UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended December 31, 1996 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 A Delaware Corporation I.D. #42-0823980 215 N. Main Street Davenport, Iowa 52801 Phone: (319) 383-2100 Indicate by a 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding At December 31, 1996 Common Stock, $2.00 par value 34,280,223 Class "B" Common Stock, $2.00 par value 12,410,236 PART I. FINANCIAL INFORMATION Item 1. LEE ENTERPRISES, INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Per Share Data) 1996 1995 - -------------------------------------------------------------------------------- Three Months Ended December 31: (Unaudited) Operating revenue: Newspaper: Advertising ................................. $48,293 $45,201 Circulation ................................. 20,194 20,184 Other ....................................... 13,888 13,134 Broadcasting .................................. 35,381 30,341 Equity in net income of associated companies .. 1,912 1,921 ----------------- 119,668 110,781 ----------------- Operating expenses: Compensation costs ............................... 41,323 38,614 Newsprint and ink ................................ 7,964 10,215 Depreciation ..................................... 3,981 3,773 Amortization of intangibles ...................... 2,703 2,838 Other ............................................ 31,285 29,278 ------------------ 87,256 84,718 ------------------ Operating income ..................... 32,412 26,063 ------------------ Financial (income) expense, net Financial (income) .............................. (544) (527) Financial expense ............................... 1,742 2,555 ------------------ 1,198 2,028 ------------------ Income from continuing operations before taxes on income ................ 31,214 24,035 Income taxes ........................................ 12,106 9,343 ------------------ Income from continuing operations ..... 19,108 14,692 Income from discontinued operations, net of income tax effect ....................................... - - 1,248 ------------------ Net income ............................ $19,108 $15,940 ------------------ Weighted average number of shares ................... 47,820 48,297 ================== Earnings per share: Income from continuing operations ................ $ 0.40 $ 0.30 Income from discontinued operations .............. - - 0.03 ------------------ $ 0.40 $ 0.33 ------------------ Dividends per share ................................. $ 0.13 $ 0.12 ================== LEE ENTERPRISES, INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) December 31, September 30, ASSETS 1996 1996 - -------------------------------------------------------------------------------- (Unaudited) Cash and cash equivalents .................... $ 30,590 $ 19,267 Accounts receivable, net ..................... 57,235 50,211 Newsprint inventory .......................... 1,441 3,668 Program rights and other ..................... 14,695 17,183 Net assets of discontinued operations ........ 55,496 56,379 --------------------------- Total current assets ........... 159,457 146,708 Investments .................................. 22,187 22,156 Property and equipment, net .................. 105,026 104,705 Intangibles and other assets ................. 251,243 253,847 --------------------------- $537,913 $527,416 =========================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities ........................ $103,387 $ 97,777 Long-term debt, less current maturities .... 52,103 52,290 Deferred items ............................. 53,067 52,395 Stockholders' equity ....................... 329,356 324,954 --------------------------- $537,913 $527,416 =========================== LEE ENTERPRISES, INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) Three Months Ended December 31: 1996 1995 - -------------------------------------------------------------------------------- (Unaudited) Cash Provided by Operations: Net income ............................................ $19,108 $15,940 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization ...................... 7,743 7,720 Distributions in excess of current earnings of associated companies ............................. 1,844 1,953 Other balance sheet changes ........................ 11,109 (395) ------------------ Net cash provided by operations ............ 39,804 25,218 ------------------ Cash (Required for) Investing Activities: Purchase of temporary investments ..................... - - (200) Proceeds from maturities of temporary investments ..... - - 200 Purchase of property and equipment .................... (4,302) (4,346) Other ................................................. (437) (931) ------------------ Net cash (required for) investing activities (4,739) (5,277) ------------------ Cash (Required for) Financing Activities: Purchase of Lee Common Stock .......................... (9,115) (868) Payments on short-term notes payable .................. (15,000) - - Other ................................................. 373 151 ------------------ Net cash (required for) financing activities (23,742) (717) ------------------ Net increase in cash and cash equivalents .. 11,323 19,224 Cash and cash equivalents: Beginning ............................................. 