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LEE ENTERPRISES, Inc - Annual Report: 2016 (Form 10-K)

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 25, 2016
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-6227
LEE ENTERPRISES, INCORPORATED
(Exact name of Registrant as specified in its Charter)
Delaware
42-0823980
(State of incorporation)
(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
Title of Each Class
Name of Each Exchange On Which Registered
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock - $0.01 par value
New York Stock Exchange
Preferred Share Purchase Rights
New York Stock Exchange

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
 
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
                                     
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (S 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
                                         
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a "smaller reporting company" under Rule 12b-2 under the Exchange Act. See the definition of “large accelerated filer", "accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller Reporting Company [ ]
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
 
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [X]     No [  ]
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant's most recently completed second fiscal quarter. Based on the closing price of the Registrant's Common Stock on the New York Stock Exchange on March 31, 2016, such aggregate market value is approximately $93,233,000. For purposes of the foregoing calculation only, as required, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.
 
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of November 30, 2016. Common Stock, $0.01 par value, 55,562,832 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Lee Enterprises, Incorporated Definitive Proxy Statement to be filed in January 2017 are incorporated by reference in Part III of this Form 10-K.
 



TABLE OF CONTENTS
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
Part I
 
 
 
 
 
 
Item 1
 
 
 
 
 
Item 1A
 
 
 
 
 
Item 1B
 
 
 
 
 
Item 2
 
 
 
 
 
Item 3
 
 
 
 
 
Item 4
Mine Safety Disclosures
 
 
 
 
Part II
 
 
 
 
 
 
Item 5
 
 
 
 
 
Item 6
 
 
 
 
 
Item 7
 
 
 
 
 
Item 7A
 
 
 
 
 
Item 8
 
 
 
 
 
Item 9
 
 
 
 
 
Item 9A
 
 
 
 
 
Item 9B
 
 
 
 
Part III
 
 
 
 
 
 
Item 10
 
 
 
 
 
Item 11
 
 
 
 
 
Item 12
 
 
 
 
 
Item 13
 
 
 
 
 
Item 14
Principal Accounting Fees and Services
 
 
 
 
Part IV
 
 
 
 
 
 
Item 15
 
 
 
 
 
 
 
 
 
 
 
 




References to “we”, “our”, “us” and the like throughout this document refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2016", "2015", "2014" and the like refer to the fiscal years ended the last Sunday in September.
 
FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. This report contains information that may be deemed forward-looking that is based largely on our 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, which in some instances are beyond our control, are:

Our ability to generate cash flows and maintain liquidity sufficient to service our debt;
Our ability to comply with the financial covenants in our credit facilities;
Our ability to refinance our debt as it comes due;
That the warrants issued in our refinancing will not be exercised;
The impact and duration of adverse conditions in certain aspects of the economy affecting our business;
Change in advertising and subscription demand;
Changes in technology that impact our ability to deliver digital advertising;
Potential changes in newsprint, other commodities and energy costs;
Interest rates;
Labor costs;
Legislative and regulatory rulings;
Our ability to achieve planned expense reductions;
Our ability to maintain employee and customer relationships;
Our ability to manage increased capital costs;
Our ability to maintain our listing status on the NYSE;
Competition; and
Other risks detailed from time to time in our publicly filed documents.

Any statements that are not statements of historical fact (including statements containing the words “may”, “will”, “would”, “could”, “believes”, “expects”, “anticipates”, “intends”, “plans”, “projects”, “considers” and similar expressions) generally should be considered 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. We do not undertake to publicly update or revise our forward-looking statements, except as required by law.

PART I
 
ITEM 1. BUSINESS
 
Lee Enterprises, Incorporated is a leading provider of local news and information, and a major platform for print and digital advertising, in the markets we serve, which are located primarily in the Midwest, Mountain West and West regions of the United States. With the exception of St. Louis, Missouri, our 49 markets (including TNI Partners ("TNI") and Madison Newspapers ("MNI")), across 21 states, are principally midsize or small. Through our paid and unpaid print and digital platforms, we reach an overwhelming majority of adults in our markets.

Our products include:

46 daily and 34 Sunday newspapers with print and digital subscribers totaling 0.8 million and 1.2 million, respectively, for the 13 weeks ended September 25, 2016. We estimate that more than three million people read our printed daily newspapers each day.
Nearly 300 weekly newspapers and classified and niche publications.

Our markets have established retail bases, and most are regional shopping hubs. We are located in four state capitals. Six of our top ten markets by revenue include major universities, and seven are home to major corporate headquarters. Community newspapers and their associated digital media are a valuable source of local news and information attracting readers and providing an effective means for local advertisers to reach their customers. We believe our audiences across these communities tend to be loyal readers that actively seek our content and serve as an attractive target for our advertisers.

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We do not face significant competition from other local daily newspapers in most of our markets, although there is significant competition for audience in those markets from other media. In our top ten markets by revenue, only two have significant local daily print competition.

Lee Enterprises, Incorporated was founded in 1890, incorporated in 1950, and listed on the New York Stock Exchange ("NYSE") in 1978. We have acquired and divested a number of businesses since inception.

In 2014, we completed a comprehensive refinancing of our debt (the "2014 Refinancing"). Final maturities of our debt have been extended to dates from March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

We experienced significant net losses since 2007 primarily due to non-cash charges for impairment of intangible and other assets in 2013, 2011, 2009 and 2008 and reorganization costs in 2012. Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, 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 September 25, 2016. The information included herein should be evaluated in that context. See Item 1A, “Risk Factors”, and Notes 3 and 4 of the Notes to Consolidated Financial Statements, included herein, for additional information.

STRATEGIC INITIATIVES

We are focused on several strategic initiatives:

Comprehensive Local News That Drives Frequency And Engagement

We drive frequency and engagement with our products by delivering valuable, intensely local, original news and information that, in many cases, we believe our audiences cannot otherwise readily obtain. Our large and talented news and editorial staff provide constant, real-time local news with significant breadth, depth and reliability. Our full access platforms provide our subscribers with in-depth and breaking news and information through continuous updates to our stories digitally on websites, mobile devices and tablets.

We believe the strength of our local brands is the result of the quality and size of our news gathering staff, which allow us to provide the most comprehensive coverage of local news in our markets. In most of our markets, we are the leading source of print and digital news and information. As the digital consumption of news has expanded, we have moved quickly to develop applications that address audience and digital advertising demands for mobile and tablet advertising platforms. As new digital technologies emerge, we expect to move rapidly to make our content available through them and monitize the audience.

We are focused on continually improving the functionality and the look and feel of all our news platforms, providing greater depth of coverage and reader engagement. We are arming our journalists with new tools to give them real-time information about audience engagement on our digital platforms, helping inform their decisions on both presentation and coverage.

We believe our journalists are at the forefront for information about the local community. We are engaging our readers by providing information that we believe stirs public awareness, advances ideas, inspires vision, creates debate and provokes action. Through our news leadership we strive to contribute to community betterment, promote education, foster commerce and help improve the quality of life in our markets.

Accelerate And Expand Digital Revenue Growth

Our digital businesses have experienced rapid growth since 2010. Digital advertising grew 5.6% and reached 25.3% of total advertising and marketing services revenue in the 13 weeks and year ended September 25, 2016. We are growing revenue by offering an expansive array of digital products, including video, digital couponing, behavioral targeting, audience retargeting, banner ads and social networking.

We provide digital marketing services to small and midsized businesses ("SMBs"), including search engine marketing ("SEM"), social media, audience extension, business profiles and website hosting and design. Lee Local offers small business solutions including search engine optimization (“SEO”), local online marketing, social media marketing, video advertising and web site design. Lee Local seeks to help small businesses maximize the return on marketing dollars

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by increasing audiences, expanding brands, and enhancing their web presence. We believe that these innovative solutions will continue to drive meaningful new opportunities for us to grow our digital marketing revenue.

Digital national revenue grew 20.4% in 2016, driven by our sweeps program and improved inventory management and pricing. Mobile advertising increased 19.6% and digital retail advertising that represents 60.5% of total digital advertising increased 9.6% in 2016.

INN Partners, L.C. ("TownNews.com"), of which we own 82.5%, provides digital infrastructure and digital publishing services for nearly 1,600 daily and weekly newspapers, along with universities, television stations and niche publications, as well as for us. We believe TownNews.com represents a powerful opportunity for us to drive additional digital revenue. In 2016, digital services revenue, which is primarily TownNews,com, increased to more than $14 million, or 13.7% over 2015.

We are also a member of the Local Media Consortium (the “Consortium”). The Consortium partners with companies like Google, Yahoo! and other technology companies and service providers to increase the potential share of new revenue and audience-building programs available to consortium members, as well as the quality of information and advertising services available from, Consortium members. The Consortium currently includes more than 1,600 local newspapers and hundreds of local broadcast outlets in the United States.

Our sales force is larger than any local competitor, and we believe they are the most highly trained and proficient sales force in our markets. We also continue to expand our array of digital products to address advertisers evolving needs, while seeking to increase our share of advertising and marketing services spending from existing customers and react to competition.

In 2016, no single advertiser accounted for more than 2% of advertising revenue and our top 10 advertisers represented 8.9% of advertising revenue.

Our local sales forces are one of our core strengths. We have strong relationships with businesses in our markets and offer a wide array of products to deliver the advertisers' message. In fact eighty percent of our advertising revenue now comes from local and regional businesses, and our sales executives pitch the power of our audiences directly to these local decision makers.

To address the evolving needs of local advertisers we are changing the way we sell local advertising to maximize our opportunities with small and medium-sized businesses. Local, controllable advertising accounts, in which our local sales teams have direct contact with the advertising decision makers are the core of our business. To address the needs of and better serve these local advertisers we developed the "Edison Project" which is directly aimed at these local advertisers.

With Edison, we are completely restructuring local sales teams and simplifying advertising packages to offer bigger ads and more frequency across our digital and print products.

In our test markets, results from the Edison Project have been very promising and we're expanding Edison into all Lee markets beginning in the first quarter of fiscal 2017, with full implementation expected by the end of the second fiscal quarter.

In addition, our successful Big Pitch initiative targets larger, local accounts such as the big local hardware store or regional hospital group. We pair creative advertising campaigns with our broad suite of products, both digital and print. Because of the success of this program we've added creative resources and accelerated the number of pitches developed providing greater creativity, faster speed to market, and more pitches closed.

Grow Audience Revenue And Engagement

Based on independent audience research conducted on our behalf, for the period January to June 2016, we reached 74% of all adults over the course of a seven-day period in 11 selected markets, which include most of our largest strategic business units. Half of the adults in these markets read our newspapers in print, with 19% being both newspaper readers and visitors to our newspaper digital platforms. Another 17% were exclusive digital users. The remaining 12% primarily used our newspapers to obtain advertising and other information.

Our audiences strength spans across all age groups. Among the 18-29 age group, 15% read our printed newspapers,

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while 23% accessed our publications by web, mobile or tablet. Another 11% primarily used our newspapers to obtain advertising and other information.

As media access and delivery vehicles continue to evolve, it is clear that our audiences are evolving and increasingly moving from one delivery platform to another throughout the day and accessing our content in print, on desktops and laptops, and on mobile devices. We seek to grow our audience and engagement on whatever platform they choose by, among other things, continually improving content and presentation to maximize the unique and evolving capabilities of each platform. Our digital audiences are massive. Unique visitors to our digital sites totaled 26.0 million in September 2016, while page views totaled 218.1 million in September 2016.

To serve our readers across all delivery platforms, in 2014, we began to phase in a new subscription model, which is now in place in substantially all of our markets. This model, known as full access, provides subscribers complete access to our print and digital products available in their market for a single subscription rate.

Transforming Our Business And Managing Our Costs

We are transforming our business model and reducing our costs to maintain our margins and cash flows. We have regionalized many staff functions; consolidated and/or selectively outsourced printing and ad production; discontinued unprofitable publications; reduced newsprint volume significantly; and continually seek to improve the efficiencies of our operation and reduce costs. We have reduced personnel while protecting our strengths in news, sales and digital products. In 2016, we reduced cash costs(1) excluding unusual matters 4.8%. We continue our focus on cost efficiencies while investing in revenue drivers.

Generate Strong Adjusted EBITDA(1) With A Commitment To Reduce Our Debt

Throughout the last economic downturn and subsequent recovery, and during a time of unprecedented transition for our industry, we have posted strong adjusted EBITDA. We require modest capital expenditures and pension contributions, and we continue to make significant debt reductions each year. Since 2009, we have dedicated substantially all of our free cash flow to debt repayment, and we intend to continue to use all our available cash to continue to reduce debt.

The principal amount of debt was reduced by $108.7 million in 2016 and totaled $617.2 million as of September 25, 2016. Since 2005, we have reduced debt by over $1 billion and we expect to continue to significantly reduce our debt in 2017. As a result of our debt reductions, interest expense was reduced by $8.2 million in 2016 compared to 2015, providing additional free cash flow for debt service.

In 2016, we received $30,646,000 due to an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our production facilities. The proceeds were used to make voluntary payments on our 1st Lien Term Loan and repurchase Notes (each as defined below) at a substantial discount.

(1)     See "Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

PULITZER
 
In 2005, we acquired Pulitzer Inc. (“Pulitzer”). We currently publish 9 daily newspapers that were acquired from Pulitzer and more than 60 weekly newspapers and specialty publications. Pulitzer also owned a 50% interest in TNI, as discussed more fully below. The acquisition was financed primarily with debt and our second lien term loan lenders have a first lien of the Pulitzer assets.

Pulitzer newspaper operations include Bloomington, IL and 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, a variety of specialty publications, and supports its related digital products. St. Louis newspaper operations also include the Suburban Journals of Greater St. Louis, a group of weekly newspapers and niche publications that focus on separate communities within the metropolitan area.
 
On August 28, 2016 we sold substantially all of the assets of our Provo, Utah newspaper operations, a former Pulitzer newspaper.


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TNI Partners
 
As a result of the acquisition of Pulitzer, we own a 50% interest in TNI, the Tucson, Arizona newspaper partnership. TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”) and Citizen Publishing Company (“Citizen”), the owner of the remaining 50%, a subsidiary of Gannett Co., Inc., (“Gannett”). TNI is responsible for printing, delivery, advertising and subscription activities of the Arizona Daily Star and, until May 2009, the Tucson Citizen, as well as their related digital products and specialty publications. In May 2009, Citizen discontinued print publication of the Tucson Citizen and in 2014 stopped publishing its digital product.

TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media. Under the amended and restated operating agreement between Star Publishing and Citizen, the Arizona Daily Star remains the separate property of Star Publishing. Results of TNI are accounted for using the equity method. Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen. TNI makes weekly distributions to Star Publishing and Citizen of all available cash.
 
The TNI agency agreement (“Agency Agreement”), has governed the operation since 1940. Both the Company and Citizen incur certain administrative costs and capital expenditures that are reported by their individual companies. The Agency Agreement expires in 2040, but contains an option, which may be exercised by either party, to renew the agreement for successive periods of 25 years each. Star Publishing and Citizen also have a reciprocal right of first refusal to acquire the 50% interest in TNI owned by Citizen and Star Publishing, respectively, under certain circumstances.
 
MADISON NEWSPAPERS
 
We own 50% of the capital stock of MNI and 8.7% of the 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, and supports their related digital products. MNI conducts business under the trade name Capital Newspapers. We have a contract to furnish the editorial and news content for the Wisconsin State Journal, which is published by MNI, and periodically provide other services to MNI. 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. MNI makes quarter dividend payments to the Company and TCT.
 
ADVERTISING AND MARKETING SERVICES
 
Approximately 61% of our 2016 revenue was derived from advertising and marketing services.
 
The following broadly define major categories of advertising and marketing services revenue:
 
Retail advertising is print or digital revenue earned from sales of display advertising space in the publication, or for preprinted advertising inserted in the publication, to local accounts or regional and national businesses with local retail operations.

Classified advertising, which includes employment, automotive, real estate for sale or rent, legal, obituaries and other categories, is revenue earned from sales of advertising space in these categories or from publications consisting primarily of such advertising. Classified publications offer advertisers a cost-effective local advertising vehicle and are particularly effective in larger markets with higher media fragmentation.
 
National advertising is revenue earned from print or digital display advertising space, or for preprinted advertising inserted in the publication for national accounts that do not have a local retailer representing the account in the market.
 
Digital advertising consists of display, banner, behavioral targeting, search, rich media, directories, classified or other advertising on websites or mobile devices associated and integrated with our print publications, other digital applications, or on third party websites accessed through the extended audience network. Digital advertising is reported in combination with print advertising in the retail, classified and national categories.

Niche publications are specialty publications, such as lifestyle, business, health or home improvement publications that contain significant amounts of advertising.

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Marketing services includes a robust suite of custom digital marketing services that include: SEO, SEM, web and mobile production, social media services and reputation monitoring and management. Our services also include media buying in audience extension networks (outside of those owned and operated by us) such as Centro DSP, Google Ad Exchange and Facebook.
 
The advertising environment is influenced by the state of the overall economy, including retail sales, unemployment rates, inflation, energy prices and consumer interest rates. Our enterprises are primarily located in midsize and small markets. Historically these markets have been more stable than major metropolitan markets because our focus is on local, rather than national, advertising. More than eighty percent of our advertising revenue is derived from local and regional businesses. We believe that local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer effective advertising channels through which they may reach their customers.

Several of our businesses operate in geographic groups of publications, or “clusters,” which provide operational efficiencies, extend sales penetration and provide broader audiences for advertisers. Operational efficiencies are obtained through consolidation of sales forces, back office operations such as finance, human resources, management and/or production of the publications. A table under the caption “Daily Newspapers and Markets” in Item 1, included herein, identifies those groups of our newspapers operating in clusters.
 
Our newspapers, classified and specialty publications, and digital products compete with newspapers having national or regional circulation, magazines, radio, network, cable and satellite television, other advertising media such as outdoor, mobile, and movie theater promotions, other classified and specialty publications, direct mail, directories, as well as national, regional and local advertising websites and content providers. Competition for advertising is based on audience size and composition, subscription levels, readership demographics, distribution and display mechanisms, price and advertiser results. In addition, several of our daily and Sunday newspapers compete with other local daily or weekly newspapers. We believe we capture a substantial share of the total advertising dollars spent in each of our markets.

The number of competitors in any given market varies. However, all of the forms of competition noted above exist to some degree in our markets, including those listed in the table under the caption “Daily Newspapers and Markets” in Item 1, included herein.
 
SUBSCRIPTION

Approximately 32% of our 2016 revenue was derived from subscriptions to our printed and digital products.

Subscription revenue is derived from the delivery of our leading local news, information and advertising content in print and digitally, via desktop and mobile devices. In 2014, we began the rollout of our full access subscription model, which is now in place in substantially all of our markets. This model provides subscribers access to both the print and digital editions of our newspapers for one price. Digital only options are also available to subscribers.


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AUDIENCES
 
Based on independent research, we estimate that, in an average week, our newspapers and digital products reach approximately 74% of adults in our larger markets. We also measure use of our daily newspapers for advertising, sports scores and entertainment listings ("print users").
   
Audience reach is summarized as follows:
 
All Adults
 
(Percent, Past Seven Days)
2016

2015

2014

2013

2012

 
 
 
 
 
 
Print only
26.8

31.3

33.1

36.9

37.8

Print and digital
19.3

19.3

20.0

17.8

19.6

Digital only
16.6

12.5

12.1

10.5

9.4

Total readership
62.7

63.1

65.2

65.2

66.8

Print users
11.6

12.8

13.0

13.9

14.7

Total reach
74.3

75.9

78.2

79.1

81.5

 
 
 




 
Total print reach
57.7

63.4

66.1

68.6

72.1

Total digital reach
35.9

31.8

32.1

28.3

29.0


 
Age 18-29
 
(Percent, Past Seven Days)
2016

2015

2014

2013

2012

 
 
 
 
 
 
Print only
15.3

19.5

20.3

30.7

29.4

Print and digital
16.2

20.2

18.3

15.6

20.5

Digital only
23.4

12.7

15.3

10.5

10.7

Total readership
54.9

52.4

53.9

56.8

60.6

Print users
11.2

19.5

19.5

22.0

23.7

Total reach
66.1

71.9

73.4

78.8

84.3

 
 
 




 
Total print reach
42.7

59.2

58.1

68.3

73.6

Total digital reach
39.6

32.9

33.6

26.1

31.2

Source:
Lee Enterprises Audience Report, Thoroughbred Research. January-June 2012-2016.
Markets:
11 largest markets in 2012-2016.
Margin of Error:
Total sample +/- 1.2%, Total digital sample +/- 1.3%
  
After advertising, subscriptions and single copy sales are our largest source of revenue. For the 13 weeks ended September 2016, our daily circulation units, which include TNI and MNI, as measured by the Alliance for Audited Media ("AAM") were 0.8 million and Sunday circulation units were 1.2 million.
 
Growth in audiences can, over time, also positively impact advertising revenue. Our strategies to grow audiences include continuous improvement of content and promotional efforts to expand our audience. Content can include focus on local news, features, scope of coverage, accuracy, presentation, writing style, tone and type style. Promotional efforts include advertising, contests and other initiatives to increase awareness of our products. Customer service can also influence subscriptions. The introduction in 2010, and continued improvement since, of mobile and tablet applications has positively impacted our digital audiences.
 
We have historically experienced higher retention of customers using credit cards or bank account withdrawals, ("easy pay"). Accordingly we focus on our enterprises on increasing the number of easy pay subscribers. Other initiatives vary from location to location and are determined principally by our centralized consumer sales and marketing group in collaboration with local management. Competition for subscriptions is generally based on the content, journalistic quality and price of the publication.
 

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Audience competition exists in all markets, from unpaid print and digital products, but is most significant in markets with competing local daily newspapers. These markets tend to be near major metropolitan areas, where the size of the population may be sufficient to support more than one daily newspaper.

Our subscription sales channels continue to evolve through an emphasis on targeted telemarketing, direct mail and email to acquire new subscribers and retain current subscribers.


