Attached files

file filename
EX-32 - EX-32 - MCCLATCHY COmni-20200628xex32.htm
EX-31.2 - EX-31.2 - MCCLATCHY COmni-20200628ex312edaabd.htm
EX-31.1 - EX-31.1 - MCCLATCHY COmni-20200628ex3118d07eb.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended:  June 28, 2020

 

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

 

Graphic

 

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

N/A(1)

None

(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 became effective on May 21, 2020, 90 days 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 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 such files).  Yes   No 

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 12-b of the Exchange Act).  Yes   No 

As of August 7, 2020, the registrant had shares of common stock as listed below outstanding:

 

Class A Common Stock

5,506,185

Class B Common Stock

2,428,191



PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS.

 

THE MCCLATCHY COMPANY

(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; amounts in thousands, except per share amounts)

    

Quarters Ended

Six Months Ended

June 28,

June 30,

June 28,

June 30,

    

2020

    

2019

2020

2019

REVENUES — NET:

Advertising

$

45,738

$

85,455

$

107,833

$

170,650

Audience

73,910

80,292

154,602

163,404

Other

11,366

12,915

24,604

24,932

131,014

178,662

287,039

358,986

OPERATING EXPENSES:

Compensation

54,509

61,456

112,951

130,891

Newsprint, supplements and printing expenses

7,040

11,229

15,920

22,925

Depreciation and amortization

11,324

17,411

26,316

34,929

Other operating expenses

67,397

83,087

150,725

171,291

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

261

64,023

739

140,531

173,183

369,935

360,775

OPERATING INCOME (LOSS)

(9,517)

5,479

(82,896)

(1,789)

NON-OPERATING INCOME (EXPENSE):

Interest expense (contractual interest expense of $17,616 and $36,955 for the quarter and six months ended June 28, 2020, respectively)

(9,680)

(19,920)

(24,788)

(39,964)

Reorganization items, net

(12,048)

(107,215)

Loss on extinguishment of debt, net

(1,986)

(1,986)

Retirement benefit expense

(3,868)

(4,329)

(7,735)

(15,056)

Other — net

115

(682)

250

(1,161)

(25,481)

(26,917)

(139,488)

(58,167)

Loss before income taxes

(34,998)

(21,438)

(222,384)

(59,956)

Income tax benefit

(267)

(3,907)

(9,000)

(469)

NET LOSS

$

(34,731)

$

(17,531)

$

(213,384)

$

(59,487)

Net loss per common share:

Basic

$

(4.38)

$

(2.21)

$

(26.89)

$

(7.54)

Diluted

$

(4.38)

$

(2.21)

$

(26.89)

$

(7.54)

Weighted average number of common shares:

Basic

7,934

7,925

7,934

7,892

Diluted

7,934

7,925

7,934

7,892

See notes to the condensed consolidated financial statements.

 

1


 

THE MCCLATCHY COMPANY

(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited; amounts in thousands)

    

Quarters Ended

Six Months Ended

June 28,

June 30,

June 28,

June 30,

    

2020

    

2019

2020

2019

NET LOSS

$

(34,731)

$

(17,531)

$

(213,384)

$

(59,487)

OTHER COMPREHENSIVE INCOME:

Pension and post retirement plans: (1)

Change in pension and post-retirement benefit plans

 

6,734

 

5,441

 

13,469

 

27,993

Investment in unconsolidated companies: (1)

Other comprehensive income

 

966

 

 

966

 

Other comprehensive income

 

7,700

 

5,441

 

14,435

 

27,993

Comprehensive loss

$

(27,031)

$

(12,090)

$

(198,949)

$

(31,494)

_____________________

(1) There is no income tax benefit associated with the quarters and six months ended June 28, 2020, or June 30, 2019, due to the recognition of a valuation allowance.  

See notes to the condensed consolidated financial statements.

 

2


THE MCCLATCHY COMPANY

(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; amounts in thousands, except share amounts)

    

June 28,

    

December 29,

 

2020

2019

 

ASSETS

Current assets:

Cash and cash equivalents

$

20,065

$

10,514

Trade receivables (net of allowances of $4,628 and $1,754)

 

33,681

 

56,096

Other receivables

 

5,105

 

8,348

Newsprint, ink and other inventories

 

4,257

 

5,297

Assets held for sale

 

14,947

 

14,170

Other current assets

 

17,986

 

20,087

 

96,041

 

114,512

Property, plant and equipment, net

 

143,510

 

203,575

Intangible assets:

Identifiable intangibles — net

 

64,145

 

69,253

Goodwill

 

361,185

 

420,178

 

425,330

 

489,431

Investments and other assets:

Investments in unconsolidated companies

 

2,726

 

2,726

Operating lease right-of-use assets

15,478

45,128

Other assets

 

65,438

 

55,883

 

83,642

 

103,737

$

748,523

$

911,255

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:

Accounts payable

$

35,737

$

29,758

Accrued pension liabilities

 

 

124,200

Accrued compensation

 

17,997

 

18,932

Income taxes payable

 

2,883

 

Unearned revenue

 

53,210

 

55,155

Accrued interest

 

14,709

 

25,307

Financing obligation

9,755

13,027

Current portion of operating lease liabilities

 

5,554

 

8,105

Other accrued liabilities

 

2,272

 

5,146

 

142,117

 

279,630

Non-current liabilities:

Long-term debt

 

250,791

 

607,672

Deferred income taxes

 

15,098

 

15,027

Pension and postretirement obligations

 

4,479

 

526,010

Financing obligations

 

93,078

 

132,278

Operating lease liabilities

 

11,949

 

46,733

Other long-term obligations

 

26,636

 

27,361

 

402,031

 

1,355,081

Total liabilities not subject to compromise

544,148

1,634,711

Liabilities subject to compromise

1,126,006

Commitments and contingencies

Stockholders’ deficit:

Common stock $.01 par value:

Class A (authorized 200,000,000 shares, issued 5,507,220 shares and 5,506,030 shares)

 

55

 

55

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

 

24

 

24

Additional paid-in-capital

 

2,218,597

 

2,217,823

Accumulated deficit

 

(2,578,600)

 

(2,365,216)

Accumulated other comprehensive loss

 

(561,704)

 

(576,139)

Treasury stock at cost, 1,035 shares and 608 shares

 

(3)

 

(3)

 

(921,631)

 

(723,456)

$

748,523

$

911,255

See notes to the condensed consolidated financial statements.

