- The Washington Times - Saturday, January 3, 2009

St. Louis Post-Dispatch and other Midwestern newspapers, said in a regulatory filing that it will have trouble paying its debt over the next two years because of severe reductions in revenue.

The company also disclosed that its outside auditor is questioning Lee’s ability to remain a “going concern” if the company is unable to refinance some loans.

Industry analysts said Friday, however, that the auditor’s assessment was largely a technicality, one likely to be mirrored as other newspaper companies file annual reports over the next few months that reflect a disappointing 2008.

Like the rest of the industry, Lee has seen advertising drop sharply as the recession compounded declines that began with the migration of readers and advertisers to the Internet. Lee depends on advertising for about three-quarters of its revenue.

Lee’s daily papers include the Post-Dispatch, the Lincoln Journal Star in Davenport, Iowa.

Lee said in a regulatory filing Wednesday that it generated sufficient cash flow in 2008 to reduce its debt by $102 million. But it will need to tap a revolving credit agreement to pay off $143 million in bank notes in 2009 and more than $166 million in notes due in 2010.

In addition, Lee has $306 million in debt it assumed when it bought the Post-Dispatch and the rest of the Pulitzer newspaper group in 2005. Pulitzer had taken on the debt in 2000, and those notes come due in April 2009.

Lee said negotiations were continuing with lenders to extend or refinance the Pulitzer notes, but the prospects were uncertain given “the abnormal condition of the domestic credit markets and the overall recessionary operating environment.”

Officials with Prudential Financial Inc., the lead holder of the Pulitzer notes, had no comment Friday.

Separately, Lee missed certain lender-imposed financial targets, known as covenants, because it took accounting charges to reduce the value of its goodwill and other intangible assets by nearly $1.1 billion in the fiscal year that ended Sept. 28.

Goodwill reflects the implied value of assets such as a company’s brand, and it declines as share prices and revenue projections tumble.

Shares in Lee, which were unchanged to close at 41 cents in Friday trading, have dropped below the New York Stock Exchange’s standards for listing, and the company said it will submit plans to return to compliance.

Lee has a waiver from lenders giving it a reprieve from meeting the financial targets until at least Jan. 16. After that, a violation of the covenants could trigger an acceleration of principal payments, according to the Davenport-based company’s auditor, KPMG LLP.

The company’s debt problems “raise substantial doubt about its ability to continue as a going concern,” KPMG said in a report accompanying Lee’s filing with the Securities and Exchange Commission.

Lee spokesman Dan Hayes declined to comment Friday.

Fitch Ratings bond analyst who specializes in the media industry, said Lee’s prospects are troubled, “but this type of ‘going concern’ language from auditors is pretty standard.”

Lee’s fiscal year ends earlier than most publishers’, “so that’s why we’re seeing this now,” he said. As more publishers whose fiscal years end Dec. 31 file their financial statements, “we’d expect that other companies that have breached covenants and are in the midst of negotiating remedies with banks could have this type of language included in their audited statements, as well,” Mr. Simonton said.

Ken Doctor, a media analyst at the research firm Outsell Inc., said Lee’s use of revolving credit to pay off bank notes should buy the company time, but it isn’t sustainable in the long term.

“If you push off debt, you suspect you are going to be able to improve your cash flow significantly in the future,” he said. “No newspaper company knows that.”

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