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DAILY NEWSPAPERS AND MARKETS
 
The Company, TNI and MNI publish the following daily newspapers and maintain the following primary digital sites:
 
 
 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2) 

 
Sunday

 
 
 
 
 
 
 
 
St. Louis Post-Dispatch (3)
stltoday.com
St. Louis, MO
113,990

 
385,690

 
Arizona Daily Star (5) (3)
azstarnet.com
Tucson, AZ
53,593

 
105,839

 
Capital Newspapers (4)
 
 
 
 
 
 
Wisconsin State Journal
madison.com
Madison, WI
61,785

 
80,900

 
Daily Citizen
wiscnews.com/bdc
Beaver Dam, WI
5,883

 

 
Portage Daily Register
wiscnews.com/pdr
Portage, WI
3,023

 

 
Baraboo News Republic
wiscnews.com/bnr
Baraboo, WI
2,624

 

 
The Times
nwitimes.com
Munster, Valparaiso, and Crown Point, IN
58,026

 
67,773

 
Central Illinois Newspaper Group
 
 
 
 
 
 
The Pantagraph (3)
pantagraph.com
Bloomington, IL
24,608

 
28,585

 
Herald & Review
herald-review.com
Decatur & Mattoon/Charleston, IL
29,734

 
22,903

 
Lincoln Group
 
 
 
 
 
 
Lincoln Journal Star
journalstar.com
Lincoln, NE
42,821

 
49,394

 
Columbus Telegram
columbustelegram.com
Columbus, NE
4,796

 

 
Fremont Tribune
fremonttribune.com
Fremont, NE
4,698

 

 
Beatrice Daily Sun
beatricedailysun.com
Beatrice, NE
3,352

 

 
Quad-City Times
qctimes.com
Davenport & Muscatine, IA
38,939

 
37,473

 
River Valley Newspaper Group
 
 
 
 
 
 
La Crosse Tribune
lacrossetribune.com
La Crosse, WI
19,252

 
26,083

 
Winona Daily News
winonadailynews.com
Winona, MN
6,705

 
7,681

 
The Chippewa Herald
chippewa.com
Chippewa Falls, WI
3,501

 
3,448

 
Billings Gazette
billingsgazette.com
Billings, MT
28,741

 
32,627

 
The Courier
wcfcourier.com
Waterloo and Cedar Falls, IA
33,913

 
31,708

 
Sioux City Journal
siouxcityjournal.com
Sioux City, IA
23,350

 
26,092

 
The Bismarck Tribune
bismarcktribune.com
Bismarck, ND
21,192

 
24,214

 
The Post-Star
poststar.com
Glens Falls, NY
18,942

 
24,127

 
Missoula Group
 
 
 
 
 
 
Missoulian
missoulian.com
Missoula, MT
17,627

 
20,876


Ravalli Republic
ravallinews.com
Hamilton, MT
2,411

(6) 
2,239

(6) 
The Southern Illinoisan
thesouthern.com
Carbondale, IL
14,096

 
22,060

 
Rapid City Journal
rapidcityjournal.com
Rapid City, SD
17,596

 
21,560

 
Helena/Butte Group
 
 
 
 
 
 
Independent Record
helenair.com
Helena, MT
11,275

 
11,613

 
The Montana Standard
mtstandard.com
Butte, MT
9,204

 
9,278

 
The Journal Times
journaltimes.com
Racine, WI
18,396

 
20,758

 
Mid-Valley News Group
 
 
 
 
 
 
Albany Democrat-Herald
democratherald.com
Albany, OR
9,599

 
9,770

 
Corvallis Gazette-Times
gazettetimes.com
Corvallis, OR
8,014

 
7,904

 
Casper Star-Tribune
trib.com
Casper, WY
14,913

 
15,921

 

9


 
Average Units (1)
 
 
Newspaper
Primary Website
Location
  Daily (2)

 
Sunday

 
 
 
 
 
 
 
 
Magic Valley Group
 
 
 
 
 
 
The Times-News
magicvalley.com
Twin Falls, ID
13,714

 
15,287

 
Elko Daily Free Press
elkodaily.com
Elko, NV
3,303

(6) 

 
Globe Gazette
globegazette.com
Mason City, IA
12,123

 
13,311

 
The Daily News
tdn.com
Longview, WA
15,025

 
12,637

 
Santa Maria Times (3)
santamariatimes.com
Santa Maria, CA
7,854

 
12,090

 
Napa Valley Register (3)
napavalleyregister.com
Napa, CA
9,367

 
9,557

 
Arizona Daily Sun (3)
azdailysun.com
Flagstaff, AZ
7,763

 
8,417

 
The Citizen
auburnpub.com
Auburn, NY
6,711

 
8,202

 
The Times and Democrat
thetandd.com
Orangeburg, SC
7,220

 
7,900

 
The Sentinel
cumberlink.com
Carlisle, PA
9,009

 

 
The World (3)
theworldlink.com
Coos Bay, OR
5,508

 

 
The Sentinel (3)
hanfordsentinel.com
Hanford, CA
4,992

 

 
The Ledger Independent
maysville-online.com
Maysville, KY
4,349

 

 
Daily Journal (3)
dailyjournalonline.com
Park Hills, MO
3,600

 

 
 
 
 
837,137

 
1,183,917

 
(1)
Source: AAM: September 2016 Quarterly Executive Summary Data Report, unless otherwise noted.
(2)
Not all newspapers are published Monday through Saturday
(3)
Owned by Pulitzer, Inc.
(4)
Owned by MNI.
(5)
Owned by Star Publishing and published through TNI.
(6)
Source: Company statistics.
 
NEWSPRINT
 
The basic raw material of newspapers, and our other print publications, is newsprint. We purchase newsprint from U.S. and Canadian producers. We believe we will continue to receive a supply of newsprint adequate for our needs and consider our relationships with newsprint producers to be good. Newsprint purchase prices can be volatile and fluctuate based upon factors that include foreign currency exchange rates and both foreign and domestic production capacity and consumption. Price fluctuations can have a significant effect on our results of operations. We have not entered into derivative contracts for newsprint. For the quantitative impacts of these fluctuations, see Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, included herein.
 

10


EXECUTIVE TEAM
 
The following table lists our current executive team members:
Name
Age
Service
With The
Company
Named
To Current
Position
Current Position
 
 
 
 
 
Mary E. Junck
69
June 1999
February 2016
Executive Chairman
 
 
 
 
 
Kevin D. Mowbray
54
September 1986
February 2016
President and Chief Executive Officer
 
 
 
 
 
Nathan E. Bekke
47
January 1992
February 2015
Vice President - Consumer Sales and Marketing
 
 
 
 
 
Paul M. Farrell
61
October 2013
October 2015
Vice President - Sales and Marketing
 
 
 
 
 
Robert P. Fleck
54
May 2016
May 2016
Vice President - Business Development
 
 
 
 
 
Suzanna M. Frank
46
December 2003
March 2008
Vice President - Audience
 
 
 
 
 
Astrid J. Garcia
66
December 2006
December 2013
Vice President - Human Resources
 
 
 
 
 
James A. Green
50
March 2013
March 2013
Vice President - Digital
 
 
 
 
 
Michael R. Gulledge
56
October 1982
October 2015
Vice President - Advertising Sales Leadership
 
 
 
 
 
John M. Humenik
53
December 1998
February 2015
Vice President - News
 
 
 
 
 
Ronald A. Mayo
55
May 2015
June 2015
Vice President - Chief Financial Officer and Treasurer
 
 
 
 
 
Michele Fennelly White
54
June 1994
June 2011
Vice President - Information Technology and Chief Information Officer
Mary E. Junck was elected Executive Chairman in February 2016. From 2002 - February 2106 she served as President and Chief Executive Officer. She was elected to the Board of Directors of the Company in 1999.
 
Kevin D. Mowbray was elected President and Chief Executive Officer in February 2016. From April 2015 - February 2016 he was Executive Vice President and Chief Operating Officer. From May 2013 to April 2015 he served as Vice President and Chief Operating Officer. From 2004 to May 2013 he served as a Vice President - Publishing and was Publisher of the St. Louis Post-Dispatch from 2006 until May 2013. He was elected to the Board of Directors of the Company in February 2016.
 
Nathan E. Bekke was appointed Vice President - Consumer Sales and Marketing in February 2015. From 2003 to February 2015, he served as Publisher of the Casper Star-Tribune.
 
Paul M. Farrell was appointed Vice President - Sales in October 2015. From October 2013 to October 2015, he served as Vice President - Digital Sales. From September 2012 to October 2013, he served as Publisher of the Connecticut Media Group of Hearst Media Services. From May 2007 to August 2012, he served as Vice President - Sales and Marketing of the Company.

Robert P. Fleck was appointed Vice President - Business Development in May 2016. Prior to joining the Company, he was with The Tribune Company. His 24-year career with Tribune included Executive Vice President of Tribune Publishing Company; General Manager and Senior Vice President for TRIBUNE365; and Senior Vice President of the Chicago Tribune Media Group.

Suzanna M. Frank was appointed Vice President - Audience in March 2008. From 2003 to March 2008 she served as Director of Research and Marketing of the Company.
 
Astrid J. Garcia was appointed Vice President - Human Resources in December 2013. From 2006 to November 2013 she served as Vice President of Human Resources, Labor Relations and Operations of the St. Louis Post-Dispatch.

11


James A. Green was appointed Vice President - Digital in March 2013. From June 2011 to March 2013, he served as Executive Vice President and General Manager of Travidia, Inc., a developer of newspaper digital shopping media and marketing programs. From 2004 to June 2011 he served as Chief Marketing Officer of Travidia, Inc.

Michael R. Gulledge was elected Vice President - Sales and Marketing in September 2012 and named Publisher of the Billings Gazette in 2000. From 2005 to September 2012 he served as a Vice President - Publishing.

John M. Humenik was appointed Vice President - News in February 2015.  He is also president and publisher of the Wisconsin State Journal and president of Madison Newspapers Inc., a position he has held since 2013. He was publisher and editor of the Arizona Daily Star from 2005 to 2010 and additionally served president of Tucson Newspapers Inc until 2013.

Ronald A. Mayo was elected Vice President, Chief Financial Officer and Treasurer in June 2015. Prior to joining the Company, he was Chief Financial Officer of Halifax Media Group from July 2014 to January 2015 and previously served MediaNews Group, Inc, most recently as Vice President and Chief Financial Officer.

Michele Fennelly White was appointed Vice President - Information Technology and Chief Information Officer in June 2011. From 1999 to June 2011, she served as Director of Technical Support.
 
Ms. Junck and Messrs. Mowbray, Farrell, Green, Gulledge, and Mayo have been designated by the Board of Directors as executive officers for US Securities and Exchange Commission ("SEC") reporting purposes.

EMPLOYEES
 
At September 25, 2016, we had approximately 3,976 employees, including approximately 1,062 part-time employees, exclusive of TNI and MNI. Full-time equivalent employees in 2016 totaled approximately 3,666. We consider our relationships with our employees to be good.
Bargaining units represent 372, or 66%, of the total employees of the St. Louis Post-Dispatch, which has six contracts with bargaining units with expiration dates through September 2018.
Approximately 35 employees in three additional locations are represented by collective bargaining units.
CORPORATE GOVERNANCE AND PUBLIC INFORMATION
 
We have a long, substantial history of sound corporate governance practices. Our Board of Directors has a lead independent director, and has had one for many years. Currently, six of nine members of our Board of Directors are independent, as are all members of the Board's Audit, Executive Compensation and Nominating and Corporate Governance committees. The Audit Committee approves all services to be provided by our independent registered public accounting firm and its affiliates.
 
At www.lee.net, one may access a wide variety of information, including news releases, SEC filings, financial statistics, annual reports, investor presentations, governance documents, newspaper profiles and digital links. We make available via our website all filings made by the Company under the Securities Exchange Act of 1934 (the "Exchange Act"), including Forms 10-K, 10-Q and 8-K, and related amendments, as soon as reasonably practicable after they are filed with, or furnished to, the SEC. All such filings are available free of charge. The content of any website referred to in this Annual Report is not incorporated by reference unless expressly noted.
 
ITEM 1A. RISK FACTORS
 
Risk exists that our past results may not be indicative of future results. A discussion of our risk factors follows. See also, “Forward-Looking Statements”, included herein. In addition, a number of other factors (those identified elsewhere in this document) may cause actual results to differ materially from expectations.
 

12


DEBT AND LIQUIDITY
 
We May Have Insufficient Earnings Or Liquidity To Meet Our Future Debt Obligations
 
We have a substantial amount of debt, as discussed more fully (and certain capitalized terms used below defined) in Item 7,"Liquidity" and Note 5 of the Notes to Consolidated Financial Statements, included herein. Since February 2009, we have satisfied substantially all principal and interest payments due under our debt facilities with our cash flows and asset sales.
 
As of September 25, 2016, our debt consists of the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”) due March 2022, pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”), of which $385,000,000 is currently outstanding as of September 25, 2016;
 
$250,000,000 first lien term loan (the "1st Lien Term Loan") due March 2019 and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”), of which $101,304,000 is outstanding at September 25, 2016; and

$150,000,000 12.0% second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”) due December 2022, of which $130,863,000 is outstanding at September 25, 2016.

Our ability to make payments on our indebtedness will depend on our ability to generate future cash flows from operations. Cash generated from future asset sales could serve as an additional source of repayment. This ability, to a certain extent, is subject to general economic, financial, competitive, business, legislative, regulatory and other factors that are beyond our control.

At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. This liquidity amount excludes any future cash flows. Our adjusted EBITDA has been strong for the last seven years and has exceeded $153,000,000 in each year from 2011 through 2016, but there can be no assurance that such results will continue. We expect all interest and principal payments due in the next twelve months will be satisfied by our continuing cash flows and certain asset sales, which will allow us to maintain an adequate level of liquidity.

At September 25, 2016, the principal amount of our outstanding debt totals $617,167,000. At September 25, 2016 and September 27, 2015 our debt, net of cash, is 3.9 times and 4.4 times our adjusted EBITDA, respectively.

Final maturities of our debt are March 2019 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, 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 applicable lenders to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, respectively, including, without limitation, the right to accelerate the repayment of 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, if necessary. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.


13


ECONOMIC CONDITIONS
 
General Economic Conditions May Continue To Impact Our Revenue And Operating Results
 
It is difficult to estimate the level of economic growth or contraction as current and future conditions in the economy have an inherent degree of uncertainty. Adverse changes may occur to our business as a result of weak global economic conditions, declining oil prices, wavering consumer confidence, unemployment, declines in stock markets, contraction of credit availability, changes in interest rates, declines in real estate values, or other factors affecting economic conditions in general. These changes may negatively affect the sales of our products, increase exposure to losses from bad debts, increase the cost and decrease the availability of financing, or increase costs associated with publishing and distributing our publications.

OPERATING REVENUE
 
Our Revenue May Not Return To Historical Levels

A significant portion of our revenue is derived from advertising. The demand for advertising is sensitive to the overall level of economic activity, both locally and nationally. Newspaper publishing is both capital and labor intensive and, as a result, newspapers may not be able to quickly reduce cost. Accordingly, changes in advertising and circulation revenue could have a disproportionate effect on our results of operations.

Operating revenue in most categories has decreased since 2007 and may decrease in the future. Such decreases may not be offset by growth in advertising in other categories, such as digital revenue which has been rising since 2010. Historically, newspaper publishing has been viewed as a cost-effective method of delivering various forms of advertising. There can be no guarantee that this historical perception will guide future decisions on the part of advertisers. Web sites and applications for mobile devices distributing news and other content continue to gain popularity. As a result, audience attention and advertising spending are shifting and may continue to shift from traditional print media to digital media. As media audiences increasingly move to consume news and information digitally, we expect that advertisers will allocate greater portions of their future budgets to digital media advertising, which can offer more measurable returns than traditional print media through pay for performance and keyword-targeted advertising. If our efforts to adapt to evolving technological developments in the media industry are unsuccessful, or if we fail to correctly anticipate shifts in audience demand and digital media trends, we may be unable to provide the services, media and content that audiences and potential audiences in our markets prefer and we may be unable to provide the returns on ad spending that our advertisers seek. This increased competition and shift to the digital consumption of news and information has had, and may continue to have, an adverse effect on our business and financial results. The digital media industry has greater competitive challenges than print because barriers to entry can be low and geographic location is less relevant.

Technological developments also pose additional challenges that could adversely affect our revenue and competitive position. New delivery platforms may lead to pricing restrictions and the loss of a direct relationship with consumers. We may also be adversely affected if the use of technology developed to block the display of advertising on websites and other digital platforms proliferates.

The rates we charge for advertising are, in part, related to the size of the audience of our publications and digital products. There is significant competition for readers and viewers from other media. Our business may be adversely affected to the extent individuals decide to obtain news, entertainment, classified listings and local shopping information from digital or other media, to the exclusion of our outlets for such information.

Retail Advertising

Many advertisers, including major retail store chains, automobile manufacturers and dealers, banks and telecommunications companies, have experienced significant merger and acquisition activity over the last several years, and some have gone out of business, effectively reducing the number of brand names under which the merged entities operate. Changes in the economy and consumer shopping habits such as the increasing use of online shopping, drive advertising spending and retailers approach to advertising and marketing their goods and services.


14


Classified Advertising

Classified advertising is the category that has been most significantly impacted by changing advertising trends and the increase in digital/classified advertising competitors. All categories of classified advertising have generally declined since 2007.

See "Advertising and Marketing Services” in Item 1, included herein, for additional information on the risks associated with advertising revenue.

Subscription Revenue

Advertising and subscription revenue is affected by readership of our print publications and digital products. Although our aggregate print and digital audience is relatively stable, subscription sales have nonetheless been declining for many years, reflecting general trends in the newspaper industry, including consumer migration toward digital platforms and other media for news and information. The possibility exists that future subscription price increases may be difficult to accomplish or maintain and as a result subscription sales may decline, and price decreases may be necessary to retain or grow subscription volume. We believe we are maintaining our share of audience in our local markets through digital audience growth and strong print newspaper readership.

 
As audience attention increasingly focuses on digital media, print circulation of our newspapers may be adversely affected, which may decrease subscription revenue and exacerbate declines in print advertising. We face increasing competition from other digital news sources which can impact subscription revenue. This competition has increased as a result of the continued development of new digital media technologies. To maintain our subscription base, we may be required to incur additional costs that we may not be able to recover through subscription and advertising revenue. We may not be able to achieve a profitable balance between subscription levels and advertising revenue. In addition, if we are not successful in growing our digital businesses, including digital subscription revenue, to offset declines in revenue from our print products, our business, financial condition and prospects will be adversely affected.

In 2014, we began the transition of our subscriptions to full access, including the printed edition, desktop, mobile and tablet. Our ability to build a subscriber base on our digital platforms through these packages depends on market acceptance, consumer habits, pricing, an adequate digital infrastructure, terms of delivery platforms and other factors. In addition, the metered model and/or the price increases may result in fewer page views or unique visitors to our digital platforms if viewers are unwilling to pay to gain access to our digital content after reaching the maximum number of free articles in a month. Stagnation, or a decline in traffic levels, may adversely affect our advertiser base and advertising rates and result in a decline in digital revenue.

See "Audiences” in Item 1, included herein, for additional information on the risks associated with subscription revenue.

If We Are Not Successful In Growing Our Digital Business, Our Business, Financial Condition, Results Of Operations And Prospects Could Be Adversely Affected

Our future performance depends to a significant degree upon the development and management of our digital business. The growth of our digital business over the long term depends on various factors, including, among other things, the ability to:

Continue to increase digital audiences;

Attract advertisers to our digital platforms;

Maintain or increase the advertising rates on our digital platforms;

 
Exploit new and existing technologies to distinguish our products and services from those of competitors and develop new content, products and services;

Invest funds and resources in digital opportunities; and

Partner with, or use services from, providers that can assist us in effectively growing our digital business.

15


Create digital content that is useful and attractive to audiences in our markets.

In addition, we expect that our digital business will continue to increase as a percentage of our total revenue. In 2016, total digital revenue (including revenue from advertising and marketing services and digital services, mainly TownNews.com) comprised 16.4% of total revenue, as compared to 14.5% in 2015. As our digital business becomes a greater portion of our overall business, we will face a number of increased risks from managing our digital operations, including, but not limited, to the following:

Continuing training of our sales force to more effectively sell digital advertising, combined digital and print advertising packages versus our historical print advertising business;

Attracting and retaining employees with skill sets and the knowledge base needed to successfully operate our digital business; and

Managing the transition to a digital business from a historically print-focused business.

OPERATING EXPENSES
 
We May Not Be Able To Reduce Future Expenses To Offset Potential Revenue Declines
 
We reduced cash costs(1) of our continuing operations (compensation, newsprint and ink, other operating expenses and workforce adjustments) significantly since 2011. Such expense reductions are not expected to significantly impact our ability to deliver advertising, news or other content to our customers. As a result of the significantly reduced cost structure to date, future cost reductions may not be as significant.
 
Newsprint comprises approximately five percent of our operating costs. See “Newsprint” in Item 1, and “Commodities” in Item 7A, included herein, for additional information on the risks associated with changes in newsprint costs.

In addition, the technological developments and changes we need to make to our business, may require significant capital investments. We may be limited in our ability to invest funds and resources in digital products, services or opportunities, and we may incur costs of research and development in building and maintaining the necessary and continually evolving technology infrastructure. As a result, our digital business could suffer if we are unable to make these investments.

(1) See Non-GAAP Financial Measures: in Item 7, included herein, for additional information.

We May Incur Additional Non-Cash Impairment Charges

We have significant amounts of goodwill and identified intangible assets. Since 2007 we have recorded impairment charges totaling almost $1.3 billion to reduce the value of certain of these assets. Should general economic, market or business conditions decline, and have a negative impact on our stock price or projected future cash flows, we may be required to record additional impairment charges in the future. Such charges would not impact our cash flows or debt covenant compliance. See “Critical Accounting Policies” in Item 7, included herein, for additional information on the risks associated with such assets.

Sustained Increases In Costs Of Employee Health And Welfare Benefits May Reduce Our Profitability

In recent years, we experienced significant increases in the cost of employee medical benefits because of economic factors beyond our control, including increases in health care costs. At least some of these factors may continue to put upward pressure on the cost of providing medical benefits. Although we have actively sought to control increases in these costs, there can be no assurance that we will succeed in limiting cost increases, and continued upward pressure could reduce the profitability of our businesses.


16


Sustained Increases In Funding Requirements Of Our Pension and Postretirement Obligations
May Reduce The Cash Available For Our Business

Pension liabilities, net of plan assets, totaled $55.1 million at September 25, 2016. The Company does not expect to be required to make pension contributions in 2017. At September 25, 2016 the assets of one of our postretirement medical plans exceeded plan liabilities by $9.1 million.

Our pension and postretirement plans invest in a variety of equity and debt securities. Future volatility and disruption in the securities markets could cause declines in the asset values of our pension and postretirement plans. In addition, a decrease in the discount rates or changes to mortality estimates and other assumptions used to determine the liability could increase the benefit obligation of the plans. Unfavorable changes to the plan assets and/or the benefit obligations could increase the level of required contributions above what is currently estimated, which could reduce the cash available for our business. Legislation passed in 2012, 2014 and 2015 temporarily reduced funding requirements for our pension plans, but those payments will eventually need to be restored unless discount rates and/or plan assets increase.

We Expect To Be Subject To Withdrawal Liability In Connection With One Multiemployer Pension Plan And May Be Subject To Additional Withdrawal Liabilities In Connection With Other Multiemployer Pension Plans, Which May Reduce The Cash Available For Our Business

Pursuant to our collective bargaining obligations, we contribute to three multiemployer pension plans on behalf of certain of our employees. Based on the most recent communications from the plans’ administrators, two of these plans are currently in “critical” status, as that term is used in relation to such plans under the PPA. For plans that are in critical status, benefit reductions may apply and/or we could be required to make additional contributions.

One of our enterprise's bargaining units withdrew from representation, and as a result we could be subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount of such liability, if any, will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. The withdrawal liability is expected to be funded over a 20 year period.

If, we were to withdraw from one of these plans or trigger a partial withdrawal due to declines in contribution base units, and the plan had unfunded vested benefits at the time of our withdrawal or partial withdrawal, we could incur a significant plan withdrawal liability, which could reduce the cash available for our business.
 