3


THE MCCLATCHY COMPANY

(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

Six Months Ended

June 28,

June 30,

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

    

    

Net loss

$

(213,384)

$

(59,487)

Reconciliation to net cash provided by (used in) operating activities:

Depreciation and amortization

 

26,316

 

34,929

(Gain) loss on disposal of property and equipment (excluding other asset write-downs)

 

1,161

 

(2,250)

Retirement benefit expense

 

7,735

 

15,056

Stock-based compensation expense

 

774

 

966

Deferred income taxes

 

71

 

261

Non-cash reorganization items, net

 

74,462

 

(Gain) loss on extinguishment of debt, net

 

 

1,986

Goodwill and other asset write-downs

 

64,023

 

739

Amortization of bond fees and other debt-related items

2,108

5,028

Non-cash lease expense

4,724

Other

 

600

 

(3,216)

Changes in certain assets and liabilities:

Trade receivables

 

22,415

 

25,064

Inventories

 

1,040

 

1,462

Other assets

 

789

 

4,058

Accounts payable

 

22,072

 

(10,613)

Accrued compensation

 

(912)

 

(573)

Income taxes

 

2,883

 

(6,535)

Accrued interest

 

7,514

 

(513)

Postretirement obligations and other liabilities

 

(4,834)

 

(4,391)

Net cash provided by operating activities

 

19,557

 

1,971

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property, plant and equipment

 

(1,557)

 

(1,233)

Proceeds from sale of property, plant and equipment and other

 

150

 

3,326

Contributions to cost and equity investments

(425)

Net cash provided by (used in) investing activities

(1,407)

 

1,668

CASH FLOWS FROM FINANCING ACTIVITIES:

Repurchase of notes and related expenses

(36,602)

Payment of financing costs

(771)

(28)

Proceeds from sale-leaseback financing obligations

29,743

Purchase of treasury shares

(353)

Other

 

(1,170)

 

(705)

Net cash used in financing activities

 

(1,941)

 

(7,945)

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

 

16,209

 

(4,306)

Cash, cash equivalents and restricted cash at beginning of period

 

37,163

 

50,555

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD

$

53,372

$

46,249

See notes to the condensed consolidated financial statements

4


THE MCCLATCHY COMPANY

(DEBTOR IN POSSESSION)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited; amounts in thousands)

Common Stock

Accumulated

Class A

Class B

Additional

Other

$.01 par

$.01 par

Paid-In

Accumulated

Comprehensive

Treasury

value

value

Capital

Deficit

Income (Loss)

Stock

Total

Balance at December 29, 2019

$

55

$

24

$

2,217,823

$

(2,365,216)

$

(576,139)

$

(3)

$

(723,456)

Net loss

 

 

 

 

(178,653)

 

 

 

(178,653)

Other comprehensive income

 

 

 

 

 

6,735

 

 

6,735

Issuance of 1,190 Class A shares under stock plans

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

406

 

 

 

 

406

Purchase of 427 shares of treasury stock

 

 

 

 

 

 

 

Balance at March 29, 2020

$

55

$

24

$

2,218,229

$

(2,543,869)

$

(569,404)

$

(3)

$

(894,968)

Net loss

 

 

 

 

(34,731)

 

 

 

(34,731)

Other comprehensive income

 

 

 

 

 

7,700

 

 

7,700

Stock compensation expense

 

 

 

368

 

 

 

 

368

Balance at June 28, 2020

$

55

$

24

$

2,218,597

$

(2,578,600)

$

(561,704)

$

(3)

$

(921,631)

Common Stock

Accumulated

Class A

Class B

Additional

Other

$.01 par

$.01 par

Paid-In

Accumulated

Comprehensive

Treasury

value

value

Capital

Deficit

Income (Loss)

Stock

Total

Balance at December 30, 2018

    

$

53

$

24

$

2,216,681

$

(1,954,132)

$

(604,289)

$

(2)

$

(341,665)

Net loss

 

 

 

 

(41,956)

 

 

 

(41,956)

Cumulative effect adjustment of Topic 842

 

 

 

 

23

 

 

 

23

Other comprehensive income

 

 

 

 

 

22,552

 

 

22,552

Issuance of 168,610 Class A shares under stock plans

 

2

 

 

(2)

 

 

 

 

Stock compensation expense

 

 

 

663

 

 

 

 

663

Purchase of 56,934 shares of treasury stock

 

 

 

 

 

 

(268)

 

(268)

Balance at March 31, 2019

$

55

$

24

$

2,217,342

$

(1,996,065)

$

(581,737)

$

(270)

$

(360,651)

Net loss

 

 

 

 

(17,531)

 

 

 

(17,531)

Other comprehensive income

 

 

 

 

 

5,441

 

 

5,441

Issuance of 2,320 Class A shares under stock plans

 

1

 

 

(1)

 

 

 

 

Stock compensation expense

 

 

 

303

 

 

 

 

303

Purchase of 851 shares of treasury stock

 

 

 

 

 

 

(85)

 

(85)

Balance at June 30, 2019

$

56

$

24

$

2,217,644

$

(2,013,596)

$

(576,296)

$

(355)

$

(372,523)

See notes to the condensed consolidated financial statements

5


THE MCCLATCHY COMPANY

(DEBTOR IN POSSESSION)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
(UNAUDITED)

1.  BUSINESS AND BASIS OF ACCOUNTING

 

The McClatchy Company (“Company,” “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. based 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 are a publisher of brands such as the Miami HeraldThe Kansas City StarThe Sacramento BeeThe Charlotte Observer, The (Raleigh) News & Observer, and the Fort Worth Star-Telegram

Basis of Presentation

Preparation of the financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulation of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The condensed consolidated financial statements include the Company and our subsidiaries. Intercompany balances and transactions are eliminated.  

 

The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, that are necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. These financial statements are not necessarily indicative of the results to be expected for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 29, 2019 (“Form 10-K”). Each of the fiscal periods included herein comprise 13 weeks for the second-quarter periods and 26 weeks for the six-month periods.

Reclassifications

Certain amounts in the accompanying condensed consolidated statement of operations for the quarter and six months ended June 28, 2019, and in the condensed consolidated statement of cash flows for the six months ended June 28, 2019, have been reclassified to conform to the 2020 presentation.

Going Concern

We have concluded that our financial condition and projected operating results (including the effects of the COVID-19 pandemic as defined below), required contributions to our qualified defined benefit pension plan (“Pension Plan”) (as described below), defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 Cases (see Note 2) raise substantial doubt as to our ability to continue as a going concern and it is not probable that our plans will mitigate the going concern uncertainty within the next twelve months.

