| (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.Company (now known as JCK Legacy 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 bebecame effective on May 21, 2020, 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‑knownwell-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‑TS-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‑KS-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‑K10-K or any amendment to this Form 10‑K. ☐10-K. ◻ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-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‑212b-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‑212b-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‑votingnon-voting common equity held by non‑affiliatesnon-affiliates was approximately $17.1 million. For purposes of the foregoing calculation only, as required by Form 10‑K,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 |
| | | | | Class A Common Stock | 5,506,185 | | Class B Common Stock | 2,428,191 |
DOCUMENTS INCORPORATED BY REFERENCE:None. 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.
Explanatory Note TABLE OF CONTENTS
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:
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| | the effects of the Bankruptcy Court rulings in the Chapter 11 Cases (as defined below) and the outcome of the proceedings in general;
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| | the length of time the Company will operate while in the Chapter 11 Cases;
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| | our restructuring efforts rely on coming to terms with multiple parties who may have conflicting interests;
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| | 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;
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| | 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;
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| | the sufficiency of the DIP Facility (as defined below) to allow the Company to operate as usual and fulfill ongoing commitments to stakeholders;
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| | 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;
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| | increased levels of employee attrition during the Chapter 11 Cases;
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| | our reliance on third party vendors and the impact of the Chapter 11 filing on such relationships;
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| | our ability to continue as a going concern;
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| | the continued trading of our securities on the OTC Pink Market;
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| | significant competition in the market for news and advertising;
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| | general economic and business conditions;
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| | 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;
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| | changes in technology, services and standards, and changes in consumer behavior;
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| | ability to grow and manage our digital businesses;
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| | our ability to successfully execute cost-control measures, including selling excess assets;
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| | any changes to our business and operations that may result in goodwill and masthead impairment charges;
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| | any harm to our reputation, business and results of operations resulting from data security breaches and other threats and disruptions;
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| | fluctuating price of newsprint or disruptions in newsprint supply chain;
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| | accelerated decline in print circulation volume;
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| | developments in the laws and regulations to which we are subject resulting in increased costs and lower revenues; and
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| | adverse results from litigation or governmental investigations.
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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
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
On March 30, 2020, The McClatchy Company (now known as JCK Legacy Company) (the “Company,” “McClatchy,” “we,” “us” or “our”) provides strong, independent local journalismfiled its Annual Report on Form 10-K for the fiscal year ended December 29, 2019 (the “Original Form 10-K”) Certain Part III information was omitted from the Original Form 10-K in reliance on General Instruction G(3) to 30 communities with operationsForm 10-K. This Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) amends the Original Form 10-K to include the information required by and not included in 14 states,Part III of the Original Form 10-K. Further, as wella “smaller reporting company,” as selected national news coverage through our Washington, D.C. bureau. We also provide a full suitedefined in Item 10 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 Herald, The Kansas City Star, The Sacramento Bee, The 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”)Regulation S-K promulgated under the symbol MNI. AsSecurities Exchange Act of February 14, 2020, our Class A Common Stock is traded “over-the-counter” on1934, as amended, the OTC Pink Market under the symbol MNIQQ.Company has elected to provide scaled disclosures permitted for smaller reporting companies. Chapter 11 Proceedings
On February 13, 2020, McClatchythe Company and each of our 53 wholly ownedwholly-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”). York. 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 Proceedings 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 Discussionhave resulted in the forfeiture or nullification of certain equity grants, contributions, benefits plans, and Analysis of Financial Condition and Results of Operations (“MD&A”) and Item 8, Note 2employment agreements described in this Form 10-K/A. Further, on September 4, 2020, upon the closing of the Consolidated Financial Statements.previously disclosed Sale Transaction whereby substantially all of the Company’s assets were sold to SIJ Holdings, LLC, the Company, among other things, changed its name from “The McClatchy Company” to “JCK Legacy Company.”
As required by Rule 12b-15 under the Securities Act of 1934, as amended, we are including with this Form 10-K/A a new certification by our principal executive and principal financial officer. Accordingly, Item 15 of Part IV has been amended to reflect the filing of this new certification. Item 15 of Part IV has also been amended to reflect an Executive Retention Agreement entered into on May 24, 2019, by and between Scott Manuel (one of our named executive officers) and The McClatchy Company. Going Concern
We have concluded thatExcept for the changes in Part III and the filing of the related certification and the Executive Retention Agreement exhibit added to the list of exhibits in Part IV, this Form 10-K/A does not reflect events occurring after the filing of the Original Form 10-K and no attempt has been made in this Form 10-K/A to modify or update other disclosures as presented in the Original Form 10-K. This Form 10-K/A should be read in conjunction with the Original Form 10-K and with our financial condition and projected operating results,filings with the minimum required contribution amounts on our defined benefit pension plan (“Pension Plan”) (as described below), the defaults under our debt agreementsSEC 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.Original Form 10-K.