EQUITY CAPITAL
 
A Decrease In Our Stock Price May Limit The Ability To Trade Our Stock
Or For The Company To Raise Equity Capital

Under the NYSE listing standards, if our common stock fails to maintain an adequate per share price and our total market capitalization falls below $50.0 million, our common stock could be removed from the NYSE and traded in the over the counter market. In July 2011, the NYSE 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. However, there can be no assurance that we will continue to be able to meet these listing standards, and the removal of our common stock from the NYSE could adversely affect our ability to raise equity capital.

OTHER

Cybersecurity Risks Could Harm Our Ability To Operate Effectively

In the 13-weeks ended September 25, 2016, 17.5% of our revenue was obtained from digital sources, including advertising and one of our businesses, TownNews.com, that provides digital infrastructure and digital publishing services for us and other companies.

We use computers and digital technology in substantially all aspects of our business operations. Such uses give rise to cybersecurity risks, including the misappropriation of personally identifiable information that we store and manage

17


and disabling or taking over of our websites. We have preventive systems and processes in place to protect against the risk of cyber incidents. However, the techniques used to obtain unauthorized access and to disable systems and websites change frequently and may be difficult to detect for long periods of time. There can be no assurance that we, or the security systems we implement, will protect against all of these rapidly changing risks. Prolonged system outages or a cyber incident that goes undetected could reduce our print and/or digital revenue, increase our operating costs, disrupt our operations, harm our reputation, lead to legal exposure to customers and/or subject us to liability under laws and regulations that protect personal data. We maintain insurance coverage against certain of such risks, but cannot guarantee that such coverage will be applicable or sufficient with respect to any given incident.

We May Not Be Able To Protect Our Intellectual Property Rights, Which May Adversely Affect Our Business

Our business depends on our intellectual property, including our valuable brands and content. We believe our proprietary trademarks and other intellectual property rights are important to our continued success and our competitive position.

Unauthorized parties may attempt to copy or otherwise obtain and use our content or infringe upon, dilute, reproduce, misappropriate or otherwise violate our intellectual property. There can be no assurance that the steps we have taken to protect our proprietary rights will be successful in any given case.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
Our executive offices are located in leased facilities at 201 North Harrison Street, Suite 600, Davenport, Iowa. The initial lease term expires April 30, 2019.

All of our principal printing facilities are owned, except Madison, Wisconsin (which is owned by MNI), Tucson (which is jointly owned by Star Publishing and Citizen), St. Louis (as described below) and leased land for the Helena, Montana plant. All facilities are well maintained, in good condition, suitable for existing office and publishing operations, as applicable, and adequately equipped. With the exception of St. Louis, none of our facilities is individually significant to our business.

Information related to St. Louis facilities at September 25, 2016 is as follows:
(Square Feet)
Owned

Leased

 
 
 
PD LLC
665,000

2,500

Suburban Journals
9,000

4,000

   
Nearly 43% of our daily newspapers, as well as many of our nearly 300 other publications, are printed at other Company facilities, or such printing is outsourced, to enhance operating efficiency. We are continuing to evaluate additional insourcing and outsourcing opportunities in order to more effectively manage our operating and capital costs.
 
Our newspapers and other publications have formal or informal backup arrangements for printing in the event of a disruption in production capability.

ITEM 3. LEGAL PROCEEDINGS
 
We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


18


PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our Common Stock is listed on the NYSE. In March 2011, in accordance with sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. The table below includes the high and low prices of Common Stock for each calendar quarter during the past three years and the closing price at the end of each quarter.
 
Quarter Ended
 
(Dollars)
December

 
March

 
June

 
September

 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
High
2.54

 
2.20

 
2.43

 
3.92

Low
1.43

 
1.15

 
1.69

 
1.74

Closing
1.68

 
1.80

 
1.91

 
3.75

 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
High
3.93

 
3.73

 
3.55

 
3.40

Low
3.07

 
2.74

 
2.78

 
1.36

Closing
3.68

 
3.17

 
3.33

 
2.08

 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
High
3.92

 
5.42

 
4.78

 
4.72

Low
2.60

 
3.30

 
3.81

 
3.24

Closing
3.47

 
4.47

 
4.45

 
3.38

 
At September 25, 2016, we had 6,350 holders of record of our Common Stock.
 
Our debt agreements generally limit our ability to pay dividends and repurchase Common Stock unless in each case no default has occurred and we have satisfied certain financial measurements. See Note 4 of the Notes to Consolidated Financial Statements, included herein.


19


PERFORMANCE PRESENTATION
 
The following graph compares the percentage change in the cumulative total return of the Company, the Standard & Poor's ("S&P") 500 Stock Index, and a peer group index, in each case for the five years ended September 30, 2016 (with September 30, 2011 as the measurement point). Total return is measured by dividing (a) the sum of (i) the cumulative amount of dividends declared for the measurement period, assuming dividend reinvestment and (ii) the difference between the issuer's share price at the end and the beginning of the measurement period, by (b) the share price at the beginning of the measurement period.

performancegrapha06.jpg

Copyright© 2016 Standard & Poor's, a division of S&P Global. All rights reserved.
 
The value of $100 invested on September 30, 2011 in stock of the Company, the Peer Group Index and in the S&P 500 Stock Index, including reinvestment of dividends, is summarized in the table below.
 
September 30
 
(Dollars)
2011

 
2012

 
2013

 
2014

 
2015

 
2016

 
 
 
 
 
 
 
 
 
 
 
 
Lee Enterprises, Incorporated
100.00

 
189.74

 
338.46

 
433.33

 
266.67

 
480.77

Peer Group Index
100.00

 
163.87

 
216.20

 
208.59

 
198.19

 
211.93

S&P 500 Stock Index
100.00

 
130.20

 
155.39

 
186.05

 
184.91

 
213.44

 
The S&P 500 Stock Index includes 500 U.S. companies in the industrial, transportation, utilities and financial sectors and is weighted by market capitalization. The New Peer Group Index is comprised of three U.S. publicly traded companies with significant newspaper publishing operations (excluding the Company) and is weighted by market capitalization. The Peer Group Index includes A.H. Belo Corp., The McClatchy Company and The New York Times Company.

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ITEM 6.  SELECTED FINANCIAL DATA
 
Selected financial data is as follows:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2016

 
2015

 
2014

 
2013

 
2012

 
 
 
 

 
 

 
 

 
 
OPERATING RESULTS (1)
 
 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
614,364

 
648,543

 
660,877

 
677,774

 
709,580

Operating expenses, excluding depreciation, amortization, and impairment of intangible and other assets
476,413

 
501,760

 
505,822

 
517,047

 
546,863

Depreciation and amortization
43,441

 
45,563

 
48,511

 
55,527

 
65,191

Loss (gain) on sales of assets, net
(3,139
)
 
106

 
(1,338
)
 
110

 
(52
)
Impairment of intangible and other assets (2)
2,185

 

 
2,980

 
171,094

 
1,388

Equity in earnings of associated companies
8,533

 
8,254

 
8,297

 
8,685

 
7,231

Operating income (loss)
103,997

 
109,368

 
113,199

 
(57,319
)
 
103,421

Financial income
400

 
337

 
385

 
300

 
236

Interest expense
(64,233
)
 
(72,409
)
 
(79,724
)
 
(89,447
)
 
(83,078
)
Debt financing and administration costs
(5,947
)
 
(5,433
)
 
(22,927
)
 
(646
)
 
(2,823
)
Gain on insurance settlement
30,646

 

 

 

 

Other, net
(6,668
)
 
6,049

 
3,028

 
7,889

 
(2,533
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
36,019

 
24,318

 
7,671

 
(76,478
)
 
(13,381
)
Discontinued operations, net of income taxes

 

 

 
(1,246
)
 
(2,918
)
Net income (loss)
36,019

 
24,318

 
7,671

 
(77,724
)
 
(16,299
)
 
 
 
 
 
 
 
 
 
 
Income (loss) attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
6,795

 
(78,317
)
 
(16,698
)
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
6,795

 
(77,071
)
 
(13,780
)
 
 
 
 
 
 
 
EARNINGS (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
 
Continuing operations
0.66

 
0.44

 
0.13

 
(1.49
)
 
(0.28
)
Discontinued operations

 

 

 
(0.02
)
 
(0.06
)
 
0.66

 
0.44

 
0.13

 
(1.51
)
 
(0.34
)
 
 
 
Diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
0.64

 
0.43

 
0.13

 
(1.49
)
 
(0.28
)
Discontinued operations

 

 

 
(0.02
)
 
(0.06
)
 
0.64

 
0.43

 
0.13

 
(1.51
)
 
(0.34
)
 
 
 
Weighted average common shares:
 
 
 
 
 
 
 
 
 
Basic
53,198

 
52,640

 
52,273

 
51,833

 
49,261

Diluted
54,224

 
53,931

 
53,736

 
51,833

 
49,261

 
 
 
BALANCE SHEET INFORMATION (End of Year)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
689,126

 
747,825

 
811,275

 
827,705

 
1,061,136

Debt, including current maturities (3)
617,167

 
725,872

 
804,750

 
847,500

 
945,850

Debt, net of cash and restricted cash (3)
600,183

 
714,738

 
787,605

 
829,938

 
931,930

Stockholders' deficit
(128,485
)
 
(159,393
)
 
(178,253
)
 
(170,350
)
 
(114,633
)
(1
)
2012 includes 53 weeks of business operations. All other years include 52 weeks.

21


(2
)
The Company recorded pretax, non-cash impairment charges to reduce the carrying value of assets as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
2013

 
2012

 
 
 
 
 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
 
 
 
 
Goodwill

 

 

 

 

Non-amortized intangible assets
818

 

 
1,936

 
1,567

 

Amortizable intangible assets

 

 

 
169,041

 

Property, equipment and other assets
1,367

 

 
1,044

 
486

 
1,388

 
2,185

 

 
2,980

 
171,094

 
1,388

 
 
 
 
 
 
 
 
 
 
Discontinued operations

 

 

 

 
3,606

(3
)
Principal amount of debt, excluding fair value adjustments. See Note 4 of the Notes to Consolidated Financial Statements, included herein.
 
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion includes comments and analysis relating to our results of operations and financial condition as of, and for 2016, 2015 and 2014. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, included herein.
 
NON-GAAP FINANCIAL MEASURES
 
We use the following non-GAAP financial performance measure for purpose of evaluating our performance and liquidity. We believe that each of the non-GAAP measures provides additional useful information to investors by allowing them to view our businesses through the eyes of our management and Board of Directors, facilitating comparison of results across historical periods, and providing a focus on the underlying ongoing operating performance and liquidity of our businesses. The non-GAAP financial measures we use are as follows:

Adjusted EBITDA is a non-GAAP financial performance measure that enhances financial statement users overall understanding of the operating performance of the Company. The measure isolates, unusual, infrequent or non-cash transactions from the operating performance of the business. This allows users to easily compare operating performance among various fiscal periods and understand how management measures the performance of the business. This measure also provides users with a benchmark that can be used when forecasting future operating performance of the Company that excludes unusual, nonrecurring or one time transactions. Adjusted EBITDA is also a component of the calculation used by stockholders and analysts to determine the value of our business when using the market approach, which applies a market multiple to financial metrics. It is also a measure used to calculate the leverage ratio of the Company, which is a key financial ratio monitored and used by the Company and its investors. Adjusted EBITDA is defined as net income (loss), plus nonoperating expenses (net), income tax expenses (benefit), depreciation, amortization, loss (gain) on sale of assets, impairment charges, workforce adjustment costs, stock compensation and our 50% share of EBITDA from TNI and MNI, minus equity in earnings of TNI and MNI curtailment gains.
  
Adjusted Earnings and Adjusted Earnings Per Diluted Common Share are non-GAAP financial performance measures that we believe offer a useful metric to evaluate overall performance of the Company by providing financial statement users the operating performance of the Company on a per share basis excluding unusual and infrequent transactions. It is defined as income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share adjusted to exclude both unusual matters and those of a substantially non-recurring nature.

Cash Costs is a non-GAAP financial performance measure of operating expenses that are settled in cash and is useful to investors in understanding the components of the Company's cash operating costs. Generally, the Company provides forward-looking guidance to Cash Costs, which can be used by financial statement users to asses the Company's ability to manage and control its operating cost structure. Cash Costs is defined as compensation, newsprint and ink, other operating expenses and certain unusual matters, such as workforce adjustment costs. Depreciation, amortization, impairment charges, other non-cash operating expenses and other unusual matters are excluded. Cash Costs

22


are also presented excluding workforce adjustments, which are paid in cash.

A table reconciling adjusted EBITDA to net income (loss), the most directly comparable measure under GAAP, is set forth below under the caption "Non-GAAP Financial Measures".

Reconciliations of adjusted earnings and adjusted earnings per diluted common share to income (loss) attributable to Lee Enterprises, Incorporated and earnings (loss) per diluted common share, respectively, the most directly comparable measures under GAAP, are set forth in Item 7, included herein, under the caption “Overall Results”.

The subtotals of operating expenses representing cash costs can be found in tables in Item 7, included herein, under the captions “2016 vs. 2015” and “2015 vs. 2014”.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)

The table below reconciles the non-GAAP financial performance measure of adjusted EBITDA to net income, the most directly comparable GAAP measure:
(Thousands of Dollars)
2016

2015

2014

 
 
 
 
Net Income
36,019

24,318

7,671

Adjusted to exclude
 
 
 
Income tax expense
22,176

13,594

6,290

Non-operating expenses, net
45,802

71,456

99,238

Equity in earnings of TNI and MNI
(8,533
)
(8,254
)
(8,297
)
Loss (gain) on sale of assets, net
(3,139
)
106

(1,338
)
Impairment of intangible and other assets
2,185


2,980

Depreciation and amortization
43,441

45,563

48,511

Workforce adjustments
1,825

3,304

1,265

Stock compensation
2,306

1,971

1,481

Add:
 
 
 
Ownership share of TNI and MNI EBITDA (50%)
11,705

11,246

11,236

Adjusted EBITDA
153,787

163,304

169,037

    
CRITICAL ACCOUNTING POLICIES
 
Our discussion and analysis of operations and financial condition are based upon our Consolidated Financial Statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Additional information follows with regard to certain of the most critical of our accounting policies.

Goodwill and Other Intangible Assets
 
In assessing the recoverability of goodwill and other non-amortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections, stock price and other industry or market considerations. This assessment is made as of the first day of our fourth fiscal quarter of each year.


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We analyze goodwill and other non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.

Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach and a market approach weighted equally.

Under the income approach, fair value is determined by estimating future cash flows discounted to their present value. The market approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the publishing industry. Determining the fair value is judgmental in nature and involves significant estimates and assumptions including estimates of future revenue, cash costs, operating margins, discount rates, valuation multiples of entities engaged in the same or similar lines of business and future economic and market conditions.

There are significant inherent uncertainties and judgments involved in estimating fair value. An extension or deepening of the industry downturn could have a negative impact on the cash flow analysis. While we believe we have used reasonable estimates and assumptions to estimate the fair value of our reporting unit, it is possible that material changes could occur due to factors impacting our industry. If actual results are not consistent with our estimates and assumptions, such as future revenue, operating margins, EBITDA, growth rates and discount rates, we may be required to reassess the fair value of goodwill in the future.

Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.

We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.

The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
We also periodically evaluate our determination of the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.

In 2016, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2015 , we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was significantly in excess of its carrying value. As a result no goodwill impairment was recorded. In 2014, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%.

In 2016 and 2014, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. We also recorded pretax, non-cash charges to reduce the carrying value of property, equipment and other assets in 2016 and 2014. We recorded deferred income tax benefits related to these charges.
 

24


A summary of impairment charges is included in the table below:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Non-amortized intangible assets
818

 

 
1,936

Property, equipment and other assets
1,367

 

 
1,044

 
2,185

 

 
2,980


Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in additional impairment charges in the future.
 
Pension, Postretirement and Postemployment Benefit Plans
 
We evaluate our liability for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan assets, and other factors. If we used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
 
Increases in market interest rates, which may impact plan assumptions, generally result in lower service costs for current employees, higher interest expense and lower liabilities. Actual returns on plan assets that are lower than the plan assumptions will generally result in decreases in a plan's funded status and may necessitate additional contributions.

Income Taxes
 
Deferred income taxes are provided using the asset and liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. We currently have recorded valuation allowances that we will maintain until, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Our income tax expense recorded in the future may be increased or decreased to the extent our valuation allowances change. An increase in the valuation allowance could result in additional income tax expense, while a decrease in the valuation allowance could result in a reduction to income tax expense, in such period and could have a significant impact on our future earnings.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. Changes in accounting for uncertain tax positions can result in additional variability in our effective income tax rate.

Our current and deferred income tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates are reviewed and adjusted, if needed, throughout the year. Adjustments between our estimates and the actual results of filed returns are recorded when identified.
 
We file income tax returns with the Internal Revenue Service (“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 Income and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined.
 

25


 Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term as the product is delivered or made available or as newspapers are individually sold. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for print or digital products or advance payments for advertising.
 
Uninsured Risks
 
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits exposure to large claims. We accrue our estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts.
 
Our accrued reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

An increasing frequency of large claims, deterioration in overall claim experience or changes in federal or state laws affecting our liability for such claims could increase the volatility of expenses for such self-insured risks.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2016, the Financial Accounting Standards Board ("FASB") issued a new standard to conform the presentation in the statement of cash flows for certain transactions, including cash distributions from equity method investments, among others. The adoption of the new standard is required in 2019. The adoption of this standard may reclassify certain cash receipts within the Consolidated Statements of Cash Flows.

In March 2016, the FASB issued a new standard with improvements to the accounting for employee share-based payments. The new standard simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements, as well as classification in the statement of cash flows. The adoption of the new standard is required in 2018. We have not determined the potential effects on the Consolidated Financial Statements.

In February 2016, the FASB issued a new standard for the accounting treatment of leases. The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Leases are classified as finance or operating. The new standards primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the new standard is largely unchanged from the previous accounting standard. In addition, the new standard expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach, which includes a number of practical expedients. The adoption of this new standard is required in the first quarter of fiscal year 2020 with early adoption permitted. We have not determined the potential effects on the Consolidated Financial Statements.

In April 2015, the FASB issued a new standard for the presentation of debt issuance costs. The new standard will streamline the balance sheet presentation of debt related valuations. Debt issuance costs are currently recognized as deferred charges and presented as an asset while debt discounts and premiums are treated as adjustments to the related debt. Under the new standard, debt issuance costs will be recognized as reductions to the related debt. The adoption of the new standard is required in 2017. The adoption of this standard will serve to reclassify certain amounts within our Consolidated Balance Sheets.

In August 2014, the FASB issued a new going concern standard. The new standard changes the period that companies use to evaluate their ability to meet obligations to a look-forward period of one year from the financial statement issuance date, from one year from the balance sheet date. The new standard also changes disclosure requirements. The

26


adoption of the new standard is required in 2017. We do not expect the adoption of this standard to have a material impact on our Consolidated Financial Statements, taken as a whole.

In May 2014, the FASB issued new accounting requirements for the recognition of revenue from contracts with customers. The new requirements also include additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of these requirements is required in 2019. We have not yet determined the potential impact on our Consolidated Financial Statements.



27


CONTINUING OPERATIONS

2016 vs. 2015

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2016

 
2015

 
Percent Change

 
 
 
 
 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
239,136

 
262,079

 
(8.8
)
Classified
100,582

 
116,480

 
(13.6
)
National
22,114

 
22,422

 
(1.4
)
Niche publications and other
11,631

 
11,118

 
4.6

Total advertising and marketing services revenue
373,463

 
412,099

 
(9.4
)
Subscription
194,002

 
194,474

 
(0.2
)
Digital services
14,240

 
12,522

 
13.7

Commercial printing
12,269

 
11,875

 
3.3

Other
20,390

 
17,573

 
16.0

Total operating revenue
614,364

 
648,543

 
(5.3
)
Compensation
229,752

 
239,028

 
(3.9
)
Newsprint and ink
26,110

 
30,263

 
(13.7
)
Other operating expenses
218,726

 
229,165

 
(4.6
)
Workforce adjustments
1,825

 
3,304

 
(44.8
)
Cash costs
476,413

 
501,760

 
(5.1
)
 
137,951

 
146,783

 
(6.0
)
Depreciation
17,291

 
18,418

 
(6.1
)
Amortization
26,150

 
27,145

 
(3.7
)
Loss (gain) on sales of assets, net
(3,139
)
 
106

 
NM

Impairment of intangible and other assets
2,185

 

 
NM

Equity in earnings of associated companies
8,533

 
8,254

 
3.4

Operating income
103,997

 
109,368

 
(4.9
)
Non-operating expense, net
(45,802
)
 
(71,456
)
 
(35.9
)
Income from continuing operations before income taxes
58,195

 
37,912

 
53.5

Income tax expense
22,176

 
13,594

 
63.1

Net income
36,019

 
24,318

 
48.1

Net income attributable to non-controlling interests
(1,058
)
 
(1,002
)
 
5.6

Income attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
49.9

Other comprehensive loss, net
(6,503
)
 
(6,445
)
 
0.9

Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
28,458

 
16,871

 
68.7

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
0.66

 
0.44

 
47.7

Diluted
0.64

 
0.43

 
48.8



28


Advertising and Marketing Services Revenue

In 2016 advertising and marketing services revenue decreased $38,636,000, or 9.4% compared to 2015. Retail advertising decreased 8.8%. The decrease in advertising and marketing services revenue is due to reduced advertising volume primarily from large retailers, big box stores and classifieds. Digital retail advertising on a stand-alone basis, which is the largest digital advertising category, increased 9.6%, partially offsetting print declines.

Classified revenue decreased $15,898,000, or 13.6% in 2016 as we continue to experience a reduction in print and digital advertising in automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis decreased 5.5%.

National advertising decreased $308,000, or 1.4%. Digital national advertising on a stand-alone basis increased 20.4% as a result of improved inventory management of available ad positions offered on the national advertising exchanges and improved pricing. Revenue in niche publications and other increased $513,000, or 4.6% mainly attributed to increases in creative service charges.

On a stand alone basis, digital advertising and marketing services revenue increased 5.6%, to $86,279,000 in 2016, representing 23.1% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 19.6% in 2016. Total digital revenue, including advertising and marketing services and all other digital business, totaled $100,519,000 in 2016, an increase of 6.6% from a year ago, representing 16.4% of total operating revenue. Print advertising, including preprints and print marketing services revenue decreased 13.1%.

Subscription and Other Revenue

Subscription revenue decreased $472,000, or 0.2% in 2016. Subscription revenue was virtually flat as price increases and the addition of premium content days with higher single day pricing almost completely offset revenue declines from print subscription units loses.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.8 million in the September 2016 quarter. Sunday circulation totaled 1.2 million.