19,267 10,683 ----------------- Ending ................................................ $30,590 $29,907 ================= LEE ENTERPRISES, INCORPORATED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Note 1. Basis of Presentation The information furnished reflects all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary to a fair presentation of the financial position as of December 31, 1996 and the results of operations and cash flows for the three-month periods ended December 31, 1996 and 1995. Note 2. Investment in Associated Companies Condensed operating results of unconsolidated associated companies are as follows: Three Months Ended December 31, ---------------- 1996 1995 ---------------- (In Thousands) (Unaudited) Revenues ............................................... $19,777 $19,291 Operating expenses, except depreciation and amortization 13,190 12,727 Depreciation and amortization .......................... 501 460 Operating income ....................................... 6,086 6,104 Financial income ....................................... 317 308 Income before income taxes ............................. 6,403 6,412 Income taxes ........................................... 2,578 2,569 Net income ............................................. 3,825 3,843 a. Madison Newspapers, Inc. (50% owned) b. Quality Information Systems (50% owned) c. INN Partnership, LC (an effective 50% owned) Note 3. Cash Flows Information The components of other balance sheet changes are: Three Months Ended December 31, ------------------ 1996 1995 ------------------ (In Thousands) (Unaudited) (Increase) in receivables ................................ $(8,663) $(8,151) Decrease in inventories, film rights and other ........... 4,355 1,969 Increase (decrease) in accounts payable, accrued expenses and unearned income ................................... 5,161 (4,209) Increase in income taxes payable ......................... 11,085 9,265 Other .................................................... (829) 731 ----------------- $11,109 $ (395) ================= Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating results: Three Months Ended December 31, ------------------- 1996 1995 ------------------- (Dollar Amounts in Thousands, Except Per Share Data) Revenue ................................................. $119,668 $110,781 Percent change ....................................... 8.0% Income before depreciation and amortization, interest and taxes (EBITDA) ....................................... 39,096 32,674 Percent change ....................................... 19.7% Operating income ........................................ 32,412 26,063 Percent change ....................................... 24.4% Income from continuing operations ....................... 19,108 14,692 Percent change ....................................... 30.1% Net income .............................................. 19,108 15,940 Percent change ....................................... 19.9% Earnings per share: Income from continuing operations .................... 0.40 0.30 Percent change .................................... 33.3% Net income ........................................... 0.40 0.33 Percent change .................................... 21.2% Operations by line of business are as follows: Three Months Ended December 31, --------------------- 1996 1995 --------------------- (In Thousands) Revenue: Newspapers .......................................... $ 84,287 $ 80,440 Broadcasting ........................................ 35,381 30,341 ------------------ $119,668 $110,781 ================== Income before depreciation and amortization, interest, and taxes (EBITDA): Newspapers .......................................... $ 30,119 $ 26,151 Broadcasting ........................................ 12,925 9,878 Corporate ........................................... (3,948) (3,355) ------------------ $ 39,096 $ 32,674 ================== Operating income: Newspapers .......................................... $ 26,387 $ 22,601 Broadcasting ........................................ 10,122 6,951 Corporate and other ................................. (4,097) (3,489) ------------------ $ 32,412 $ 26,063 ================== Capital expenditures: Newspaper ........................................... $ 1,567 $ 2,013 Broadcasting ........................................ 2,528 2,061 Graphic arts ........................................ - - 227 Corporate ........................................... 