TABLE OF CONTENTS
PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following sets forth information as of March 30, 2020, regarding the name, age and principal occupation or employment of each member of our board of directors (“Board”) and executive officers. We have also included information about each director’s specific attributes, experience or skills that led our Board to conclude that he or she should serve as a director on the Board in light of our business and structure. Unless we specifically note below, no corporation or organization referred to below is a subsidiary or other affiliate of the Company. Directors are elected at each annual meeting of stockholders and serve until their respective successors are elected and qualified or until their earlier resignation or removal. | | | Name | Age | Position | Elizabeth Ballantine | 71 | Director | Leroy Barnes Jr. | 68 | Director | Molly Maloney Evangelisti (1) | 67 | Director | Anjali Joshi | 59 | Director | Brown McClatchy Maloney (1) | 64 | Director | Kevin S. McClatchy (1) | 57 | Director, Chairman of the Board | William McClatchy (1) | 58 | Director | Theodore R. Mitchell | 64 | Director | Clyde Ostler | 73 | Director | Maria Thomas | 56 | Director | Craig I. Forman | 58 | President, Chief Executive Officer and Director | Peter R. Farr | 56 | Vice President, Chief Financial Officer (2) | Elaine Lintecum | 64 | Special Advisor to the CEO (2) | Scott Manuel | 44 | Vice President, Customer and Product | Billie S. McConkey | 49 | Vice President, People, Legal and Corporate Secretary | Kristin Roberts | 44 | Vice President, News |
| (1) | Molly Maloney Evangelisti and Brown McClatchy Maloney are siblings. Kevin S. McClatchy and William McClatchy are cousins to each other and to Ms. Evangelisti and Mr. Maloney. |
| (2) | Effective March 30, 2020, Mr. Farr was appointed Vice President, Chief Financial Officer and Ms. Lintecum was appointed to serve as Special Advisor to the CEO until her retirement on June 30, 2020. |
DIRECTORS Elizabeth Ballantine, 71, has been a director of McClatchy since March 1998. Prior to joining the Board of Directors, Ms. Ballantine was a director of Cowles Media Company, a position she had held since 1993. Since 1999, Ms. Ballantine has been president of EBA Associates, a consulting firm. From 1993 to 1999, she was an attorney in the Washington, D.C. law firm of Dickstein, Shapiro, Morin and Oshinsky LLP. From 1990 until 1993, she worked as a private consultant advising clients on international business investments. Ms. Ballantine is a life trustee of Grinnell College in Iowa and was chair of the Governing Board of the National Cathedral School in Washington, D.C. Since December 2004, Ms. Ballantine has been a director of the mutual funds of the Principal Financial Group of Des Moines, Iowa. She also serves on the board of directors of Durango Herald, Inc. of Durango, Colorado. Ms. Ballantine has significant experience and knowledge of media and publishing stemming from her service on the board of directors of Cowles Media Company as well as her involvement with her family-owned newspaper in Durango, Colorado. Leroy Barnes, Jr., 68, has been a director of McClatchy since September 2000. Mr. Barnes is the retired vice president and treasurer of PG&E Corporation, a position he held from 2001 to 2005. From 1997 to 2001, Mr. Barnes was vice president and treasurer of Gap, Inc. Prior to that, Mr. Barnes held various executive positions with Pacific Telesis Group/SBC Communications. Earlier in his career, Mr. Barnes was a consultant at Touche Ross & Co., a predecessor of Deloitte & Touche LLP. Mr. Barnes is also a member of the boards of directors of Principal Funds, Inc. and Principal Variable Contracts, Inc., each since March 2012. He has also been a trustee of Principal ETF, Inc. since December 2014. Mr. Barnes had also served as a member of the board of directors of Herbalife, Ltd. from December 2004 to February 2015 and a member of the board of directors of Frontier Communications, Inc. from May 2005 to May 2019. Mr. Barnes’ experience as a finance executive at other publicly-traded companies as well as his service on other boards position him to critically review and oversee various managerial, strategic, financial and compliance-based considerations applicable to McClatchy. Mr. Barnes’ expertise also qualifies him to serve as an “audit committee financial expert” as defined by Item
407(d)(5)(ii) of Regulation S-K. Molly Maloney Evangelisti,67, has been a director of McClatchy since July 1995. She worked in various capacities for The Sacramento Bee from October 1978 to December 1996, including the oversight of special projects. As a longtime McClatchy employee, with nearly 20 years of December 29,hands-on experience at The Sacramento Bee, Ms. Evangelisti has an extensive knowledge of the Company’s people and business. Anjali Joshi, 59, has been a director of McClatchy since July 31, 2017 and also serves on the boards of Moble Iron and Lattice Semiconductor. Until March 2019, we faced liquidity challenges relatingMs. Joshi was Vice President for Product Management at Google, Inc., and has held various positions there since 2006, including Search and News. Prior to joining Google, Ms. Joshi served as Executive Vice President of Engineering for Covad Communications, Inc. from 1998 to 2003. Ms. Joshi also held positions at AT&T Bell Labs working in the areas of voice and high-speed