As of June 28, 2020, we continue to face liquidity challenges relating to approximately $124.2 million in minimum required contributions that are due in the next 12 months to our Pension Plan. In January 2020, we entered into a Standstill Agreement with the Pension Benefit Guaranty Corporation (“PBGC”), pursuant to which the PBGC agreed not to exercise the remedies available to it as a result of our not making a previously scheduled qualified pension contribution of $4.0 million due in January 2020. The payment obligations to the Pension Plan were further stayed when we filed for reorganization under Chapter 11 in February 2020. However, section 3608 of the CARES Act (as defined below) delays all minimum required contributions due in calendar year 2020 until January 1, 2021. As a result, the notice of missed payment in January 2020 and our required contribution due in April 2020 no longer constitute missed contributions as of June 28, 2020.  

6


As of June 28, 2020, we had $703.3 million aggregate principal amount of outstanding debt consisting of $262.9 million of our Senior Secured Notes due 2026 (“2026 Notes” or “First Lien 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 Debentures. See Notes 2 and 7 regarding a discussion about our long-term debt obligations that have been reclassified to liabilities subject to compromise as of June 28, 2020.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Financial Reporting in Reorganization

Effective February 13, 2020, we applied Accounting Standard Codification, No. 852, “Reorganizations,” (“ASC 852”) which is applicable to companies under Chapter 11 bankruptcy protection. ASC 852 requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as “Reorganization items, net” in the condensed consolidated statements of operations. In addition, the balance sheet must distinguish between debtor pre-petition liabilities subject to compromise from pre-petition or post-petition liabilities that are not subject to compromise. Liabilities subject to compromise are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. See Note 2 for additional discussion of the liabilities subject to compromise and reorganization items, net.

NYSE American Delisting

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”), became effective on May 21, 2020, 90 days after the filing date of the Form 25.

Coronavirus (COVID-19) Pandemic

In early 2020, the World Health Organization declared that the recent coronavirus disease 2019 (“COVID-19”) outbreak was a global health emergency and then in March 2020, they raised the COVID-19 outbreak to “pandemic” status. Early on, the transmission of COVID-19 and efforts to contain its spread 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. More recently, state and local jurisdictions started to lift mandatory stay-at-home or shelter-in-place orders and started gradually to ease restrictions. However, as cases have resurged in parts of the U.S., including areas in which we operate, we have seen governments slow or reverse efforts to reopen or shift into later phases of recovery, which increased risks to our operations.

Throughout this crisis, we have worked to adapt and focus on the health and safety of our employees. However, we have not previously experienced such a significant portion of our workforce working remotely for a prolonged period, and therefore, its effects on our long-term operations are unknown. The impact of COVID-19 could worsen depending on the duration and spread of the COVID-19 outbreak or resurgences of COVID-19 cases in affected regions after they have begun to experience improvement. We are unable to predict the duration or extent of the COVID-19 induced business disruption, or its financial impact. The COVID-19 outbreak has negatively impacted our advertising revenues and the collectability of some of our accounts receivables. To address the financial impact of COVID-19, we have taken steps to reduce operating expenses, while continuing to deliver news and information that is vital to our subscribers and customers

7


in the communities we serve. We will continue to monitor the COVID-19 situation and the impact it has on our financial results, which may require us to take additional actions to ensure our operating expenses align with revenues.

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 allowed us to file for a federal tax refund of $11.7 million, which we received during the second quarter of 2020. In addition, section 2302 of the CARES Act allows us to delay the payment of our share of certain payroll taxes incurred from March 27, 2020, through December 31, 2020. As of June 28, 2020, we have deferred $2.8 million of these certain payroll taxes. For all amounts deferred through December 31, 2020, one half of the amount is due in December 2021 and the remaining balance is due in December 2022.

As discussed above, the CARES Act permits a delay in the payment of minimum required pension contributions due in 2020 to January 1, 2021. The delayed payment must include interest from the original due dates of the minimum required contribution. See Notes 2 and 8 regarding a discussion about our pension and post-retirement obligations that have been reclassed to liabilities subject to compromise as of June 28, 2020.

2. CHAPTER 11 BANKRUPTCY FILING

Bankruptcy Petitions

On February 13, 2020 (“Petition Date”), McClatchy and each of our 53 wholly owned subsidiaries (collectively, the “Debtors”) filed voluntary petitions (“Chapter 11 Cases”) for reorganization 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.

Operation and Implications of the Bankruptcy Filing

We and our 30 local media companies 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. We intend to continue to operate our businesses in the ordinary course during the pendency of the Chapter 11 Cases until consummation of the proposed Asset Sale (as defined below), after which the Debtors intend to wind down in accordance with a plan of distribution.

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 and second 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: (i) obtain debtor-in-possession financing, (ii) pay employee wages and benefits, (iii) fund customer and subscriber programs, (iv) pay vendors and suppliers in the ordinary course for all goods and services going forward, and (v) pay critical vendors, utilities, and taxes in the ordinary course.

Debtor-In-Possession Financing

To ensure sufficient liquidity throughout the Chapter 11 Cases, on February 13, 2020, we obtained $50.0 million of debtor-in-possession financing under a credit agreement (“DIP Credit Agreement”) from Encina Business Credit, LLC (“Encina”). 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 Bank, N.A. (“Wells Fargo”), provides for a secured debtor-in-possession credit facility (“DIP Facility”) consisting of a new revolving

8


loan facility in the aggregate principal amount of up to $50.0 million, which will be 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 are and will be secured by all of our assets, whether now existing or hereafter acquired. The maturity date of the DIP Facility is no later than August 12, 2021. See Note 7 for further discussion of our debt.

Proposed Plan of Reorganization

Prior to and following the filing of the Chapter 11 Cases, we pursued approval of a proposed restructuring plan with our secured lenders, bondholders, and the Pension Benefit Guaranty Corporation (“PBGC”). We included lenders holding approximately 87% of our First Lien Notes in these confidential discussions. Unfortunately, we were unable to come to an agreement with our stakeholders and therefore, were unable to obtain approval from our creditors for the proposed restructuring plan at that time.

