
March 31
2013
|
|
June 30
2013
|
|
September 29
2013
|
|
|
|
|
|
|
Mandatory
|
3,800
|
|
2,600
|
|
—
|
|
—
|
|
Voluntary
|
—
|
|
1,500
|
|
14,000
|
|
17,000
|
|
Asset sales
|
5,200
|
|
1,900
|
|
—
|
|
—
|
|
Excess cash flow
|
—
|
|
—
|
|
—
|
|
—
|
|
|
9,000
|
|
6,000
|
|
14,000
|
|
17,000
|
|
Security
Obligations under the New Pulitzer Notes are fully and unconditionally guaranteed on a joint and several basis by Pulitzer's existing and future subsidiaries other than PD LLC and TNI. The New Pulitzer Notes are also secured by first priority security interests in the stock and other equity interests owned by Pulitzer's subsidiaries including the 50% ownership interest in TNI. Also, Pulitzer, certain of its subsidiaries and PD LLC granted a first priority security interest on substantially all of its tangible and intangible assets, excluding the assets of Star Publishing leased to, or used in the operations or business of, TNI and granted deeds of trust covering certain real estate in the St. Louis area, as collateral for the payment and performance of their obligations under the New Pulitzer Notes.
Covenants and Other Matters
The New Pulitzer Notes contain certain covenants and conditions including the maintenance, by Pulitzer, of minimum trailing 12 month EBITDA (minimum of
$24,800,000
beginning
December 29, 2013
), as defined in the New Pulitzer Notes agreement, and limitations on capital expenditures and the incurrence of other debt. Our actual trailing 12 month EBITDA at
December 29, 2013
is
$45,237,000
. The determination of this amount is not the same as the comparable amount under the 1
st
Lien Agreement.
Further, the New Pulitzer Notes have limitations or restrictions on distributions, loans, advances, investments, acquisitions, dispositions and mergers. Such covenants require that substantially all future cash flows of Pulitzer are required to be directed first toward repayment of the New Pulitzer Notes, interest due under the 2
nd
Lien Agreement, or accumulation of cash collateral and that cash flows of Pulitzer are largely segregated from those of the Credit Parties.
Intercreditor Agreements
The 1
st
Lien Agreement, 2
nd
Lien Agreement and New Pulitzer Notes contain cross-default provisions tied to each of the various agreements. Intercreditor agreements and an intercompany subordination agreement are also in effect.
Other
Cash payments to the Lenders, Noteholders and legal and professional fees related to the Plan totaled
$38,628,000
, of which
$6,273,000
was paid in 2011, and the remainder of which was paid in 2012.
$720,000
of such costs were charged to expense in 2011. In addition, previously capitalized financing costs of
$4,514,000
at September 25, 2011 were charged to expense in 2012 as debt financing costs prior to consummation of the Plan, with the remainder classified as reorganization costs in the Consolidated Statements of Operations and Comprehensive Income (Loss) upon consummation of the Plan.
Debt under the Plan was considered compromised. As a result, the 1
st
Lien Agreement, 2
nd
Lien Agreement and Pulitzer Notes were recorded at their respective present values, which resulted in a discount to the stated principal amount totaling
$23,709,000
. We used the effective rates of the respective debt agreements to discount the debt to its present value. In determining the effective rates, we considered all cash outflows of the respective debt agreements including: mandatory principal payments, interest payments, fees paid to lenders in connection with the refinancing as well as, in the case of the 2
nd
Lien Agreement, Common Stock issued. The present value is being amortized as a non-cash component of interest expense over the terms of the related debt.
The refinancing of the Pulitzer Notes with the New Pulitzer Notes resulted in the acceleration of
$1,565,000
of the present value adjustment discussed above, which was partially offset by eliminating deferred interest expense of
$1,189,000
, and the net amount of which was recognized in the 13 weeks ended June 30, 2013. Expenses related to the issuance of the New Pulitzer Notes are capitalized as debt issuance costs and will be amortized until April 2017.
