Followers of the financial future of the newspaper business — already nervous because of giant Tribune Co.’s bankruptcy filing — got another shock as Lee Enterprises Inc. warned that its auditor is raising questions about its ability to continue as a going concern.
The parent of the St. Louis Post-Dispatch and other newspapers said that KPMG could issue the going-concern ruling unless the media company can work out a deal to comply with certain debt covenants. Lee added that a modification of KPMG’s report would, unless waived by the lenders, constitute an event of default under Lee’s bank credit agreement.
Meanwhile, the company said it will delay the filing of its annual report.
It also warned that it expects to record impairment charges of at least $180 million after tax for the fourth quarter of the fiscal year ended Sept. 28, 2008. Part of the charge would also reduce the stockholders’ equity of Pulitzer Inc., a wholly owned subsidiary, and trigger the need for noteholders to waive the minimum net worth covenant in the guaranty agreement related to the $306 million senior notes, which were originated in 2000 by St. Louis Post-Dispatch LLC, a Pulitzer Inc. subsidiary. These are the notes that concern KPMG.
Lee explained that without a waiver by the noteholders, the reduction in Pulitzer’s stockholders equity would constitute an event of default in the guaranty agreement. Unless waived, the condition also would cause a cross-default in Lee’s recently amended bank credit agreement, dating to Lee’s acquisition of Pulitzer in 2005. Notice of an event of default would allow creditors to exercise certain remedies granted by the various debt agreements. The Pulitzer notes mature in April 2009.
As a result, on Dec. 12, KPMG formally notified Lee’s audit committee chairman that, in the absence of further information in support of the Lee’s ability to meet its obligations as they become due and comply with certain debt covenants, its auditors’ report for the year ended Sept. 28 will include an explanatory paragraph relating to Lee’s ability to continue as a going concern.
“As the economy has continued to worsen, Lee is actively engaged in discussions with the noteholders to extend or renew the Pulitzer Notes as soon as possible, and we are simultaneously working to obtain the necessary waivers under our various debt agreements,” said Mary Junck, chairman and chief executive officer. “Although the credit markets remain very difficult, lenders have shown a willingness to work toward acceptable solutions to help us avoid violating performance conditions in our debt agreements.”
She said that even in this recession, Lee still generates substantial cash flow, adding, “We continue to believe that Lee will emerge strong when all the national economic turbulence ends.”