data from 1990 to 1998. Ms. Joshi’s experience as an accomplished technology and digital executive brings additional platform experience and technical acumen to the minimum required contributionsBoard as the Company transitions into the digital landscape. Brown McClatchy Maloney, 64, has been a director of McClatchy since September 2004. Mr. Maloney is the owner of Radio Pacific and the operator of KONP radio, an ABC affiliate, and two additional radio stations in fiscalwestern Washington State. Mr. Maloney is also the owner of Olympic View Properties and Cedar Ridge Properties, both Washington state real estate companies. In addition, Mr. Maloney serves as a member of the board of directors of The Seattle Times Company. From 1988 through November 2011, he was the owner of Olympic View Publishing, a weekly newspaper company in Washington State. From 1974 to 1987, prior to his ownership of Olympic View Publishing and Radio Pacific, Mr. Maloney held various circulation and advertising positions at the Anchorage Daily News, The Sacramento Bee and The Fresno Bee. He served as the president of the Washington Newspaper Publishers Association from 1996 to 1997 and is the former president of the Washington Newspaper Publishers Association Foundation. Mr. Maloney’s ownership of various newspapers and radio stations provides him with valuable insight into McClatchy’s business strategy and industry challenges. He also has valuable executive leadership, management and entrepreneurial experience. Kevin S. McClatchy, 57, has been a director of McClatchy since September 1998, and non-executive Chairman of the Board since May 2012. From 1996 to 2007, he was the managing general partner and chief executive officer of the Pittsburgh Pirates Major League Baseball team. From 1994 to 1995, he was president of the Northern California Sports Development Group and The Modesto A’s, a minor league baseball team. Mr. McClatchy held various positions with McClatchy from 1990 to 1994, including serving as sales director for The Newspaper Network, Inc., advertising director at the Amador Ledger Dispatch and sales representative for The Sacramento Bee. As a former senior executive officer of a professional and minor league sports franchise, Mr. McClatchy has demonstrated leadership capability and extensive knowledge of the complex financial, operational and personnel issues facing large organizations. In addition, his years of experience working at McClatchy have given him extensive knowledge of its business. William McClatchy, 58, has been a director of McClatchy since September 2004. Mr. McClatchy is an entrepreneur, journalist and currently a real estate investor. He formerly managed Index Investing’s ETFzone.com, a website supplying content concerning exchange-traded index funds. In 1999, Mr. McClatchy co-founded indexfunds.com, a website for index investing content. From 1987 through 1991, Mr. McClatchy served in a variety of editorial positions for computer magazines, including staff writer at PC Week and MAC Week, and microcomputing editor at Information Week. From 1993 to 1996, Mr. McClatchy worked as a reporter for The Fresno Bee. Mr. McClatchy’s founding of a financial and investing website, in conjunction with his continued involvement in the digital world as editor of ETFzone.com, positions him to offer unique knowledge and perspective of McClatchy’s digital business and assets. Theodore R. Mitchell, 64, assumed the Presidency of the American Council on Education on September 1, 2017. Prior to that he was the Under Secretary of the United States Department of Education from May 2014 until January 2017, responsible for all post-secondary and adult education policy programs as well as the $1.3 trillion Federal Student Aid Portfolio. Prior to his federal service, Dr. Mitchell served for ten years as CEO of the NewSchools Venture Fund, a national investor in education technology from September 2005 to May 2014. He served, as well, as President of the California State Board of Education, President of Occidental College, and in a variety of leadership roles at UCLA, including Vice Chancellor. Dr. Mitchell was deputy to the President and to the Provost at Stanford University and began his career as a professor at Dartmouth College where he also served as Chair of the Department of Education. Dr. Mitchell served as a McClatchy Director from September 2001 until May 2014. Dr. Mitchell was re-elected to the Board of McClatchy in May 2017. Dr. Mitchell has also been serving on the board of overseers of TIAA, a major financial services company, since December 2018. Dr. Mitchell’s experience as a leader in education, business and public policy provides the Board with
