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EX-32 - EX-32 - MCCLATCHY COmni-20191229xex32.htm
EX-31.2 - EX-31.2 - MCCLATCHY COmni-20191229ex3129a7198.htm
EX-31.1 - EX-31.1 - MCCLATCHY COmni-20191229ex311607091.htm
EX-23 - EX-23 - MCCLATCHY COmni-20191229xex23.htm
EX-21 - EX-21 - MCCLATCHY COmni-20191229ex21b47f5b0.htm
EX-4.1 - EX-4.1 - MCCLATCHY COmni-20191229ex4139f5c06.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 29, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from        to       

 

Commission file number: 1‑9824

Picture 1

The McClatchy Company

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

52‑2080478

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

2100 Q Street, Sacramento, CA

 

95816

(Address of principal executive offices)

 

(Zip Code)

 

 

 

916‑321‑1844

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of each class

 

Ticker Symbol

 

Name of each exchange on which registered

Class A Common Stock, par value $.01 per share

 

MNI(1)

 

NYSE American LLC(1)

 

Securities registered pursuant to Section 12 (g) of the Act: None(1)

(1)

On February 21, 2020, the NYSE American filed a Form 25 with the Securities and Exchange Commission (the “SEC”) to delist the Class A Common Stock of The McClatchy Company. The delisting became effective 10 days after the Form 25 was filed. The deregistration of the Class A Common Stock under section 12(b) of the Securities Exchange Act of 1934 will be effective 90 days, or such shorter period as the SEC may determine, after filing of the Form 25. Following deregistration of the Class A Common Stock under Section 12(b) of the Securities Exchange Act of 1934, the Class A Common Stock shall remain registered under Section 12(g) of the Securities Exchange Act of 1934. Beginning on February 16, 2020, the Class A Common Stock was quoted on the OTC Pink Market under the symbol “MNIQQ.”  

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☐ Yes ☒ No

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

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 ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒ Yes ☐ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K (§ 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, a non‑accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”  and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☐

 

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).  ☐ Yes ☒ No

Based on the closing price of the registrant’s Class A Common Stock on the NYSE American LLC on June 30, 2019, the last business day of the registrant’s second fiscal quarter, the aggregate market value of the voting and non‑voting common equity held by non‑affiliates was approximately $17.1 million. For purposes of the foregoing calculation only, as required by Form 10‑K, 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.

Shares outstanding as of March 25, 2020:

 

 

 

 

 

Class A Common Stock

5,506,185

 

Class B Common Stock

2,428,191

 

DOCUMENTS INCORPORATED BY REFERENCE:

The registrant intends to file a Definitive Proxy Statement pursuant to Regulation 14A or an amendment to Form 10-K within 120 days after our fiscal year end of December 29, 2019. Portions of such definitive proxy statement or an amendment to Form 10-K are incorporated by reference in Part III of this Annual Report on Form 10‑K.

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

PART I 

    

    

    

    

Item 1. 

 

Business

 

3

Item 1A. 

 

Risk Factors

 

10

Item 1B. 

 

Unresolved Staff Comments

 

10

Item 2. 

 

Properties

 

10

Item 3. 

 

Legal Proceedings

 

10

Item 4. 

 

Mine Safety Disclosures

 

10

PART II 

 

 

 

 

Item 5. 

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

13

Item 6. 

 

Selected Financial Data

 

13

Item 7. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

14

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

26

Item 8. 

 

Financial Statements and Supplementary Data

 

27

Item 9. 

 

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

67

Item 9A. 

 

Controls and Procedures

 

67

Item 9B. 

 

Other Information

 

67

PART III 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

 

65

Item 11. 

 

Executive Compensation

 

65

Item 12. 

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

68

Item 13. 

 

Certain Relationships and Related Transactions, and Director Independence

 

68

Item 14. 

 

Principal Accounting Fees and Services

 

68

PART IV 

 

 

 

 

Item 15. 

 

Exhibits, Financial Statement Schedules

 

66

Item 16. 

 

Form 10-K Summary

 

71

SIGNATURES 

 

72

 

 

 

 

PART I

Forward‑Looking Statements:

This annual report on Form 10‑K contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including statements relating to future financial performance and operations, trends in advertising, uses of cash, including offers for or repurchases of our debt, the refinancing of our debt and our pension plan obligations. These statements are based upon our current expectations and knowledge of factors impacting our business and are generally preceded by, followed by or are a part of sentences that include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions. All statements, other than statements of historical fact, are statements that could be deemed forward‑looking statements. For all of those statements, we claim the protection of the safe harbor for forward‑looking statements contained in the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, trends and uncertainties.

 

These risks and uncertainties include, but are not limited to:

 

·

the effects of the Bankruptcy Court rulings in the Chapter 11 Cases (as defined below) and the outcome of the proceedings in general;

·

the length of time the Company will operate while in the Chapter 11 Cases;  

·

our restructuring efforts rely on coming to terms with multiple parties who may have conflicting interests;

·

the potential adverse effects of Chapter 11 Cases on the Company’s liquidity or results of operations or its ability to pursue its business strategies, maintain business and operational relationships and retain key executives;  

·

our ability to complete definitive documentation in connection with any Chapter 11 satisfactory to the Company and our stakeholders, and our ability to obtain requisite support for our proposed restructuring plan from various stakeholders and confirm and consummate that plan in accordance with its terms;

·

the sufficiency of the DIP Facility (as defined below) to allow the Company to operate as usual and fulfill ongoing commitments to stakeholders;

·

our ability to successfully emerge from Chapter 11, which will be contingent upon numerous factors, including obtaining the Bankruptcy Court’s approval of our proposed Chapter 11 plan of reorganization and our ability to obtain a new credit facility, or “exit financing” upon our emergence from Chapter 11;

·

increased levels of employee attrition during the Chapter 11 Cases;  

·

our reliance on third party vendors and the impact of the Chapter 11 filing on such relationships;

·

our ability to continue as a going concern;

·

the continued trading of our securities on the OTC Pink Market;

·

significant competition in the market for news and advertising;

·

general economic and business conditions;

·

any business, workforce and sales disruption, including from third parties on whom we are dependent, or difficulties securing financing resulting from natural disasters and public health emergencies, such as the coronavirus;

·

changes in technology, services and standards, and changes in consumer behavior;

·

ability to grow and manage our digital businesses;

·

our ability to successfully execute cost-control measures, including selling excess assets;

·

any changes to our business and operations that may result in goodwill and masthead impairment charges;

·

any harm to our reputation, business and results of operations resulting from data security breaches and other threats and disruptions;

·

fluctuating price of newsprint or disruptions in newsprint supply chain;

·

any labor unrest;

·

accelerated decline in print circulation volume;

·

developments in the laws and regulations to which we are subject resulting in increased costs and lower revenues; and

·

adverse results from litigation or governmental investigations.

 

Although the forward-looking statements in this report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. In light of these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Except as required by law, we undertake no obligation to announce publicly revisions we make to these forward-looking statements to reflect the effect of events or circumstances

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that may arise after the date of this report. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section. 

 

ITEM 1.  BUSINESS

Overview

 

The McClatchy Company (the “Company,” “McClatchy,” “we,” “us” or “our”) provides strong, independent local journalism to 30 communities with operations in 14 states, as well as selected national news coverage through our Washington, D.C. bureau. We also provide a full suite of digital marketing services, both through our local sales teams based in the communities we serve, as well as through excelerate®, our national digital marketing agency. We consider our journalism to be in the public interest and strive to be essential to our audiences and advertisers through a wide array of storytelling formats. We are a publisher of well-respected brands such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News & Observer, and the Fort Worth Star-Telegram. Incorporated in Delaware in 1997, we are headquartered in Sacramento, California.  During fiscal years 2019 and 2018, our Class A Common Stock was traded on the NYSE American LLC (“NYSE American”) under the symbol MNI. As of February 14, 2020, our Class A Common Stock is traded “over-the-counter” on the OTC Pink Market under the symbol MNIQQ.

Chapter 11 Proceedings

 

On February 13, 2020, McClatchy and each of our 53 wholly owned subsidiaries filed voluntary petitions for reorganization (“Chapter 11 Cases”) under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”) in the U.S. Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”).  The Chapter 11 Cases are being jointly administered under the caption In re: The McClatchy Company, et al., Case No. 20-10418.

 

We and our 30 local media companies will continue to operate our businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. 

 

In general, as debtors-in-possession under the Bankruptcy Code, we are authorized to continue to operate as an ongoing business but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Pursuant to first-day motions filed with the Bankruptcy Court, the Bankruptcy Court authorized us to conduct our business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorizing us to obtain debtor-in-possession financing, pay employee wages and benefits, and pay vendors and suppliers in the ordinary course for all goods and services going forward.  

 

We will continue to pursue approval of a proposed restructuring plan with our secured lenders, bondholders, and the Pension Benefit Guaranty Corporation (“PBGC”).

 

We have obtained new $50.0 million debtor-in-possession financing under a credit agreement (“DIP Credit Agreement”) from Encina Business Credit, LLC, (“Encina”) which, coupled with our normal operating cash flows, is providing liquidity for McClatchy and all of our local news outlets to operate as usual and fulfill ongoing commitments to stakeholders. We are unable to predict when we will emerge from this Chapter 11 process.  

For more information about the Chapter 11 Cases see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Item 8, Note 2 of the Consolidated Financial Statements. 

 

Going Concern

 

We have concluded that our financial condition and projected operating results, the minimum required contribution amounts on our defined benefit pension plan (“Pension Plan”) (as described below), the defaults under our debt agreements subsequent to December 29, 2019, and the risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt as to our ability to continue as a going concern. Accordingly, the audit report issued by our independent registered public accounting firm contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

 

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As of December 29, 2019, we faced liquidity challenges relating to the minimum required contributions in fiscal year 2020 to our Pension Plan. These required contributions were estimated to be approximately $124.2 million, which would be paid in installments beginning in January 2020 with the majority of those payments due on or subsequent to September 15, 2020. In January 2020, we entered into a Standstill Agreement with the PBGC, pursuant to which the PBGC agreed not to exercise the remedies available to it as a result of our not making the scheduled qualified pension contribution of $4.0 million due in January 2020. The payment obligations to the PBGC were further stayed when we filed for reorganization under Chapter 11 in February 2020.


Delisting of our Common Stock from the NYSE American

 

Our Class A Common Stock was previously listed on the NYSE American under the symbol MNI. On February 13, 2020, the NYSE American suspended the trading of our Class A Common Stock upon our filing the Chapter 11 petitions, and our Class A Common Stock has been quoted “over-the-counter” on the OTC Pink Market, operated by OTC Markets Group, under the symbol MNIQQ. On February 21, 2020, the NYSE American filed a Form 25 with the SEC to delist our Class A Common Stock from the NYSE American. The delisting was effective 10 days after the Form 25 was filed. The deregistration of the Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will become effective 90 days after the filing date of the Form 25.