Amortization of the present value adjustment and other costs totaled
$6,681,000
in 2013. Amortization of such costs is estimated to total
$4,779,000
in 2014,
$4,742,000
in 2015,
$2,297,000
in 2016 and
$1,125,000
in 2017 before accounting for the New 2
nd
Lien Agreement.
As a result of the Plan, we recognized
$37,765,000
of reorganization costs in the 2012 Consolidated Statements of Operations and Comprehensive Income (Loss). The components of reorganization costs are summarized as follows:
|
|
|
|
|
(Thousands of Dollars)
|
|
|
|
|
|
Fees paid in cash to lenders, attorneys and others
|
|
38,628
|
|
Unamortized loan fees from previous debt agreements
|
|
1,740
|
|
Fair value of stock granted to 2
nd
Lien Lenders
|
|
9,576
|
|
Noncash fees paid in the form of additional debt
|
|
12,250
|
|
Present value adjustment
|
|
(23,709
|
)
|
|
|
38,485
|
|
Charged to expense in 2012
|
|
37,765
|
|
Charged to expense in 2011 as other non-operating expense
|
|
720
|
|
Debt is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Interest Rates
(%)
|
(Thousands of Dollars)
|
December 29
2013
|
|
September 29
2013
|
|
December 29
2013
|
|
|
|
|
Revolving credit facility
|
—
|
|
—
|
|
6.75
|
1
st
Lien Agreement
|
603,000
|
|
609,500
|
|
7.50
|
2
nd
Lien Agreement
|
175,000
|
|
175,000
|
|
15.00
|
New Pulitzer Notes
|
55,000
|
|
63,000
|
|
9.00
|
Pulitzer Notes
|
—
|
|
—
|
|
|
Unamortized present value adjustment
|
(11,745
|
)
|
(12,942
|
)
|
|
|
821,255
|
|
834,558
|
|
|
Less current maturities of long-term debt
|
13,925
|
|
19,150
|
|
|
Current amount of present value adjustment
|
(4,779
|
)
|
(4,779
|
)
|
|
Total long-term debt
|
812,109
|
|
820,187
|
|
|
At
December 29, 2013
, our weighted average cost of debt was
9.2%
.
Aggregate maturities of debt total
$9,750,000
for the remainder of 2014 and are estimated to total
$19,900,000
in 2015,
$586,150,000
in 2016 and
$217,200,000
in 2017.
Liquidity
At
December 29, 2013
, after consideration of letters of credit, we have approximately
$29,942,000
available for future use under our revolving credit facility. Including cash, our liquidity at
December 29, 2013
totals
$42,598,000
. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by our cash flows, which will allow us to maintain an adequate level of liquidity.
At
December 29, 2013
, the principal amount of our outstanding debt totals
$833,000,000
.
We expect to refinance amounts outstanding under our debt agreements on or before their respective maturity dates with other loans, debt securities or equity securities, in privately negotiated transactions (including exchanges), or public offerings. The timing of such refinancing will depend on many factors, including market conditions, our liquidity requirements, our debt maturity profile, and contractual restrictions. We continuously monitor the credit and equity markets for refinancing opportunities, and have ongoing relationships with experts in debt and equity financing to assist us. As noted above, we recently reached an agreement to refinance the 2
nd
Lien Agreement with new
$200,000,000
facility maturing in December 2022.
There are numerous potential consequences under the 1
st
Lien Agreement, 2
nd
Lien Agreement, and the New Pulitzer Notes, if an event of default, as defined, occurs and is not remedied. Many of those consequences
are beyond our control. The occurrence of one or more events of default would give rise to the right of the 1
st
Lien Lenders, 2
nd
Lien Lenders and/or Berkshire, to exercise their remedies under the 1
st
Lien Agreement, 2
nd
Lien Agreement, and the New Pulitzer Notes, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.
Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to refinance or amend our debt agreements as they become due, or earlier if available liquidity is consumed. We are in compliance with our debt covenants at
December 29, 2013
.
|
|
6
|
PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS
|
We have several noncontributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, all benefits are frozen and no additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of active employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations and income tax laws. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.
In addition, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, PD LLC provides postemployment disability benefits to certain employee groups prior to retirement. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. Plan assets may also be used to fund medical costs of certain active employees.
We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.
The net periodic cost (benefit) components of our pension and postretirement medical plans are as follows:
|
|
|
|
|
|
|
|
PENSION PLANS
|
13 Weeks Ended
|
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
December 30
2012
|
|
|
|
|
|
|
Service cost for benefits earned during the period
|
39
|
|
54
|
|
|
Interest cost on projected benefit obligation
|
1,999
|
|
1,882
|
|
|
Expected return on plan assets
|
(2,483
|
)
|
(2,459
|
)
|
|
Amortization of net loss
|
106
|
|
572
|
|
|
Amortization of prior service benefit
|
(34
|
)
|
(34
|
)
|
|
|
(373
|
)
|
15
|
|
|
|
|
|
|
POSTRETIREMENT MEDICAL PLANS
|
13 Weeks Ended
|
|
|
(Thousands of Dollars)
|
December 29
2013
|
|
December 30
2012
|
|
|
|
|
|
|
Service cost for benefits earned during the period
|
149
|
|
182
|
|
|
Interest cost on projected benefit obligation
|
228
|
|
281
|
|
|
Expected return on plan assets
|
(371
|
)
|
(368
|
)
|
|
Amortization of net gain
|
(455
|
)
|
(331
|
)
|
|
Amortization of prior service benefit
|
(365
|
)
|
(365
|
)
|
|
|
(814
|
)
|
(601
|
)
|
Amortization of net gains (losses) and prior service benefits are recorded as Compensation in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Based on our forecast at December 29, 2013, we expect to contribute
$1,400,000
to our pension plans for the remainder of 2014. Based on our forecast at December 29, 2013, we do not expect to contribute to our postretirement plans for the remainder of 2014.
The provision for income taxes includes deferred taxes and is based upon estimated annual effective tax rates in the tax jurisdictions in which we operate. Such annualization of effective tax rates can cause distortion in quarterly tax rates.
Income tax expense related to continuing operations differs from the amounts computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows:
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
(Percent of Income Before Income Taxes)
|
December 29
2013
|
|
December 30
2012
|
|
|
|
|
|
|
Computed “expected” income tax expense
|
35.0
|
|
35.0
|
|
|
State income taxes, net of federal tax effect
|
3.4
|
|
3.4
|
|
|
Dividends received deductions and credits
|
(2.6
|
)
|
(5.2
|
)
|
|
Valuation allowance
|
(0.9
|
)
|
4.8
|
|
|
Resolution of tax matters
|
1.9
|
|
1.2
|
|
|
Deferred income tax rate adjustments
|
—
|
|
—
|
|
|
Other
|
1.1
|
|
1.7
|
|
|
|
37.9
|
|
40.9
|
|
In connection with the refinancing of debt under the Chapter 11 Proceedings, we realized substantial cancellation of debt income (“CODI”) for income tax purposes. However, this income was not immediately taxable for U.S. income tax purposes because the CODI resulted from our reorganization under the U.S. Bankruptcy Code. For U.S. income tax reporting purposes, we are required to reduce certain tax attributes, including any net operating loss carryforwards, capital losses, tax credit carryforwards, and the tax basis in other assets in a total amount equal to the tax gain on the extinguishment of debt. As a result, in February 2012 we began recognizing additional interest expense deductions for income tax purposes. The reduction in the basis of certain assets also resulted in reduced depreciation and amortization expense for income tax purposes, beginning in 2013.