Asset Sale

On May 11, 2020, the Bankruptcy Court approved our motion for an auction process through which we were authorized to determine the highest or otherwise best offer for the sale of all or substantially all of our assets pursuant to Section 363 of the Bankruptcy Code or for sponsorship proposals with respect to a Chapter 11 plan of reorganization. The auction process concluded on July 10, 2020, and Chatham Asset Management LLC (“Chatham”) was identified as the successful bidder. On July 24, 2020, we entered into an Asset Purchase Agreement, by and among the Company, the Company subsidiaries listed on the signature pages thereto, SIJ Holdings, LLC (the “Purchaser”), and, solely for purposes of Sections 5.19 and 5.20, Chatham, and, solely for purposes of Section 8.3, Chatham Asset High Yield Master Fund, Ltd. (the “Asset Purchase Agreement”), pursuant to which the Purchaser has agreed to acquire substantially all of our assets for a purchase price of approximately $312.0 million, comprised of (i) a credit bid of our first lien notes of an aggregate principal amount of approximately $262.9 million and (ii) approximately $49.1 million in cash. On August 4, 2020, the Bankruptcy Court approved the Asset Purchase Agreement. The transaction contemplated by the Asset Purchase Agreement (the “Asset Sale”) remains subject to customary closing conditions, including Hart-Scott Rodino Antitrust Improvement Act  of 1976 (“HSR Act”) approval, and is expected to close in September 2020. After the closing of the Asset Sale, the Debtors’ estates will wind down in accordance with a plan of distribution.

Reorganization Items, Net

 

We have incurred and will continue to incur significant costs associated with the reorganization, including costs such as debtor-in-possession financing, and legal and professional fees. The amount of these costs incurred since the Petition Date have been charged to expense and are expected to significantly affect our results of operations. These costs have been partially offset by non-cash gains on the write off of rejected operating leases and failed sale and leaseback financing obligations. In accordance with ASC 852, costs and gains associated with the bankruptcy proceedings since the Petition Date have been recorded as reorganization items, net, within our accompanying condensed consolidated statement of operations for the quarter and six months ended June 28, 2020.

Reorganization items incurred as a result of the Chapter 11 Cases are as follows:

    

Quarter Ended

Six Months Ended

June 28,

June 28,

(in thousands)

    

2020

2020

Professional fees

$

20,841

$

32,753

Write-off of unamortized deferred financing costs

83,040

DIP financing fees

(88)

Write-off of leasehold improvements on rejected leases

897

Provision for estimated damages on rejected leases

6,092

6,857

Net gains on write-off of rejected leases

(4,907)

(6,442)

Net gains on write-off of rejected failed sale-leaseback financing obligations

(10,902)

(10,902)

Losses on write-off of rejected executory contracts

1,012

1,012

Reorganization items, net

$

12,048

$

107,215

9


Professional fees include legal and financial advisor professional fees related to the Chapter 11 Cases. Write-off of unamortized deferred financing costs includes; (i) unamortized debt discounts, debt issuance costs, and fair market value adjustments for all tranches of debt except for the First Lien Notes as all other debt has been classified as liabilities subject to compromise at face value, and (ii) the cancellation of our ABL Credit Agreement (as described in Note 7). Provision for estimated damages relates to estimated claims by the lessors on rejected leases.

As of June 28, 2020, $24.9 million of the reorganization items, net, were unpaid and accrued in accounts payable in the accompanying condensed consolidated balance sheet.

Liabilities Subject to Compromise

As discussed above, since the Petition Date, we have been operating as debtor in possession under the jurisdiction of the Bankruptcy Court and in accordance with provisions of the Bankruptcy Code. The accompanying condensed consolidated balance sheet as of June 28, 2020, includes amounts classified as liabilities subject to compromise, which represent liabilities we anticipate will be allowed as claims in the Chapter 11 Cases. These amounts represent our current estimate of known or potential obligations to be resolved in connection with the Chapter 11 Cases, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material. These liabilities subject to compromise are not fully secured and have a possibility of not being repaid at the full claim amount.

Liabilities subject to compromise at June 28, 2020, consisted of the following:

June 28,

(in thousands)

    

2020

Accounts payable

$

22,950

Accrued compensation

23

Other accrued liabilities

1,511

Other long-term liabilities

3,336

Accounts payable, accrued and other liabilities

27,820

Debt subject to compromise

440,418

Accrued interest on debt subject to compromise

18,112

Long-term debt and accrued interest

458,530

Pension and postretirement obligations

639,656

Liabilities subject to compromise

$

1,126,006

Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves a sale of the Company’s assets and reconciliations are performed. We will continue to evaluate the amount and classification of our pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Fair Value of Financial Instruments

 

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.  These levels are:

 

Level 1

Unadjusted quoted prices available in active markets for identical investments as of the reporting date.

10


Level 2

Observable inputs to the valuation methodology are other than Level 1 inputs and are either directly or indirectly observable as of the reporting date and fair value can be determined through the use of models or other valuation methodologies.

Level 3

Inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability, and the reporting entity makes estimates and assumptions related to the pricing of the asset or liability including assumptions regarding risk.

Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer. 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

Cash and cash equivalents, accounts receivable and accounts payable.  As of June 28, 2020, and December 29, 2019, the carrying amount of these items approximates fair value because of the short maturity of these financial instruments.

 

Long-term debt.  At June 28, 2020, the carrying value and the estimated fair value of our 2026 Notes (as defined in Note 7), was $250.8 million and $257.6 million, respectively. As of December 29, 2019, the carrying value and the estimated fair value of the 2026 Notes was $249.8 million and $240.5 million, respectively. The fair value of our 2026 Notes described above was determined using quoted market prices. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance and may not be representative of actual value or future settlement value through our Chapter 11 proceedings.

At June 28, 2020, the carrying value and the estimated fair value of our Debentures, Junior Term Loan and 2031 Notes (as defined in Note 7), was $440.4 million and $187.3 million, respectively. At December 29, 2019, the carrying value and the estimated fair value of our Debentures, Junior Term Loan and 2031 Notes, was $357.9 million and $213.3 million, respectively. Observable market data was not available or reliable to value our Debentures, Junior Term Loan and 2031 Notes. The fair value was based on the net present value of the future cash flows using interest rates derived from market inputs and a Treasury yield curve in effect at June 28, 2020. These are considered to be Level 3 inputs under the fair value measurements and disclosure guidance and may not be representative of actual value or future settlement value through our Chapter 11 proceedings. At June 28, 2020, in accordance with ASC 852, the carrying value of our Debentures, Junior Term Loan and 2031 Notes equaled the aggregate principal value of the notes and were classified as liabilities subject to compromise.

Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). Our non-financial assets that may be measured at fair value on a nonrecurring basis are assets held for sale, goodwill, intangible assets not subject to amortization and cost or equity method investments. All of these assets are measured using Level 3 inputs. We utilize valuation techniques that seek to maximize the use of observable inputs and minimize the use of unobservable inputs. The significant unobservable inputs include, but are not limited to, the expected cash flows and the discount rates that we estimate market participants would seek for bearing the risk associated with such assets. See Goodwill and Intangible Asset discussion below regarding valuation inputs and see Note 6 regarding goodwill and intangible newspaper masthead impairments recorded during the quarter ended March 29, 2020.

11


Newsprint, ink and other inventories

Newsprint, ink and other inventories are stated at the lower of cost (based principally on the first-in, first-out method) and net realizable value.

Assets Held for Sale

As of June 28, 2020, we had land and/or buildings classified as assets held for sale at seven of our media companies compared to only five as of December 29, 2019. During the six months ended June 28, 2020, we began to actively market for sale land and buildings at two of our media companies.

The carrying value of the land and building at one of the properties held for sale during 2019 was reduced to its estimated net realizable value during the first quarter of 2019. As a result, an impairment charge of $0.7 million was recorded in goodwill and other asset write-downs during the three months ended March 31, 2019. The same property has been reduced further to a revised net realizable value during the second quarter of 2020, resulting in an impairment charge of $0.3 million.

Property, Plant and Equipment

Depreciation expense with respect to property, plant and equipment is summarized below:

Quarters Ended

Six Months Ended

    

June 28,

    

June 30,

June 28,

June 30,

(in thousands)

2020

2019

2020

2019

Depreciation expense

 

$

11,209

 

$

5,610

 

$

25,977

 

$

11,327

During the quarter and six months ended June 28, 2020, we accelerated $6.9 million and $16.9 million, respectively, in depreciation expense primarily related to the production equipment associated with outsourcing our printing process in Miami, Florida. Accelerated depreciation in the quarter and six months ended June 30, 2019, was $0.1 million.

Goodwill and Intangible Assets

We test the recorded amount of goodwill for impairment annually at year-end, or whenever events occur, or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We perform this testing on our operating segments, which are also considered our reporting units. An impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The fair value of our reporting units are generally determined using an equal weighting of a market approach and an income approach. We use 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 estimation of future cash flows, which is dependent on internal forecasts, the long-term rate of growth for our business, and the 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. See Note 6 for discussion of our goodwill impairment testing results.

In the first quarter of 2020, there was significant volatility in the market as initial reactions to the COVID-19 pandemic began to impact companies and long-term impacts of COVID-19 on domestic and foreign affairs were unknown. The market sentiment created a wide range of metrics for our peer group, making the market approach less reliable or meaningful than it has been historically. As such, when we performed our impairment testing during the first quarter of 2020, we used the income approach to estimate the fair value of the reporting units rather than a market approach, because the implied revenue and EBITDA multiples from the market approach did not yield as reliable fair values given the volatile

12


market conditions at the time of the interim assessment. See Note 6 for discussion of our goodwill impairment testing results.

The recorded amount of identifiable intangible assets related to 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, which utilizes the discounted cash flow model to determine the fair value of each newspaper masthead. See Note 6 for discussion of our intangible assets impairment testing results.

Long-lived assets such as 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. We had no impairment of such long-lived assets during the six months ended June 28, 2020, or June 30, 2019.

Investments in Unconsolidated Companies

Investments in unconsolidated companies are accounted for using either the equity method or the measurement alternative method. Investments through which we exercise significant influence but do not have control over the investee are accounted for under the equity method. Investments through which we are not able to exercise significant influence over the investee are accounted for under the measurement alternative method as these investments do not have readily determinable fair values. The measurement alternative method was elected for investments without readily determinable fair values formerly accounted for under the cost method. The measurement alternative value represents cost minus any impairments, if any, plus or minus any observable price changes. There was no impairment of our investments in unconsolidated companies during the six months ended June 28, 2020, or June 30, 2019.

Financing Obligations

Financing obligations (also known as failed sale and leaseback transactions) consist of contributions of real properties to the Pension Plan (see Note 8) in 2016 and 2011, real property previously owned by The Sacramento Bee in Sacramento, California that was sold and leased back during the third quarter of 2017, real property previously owned by The State in Columbia, South Carolina that we sold and leased back during the second quarter of 2018, and real property previously owned by The Kansas City Star in Kansas City, Missouri that was sold and leased back during the second quarter of 2019.

We account for all of these properties that we lease back as financing transactions and, accordingly, we continue to depreciate the carrying value of the properties in our financial statements. No gain or loss will be recognized on the contributed or sold properties until the financing obligation is extinguished. For the contributed properties, at the time of our contribution to the Pension Plan, our pension obligation was reduced and our financing obligations were recorded equal to the fair market value of the properties. For all of the contributed and sold properties, the financing obligation is reduced by a portion of the lease payments made either to the Pension Plan or to the new owners each month.

In May 2020, we received approval from the Bankruptcy Court to reject five of our leases classified as financing obligations that were previously contributed to the Pension Plan. All of those rejected leases were terminated during the second quarter 2020. Also see Note 12 regarding the impact of rejected financing obligation leases in the third quarter of 2020.

As of June 28, 2020, the rejection of these finance obligations represented a decrease of $31.0 million to property, plant and equipment (“PP&E”), net and $41.9 million of financing obligations, within our condensed consolidated balance sheet. The lessors have claims for damages that we could be required to pay as a result of rejecting these leases associated with these financing obligations. Therefore, we recorded $3.3 million in charges related to the estimated damages on these rejected financing obligations during the quarter and six months ended June 28, 2020. These estimated damages are included in liabilities subject to compromise as of June 28, 2020.

13


Segment Reporting

We have two operating segments that we aggregate into a single reportable segment because each has similar economic characteristics, products, customers and distribution methods. Our operating segments are based on how our chief executive officer, who is also our Chief Operating Decision Maker (“CODM”), makes decisions about allocating resources and assessing performance. The CODM is provided discrete financial information for the two operating segments. Each operating segment consists of a group of media companies and both operating segments report to the same segment manager. One of our operating segments (“Western Segment”) consists of our media companies’ operations in California, Washington and the Central region, while the other operating segment (“Eastern Segment”) consists primarily of media companies’ operations in the Carolinas and the East and Southeast regions.

Income Taxes

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.