Business Operations

 

The cornerstone of our business is providing content, either editorial or through advertising that will inform, educate, entertain and enhance the everyday lives of people with ties to the communities in which we operate. Our media companies and our digital media agency,  excelerate®, distribute content, including video products, through our owned and operated websites and mobile applications, third-party search and advertising exchanges, social media platforms, electronic editions of our daily newspapers (“e-editions”) as well as our printed daily newspapers. We also print selected niche publications and community newspapers,  and offer other print and digital direct marketing services. Our media companies range from large daily newspapers and news websites serving metropolitan areas to non‑daily newspapers with news websites and online platforms serving small communities. We had 55.7 million average monthly unique visitors to our online platforms and 3.4 billion page views of our digital products for the full year ended December 29, 2019. Our local websites, e-editions and mobile applications in each of our markets provide us fully developed but rapidly evolving channels to extend our journalism and advertising products to our audience in each market. In 2019, we continued to expand our full-service digital agency, excelerate®, which provides digital marketing tools designed to customize digital marketing plans for our customers. For the year ended December 29, 2019, we had an average aggregate paid daily circulation of 1.1 million and Sunday circulation of 1.5 million.

Our business is roughly divided between those media companies operating west of the Mississippi River and those that are east of it. For the year ended December 29, 2019, no single media company represented more than 11.5% of our total revenues.

Our fiscal year ends on the last Sunday in December of each calendar year. The fiscal years ended December 29, 2019, and December 30, 2018, consisted of 52-week periods.  

Strategy

 

Our mission is to deliver strong, independent journalism and information. To accomplish this goal, we are committed to a three‑pronged strategy to grow our businesses and total revenues as a leading local media company:

·

First, to maintain our position as a leading local media company in each of our markets by providing independent journalism and advertising information essential to our communities on digital platforms and in our printed newspapers; and to grow these audiences for the benefit of our advertisers and our communities; and

·

Second, to improve digital advertising and audience revenues as we transition to a digitally focused, digitally driven media company. This strategy includes being a leader of local digital businesses in each of our markets, growing our digital subscriptions and digital audiences in general by providing compelling websites, e-editions of the printed newspaper, mobile applications, e‑mail products, mobile services, video products and other electronic media; and

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·

Third, to extend these franchises by supplementing the reach of the digital and printed newspaper and other digital businesses with direct marketing, niche publications and events and direct mail products so advertisers can capture both mass and targeted audiences with one‑stop shopping.

To assist with these strategies, we continually improve existing digital products and develop new ones, reengineer our operations to reduce legacy costs and strengthen areas driving performance in news, audience, advertising and digital growth. As a result of our efforts, we saw a 41.4% growth in digital-only subscriptions and an 47.5%  growth in digital-only audience revenues in 2019. We continued our focus to drive operating expenses down.

Business Initiatives

 

Our local media companies continue to undergo tremendous structural and cyclical change. To strengthen our position as a leading local media company in the markets we serve and implement our strategies, we are focused on the following five major business initiatives:

Broadening Total Revenues

Revenue initiatives over the last several years have included aligning ourselves for digital growth by revamping and centralizing certain departments and focusing on digital marketing; digital audience growth through new audiences and digital subscribers; organizing our technology groups to help us better serve our customers; and developing innovation teams that help us implement additional customer-focused approaches to running our businesses. In 2019, we continued to expand our full-service digital agency, excelerate®, which provides customized digital marketing plans for our customers.

Our strategy has been to focus on growing revenue sources that include digital and direct marketing advertising, audience and other non-traditional revenues. Management expects newspaper print advertising to continue to be a smaller share of total revenues in the future, but that audience revenues will reflect a more stable source of revenues. In fact, in 2019 audience revenues were nearly equal to advertising revenues and exceeded advertising revenues in some periods during the year. We continue to look for opportunities to expand our advertiser base, including advertisers outside of our markets using our excelerate® agency services.

Advertising revenues were 47.5% and 51.6% of total revenues in 2019 and 2018, respectively. Our sales force is responsible for delivering to advertisers a broad array of advertising products, including digital marketing solutions and print and direct marketing solutions. Our advertisers range from large national retail chains to regional automobile dealerships and grocers to small local businesses and even individuals.

Video revenues were $9.1 million in 2019, compared to $9.5 million in 2018. During 2019, more than 513 million video views were recorded across our digital platforms, including those on social media platforms and distribution partners, up 4.0% from 493 million video views in 2018. 

Increasingly, our emphasis has been on growing the breadth of products offered to advertisers, particularly our digital marketing products, while expanding our relationships with current advertisers and growing new accounts. For 2019, total digital and direct marketing advertising revenues combined represented 63.6% of total advertising revenues compared to 62.6% in 2018. Our digital products are discussed in more detail below.

Audience revenues were 45.4% and 42.1% of consolidated total revenues in 2019 and 2018, respectively. Audience revenues have been a more stable revenue source than advertising as we have leveraged technology to increase the number of digital products we offer and better understand our digital audience. As a result, digital-only audience revenues grew 47.5% in 2019, while the number of digital subscribers grew by 63,700 as of December 29, 2019, up 41.0% from the end of 2018. See Broadening Our Audience in Our Local Markets below for a greater description of our efforts in digital audience growth.

Expanding Our Digital Business

In 2019, 37.5%  of total revenues came from digital products compared to 35.2% in 2018. Digital-only advertising revenues declined 16.1%, to $127.3 million in 2019 from $151.7 million in 2018, as we and the rest of the industry faced the

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headwinds of competing with large platform companies in the digital advertising arena. 

Our media companies’ websites and mobile applications, e‑mail products, video and mobile services and other electronic media enable us to engage our readers with real‑time news and information that matters to them. As discussed below in Maintaining Our Commitment to Public Service Journalism, our storytelling capability is contributing to our growth in digital subscribers. During 2019, our websites attracted an average of approximately 55.7 million unique visitors per month. Although this figure is down 16.1% compared to 2018, this decline reflects our focus on enforcing stricter pay walls in 2019, which resulted in strong growth in digital subscriptions,  as discussed above and changes made by platform companies that previously linked to our websites. We had 3.4 billion page views of our digital products for the full year of 2019 compared to 3.9 billion page views in 2018.  

We continued to expand our concept of comprehensive digital marketing solutions for local businesses via our digital marketing agency called excelerate®.  We also continued to expand the footprint of excelerate® to markets beyond those served by our media companies. Offering advertisers integrated packages including website customization, search engine marketing and optimization, social media presence and marketing services, and other multi‑platform advertising opportunities, excelerate® helps businesses improve the effectiveness of their marketing efforts. 

In 2019, we continued to expand our advertising efforts on third-party advertising exchanges. Our real-time, programmatic revenues from the buying and selling of digital advertising inventory – often targeting very specific audiences at very specific times – grew 27.0% in 2019 compared to 2018.  Our growth continues to be strengthened by our participation in the Local Media Consortium (“LMC”) and its more than 89 member companies representing more than 3,000 daily newspapers, broadcast and online-only local media outlets. The LMC mission is to provide economic benefit to its members by negotiating partnerships that deliver cost savings or new revenue opportunities. In addition, the LMC offers a private advertising exchange of high-quality advertising inventory from member publishers providing advertisers with access to more than 19 billion advertising impressions monthly.

More than 513 million video views were recorded across our digital platforms, including those on social media platforms and distribution partners, up 4.0% from 493 million video views in 2018.

All of our markets offer audience subscription packages for digital content. The packages include a combined digital and print subscription or a digital‑only subscription. Digital‑only subscriptions grew 41.0%  to 219,200 subscribers in 2019 from 155,500 subscribers in 2018. When coupled with combination print/digital subscriptions, for which customers have activated their digital products, total paid digital customer relationships were approximately 535,300 at the end of 2019, up 21.4% from a year earlier.

In early 2019, we conducted a trial in four of our smaller markets by providing our Saturday newspaper in digital format only,  which was primarily accessed via our e-edition by combination print/digital subscribers. In addition to expanded digital content, readers enjoy additional print content added to the Friday and Sunday printed newspapers. We saw digital engagement increase in each of these markets and the change has been well-accepted by almost all subscribers and advertisers. As a result, in the fourth quarter of 2019 we launched another nine markets, and we are seeing wide acceptance of digital Saturdays among our subscribers in the markets. We launched digital Saturdays to all of our markets by the end of the first quarter of 2020. 

We have not only increased the number of our digital-only subscriptions, we have also grown ways in which those subscribers are acquired. For instance, some of our growth is driven by a sports-only subscription product branded as SportsPass,  which is available in 11 of our markets. In addition, we have partnered with Google to offer a way for readers to purchase a subscription to each of our digital brands. Consumers are able to link our subscription account with their Google accounts, which allows for a better user experience. We continue to improve our technology to know our customers better, to identify areas of interest that allow us to target and retarget potential subscribers and to provide new products to all subscribers. 

Maintaining Our Commitment to Public Service Journalism 

 

We believe that independent journalism in the public interest is critical to our democracy. It is also the underpinning of our success as a business.

We are committed to producing best‑in‑class journalism and local content in every community we serve. Each of our newsrooms is expected to improve annually; whether measured by growth in readership, loyalty of readers, our own

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assessments of journalistic strengths, or recognition by peers and others. And each of our newsrooms is expected to serve our core public service mission – holding leaders and institutions accountable and making our communities better places in which to live.

During the digital transition that has reshaped the industry over the past decade, we have moved to expand our digital reach and deliver news to readers where they want it and when they want it. All of our newsrooms place an intense focus on what our readers want and need from us in a fast-changing news landscape. We continue to produce ground-breaking accountability journalism – from the Miami Herald’s ongoing investigation of the influential figures who enabled a billionaire sex abuser, to The Kansas City Star’s deep, ground-breaking exploration of a foster care system whose failures create a pathway to prison for teenagers, to in-depth reporting by The Wichita Eagle into the mayor’s decision to go against a panel’s advice and award a multi-million-dollar contract to a friend, to the Lexington Herald Leader’s dogged reporting on the water crisis in Appalachia that is stirring a public debate and prompting calls to fix a long-failing infrastructure. Meanwhile, our Washington, D.C. bureau continues to deliver unparalleled exclusives that are locally relevant and have national impact, most recently exemplified by an investigation that uncovered elevated rates of cancers among service members who served in Iraq and Afghanistan.