Digital services revenue increased $1,718,000, or 13.7% in 2016, largely due to TownNews.com, which generates the majority of its revenue from content management services but is expanding into digital ad agency services for web, mobile and social products at our properties as well as 1,600 other newspapers, and media operations. Commercial printing revenue increased 3.3% in 2016, due to new customers offset by decreased volume for existing customers at several of our larger markets. Other revenue increased $2,817,000, or 16.0% in 2016, due to an increase in revenue for delivery of third party newspapers.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted an average of 26.0 million unique visitors in the quarter ended September 2016, with 218.1 million page views. Research in our larger markets indicates we continue to reach over 74% of all adults in the market through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Operating expenses decreased 5.2% in 2016. Cash costs decreased by $25,347,000, or 5.1% in 2016.

Compensation expense decreased $9,276,000, or 3.9% in 2016, driven by a decline of 7.9% in average full-time equivalent employees. Costs associated with our self-insured medical plan increased $4.0 million in 2016 due to higher claims costs compared to 2015, offsetting some of the costs due to the reduction in full-time equivalent employees.

Newsprint and ink costs decreased $4,153,000, or 13.7% in 2015, primarily as a result of reduction in newsprint volume of 10.7%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint prices on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of goods sold, facility expenses among others, decreased $10,439,000, or 4.6% in 2016. Cost reductions were primarily related to the impact of both subscriber delivery cost and a decrease in postage costs primarily related to a reduction in direct

29


mail advertising volumes.
Excluding workforce adjustments, cash costs decreased 4.8% in 2016.

Reductions in staffing resulted in workforce adjustment costs totaling $1,825,000 and $3,304,000 in 2016 and 2015, respectively.

For fiscal year 2017, we expect cash costs excluding workforce adjustments on a same property basis, to decrease between 2.5% to 3.5%.

Results of Operations

Depreciation expense decreased $1,127,000, or 6.1%, and amortization expense decreased $995,000, or 3.7% in 2016. Sales of operating assets including the sale of the Provo Daily Herald in August 2016, resulted in a net gain of $3,139,000 in 2016 compared to a net loss of $106,000 in 2015.

In 2016, we recorded a $818,000 non-cash charge to reduce the carrying values of certain non-amortized intangible assets to fair value. We also recorded $1,367,000 pre-tax, non-cash charges for assets considered other than temporarily impaired in 2016.

Equity in earnings of TNI and MNI increased $279,000 in 2016.

The factors noted above resulted in operating income of $103,997,000 in 2016 compared to $109,368,000 in 2015.

Nonoperating Income and Expenses

Interest expense decreased $8,176,000, or 11.3%, to $64,233,000 in 2016 due to lower debt balances. Our weighted average cost of debt, excluding amortization of debt financing cost, increased to 9.7% in 2016 compared to 9.4% in 2015, as our Notes and 2nd Lien Term Loan balances are now a greater percentage of our outstanding debt due to reduction on the 1st Lien Term Loan, our lowest cost of debt.

In 2016, we recognized a $30,646,000 gain on an insurance settlement. The settlement represents our share of a subrogation recovery arising from the settlement of claims for damages suffered as a result of a 2009 loss at one of our production facilities.

We recognized $5,947,000 of debt financing and administrative costs in 2016 compared to $5,433,000 in 2015.

As more fully discussed in Note 4 of the Notes to the Consolidated Financial Statements, included herein, we recorded a liability for the Warrants, issued in connection with the Warrant Agreement. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expenses). Due to the fluctuation in the price of our Common Stock, we recorded non-operating expenses related to the increase in the value of the Warrants of $7,520,000 in 2016 and non-operating income related to the decrease in the value of the Warrants of $6,568,000, in 2015.

Overall Results

We recognized income tax expense at 38.1% of income before income taxes in 2016 and 35.9% in 2015. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the differences between the expected federal income tax rate to the actual tax rates.


30


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $34,961,000 in 2016 compared to $23,316,000 in 2015. We recorded earnings per diluted common share of $0.64 in 2016 and $0.43 in 2015. Excluding unusual matters, as detailed in the table below, adjusted earnings per diluted common share were $0.42 in 2016, compared to $0.31 in 2015. Per share amounts may not add due to rounding.
 
2016
 
2015
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
34,961

0.64

23,316

0.43

Adjustments:
 
 
 
 
Warrants fair value adjustment
7,519

 
(6,568
)
 
Gain on insurance settlement
(30,646
)
 

 
 
(23,127
)
 
(6,568
)
 
Income tax effect of adjustments, net
10,726

 

 
 
(12,401
)
(0.23
)
(6,568
)
(0.12
)
Income attributable to Lee Enterprises, Incorporated, as adjusted
22,560

0.42

16,748

0.31




31


2015 vs. 2014

Operating results, as reported in the Consolidated Financial Statements, are summarized below:
(Thousands of Dollars and Shares, Except Per Share Data)
2015

 
2014

 
Percent Change

 
 
 
 
 
 
Advertising and marketing services revenue:
 
 
 
 
 
Retail
262,079

 
282,044

 
(7.1
)
Classified
116,480

 
126,277

 
(7.8
)
National
22,422

 
24,867

 
(9.8
)
Niche publications and other
11,118

 
10,059

 
10.5

Total advertising and marketing services revenue
412,099

 
443,247

 
(7.0
)
Subscription
194,474

 
176,826

 
10.0

Digital services
12,522

 
10,181

 
23.0

Commercial printing
11,875

 
12,050

 
(1.5
)
Other
17,573

 
18,573

 
(5.4
)
Total operating revenue
648,543

 
660,877

 
(1.9
)
Compensation
239,028

 
243,054

 
(1.7
)
Newsprint and ink
30,263

 
37,994

 
(20.3
)
Other operating expenses
229,165

 
223,509

 
2.5

Workforce adjustments
3,304

 
1,265

 
NM

Cash costs
501,760

 
505,822

 
(0.8
)
 
146,783

 
155,055

 
(5.3
)
Depreciation
18,418

 
20,920

 
(12.0
)
Amortization
27,145

 
27,591

 
(1.6
)
Loss (gain) on sales of assets, net
106

 
(1,338
)
 
NM

Impairment of intangible and other assets

 
2,980

 
NM

Equity in earnings of associated companies
8,254

 
8,297

 
(0.5
)
Operating income
109,368

 
113,199

 
(3.4
)
Non-operating expense, net
(71,456
)
 
(99,238
)
 
(28.0
)
Income from continuing operations before income taxes
37,912

 
13,961

 
NM

Income tax expense
13,594

 
6,290

 
NM

Net income
24,318

 
7,671

 
NM

Net income attributable to non-controlling interests
(1,002
)
 
(876
)
 
14.4

Income attributable to Lee Enterprises, Incorporated
23,316

 
6,795

 
NM

Other comprehensive loss, net
(6,445
)
 
(17,497
)
 
(63.2
)
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
16,871

 
(10,702
)
 
NM

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
0.44

 
0.13

 
NM

Diluted
0.43

 
0.13

 
NM


Total operating revenue decreased $12,334,000, or 1.9% in 2015 compared to the prior year. Excluding the impact of the subscription-related expense reclassification as a result of moving to fee-for-service delivery contracts at several of our newspapers, operating revenue for 2015 decreased 3.7%. This reclassification increases both print subscription revenue and other operating expenses, with no impact on operating cash flow or operating income. Certain delivery expenses were previously reported as a reduction of revenue. A table below under the heading Operating Expenses details the impact of the reclassification on revenue and cash costs. Unless otherwise noted, the comparisons below are presented on an as reported basis.

Advertising and Marketing Services Revenue

In 2015 advertising and marketing services revenue decreased $31,148,000, or 7.0%, compared to 2014. Retail advertising decreased 7.1%. The decrease in retail advertising revenue is due to reduced advertising volume primarily

32


from large retail and big box stores. Digital retail advertising on a stand-alone basis increased 5.6%, partially offsetting print declines.

Classified revenue decreased $9,797,000, or 7.8% in 2015 as we continue to experience a reduction in print advertising from automotive, employment and real estate in most of our markets. Digital classified revenue on a stand-alone basis increased 7.0%, partially offsetting print declines.

National advertising decreased $2,445,000 or 9.8%. Digital national advertising on a stand-alone basis increased 16.9% due to improved management of available ad positions offered on the national advertising exchanges and improved pricing. Advertising in niche publications and other increased $1,059,000, or 10.5%.

On a stand-alone basis, digital advertising and marketing services revenue increased 6.9%, to $81,735,000 in 2015, representing 19.8% of total advertising and marketing services revenue. Mobile advertising revenue, which is included in digital advertising, increased 24.8% in 2015. Total digital revenue for 2015, including advertising and marketing services and all other digital business, totaled $94 million, an increase of 8.8% from a year ago, representing 14.5% of total operating revenue. Print advertising, including preprints and print marketing services revenue decreased 9.9%

Subscription and Other Revenue

Subscription revenue increased $17,648,000, or 10.0% in 2015. Excluding the impact of the subscription-related expense reclassification, subscription revenue increased 3.6% or $6,055,000. The increase in subscription revenue in 2016 is primarily due to the effect of our full access subscription model, price increases and the addition of premium content days with higher single day pricing, in part offset by a decline in print units.

Our average daily newspaper circulation, including TNI, MNI and digital subscribers, totaled 0.9 million in the September 2015 quarter. Sunday circulation totaled 1.3 million.

Digital services revenue increased $2,341,000, or 23.0% in 2015, largely due to TownNews.com. Commercial printing revenue decreased $175,000, or 1.5% in 2015 due to decreased volume for existing customers at several of our large markets. Other revenue decreased $1,000,000, or 5.4%.

Our mobile, tablet, desktop and app sites, including TNI and MNI, attracted 24.9 million unique visitors in the month of September 2015, with 221.4 million page views. Research in our larger markets indicates we are maintaining our share of audience through the combination of digital audience growth and strong print newspaper readership.

Operating Expenses

Operating expenses decreased 1.5%, and cash cost decreased $4,062,000, or 0.8% in 2015. Excluding the impact of the subscription-related expense reclassification, cash costs decreased 3.1%. Also excluding workforce adjustments and the subscription-related expense reclassification, cash costs decreased 3.6% in 2015 or $17,694,000.

Compensation expense decreased $4,026,000, or 1.7% in 2015, driven by a decline in average full-time equivalent employees of 4.2%, partially offset by company-wide compensation increases in January 2015.

Newsprint and ink costs decreased $7,731,000, or 20.3% in 2015, primarily as a result of lower newsprint prices and a reduction in newsprint volume of 12.3%%. See Item 7A, “Commodities”, included herein, for further discussion and analysis of the impact of newsprint on our business.

Other operating expenses, which are comprised of all operating costs not considered to be compensation, newsprint, depreciation, amortization, or unusual matters including delivery, postage, outsourced printing, digital cost of good sold, facility expenses among others, increased $5,656,000, or 2.5% in 2015, due to the subscription-related expense reclassification. Excluding the impact of the subscription-related expenses reclassification, other operating expenses decreased 2.7%.

Reductions in staffing resulted in workforce adjustment costs totaling $3,304,000 and $1,265,000 in 2015 and 2014, respectively.


33


Certain results, excluding the impact of the subscription-related expense reclassification, are as follows:
(Thousands of Dollars)
2015

2014

Percent
Change

 
 
 
 
Subscription revenue, as reported
194,474

176,826

10.0

Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Subscription revenue, as adjusted
176,174

170,119

3.6

 
 
 
 
Total operating revenue, as reported
648,543

660,877

(1.9
)
Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Total operating revenue, as adjusted
630,243

654,170

(3.7
)
 
 
 
 
Other cash costs, as reported
229,165

223,509

2.5

Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Other cash costs, as adjusted
210,865

216,802

(2.7
)
 
 
 
 
Total cash costs excluding workforce adjustments
498,456

504,557

(1.2
)
Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Total cash cost excluding workforce adjustments, as adjusted
480,156

497,850

(3.6
)
 
 
 
 
Total cash costs, as reported
501,760

505,822

(0.8
)
Adjustment for subscription-related expense reclassification
(18,300
)
(6,707
)
NM

Total cash costs, as adjusted
483,460

499,115

(3.1
)

The subscription-related expense reclassification described above also increased revenue and cash costs of MNI by $5,791,000 in 2015. Such amounts for MNI are not included in the table above.

Results of Operations

Depreciation expense decreased $2,502,000, or 12.0% in 2015 and amortization expense decreased $446,000, or 1.6% in 2015.

In 2014, we recorded a $1,936,000 non-cash charge to reduce the carrying values of certain non-amortized intangible assets to fair value. We also recorded $1,044,000 pre-tax, non-cash charges to reduce the carrying value of property and equipment in 2014. Sales of operating assets resulted in a net loss of $106,000 in 2015 compared to a net gain of $1,338,000 in 2014.

Equity in earnings in associated companies decreased $43,000 in 2015.

The factors noted above resulted in operating income of $109,368,000 in 2015 compared to $113,199,000 in 2014.

Nonoperating Income and Expenses

Interest expense decreased $7,315,000 or 9.2%, to $72,409,000 in 2015 due to lower debt balances.

We recognized $5,433,000 of debt financing and administrative costs in 2015 compared to $22,927,000 in 2014. The decrease is related to the costs charged to expense at the closing of the 2014 Refinancing. Also in 2014, we recorded a $2,300,000 loss related to a litigation settlement.

Due to the decrease in the price of our Common Stock, we recorded non-operating income related to the decrease in the value of the Warrants of $6,568,000 and $6,122,000, in 2015 and 2014, respectively.

Overall Results

We recognized income tax expense at 35.9% of income before income taxes in 2015 and 45.1% in 2014. See Note 10 of the Notes to the Consolidated Financial Statements, included herein, for a discussion of the difference between the expected federal income tax rate and the actual tax rates.

34


As a result of the factors noted above, income attributable to Lee Enterprises, Incorporated totaled $23,316,000 in 2015 compared to $6,795,000 in 2014. We recorded earnings per diluted common share of $0.43 in 2015 and $0.13 in 2014. Excluding unusual matters, as detailed in the table below, adjusted earnings per diluted common share were $0.31 in 2015, compared to $0.26 in 2014. Per share amounts may not add due to rounding.
 
2015
 
2014
 
(Thousands of Dollars, Except Per Share Data)
Amount

Per Share

Amount

Per Share

 
 
 
Income attributable to Lee Enterprises, Incorporated, as reported
23,316

0.43

6,795

0.13

Adjustments:
 
 
 
 
Warrants fair value adjustment
(6,568
)
 
(6,122
)
 
Expenses related to the 2014 Refinancing

 
20,591

 
 
10,180

 
14,469

 
Income tax effect of adjustments, net

 
(7,380
)
 
 
10,180

(0.12
)
7,089

0.13

Income attributable to Lee Enterprises, Incorporated, as adjusted
16,748

0.31

13,884

0.26




35


LIQUIDITY AND CAPITAL RESOURCES
 
Operating Activities
 
Cash provided by operating activities was $79,190,000, $74,476,000 and $82,075,000 in 2016, 2015 and 2014, respectively. We recorded net income of $36,019,000, $24,318,000 and $7,671,000 in 2016, 2015 and 2014, respectively. Non-cash debt financing and administration costs charged to expense totaled $5,947,000, $5,433,000, and $22,927,000 in 2016, 2015 and 2014, respectively. Changes in operating assets and liabilities accounted for the bulk of the change in cash provided by operating activities in 2016 and 2015.

Pension liabilities, net of plan assets, totaled $55.1 million as of September 25, 2016. No contributions to pension plans are expected in 2017.

Investing Activities
 
Cash required for investing activities totaled $34,508,000, $208,000 and $9,284,000 in 2016, 2015 and 2014, respectively. Capital spending totaled $7,091,000 in 2016, $9,707,000 in 2015 and $13,661,000 in 2014. In 2016 we received proceeds of $30,646,000 related to an insurance settlement. We received $9,878,000, $8,871,000 and $4,485,000 in proceeds from sales of assets in 2016, 2015 and 2014, respectively.
 
We anticipate that funds necessary for capital expenditures, which are expected to total up to $10,000,000 in 2017, and other requirements, will be available from internally generated funds, or available under our Revolving Facility.
 
Financing Activities
 
Cash required for financing activities for continued operations totaled $107,848,000 in 2016, $79,838,000 in 2015 and $73,649,000 in 2014. We paid $422,000, $733,000 and $31,587,000 of debt financing and administrative costs in 2016, 2015 and 2014, respectively. The increase in such costs in 2014 was due to the 2014 Refinancing. Debt reduction accounted for the majority of the remaining usage of funds in all years.

Debt is summarized as follows:
 
 
 
Interest Rates (%)
(Thousands of Dollars)
September 25
2016

September 27
2015

September 25
2016
 
 
 
 
Revolving Facility


5.65
1st Lien Term Loan
101,304

180,872

7.25
Notes
385,000

400,000

9.50
2nd Lien Term Loan
130,863

145,000

12.00
 
617,167

725,872

 
Less current maturities of long-term debt
25,070

25,000

 
Total long-term debt
592,097

700,872

 

At September 25, 2016, our weighted average cost of debt, excluding amortization of debt financing costs, is 9.7%.

Aggregate maturities of debt total $25,070,000 in 2017, $25,000,000 in 2018 $51,234,000 in 2019, $0 in 2020 and $515,863,000 thereafter. In addition to mandatory paydowns, the first lien and 2nd lien term loans require excess cash flow payments based on calculations defined in the credit agreements. See Note 4 of the Notes to the Consolidated Financial Statements.

Liquidity
 
At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. 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. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000.

36


At September 25, 2016, the principal amount of our outstanding debt totals $617,167,000. For the last twelve months ending September 25, 2016, the principal amount of our debt, net of cash, is 3.9 times our adjusted EBITDA, compared to a ratio of 4.4 times at September 27, 2015.

The 2014 Refinancing significantly extended our debt maturity profile with final maturity of the majority of our debt in 2022. As a result, refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, 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 applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility, 2nd Lien Term Loan, 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. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.

In 2014, we filed a Form S-3 shelf registration statement ("Shelf") with the SEC, which has been declared effective. The Shelf gives us the flexibility to issue and publicly distribute various types of securities, including preferred stock, common stock, warrants, secured or unsecured debt securities, purchase contracts and units consisting of any combination of such securities, from time to time, in one or more offerings, up to an aggregate amount of $750,000,000. SEC issuer eligibility rules require us to have a public float of at least $75,000,000 in order to use the Shelf. Subject to maintenance of the minimum level of equity market float and the conditions of our existing debt agreements, the Shelf may enable us to sell securities quickly and efficiently when market conditions are favorable or financing needs arise. Under our existing debt agreements, net proceeds from the sale of any securities may be used generally to reduce debt.

Other Matters
 
Cash and cash equivalents increased $5,850,000 in 2016 and decreased $5,570,000 and $858,000 in 2015 and 2014, respectively.
 
SEASONALITY
 
Our largest source of publishing revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the December and June quarters. Advertising and marketing services revenue is lowest in the March quarter.
 
Quarterly results of operations are summarized in Note 18 of the Notes to Consolidated Financial Statements, included herein.

INFLATION
 
Price increases (or decreases) for our products are implemented when deemed appropriate by us. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation.

CHANGES IN LAWS AND REGULATIONS
 
Energy Costs
 
Energy costs can be volatile, and may increase in the future as a result of carbon emissions and other regulations being developed by the United States Environmental Protection Agency.


37


Health Care Costs
 
The Affordable Care Act was enacted into law in 2010.
 
We expect the Affordable Care Act will continue to evolve. More recently, certain provisions applicable to employers were delayed. We expect our future health care costs to increase based on analysis published by the United States Department of Health and Human Services, input from independent advisors and our understanding of various provisions of the Affordable Care Act that differ from our previous medical plans, such as:
 
Certain preventive services provided without charge to employees;
Automatic enrollment of new employees;
Higher maximum age for dependent coverage;
Elimination of lifetime benefit caps; and
Free choice vouchers for certain lower income employees.
 
Administrative costs are also likely to increase as a result of new compliance reporting and mandatory fees per participant. New costs being imposed on other medical care businesses, such as health insurers, pharmaceutical companies and medical device manufacturers, may be passed on to us in the form of higher costs. We may be able to mitigate certain of these future cost increases through changes in plan design.

We do not expect the Affordable Care Act will have a significant impact on our postretirement medical benefit obligation liability.

Pension Plans

In 2012, the Surface Transportation Extension Act of 2012 (“STEA”) was signed into law. STEA provides for changes in the determination of discount rates that resulted in a near-term reduction in minimum funding requirements for our defined benefit pension plans. STEA will also result in an increase in future premiums to be paid to the Pension Benefit Guarantee Corporation ("PBGC").

In 2014, the Highway and Transportation Funding Act ("HATFA") was signed into law. HATFA generally extends the relief offered under STEA and further increases premiums to be paid to the PBGC.

Income Taxes

Certain states in which we operate are considering changes to their corporate income tax rates. Until such changes are enacted, the impact of such changes cannot be determined.

Wage Laws

In 2016, the Department of Labor ("DOL") published its final rule updating overtime regulations and minimum pay regulations for exempt employees. Among other things, the final rule establishes a minimum weekly rate for all exempt employees of $913 per week, more than double the previous limit. The final rule was scheduled to be effective beginning December 1, 2016. However, recently a federal district court issued a preliminary injunction on the rule becoming final. Until a final ruling is issued, the Company cannot determine what impact this rule will have.

The United States and various state and local governments are considering increasing their respective minimum wage rates. Most of our employees earn an amount in excess of the current United States or state minimum wage rates. However, until changes to such rates are enacted, the impact of the changes cannot be determined.


38


CONTRACTUAL OBLIGATIONS
 
The following table summarizes our significant contractual obligations at September 25, 2016:
(Thousands of Dollars)
Payments (or Commitments) Due (Years)
 
Nature of Obligation
Total

 
Less
Than 1

 
1-3

 
3-5

 
More
Than 5

 
 
 
 
 
 
 
 
 
 
Debt (Principal Amount) (1)
617,167

 
25,070

 
76,234

 

 
515,863

Interest expense (2)(3)
300,960

 
58,490

 
110,457

 
104,557

 
27,456

Operating lease obligations
12,392

 
3,065

 
3,918

 
1,633

 
3,776

Capital expenditure commitments
479

 
479

 

 

 

 
930,998

 
87,104

 
190,609

 
106,190

 
547,095

(1)
Maturities of long-term debt are limited to mandatory payments and, accordingly, exclude excess cash flow, asset sale and other payments under the 1st Lien Credit Facility, Notes and the 2nd Lien Term Loan. While excess cash flow payments are based on actual performance, we expect to make substantial voluntary and excess cash flow payments on the debt currently outstanding, in the next five years. See Note 5 of the Notes to the Consolidated Financial Statements, included herein.
(2)
Interest expense includes an estimate of interest expense for the Notes, 1st Lien Credit Facility, and 2nd Lien Term Loan until their maturities in March 2022, March 2019, and December 2022, respectively. Interest expense under the Notes is estimated using the 9.5% contractual rate applied to the outstanding balance as reduced by future contractual maturities of such debt. Interest expense under the 1st Lien Term Loan is estimated based on the 30 day minimum LIBOR level of 1.0% as increased by our applicable margin of 6.25% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the Revolving Facility is estimated based on the current 30 day LIBOR level as increased by our applicable margin of 5.5% applied to the outstanding balance, as reduced by future contractual maturities of such debt. Interest expense under the 2nd Lien Term Loan is estimated using the 12.0% contractual rate applied to the outstanding balance during each period. Changes in interest rates in excess of the minimum LIBOR level, use of borrowing rates not based on LIBOR, use of interest rate hedging instruments, and/or principal payments in excess of contractual maturities or based on other requirements of the Notes, 1st Lien Credit Facility or 2nd Lien Term Loan could significantly change this estimate. See Note 5 of the Notes to Consolidated Financial Statements, included herein.
(3)
Interest expense excludes non-cash present value adjustments and amortization of debt financing costs previously paid. See Note 5 of the Notes to Consolidated Financial Statements, included herein.
 