valuable insights into the needs of McClatchy’s communities and its business development strategy. Clyde W. Ostler, 73, has been a director of McClatchy since May 2013. In March 2011, Mr. Ostler retired from Wells Fargo and Company as a Group Executive Vice President, Vice Chairman of Wells Fargo Bank California and President of Wells Fargo Family Wealth. During his 40-year tenure with Wells Fargo, Mr. Ostler served in a number of capacities including Vice Chairman in the Office of the President, Chief Financial Officer, Chief Auditor, Head of Retail Branch Banking, Head of Information Technology, Head of Institutional and Personal Investments and Head of Internet Service. Mr. Ostler was a member of Wells Fargo’s management committee for over 25 years. He has served on a number of for-profit and not-for-profit boards. He is currently a member of the board of directors and chair of the Audit Committee of EXLService Holdings, Inc., a position he has held since December 2007. From May 2002 to November 2006, Mr. Ostler served on the board of directors of Mercury Interactive Corporation and from November 1999 to November 2004, was a member of the board of directors of BARRA, Inc. Mr. Ostler is currently on the Scripps Institution of Oceanography Directors’ Advisory Council. Mr. Ostler has extensive experience serving on boards of directors of public companies and his years of senior executive experience at a large financial institution give him significant executive leadership, management and financial oversight experience. His experience and background qualify him to serve as one of the Board’s “audit committee financial experts” as defined by Item 407(d)(5)(ii) of Regulation S-K. Maria Thomas, 56, has been a director of McClatchy since August 2016. Since 2017 Ms. Thomas has been an angel investor and founder of Axios Ventures, LLC. Prior to that, in 2016, Ms. Thomas served as the interim CEO and strategic advisor to Glamsquad, a NYC-based startup offering beauty services on demand. From February 2013 to August 2015, Ms. Thomas served as Chief Marketing and Consumer Officer for SmartThings, a pioneer in the consumer Internet of Things arena. She helped SmartThings navigate its two year journey from launch on Kickstarter to a $200 million sale to Samsung. From 2008 to 2010, Ms. Thomas was the first non-founder CEO at Etsy, where under her leadership, Etsy became a trusted global brand with seven million customers and a trusted e-commerce platform serving hundreds of thousands of sellers with gross merchandise sales of more than $300 million. From 2001 to 2008, she was SVP and GM of NPR Digital. She was a driving force behind NPR’s successful transformation from a radio-only company to a best-in-class, multimedia enterprise. Ms. Thomas currently serves on the board of directors of the privately held digital textile printing and e-commerce company, Spoonflower and previously served on the board of directors and compensation committee of Control4Corp, a company that provides personalized automation and control solutions, since February 2018 to its acquisition by Snap AV in August 2019. Ms. Thomas started her career on Wall Street as a financial analyst and spent seven years with World Bank Group as an Investment Officer with the International Finance Corporation, the World Bank’s private sector arm. Ms. Thomas’ deep digital management and product experience, her work with investors and venture capitalists, and background in media make her uniquely suited to helping McClatchy develop new business models for public service journalism. Ms. Thomas’ expertise also qualifies her to serve as an “audit committee financial expert” as defined by Item 407(d)(5)(ii) of Regulation S-K. Craig I. Forman, 58, has been President and Chief Executive Officer of McClatchy since January 2017 and a director of McClatchy since July 2013. Prior to his appointment as President and Chief Executive Officer, Mr. Forman was a private investor and entrepreneur. From 2006 until 2009, Mr. Forman served as president of consumer access and audience business of the Atlanta-based internet services provider Earthlink. Earlier, Mr. Forman served as the Vice President and general manager for Yahoo’s media and information divisions, overseeing Yahoo! News, Yahoo! Sports and Yahoo! Finance. Mr. Forman led internet and new media divisions at Time Warner, a cable television company, was the vice president for product development and editor at the search engine Infoseek, and was the director and editor of international business information services for Dow Jones, a publishing and financial information firm. Since 2009, Mr. Forman has served as a director on a variety of public and private company boards. Until March 2015, Mr. Forman was the executive chairman of the board of Appia, Inc., a Durham, N.C., based mobile-applications marketer and distributor. In connection with the completion of Digital Turbine, Inc.’s merger with Appia, Inc. in March 2015, Mr. Forman was appointed to Digital Turbine, Inc.’s board of directors; he resigned from the Digital Turbine board upon his appointment as McClatchy’s President and Chief Executive Officer. Mr. Forman has served on the board of Yellow Media, Inc., a Canadian publisher of print and digital business directories, since 2012. Previously, Mr. Forman served as executive chairman of WHERE, Inc., a leading mobile-advertising technology network, until it was acquired by eBay Inc. in 2011. Mr. Forman began his career as a foreign correspondent and editor for The Wall Street Journal. He worked as a deputy bureau chief in The Wall Street Journal’s London bureau and later served as bureau chief in the newspaper’s Tokyo bureau. Mr. Forman’s digital, business and media experience, which focused on helping companies successfully navigate and thrive in the digital landscape, and extensive knowledge of the Company, make him a valuable asset to the Company. This experience and his knowledge of the Company’s day-to-day operations as President and Chief Executive Officer put him in a position to work proactively with the Board to develop and implement the Company’s business strategy in the coming years.