 

Our heritage of public service journalism is the foundation of our business, and the work of our journalists received significant recognition. We have been honored with 54 Pulitzer Prize wins and an impressive streak of being a Pulitzer winner or finalist every year for more than a decade. In 2019, journalists from the Miami Herald were finalists for the Pulitzer Prize for investigative reporting for their in-depth report detailing how drug lords make billions smuggling gold to Miami. The Kansas City Star was a finalist for the Pulitzer Prize in commentary, and won the Mike Royko Award for Commentary and Column Writing in the 2019 News Leaders Association Awards. The Online News Association recognized McClatchy for “Since Parkland,” a project that documented every child lost to gun violence over the year that followed the mass shooting at Marjory Stoneman Douglas High School in Florida. The Miami Herald’s ongoing investigation of a sexual predator continues to be recognized nationally and internationally, winning a Polk award and the Hillman Prize for Journalism in the Common Good, among many others. The Wichita Eagle won a Polk Award for political reporting, and our sports reporting teams were recognized nationwide, with eight McClatchy newsrooms winning 30 Associated Press Sports Editors awards. Also, Aminda Marques Gonzalez, president, publisher and editor of the Miami Herald and el Nuevo Herald, has been recognized by the National Press Foundation as the Benjamin C. Bradlee Editor of the Year.

 

Our video journalists continued to produce ambitious stories around breaking news, projects and series that have gained industry recognition. Our High Impact team earned four Emmys for third season of “Titletown, TX” as well as first place in the Online News Awards and first place in the White House News Photographer Association honors. A podcast series on Rae Carruth, who spent more than 18 years in prison for the killing of his girlfriend while he played for the NFL’s Carolina Panthers, earned an Editor and Publisher Award, known as an EPPY, and the AP Sports Editors Award for Best Podcast.

 

These are just a few of the hundreds of examples of our powerful journalism we have published across the country. We intend to build on our legacy in the years ahead, propelled by the recent success of our ongoing digital transformation. For instance, the digital replica edition of each of our daily newspapers includes stories from our 30 newsrooms and other journalistic organizations that on many days more than doubles the news that could be found in the daily newspaper delivered to subscribers’ doorsteps. This additional content, known as “Extra Extra” and “SportsXtra,” has been well received by readers of our digital products.

 

Broadening and Deepening Our Audience in Our Local Markets

Each of our media companies’ print circulation, coupled with its local website and other digital platforms, reaches a broad and deep audience in each market. We believe that our broad reach in each market is of primary importance in attracting advertising, which is an important source of revenues.

We remain strongly committed to independent local journalism in the public interest. And that commitment goes beyond markets where we own a masthead. In October 2019, we launched Mahoning Matters, a digital-only news outlet serving Ohio's Mahoning Valley as a part of our Compass Experiment. The Compass Experiment is a local news laboratory founded by McClatchy and funded by Google News Initiative's Local Experiments Project where we intend to launch digital-only news outlets in three localities with 60,000 to 300,000 residents and limited sources of local news.

Our news and information follow readers continuously. To start their day, we reach our readers who can check out our

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latest headlines and stories on their mobile phones or with the morning newspaper. Our news websites, updated frequently throughout the day, are available to readers via their desktop computers and optimized for all of their different mobile devices.

Daily newspapers’ paid circulation volumes for 2019 were down 7.6% compared to 2018. The declines in daily circulation reflect the fragmentation of audiences faced by all media companies, including our own digital‑only subscriptions, as available media outlets proliferate, and readership trends change. Our Sunday circulation volumes were down 16.4% in 2019 compared to 2018.

We also reach audiences through our direct marketing products. In 2019, we distributed approximately 410,000 preprinted advertisements to non‑newspaper subscribers who have interest in circulars. We also distribute thousands of e-mail messages each day, including editorial and advertising content, as well as other alerts to subscribers and non‑subscribers in our markets, which supplement the reach of our print and digital subscriptions.

To remain a leading local media company for the communities we serve and a must‑buy for advertisers, we are focused on maintaining a broad reach of print and digital audiences in each of our markets. We will continue to refine and strengthen our print platform, but our growth increasingly comes from our digital products and the beneficial impact those products have on the total audience we deliver for our advertisers.

Focusing on Cost Efficiencies While Investing for the Future

While continuing to maintain our core business in news, advertising and audience revenues and digital media, we pay particular attention to cost efficiencies. Our cost initiatives in 2019 were focused on continuing to reduce legacy costs from our traditional print business, and we have realized significant savings from these efforts, primarily in postage, newsroom and advertising regionalization/consolidation, distribution and printing costs.

In 2018, in order to ensure a more collaborative enterprise, we began the process of regionalizing certain areas of our operations, including newsrooms and advertising departments. We had previously regionalized our publisher and editorial leadership functions and have since centralized certain functional areas, like audience operations, revenue accounting and other smaller functions.

In the first quarter of 2019, we announced an early retirement program that resulted in savings of approximately $12 million in 2019. During the second quarter we rolled out a new advertising structure aligned around channels to reduce redundancies, create a  more digital focus, standardize and streamline our processes and procedures and generally make us more efficient and effective. These changes resulted in some workforce reductions, but they have also created additional positions and capabilities, including a new centralized call center. The changes, coupled with the impact of our early retirement program in the advertising department, have resulted in $20.0 million in savings, most of which started in the second quarter.

 

We further focused on efficiencies as we outsourced our printing operations in Tacoma, Washington in early 2019,  bringing the total number of our newspapers now printed outside of their markets to 23. In 2020,  we announced the outsourcing of our newspaper printing in State College, Pennsylvania and in Miami, Florida. 

 

Although, we have reduced our ranks over the years, we have maintained a strong editorial department. For instance, at the end of 2019 our editorial staff made up 30.9% of our total full-time equivalent employees, the largest department within the Company. In addition, our newsrooms have improved their efficiency, which is evidenced by a 69.9% increase in page views per newsroom dollar spent from when we began measuring this key performance index in 2015.  

 

As we transition to a more digital company, we continue to realize savings in newsprint and third-party printing costs. Our newsprint savings are coming from volume declines resulting from circulation declines and strategic changes we have made, such as reorganizing our print product and moving to digital-only editions on Saturdays in our markets. Our newsprint costs in 2019 comprised only about 3.6% of our total cost structure, substantially lower than historical amounts. 

 

Compensation, newsprint, supplements and printing expenses, and other operating expenses combined, were down $76.7 million or 10.7% in 2019 compared to 2018. We will continue to outsource, regionalize and consolidate operations to achieve a more streamlined and efficient cost structure.

Other Operational Information

Historically, each of our media companies was largely autonomous in its local advertising and editorial operations in order

8

to meet the needs of the particular community it served. However,  we continue to regionalize or centralize certain operations across our local markets to strengthen our local media companies’ ability to collaborate and improve their performance in news, audience, advertising and digital growth.

We have two operating segments that are aggregated into a single reportable segment. Each operating segment consists primarily of a group of local media companies with similar economic characteristics, products, customers and distribution methods. The operating segments report to two segment managers. One of our operating segments (“Western Segment”) consists of our media operations in California, Washington and the Central region of the United States, while the other operating segment (“Eastern Segment”) consists of media operations in the Carolinas and the East and Southeast regions of the United States. Local publishers/general managers of the media companies make day‑to‑day decisions and report to the segment managers, who are responsible for working with the functional leaders of advertising, editorial, audience, product and technology, finance and people organizations to implement the operating and financial plans at each operation within the respective operating segment. The corporate managers, including executive officers, set the basic business, accounting, financial and reporting policies.

Our media companies also work together to consolidate functions and share resources across operating segments that lend themselves to such efficiencies, such as certain regional or national sales efforts, certain editorial functions, accounting functions, digital publishing systems and products, information technology functions and others. These efforts are often coordinated through senior executives and corporate personnel.

Our business is somewhat seasonal, with peak revenues and profits generally occurring in the fourth quarter of each year, reflecting the Thanksgiving and Christmas holidays. The other quarters, when holidays are not as prevalent, are historically slower quarters for revenues and operating profits.

9

The following table summarizes our media companies, their digital platforms, total circulation (print copies and digital subscriptions)  and total unique visitors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Circulation (1)

 

Media Company

Website

Location

 

UV (2)

 

Daily

 

Sunday

 

Miami Herald

www.miamiherald.com

Miami, FL

 

12,066,000

 

75,297

 

111,769

 

The Sacramento Bee

www.sacbee.com

Sacramento, CA

 

6,110,000

    

92,733

 

164,041

 

Fort Worth Star-Telegram

www.star-telegram.com

Fort Worth, TX

 

4,764,000

 

179,339

 

155,981

 

The Charlotte Observer

www.charlotteobserver.com

Charlotte, NC

 

4,756,000

 

68,241

 

95,328

 

The Kansas City Star

www.kansascity.com

Kansas City, MO

 

4,639,000

 

93,484

 

122,115

 

The News & Observer

www.newsobserver.com

Raleigh, NC

 

3,210,000

 

70,413

 

91,164

 

El Nuevo Herald

www.elnuevoherald.com

Miami, FL

 

4,589,000

 

19,533

 

24,753

 

Lexington Herald-Leader

www.kentucky.com

Lexington, KY

 

2,473,000

 

44,811

 

66,810

 

The State

www.thestate.com

Columbia, SC

 

2,426,000

 

39,215

 

56,550

 

The News Tribune

www.thenewstribune.com

Tacoma, WA

 

1,960,000

 

32,714

 

62,560

 

The Fresno Bee

www.fresnobee.com

Fresno, CA

 

1,722,000

 

48,266

 

67,417

 

The Wichita Eagle

www.kansas.com

Wichita, KS

 

1,576,000

 

32,373

 

71,068

 

Idaho Statesman

www.idahostatesman.com

Boise, ID

 

1,527,000

 

29,021

 

50,568

 

The Modesto Bee

www.modbee.com

Modesto, CA

 

1,041,000

 

29,729

 

37,616

 

McClatchy DC Bureau

www.mcclatchydc.com

 

 

1,000,000

 

N/A

    

N/A

 

Belleville News-Democrat

www.bnd.com

Belleville, IL

 

959,000

 

15,450

 

44,257

 

Sun Herald

www.sunherald.com

Biloxi, MS

 

942,000

 

16,578

 

18,806

 

The Tribune

www.sanluisobispo.com

San Luis Obispo, CA

 

846,000

 

15,876

 

19,206

 

The Bradenton Herald

www.brandenton.com

Bradenton, FL

 

815,000

 

16,867

 

21,174

 

The Bellingham Herald

www.bellinghamherald.com

Bellingham, WA

 

778,000

 

9,520

 

12,613

 

The Telegraph

www.macon.com

Macon, GA

 

749,000

 

15,824

 

20,086

 

The Island Packet 

www.islandpacket.com

Hilton Head, SC

 

692,000

 

15,766

 

16,889

 

The Sun News

www.thesunnews.com

Myrtle Beach, SC

 

692,000

 

18,269

 

24,244

 

The Olympian

www.theolympian.com

Olympia, WA

 

628,000

 

12,014

 

20,604

 

Tri-City Herald

www.tri-cityherald.com

Kennewick, WA

 

607,000

 

16,895

 

21,993

 

Centre Daily Times

www.centredaily.com

State College, PA

 

598,000

 

11,279

 

14,277

 

Ledger-Enquirer

www.ledger-enquirer.com

Columbus, GA

 

519,000

 

12,536

 

15,196

 

The Herald

www.heraldonline.com

Rock Hill, SC

 

495,000

 

9,339

 

11,818

 

Merced Sun-Star

www.mercedsunstar.com

Merced, CA

 

340,000

 

8,345

 

 —

 

The Herald-Sun

www.heraldsun.com

Durham, NC

 

259,000

 

7,113

 

7,956

 

The Beaufort Gazette

www.beaufortgazette.com

Beaufort, SC

(3)

N/A

 

4,018

 

4,423

 

 

 

 

 

63,778,000

 

1,060,858

    

1,451,282

 

(1)

Circulation figures are reported as of the end of our fiscal year 2019 and are not meant to reflect Alliance for Audited Media (“AAM”) reported figures.