207 45 ------------------ $ 4,302 $ 4,346 ================== There were no significant non-recurring items during the quarter. NEWSPAPERS Wholly-owned daily newspaper advertising revenue increased $3,092,000, 6.8%. Advertising revenue from local merchants increased $1,907,000, 6.7%. Local "run-of-press" advertising increased $1,756,000, 9.1%, as a result of higher average rates and a 4.0% increase in advertising inches. The period between Thanksgiving and Christmas was shorter than normal and merchants increased their advertising to stimulate sales. Local preprint revenue increased $151,000, 1.7%. Classified advertising revenue increased $1,005,000, 8.0%, as a result of higher averages rates and a 4.3% increase in advertising inches. The employment category was the biggest contributor to the increase. Circulation revenue increased $10,000, 0.1%, as a result of higher rates which offset a 2.4% decrease in volume. Other revenue at daily newspapers increased $495,000, 6.0%, primarily as a result of increases in commercial printing and other non-traditional products and services. Wholly-owned daily newspaper compensation expense increased $1,231,000, 5.2%, due primarily to increases in average compensation. Newsprint and ink costs decreased $2,251,000, (22.0%), due to lower newsprint prices. Newsprint prices remain below prior year levels; however, newsprint suppliers have announced their intention to increase prices in the second quarter of the fiscal year. Based on present market conditions, we anticipate prices to remain below prior year levels for the balance of the fiscal year but price increases are probable in the future. Other operating expenses exclusive of depreciation and amortization increased $702,000, 4.4%. Revenues from weekly newspapers, shoppers, and specialty publications increased $259,000, 5.0%. Operating income decreased $52,000, (26.0%), due to higher than anticipated costs of specialty publications. BROADCASTING Revenue for the quarter increased $5,040,000, 16.6%, as political advertising increased $4,273,000, 391.5%, and local/regional/national advertising increased $340,000, 1.3%. Production revenue increased $390,000, 34.5%, primarily due to increased corporate/studio business at MIRA Creative Group in Portland, Oregon. Advertising revenue growth may be adversely affected in the balance of the fiscal year due to limited political advertising which category amounted to approximately $5,000,000 in the last nine months of fiscal 1996. We are also affected, but less significantly, by the loss of Olympic advertising as NBC affiliate revenue accounts for only 30% of our broadcast revenue. Compensation costs increased $1,197,000, 10.5%, due to a 4.4% increase in the number of hours worked and an increase in the average hourly rates. Programming costs for the quarter decreased $476,000, (19.1%), primarily due to decreased amortization from programs amortized on an accelerated basis. Other operating expenses exclusive of depreciation and amortization increased $1,270,000, 19.2%, primarily due to increased audience promotion for the November ratings period, and outside services. CORPORATE COSTS Corporate costs increased by $608,000, 17.4%, as a result of increased marketing costs, the enhancement of computer software, and relocation costs. FINANCIAL EXPENSE AND INCOME TAXES Interest expense was reduced due to payments on long-term debt, along with payment of short-term borrowings used to finance the acquisition of SJL of Kansas Corp. Income taxes were 38.8% and 38.9% of pre-tax income for the quarters ended December 31, 1996 and 1995, respectively. DISCONTINUED OPERATIONS On November 4, 1996 the Company signed a letter of intent to sell its graphic arts products subsidiary, NAPP Systems Inc. for approximately $55,000,000. The closing occurred on January 17, 1997. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations, which is the Company's primary source of liquidity, generated $39,804,000 for the quarter. Available cash balances, cash flow from operations and bank lines of credit provide adequate liquidity. Covenants related to the Company's credit agreements are not considered restrictive to operations and anticipated stockholder dividends. SAFE HARBOR STATEMENT This report contains forward-looking statements and includes assumptions concerning the Company's operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to risks and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary statements identifying important economic, political, and technological factors which, among others, could cause the actual results or events to differ materially from those set forth or implied by the forward-looking statements or assumptions. Such factors include the following: (i) changes in the current and future business environment, including interest rates and capital and consumer spending; (ii) prices for newsprint products; (iii) the availability of quality broadcast programming at competitive prices; (iv) the quality and ratings of network over-the-air broadcast programs; and (v) legislative or regulatory initiatives affecting the cost of delivery of over-the-air broadcast programs to the Company's customers. Further information concerning the Company and its businesses, including factors that potentially could materially affect the Company's financial results, is included in the Company's annual report on Form 10-K. LEE ENTERPRISES, INCORPORATED PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit "A" - Computation of Earnings Per Share (b) The following report on Form 8-K was filed during the three months ended December 31, 1996. Date of Report: November 4, 1996 Item 5: Announce that a letter of intent was executed for the disposition by Lee Enterprises, Incorporated of its graphic arts products subsidiary, NAPP Systems Inc. to Polyfibron Technologies, Inc. Financial statements filed: None 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/ G.C. Wahlig January 30, 1997 - ------------------------------------- ------------------------------ G.C. Wahlig, Chief Accounting Officer Date