The table above excludes future cash requirements for pension, postretirement and postemployment obligations. The periods in which these obligations will be settled in cash are not readily determinable and are subject to numerous future events and assumptions. We estimate no cash requirements for these obligations in 2017. See Notes 5 and 6 of the Notes to the Consolidated Financial Statements, included herein.

Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. A substantial amount of our deferred income tax liabilities will not result in future cash payments. See Note 10 of the Notes to the Consolidated Financial Statements, included herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to market risk stemming from changes in interest rates and commodity prices. Changes in these factors could cause fluctuations in earnings and cash flows. In the normal course of business, exposure to certain of these market risks is managed as described below.
 
INTEREST RATES ON DEBT
 
Our debt structure, which is predominantly fixed rate, significantly reduces the potential impact of an increase in interest rates. At September 25, 2016, 16.4% of the principal amount of our debt is subject to floating interest rates. Our primary exposure is to LIBOR. A 100 basis point increase to LIBOR would, if in excess of LIBOR minimums discussed more fully below, decrease income before income taxes on an annualized basis by approximately $1,013 based on $101,304,000 of floating rate debt outstanding at September 25, 2016.

Our debt under the 1st Lien Term Loan is subject to minimum interest rate levels of 1.0%. Based on the difference between interest rates in October 2016 and our 1.0% minimum rate, LIBOR would need to increase approximately 47 basis points for one month borrowing before our borrowing cost would begin to be impacted by an increase in interest rates.

We regularly evaluate alternatives to hedge our interest rate risk, but have no hedging instruments in place.

39


COMMODITIES

Several price increases have been implemented from all North American newsprint producers in the first nine months of 2016. Facing constant North American and worldwide demand decline, U.S. and Canadian producers continue to manage supply capacity via temporary and permanent production capacity reduction.

Price change announcements are influenced primarily by the balance between supply capacity and demand, domestic and export, and the producer's ability to mitigate input cost pressures taking the U. S. dollar to Canadian dollar exchange rate into consideration. The extent to which a current announced price increases are successful or future price changes occur is subject to negotiations with each newsprint producer at the time newsprint is ordered. Average cost per metric ton was approximately 15% higher at the end of September 2016 compared to the same period a year ago.

Long term supply strategy takes potential capacity closures into consideration and aligns the Company with suppliers most likely to continue to supply the North American newsprint market and our print locations.
 
A $10 per tonne price increase for 30 pound newsprint would result in an annualized reduction in income before income taxes of approximately $483,000, based on anticipated consumption in 2017, excluding consumption of TNI and MNI and the impact of LIFO accounting. Such prices may also decrease. We manage significant newsprint inventories, which will temporarily mitigate the impact of future price changes.

SENSITIVITY TO CHANGES IN VALUE
 
At September 25, 2016, the fair value of floating rate debt, which consists primarily of our 1st Lien Term Loan, is $101,240,000, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and $130,863,000 principal amount under the 2nd Lien Term Loan. At September 25, 2016, based on an average of private market price quotations, the fair values were $399,437,000 and $136,833,000 for the Notes and 2nd Lien Term Loan, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Information with respect to this Item is included herein under the caption “Consolidated Financial Statements”.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.

ITEM 9A. CONTROLS AND PROCEDURES
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 25, 2016, the end of the period covered by this annual report (the Evaluation Date). Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Any internal control system, no matter how well designed, has inherent limitations and may not prevent or detect misstatements. Accordingly, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

40


Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of the Evaluation Date, using the criteria set forth in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that our internal control over financial reporting is effective as of the Evaluation Date.

Our independent registered public accounting firm, KPMG LLP, has issued a report on the Company's internal control over financial reporting. KPMGs report on the audit of internal control over financial reporting appears in this Annual Report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in our internal control over financial reporting that occurred during the 13 weeks ended September 25, 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


41


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 

The Board of Directors and Stockholders
Lee Enterprises, Incorporated:
We have audited Lee Enterprises, Incorporated and subsidiaries’ (the Company) internal control over financial reporting as of September 25, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Lee Enterprises, Incorporated and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 25, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lee Enterprises, Incorporated and subsidiaries as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014, and our report dated December 9, 2016 expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP

Chicago, Illinois
December 9, 2016



42


ITEM 9B. OTHER INFORMATION
 
None.
 
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Information with respect to this Item, except for certain information related to our executive officers included under the caption “Executive Team” in Part I of this Annual Report, is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the captions “Proposal 1 - Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. Our executive officers are those elected officers whose names and certain information are set forth under the caption “Executive Team” in Part 1 of this Annual Report.
 
We have a Code of Business Conduct and Ethics ("Code") that applies to all of our employees, including our principal executive officer, and principal financial and accounting officer. The Code is monitored by the Audit Committee of our Board of Directors and is annually affirmed by our directors and executive officers. We maintain a corporate governance page on our website which includes the Code. The corporate governance page can be found at www.lee.net by clicking on “Governance” under the "About" tab. A copy of the Code will also be provided without charge to any stockholder who requests it. Any future amendment to, or waiver granted by us from, a provision of the Code will be posted on our website.
 
ITEM 11. EXECUTIVE COMPENSATION
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the captions, “Compensation of Non-Employee Directors”, “Executive Compensation” and “Compensation Discussion and Analysis” provided, however, that the subsection entitled “Executive Compensation - Executive Compensation Committee Report” shall not be deemed to be incorporated by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the captions “Voting Securities and Principal Holders Thereof” and “Equity Compensation Plan Information”.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the caption “Directors' Meetings and Committees of the Board of Directors”.
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
Information with respect to this Item is included in our Proxy Statement to be filed in January 2017, which is incorporated herein by reference, under the caption “Relationship with Independent Registered Public Accounting Firm”.
 

43


PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
The following documents are filed as part of this Annual Report:
 
FINANCIAL STATEMENTS
 
Consolidated Statements of Income and Comprehensive Income (Loss) - Years ended September 25, 2016, September 27, 2015 and September 28, 2014
Consolidated Balance Sheets - September 25, 2016 and September 27, 2015
Consolidated Statements of Stockholders' Equity (Deficit) - Years ended September 25, 2016, September 27, 2015 and September 28, 2014
Consolidated Statements of Cash Flows - Years ended September 25, 2016, September 27, 2015 and September 28, 2014
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
 
FINANCIAL STATEMENT SCHEDULES
 
All schedules have been omitted as they are not required, not applicable, not deemed material or because the information is included in the Notes to Consolidated Financial Statements, included herein.
 
EXHIBITS
 
See Exhibit Index, included herein.
 

44


SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the 9th day of December 2016.

LEE ENTERPRISES, INCORPORATED
/s/ Kevin D. Mowbray
 
/s/ Ronald A. Mayo
Kevin D. Mowbray
 
Ronald A. Mayo
President and Chief Executive Officer
 
Vice President, Chief Financial Officer and Treasurer
(Principal Executive Officer)
 
(Principal Financial and Accounting Officer)
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their respective capacities on the 9th day of December 2016.
Signature
 
 
 
 
 
 
/s/ Richard R. Cole
 
Director
Richard R. Cole
 
 
 
 
 
/s/ Nancy S. Donovan
 
Director
Nancy S. Donovan
 
 
 
 
 
/s/ Leonard J. Elmore
 
Director
Leonard J. Elmore
 
 
 
 
 
/s/ Mary E. Junck
 
Executive Chairman and Director
Mary E. Junck
 
 
 
 
 
/s/ Brent Magid
 
Director
Brent Magid
 
 
 
 
 
/s/ William E. Mayer
 
Director
William E. Mayer
 
 
 
 
 
/s/ Herbert W. Moloney III
 
Director
Herbert W. Moloney III
 
 
 
 
 
/s/ Kevin D. Mowbray
 
President and Chief Executive Officer, and Director
Kevin D. Mowbray
 
 
 
 
 
/s/ Gregory P. Schermer
 
Director
Gregory P. Schermer
 
 
 
 
 
/s/ Ronald A. Mayo
 
Vice President, Chief Financial Officer and Treasurer
Ronald A. Mayo
 
 

45


CONSOLIDATED FINANCIAL STATEMENTS
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 















 

46


CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(Thousands of Dollars, Except Per Common Share Data)
2016

 
2015

 
2014

 


 
 
 
 
Operating revenue:
 
 
 
 
 
Advertising and marketing services
373,463

 
412,099

 
443,247

Subscription
194,002

 
194,474

 
176,826

Other
46,899

 
41,970

 
40,804

Total operating revenue
614,364

 
648,543

 
660,877

Operating expenses:
 
 
 
 
 
Compensation
229,752

 
239,028

 
243,054

Newsprint and ink
26,110

 
30,263

 
37,994

Other operating expenses
218,726

 
229,165

 
223,509

Depreciation
17,291

 
18,418

 
20,920

Amortization of intangible assets
26,150

 
27,145

 
27,591

Impairment of intangible and other assets
2,185

 

 
2,980

Loss (gain) on sales of assets, net
(3,139
)
 
106

 
(1,338
)
Workforce adjustments
1,825

 
3,304

 
1,265

Total operating expenses
518,900

 
547,429

 
555,975

Equity in earnings of associated companies
8,533

 
8,254

 
8,297

Operating income
103,997

 
109,368

 
113,199

Non-operating income (expense):
 
 
 
 
 
Financial income
400

 
337

 
385

Interest expense
(64,233
)
 
(72,409
)
 
(79,724
)
Debt financing and administrative costs
(5,947
)
 
(5,433
)
 
(22,927
)
Gain on insurance settlement
30,646

 

 

Other, net
(6,668
)
 
6,049

 
3,028

Total non-operating expense, net
(45,802
)
 
(71,456
)
 
(99,238
)
Income before income taxes
58,195

 
37,912

 
13,961

Income tax expense
22,176

 
13,594

 
6,290

Net income
36,019

 
24,318

 
7,671

Net income attributable to non-controlling interests
(1,058
)
 
(1,002
)
 
(876
)
Income attributable to Lee Enterprises, Incorporated
34,961

 
23,316

 
6,795

Other comprehensive loss, net of income taxes
(6,503
)
 
(6,445
)
 
(17,497
)
Comprehensive income (loss) attributable to Lee Enterprises, Incorporated
28,458

 
16,871

 
(10,702
)
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic:
0.66

 
0.44

 
0.13

Diluted:
0.64

 
0.43

 
0.13

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


47


CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
16,984

 
11,134

Accounts receivable, less allowance for doubtful accounts:
 
 
 
2016 $4,327; 2015 $4,194
51,334

 
58,899

Income taxes receivable

 
413

Inventories
4,252

 
3,914

Other
4,683

 
8,304

Total current assets
77,253

 
82,664

Investments:
 
 
 
Associated companies
29,716

 
35,069

Other
9,488

 
9,083

Total investments
39,204

 
44,152

Property and equipment:
 
 
 
Land and improvements
21,028

 
22,257

Buildings and improvements
174,164

 
179,731

Equipment
279,770

 
290,127

Construction in process
823

 
997

 
475,785

 
493,112

Less accumulated depreciation
347,223

 
349,343

Property and equipment, net
128,562

 
143,769

Goodwill
243,729

 
243,729

Other intangible assets, net
158,354

 
185,962

Medical plan assets, net
14,063

 
13,421

Other
27,961

 
34,128

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
689,126

 
747,825

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


48


(Thousands of Dollars and Shares, Except Per Share Data)
September 25
2016

 
September 27
2015

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
25,070

 
25,000

Accounts payable
18,143

 
20,113

Compensation and other accrued liabilities
23,884

 
27,055

Accrued interest
2,895

 
4,184

Income taxes payable
665

 

Unearned revenue
28,361

 
28,929

Total current liabilities
99,018

 
105,281

Long-term debt, net of current maturities
592,097

 
700,872

Pension obligations
55,148

 
52,522

Postretirement and postemployment benefit obligations
10,717

 
11,060

Deferred income taxes
38,308

 
22,137

Income taxes payable
5,016

 
4,856

Warrants and other
16,363

 
9,680

Total liabilities
816,667

 
906,408

Equity (deficit):
 
 
 
Stockholders' equity (deficit):
 
 
 
Serial convertible preferred stock, no par value; authorized 500 shares; none issued

 

Common Stock, authorized 120,000 shares; issued and outstanding:
558

 
547

September 25, 2016; 55,771 shares; $0.01 par value
 
 
 
September 27, 2015; 54,679 shares; $0.01 par value
 
 
 
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued

 

Additional paid-in capital
249,740

 
247,302

Accumulated deficit
(356,005
)
 
(390,966
)
Accumulated other comprehensive loss
(22,778
)
 
(16,276
)
  Total stockholders' deficit
(128,485
)
 
(159,393
)
  Non-controlling interests
944

 
810

Total deficit
(127,541
)
 
(158,583
)
Total liabilities and deficit
689,126

 
747,825

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

49


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
 
Amount
 
Shares
(Thousands of Dollars and Shares)
2016

 
2015

 
2014

 
2016

 
2015

 
2014

 
 
 
 
 
 
 
 
 
 
Common Stock:
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
547

 
537

 
524

 
54,679

 
53,747

 
52,434

Shares issued
11

 
10

 
13

 
1,092

 
932

 
1,313

Balance, end of year
558

 
547

 
537

 
55,771

 
54,679

 
53,747

Additional paid-in capital:
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
247,302

 
245,323

 
242,537

 
 
 
 
 
 
    Stock compensation
2,306

 
1,971

 
1,481

 
 
 
 
 
 
Shares issued
132

 
8

 
1,305

 
 
 
 
 
 
Balance, end of year
249,740

 
247,302

 
245,323

 
 
 
 
 
 
Accumulated deficit:
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
(390,966
)
 
(414,282
)
 
(421,077
)
 
 
 
 
 
 
Net income
36,019

 
24,318

 
7,671

 
 
 
 
 
 
Net income attributable to non-controlling interests
(1,058
)
 
(1,002
)
 
(876
)
 
 
 
 
 
 
Balance, end of year
(356,005
)
 
(390,966
)
 
(414,282
)
 
 
 
 
 
 
Accumulated other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
(16,276
)
 
(9,831
)
 
7,666

 
 
 
 
 
 
Change in pension and postretirement benefits
(11,001
)
 
(10,973
)
 
(29,591
)
 
 
 
 
 
 
Deferred income taxes, net
4,499

 
4,528

 
12,094

 
 
 
 
 
 
Balance, end of year
(22,778
)
 
(16,276
)
 
(9,831
)
 
 
 
 
 
 
Total stockholders' deficit
(128,485
)
 
(159,393
)
 
(178,253
)
 
55,771

 
54,679

 
53,747

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

50


CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Cash provided by operating activities:
 
 
 
 
 
Net income
36,019

 
24,318

 
7,671

Adjustments to reconcile income to net cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
43,441

 
45,563

 
48,511

Net (gain) loss on sales of assets
(3,139
)
 
106

 
(1,338
)
Insurance settlement
(30,646
)
 

 

Impairment of intangible and other assets
2,185

 

 
2,980

Distributions greater than earnings of MNI
3,777

 
2,084

 
1,366

Stock compensation expense
2,306

 
1,971

 
1,481

Amortization of debt fair value adjustment

 

 
2,394

Deferred income tax expense
20,669

 
12,764

 
6,425

Debt financing and administrative costs
5,947

 
5,433

 
22,927

Gain on extinguishment of debt
(1,250
)
 

 

Pension contributions
(4,604
)
 
(3,577
)
 
(1,435
)
Changes in operating assets and liabilities:
 
 
 
 
 
Decrease in receivables
6,933

 
3,444

 
872

Decrease in inventories and other
617

 
3,122

 
217

Decrease in accounts payable, compensation and other accrued liabilities and unearned revenue
(8,327
)
 
(9,587
)
 
(5,315
)
Decrease in pension, postretirement and postemployment benefit obligations
(4,757
)
 
(3,627
)
 
(4,643
)
Change in income taxes receivable or payable
1,238

 
(34
)
 
5,854

Other, net
8,781

 
(7,504
)
 
(5,892
)
Net cash provided by operating activities
79,190

 
74,476

 
82,075

Cash provided by (required for) investing activities:
 
 
 
 
 
Purchases of property and equipment
(7,091
)
 
(9,707
)
 
(13,661
)
Decrease (increase) in restricted cash

 
441

 
(441
)
Insurance settlement
30,646

 

 

Proceeds from sales of assets
9,878

 
8,871

 
4,485

Distributions greater than earnings of TNI
1,575

 
637

 
333

Other, net
(500
)
 
(450
)
 

Net cash provided by (required for) investing activities
34,508

 
(208
)
 
(9,284
)
Cash provided by (required for) financing activities:
 
 
 
 
 
Proceeds from long-term debt
5,000

 
5,000

 
805,000

Payments on long-term debt
(112,455
)
 
(83,878
)
 
(847,750
)
Debt financing and administrative costs paid
(422
)
 
(733
)
 
(31,587
)
Common stock transactions, net
29

 
(227
)
 
688

Net cash required for financing activities
(107,848
)
 
(79,838
)
 
(73,649
)
Net increase (decrease) in cash and cash equivalents
5,850

 
(5,570
)
 
(858
)
Cash and cash equivalents:
 
 
 
 
 
Beginning of year
11,134

 
16,704

 
17,562

End of year
16,984

 
11,134

 
16,704

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

51


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
References to "we", "our", "us" and the like throughout the Consolidated Financial Statements refer to Lee Enterprises, Incorporated and subsidiaries (the "Company"). References to "2016", "2015", "2014" and the like refer to the fiscal years ended the last Sunday in September.
 
Lee Enterprises, Incorporated is a leading provider of local news and information and a major platform for advertising, Primarily in midsize markets, with 48 daily newspapers and a joint interest in four others, rapidly growing digital products and nearly 300 weekly newspapers and specialty publications in 21 states. We currently operate in a single operating segment.

1.     SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
 
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, 50% interest in MNI and 82.5% interest in TownNews.com. TNI and MNI are accounted for under the equity method. Results of TownNews.com are consolidated.

Fiscal Year
  
All of our enterprises use period accounting with the fiscal year ending on the last Sunday in September.

Subsequent Events
 
We have evaluated subsequent events through December 9, 2016. No events have occurred subsequent to September 25, 2016 that require disclosure or recognition in these financial statements, except as included herein.

Accounting Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Principles of Consolidation
 
All significant intercompany transactions and balances have been eliminated.

Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of, and reductions in the value of, intangible assets.
 
Cash and Cash Equivalents
 
We consider all highly liquid debt instruments purchased with an original maturity of three months or less at date of acquisition to be cash equivalents.
 
Outstanding checks in excess of funds on deposit are included in accounts payable and are classified as financing activities in the Consolidated Statements of Cash Flows.

Accounts Receivable
 
We evaluate our allowance for doubtful accounts receivable based on historical credit experience, payment trends and other economic factors. Delinquency is determined based on timing of payments in relation to billing dates. Accounts considered to be uncollectible are written off.


52


Inventories
 
Newsprint inventories are priced at the lower of cost or market, with cost being determined by the first-in, first-out or last-in, first-out methods. Newsprint inventories at September 25, 2016 and September 27, 2015 are less than replacement cost by $1,900,000 and $1,780,000, respectively.
 
The components of newsprint inventory by cost method are as follows:
(Thousands of Dollars)
September 25 2016

 
September 27 2015

 
 
 
 
First-in, first-out
1,064

 
786

Last-in, first-out
1,627

 
1,547

 
2,691

 
2,333

 
Other inventories consisting of ink, plates and film are priced at the lower of cost or market, with cost being determined by the first-in, first-out method.
 
Other Investments
 
Other investments primarily consist of marketable securities held in trust under a deferred compensation arrangement and investments for which no established market exists. Marketable securities are classified as trading securities and carried at fair value with gains and losses reported in earnings. Non-marketable securities are carried at cost.
 
Property and Equipment
 
Property and equipment are carried at cost. Equipment, except for printing presses and preprint insertion equipment, is depreciated primarily by declining-balance methods. The straight-line method is used for all other assets. The estimated useful lives are as follows:
 
Years
 
 
Buildings and improvements
5 - 54
Printing presses and insertion equipment
3 - 28
Other
3 - 17
 
We capitalize interest as a component of the cost of constructing major facilities. At September 25, 2016 and September 27, 2015, capitalized interest was not significant.

We recognize the fair value of a liability for a legal obligation to perform an asset retirement activity when such activity is a condition of a future event and the fair value of the liability can be estimated.
 
Goodwill and Other Intangible Assets
 
Intangible assets include covenants not to compete, consulting agreements, customer lists, newspaper subscriber lists and mastheads. Intangible assets subject to amortization are being amortized using the straight-line method as follows:
 
Years

 
 
Customer lists
15 - 23

Newspaper subscriber lists
12 - 33

Non-compete and consulting agreements
15

 
In assessing the recoverability of goodwill and other non-amortized intangible assets, we annually assess qualitative factors affecting our business to determine if the probability of a goodwill impairment is more likely than not. Our assessment includes reviewing internal and external factors affecting our business, such as cash flow projections,

53


stock price and other industry or market considerations. This assessment is made on the first day of our fourth fiscal quarter of each year.

We analyze goodwill and other non-amortized intangible assets for impairment more frequently if impairment indicators are present. Such indicators of impairment include, but are not limited to, changes in business climate and operating or cash flow losses related to such assets.

Should we determine that a goodwill impairment is more likely than not, we make a determination of the fair value of our business. Fair value is determined using a combination of an income approach and a market approach weighted equally.

Should we determine that a non-amortized intangible asset impairment is more likely than not, we make a determination of the individual asset's fair value. Fair value is determined using the relief from royalty method, which estimates fair value based upon appropriate royalties of future revenue discounted to their present value. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of such asset.
 
We review our amortizable intangible assets for impairment when indicators of impairment are present. We assess recoverability of these assets by comparing the estimated undiscounted cash flows associated with the asset group with their carrying amount. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those asset groups.

The required valuation methodology and underlying financial information that are used to determine fair value require significant judgments to be made by us and represent a Level 3 fair value measurement. These judgments include, but are not limited to, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows. Changes in such estimates or the application of alternative assumptions could produce significantly different results.
 
We also periodically evaluate the useful lives of amortizable intangible assets. Any resulting changes in the useful lives of such intangible assets will not impact our cash flows. However, a decrease in the useful lives of such intangible assets would increase future amortization expense and decrease future reported operating results and earnings per common share.
 
Future decreases in our market value, or significant differences in revenue, expenses or cash flows from estimates used to determine fair value, could result in impairment charges in the future. See Note 3.

Non-controlling Interest
 
Non-controlling interest in earnings of TownNews.com is recognized in the Consolidated Financial Statements.
  