(2)

Total monthly unique visitors for December 2019 according to Adobe Analytics.

(3)

The Beaufort Gazette unique visitor activity is included in The Island Packet activity.

 

Other Operations

We own 49.5% of the voting stock and 70.6% of the nonvoting stock of The Seattle Times Company. The Seattle Times Company owns The Seattle Times newspaper, weekly newspapers in the Puget Sound area and daily newspapers located in Walla Walla and Yakima, Washington, and their related websites and mobile applications.

In addition, three of our wholly owned subsidiaries own a combined 27.0% interest in Ponderay Newsprint Company (“Ponderay”), a general partnership that owns and operates a newsprint mill in the state of Washington. In connection with the Chapter 11 Cases we expect to abandon our interest in Ponderay, as long-term ownership of the mill is not anticipated to create or maximize value in the future and is thus inconsistent with our overall restructuring strategy. 

Raw Materials

During 2019, we consumed approximately 38,600 metric tons of newsprint for all of our operations compared to 50,700 metric tons in 2018. The decrease in tons consumed was primarily due to changes in our print products at numerous media companies, as well as lower print advertising sales and print circulation volumes.

10

During 2019,  the newsprint we consumed was purchased through a third-party intermediary and approximately 10,300 metric tons of this newsprint was produced by Ponderay, as compared to 12,700 metric tons in 2018. 

Our earnings are somewhat sensitive to changes in newsprint prices, albeit substantially less sensitive as our digital business continues to grow. In 2019 and 2018, newsprint expense accounted for 3.6% and 4.0%,  respectively, of total operating expenses, excluding impairments and other asset write-downs.

Competition

Our newspapers, direct marketing programs, websites and mobile content compete for advertising revenues and readers’ time with television, radio, other media websites, social network sites and mobile applications, direct mail companies, free shoppers, billboard companies, and neighborhood and national newspapers and other publications, among others. In some of our markets, our newspapers also compete with other newspapers published in nearby cities and towns. Competition for advertising is generally based upon digital and print readership levels and demographics, advertising rates, internet usage and advertiser results, while competition for circulation and readership (digital and print) is generally based upon content, journalistic quality, service, competing news sources and the price of the newspaper or digital service.

In each of our major daily markets, our media companies’ internet sites are generally a leading local news website. We have continued to shift advertising to digital advertising to stay current with reader trends. Each of our media companies also has the largest print circulation of any printed news media source in its respective market. However, our media companies have experienced difficulty maintaining print circulation levels because of a number of factors. These include increased competition from other publications and other forms of media technology, including the internet and other new media formats that are often free for users; and a proliferation of news outlets that fragments audiences. We face greater competition from online competitors, particularly in the areas of employment, automotive and real estate advertising.

To address the structural shift to digital media, we reengineered our operations to strengthen areas driving performance in news, audience, advertising and digital growth. Our newsrooms also provide editorial content on a wide variety of platforms and formats from our daily newspaper to leading local websites; on social network sites such as Facebook and Twitter; on smartphones and on e‑readers; on websites and blogs; in niche online publications and in e‑mail newsletters; and mobile applications. Upgrades are continually made to our mobile applications and websites.

Employees — Labor

As of December 29, 2019, we had approximately 2,800 full and part‑time employees (equating to approximately 2,700 full‑time equivalent employees), of whom approximately 8.1% were represented by unions. Most of our union‑represented employees are currently working under labor agreements with expiration dates through 2021. We have unions at six of our 30 media companies. 

While our media companies have not had a strike for decades, and we do not currently anticipate a strike occurring, we cannot preclude the possibility that a strike may occur at one or more of our media companies when future negotiations take place. We believe that in the event of a strike we would be able to continue to publish and deliver to subscribers, a capability that is critical to retaining revenues from advertising and audience, although there can be no assurance that we will be able to continue to publish in the event of a strike.

Compliance with Environmental Laws

We use appropriate waste disposal techniques for hazardous materials. To the best of our knowledge, as of December 29, 2019, we have complied with all applicable environmental certifications with various state environmental agencies and the U.S. Environmental Protection Agency related to existing underground storage tanks. We do not believe that we currently have any significant environmental issues and, in 2019 and 2018, had no significant expenses or capital expenditures related to environmental control facilities.

Available Information

Our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available, free of charge, on our website at www.mcclatchy.com, as soon as reasonably practicable after we file or furnish them with the U.S. Securities and Exchange Commission (the “SEC”).

11

 

ITEM 1A.  RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.  

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None. 

ITEM 2.  PROPERTIES

Our corporate headquarters are located at 2100 Q Street, Sacramento, California. At December 29, 2019, we had newspaper production facilities in 7 markets in 6 states. Our facilities vary in size and in total occupy about 3.8 million square feet. Approximately 3.0 million of the total square footage is leased from others, while we own the properties for the remaining square footage. We own substantially all of our production equipment, although certain office equipment is leased. 

We maintain our properties in good condition and believe that our current facilities are adequate to meet the present needs of our media companies.

ITEM 3.  LEGAL PROCEEDINGS

See Part II, Item 8, (i) the description of the Chapter 11 Cases in Note 2, Chapter 11 Bankruptcy Filing, and (ii) Note 11,  Commitments and Contingencies to the consolidated financial statements included as part of this Annual Report on Form 10-K.

 

ITEM 4.  MINE SAFETY DISCLOSURES

None.

12

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

On September 9, 2019, we received a notice from the NYSE American notifying us that we were not in compliance with the stockholders’ equity requirements set forth in Sections 1003(a)(i) and 1003(a)(ii) of the NYSE American Company Guide. At the time, we had reported stockholders’ deficit of $372.5 million as of June 30, 2019 and net losses in each of the four most recent fiscal years ended December 30, 2018. We submitted a plan to the NYSE American to regain compliance with Sections 1003(a)(i) and 1003(a)(ii) of the Company Guide on October 9, 2019, and on December 13, 2019, the NYSE American notified us that they had accepted our compliance plan. 

On February 13, 2020, the NYSE American suspended the trading of our Class A Common Stock upon our filing the Chapter 11 petitions, and our Class A Common Stock has been quoted “over-the-counter” on the OTC Pink Market, operated by OTC Markets Group, under the symbol MNIQQ. On February 21, 2020, the NYSE American filed a Form 25 with the SEC to delist our Class A Common Stock from the NYSE American. The delisting was effective 10 days after the Form 25 was filed. The deregistration of the Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will become effective 90 days after the filing date of the Form 25. Our Class B Common Stock is not publicly traded.

Under our Chapter 11 restructuring we expect that our Class A and Class B Common Stock will be eliminated and that we will emerge from Chapter 11 as a privately held company.

Securities traded in the over-the-counter market generally have significantly less liquidity than securities traded on a national securities exchange.  Over-the-counter market quotations may reflect inter-dealer prices, without any retail mark-up, mark-down or commission and may not necessarily represent actual transactions. As of March 25, 2020, there were approximately 3,011 and 15 record holders of our Class A and Class B Common Stock, respectively.

Dividends:

In 2009, we suspended our quarterly dividend, and we have not paid any cash dividends since the first quarter of 2009. Under the indenture for the 2026 Notes, dividends are allowed if the consolidated leverage ratio (as defined in the indenture) is less than 5.25 to 1.00 and we have sufficient amounts under our restricted payments basket (as determined pursuant to the indenture), or if we use other available exceptions provided for under the indenture. However, the payment and amount of future dividends remain within the discretion of the Board of Directors and will depend upon our future earnings, financial condition, and other factors considered relevant by the Board of Directors.

Equity Securities:

During the year ended December 29, 2019, we did not repurchase any equity securities and we did not sell any equity securities of the Company that were not registered under the Securities Act of 1933, as amended.

 

Effects of the Chapter 11 Cases on the Class A Common Stock:

 

Pursuant to the terms of the proposed restructuring plan, we expect that our existing equity interests will be cancelled and discharged in connection with the Chapter 11 Cases and the holders of those equity interests, including the holders of our outstanding shares of Class A Common Stock, will be entitled to no recovery relating to those equity interests.

 

 

 

 

 

ITEM 6.  SELECTED FINANCIAL DATA 

We are a smaller reporting company  as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

13

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Reference is made to Part I, Item 1 “Forward‑Looking Statements.” Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements.  In addition, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. MD&A should be read in conjunction with our audited consolidated financial statements and accompanying notes to the consolidated financial statements (“Notes”) as of and for each of the two years ended December 29, 2019 and December 30, 2018, included elsewhere in this Annual Report on Form 10‑K.

Bankruptcy Filing and Going Concern

As a result of the commencement of the Chapter 11 Cases on February 13, 2020, we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 Cases, we intend to de-lever our balance sheet and reduce overall indebtedness. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by the Bankruptcy Court, including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee we will successfully agree upon a viable plan of reorganization with our various stakeholders, or that any such agreement will be reached in the time frame that is acceptable to the Bankruptcy Court. 

We have concluded that our financial condition and our projected operating results, contribution amounts required on our qualified defined benefit pension plan (“Pension Plan”), the defaults under our debt agreements subsequent to December 29, 2019, and the risks and uncertainties surrounding our Chapter 11 Cases raise substantial doubt as to our ability to continue as a going concern.

See Note 2 for further discussion.

Debtor-In-Possession Financing

 

To ensure sufficient liquidity throughout the Chapter 11 Cases, we have obtained new $50.0 million debtor-in-possession financing under a credit agreement (“DIP Credit Agreement”) from Encina Business Credit, LLC. This DIP Credit Agreement, coupled with our normal operating cash flows, is providing liquidity for McClatchy and all of our local news outlets to operate as usual and fulfill ongoing commitments to stakeholders.

