Lee auditors issue ‘going concern’ warning
The statement is contained in multiple locations in the annual report the company filed quietly at 4:42 p.m. (EST) on New Year’s Eve. Twenty-three minutes later, the company also disclosed that it has been warned by the New York Stock Exchange that it may be booted off the Big Board because its shares have fallen below the minimum price required for continued listing.
The stock exchange forbids a company’s shares from closing below $1 for 30 trading days in a row. Lee’s shares have been trading under the $1 minimum since Dec. 1, closing Wednesday at 41 cents. With only a few days left to cure the problem, Lee said it “intends to notify the NYSE within the required period of 10 business days of its plans to return to compliance.”
Getting booted off the Big Board is the least of the company’s problems.
As discussed here, Lee, like lots of other publishers, loaded up on debt to fund acquisitions in the expectation that it could repay the loans though ever-rising sales and profits. The deep, secular decline in the newspaper industry – exacerbated by the worst economic downturn in several generations – has dashed those hopes.
In Lee’s case, the acquisition was the purchase of Pulitzer for $1.46 billion in 2005. Lee wrote off two-thirds of the value of the acquisition as a loss in 2008, according to accounting rules that require it to be treated as an “impaired asset.”
Lee took on $1.4 billion in debt to buy Pulitzer, assuming in the process the responsibility for a loan originally secured by Pulitzer. The upcoming repayment of the Pulitzer notes is the company’s most pressing concern.
With $142.5 million in principal due to be repaid on the Pulitzer loan this spring, “the company does not have sufficient cash flows to meet both its requirements for 2009 operations and repayment of the Pulitzer notes,” said Deloitte and Touche, the company's independent auditor.
Beyond the Pulitzer note, the annual report states Lee is in violation of additional requirements in its borrowings, which mandate specific ratios of cash to debt and certain other technical – but crucial – requirements known in the trade as “covenants.”
Unless Lee can begin generating substantially more profit or its lenders agree to renegotiate the loans, said the auditors, “the company has short-term obligations that cannot be satisfied by available funds and has incurred violations of debt covenants that subject the related principal amounts to acceleration, all of which raise substantial doubt about its ability to continue as a going concern.”
Acceleration of a loan means that immediate repayment is required, rather than waiting to the date it originally was due.
Noting that Lee last year paid $32.6 million in dividends and bought back nearly $19.5 million worth of its now anemically priced stock, the annual report questioned whether such expenditures would be possible in 2009. (BTW, the entire value of the company's stock today is less than $18.5 million.)
With “substantially all of the cash flows of the company required to be applied to payment of debt interest and principal,” Lee will face a reduced amount of “funds available for investment, capital expenditures and other purposes,” said the annual report, adding:
“The company’s flexibility to react to changes in economic and industry conditions may be more limited,” making it “more vulnerable in the event of additional deterioration of general economic conditions or other adverse events.”