Revenue Recognition
 
Advertising revenue is recorded when advertisements are placed in the publication or on the related digital platform. Subscription revenue is recorded over the print or digital subscription term or as newspapers are individually sold. Other revenue is recognized when the related product or service has been delivered. Unearned revenue arises in the ordinary course of business from advance subscription payments for print or digital products or advance payments for advertising.
 
Advertising Costs
 
A substantial amount of our advertising and promotion consists of advertising placed in our own publications and digital platforms, using available space. The incremental cost of such advertising is not significant and is not measured separately by us. External advertising costs are not significant and are expensed as incurred.
 
Pension, Postretirement and Postemployment Benefit Plans
 
We evaluate our liabilities for pension, postretirement and postemployment benefit plans based upon computations made by consulting actuaries, incorporating estimates and actuarial assumptions of future plan service costs, future interest costs on projected benefit obligations, rates of compensation increases, when applicable, employee turnover rates, anticipated mortality rates, expected investment returns on plan assets, asset allocation assumptions of plan

54


assets and other factors. If we used different estimates and assumptions regarding these plans, the funded status of the plans could vary significantly, resulting in recognition of different amounts of expense over future periods.
 
We use a fiscal year end measurement date for all our pension and postretirement obligations in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 715, Retirement Plans.

Income Taxes
 
Deferred income taxes are provided using the asset and liability method, whereby deferred income tax assets are recognized for deductible temporary differences and loss carryforwards and deferred income tax liabilities are recognized for taxable temporary differences. Temporary differences are the difference between the reported amounts of assets and liabilities and their tax basis. Deferred income tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not some portion or all of the deferred income tax assets will not be realized. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.

Fair Value of Financial Instruments
 
We utilize FASB ASC Topic 820, Fair Value Measurements and Disclosures, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. 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.
  
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

Investments measured at net asset value, as a practical expedient for fair value, are excluded from the fair value hierarchy.

Valuation methodologies used for pension and postretirement assets measured at fair value are as follows:
 
Cash and cash equivalents consist of short term deposits valued based on quoted prices in active markets. Such investments are classified as Level 1.
 
Treasury Inflation-Protected Securities ("TIPS") consist of low yield mutual funds and are valued by quoted market prices. Such investments are classified as Level 1.

Equity securities are valued based on the closing market price in an active market and are classified as Level 1. Certain investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. Such investments are classified as Level 2.

Debt securities consist of corporate bonds and government securities that are valued based upon quoted market prices. Such investments are classified as Level 1. Certain investments in commingled funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments as determined by quoted market prices. Such investments are classified as Level 2.

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Hedge funds consist of a long/short equity fund and a diversified fund of funds. These funds are valued at the net asset value of units held at the end of the period based upon the value of the underlying investments, which is determined using multiple approaches including by quoted market prices and by private market quotations. Such investments are classified as Level 2 and Level 3.
 
Stock Compensation and Warrants
 
We have several active stock-based compensation plans. We account for grants under those plans under the fair value expense recognition provisions of FASB ASC Topic 718, Compensation-Stock Compensation. We determine the fair value of stock options using the Black-Scholes option pricing formula. Key inputs to this formula include expected term, expected volatility and the risk-free interest rate.
 
The expected term represents the period that our stock-based awards are expected to be outstanding, and is determined based on historical experience of similar awards, giving consideration to contractual terms of the awards, vesting schedules and expectations of future employee behavior. The volatility factor is calculated using historical market data for our Common Stock. The time frame used is equal to the expected term. We base the risk-free interest rate on the yield to maturity at the time of the stock option grant on zero-coupon U.S. government bonds having a remaining term equal to the option's expected term. When estimating forfeitures, we consider voluntary termination behavior as well as actual option forfeitures.
 
We amortize as compensation expense the value of stock options and restricted Common Stock using the straight-line method over the vesting or restriction period, which is generally one to three years.

We also have 6,000,000 warrants outstanding to purchase shares of our Common Stock. Warrants are recorded at fair value determined using the Black-Scholes option pricing formula. See Notes 4, 8 and 11.
 
Uninsured Risks
 
We are self-insured for health care, workers compensation and certain long-term disability costs of our employees, subject to stop loss insurance, which limits our losses in the event of large claims. We accrue our estimated health care costs in the period in which such costs are incurred, including an estimate of incurred but not reported claims. Other risks are insured and carry deductible losses of varying amounts. Letters of credit and performance bonds totaling $5,107,000 at September 25, 2016 are outstanding in support of our insurance program.
  
Our accrued reserves for health care and workers compensation claims are based upon estimates of the remaining liability for retained losses made by consulting actuaries. The amount of workers compensation reserve has been determined based upon historical patterns of incurred and paid loss development factors from the insurance industry.

2     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 newspaper and other media.
 
Income or loss of TNI is allocated equally to Star Publishing and Citizen.
 

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Summarized financial information of TNI is as follows:    
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets
5,107

 
5,761

Investments and other assets
12

 
33

Total assets
5,119

 
5,794

 
 
 
 
LIABILITIES AND MEMBERS' EQUITY
 
 
 
 
 
 
 
Current liabilities
6,484

 
4,787

Members' equity
(1,365
)
 
1,007

Total liabilities and members' equity
5,119

 
5,794

 
Summarized results of TNI are as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Operating revenue
52,761

 
55,926

 
57,892

Operating expenses
41,804

 
45,413

 
47,229

Operating income
10,957

 
10,513

 
10,663

 
 
 
 
 
 
Company's 50% share
5,478

 
5,256

 
5,331

Less amortization of intangible assets
418

 
418

 
418

Equity in earnings of TNI
5,060

 
4,838

 
4,913


TNI makes weekly distributions of its earnings. We received $6,636,000, $5,475,000 and $5,246,000 in distributions in 2016, 2015 and 2014, respectively.

Star Publishing's 50% share of TNI depreciation and certain general and administrative expenses associated with its share of the operation and administration of TNI are reported as operating expenses (benefit) in our Consolidated Statements of Income and Comprehensive Income (Loss). These amounts totaled $149,000, $(254,000),and $(60,000), in 2016, 2015 and 2014, respectively. Fees for editorial services provided to TNI by Star Publishing totaled $5,599,000, $5,492,000, and $5,908,000 in 2016, 2015 and 2014, respectively.
 
At September 25, 2016, the carrying value of the Company's 50% investment in TNI is $15,933,000. The difference between our carrying value and our 50% share of the members' equity of TNI relates principally to goodwill of $12,366,000 and other identified intangible assets of $4,554,000, certain of which are being amortized over their estimated useful lives through 2020. See Note 3.
 
Annual amortization of intangible assets is estimated to be $418,000 in 2017, 2018, 2019, and $280,000 in 2020.

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 sites. 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.

 

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Summarized financial information of MNI is as follows:    
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets
12,320

 
18,255

Investments and other assets
33,364

 
34,209

Total assets
45,684

 
52,464

 
 
 
 
LIABILITIES AND MEMBERS' EQUITY
 
 
 
 
 
 
 
Current liabilities
8,391

 
8,100

Other liabilities
9,500

 
9,235

Stockholders' equity
27,793

 
35,129

Total liabilities and stockholders' equity
45,684

 
52,464


Summarized results of MNI are as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Operating revenue
65,172

 
67,264

 
67,478

Operating expenses, excluding workforce adjustments, depreciation and amortization
52,646

 
54,795

 
55,393

Workforce adjustments
39

 
459

 
244

Depreciation and amortization
1,684

 
1,630

 
1,626

Operating income
10,803

 
10,380

 
10,215

Net income
6,947

 
6,832

 
6,768

Equity in earnings of MNI
3,473

 
3,416

 
3,384


MNI makes quarterly distributions of its earnings. We received $7,250,000, $5,500,000 and $4,750,000 in distributions in 2016, 2015 and 2014, respectively.

Fees for editorial services provided to MNI by us are included in other revenue in the Consolidated Statements of Operations and Comprehensive Income and totaled $7,099,000, $7,242,000 and $7,050,000, in 2016, 2015 and 2014, respectively.

At September 25, 2016, the carrying value of the Company's 50% investment in MNI is $13,896,000.
  
3    GOODWILL AND OTHER INTANGIBLE ASSETS
 
Changes in the carrying amount of goodwill related to continuing operations are as follows:
(Thousands of Dollars)
2016

 
2015

 
 
 
 
Goodwill, gross amount
1,532,458

 
1,532,458

Accumulated impairment losses
(1,288,729
)
 
(1,288,729
)
Goodwill, end of year
243,729

 
243,729



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Identified intangible assets related to continuing operations consist of the following:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Non-amortized intangible assets:
 
 
 
Mastheads
23,644

 
25,102

Amortizable intangible assets:
 
 
 
Customer and newspaper subscriber lists
687,182

 
687,182

Less accumulated amortization
552,472

 
526,322

 
134,710

 
160,860

Non-compete and consulting agreements
28,524

 
28,524

Less accumulated amortization
28,524

 
28,524

 

 

 
158,354

 
185,962

 
In 2016, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%. In 2015, we performed additional quantitative analysis of the carrying value of our goodwill and concluded the implied fair value of goodwill was significantly in excess of its carrying value. As a result no goodwill impairment was recorded. In 2014, we performed a qualitative analysis to test our goodwill for impairment and concluded that the likelihood of an impairment was less than 50%.

In 2016 and 2014, due to continuing revenue declines, we recorded non-cash charges to reduce the carrying value of non-amortized intangible assets. We also recorded pretax charges to reduce the carrying value of other assets in 2016 and 2014 in Impairment of intangible and other assets in the Consolidated Statements of Income and Comprehensive Income (Loss). We recorded deferred income tax benefits related to these charges.

A summary of the pretax impairment charges is included in the table below:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Continuing operations:
 
 
 
 
 
Non-amortized intangible assets
818

 

 
1,936

Property, equipment and other assets
1,367

 

 
1,044

 
2,185

 

 
2,980


Annual amortization of intangible assets for the years ending September 2017 to September 2021 is estimated to be $25,030,000, $16,653,000, $15,972,000, $15,206,000, and $14,042,000, respectively.

4     DEBT

On March 31, 2014, we completed a comprehensive refinancing of our debt (the “2014 Refinancing”), which includes the following:

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”) due March 2022, pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”).
 
$250,000,000 first lien term loan (the "1st Lien Term Loan") due March 2019 and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together, the “1st Lien Credit Facility”).

$150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “ 2nd Lien Term Loan”) due December 2022 and bears interest at a fixed annual rate of 12.0%.


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The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan enabled us to repay in full, including accrued interest, and terminate, on March 31, 2014: (i) the remaining principal balance of $593,000,000 under our previous 1st lien agreement and (ii) the remaining principal balance of $175,000,000 under our previous 2nd lien agreement. We also used the proceeds of the refinancing to pay fees and expenses totaling $30,931,000 related to the 2014 Refinancing.

Notes

The Notes are senior secured obligations of the Company and mature on March 15, 2022. At September 25, 2016 the principal balance of the Notes is $385,000,000.

Interest

The Notes require payment of interest semiannually on March 15 and September 15 of each year, at a fixed annual rate of 9.5%.
 
Redemption

We may redeem some, or all, of the principal amount of the Notes at any time on or after March 15, 2018 as follows:
Period Beginning
Percentage of Principal Amount

 
 
March 15, 2018
104.75

March 15, 2019
102.38

March 15, 2020
100.00


We may redeem up to 35% of the Notes prior to March 15, 2017 at 109.5% of the principal amount using the proceeds of certain future equity offerings.

We may repurchase Notes in the open market at any time. In 2016 we purchased $15,000,000 principal amount of Notes in privately negotiated transactions. The transactions resulted in a gain on extinguishment of debt totaling $1,250,000, which is recorded in Other, net non-operating income (expense) in our Consolidated Statements of Income and Comprehensive Income.

If we sell certain of our assets or experience specific types of changes of control, we must, subject to certain exceptions, offer to purchase the Notes at 101% of the principal amount. Any redemption of the Notes must also satisfy any accrued and unpaid interest thereon.

Covenants and Other Matters

The Indenture and 1st Lien Credit Facility contains restrictive covenants as discussed more fully below. However, certain of these covenants will cease to apply if the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and there is no default or event of default under the Indenture.

1st Lien Credit Facility

The 1st Lien Credit Facility consists of the $250,000,000 1st Lien Term Loan that matures in March 2019 and the $40,000,000 Revolving Facility that matures in December 2018. The 1st Lien Credit Facility documents the primary terms of the 1st Lien Term Loan and the Revolving Facility. The Revolving Facility may be used for working capital and general corporate purposes (including letters of credit). At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under the Revolving Facility.

Interest

Interest on the 1st Lien Term Loan, which has a principal balance of $101,304,000 at September 25, 2016, accrues, at our option, at either (A) LIBOR plus 6.25% (with a LIBOR floor of 1.0%) or (B) 5.25% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0% (with a floor of 2.0%). Interest is payable quarterly.


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The 1st Lien Term Loan was funded with an original issue discount of 2.0%, or $5,000,000, which is being amortized as interest expense over the life of the 1st Lien Term Loan.
Interest on the Revolving Facility, which has a principal balance of zero at September 25, 2016, accrues, at our option, at either (A) LIBOR plus 5.5%, or (B) 4.5% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0%.

Principal Payments

Quarterly principal payments of $6,250,000 are required under the 1st Lien Term Loan, with additional payments required to be made based on 90% of excess cash flow of Lee Legacy ("Lee Legacy Excess Cash Flow"), as defined, or from proceeds of asset sales, which are not reinvested, as defined, from our subsidiaries other than Pulitzer Inc. ("Pulitzer") and its subsidiaries (collectively, the "Pulitzer Subsidiaries"). For excess cash flow calculation purposes Lee Legacy constitutes the business of the Company, including MNI, but excluding Pulitzer and TNI. We may voluntarily prepay principal amounts outstanding or reduce commitments under the 1st Lien Credit Facility at any time without premium or penalty, upon proper notice and subject to certain limitations as to minimum amounts of prepayments.

Quarterly, the Company is required to prepare a Lee Legacy Excess Cash Flow calculation, which is generally determined as the cash earnings of our subsidiaries other than the Pulitzer Subsidiaries and is adjusted for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments or refunds. Any excess cash flow as calculated is required to be paid to the 1st Lien lenders 45 days after the end of the quarter.

2016 payments made under the 1st Lien Term Loan are summarized by quarter and fiscal year as follows:
(Thousands of Dollars)
December 27
2015

March 27
2016

June 26
2016

September 25
2016

2016

 
 
 
 
 
 
Mandatory
6,250

6,250

6,250

6,250

25,000

Voluntary
5,000

27,000

3,000

6,000

41,000

Excess cash flow

1,135

6,441

5,992

13,568

 
11,250

34,385

15,691

18,242

79,568


In January 2016, we used $20,000,000 of the proceeds received from an insurance settlement to reduce outstanding debt under our 1st Lien Term Loan. The majority of the remaining proceeds was used to repurchase Notes at a substantial discount.

Covenants and Other Matters

The 1st Lien Credit Facility requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including a maximum total leverage ratio, which is only applicable to the Revolving Facility. 

The 1st Lien Credit Facility restricts us from paying dividends on our Common Stock. These restrictions no longer apply if Lee Legacy leverage is below 3.25x before and after such payments. Further, the 1st Lien Credit Facility restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur indebtedness, (ii) enter into mergers, acquisitions and asset sales, (iii) incur or create liens and (iv) enter into transactions with certain affiliates. The 1st Lien Credit Facility contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 1st Lien Credit Facility also contains cross-default provisions tied to the terms of each of the Indenture and 2nd Lien Term Loan.

2nd Lien Term Loan

The 2nd Lien Term Loan, which has a balance of $130,863,000 at September 25, 2016, bears interest at a fixed annual rate of 12.0%, payable quarterly, and matures in December 2022.

Principal Payments

There are no scheduled mandatory amortization payments required under the 2nd Lien Term Loan.


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Quarterly, we are required to prepare a calculation of excess cash flow of the Pulitzer Subsidiaries ("Pulitzer Excess Cash Flow"). Pulitzer Excess Cash Flow is generally determined as the cash earnings of the Pulitzer Subsidiaries adjusted for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments. Pulitzer Excess Cash Flow also includes a deduction for interest costs incurred under the 2nd Lien Term Loan. Changes to settlement of certain intercompany costs between the Company and Pulitzer have been affected, with the net result being a reduction in the excess cash flows of Pulitzer from historically reported levels.

Under the 2nd Lien Term Loan, subject to certain other conditions, Pulitzer Excess Cash Flow must be used, (a) prior to March 31, 2017, to make an offer to the 2nd Lien Lenders to prepay amounts under the 2nd Lien Term Loan at par (which offer the 2nd Lien Lenders may accept or reject; if rejected, we may use the Pulitzer Excess Cash Flow to prepay amounts under the 1st Lien Credit Facility or repurchase Notes in the open market), and (b) after March 31, 2017, to pay such amounts under the 2nd Lien Term Loan at par. Pulitzer Excess Cash Flow payments are required to be offered and/or paid 45 days after the end of the quarter.

Pulitzer Excess Cash Flow and the related payments on the 2nd Lien Term Loan made in 2016 are as follows:
For the Period Ending
(Thousands of Dollars)
Pulitzer Excess Cash Flow
Payment Date
Payment Amount
(not rejected)

 
 
 
 
September 27, 2015
5,143
Q1 2016
3,326

December 27, 2015
2,864
Q2 2016
1,867

March 27, 2016
2,730
Q3 2016
525

June 26, 2016
1,583
Q4 2016
299


There was no Pulitzer Excess Cash Flow for the quarter ended September 25, 2016.

Subject to certain other conditions in the 2nd Lien Term Loan, the balance of the 2nd Lien Term Loan will be repaid at par from proceeds from asset sales by the Pulitzer Subsidiaries that are not reinvested. We repaid $8,119,000 and $5,000,000 of the 2nd Lien Term Loan, at par, due to the sale of assets at our Pulitzer properties in 2016 and 2015, respectively.

Voluntary payments under the 2nd Lien Term Loan are subject to call premiums as follows:
Period Beginning
Percentage of Principal Amount
 
 
March 31, 2014
112
March 31, 2017
106
March 31, 2018
103
March 31, 2019
100

Covenants and Other Matters

The 2nd Lien Term Loan requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including the negative covenants under the 1st Lien Credit Facility discussed above. The 2nd Lien Term Loan contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 2nd Lien Term Loan also contains cross-default provisions tied to the terms of the Indenture and 1st Lien Credit Facility.

In connection with the 2nd Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.1% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.

The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018 as well as other provisions requiring the Warrants to be measured at fair value and included in other liabilities in our Consolidated Balance Sheets. We remeasure the fair value of the liability each reporting period, with changes

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reported in other, net non-operating income (expense). The initial fair value of the Warrants was $16,930,000. See Note 8.

In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.

Security

The Notes and the 1st Lien Credit Facility are fully and unconditionally guaranteed on a joint and several first-priority basis by each of the Company's material domestic subsidiaries, excluding MNI, the Pulitzer Subsidiaries and TNI (the "Lee Legacy Assignors"), pursuant to a first lien guarantee and collateral agreement dated as of March 31, 2014 (the "1st Lien Guarantee and Collateral Agreement").

The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in all property and assets, including certain real estate, of the Lee Legacy Assignors, other than the capital stock of MNI and any property and assets of MNI (the “Lee Legacy Collateral”), on a first-priority basis, equally and ratably with all of the Lee Legacy Assignors' existing and future obligations. The Lee Legacy Collateral includes, among other things, equipment, inventory, accounts receivables, depository accounts, intellectual property and certain of their other tangible and intangible assets.

Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Lee Legacy Assignors (excluding the capital stock of MNI). The Notes and 1st Lien Credit Facility are subject to a Pari Passu Intercreditor Agreement dated March 31, 2014.

The Notes, the 1st Lien Credit Facility and the subsidiary guarantees are also secured, subject to permitted liens, by a second-priority security interest in the property and assets of the Pulitzer Subsidiaries that become subsidiary guarantors (the "Pulitzer Assignors") other than assets of or used in the operations or business of TNI (collectively, the “Pulitzer Collateral”). In June 2015 the Pulitzer Assignors became a party to the 1st Lien Guarantee and Collateral Agreement on a second lien basis.

Also, the Notes and the 1st Lien Credit Facility are secured, subject to certain exceptions, priorities, and limitations in the various agreements, by second-priority security interests in the capital stock of, and other equity interests in, the Pulitzer Assignors and Star Publishing’s interest in TNI.

The 2nd Lien Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Pulitzer Assignors, pursuant to a Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 (the “2nd Lien Guarantee and Collateral Agreement”) among the Pulitzer Assignors and the 2nd Lien collateral agent.

Under the 2nd Lien Guarantee and Collateral Agreement, the Pulitzer Assignors have granted (i) first-priority security interests, subject to certain priorities and limitations in the various agreements, in the Pulitzer Collateral and (ii) have granted first-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan.

Also, under the 2nd Lien Guarantee and Collateral Agreement, the Lee Legacy Assignors have granted (i) second-priority security interests, subject to certain priorities and limitations in the various agreements, in the Lee Legacy Collateral, and (ii) have granted second-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2nd Lien Term Loan. Assets of, or used in the operations or business of, MNI are excluded.

The rights of each of the collateral agents with respect to the Lee Legacy Collateral and the Pulitzer Collateral are subject to customary intercreditor and intercompany agreements.

Other

In connection with the 2014 Refinancing, we capitalized $37,819,000 of debt financing costs. Amortization of debt financing costs totaled $5,541,000, $4,693,000 and $2,145,000 in 2016, 2015 and 2014 respectively. Amortization of

63


such costs is estimated to total $4,176,000 in 2017, $4,245,000 in 2018, $4,044,000 in 2019, $4,040,000 in 2020 and $4,217,000 in 2021. At September 25, 2016 we have $26,271,000 of unamortized debt financing costs recorded in other long term assets in our Consolidated Balance Sheets.
Debt is summarized as follows:
 
 
 
Interest Rates (%)
(Thousands of Dollars)
September 25
2016

September 27
2015

September 25
2016
 
 
 
 
Revolving Facility


5.65
1st Lien Term Loan
101,304

180,872

7.25
Notes
385,000

400,000

9.50
2nd Lien Term Loan
130,863

145,000

12.00
 
617,167

725,872

 
Less current maturities of long-term debt
25,070

25,000

 
Total long-term debt
592,097

700,872

 
 
At September 25, 2016, our weighted average cost of debt, excluding amortization of debt financing costs, is 9.7%.

Aggregate minimum required maturities of debt excluding amounts required to be paid from excess cash flow requirements at September 25, 2016 total $25,070,000 for 2017, $25,000,000 in 2018, $51,234,000 in 2019, zero in 2020, zero in 2021 and $515,863,000 thereafter.
 
Liquidity
 
At September 25, 2016, after consideration of letters of credit, we have approximately $33,318,000 available for future use under our Revolving Facility. Including cash, our liquidity at September 25, 2016 totals $50,302,000. 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. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000 subject to a reduction for any amounts the Company may elect to use to repay our 1st Lien Term Loan and/or the Notes.