 

The DIP Credit Agreement, which replaces our former asset based loan (“ABL”) revolver from Wells Fargo, N.A. (see Note 7 for further discussion of our debt), provides for a secured debtor-in-possession credit facility (the “DIP Facility”) consisting of a new revolving loan facility in an aggregate principal amount up to $50 million, which is in the form of revolving loans or, subject to a sub-limit of $3.5 million, in the form of letters of credit. Our obligations under the DIP Facility will be guaranteed by all of our assets, whether now existing or hereafter acquired. The scheduled maturity date of the DIP Facility will be the eighteen-month anniversary following the Closing Date (as defined in the DIP Credit Agreement). 

 

The DIP Credit Agreement contains customary representations, warranties and covenants that are typical and customary for debtor-in-possession facilities of this type, including, but not limited to specified restrictions on indebtedness, liens, guarantee obligations, mergers, acquisitions, consolidations, liquidations and dissolutions, sales of assets, leases, payment of dividends and other restricted payments, voluntary payments of other indebtedness, investments, loans and advances, transactions with affiliates, sale and leaseback transactions and compliance with case milestones. The DIP Credit Agreement also contains customary events of default, including as a result of certain events occurring in the Chapter 11 Cases. The DIP Credit Agreement was subject to approval by the Bankruptcy Court and is subject to customary conditions precedent.

 

Delisting of our Common Stock from the NYSE American

 

Our Class A Common Stock was previously listed on the NYSE American under the symbol MNI. On February 13, 2020,

14

the NYSE American suspended the trading of our Class A Common Stock upon our filing the Chapter 11 Cases, and our Class A Common Stock has been quoted “over-the-counter” on the OTC Pink Market under the symbol MNIQQ. On February 21, 2020, the NYSE American filed a Form 25 with the SEC to delist our Class A Common Stock from the NYSE American. The delisting was effective 10 days after the Form 25 was filed. The deregistration of the Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will become effective 90 days after the filing date of the Form 25.

Overview

We operate 30 media companies in 14 states, each providing its community with high-quality news and advertising services in a wide array of digital and print formats. We are a publisher of well-respected brands such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer,  The (Raleigh) News & Observer, and the Fort Worth Star-Telegram

Our fiscal year ends on the last Sunday in December of each calendar year.  The fiscal years ended December 29, 2019, and December 30, 2018, consisted of 52-week periods.  

The following table reflects our sources of revenues as a percentage of total revenues for the periods presented:

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

Revenues:

    

    

    

    

 

Advertising

 

47.5

%  

51.6

%  

Audience

 

45.4

%  

42.1

%  

Other

 

7.1

%  

6.3

%  

Total revenues

 

100.0

%  

100.0

%  

 

Our primary sources of revenues are digital and print advertising and audience subscriptions. Advertising revenues include advertising delivered digital-only, advertising carried digitally and bundled as a part of newspapers (run of press (“ROP”) advertising), and/or advertising inserts placed in newspapers (“preprint” advertising). Audience revenues include either digital-only subscriptions, or bundled subscriptions which include digital and print. Our print newspapers are delivered by large distributors and independent contractors. Other revenues include commercial printing and distribution revenues.

 

See “Results of Operations” section below for a discussion of our revenue performance and contribution by category for 2019 and 2018.

15

Recent Developments

 

Coronavirus (COVID-19) Pandemic

 

On January 30, 2020, the World Health Organization declared that the recent coronavirus disease 2019 (“COVID-19”) outbreak was a global health emergency. On March 11, 2020, the World Health Organization raised the COVID-19 outbreak to “pandemic” status. Our advertising revenues are dependent on general economic and business conditions in our markets or those impacting our customers, including from natural disasters and public health emergencies, such as COVID-19. COVID-19 was first detected in China in late 2019 and subsequently spread globally. The transmission of COVID-19 and efforts to contain its spread have resulted in international, national and local border closings and other significant travel restrictions and disruptions, significant disruptions to business operations, supply chains and customer activity, event cancellations and restrictions, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, quarantines and related government actions and policies, as well as general concern and uncertainty that has negatively affected the economic environment.

 

In many of the states in which we operate, the governors have issued stay-at-home orders, which restrict the movements of residents except for essential tasks or to go to work in essential businesses. These restrictions have caused challenges to our business operations and have increased the risk factors listed above. And while, the news media industry has generally been designated as essential businesses thus far, if significant portions of our workforce are unable to work effectively, our operations, including the printing and delivery of print newspapers, will likely be impacted. We may be unable to perform fully on our contracts and our costs may increase. These cost increases may not be fully recoverable or adequately covered by insurance. Furthermore, the outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in the financial markets. In addition to disrupting our operations, these developments may adversely affect our access to capital and/or financing. As such, we expect the majority of the COVID-19 pandemic disruptions to impact our business operations, employee costs, single copy newspaper revenues (4.2% of 2019 total revenues) and total advertising revenues (47.5% of 2019 total revenues), with a greater impact to revenues than costs. We continue to monitor the situation, to assess further possible implications to our business and customers, and to take actions in an effort to mitigate adverse consequences. We are unable to quantify the impact on our business at this time, but it could have a material adverse effect on our business, financial position, results of operations and/or cash flows in the future.

   

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. Key provisions of the CARES Act include one-time payments to individuals, strengthened unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. While we do not qualify for any of the business loans or grants under the CARES Act, modifications to the tax rules for the carryback of net operating losses and business interest limitations may result in a federal tax refund of approximately $9.0 million.

 

Non-Cash Impairment Charges

 

Our financial operating results for 2019 include $335.7 million of non-cash impairment charges, which primarily includes a reduction of the carrying value of goodwill for $285.0 million and of intangible newspaper mastheads for $49.9 million. See Critical Accounting Policies below and Notes 3 and 6 for additional discussion regarding the goodwill and masthead impairments.

 

Asset sales and leasebacks

 

During 2019, we recognized gains totaling $3.3 million related to the sale of land and buildings in Belleville, Illinois,  Kennewick, Washington and Miami, Florida.  

 

In May 2019, we closed a sale and leaseback of real property in Kansas City, Missouri. The transaction resulted in net proceeds of $29.7 million. We are leasing back the Kansas City property under a 15-year lease with initial annual payments totaling approximately $2.8 million. The lease includes a repurchase clause allowing us to repurchase the property after the 15-year lease term. Accordingly, the lease is being treated as a financing obligation, and we continue to depreciate the carrying value of the property in our financial statements. No gain or loss was recognized on the transfer of the property to the buyer and no gain or loss will be recognized until the transaction qualifies for sale accounting.

 

16

Debt Redemption and extinguishment of debt

 

In accordance with our 2026 Notes Indenture, we are required to redeem the 2026 Notes from the net cash proceeds of certain asset dispositions and from a portion of our excess cash flow (as defined in the 2026 Notes Indenture). During 2019, in accordance with our 2026 Notes Indenture, we redeemed $41.8 million aggregate principal amount of our 2026 Notes from the net proceeds from asset dispositions and from 2018 excess cash flows. As a result,  we recorded a loss on extinguishment of debt of $2.3 million in 2019.

 

Debt Issuance and Exchange

 

In March 2019, we converted approximately $75.0 million aggregate principal amount of 2029 Debentures to additional 2031 Notes. The additional 2031 Notes have identical terms to our senior secured junior lien 2031 Notes, other than with respect to the date of issuance, and will be treated as a single class for all purposes under the applicable indenture. See Note 7.

 

Early Retirement Incentive Program

 

In February 2019, we announced a one-time voluntary Early Retirement Incentive Program (“ERIP”) that was offered to approximately 450 employees. The ERIP allowed the employees to accept a special termination benefit based on years of continuous service and the option to take their vested benefits under our frozen Pension Plan in a lump sum payment. Nearly 50% of the employees opted into the program.

 

Lump sum pension and termination payments made under the ERIP totaled approximately $35.1 million, decreasing both the benefit obligation and the fair value of plan assets. Due to the significance of this program, we remeasured the retirement plan assets and benefit obligations as of March 22, 2019, resulting in a net reduction to the pension liability, the recognition of a one-time non-cash charge of $6.8 million for the special termination benefits and an increase in our total 2019 benefit pension costs by approximately $1.5 million. See Note 9 for additional information.

Results of Operations

The following table reflects our financial results on a consolidated basis for 2019 and 2018: 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 29,

 

December 30,

(in thousands, except per share amounts)

 

2019

 

2018

Net loss

 

 $

(411,107)

 

 $

(79,757)

 

 

 

 

 

 

 

Net loss per diluted common share

 

 $

(51.97)

 

 $

(10.27)

 

The increase in net loss in 2019 compared to 2018 was primarily due to non-cash impairment charges totaling $335.7 million for in 2019 compared to $37.3 million in 2018 (see  Notes 3 and 6).  In addition, we recognized a $30.6 million gain on extinguishment of debt during 2018 compared to a $2.3 million loss on extinguishment of debt in 2019. During 2019 we also recorded a non-cash charge of $6.8 million related to the ERIP (see Note 9) and a non-cash deferred tax valuation allowance charge of $28.5 million. In addition, while advertising revenues were lower during 2019 compared to 2018, the lower revenues were largely offset by lower operating expenses, excluding goodwill and other asset write-downs.

 

2019 Compared to 2018

Revenues

During 2019, total revenues decreased 12.1% compared to 2018, primarily due to the continued decline in demand for advertising. The decline in print advertising was primarily a result of large retail advertisers continuing to reduce preprinted inserts and printed ROP advertising in favor of digital products. We expect this trend to continue for the foreseeable future and particularly in light of our Chapter 11 filing. In addition, we experienced lower page views in 2019 compared to 2018, resulting in a decline in digital advertising revenues, primarily impacting programmatic revenues in the national advertising category, as discussed below.

17

 

The following table summarizes our revenues by category, which compares 2019 to 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

December 29,

 

December 30,

 

$

 

%

(in thousands)

 

2019

 

2018

 

Change

 

Change

Advertising

 

 

    

    

 

    

    

 

    

    

    

Digital-only

 

$

127,255

 

$

151,733

 

$

(24,478)

 

(16.1)

Digital bundled with print

 

 

27,111

 

 

28,517

 

 

(1,406)

 

(4.9)

Total digital

 

 

154,366

 

 

180,250

 

 

(25,884)

 

(14.4)

Print

 

 

122,593

 

 

155,701

 

 

(33,108)

 

(21.3)

Direct marketing and other

 

 

60,151

 

 

80,769

 

 

(20,618)

 

(25.5)

Total advertising

 

 

337,110

 

 

416,720

 

 

(79,610)

 

(19.1)

Total audience

 

 

321,782

 

 

339,506

 

 

(17,724)

 

(5.2)

Other revenues

 

 

50,624

 

 

51,000

 

 

(376)

 

(0.7)

Total revenues

 

$

709,516

 

$

807,226

 

$

(97,710)

 

(12.1)

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental advertising detail:

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

155,944

 

$

191,043

 

$

(35,099)

 

(18.4)

National

 

 

31,927

 

 

42,273

 

 

(10,346)

 

(24.5)

Classified

 

 

89,088

 

 

102,635

 

 

(13,547)

 

(13.2)

Direct marketing and other

 

 

60,151

 

 

80,769

 

 

(20,618)

 

(25.5)

Total advertising

 

$

337,110

 

$

416,720

 

$

(79,610)

 

(19.1)

 

Advertising Revenues

Total advertising revenues decreased 19.1% during 2019 compared to 2018. We experienced declines in all of our advertising revenue categories, as discussed below.