EXECUTIVE OFFICERS Peter R. Farr, 56, was named as McClatchy's Vice President of Finance and Chief Financial Officer on March 30, 2020, prior to our Pension Plan. These required contributions were estimatedwhich he was the Corporate Controller and Chief Accounting Officer, a position he held since joining McClatchy in April 2018. Prior to be approximately $124.2 million, which would be paid in installmentsthat Mr. Farr held various Finance roles at The Boeing Company beginning in January2008 and at Allianz SE from 2006. Previously, he worked as a certified public accountant for Deloitte & Touche LLP and KPMG LLP. Mr. Farr also served as a Captain in the United States Marine Corps. Elaine Lintecum, 64, was named Special Advisor to the CEO on March 30, 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, pursuantprior to which she was the PBGC agreed notVice President, Finance and Chief Financial Officer and Treasurer of McClatchy, a position she held since May 2012. Ms. Lintecum joined McClatchy in 1988 as the corporate analyst responsible for external financial reporting and for SEC compliance. She was promoted to exercise the remedies availableinvestor relations manager in 1993, was named assistant treasurer and director of treasury services in 2000 and became Treasurer in 2002. Prior to itjoining McClatchy, Ms. Lintecum worked for Deloitte, Haskins & Sells, a predecessor of Deloitte & Touche LLP, as a resultcertified public accountant. Ms. Lintecum serves on the board of our not makingdirectors of the scheduled qualified pension contributionRiver City Bank. Scott Manuel, 44, has been Vice President, Customer and Product since October 9, 2017. Prior to joining McClatchy, Mr. Manuel held various positions beginning in 2010 at Thomson Reuters, which included Vice President, Technology Strategy & Architecture – Healthcare, Intellectual Property & Science, Vice President, Global Data Center Operations and his last position was Vice President, Head of $4.0 million dueStrategic Product Management & Delivery - Applied Innovation. Billie S. McConkey, 49, is McClatchy’s Vice President of People, Legal and Corporate Secretary, roles she has held since 2015. Ms. McConkey worked with McClatchy as special employment counsel from 2006 until March 2015. Previously, from 2000 to 2006, Ms. McConkey was special labor counsel for Knight Ridder, Inc. and from 1998 to 2000, Ms. McConkey was vice president, labor and employment counsel for Central Newspapers, Inc. Ms. McConkey was also an associate at the law firms, Brown & Bain P.A. (a predecessor of Perkins Coie LLP) and Bryan Cave LLP from 1995 to 1998. Kristin Roberts, 44, has been Vice President of News since May 27, 2019. Before being named to that executive role, she was Regional Editor for McClatchy's East Region and Executive Editor for the Washington Bureau after joining the company in January 2020. The payment obligations2017. Before McClatchy, Ms. Roberts served as National Editor at POLITICO in 2015 and 2016 and Managing Editor at National Journal from 2011 to 2015. She held various positions at Thomson Reuters over 13 years, including reporting jobs in New York, Miami and Washington, and editing roles in the PBGC were further stayed when we filed for reorganization under Chapter 11 in February 2020.Washington Bureau, last serving as deputy bureau chief
Delisting of our Common Stock from the NYSE AmericanDelinquent Section 16(a) Reports
Our Class A Common Stock was previously listed on the NYSE American under the symbol MNI. On February 13, 2020, theNYSE 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)16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), will become effective 90 days afterrequires our directors, executive officers, and beneficial owners of more than 10% of our Class A Common Stock to file with the filing dateSecurities and Exchange Commission (“SEC”) initial reports of ownership and reports of changes in ownership of equity securities of McClatchy. Such officers, directors, and greater than 10% beneficial owners are required by SEC regulations to furnish McClatchy with all Section 16(a) forms that they file.
To our knowledge, based on our review of the Form 25. Business Operations
The cornerstone of our business is providing content, either editorial or through advertisingforms that will inform, educate, entertain and enhancewe received during 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 thefiscal year ended December 29, 2019, no single media company representeddirector, executive officer, or beneficial owner of more than 11.5%10% of our total revenues.Class A Common Stock failed to timely file the forms required by Section 16(a) of the Exchange Act, except for Peter R. Farr who reported four late transactions on one late report.