A tax valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. The timing of recording or releasing a valuation allowance requires significant judgment. Establishment and removal of a valuation allowance requires us to consider all positive and negative evidence and to make a judgmental decision regarding the amount of valuation allowance required as of a reporting date. The assessment considers expectations of future taxable income or loss, available tax planning strategies and the reversal of temporary differences. 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 perform our assessment of the deferred tax assets quarterly, weighing the positive and negative evidence as outlined in ASC 740-10, Income Taxes. As we have incurred three years of cumulative pre-tax losses, such objective negative evidence limits our ability to give significant weight to other positive subjective evidence, such as projections for future growth and profitability. As of December 29, 2019, our valuation allowance against a majority of our deferred tax assets was $176.1 million. For the quarter and six months ended June 28, 2020, we recorded an increase in the valuation allowance of $4.9 million and $13.4 million, respectively. Our valuation allowance as of June 28, 2020, was $189.5 million.

We will continue to maintain a valuation allowance against our deferred tax assets until we believe it is more likely than not that these assets will be realized in the future. If sufficient positive evidence arises in the future that provides an indication that all of 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.  

 

Current generally accepted accounting principles prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax returns. We also evaluate any uncertain tax positions and recognize a liability for the tax benefit associated with an uncertain tax position if it is more likely than not that the tax position will not be sustained on examination by the taxing authorities upon consideration of the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We record a liability for uncertain tax positions taken or expected to be taken in a tax return. Any change in judgment related to the expected ultimate resolution of uncertain tax positions is recognized in earnings in the period in which such change occurs.  We recognize accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-02 adds, removes and modifies various disclosure requirements within Topic 820. We

14


adopted Topic 820 as of December 30, 2019, and the adoption did not have an impact on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. The amendments in the ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires that financial assets measured at amortized cost be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based upon a broad set of information to include historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU 2016-13 has been amended by ASU’s 2018-19, 2019-04, 2019-05, 2019-11, 2020-02 and 2020-03, which provide further guidance and clarification on specific items within the previously issued update. ASU 2016-13 is effective for us for interim and annual reporting periods beginning after December 15, 2022. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plan-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” ASU 2018-14 adds, removes or clarifies various disclosure requirements within guidance. It is effective for us for annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 modifies Accounting Standards Codification 740 to remove certain exceptions and also add guidance to reduce complexity in certain areas. For companies that file with the Securities and Exchange Commission, the standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted but requires simultaneous adoption of all provisions of the new standard. We are currently in the process of evaluating the impact of the adoption on our condensed consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815).” ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security over under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. It is effective for us for interim and annual reporting periods beginning after December 15, 2020, and early adoption is permitted. We do not expect that the adoption of this guidance will have an impact on our consolidated financial statements.

4. REVENUES

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

All revenues recognized on the condensed consolidated statements of operations are the result of contracts with customers, except for revenues associated with lease income where we are the lessor through a sublease arrangement.

15


Advertising Revenues

We generate revenues primarily by delivering advertising on our digital media sites, on our partners’ websites and in our newspapers. These advertising revenues are generated through digital and print performance obligations that are included in contracts with customers, which are typically one year or less in duration or commitment. There are no differences in the treatment of digital and print advertising performance obligations or the recognition of revenues for retail, national, classified, and direct marketing revenue categories.  

We generate advertising revenues through digital products that are sold on cost-per-thousand impressions (“CPM”) which means that an advertiser pays based upon the number of times their ad is displayed on our owned and operated websites and apps, our partners’ websites, ad exchanges, in a video pre-roll or a programmatic bidding exchange. Such revenues are recognized according to the timing outlined in the contract.  

In addition to the advertising sold on a CPM basis, we also sell monthly marketing campaigns to some of our clients. Monthly marketing campaigns include multiple products some of which are sold as a CPM basis and other – like reputation management and search engine optimization – which are not. The contracted goods and services offered as part of monthly marketing campaigns are performed over the specific contract term and the transfer of the performance obligation occurs as the benefits are consumed by the customer. As such, revenue is recognized daily regardless of the performance obligations classification of timing of being point in time or overtime.

Print advertising is advertising that is printed in a publication, inserted into a publication, or physically mailed to a customer. Our performance obligations for print products are directly associated with the inclusion of the advertisement in the final publication and delivery of the product on the contracted distribution day. Revenues are recognized at the point in time that the newspaper publication is delivered, and distribution of the advertisement is satisfied.

Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. We estimate these amounts based on the expected value approach.

For advertisements placed on our partners’ websites or selling a product hosted or managed by partners, we evaluate whether we are the principal or agent. Generally, we report advertising revenues for ads placed on our partners’ websites or for the resale of their products on a gross basis; that is, the amounts billed to our customers are recorded as revenues, and amounts paid to our partners for their products or advertising space are recorded as operating expenses. If we are determined to be the principal, we are primarily responsible to our customers for fulfillment of the contract goals though, from time to time, we may use third-party goods or services. Our control is further supported by our level of discretion in establishing price and in some cases, controlling inventory before it is transferred to the customer.  

Most products, including the printed newspaper advertising product, banner advertisements on our websites and video advertisements on our owned and operated player are reported on a gross basis. However, there are some third-party products and services that we offer to customers and various revenue share arrangements, such as exchange platforms, that are reported on a net revenue basis. Revenues are earned through being a reseller of a product or participating in an exchange where control over the service provided is limited and costs of the arrangement are net of revenues received.

Audience Revenues

Audience revenues include digital and print subscriptions or a combination of both at various frequencies of delivery. Our subscribers typically pay us in advance of when their subscriptions start or shortly thereafter. Our performance obligation to subscribers of our digital products is the real-time access to news and information delivered through multiple digital platforms. Our performance obligation to our traditional print subscribers is delivery of the physical newspaper according to their subscription plan. Revenues related to digital and print subscriptions are recognized ratably each day that a product is delivered to the subscriber.  

Digital subscriptions may be purchased for a day, month, quarter, or year, and revenue is reported daily over the term of the contract.

16


Traditional print subscriptions may have various frequencies of delivery based upon each subscriber’s delivery preference. Revenues are recognized based upon each delivery, therefore at a point in time.  

Certain subscribers may enter into a grace period (“grace”) after their previous contract term has expired but before payment has been received on the renewal. Grace is granted as a continuation of the subscription contract, so that service is not disrupted, and the extension is accounted for as variable consideration. We estimate these revenue amounts based on the expected amount to be received, considering the expected discontinuation of service or nonpayment based on historical experience.