|
|
8
|
EARNINGS PER COMMON SHARE
|
The following table sets forth the computation of basic and diluted earnings per common share:
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
(Thousands of Dollars and Shares, Except Per Share Data)
|
December 29
2013
|
|
December 30
2012
|
|
|
|
|
|
|
Income attributable to Lee Enterprises, Incorporated:
|
|
|
|
Continuing operations
|
11,892
|
|
13,534
|
|
|
Discontinued operations
|
—
|
|
1,046
|
|
|
|
11,892
|
|
14,580
|
|
|
Weighted average common shares
|
52,886
|
|
52,294
|
|
|
Less weighted average restricted Common Stock
|
805
|
|
500
|
|
|
Basic average common shares
|
52,081
|
|
51,794
|
|
|
Dilutive stock options and restricted Common Stock
|
1,178
|
|
60
|
|
|
Diluted average common shares
|
53,259
|
|
51,854
|
|
|
Earnings per common share:
|
|
|
|
Basic:
|
|
|
|
Continuing operations
|
0.23
|
|
0.26
|
|
|
Discontinued operations
|
—
|
|
0.02
|
|
|
|
0.23
|
|
0.28
|
|
|
Diluted:
|
|
|
|
Continuing operations
|
0.22
|
|
0.26
|
|
|
Discontinued operations
|
—
|
|
0.02
|
|
|
|
0.22
|
|
0.28
|
|
For the 13 weeks ended
December 29, 2013
and
December 30, 2012
, we had
101,000
and
3,036,000
weighted average shares, respectively, not considered in the computation of diluted earnings per common share because the stock option exercise price was in excess of the fair market value of our Common Stock.
A summary of stock option activity during the 13 weeks ended
December 29, 2013
follows:
|
|
|
|
|
|
|
|
|
|
|
(Thousands of Dollars and Shares, Except Per Share Data)
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
Outstanding, September 29, 2013
|
2,769
|
|
2.94
|
|
|
|
|
Granted
|
15
|
|
2.99
|
|
|
|
|
Exercised
|
(114
|
)
|
2.09
|
|
|
|
|
Cancelled
|
(42
|
)
|
14.85
|
|
|
|
|
Outstanding, December 29, 2013
|
2,628
|
|
2.79
|
|
7.2
|
4,347
|
|
|
|
|
|
|
|
|
Exercisable, December 29, 2013
|
1,647
|
|
3.73
|
|
6.5
|
2,117
|
|
Total unrecognized compensation expense for unvested stock options as of
December 29, 2013
is
$684,000
, which will be recognized over a weighted average period of
1.4
years.
Restricted Common Stock
The table summarizes restricted Common Stock activity during the 13 weeks ended December 29, 2013.
|
|
|
|
|
|
|
|
(Thousands of Shares, Except Per Share Data)
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
Outstanding, September 29, 2013
|
500
|
|
1.31
|
|
|
Granted
|
801
|
|
3.61
|
|
|
Outstanding, December 29, 2013
|
1,301
|
|
2.73
|
|
Total unrecognized compensation expense for unvested restricted Common Stock at December 29, 2013 is
$3,140,000
, which will be recognized over a weighted average period of
2.4
years.
|
|
10
|
FAIR VALUE MEASUREMENTS
|
Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable which consists of the following levels:
Level 1
- Quoted prices for identical instruments in active markets;
Level 2
- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and
Level 3
- Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value. The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments.
Investments totaling
$8,774,000
, including our 17% ownership of the nonvoting common stock of TCT, are carried at cost. The fair value of floating rate debt cannot be determined as an active market for such debt does not exist. Our fixed rate debt at December 29, 2013 consists of the
$175,000,000
principal amount under the 2
nd
Lien Agreement and
$55,000,000
principal amount of New Pulitzer Notes, as discussed more fully in Note 5, which are not traded on an active market and are held by a small group of investors and Berkshire, respectively. At December 29, 2013, we estimate the fair value of debt under the 2
nd
Lien Agreement to be approximately
$176,750,000
, the amount at which it will be redeemed when refinanced in 2014. We are unable, as of December 29, 2013, to determine the fair value of the New Pulitzer Notes. The value, if determined, may be more or less than the carrying amount.