Our fiscal year ends on the last Sunday in DecemberCode of each calendar year. The fiscal years ended December 29, 2019,Business Conduct and December 30, 2018, consistedEthics and Anti-Hedging Policy
We have adopted a written code of 52-week periods. Strategy
Our mission isbusiness conduct and ethics that applies to deliver strong, independent journalismall of our officers, directors and information. To accomplish this goal, we are committed to a three‑pronged strategy to grow our businesses and total revenuesemployees, as well as a leading local media company:
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| | 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
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| | 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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code of ethics for senior officers that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Our code of business conduct and ethics prohibits officers, directors and employees from engaging in any hedging transactions involving our stock or any options to purchase our stock or stock appreciation rights (“SARs”) related to our stock (i) granted to the employee or director by the registrant as part of the compensation of the employee or director, or (ii) held, directly or indirectly, by the employee or director. Our codes of business conduct and ethics can be found on our website at www.mcclatchy.com. Any waivers
of the code of ethics for senior officers or directors will be posted on our website. | ·
| | 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.
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To assist with these strategies, we continually improve existing digital productsAudit Committee and develop new ones, reengineer our operations to reduce legacy costsAudit Committee Financial Expert
Mr. Barnes serves as the chairman and strengthen areas driving performance in news, audience, advertisingMs. Ballantine, Mr. Ostler and digital growth. As a resultMs. Thomas serve as members 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 focusedAudit Committee. Mr. Barnes serves 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 revampingaudit committees of The McClatchy Company 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
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 inMaintaining 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
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”Frontier Communications, as well as first placethree investment companies that are part of the Principal Funds, Inc. “fund complex.” The Committee on the Board reviews and makes a recommendation to the Board as to whether service on these audit committees impairs Mr. Barnes’ ability to fulfill his duties as a member of the Audit Committee. The Board has designated Mr. Barnes, Mr. Ostler and Ms. Thomas who qualify as “independent” within the meaning of the applicable requirements set forth 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,Exchange Act and the AP Sports Editors Award for Best Podcast.applicable SEC and listing rules, as currently in effect, as “audit committee financial experts” as defined by Item 407(d)(5)(ii) of Regulation S-K.
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,”The Audit Committee has been well received by readers of our digital products.
Broadeningestablished in accordance with Section 10A(m)(1) 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
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
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.
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 | |
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| | 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.
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| (2)
| | Total monthly unique visitors for December 2019 according to Adobe Analytics.
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| (3)
| | The Beaufort Gazette unique visitor activity is included in The Island Packet activity.
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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.
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)Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are made available, freeamended. Among other things, the Audit Committee appoints, evaluates and determines the compensation of charge,our independent auditors; reviews and approves the scope of the annual audit, and the financial statements; reviews our disclosure controls and procedures, internal controls, information security policies, internal audit function, and corporate policies with respect to financial information and (if provided by the Company) earnings guidance, oversees investigations into complaints concerning financial matters; reviews other risks that may have a significant impact on our website at www.mcclatchy.com,financial statements; and annually reviews the Audit Committee charter and the Committee’s performance. The Audit Committee works closely with management and oversees our independent auditors. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from McClatchy for outside legal, accounting or other advisers as soon as reasonably practicable after we filethe Audit Committee deems necessary to carry out its duties. The Audit Committee regularly meets separately with members of management and our independent auditors. The Audit Committee held fifteen (15) meetings during fiscal 2019.