 

The following table reflects the category of advertising revenues as a percentage of total advertising revenues for the periods presented:

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 29,

 

December 30,

 

 

 

2019

 

2018

 

Advertising:

 

    

    

    

 

Total digital

 

45.8

%

43.2

%

Print

 

36.4

%

37.4

%

Direct marketing and other

 

17.8

%

19.4

%

Total advertising

 

100.0

%

100.0

%

We categorize advertising revenues as follows:

·

Digital advertising -  can come in many forms, including banner ads, video, search advertising and/or liner ads, while print advertising is typically display advertising, or in the case of classified, display and/or liner advertising.

·

Print advertising - directly in the newspaper is considered ROP advertising.  

·

Direct Marketing and Other – primarily preprint advertisements in direct mail, shared mail and niche publications, events programs, total market coverage publications and other miscellaneous advertising not included in the daily newspaper. These products are generally delivered to non-subscribers of our daily newspapers.

Digital:

 

Total digital advertising revenues decreased 14.4% during year ended December 29, 2019, compared to the same period in 2018. Digital advertising constituted 45.8% of total advertising revenues in 2019 compared to 43.2% in 2018. Total digital advertising includes digital-only advertising and digital advertising bundled with print.

 

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Digital-only advertising is defined as digital advertising sold on a stand-alone basis or as the primary advertising buy. Digital-only advertising revenues decreased 16.1% in 2019 compared to 2018, largely due to lower page views. As expected, the decline in digital-only advertising continued due to lower audience traffic compared to 2018, largely the result of a strategic tightening of website paywalls that accelerated paid digital subscriptions and a change in algorithms by a large platform company in the last half of 2018 that impacted us and the rest of the industry during all of 2019. In addition, we restructured our advertising function during the second quarter of 2019, which temporarily impacted sales in the second quarter, and to a lesser extent, the third quarter of 2019.  

 

Digital advertising revenues bundled with print products declined 4.9% in 2019 compared to 2018 as a result of lower print advertising sales and a decline in digital sales.

 

The newspaper industry continues to experience a secular shift in advertising demand from print to digital products as advertisers look for multiple advertising channels to reach their customers and are increasingly focused on online customers. While our product offerings and collaboration efforts in digital advertising have steadily grown, we expect to continue to face intense competition in the digital advertising space. We will continue to adjust our content, targeting and paywalls as we pursue the best experience for our digital customers, knowing that it may impact the mix of digital advertising and digital audience revenues.

 

Print:

 

Print advertising decreased 21.3%  during the year ended December 29, 2019, compared to the same period in 2018. In 2019, the decrease in print advertising revenues was primarily due to decreases of 20.2% in retail ROP advertising revenues, 22.3% in preprint advertising revenues, and 20.9% in classified advertising, compared to the same period in 2018.

 

Direct Marketing and Other:

 

Direct marketing and other advertising revenues decreased 25.5% during the year ended December 29, 2019, compared to the same period in 2018. The decrease was largely due to declines in insert advertising in our total market coverage (“TMC”) products by large retail customers and from eliminating certain unprofitable TMC programs or niche and direct marketing products. 

 

Audience Revenues

Total audience revenues decreased 5.2% during the year ended December 29, 2019, compared to the same period in 2018. Total audience revenues represented 45.4% of the total revenues during 2019 compared to 42.1% in the same period of 2018.

 

Overall, digital audience revenues increased 7.8% in 2019 compared to 2018. Digital-only audience revenues increased 47.5% in 2019 compared to the same period in 2018. The increase in digital-only audience revenues during 2019 was largely a result of a 41.0% increase in our digital-only subscribers to 219,200 at the end of 2019 compared to 155,500 at the end of 2018.

 

Print audience revenues decreased 10.9% in 2019 compared to the same period in 2018, primarily due to lower print circulation volumes that were partially offset by pricing adjustments. Print circulation volumes continue to decline as a result of fragmentation of audiences faced by our industry as available media outlets proliferate and readership trends change. To help reduce potential attrition due to the increased pricing, we increased our subscription-related marketing and promotion efforts.

 

Operating Expenses

Total operating expenses increased 23.1% in the year ended December 29, 2019, compared to the same period in 2018, primarily due to increases in goodwill and other asset write-offs. This was partially offset by decreases in compensation and amortization expenses, as discussed below. Our total operating expenses, excluding goodwill and other asset write-offs, decreased 13.5% and reflects our continued effort to reduce costs through streamlining processes to gain efficiencies.

 

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The following table summarizes our operating expenses, which compares 2019 to 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

December 29,

 

December 30,

 

$

 

%

(in thousands)

2019

 

2018

 

Change

 

Change

Compensation expenses

$

251,677

    

$

298,033

    

$

(46,356)

 

(15.6)

Newsprint, supplements and printing expenses

 

45,617

 

 

54,592

 

 

(8,975)

 

(16.4)

Depreciation and amortization expenses

 

46,021

 

 

76,242

 

 

(30,221)

 

(39.6)

Other operating expenses

 

342,631

 

 

364,038

 

 

(21,407)

 

(5.9)

Other asset write-downs

 

335,676

 

 

37,274

 

 

298,402

 

nm

 

$

1,021,622

 

$

830,179

 

$

191,443

 

23.1

_________________

_____________________

nm – not meaningful

 

Compensation expenses, which included both payroll and fringe benefit costs, decreased 15.6% in the year ended December 29, 2019, compared to the same period in 2018. Payroll expenses declined 14.8% during 2019 compared to the same period in 2018, primarily due to the reduction in headcount. Average full-time equivalent employees declined 19.7% in 2019 compared to in 2018, partially reflecting the ERIP we discussed above in Recent Developments, as well as the restructuring of our advertising function in mid-2019. Fringe benefit costs decreased 19.4% in 2019 compared to in 2018, which is consistent with the decreases in payroll expenses.

 

Newsprint, supplements and printing expenses decreased 16.4% in the year ended December 29, 2019, compared to the same period in 2018. Newsprint expense declined 22.3% during 2019 compared to the same period in 2018. The newsprint expense decline reflects a decrease in newsprint tonnage used of 21.3% in 2019 compared to in 2018. Newsprint prices decreased 1.3% during 2019 compared to 2018. During these same periods, printing expenses, which are primarily costs associated with outsourced printing to third parties, decreased 14.9%.

 

Depreciation and amortization expenses decreased 39.6% in the year ended December 29, 2019, compared to the same period in 2018. Depreciation expense decreased $6.7 million or 23.5% in 2019 compared to the same period in 2018, as a result of assets becoming fully depreciated in previous periods. Amortization expense decreased 49.3% in 2019 compared to in 2018. A majority of the intangible assets subject to amortization became fully amortized in the second quarter of 2019 and therefore amortization expense during the remainder of 2019 and in future years will be significantly lower.

 

Other operating expenses decreased 5.9% in the year ended December 29, 2019, compared to the same period in 2018. The decrease was primarily a result of cost savings initiatives and other efforts to reduce operational costs, as well as the timing of gains on the sale of property and equipment. During 2019, compared to 2018, we had decreases in various categories, such as bad debt, postage, travel, outsourcing costs, circulation delivery costs and other miscellaneous expenses. These decreases were partially offset by an increase other professional services and the change in gain on sale of property and equipment. Other professional services include the legal counsel and financial consultants engaged to advise us through the negotiations with stakeholders and to prepare for the Chapter 11 proceedings, as discussed above. The change in the gain on sale of property and equipment includes a  $4.1 million gain on the disposal of property and equipment, which reduced operating expenses in 2018, with similar transactions for $2.6 million in 2019.

 

Goodwill and other asset write-downs include charges of $335.7 million in the year ended December 29, 2019, compared to $37.3 million in the same period in 2018. These write-downs in 2019 are primarily due to impairment charges to goodwill of $285.0 million and intangible newspaper mastheads of $49.9 million. The write-downs in 2018 are due to impairment charges related to intangible newspaper mastheads. During 2019 and 2018, goodwill and other asset write-downs also includes impairment charges recognized upon classifying certain land and buildings as assets held for sale during the applicable periods. 

 

Non‑Operating Items

Interest Expense:

 

Total interest expense decreased 3.0% in the year ended December 29, 2019, compared to the same period in 2018. During 2019, interest expense related to debt balances decreased $0.5 million compared to the same period in 2018, primarily related to lower overall debt balances resulting from redemptions made in the first half of 2019.

 

20

In 2019, the decrease in total interest expense was also due to a decrease in our non-cash imputed interest of $2.1 million related to our financing obligations due to differences in the relevant interest rates in 2019 as compared to 2018.

 

Gains Related to Investments in Unconsolidated Companies:

 

During 2018, we recorded $1.7 million gain on the sale of our investment in CareerBuilder. We had no such related transactions during 2019.

 

Extinguishment of Debt:

In accordance with our 2026 Notes Indenture, we are required to redeem 2026 Notes from the net cash proceeds of certain asset dispositions and from a portion of our excess cash flow (as defined in the 2026 Notes Indenture). During 2019, in accordance with our 2026 Notes Indenture, we redeemed $41.8 million aggregate principal amount of our 2026 Notes from the net proceeds from asset dispositions and from 2018 excess cash flows. As a result, we recorded a loss on extinguishment of debt of $2.3 million in 2019.

 

During the first quarter of 2019, our exchange of $75.0 million of the 2029 Debentures to additional 2031 Notes did not result in a gain or loss on extinguishment of debt. See Note 7 for further discussion.

 

During 2018, we recorded a net gain on the extinguishment of debt of $30.6 million as a result of the following transactions: we redeemed $344.1 million of our 2022 Notes and we executed a non-cash exchange of most of our Debentures for new Tranche A and Tranche B Junior Term Loans. Also, during 2018, we redeemed or repurchased $95.5 million of our 2022 Notes and we redeemed $5.3 million of our 2026 Notes. As a result of these transactions, we recorded any applicable premiums that were paid, wrote off unamortized discounts and debt issuance costs, and recorded a gain based on the relative fair market of the new debt issued as compared to the carrying value of the debt that was extinguished. 

 

Income Taxes: 

 

In the year ended December 29, 2019, we recorded an income tax benefit of $6.3 million. As discussed more fully in Note 3 under Income Taxes, during 2019, we recorded charges of $28.5 million related to the current period impact of the valuation allowance on deferred tax assets. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes, certain permanently non-deductible expenses and the impact of non-tax deductible charges related to intangibles and goodwill.