Other Revenues

The largest revenue streams within other revenues are for commercial printing and distribution. The commercial print agreements are between us and third-party publishers to print and make available for distribution their finished products. Commercial print contracts are for a daily finished product and each day’s product is unique, or a separate performance obligation.  Revenue is recorded at a point in time upon completion of each day’s print project.

The performance obligation for distribution revenues is the transportation of third-party published products to their subscribers or stores for resale. Distribution is performed substantially the same over the life of the contract and revenue is recognized at the point in time each performance obligation is completed.

We report distribution revenues from the third-party publishers on a gross basis. That is, the amounts that we bill to third-party publishers to deliver their finished product to their customers are recorded as revenues, and the amounts paid to our independent carriers to deliver the third-party product are recorded as operating expenses.

Other revenues also include revenues from subleasing contracts and grant and sponsorship revenue received through our Community Funding Initiatives and the Compass Experiment. Revenues received from subleasing are discussed in Note 5. Grants and sponsorships are accounted for in accordance with ASC Subtopic 958-605, Not-for-Profit Entities – Revenue Recognition, and revenues are recorded when funds are received and no conditions exist, or after conditions have been met.

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its stand-alone selling price. We generally determine stand-alone selling prices for audience revenue contracts based upon observable market values and the adjusted market assessment. For advertising revenue contracts with multiple performance obligations, stand-alone selling price is based on the prices charged to customers or on an adjusted market assessment.

Unearned Revenues

We record unearned revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. The decrease in the unearned revenue balance for the six months ended June 28, 2020, reflects cash payments received or due in advance of satisfying our performance obligations, offset by $46.3 million of revenues recognized that were included in the unearned revenue balance as of December 29, 2019.

Our payment terms vary for advertising and subscriber customers. Subscribers generally pay in advance of up to one year. Advertiser payments are due within 30 days of invoice issuance and therefore amounts paid in advance are not significant. For advertisers that are considered to be at a higher risk of collectability due to payment history or credit processing, we require payment before the products or services are delivered to the customer.  

5.  LEASES

We determine if a contract is a lease at the inception of the arrangement. If an operating lease is identified, it is classified as one of three asset classes: building and land, vehicles or equipment. We lease space under non-cancelable operating

17


leases for general office facilities, distribution centers, a training center and a call center. We also have operating leases for vehicles that consist mainly of tractor trailers and box trucks to transport newspapers from printing facilities to distribution centers, as well as office equipment consisting mostly of copiers.

Certain leases have rent holidays or leasehold improvement incentives which account for the difference between the right-of-use (“ROU”) assets and the lease liabilities. Many of our leases include lease components (e.g., fixed rent payments) and non-lease components (e.g., common-area or other maintenance costs, utilities, or other lease costs imposed) which are accounted for as a single lease component, because we have elected the practical expedient to group lease and non-lease components for all leases.

None of our leases contain contingent rent provisions or concessions, residual value guarantees or restrictive covenants. Our leases have remaining terms of less than one year to eight years, except for one parking lot lease with 42 years remaining.

Some of our distribution center, vehicle, and equipment leases have a combination of cancelable month-to-month lease terms and non-cancelable lease terms of less than one year. We have elected the practical expedient to exclude these short-term leases from recognition of our ROU assets and lease liabilities.

Most leases include escalating lease payments, and many include one or more options to renew or terminate the lease. The exercise of lease renewal options is typically at our sole discretion; therefore, the renewals to extend the lease terms are not included in our ROU assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.

We have one financing lease (formerly known as a capital lease) for office furniture and fixtures located at one of our office facilities. The total financing lease payments are calculated to be approximately $38.0 thousand and $1.0 million as of June 28, 2020, and December 29, 2019, respectively. As of June 28, 2020, the payments run over the course of the remaining two months and are not material to the future lease payments schedules presented below. Also, see Rejected Leases discussion below. The finance lease asset is recorded within the other assets line item of the condensed consolidated balance sheet. The finance lease short-term and long-term obligations are recorded within other accrued liabilities and other long-term liabilities line items of the condensed consolidated balance sheet, respectively.

As our lease contracts do not provide an implicit interest rate, we use our effective yield of our secured debt as the secured incremental borrowing rate for leases with an 8-year tenure. The secured incremental borrowing rate was adjusted using the treasury yield curve at the transition date to determine the present value of each of the future payments.

The cost components of our operating and financing leases were as follows:

Quarter Ended

Six Months Ended

    

June 28,

    

June 30,

June 28,

June 30,

(in thousands)

2020

2019

2020

2019

Financing lease costs:

Amortization of ROU asset

$

18

$

24

$

42

$

48

Interest on lease liabilities

12

20

30

40

Operating lease costs

2,652

3,465

5,821

 

6,929

Short-term lease cost

505

451

865

1,164

Variable lease cost

 

624

 

609

 

951

1,076

Sublease income

 

(1,111)

 

(1,460)

 

(2,602)

 

(2,921)

Total lease costs

$

2,700

$

3,109

$

5,107

$

6,336

Variable lease costs for our leased facilities consist primarily of taxes and insurance, as well as common area maintenance true-up assessments which are paid based on actual costs incurred by the lessor. We also incur variable mileage costs related to our leased vehicles and variable usage costs related to leased equipment. Variable lease costs also include annual changes in monthly rent costs, mainly based on the consumer price index.

We sublease office space to other companies under non-cancelable agreements. There are no residual value guarantees or restrictions or covenants imposed as part of these sublease arrangements, except that the subtenant may not transfer the

18


assignment of the sublease without prior permission or permit liens against the office space. Some sublease agreements included options to renew or terminate the lease, but only within the term of the master lease arrangement held by us. See Rejected Leases below.  

As of June 28, 2020, the aggregate future lease payments for operating leases are as follows:

    

Operating

(in thousands)

Leases

2020 (remainder)

$

4,000

2021

 

4,838

2022

 

4,028

2023

 

2,389

2024

 

1,727

2025

 

1,316

Thereafter

 

4,969

Total undiscounted cash flows

23,267

Less imputed interest

(5,764)

Total lease liability

$

17,503

The weighted average remaining lease terms and discount rates for all of our operating and financing leases were as follows:

    

June 28, 2020

    

June 30, 2019

    

Operating

Financing

Operating

Financing

Leases

Lease

Leases

Lease

Weighted average remaining lease term (years)

 

5.82

0.21

7.35

6.50

Weighted average discount rate

 

9.17

%  

9.11

%  

9.19

%  

10.50

%  

Supplemental cash flow information related to our operating and financing leases was as follows:

Six Months Ended

    

June 28,

June 30,

(in thousands)

2020

2019

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash outflow from operating leases

 $

6,315

 $

7,129

Operating cash outflow from financing lease

30

40

Financing cash outflow from financing lease

46

34

ROU assets obtained in exchange for new operating lease liabilities

3,524

1,999

As of June 28, 2020, we do not have any new financing leases or significant additional operating leases that have not yet commenced.