|
|
11
|
COMMITMENTS AND CONTINGENT LIABILITIES
|
Redemption of PD LLC Minority Interest
In February 2009, in conjunction with the Notes Amendment, PD LLC redeemed the
5%
interest in PD LLC and STL Distribution Services LLC ("DS LLC") owned by The Herald Publishing Company, LLC ("Herald") pursuant to a Redemption Agreement and adopted conforming amendments to the Operating Agreement. As a result, the value of Herald's former interest (the “Herald Value”) was to be settled, based on a calculation of
10%
of the fair market value of PD LLC and DS LLC at the time of settlement, less the balance, as adjusted, of the Pulitzer Notes or the equivalent successor debt, if any. We recorded a liability of
$2,300,000
in 2009 as an estimate of the amount of the Herald Value to be disbursed.
In 2011, we reduced the liability related to the Herald Value to
$300,000
based on the current estimate of fair value.
In October 2013, we issued
100,000
shares of Common Stock in full satisfaction of the Herald Value. Such shares had a fair value of
$298,000
on the date of issuance.
The redemption of Herald's interest in PD LLC and DS LLC may generate significant tax benefits to us as a consequence of the resulting increase in the tax basis of the assets owned by PD LLC and DS LLC and the related depreciation and amortization deductions. The increase in basis to be amortized for income tax purposes over a 15 year period beginning in February 2009 is approximately
$258,000,000
.
Income Taxes
We file income tax returns with the IRS and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.
We have various income tax examinations ongoing which are at different stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.
Legal Proceedings
In 2008, a group of newspaper carriers filed suit against us in the United States District Court for the Southern District of California, claiming to be our employees and not independent contractors. The plaintiffs seek relief related to alleged violations of various employment-based statutes, and request punitive damages and attorneys' fees. In 2010, the trial court granted the plaintiffs' petition for class certification. We filed an interlocutory appeal which was denied. After concluding discovery, a motion to decertify the class was filed, which was granted as to plaintiffs' minimum wage, overtime, unreimbursed meal, and unreimbursed rest period claims. The Company denies the allegations of employee status, consistent with our past practices and industry standards, and will continue to vigorously contest the remaining claims in the action, which are not covered by insurance. At this time we are unable to predict whether the ultimate economic outcome, if any, could have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
We are involved in a variety of other legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these other matters. While we are unable to predict the ultimate outcome of these other legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.
Under the Plan, the par value of our Common Stock was changed from
$2.00
per share to
$0.01
per share effective January 30, 2012. 2
nd
Lien Lenders shared in the issuance of
6,743,640
shares of our Common Stock, an amount equal to
13%
of outstanding shares on a pro forma basis as of January 30, 2012.
As of July 1, 2011, our Common Stock traded at an average 30-day closing market price of less than
$1
per share. Under the New York Stock Exchange ("NYSE") listing standards, if our Common Stock fails to maintain an adequate per share price and total market capitalization of less than
$50,000,000
, our Common Stock could be removed from the NYSE and traded in the over-the-counter market. In July 2011, the NYSE first notified us that our Common Stock did not meet the NYSE continued listing standards due to the failure to maintain an adequate share price. Under the NYSE rules, our Common Stock was allowed to continue to be listed during a cure period. In February 2012, after completing our debt refinancing, the NYSE notified us that we were again in compliance with the minimum closing price standard. In January 2013, the NYSE notified us that we had returned to full compliance with all continued listing standards.
13 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 2013, the Financial Accounting Standards Board issued an amendment to an existing accounting standard, which requires an entity to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income ("AOCI") by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line
items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This guidance does not change the current requirements for reporting net income or other comprehensive income in the financial statements and is effective beginning in 2014. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.