The 2014 Refinancing significantly improved our debt maturity profile. Final maturities of our debt have been extended to dates from December 2018 through December 2022. As a result, we believe refinancing risk has been substantially reduced for the next several years.

There are numerous potential consequences under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, 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 applicable lender(s) to exercise their remedies under the Notes, 1st Lien Credit Facility and 2nd Lien Term Loan, 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 repay, refinance or amend our debt agreements as they become due. The Notes, 1st Lien Credit Facility and 2nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at September 25, 2016.

5     PENSION PLANS
 
We have several non-contributory 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, substantially all benefits are frozen and only a small amount of additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.


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The net periodic cost (benefit) components of our pension plans are as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Service cost for benefits earned during the year
197

 
232

 
156

Interest cost on projected benefit obligation
6,061

 
8,122

 
7,996

Expected return on plan assets
(8,698
)
 
(9,863
)
 
(9,932
)
Amortization of net loss
2,397

 
1,682

 
423

Amortization of prior service benefit
(136
)
 
(136
)
 
(136
)
Net periodic pension cost (benefit)
(179
)
 
37

 
(1,493
)
 
Net periodic pension benefit of $56,000 is allocated to TNI in 2016, 2015 and 2014
 
Changes in benefit obligations and plan assets are as follows:
(Thousands of Dollars)
2016

 
2015

 
 
 
 
Benefit obligation, beginning of year
193,751

 
199,197

Service cost
197

 
232

Interest cost
6,061

 
8,122

Actuarial loss (gain)
13,630

 
(2,543
)
Benefits paid
(11,481
)
 
(11,257
)
Benefit obligation, end of year
202,158

 
193,751

Fair value of plan assets, beginning of year:
143,288

 
151,013

Actual return on plan assets
14,819

 
1,817

Benefits paid
(11,481
)
 
(11,257
)
Administrative expenses paid
(2,099
)
 
(1,862
)
Employer contributions
4,604

 
3,577

Fair value of plan assets, end of year
149,131

 
143,288

Funded status - benefit obligation in excess of plan assets
53,027

 
50,463


Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Pension obligations
53,027

 
50,463

Accumulated other comprehensive loss (before income taxes)
(54,862
)
 
(47,515
)
 
Amounts recognized in accumulated other comprehensive income (loss) are as follows:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Unrecognized net actuarial loss
(55,241
)
 
(48,031
)
Unrecognized prior service benefit
379

 
516

 
(54,862
)
 
(47,515
)
 
We expect to recognize $2,947,000 and $137,000 of unrecognized net actuarial loss and unrecognized prior service benefit, respectively, in net periodic pension cost in 2017.
 
The accumulated benefit obligation for the plans total $202,158,000 at September 25, 2016 and $193,751,000 at September 27, 2015. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are $202,158,000, $202,158,000 and $149,131,000, respectively, at September 25, 2016.

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Assumptions
 
Weighted-average assumptions used to determine benefit obligations are as follows:
(Percent)
September 25
2016
 
September 27
2015
 
 
 
 
Discount rate
3.5
 
4.2
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
(Percent)
2016

 
2015

 
2014

 
 
 
 
 
 
Discount rate
4.2

 
4.2

 
4.7

Expected long-term return on plan assets
6.3

 
6.8

 
7.0

 
For 2016, the expected long-term return on plan assets is 5.5%. The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns, current market conditions and composition of plan assets.

Plan Assets
 
The primary objective of our investment strategy is to satisfy our pension obligations at a reasonable cost. Assets are actively invested to balance real growth of capital through appreciation and reinvestment of dividend and interest income and safety of invested funds.
 
Our investment policy outlines the governance structure for decision making, sets investment objectives and restrictions and establishes criteria for selecting and evaluating investment managers. The use of derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment committee, consisting of certain of our executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the appropriate policy allocation.

The weighted-average asset allocation of our pension assets is as follows:
(Percent)
Policy Allocation

Actual Allocation
Asset Class
September 25 2016

September 25
2016
September 27
2015
 
 
 
 
Equity securities
50

50
46
Debt securities
35

33
37
TIPS
5

4
4
Hedge fund investments
10

11
11
Cash and cash equivalents

2
2
 
Plan assets include no Company securities. Assets include cash and cash equivalents and receivables from time to time due to the need to reallocate assets within policy guidelines.
 

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Fair Value Measurements
 
The fair value hierarchy of pension assets at September 25, 2016 is as follows:
(Thousands of Dollars)
NAV

Level 1

Level 2

 
 
 
 
Cash and cash equivalents

2,757


Domestic equity securities

9,669

49,809

International equity securities

6,773

7,755

TIPS

6,883


Debt securities
14,558

25,612

9,648

Hedge fund investments
17,531




The fair value hierarchy of pension assets at September 27, 2015 is as follows:
(Thousands of Dollars)
NAV

Level 1

Level 2

 
 
 
 
Cash and cash equivalents

2,407


Domestic equity securities

8,153

44,470

International equity securities

6,286

7,389

TIPS

6,450


Debt securities
17,246

31,196

4,124

Hedge fund investments
17,344




There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.

Cash Flows
 
Based on our forecast at September 25, 2016, we do not expect to make contributions to our pension trust in 2017.

We anticipate future benefit payments to be paid from the pension trust as follows:
(Thousands of Dollars)
 
 
 
2017
11,803

2018
11,735

2019
11,757

2020
11,728

2021
11,735

2022-2026
58,487

 
Other Plans
 
We are obligated under an unfunded plan to provide fixed retirement payments to certain former employees. The plan is frozen and no additional benefits are being accrued. The accrued liability under the plan is $2,232,000 and $2,337,000 at September 25, 2016 and September 27, 2015, respectively, of which $113,000 and $278,000 is included in compensation and other accrued liabilities in the Consolidated Balance Sheet at September 25, 2016 and September 27, 2015 , respectively.

6     POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
 
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, St. Louis Post Dispatch LLC ("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

67


becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.

The net periodic postretirement benefit cost (benefit) components for our postretirement plans are as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Service cost for benefits earned during the year
63

 
76

 
596

Interest cost on projected benefit obligation
623

 
922

 
911

Expected return on plan assets
(1,322
)
 
(1,445
)
 
(1,483
)
Amortization of net actuarial gain
(1,093
)
 
(1,386
)
 
(1,819
)
Amortization of prior service benefit
(1,459
)
 
(1,459
)
 
(1,459
)
Net periodic postretirement benefit
(3,188
)
 
(3,292
)
 
(3,254
)
 
Changes in benefit obligations and plan assets are as follows:
(Thousands of Dollars)
2016

 
2015

 
 
 
 
Benefit obligation, beginning of year
23,812

 
25,506

Service cost
63

 
76

Interest cost
623

 
922

Actuarial loss (gain)
(773
)
 
(1,149
)
Benefits paid, net of premiums received
(1,434
)
 
(1,541
)
Medicare Part D subsidies
220

 
(2
)
Benefit obligation, end of year
22,511

 
23,812

Fair value of plan assets, beginning of year
30,123

 
32,881

Actual return on plan assets
1,085

 
(547
)
Employer contributions
563

 
745

Benefits paid, net of premiums and Medicare Part D subsidies received
(1,213
)
 
(1,544
)
Benefits paid for active employees
(1,510
)
 
(1,412
)
Allocation to active medical plans
(4,925
)
 

Fair value of plan assets at measurement date
24,123

 
30,123

Funded status - benefit obligation less than plan assets
(1,612
)
 
(6,311
)
 
The accumulated benefit obligation for plans with benefit obligations in excess of plan assets included in the table above was $7,527,000 at September 25, 2016. These plans are unfunded.

Disaggregated amounts recognized in the Consolidated Balance Sheets are as follows:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Non-current assets
9,138

 
13,420

Postretirement benefit obligations
7,527

 
7,109

Accumulated other comprehensive income (before income tax benefit)
19,026

 
22,551

 
Amounts recognized in accumulated other comprehensive income are as follows:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Unrecognized net actuarial gain
11,089

 
13,155

Unrecognized prior service benefit
7,937

 
9,396

 
19,026

 
22,551

 

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We expect to recognize $1,016,000 and $1,459,000 of unrecognized net actuarial gain and unrecognized prior service benefit, respectively, in net periodic postretirement benefit in 2017.

Assumptions
 
Weighted-average assumptions used to determine post retirement benefit obligations are as follows:
(Percent)
September 25
2016
 
September 27
2015
 
 
 
 
Discount rate
3.1
 
3.7
Expected long-term return on plan assets
4.5
 
4.5

The assumptions related to the expected long-term return on plan assets are developed through an analysis of historical market returns, current market conditions and composition of plan assets.

Weighted-average assumptions used to determine net periodic benefit cost are as follows:
(Percent)
2016

 
2015

 
2014

 
 
 
 
 
 
Discount rate
3.7

 
3.7

 
4.0

Expected long-term return on plan assets
4.5

 
4.5

 
4.5

 
Assumed health care cost trend rates are as follows:
(Percent)
September 25
2016
 
September 27
2015
 
 
 
 
Health care cost trend rates
9.0
 
9.0
Rate to which the cost trend rate is assumed to decline (the “Ultimate Trend Rate”)
4.5
 
4.5
Year in which the rate reaches the Ultimate Trend Rate
2025
 
2025
 
Administrative costs related to indemnity plans are assumed to increase at the health care cost trend rates noted above.
 
Assumed health care cost trend rates have an effect on the amounts reported for the postretirement plans. A one percentage point change in assumed health care cost trend rates would have the following annualized effects on reported amounts for 2016:
 
One Percentage Point
 
(Thousands of Dollars)
Increase

 
Decrease

 
 
 
 
Effect on net periodic postretirement benefit
20

 
(18
)
Effect on postretirement benefit obligation
697

 
(629
)
 
Plan Assets
 
Assets of the retiree medical plan are invested in a master trust. The master trust also pays benefits of active employee medical plans for the same union employees. In 2016, it was determined that the assets of the retiree medical plan should be allocated among all plans that it funds and as a result, we allocated $4,925,000 of the retiree medical plan assets to the active medical plans during the year. The fair value of master trust assets allocated to the retiree medical plan is $24,123,000 at September 25, 2016. The fair value of master trust assets allocated to the active employee medical plans at September 25, 2016 is $4,925,000.

The primary objective of our investment strategy is to satisfy our postretirement obligations at a reasonable cost. Assets are actively invested to balance real growth of capital through appreciation and reinvestment of dividend and interest income and safety of invested funds.
 

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Our investment policy outlines the governance structure for decision making, sets investment objectives and restrictions, and establishes criteria for selecting and evaluating investment managers. The use of derivatives is strictly prohibited, except on a case-by-case basis where the manager has a proven capability, and only to hedge quantifiable risks such as exposure to foreign currencies. An investment committee, consisting of certain of our executives and supported by independent consultants, is responsible for monitoring compliance with the investment policy. Assets are periodically redistributed to maintain the appropriate policy allocation.

The weighted-average asset allocation of our postretirement assets is as follows:
(Percent)
Policy Allocation

Actual Allocation
Asset Class
September 25 2016

September 25
2016
September 27
2015
 
 
 
 
Equity securities
20

22
19
Debt securities
70

65
68
Hedge fund investment
10

11
10
Cash and cash equivalents

2
3
 
Plan assets include no Company securities. Assets include cash and cash equivalents and receivables from time to time due to the need to reallocate assets within policy guidelines.

Fair Value Measurements
 
The fair value hierarchy of postretirement assets at September 25, 2016 is as follows:
(Thousands of Dollars)
NAV

Level 1

Level 2

 
 
 
 
Cash and cash equivalents

518


Domestic equity securities

3,342

1,572

International equity securities

695

898

Debt securities

18,840


Hedge fund investment
3,182




The fair value hierarchy of postretirement assets at September 27, 2015 is as follows:
(Thousands of Dollars)
NAV

Level 1

Level 2

 
 
 
 
Cash and cash equivalents

790


Domestic equity securities

2,896

1,372

International equity securities

645

857

Debt securities

13,910

6,581

Hedge fund investment
3,072



 
There were no purchases, sales or transfers of assets classified as Level 3 in 2016 or 2015.

Cash Flows
 
Based on our forecast at September 25, 2016, we do not expect to contribute to our postretirement plans in 2017.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Modernization Act”) introduced a prescription drug benefit under Medicare (“Medicare Part D”) and a federal subsidy to sponsors of retiree health care benefit plans (“Subsidy”) that provide a benefit at least actuarially equivalent (as that term is defined in the Modernization Act) to Medicare Part D. We concluded we qualify for the Subsidy under the Modernization Act since the prescription drug benefits provided under our postretirement health care plans generally require lower premiums from covered retirees and have lower deductibles than the benefits provided in Medicare Part D and, accordingly, are actuarially equivalent to or better than, the benefits provided under the Modernization Act.

70


We anticipate future benefit payments to be paid either with future contributions to the plan or directly from plan assets, as follows:
(Thousands of Dollars)
Gross
Payments

 
Less
Medicare
Part D
Subsidy

 
Net
Payments

 
 
 
 
 
 
2017
3,600

 
(200
)
 
3,400

2018
1,870

 
(210
)
 
1,660

2019
1,910

 
(210
)
 
1,700

2020
1,880

 
(210
)
 
1,670

2021
1,790

 
(200
)
 
1,590

2022-2026
7,910

 
(870
)
 
7,040

 
Postemployment Plan
 
Our postemployment benefit obligation, representing certain disability benefits, is $3,190,000 at September 25, 2016 and $3,951,000 at September 27, 2015.
 
7    OTHER RETIREMENT PLANS
 
Substantially all of our employees are eligible to participate in a qualified defined contribution retirement plan. We also have a non-qualified plan for employees whose incomes exceed qualified plan limits.

Retirement and compensation plan costs, including costs related to stock based compensation and interest on deferred compensation costs, charged to continuing operations are $4,616,000 in 2016, $4,125,000 in 2015 and $3,963,000 in 2014.

Multiemployer Pension Plans

We contribute to three multiemployer defined benefit pension plans under the terms of collective-bargaining agreements ("CBAs"). The risks of participating in these multiemployer plans are different from our company-sponsored plans in the following aspects:

We do not manage the plan investments or any other aspect of plan administration;

Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers;

If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and

If we choose to stop participating in one or more multiemployer plans, we may be required to fund over time an amount based on the unfunded status of the plan at the time of withdrawal, referred to as "withdrawal liability".


71


Information related to these plans is outlined in the table below:
(Thousands of Dollars)
Zone Status September 30
Funding Improvement Plan/Rehabilitation Plan Status
Contributions
 
 
 
Pension Plan
2016
2015
Status
2016

2015

2014

Surcharge Imposed
Expiration Dates of CBAs
 
 
 
 
 
 
 
 
 
GCIU- Employer Retirement Fund
91-6024903/001
Red
Red
Implemented
138

145

265

No
1/13/2017
 
 
 
 
 
 
 
8/31/2017
CWA/ITU Negotiated Pension Plan
13-6212879/001
Red
Red
Implemented
108

122

133

No
5/12/2017
 
 
 
 
 
 
 
12/31/2017
 
 
 
 
 
 
 
4/1/2017
 
 
 
 
 
 
 
8/31/2017
District No. 9, International Association of Machinists and Aerospace Workers Pension Trust
43-0736847/001

Green
Green
N/A
31

34

37

N/A
2/28/2017

Multiemployer plans in red zone status are generally less well funded than plans in green zone status.

One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.

8     COMMON STOCK, CLASS B COMMON STOCK AND PREFERRED SHARE PURCHASE RIGHTS
 
Common Stock

The par value of our Common Stock was changed from $2.00 per share to $0.01 per share effective January 30, 2012. Holders of our previous 2nd lien agreement 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.

In connection with the currently outstanding 2nd Lien Term Loan, we entered into the Warrant Agreement. Under the Warrant Agreement, certain affiliates or designees of the 2nd Lien Lenders received on March 31, 2014 their pro rata share of Warrants to purchase, in cash, 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions. The Warrants represent, when fully exercised, approximately 10.1% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.

The Warrant Agreement contains a cash settlement provision in the event of a change of control prior to March 31, 2018, as well as other provisions requiring the Warrants be measured at fair value and classified as other liabilities in our Consolidated Balance Sheets. We remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. At September 25, 2016, the fair value of the Warrants is $11,760,000.

In connection with the issuance of the Warrants, we entered into the Registration Rights Agreement. The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to file and maintain the effectiveness for certain specified periods of a shelf registration statement covering the shares of Common Stock upon exercise of the Warrants.


72


Class B Common Stock

In 1986, one share of Class B Common Stock was issued as a dividend for each share of Common Stock held by stockholders of record at the time. The transfer of Class B Common Stock was restricted. As originally anticipated, the number of outstanding Class B shares decreased over time through trading and reached the sunset level of 5,600,000 shares in March 2011. In March 2011, in accordance with the sunset provisions established in 1986, we effected conversion of all outstanding shares of Class B Common Stock to Common Stock. As a result, all stockholders have one vote per share on all future matters. Class B shares formerly had ten votes per share.
 
Preferred Share Purchase Rights

In 1998, the Board of Directors adopted a Shareholder Rights Plan (the “Rights Plan”). Under the Rights Plan, the Board of Directors declared a dividend of one Preferred Share Purchase Right (“Right”) for each outstanding share of our Common Stock and Class B Common Stock (collectively “Common Shares”). Rights are attached to, and automatically trade with, our Common Shares. In 2008, the Board of Directors approved an amendment to the Rights Plan. The amendment increased the beneficial ownership threshold to 25% from 20% for stockholders purchasing Common Stock for passive investment only and decreased the threshold to 15% for all other investors. In addition, the amendment extended the expiration of the Rights Plan to May 31, 2018 from May 31, 2008.
 
Rights become exercisable only in the event that any person or group of affiliated persons other than a passive investor becomes a holder of 15% or more of our outstanding Common Shares, or commences a tender or exchange offer which, if consummated, would result in that person or group of affiliated persons owning at least 15% of our outstanding Common Shares. Once the Rights become exercisable, they entitle all other stockholders to purchase, by payment of a $150 exercise price, one one-thousandth of a share of Series A Participating Preferred Stock, subject to adjustment, with a value of twice the exercise price. In addition, at any time after a 15% position is acquired and prior to the acquisition of a 50% position, the Board of Directors may require, in whole or in part, each outstanding Right (other than Rights held by the acquiring person or group of affiliated persons) to be exchanged for one share of Common Stock or one one-thousandth of a share of Series A Preferred Stock. The Rights may be redeemed at a price of $0.001 per Right at any time prior to their expiration.

9    STOCK OWNERSHIP PLANS
 
Total non-cash stock compensation expense is $2,306,000, $1,971,000 and $1,481,000, in 2016, 2015 and 2014, respectively.

At September 25, 2016, we have reserved 4,460,214 shares of Common Stock for issuance to employees under an incentive and nonstatutory stock option and restricted stock plan approved by stockholders. At September 25, 2016, 2,762,549 shares are available for granting of non-qualified stock options or issuance of restricted Common Stock.

Stock Options
 
Options are granted at a price equal to the fair market value on the date of the grant and are exercisable, upon vesting, over a ten-year period.
 
A summary of stock option activity is as follows:
(Thousands of Shares)
2016

 
2015

 
2014

 
 
 
 
 
 
Under option, beginning of year
1,871

 
2,333

 
2,769

Granted

 

 
15

Exercised
(74
)
 
(289
)
 
(342
)
Canceled
(99
)
 
(173
)
 
(109
)
Under option, end of year
1,698

 
1,871

 
2,333

Exercisable, end of year
1,692

 
1,840

 
1,786



73


Weighted average prices of stock options are as follows:
(Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Granted

 

 
2.99

Exercised
1.17

 
1.27

 
2.01

Cancelled
8.78

 
5.02

 
10.98

Under option, end of year
2.42

 
2.71

 
2.70

 
The following assumptions were used to estimate the fair value of option awards:
 
 
 
 
 
2014

 
 
 
 
 
 
Volatility (Percent)
 
 
 
 
91

Risk-free interest rate (Percent)
 
 
 
 
1.24

Expected term (Years)
 
 
 
 
4.5

Estimated fair value (Dollars)
 
 
 
 
2.02

 
A summary of stock options outstanding at September 25, 2016 is as follows:
(Dollars)
Options Outstanding
 
 
Options Exercisable
 
Range of
Exercise
Prices
Number
Outstanding (Thousands)

Weighted Average
Remaining Contractual
Life (Years)
 
Weighted
Average
Exercise Price

 
Number
Exercisable  (Thousands)

 
Weighted
Average
Exercise Price

 
 
 
 
 
 
 
 
 
1 - 5 
1,659

4.5
 
1.80

 
1,653

 
1.80

25 - 50
39

0.1
 
28.72

 
39

 
28.72

 
1,698

4.4
 
2.42

 
1,692

 
2.42

  
Total unrecognized compensation expense for unvested stock options at September 25, 2016 is $1,000, which will be recognized over a weighted average period of 0.1 years.

The aggregate intrinsic value of stock options outstanding at September 25, 2016 is $3,227,000.

Restricted Common Stock
 
A summary of restricted Common Stock activity follows:
(Thousands of Shares)
2016

 
2015

 
2014

 
 
 
 
 
 
Outstanding, beginning of year
1,546

 
1,291

 
500

Granted
1,018

 
786

 
817

Vested
(63
)
 
(500
)
 

Forfeited
(39
)
 
(31
)
 
(26
)
Outstanding, end of year
2,462

 
1,546

 
1,291

 
Weighted average grant date fair values of restricted Common Stock are as follows:
(Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Outstanding, beginning of year
3.62

 
2.72

 
1.31

Granted
1.49

 
3.62

 
3.61

Vested
3.39

 
1.31

 

Forfeited
3.31

 
3.62

 
3.61

Outstanding, end of year
2.74

 
3.62

 
2.72

 

74


Total unrecognized compensation expense for unvested restricted Common Stock at September 25, 2016 is $2,260,000, which will be recognized over a weighted average period of 1.4 years.

In December 2016, we issued 832,500 shares of restricted Common Stock to employees. The grant date fair value was $3.35 per share. All restrictions lapse in December 2019 with respect to these shares.

Stock Purchase Plans
 
We have 270,000 shares of Common Stock available for issuance pursuant to our Employee Stock Purchase Plan. We also have 8,700 shares of Common Stock available for issuance under our Supplemental Employee Stock Purchase Plan. There has been no activity under these plans in 2016, 2015 or 2014.