 

In 2018, we recorded an income tax benefit of $2.2 million. As discussed more fully in Note 3 under Income Taxes, during 2018, we recorded a charge of $20.4 million related to the current period impact of the valuation allowance on deferred taxes. The remaining income tax benefit differed from the expected federal tax amounts primarily due to the inclusion of state income taxes and certain permanently non-deductible expenses.

 

Liquidity and Capital Resources

As a result of the commencement of the Chapter 11 Cases on February 13, 2020, we are operating as a debtor-in-possession pursuant to the authority granted under Chapter 11 of the Bankruptcy Code. Pursuant to the Chapter 11 filings, we intend to de-lever our balance sheet and reduce overall indebtedness upon completion of that process. Additionally, as a debtor-in-possession, certain of our activities are subject to review and approval by the Bankruptcy Court, including, among other things, the incurrence of secured indebtedness, material asset dispositions, and other transactions outside the ordinary course of business. There can be no guarantee we will successfully agree upon a viable plan of reorganization with our various stakeholders or reach any such agreement in the time frame that is acceptable to the Bankruptcy Court. See Note 2 for additional information.

We have entered into a  new $50.0 million DIP Credit Agreement with Encina which, coupled with our normal operating cash flows, is providing liquidity for McClatchy and all of our local news outlets to operate as usual and fulfill ongoing commitments to stakeholders.

We have concluded that our financial condition and projected operating results, the minimum required contribution amounts to the Pension Plan, the defaults under our debt agreements subsequent to December 29, 2019, and the risks and uncertainties surrounding our Chapter 11 proceedings raise substantial doubt as to our ability to continue as a going

21

concern. As a result of the substantial doubt about our ability to continue as a going concern for the next twelve months, and the associated steps that have been undertaken to restructure our balance sheet, our expected cash outflows related to interest payments on our debt in 2020 are difficult to predict at this time. We expect to make interest payments under the DIP Credit Agreement and our first lien notes during 2020 in accordance with the Bankruptcy Court order approving the DIP Credit Agreement but do not expect to make interest payments on our other notes. We plan to fund our ongoing operations through available borrowings under our DIP Credit Agreement as well as cash generated from operations.

We are unable to predict when we will emerge from Chapter 11 because it is contingent upon numerous factors, many of which are out of our control. Major factors include obtaining the Bankruptcy Court’s approval of a Chapter 11 plan of reorganization, which will enable us to transition from Chapter 11 into ordinary course operations outside of bankruptcy. We also may need to obtain a new credit facility, or “exit financing.” Our ability to obtain such approval and financing will depend on, among other things, the timing and outcome of various ongoing matters related to the Chapter 11 Cases as well as the general global economic downturn due to the recent outbreak of COVID-19. The plan of reorganization will determine the rights and satisfaction of claims of various creditors and security holders, and is subject to the ultimate outcome of negotiations and Bankruptcy Court decisions ongoing through the date on which such plan is confirmed.

We are a highly leveraged company. Our primary sources of liquidity are cash flows generated from operations and availability under our DIP Credit Agreement. Subsequent to and during pendency of the Chapter 11 Cases, we expect that our primary liquidity requirements will be to fund operations and make required payments under our DIP Credit Agreement. Our ability to meet the requirements of our DIP Credit Agreement will be dependent on our ability to generate sufficient cash flows from operations.

Based on current financial projections, we expect to be able to continue to generate cash flows from operations in amounts sufficient to fund our operations, satisfy our interest and principal payment obligations on our DIP Credit Agreement and pay administrative expenses including professional fees while under Chapter 11. However, should the Chapter 11 Cases take longer than anticipated or should our financial results be materially and negatively impacted by the coronavirus pandemic, we may be required to seek additional sources of liquidity. There can be no assurance that we will be able to obtain such liquidity on terms favorable to us, if at all.

At December 29, 2019, we had $703.3 million aggregate principal amount of outstanding debt consisting of $262.9 million of our 2026 Notes, $157.1 million of our Junior Term Loan, $268.4 million of our senior secured junior lien 2031 Notes and $14.9 million of our unsecured Debentures.

Pension Matters:

 

For our Pension Plan, the net retirement obligations in excess of the retirement plan assets were $526.3 million as of December 29, 2019. We will seek the Bankruptcy Court’s authority to terminate our Pension Plan, and appoint the PBGC as the plan’s trustee. Under a plan termination, the PBGC would continue to pay the Pension Plan participants their benefits, subject to federal statutory limits. Under current regulations, we believe that such a solution would not have an adverse impact on qualified pension benefits for substantially all plan participants.

 

Sources and Uses of Liquidity and Capital Resources:

Our cash and cash equivalents were $10.5 million as of December 29, 2019, compared to $21.9 million of cash and cash equivalents at December 30, 2018.  

The following table summarizes our cash flows:

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

 

December 29,

 

December 30,

 

(in thousands)

 

2019

 

2018

 

Cash flows provided by (used in)

    

 

    

    

 

    

 

Operating activities

 

$

(6,763)

 

$

25,919

 

Investing activities

 

 

7,219

 

 

(374)

 

Financing activities

 

 

(13,848)

 

 

(106,344)

 

Increase (decrease) in cash, cash equivalents and restricted cash

 

$

(13,392)

 

$

(80,799)

 

22

Operating Activities:

We used  $6.8 million of cash from operating activities in 2019 compared to generating $25.9 million of cash in 2018. The decrease in operating cash flows reflects a contribution of $3.1 million to our Pension Plan in 2019 (no contribution was made in 2018), a $13.3 million change in our accounts payable balances and an  $18.8 million change in our accrued interest balances in 2019 compared to the same period in 2018. This was partially offset by the timing of income tax payments in 2019 compared to 2018. In 2019, we had net income tax payments of $7.5 million compared to net income tax payments of $13.9 million during the same period in 2018. The remaining changes in operating activities relate to miscellaneous timing differences in various payments and receipts.

Investing Activities: 

We generated  $7.2 million of cash from investing activities in 2019. We received proceeds from the sale of property, plant and equipment (“PP&E”) of $8.8 million and from the redemption of time deposits of $2.0 million. These amounts were offset by the purchase of PP&E for $2.7 million and contributions to equity investments of $0.8 million.

 

We used $0.4 million of cash from investing activities in 2018. We received proceeds from the sale of PP&E of $5.7 million,  from the sale of an investment of $5.3 million and from the net purchases of and proceeds from redemptions of certificates of deposit, which net to a $2.3 million source of cash. These amounts were offset by the purchase of PP&E for $11.1 million and contributions to equity investments of $2.5 million.

 

Financing Activities: 

We used  $13.8 million of cash for financing activities in 2019. During 2019, we redeemed $41.8 million principal amount of our 2026 Notes at par. See Note 7 for further discussion. These redemptions were partially offset by the $29.7 million increase in our financial obligations as a result of the sale and leaseback of one of our real properties, as described in Recent Developments.  

 

We used $106.3 million of cash for financing activities in 2018. During 2018, we repurchased or redeemed $439.6 million principal amount of our 2022 Notes for $459.6 million in cash, we redeemed $5.3 million principal amount of our 2026 Notes at par, and incurred financing costs of $17.7 million related to the refinancing of our debt. Those amounts were offset by cash proceeds of $361.4 million for the issuance of $310.0 million principal amount of the 2026 Notes and $75.0 million principal amount of the Junior Term Loans (which represents the excess from the exchange of debt, as more fully described in Note 7). We also had an increase of $15.7 million in our financing obligations as a result of the sale and leaseback of one of our real properties.

 

Off‑Balance‑Sheet Arrangements

As of December 29, 2019, we did not have any significant off‑balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S‑K.

Critical Accounting Policies

This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustment. The most significant areas involving estimates and assumptions are amortization and/or impairment of goodwill and other intangibles, pension and post‑retirement expenses, and our accounting for income taxes. We believe the following critical accounting policies in particular, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Goodwill Impairment:

Goodwill consists of the excess of cost of acquired enterprises over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. An impairment loss is recognized when the carrying amount of the reporting unit’s net

23

assets exceed the estimated fair value of the reporting unit. We assess goodwill for impairment on an annual basis at a reporting unit level, and we have identified two reporting units. One reporting unit (“Western” reporting unit) consists of operations in California, Washington and the Central region and the other reporting unit (“Eastern” reporting unit) consists of operations primarily in the Carolinas and East and Southeast regions. Goodwill is assessed between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in our stock price and market capitalization or in the estimated future discounted cash flows of our reporting units. Our annual test is performed at our fiscal year end.

We test for goodwill impairment using an equal weighting of a market approach and an income approach.  We used market multiples derived from a set of competitors or companies with comparable market characteristics to establish fair values for a reporting unit (market approach). We also estimate fair value using discounted projected cash flow analysis (income approach.  This analysis requires significant judgments, including future cash flows, which is dependent on internal forecasts, the long‑term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. In addition, financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital, used to determine our discount rate, and through our stock price, used to determine our market capitalization. We may be required to recognize impairment of goodwill based on future economic factors.

We performed interim and annual goodwill impairment tests in 2019. As a result of our testing, we recorded total impairment charges of $285.0 million, of which a majority was recorded as of the third quarter of 2019.  No goodwill impairments were recorded during 2018.    

As of December 29, 2019, the amount of goodwill allocated to the Eastern reporting unit was $174.4 million and the amount allocated to the Western reporting unit was $245.8 million. We performed the annual goodwill impairment tests using a terminal growth rate of 0.0% and a discount rate of 9.6% for the income approach and comparable market multiples from seven companies as an input for the market approach. 

After the impairments, the fair value of our Eastern reporting unit is equal to its carrying value and the fair value of our Western reporting unit exceeded its carrying value by approximately 3.1%. An increase of 50 basis points in the discount rate would result in an additional impairment charge of approximately $6.3 million in the Eastern reporting unit and an impairment charge of $0.3 million in the Western reporting unit.    

Mastheads: 

Newspaper mastheads (newspaper titles and website domain names) are not subject to amortization and are tested for impairment annually, at year‑end, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of each newspaper masthead with its carrying amount. We use a relief-from-royalty approach that utilizes the discounted cash flow model discussed above, and estimated royalty rates to determine the fair value of each newspaper masthead. Our judgments and estimates of future operating results in determining the reporting unit fair values are consistently applied to each newspaper in determining the fair value of each newspaper masthead.

We performed interim and annual masthead impairment tests in 2019 and 2018.  As a result of our testing, we recorded total impairment charges of $49.9 million and $37.2 million in 2019 and 2018, respectively.

Other Intangible Assets:

Long‑lived assets such as other intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of such asset group. No impairment loss was recognized on intangible assets subject to amortization in 2019 or 2018.    