Procedures for Shareholder Recommendations of Nominees to the Boards of Directors There were no material changes to the procedures described in our Proxy Statement relating to the 2019 annual meetings of shareholders by which security holders may recommend nominees to our Board. ITEM 11. EXECUTIVE COMPENSATION Director Compensation The following table sets forth the annual compensation paid or furnish them withaccrued by McClatchy to or on behalf of our non-employee directors for the U.S. Securities and Exchange Commission (the “SEC”).fiscal year ended December 29, 2019: | | | | | | | | | | | | | | Fees | | | | | | | | | | Earned | | Stock | | Option | | | | | | or Paid in | | Awards | | Awards | | | | Name | | Cash ($)(1) | | ($)(2) | | ($)(3) | | Total ($) | (a) | | (b) | | (c) | | (d) | | (h) | Elizabeth Ballantine | | $ | 87,500 | | $ | — | | — | | $ | 87,500 | Leroy Barnes, Jr. | | $ | 102,500 | | $ | — | | — | | $ | 102,500 | Molly Maloney Evangelisti | | $ | 81,500 | | $ | — | | — | | $ | 81,500 | Anjali Joshi | | $ | 75,500 | | $ | — | | — | | $ | 75,500 | Brown McClatchy Maloney | | $ | 76,500 | | $ | — | | — | | $ | 76,500 | Kevin McClatchy | | $ | 256,000 | | $ | — | | — | | $ | 256,000 | William McClatchy | | $ | 69,500 | | $ | — | | — | | $ | 69,500 | Theodore Mitchell | | $ | 89,500 | | $ | — | | — | | $ | 89,500 | Clyde Ostler | | $ | 105,000 | | $ | — | | — | | $ | 105,000 | Vijay Ravindran (4) | | $ | 40,463 | | $ | — | | — | | $ | 40,463 | Maria Thomas (5) | | $ | 81,500 | | $ | — | | — | | $ | 81,500 |
| (1) | Includes annual retainer, committee chair fees and committee meeting fees. |
| (2) | No director received a stock award in fiscal year 2019. |
| (3) | No director received an option award in fiscal year 2019. |
| (4) | Mr. Ravindran did not stand for re-election at the 2019 annual meeting of shareholders, after which time the size of the Board decreased to an eleven-person Board. |
| (5) | In 2019, the cash retainer was issued to Axios Ventures LLC, an LLC through which Ms. Thomas does her personal consulting and other work. |
Director Compensation Arrangements ITEM 1A. RISK FACTORS
We areuse a smaller reporting company as definedcombination of cash and stock-based compensation to attract and retain qualified individuals to serve on our Board. Generally, the Compensation Committee reviews the compensation of our non-employee directors on a regular basis with the last review occurring in December 2019. In determining director compensation, we have considered publicly-available data from companies within our industry, data collected by Rule 12b-2our People Department regarding trends in director compensation and competitive data prepared by Pay Governance, our independent outside compensation consultant. We also consider the significant amount of time that our directors devote to the business of the Exchange ActCompany. For 2019, the Compensation Committee reviewed the current Board and are not required to provideCommittee retainer arrangements and determined that they would remain 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. Atsame as for the prior year. These board and committee retainers for the fiscal year ended December 29, 2019, are summarized below:
| | | | Type of Compensation | | Amount | Annual Cash Retainer | | $ | 65,000 | Annual Equity Target Retainer | | $ | 65,000 | Chairman of the Board Annual Retainer | | $ | 175,000 | Audit Committee Chair Annual Retainer | | $ | 15,000 | Compensation Committee Chair Annual Retainer | | $ | 12,500 | Committee on the Board Chair Annual Retainer | | $ | 10,000 | Nominating Committee Chair Annual Retainer | | $ | 10,000 | Pension and Savings Plans Committee Chair Annual Retainer | | $ | 10,000 |
In addition to the payments set forth above, we had newspaper production facilitiesreimburse non-employee directors for reasonable expenses incurred by them in 7 marketsconnection with the business and affairs of McClatchy. Pursuant to the McClatchy Director Deferral Program under the 2012 Incentive Plan, directors may elect to defer receipt of their stock awards until their termination of service. The Board adopted director stock ownership guidelines in 6 states. Our facilities vary in size and in total occupy about 3.8 million square feet. Approximately 3.0 million2012. The Board believes that it is important to align the interests of the total square footagenon-employee members of the Board with the long-term interests of the Company’s shareholders. Accordingly, the guidelines require that each non-management director shall own a minimum of 1,500 shares of our Class A Common Stock. For those directors on the Board as of November 28, 2012, the target date for such ownership was December 31, 2012. For subsequently elected directors, the target date for achieving the desired ownership level is leasedfive (5) years from others, while we own the propertiesdate that Board service commences. Shares issuable upon vesting of restricted stock or restricted stock units shall count towards achievement of the minimum guideline amount. As of the date of this filing, all directors were in compliance with the Company’s stock ownership guidelines. Executive Compensation The following tables set forth the compensation paid to or accrued by McClatchy 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 descriptionnamed executive officers (“NEOs”) for each 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.