Rejected Leases

During the six months ended June 28, 2020, we obtained approval from the Bankruptcy Court to reject certain of our operating leases with ROU asset values of $25.0 million and a total net lease liability of $32.9 million. A majority of these operating leases were terminated during the quarter and six months ended June 28, 2020. As a result, we terminated these leases by writing off the ROU assets and net lease liabilities which resulted in net gains on rejection of the operating leases of $6.4 million and $7.9 million during the quarter and six months ended June 28, 2020, respectively. Some of the operating leases rejected were rejected and immediately amended to reflect a negotiated reduction in the footprint and term of the original contract. These operating leases were first considered for partial termination of the leased space resulting in gains on operating lease rejections, and second as a lease modification to account for the change in term which resulted in a further decline of the ROU asset and lease liability. In conjunction with the rejection of these operating leases, we also recorded charges of $1.1 million in the quarter and six months ended June 28, 2020, related to the write-off of leasehold improvements and other costs related to these rejected leases.

19


The lessors have claims for damages that we could be required to pay as a result of rejecting these leases. Therefore, we recorded charges of $2.7 million and $3.5 million related to the estimated damages on these rejected operating leases during the quarter and six months ended June 28, 2020, respectively. These estimated damages are included in liabilities subject to compromise as of June 28, 2020.

See Note 12 regarding the impact of rejected operating leases in the third quarter of 2020.

Also, during the six months ended June 28, 2020, we obtained approval from the Bankruptcy Court to reject our only financing lease with a total net lease liability of $0.6 million and a ROU asset value of $0.5 million. The lease will fully terminate in the third quarter of 2020. During the quarter and six months ended June 28, 2020, we recognized a gain of $0.1 million on the partial termination due to the change in term on this financing lease.

In addition, during the quarter ended June 28, 2020, we obtained approval from the Bankruptcy Court to reject several subleases. As a result of the rejection, we accelerated the amortization of deferred commission costs and recognized a charge of $0.5 million during the quarter and six months ended June 28, 2020.  

6. INTANGIBLE ASSETS AND GOODWILL

Intangible assets subject to amortization (primarily advertiser lists, subscriber lists and developed technology), mastheads and goodwill consisted of the following: 

December 29,

Impairment

Amortization

June 28,

(in thousands)

    

2019

    

Charges

    

Expense

    

2020

Intangible assets subject to amortization

$

838,336

$

$

$

838,336

Accumulated amortization

(831,878)

(339)

(832,217)

6,458

(339)

6,119

Mastheads

62,795

(4,769)

58,026

Goodwill

420,178

(58,993)

361,185

Total

$

489,431

$

(63,762)

$

(339)

$

425,330

Impairment of Goodwill and Intangible Assets

During the quarter ended March 29, 2020, we performed an interim test of impairment of goodwill and intangible newspaper mastheads due to the continuing challenging business conditions, the impact of COVID-19, and changes in our assessment of profitability in future years. The fair values of our reporting units for goodwill impairment testing and individual newspaper mastheads were estimated using the present value of expected future cash flows, using estimates, judgments and assumptions (see Note 3) that we believe were appropriate in the circumstances. As a result, we recorded impairment charges in our Western and Eastern reporting units related to goodwill of $19.9 million and $39.1 million, respectively, during the quarter ended March 29, 2020. We also recorded an intangible newspaper masthead impairment charge of $4.8 million in the first quarter of 2020. These impairments were recorded in the goodwill and other asset write-downs line item on our condensed consolidated statements of operations.

We had no impairment of goodwill or intangible newspaper mastheads during the quarter ended June 28, 2020 or during the quarter and six months ended June 30, 2019.

Amortization expense with respect to intangible assets is summarized below:

Quarters Ended

Six Months Ended

    

June 28,

    

June 30,

June 28,

June 30,

(in thousands)

2020

2019

2020

2019

Amortization expense

 $

115

 $

11,801

 $

339

 $

23,602

20


The estimated amortization expense for the remainder of fiscal year 2020 and the five succeeding fiscal years is as follows: 

Amortization

Expense

Year

(in thousands)

2020 (Remainder)

$

308

2021

525

2022

500

2023

509

2024

485

2025

207

7.  LONG-TERM DEBT

 

In connection with the Chapter 11 Cases, we entered into the DIP Credit Agreement. The DIP Credit Agreement replaces the ABL Credit Agreement, defined below.

The commencement of the Chapter 11 Cases constituted an event of default and caused the automatic and immediate acceleration of all debt outstanding under our various debt agreements. However, any efforts to enforce payment obligations under the debt agreements are automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the debt agreements are subject to the applicable provisions of the Bankruptcy Code.

As of June 28, 2020, and December 29, 2019, our outstanding long-term debt consisted of fixed rate obligations in senior secured notes, unsecured notes, and loans. Our outstanding long-term debt obligations are stated net of unamortized debt issuance costs, fair value adjustments and unamortized discounts, if applicable, totaling $12.1 million and $95.6 million as of June 28, 2020, and December 29, 2019, respectively. The unamortized discounts include fair value adjustments on unsecured debt acquired in 2006, as well as the Junior Term Loans and the 2026 Notes that included original issue discounts from our 2018 debt refinancing. Effective with the filing of the Chapter 11 Cases, all of the outstanding long-term debt, except for our first lien 2026 Notes, was reclassified to liabilities subject to compromise at face value. As such, during the quarter ended March 29, 2020, we recognized an $81.7 million write-off of unamortized debt issuance costs related to the notes, loans and debentures, that were all subordinate to the First Lien Notes, in reorganization items, net, on our condensed consolidated statements of operations.

Our previous ABL Credit Agreement had unamortized debt issuance costs of $1.4 million as of December 29, 2019, that were included in other assets on our condensed consolidated balance sheets. As discussed above, the ABL Credit Agreement was replaced with the DIP Credit Agreement in February 2020. Therefore, during the quarter ended March 29, 2020, we recognized a $1.4 million write-off of unamortized debt issues costs related to the ABL Credit Agreement in reorganization items, net on our condensed consolidated statements of operations.

Our long-term debt consisted of the following: