Thursday, January 01, 2009

Lee auditors issue ‘going concern’ warning

With Lee Enterprises unlikely to have the cash required to make a $142.5 million debt payment due this spring, there is “substantial doubt about its ability to continue as a going concern,” according to its auditors.

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.”

16 Comments:

Anonymous Anonymous said...

Posted this on the blog before, but I think it's worth noting again.

How smart does the Pultizer family look right about now?

$1.46 BILLION for their chain when the entire sum of Lee is now worth under $19 MILLION.

Talk about timing the market. WOW!

8:28 AM  
Anonymous Anonymous said...

Can you interpret this financial double-speak for the layperson? What is the likely scenario for the near future and what does it mean to journalism at the Lee papers? What happens if they tank? Will the individual papers survive? Fold? Be bought? Are they still making money? Thanks.

9:37 AM  
Blogger tom said...

Plain language (best guess anyway): Lee's debt covenants had a clause which said that if revenues/cash flow fall to a certain point, debt repayments become accelerated.

Imagine your bank saying if you get a pay cut from your employer, your mortgage payments go through the roof. Sounds contradictory but the covenants were put in the debt documents to a) encourage the debtor to maximize cash flow to ensure the debt get repaid; and b) offer some protection against default on the debt.

Lee is plainly insolvent at the moment, given that essentially all of its cash flow would be required to service the debt because of the acceleration provisions.

Insolvencies are often settled in bankruptcy court, but most companies stay in business while it all gets sorted out.

9:57 AM  
Anonymous Anonymous said...

I'm no business expert, but in the short term Lee will most likely file for bankruptcy protection.

The problem they have is the crushing debt versus shrinking cash flow. They aren't making enough money to cover all their expenses.

Without seeing the balance sheet, my guess would be that they could probably continue to operate if they didn't have the crushing weight of the debt on top of them.

Perhaps Mr. Mutter has more insight into the overall picture.

10:00 AM  
Anonymous Anonymous said...

To the above comment: I can tell you that Lee's Arizona Daily Star property in Tucson had a profit margin of more than 30% in 2007. Yet Lee forced the paper to lay off 11 newsroom workers last December and have not let it replace any of the two dozen other staff members who have left since. The paper makes money hand over fist, but Lee's debt is crushing it. Many of the people I know who are still there are very worried about their futures at their once-stable employer.

11:39 AM  
Anonymous Anonymous said...

Yeah, but those are 2007 numbers. I'm sure the paper (along with most of Lee's other papers) is still most likely in the black, but my guess would be the profit probably is no longer above 30%.

That said, if the debt were a non-issue they'd still probably be more than capable of continuing their operations.

12:35 PM  
Anonymous Anonymous said...

The market valuation of $18.5 million seems insanely low. Properties like Madison, Wis., should be worth much more than that by themselves. I would like to hear Alan's comments on whether that creates some opportunities for bottom-feeding capitalists. Newspapers may not be as profitable as in the past, but couldn't private owners get a bargain by picking up a mid-sized daily with the top local web site for only a few million bucks?

1:54 PM  
Blogger tom said...

Only way it gets picked up for pennies on the dollar, I assume, is in a liquidation... otherwise you can't buy the company w/out the debt, I presume.

2:38 PM  
Anonymous Anonymous said...

Buying a company like Lee for $18.5 million is a fine idea, except for the fact that you would also become responsible for their debts...which in this case is somewhere in the neighborhood of $1.5 billion or more. The banks aren't just going to let a new buyer walk away with an entire newspaper chain and not pay the loans back.

Yes, it's true that the company's tangible assets are easily worth more than $18.5 million. Heck if you just wanted to buy the company and sell it's physical real estate holdings you'd clear more than $18.5 million.

But no one is going to buy a newspaper company that is saddled with BILLIONS of dollars in debt unless they're incredibly altruistic, have some other means of generating the cash flow necessary to repay the debts or are certifiably insane.

3:58 PM  
Anonymous Anonymous said...

Horseshit; the Arizona Daily Star did not have 24 people leave in 2008. At most, a dozen people quit the paper.

3:59 PM  
Anonymous john reinan said...

Yes, local operators probably could make a profit with many of these papers IF they could get ownership without assuming the debt that comes with it.

I don't know how that would happen, though.

And, of course, the chains themselves could run them profitably -- in the short run, at least -- without the debt.

4:16 PM  
Anonymous Anonymous said...

Lee's Wisconsin State Journal is right-wing hack paper, so I can't say I'd be sad to see them go.

4:49 PM  
Anonymous Mike Kelley said...

By "right-wing hack" newspaper, I presume you mean one that prints both sides of arguments instead of just the usual lefty bias seen in most media outlets.

8:06 AM  
Anonymous Anonymous said...

"Yes, local operators probably could make a profit with many of these papers IF they could get ownership without assuming the debt that comes with it."

It's called get the banks (debt holders) to agree to their version of a "cram down", where the outstanding indebtedness takes a severe haircut in terms of principal, interest, and debt repayment terms.

Say, cut the debt load by 50% or so. Course, that makes the newsies substantially whole and makes current stockholders and employees feel a whole lot safer, but don't plan on going back out & raising any additional funds in the capital markets anytime soon - those people just got burned big time, and they got memories.

That's what the game is all about right now - how big/real is the problem?, is the picture being presented "real" or is it "enhanced" to persuade the lenders?, even if the lenders bite the bullet and take the "cram down" (remember, that means the lenders have to immediately recognize the loss on their books as a write down, which they might not have already done), does the newspaper "leadership" and employees 'get it' that big time, serious changes are required from everybody, or is everything going right back to the way it used to be?

Lots of questions to be answered, there's much posing going on w/o enough facts, and time's running out.

It's called "Chicken - Federal Bankruptcy Court" style.

The one I'm looking forward to is the NYT, with their 2 tiered classes of stock - how's the Bankruptcy Court going to view that? Fun, fun, fun....

4:21 PM  
Anonymous Anonymous said...

What is in most peril here is the service newspapers give to democracy, shining light on both the positive and negative aspects of our govenrment that is required to keep politicians and others from screwing the general populace.
This business may not be a lot of fun right now, and we need some reinventing, but it is important that all parties, newspapers and their bankers alike, look down the road and keep all four wheels on the road today and every tomorrow after that. It's in everyone's best ineterst.

7:54 AM  
Anonymous Anonymous said...

... The problem in the newspaper business is corporate, and not until recently the product itself. But to cover "corporate" error, from NYT to Lee, cutting costs also cuts product quality and sales effort.

Newspapers aren't manufacturers per se, they're purveyors of entertainment, broadly speaking. When entertainment value is lessened, so is the product's perceived value both to advertisers who want to ride the entertainment vehicle, to "stockholders" and creditors.

Newspapers sell exactly what television, movies, fishing and dinners out sell: Entertainment, something worth what the consumer is willing to pay for in time and money.

And yet Lee, even with crippling "cost cuts" by dropping people whose creative and sales work IS the product, does cash flow. Except for that debt. Most businesses would celebrate Lee's margins and reward those whose creativity made them possible.

Newspaper corporations, and not just Lee, damaged their business by moves unrelated to the core product. It isn't the Web, it's breaking the back of the goose that laid golden eggs by letting the barn fall down on her nest.

Now consider this: What young person in his or her right mind would care to be a professional journalist when journalists are treated as less important assets than trash collectors?

That damages not only newspapers, but also video and Internet "news" products for at least a generation ahead. The implications of that do not bode well, do they...

9:51 AM  

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