Pension and Post‑Retirement Benefits: 

We have significant pension and post‑retirement benefit costs and credits that are developed from actuarial valuations.

24

Inherent in these valuations are key assumptions including discount rates and expected returns on plan assets. We are required to consider current market conditions, including changes in interest rates, in establishing these assumptions. Changes in the related pension and post‑retirement benefit costs or credits may occur in the future because of changes resulting from fluctuations in our employee headcount and/or changes in the various assumptions.

Current standards of accounting for defined benefit pension plans and post‑retirement benefit plans require recognition of (1) the funded status of a pension plan (difference between the plan assets at fair value and the projected benefit obligation) and (2) the funded status of a post‑retirement plan (difference between the plan assets at fair value and the accumulated benefit obligation), as an asset or liability on the balance sheet. At December 29, 2019 and December 30, 2018, we had a total pension and post-retirement obligation of $645.5 million and $661.0 million, respectively.

We maintain a Pension Plan, which covers certain eligible employees. Benefits are based on years of service that continue to count toward early retirement calculations and vesting previously earned. No new participants may enter the Pension Plan and no further benefits will accrue. For our Pension Plan, the net retirement obligations in excess of the retirement plan assets were $526.3 million and $548.2 million as of December 29, 2019, and December 30, 2018, respectively. At December 29, 2019, we used a discount rate of 4.42% and an assumed long‑term return on assets of 7.75% to calculate our retirement plan expenses in 2019. We also performed a remeasurement on March 22, 2019, as a result of the Early Retirement Incentive  Program (see Note 9 for more information) and used a discount rate of 4.10% and an assumed long-term return on assets of 7.75%.

We also have a limited number of supplemental and post-retirement plans to provide certain key employees and retirees with additional retirement benefits. These plans are funded on a pay‑as‑you‑go basis. For these non‑qualified plans that do not have assets, the post-retirement obligations were $119.2 million and $112.8 million as of December 29, 2019, and December 30, 2018, respectively. We used discount rates of 4.30% to 4.45% to calculate our retirement plan expenses in 2019.  We used discount rates of 3.67% and 3.89% to calculate our retirement plan expenses in 2018.

For 2019, for the Pension Plan and the non-qualified post-retirement plans combined, a change in the weighted average rates would have had the following impact on our net benefit cost:

·

A decrease of 50 basis points in the long‑term rate of return would have increased our net benefit cost by approximately $6.4 million; and

·

A decrease of 25 basis points in the discount rate would have decreased our net benefit cost by approximately $0.3 million.

Income Taxes:

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.

The amount of income taxes paid is subject to periodic audits by federal and state taxing authorities, which may result in proposed assessments. These audits may challenge certain aspects of our tax positions such as the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. Income tax contingencies require significant judgment in estimating final outcomes. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future periods.

We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

As of December 30, 2018, our valuation allowance against a majority of our deferred tax assets was $143.8 million. We reviewed the overall valuation allowance as of December 29, 2019, and we determined that we needed to increase our valuation allowance by $32.3 million.

Due to the adjustments in 2019 noted above, our effective tax rate for 2019 is not comparable to the effective tax rate for 2018.  See Note 8 for further discussion

25

The timing of recording or releasing a valuation allowance requires significant judgment. The development of these expectations involves the use of estimates such as operating profitability. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. We will continue to maintain a valuation allowance against our deferred tax assets until sufficient positive evidence arises in future that provides an indication that all or a portion of the deferred tax assets meet the more likely than not standard that these assets will be realized in the future. If sufficient positive evidence, such as three-year cumulative pre-tax income, arises in the future that provides an indication that all or a portion of the deferred tax assets meet the more-likely-than-not standard, the valuation allowance may be reversed, in whole or in part, in the period that such determination is made. 

 

Recent Accounting Pronouncements

For information regarding the impact of certain recent accounting pronouncements, see Note 3.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

26

27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of The McClatchy Company:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of The McClatchy Company and subsidiaries (the "Company") as of December 29, 2019 and December 30, 2018, the related consolidated statements of operations, comprehensive loss, stockholders' deficit, and cash flows, for each of the two years in the period ended December 29, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2019 and December 30, 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 29, 2019, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes  1 and 2 to the financial statements, the Company’s financial condition and its projected operating results, contribution amounts required on its qualified defined benefit pension plan, the defaults under its debt agreements subsequent to December 29, 2019, and the risks and uncertainties surrounding its Chapter 11 Cases raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to this matter are also described in Notes  1 and 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Bankruptcy Proceedings

As discussed in Note 2 to the financial statements, the Company has filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the settlement amounts for allowed claims, or the status and priority thereof; (3) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/  Deloitte & Touche LLP

Sacramento, California

March 30, 2020

We have served as the Company’s auditor since at least 1984; however, an earlier year could not be reliably determined.

28

THE MCCLATCHY COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

December 29,

    

December 30,

 

 

2019

 

2018

REVENUES — NET:

 

 

 

 

 

 

Advertising

 

$

337,110

 

$

416,720

Audience

 

 

321,782

 

 

339,506

Other

 

 

50,624

 

 

51,000

 

 

 

709,516

 

 

807,226

OPERATING EXPENSES:

 

 

 

 

 

 

Compensation

 

 

251,677

 

 

298,033

Newsprint, supplements and printing expenses

 

 

45,617

 

 

54,592

Depreciation and amortization

 

 

46,021

 

 

76,242

Other operating expenses

 

 

342,631

 

 

364,038

Goodwill and other asset write-downs (see Notes 3 and 6)

 

 

335,676

 

 

37,274

 

 

 

1,021,622

 

 

830,179

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(312,106)

 

 

(22,953)

 

 

 

 

 

 

 

NON-OPERATING INCOME (EXPENSE):

 

 

 

 

 

 

Interest expense

 

 

(78,970)

 

 

(81,397)

Equity income (loss) in unconsolidated companies, net

 

 

(1,039)

 

 

592

Gains related to investments in unconsolidated companies

 

 

 —

 

 

1,721

Gain (loss) on extinguishment of debt, net

 

 

(2,272)

 

 

30,577

Retirement benefit expense

 

 

(23,715)

 

 

(11,114)

Other — net

 

 

716

 

 

647

 

 

 

(105,280)

 

 

(58,974)

 

 

 

 

 

 

 

Loss before income taxes

 

 

(417,386)

 

 

(81,927)

Income tax benefit

 

 

(6,279)

 

 

(2,170)

NET LOSS

 

$

(411,107)

 

$

(79,757)

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

Basic

 

$

(51.97)

 

$

(10.27)

Diluted

 

$

(51.97)

 

$

(10.27)

 

 

 

 

 

 

 

Weighted average number of common shares:

 

 

 

 

 

 

Basic

 

 

7,911

 

 

7,768

Diluted

 

 

7,911

 

 

7,768

 

See notes to consolidated financial statements.

29

 

THE MCCLATCHY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Years Ended

 

 

 

December 29,

    

December 30,

 

 

 

2019

 

2018

 

NET LOSS

 

$

(411,107)

 

$

(79,757)

 

OTHER COMPREHENSIVE INCOME (LOSS): 

 

 

 

 

 

 

 

Pension and post retirement plans: (1)

 

 

 

 

 

 

 

Change in pension and post-retirement benefit plans

 

 

28,150

 

 

(56,530)

 

Other comprehensive income (loss)

 

 

28,150

 

 

(56,530)

 

Comprehensive loss

 

$

(382,957)

 

$

(136,287)

 

_____________________

(1)

There is no income tax benefit associated with the years ended December 29, 2019 and December 30, 2018, due to the recognition of a valuation allowance. 

See notes to consolidated financial statements.

30

THE MCCLATCHY COMPANY

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

    

December 29,

    

December 30,

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,514

 

$

21,906

 

Trade receivables (net of allowances of $1,754 and $3,008) 

 

 

56,096

 

 

81,709

 

Other receivables

 

 

8,348

 

 

12,198

 

Newsprint, ink and other inventories

 

 

5,297

 

 

9,115

 

Assets held for sale

 

 

14,170

 

 

9,920

 

Other current assets

 

 

20,087

 

 

15,505

 

 

 

 

114,512

 

 

150,353

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

203,575

 

 

233,692

 

Intangible assets:

 

 

 

 

 

 

 

Identifiable intangibles — net

 

 

69,253

 

 

143,347

 

Goodwill

 

 

420,178

 

 

705,174

 

 

 

 

489,431

 

 

848,521

 

Investments and other assets:

 

 

 

 

 

 

 

Investments in unconsolidated companies

 

 

2,726

 

 

3,888

 

Operating lease right-of-use assets

 

 

45,128

 

 

 —

 

Other assets

 

 

55,883

 

 

58,847

 

 

 

 

103,737

 

 

62,735

 

 

 

$

911,255

 

$

1,295,301

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 —

 

$

4,312

 

Accounts payable

 

 

29,758

 

 

37,521

 

Accrued pension liabilities

 

 

124,200

 

 

11,510

 

Accrued compensation

 

 

18,932

 

 

20,481

 

Income taxes payable

 

 

 —

 

 

6,535

 

Unearned revenue

 

 

55,155

 

 

58,340

 

Accrued interest

 

 

25,307

 

 

26,037

 

Financing obligation

 

 

13,027

 

 

10,417

 

Current portion of operating lease liabilities

 

 

8,105

 

 

 —

 

Other accrued liabilities

 

 

5,146

 

 

5,385

 

 

 

 

279,630

 

 

180,538

 

Non-current liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

607,672

 

 

633,383

 

Deferred income taxes

 

 

15,027

 

 

20,775

 

Pension and postretirement obligations

 

 

526,010

 

 

655,310

 

Financing obligations

 

 

132,278

 

 

108,252

 

Operating lease liabilities

 

 

46,733

 

 

 —

 

Other long-term obligations

 

 

27,361

 

 

38,708

 

 

 

 

1,355,081

 

 

1,456,428

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Common stock $.01 par value:

 

 

 

 

 

 

 

Class A (authorized 200,000,000 shares, issued 5,506,030 shares and 5,384,303 shares)

 

 

55

 

 

53

 

Class B (authorized 60,000,000 shares, issued 2,428,191 shares and 2,428,191 shares)

 

 

24

 

 

24

 

Additional paid-in-capital

 

 

2,217,823

 

 

2,216,681

 

Accumulated deficit

 

 

(2,365,216)

 

 

(1,954,132)

 

Treasury stock at cost, 608 shares and 252 shares

 

 

(3)

 

 

(2)

 

Accumulated other comprehensive loss

 

 

(576,139)

 

 

(604,289)

 

 

 

 

(723,456)

 

 

(341,665)

 

 

 

$

911,255

 

$

1,295,301

 

 

See notes to consolidated financial statements.