10    INCOME TAXES
 
Income tax expense consists of the following:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Current:
 
 
 
 
 
Federal
1,241

 
720

 
451

State
379

 
(92
)
 
(571
)
Deferred
20,556

 
12,966

 
6,410

 
22,176

 
13,594

 
6,290

 
Income tax expense 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:
(Percent of Income (Loss) Before Income Taxes)
2016

 
2015

 
2014

 
 
 
 
 
 
Computed “expected” income tax expense (benefit)
35.0

 
35.0

 
35.0

State income tax expense (benefit), net of federal tax impact
3.8

 
(7.1
)
 
11.0

Net income of associated companies taxed at dividend rates
(2.6
)
 
(5.2
)
 
(9.3
)
Resolution of tax matters
3.2

 
0.5

 
3.6

Non-deductible expenses
1.0

 
2.8

 
7.9

Valuation allowance
(7.7
)
 
15.9

 
(4.5
)
Warrant valuation
5.0

 
(6.1
)
 
(15.1
)
CODI tax attribute reduction

 

 
18.3

Other
0.4

 
0.1

 
(1.8
)
 
38.1

 
35.9

 
45.1



75


Net deferred income tax liabilities consist of the following components:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Deferred income tax liabilities:
 
 
 
Property and equipment
(33,549
)
 
(35,593
)
Identified intangible assets
(43,745
)
 
(51,380
)
Long-term debt
(16,158
)
 
(15,176
)
 
(93,452
)
 
(102,149
)
Deferred income tax assets:
 

 
 
Investments
12,138

 
17,521

Accrued compensation
6,391

 
4,551

Allowance for doubtful accounts and losses on loans
1,273

 
1,184

Pension and postretirement benefits
6,505

 
5,719

Net operating loss carryforwards
52,604

 
81,228

Accrued expenses
577

 
572

Other
3,634

 
1,720

 
83,122

 
112,495

Valuation allowance
(27,978
)
 
(32,483
)
Net deferred income tax liabilities
(38,308
)
 
(22,137
)
 
All deferred taxes are categorized as non-current because the Company elected to early adopt ASU 2015-17. See Note 16, Impact of Recently Adopted Accounting Standards.
 
A reconciliation of 2016 and 2015 changes in gross unrecognized tax benefits is as follows:
(Thousands of Dollars)
2016

 
2015

 
 
 
 
Balance, beginning of year
11,799

 
13,520

Increases (decreases) in tax positions for prior years
46

 
(1,861
)
Increases in tax positions for the current year
1,600

 
1,098

Lapse in statute of limitations
(914
)
 
(958
)
Balance, end of year
12,531

 
11,799

 
Approximately $8,025,000 and $7,475,000 of the gross unrecognized tax benefit balances for 2016 and 2015 respectively, relate to state net operating losses which are netted against deferred taxes on our balance sheet. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $8,213,000 at September 25, 2016. We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was, net of tax, $317,000 at September 25, 2016 and $330,000 at September 27, 2015. There were no amounts provided for penalties at September 25, 2016 or September 27, 2015.

No significant income tax audits are currently in progress and the Company has not received any notices of intent to audit. Certain of the Company's state income tax returns for the year ended September 30, 2012 are open for examination. The Federal and remaining state returns are open beginning with the September 29, 2013 year.
 
At September 25, 2016, we had approximately $57,392,000 of state net operating loss ("NOL") tax benefits that expire between 2017 and 2036. At September 25, 2016 and September 27, 2015 the Company had deferred income tax assets related to state NOL carryforwards of $37,305,000 and $34,623,000, respectively, a portion of which are offset by a valuation allowances. In 2016, the Company reduced its state valuation allowance by $3,655,000 based on projected future earnings in the carryforward periods. In 2015, the Company recorded an additional valuation allowance of $6,043,000 due to increases in cumulative losses and other deferred tax assets not realizable within their carryforward periods.

76


We reported a Federal NOL of approximately $165,489,000 for our 2014 year. We reported taxable income on our 2015 tax return which reduced the Federal NOL to $136,630,000. We expect to record taxable income in 2016 which will further reduce the Federal NOL to $58,618,000 resulting in a deferred income tax asset balance of $20,615,000 at September 25, 2016. A valuation allowance is not required for the Federal NOL at September 25, 2016 based on our projection of future earnings during the carryforward period.

11    FAIR VALUE OF FINANCIAL INSTRUMENTS

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 $6,359,000, including our 17% ownership of the non-voting common stock of TCT and a private equity investment, are carried at cost. As of September 25, 2016, the approximate fair value of our private equity investment is $8,164,000, which is a level 3 fair value measurement.

The fair value of floating rate debt, which consists of our 1st Lien Term Loan, is $101,240,000, based on an average of private market price quotations. Our fixed rate debt consists of $385,000,000 principal amount of the Notes and, $130,863,000 principal amount under the 2nd Lien Term Loan. At September 25, 2016, based on an average of private market price quotations, the fair values were $399,437,000 and $136,833,000 for the Notes and 2nd Lien Term Loan, respectively.

As discussed more fully in Notes 4 and 8, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value and we will remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. The fair value of the Warrants at September 25, 2016, September 27, 2015 and September 28, 2014 are $11,760,000, $4,240,000 and $10,808,000, respectively. In other, net in the Consolidated Statements of Income and Comprehensive Income (Loss), we recognized expense of $7,520,000 in 2016 and income of $6,568,000 and $6,122,000 in 2015 and 2014, respectively, for adjustments in the fair value of the Warrants.

The following assumptions were used to estimate the fair value of the Warrants:
 
2016

 
2015

 
2014

 
 
 
 
 
 
Volatility (Percent)
63

 
61

 
55

Risk-free interest rate (Percent)
1.25

 
1.75

 
2.34

Expected term (Years)
5.5

 
6.5

 
7.5

Estimated fair value (Dollars)
1.96

 
0.71

 
1.80


In 2016 and 2014, we reduced the carrying value of equipment and other assets no longer in use by $1,367,000 and $1,044,000, respectively, based on estimates of the related fair value in the current market. Based on age, condition and marketability we estimated the assets had no value.


77


12       EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings (loss) per common share:
(Thousands of Dollars and Shares, Except Per Common Share Data)
2016

 
2015

 
2014

 
 
 
 
 
 
Income attributable to Lee Enterprises, Incorporated:
34,961

 
23,316

 
6,795

 
 
 
 
 
 
Weighted average Common Stock
55,493

 
54,430

 
53,438

Less non-vested restricted Common Stock
(2,295
)
 
(1,790
)
 
(1,165
)
Basic average Common Stock
53,198

 
52,640

 
52,273

Dilutive stock options and restricted Common Stock
1,026

 
1,291

 
1,463

Diluted average Common Stock
54,224

 
53,931

 
53,736

Earnings per common share:
 
 
 
 
 
Basic:
0.66

 
0.44

 
0.13

Diluted
0.64

 
0.43

 
0.13

 
For 2016, 2015 and 2014, we had 7,577,000, 6,620,000 and 3,121,000 weighted average shares, respectively, not considered in the computation of diluted earnings (loss) per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock.
 
13    ALLOWANCE FOR DOUBTFUL ACCOUNTS
Valuation and qualifying account information related to the allowance for doubtful accounts receivable related to continuing operations is as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Balance, beginning of year
4,194

 
4,526

 
4,501

Additions charged to expense
1,195

 
1,307

 
1,754

Deductions from reserves
(1,062
)
 
(1,639
)
 
(1,729
)
Balance, end of year
4,327

 
4,194

 
4,526

 
14    OTHER INFORMATION
 
Compensation and other accrued liabilities consist of the following:
(Thousands of Dollars)
September 25
2016

 
September 27
2015

 
 
 
 
Compensation
12,290

 
12,454

Retirement plans
4,135

 
3,459

Other
7,459

 
11,142

 
23,884

 
27,055


Cash payments are as follows:
(Thousands of Dollars)
2016

 
2015

 
2014

 
 
 
 
 
 
Interest
65,410

 
72,937

 
81,363

Debt financing and reorganization costs
422

 
733

 
31,587

Income tax payments (refunds), net
269

 
485

 
(6,022
)
Accumulated other comprehensive income (loss), net of deferred income taxes at September 25, 2016 and September 27, 2015, is related to pension and postretirement benefits.


78


15    COMMITMENTS AND CONTINGENT LIABILITIES
 
Operating Leases
 
We have operating lease commitments for certain of our office, production and distribution facilities. Management expects that in the normal course of business, existing leases will be renewed or replaced. Minimum lease payments during the five years ending September 2021 and thereafter are $3,065,000, $2,535,000, $1,383,000, $878,000, $755,000 and $3,776,000, respectively. Total operating lease expense is $3,792,000, $3,415,000 and $3,735,000, in 2016, 2015 and 2014, respectively.
 
Capital Expenditures
 
At September 25, 2016, we had construction and equipment purchase commitments totaling approximately $479,000.
 
Income Taxes
 
Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 10.
 
We file income tax returns with the Internal Revenue Service ("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 Income 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 and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2009.
 
Legal Proceedings
 
We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these 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.

Multiemployer Pension Plans

One of our enterprise's bargaining units withdrew from representation, and as a result we are subject to a future claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the pension plan. Any withdrawal liability determined to be due under this plan will be funded over a period of 20 years.

16    IMPACT OF RECENTLY ADOPTED ACCOUNTING STANDARDS

In November 2015, the Financial Accounting Standards Board ("FASB") issued an amendment to Accounting Standards Codification Standard 740: Income Taxes related to the classification of net deferred tax assets and liabilities. Deferred tax liabilities and assets are classified as current or noncurrent based on the classification of the related asset or liability for financial reporting. To simplify the presentation of deferred income taxes, the amendment requires that deferred income tax liabilities and assets be classified as noncurrent in our Consolidated Balance Sheets. We elected to adopt this standard in 2016 and have applied this standard retrospectively. As a result, we have reclassified $15,659,000 of current assets to a reduction of the long-term deferred tax liability in the September 27, 2015 Consolidated Balance Sheet.


79


In May 2015, FASB issued Accounting Standards Update ("ASU") 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate NAV per Share (or Its Equivalent) (“ASU 2015-07”). Under the guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. The new guidance is effective in 2017, however early adoption is permitted. We have elected to early adopt ASU 2015-07 retrospectively for the investments eligible for the NAV practical expedient.

17    QUARTERLY FINANCIAL DATA (UNAUDITED)
 
Quarter Ended
 
(Thousands of Dollars, Except Per Common Share Data)
December

 
March

 
June

 
September

 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
168,405

 
146,835

 
150,946

 
148,178

 
 
 
 
 
 
 
 
Net income
11,508

 
19,483

 
4,367

 
661

 
 
 
 
 
 
 
 
Income attributable to Lee Enterprises, Incorporated
11,237

 
19,228

 
4,092

 
404

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
0.21

 
0.36

 
0.08

 
0.01

Diluted
0.21

 
0.36

 
0.08

 
0.01

 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating revenue
177,210

 
156,557

 
158,677

 
156,099

 
 
 
 
 
 
 
 
Net income
10,007

 
2,042

 
2,135

 
10,134

 
 
 
 
 
 
 
 
Income attributable to Lee Enterprises, Incorporated
9,753

 
1,800

 
1,882

 
9,881

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic
0.19

 
0.03

 
0.04

 
0.18

    Diluted
0.18

 
0.03

 
0.03

 
0.18

 
Results of operations for the September quarter of 2016 include pre-tax non-cash impairment charges of $2,382,000.



Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lee Enterprises, Incorporated:

We have audited the accompanying consolidated balance sheets of Lee Enterprises, Incorporated and subsidiaries (the Company) as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated balance sheets of Madison Newspapers, Inc., and Subsidiary (MNI), a 50% owned investee company, as of September 25, 2016 and September 27, 2015, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the 52 week periods ended September 25, 2016, September 27, 2015, and September 28, 2014. The Company’s investment in MNI at September 25, 2016 and September 27, 2015 was $13,927,000 and $17,561,000, respectively, and its equity in earnings of MNI was $3,612,000 for the 52-week period ended September 25, 2016, $3,416,000 for the 52-week period ended September 27, 2015, and $3,384,000 for the 52-week period ended September 28, 2014. The consolidated financial statements of MNI for the 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014 were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for MNI for the 52-week periods ended September 27, 2016, September 25, 2015, and September 28, 2014, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lee Enterprises, Incorporated and subsidiaries as of September 25, 2016 and September 27, 2015, and the results of their operations and their cash flows for each of 52-week periods ended September 25, 2016, September 27, 2015, and September 28, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lee Enterprises, Incorporated and subsidiaries’ internal control over financial reporting as of September 25, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated December 9, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.



/s/ KPMG LLP

Chicago, Illinois
December 9, 2016


81


EXHIBIT INDEX
 
Exhibits marked with an asterisk (*) are incorporated by reference to documents previously filed by us with the SEC, as indicated. Exhibits marked with a plus (+) are management contracts or compensatory plan contracts or arrangements filed pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K. All other documents listed are filed with this Annual Report on Form 10-K.
Number
Description
 
 
3.1 *
Amended and Restated Certificate of Incorporation of Lee Enterprises, Incorporated effective as of January 30, 2012 (Exhibit 3.1 to Form 8-K filed on February 3, 2012)
 
 
3.2 *
Amended and Restated By-Laws of Lee Enterprises, Incorporated effective as of February 17, 2016 (Exhibit 3.1 to Form 8-K filed February 23, 2016)
 
 
4.1 *
The description of the Lee Enterprises, Incorporated’s (the “Company”) preferred stock purchase rights contained in its report on Form 8-K, filed on May 7, 1998, and related Rights Agreement, dated as of May 7, 1998 (“Rights Agreement”), between the Company and The First Chicago Trust Company of New York (“First Chicago”), as amended by Amendment No. 1 to the Rights Agreement dated January 1, 2008 between the Company and Wells Fargo Bank, N.A. (as successor rights agent to First Chicago) contained in the Company's report on Form 8-K filed on January 11, 2008 as Exhibit 4.2, and the related form of Certificate of Designation of the Preferred Stock as Exhibit A, the form of Rights Certificate as Exhibit B and the Summary of Rights as Exhibit C, included as Exhibit 1.1 to the Company's registration statement on Form 8-A filed on May 26, 1998 (File No. 1-6227), as supplemented by Form 8-A/A, Amendment No. 1, filed on January 11, 2008.
 
 
4.2 *
Indenture dated as of March 31, 2014 among Lee Enterprises, Incorporated, certain subsidiaries from time to time parties thereto, U.S. Bank National Association, as Trustee, and Deutsche Bank Trust Company Americas, as Collateral Agent (Exhibit 4.1 to Form 8-K filed on April 4, 2014)
 
 
4.3 *
Warrant Agreement dated as of March 31, 2014 between Lee Enterprises, Incorporated and Wells Fargo Bank, National Association (Exhibit 4.2 to Form 8-K filed on April 4, 2014)
 
 
4.4 *
Registration Rights Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, Mudrick Capital Management, LP, Hawkeye Capital Management, LLC, Cohanzick Management, LLC, Aristeia Capital, L.L.C., CVC Credit Partners, LLC, Franklin Mutual Advisors, LLC and Wingspan Master Fund, LP (Exhibit 4.3 to Form 8-K filed on April 4, 2014)
 
 
10.1 *
Purchase Agreement dated March 21, 2014 among Lee Enterprises, Incorporated, certain subsidiaries party thereto from time to time, U.S. Bank National Association, as Trustee, and Deutsche Bank Trust Company Americas, as Collateral Agent, involving a $400,000,000 aggregate principal amount of 9.5% Senior Secured Notes, pursuant to an Indenture dated as of March 31, 2014 (Exhibit 10.1 to Form 8-K filed on March 27, 2014)
 
 
10.2 *
Joinder Agreement dated as of June 25, 2015, made by each Subsidiary Guarantor a party thereto in favor of U.S. Bank National Association, as Trustee and Deutsche Bank Trust Company Americas, as collateral agent (Exhibit 10.1 to Form 8-K filed on July 1, 2015)
 
 
10.3 *
First Lien Credit Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and JPMorgan Securities LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers and as Joint Bookrunners (Exhibit 10.1 to Form 8-K filed on April 4, 2014)
 
 
10.4 *
Second Lien Loan Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Lenders from time to time parties thereto, Wilmington Trust, National Association, as Administrative Agent and Collateral Agent, and JPMorgan Securities LLC and Deutsche Bank Securities Inc., as Joint Lead Arrangers and as Joint Bookrunners (Exhibit 10.2 to Form 8-K filed on April 4, 2014)
 
 
10.5 *
Security Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors and Deutsche Bank Trust Company Americas, as Collateral Agent (Exhibit 10.3 to Form 8-K filed on April 4, 2014)
 
 
10.6 *
Pari Passu Intercreditor Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the other Grantors from time to time parties thereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association and Deutsche Bank Trust Company Americas (Exhibit 10.4 to Form 8-K filed on April 4, 2014)




82


Number
Description
 
 
10.7 *
Joinder Agreement dated as of June 25, 2015, made by each Subsidiary Guarantor a party thereto in favor of JPMorgan Chase Bank, N.A., as collateral agent for the benefit of the Secured Creditors referred to in the First Lien Guarantee and Collateral Agreement dated as of March 31, 2014 referred to therein (Exhibit 10.2 to Form 8-K filed on July 1, 2015)
 
 
10.8 *
Pulitzer Pari Passu Intercreditor Agreement dated as of June 25, 2015 among Lee Enterprises, Incorporated, the other Grantors party thereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association and Deutsche Bank Trust Company Americas (Exhibit 10.3 to Form 8-K filed on July 1, 2015)
 
 
10.9 *
Junior Intercreditor Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the other Grantors from time to time parties thereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Deutsche Bank Trust Company Americas and Wilmington Trust, National Association (Exhibit 10.5 to Form 8-K filed on April 4, 2014)
 
 
10.10 *
Pulitzer Junior Intercreditor Agreement dated as of June 25, 2015 among Lee Enterprises, Incorporated, the other Grantors party hereto, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Deutsche Bank Trust Company Americas and Wilmington Trust, National Association (Exhibit 10.4 to Form 8-K filed on July 1, 2015)
 
 
10.11 *
First Lien Guarantee and Collateral Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent (Exhibit 10.6 to Form 8-K filed on April 4, 2014)
 
 
10.12 *
Intercompany Subordination Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors, Pulitzer, Pulitzer Subsidiaries and JPMorgan Chase Bank, N.A. (Exhibit 10.7 to Form 8-K filed on April 4, 2014)
 
 
10.13*
Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors, Pulitzer, Pulitzer Subsidiaries and Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (Exhibit 10.8 to Form 8-K filed on April 4, 2014)
 
 
10.14 *
Second Amendment to Intercreditor Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, The Bank of New York Mellon Trust Company, N.A., Wilmington Trust, National Association, Pulitzer and the Pulitzer Subsidiaries (Exhibit 10.9 to Form 8-K filed on April 4, 2014)
 
 
10.15 *
Intercompany Subordination Agreement dated as of March 31, 2014 among Lee Enterprises, Incorporated, the Subsidiary Guarantors, Pulitzer, Pulitzer Subsidiaries and Wilmington Trust, National Association (Exhibit 10.10 to Form 8-K filed on April 4, 2014)
 
 
10.16 *
Operating Agreement of St. Louis Post-Dispatch LLC, dated as of May 1, 2000, as amended by Amendment No. 1 to Operating Agreement of St. Louis Post-Dispatch LLC, dated as of June 1, 2001 (Exhibit 10.5 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
 
 
10.17*
Amendment Number Two to Operating Agreement of St. Louis Post-Dispatch LLC, effective February 18, 2009, between Pulitzer Inc. and Pulitzer Technologies, Inc. (Exhibit 10.13 to Form 10-Q for the Fiscal Quarter Ended March 29, 2009)
 
 
10.18*
Amended and Restated Joint Operating Agreement, dated December 22, 1988, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
 
 
10.19*
Amended and Restated Partnership Agreement, dated as of November 30, 2009, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009)
 
 
10.20*
Amended and Restated Management Agreement, dated as of November 30, 2009, between Star Publishing Company and Citizen Publishing Company (Exhibit 10.1 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009)
 
 
10.21*
License Agreement (Star), as amended and restated November 30, 2009, between Star Publishing Company and TNI Partners (Exhibit 10.3 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009)
 
 
10.22*
License Agreement (Citizen), as amended and restated November 30, 2009, between Citizen Publishing Company and TNI Partners (Exhibit 10.4 to Form 10-Q for the Fiscal Quarter Ended December 27, 2009)
 
 
10.23 *
Lease Agreement between Ryan Companies US, Inc. and Lee Enterprises, Incorporated dated May 2003 (Exhibit 10.7 to Form 10-K for the Fiscal Year Ended September 30, 2003)

83


Number
Description
 
 
10.24 *
License Agreement, dated as of May 1, 2000, by and between Pulitzer Inc. and St. Louis Post-Dispatch LLC (Exhibit 10.7 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
 
 
10.25*
Non-Confidentiality Agreement, dated as of May 1, 2000 (Exhibit 10.10 to Form 10-Q for the Fiscal Quarter Ended June 30, 2005)
 
 
10.26 +*
Form of Director Compensation Agreement of Lee Enterprises, Incorporated for non-employee director deferred compensation (Exhibit 10.7 to Form 10-K for the Fiscal Year Ended September 30, 2004)
 
 
10.27.1 +*
Amended and Restated Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (effective October 1, 1999, as amended effective February 17, 2016) (Exhibit 10.1 to Form 8-K filed on February 23, 2016)
 
 
10.27.2 +*
Forms of related Restricted Stock Agreement, Incentive Stock Option Agreement and, Non-Qualified Stock Option Agreement related to Lee Enterprises, Incorporated 1990 Long-Term Incentive Plan (Effective October 1, 1999, as amended effective February 17, 2016) (Exhibits 10.2, 10.3 and 10.4 to Form 8-K filed on February 23, 2016)
 
 
10.28 +*
Amended and Restated Lee Enterprises, Incorporated 1996 Stock Plan for Non-Employee Directors Effective February 17, 2010 (Appendix A to Schedule 14A Definitive Proxy Statement for 2014)
 
 
10.29 +*
Lee Enterprises, Incorporated Supplementary Benefit Plan, Amended and Restated as of January 1, 2008 (Exhibit 10.25 to Form 10-K for the Fiscal Year Ended September 28, 2008)
 
 
10.30 +*
Lee Enterprises, Incorporated Outside Directors Deferral Plan, Amended and Restated as of January 1, 2008 (Exhibit 10.26 to Form 10-K for the Fiscal Year Ended September 28, 2008)
 
 
10.31.1 +
Form of Amended and Restated Employment Agreement between Lee Enterprises, Incorporated and its Executive Chairman
 
 
10.31.2 +
Form of Amended and Restated Employment Agreement between Lee Enterprises, Incorporated and its President and Chief Operating Officer
 
 
10.31.3 +
Form of Employment Agreement between Lee Enterprises, Incorporated and Certain of its Senior Executive Officers
 
 
10.32 +*
Form of Indemnification Agreement for Lee Enterprises, Incorporated Directors and Executive Officers Group (Exhibit 10.2 to Form 10-Q for the Fiscal Quarter Ended March 30, 2008)
 
 
10.33 +*
Lee Enterprises, Incorporated Amended and Restated Incentive Compensation Program (Appendix B to Schedule 14A Definitive Proxy Statement for 2014)
 
 
21
Subsidiaries and associated companies
 
 
23.1
Consent of KPMG LLP, Independent Registered Public Accounting Firm
 
 
23.2
Consent of Baker Tilly Virchow Krause LLP, Independent Registered Public Accounting Firm
 
 
23.3
Report of Baker Tilly Virchow Krause LLP, Independent Registered Public Accounting Firm
 
 
24
Power of Attorney
 
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



84