last two completed fiscal years:
Summary Compensation Table | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-Equity | | | | | | | | | | | | | | | | | | | | Incentive Plan | | All Other | | | | | | | | Salary | | Bonus | | Stock | | Compensation | | Compensation | | Total | Name and Principal Position | | Year | | ($) | | ($) | | Awards | | ($) | | ($) | | ($) | (a) | | (b) | | (c) | | (d)(2) | | (e)(3) | | (g)(4) | | (i)(5) | | (j) | Craig I. Forman (1) | | 2019 | | $ | 1,000,000 | | $ | 2,000,000 | | $ | 474,987 | | $ | 499,000 | | $ | 691,273 | | $ | 4,665,260 | President and | | 2018 | | $ | 980,769 | | $ | 75,000 | | $ | 606,661 | | $ | 1,000,000 | | $ | 215,020 | | $ | 2,877,450 | Chief Executive Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mark Zieman (7) | | 2019 | | $ | 739,508 | | $ | 1,059,000 | | $ | 171,017 | | $ | 124,221 | | $ | 168,548 | | $ | 2,262,294 | Vice President, | | 2018 | | $ | 678,846 | | $ | 675,000 | | $ | 214,141 | | $ | 137,039 | | $ | 99,600 | | $ | 1,804,626 | Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Scott Manuel (6) | | 2019 | | $ | 602,884 | | $ | 892,400 | | $ | 131,807 | | $ | 66,508 | | $ | 84,241 | | $ | 1,777,840 | Vice President, | | | | | | | | | | | | | | | | | | | | | Customer and Product | | | | | | | | | | | | | | | | | | | | |
| (1) | As discussed in more detail below, Mr. Forman’s total actual realized compensation was approximately $4.2 million in 2019, which included prior year income paid in 2019, and was approximately $2.3 million in 2018. |
| (2) | Amounts shown in column (d) for 2019 reflect cash retention payments paid pursuant to the 2018 Executive Retention Plan based on each NEO’s continued service (see Retention Cash Awards below for further discussion regarding timing). |
| (3) | Amounts shown in column (e) reflect the dollar amount recognized for financial statement reporting purposes for RSUs awarded in 2019 and 2018. Values of stock awards reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 using the assumptions included in Note 12 to our audited financial statements contained in Item 8 of the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2020. Based on the subsequent filing under Chapter 11 of the U.S. Bankruptcy Code, the realized value of this reported stock is zero. |
| (4) | Amounts shown in column (g) reflect the amounts earned under the CEO Short-term Incentive Non-equity Income Plan for Mr. Forman and the MBO Plan for Mr. Zieman and Mr. Manuel, described in the section entitled “Semi-Annual Cash Bonus” below. |
| (5) | Amounts in column (i) for 2019 include the benefits, received by each NEO, enumerated below. |
| ● | Premiums to continue life insurance coverage under the McClatchy Group Executive Life Insurance Plan at a level not otherwise available under McClatchy’s standard life insurance coverage; |
| ● | Premiums to provide long-term disability coverage at a level greater than that provided under McClatchy’s standard long-term disability program; |
| ● | Company-paid premiums toward the cost of health coverage under McClatchy’s group health insurance plan; |
| ● | Company contributions to each NEO’s account under McClatchy’s 401(k) plan, Bonus Recognition Plan, and Benefit Restoration Plan; |
| ● | Company contributions to each NEO’s account under McClatchy’s Executive Supplemental Retirement Plan, which for 2019 was $252,942 for Mr. Forman, $74,048 for Mr. Zieman, and $60,288 for Mr. Manuel. All of these amounts were forfeited as part of our filing under Chapter 11 of the U.S. Bankruptcy Code; and |
| ● | Pursuant to the Forman Employment Agreement (defined below), Mr. Forman was entitled to receive a monthly housing allowance equal to $5,000 for January 2019 and a supplemental business reimbursement payment equal to $35,000 per month for February through December 2019. |
| (6) | Mr. Manuel commenced employment with the Company in 2017 and was not an NEO for fiscal year 2018. |
| (7) | Mr. Zieman retired on December 31, 2019. |
Outstanding Equity Awards at Fiscal 2019 Year End The following table sets forth information concerning the outstanding equity awards held by the NEOs as of December 29, 2019. All of these equity grants ultimately provided zero compensation to the NEOs as a result of the filing under Chapter 11 of the U.S. Bankruptcy Code: | | | | | | | | | | | | | | | | | | | | | | Stock Awards | | Market | | | Option Awards | | | | | | | Number of | | Value of | | | Number of | | | | | | | Shares or | | Shares or | | | Securities | | | | | | | Units of | | Units of | | | Underlying | | Option | | | | Stock | | Stock That | | | Unexercised | | Exercise | | Option | | That Have | | Have Not | | | Options(#) | | Price | | Expiration | | Not | | Vested($) |
Name | | Exercisable | | ($) | | Date | | Vested(#) | | (7) | (a) | | (b) | | (e) | | (f) | | (g) | | (h) | Craig I. Forman | | — | | $ | — | | — | | 83,331 | (1) | $ | 40,249 | | | — | | $ | — | | — | | 44,444 | (2) | $ | 21,466 | | | — | | $ | — | | — | | 7,690 | (3) | $ | 3,714 | | | | | | | | | | | | | | Mark Zieman | | — | | $ | — | | — | | 30,003 | (1) | $ | 14,491 | | | — | | $ | — | | — | | 15,688 | (2) | $ | 7,577 | | | — | | $ | — | | — | | 3,590 | (3) | $ | 1,734 | | | 7,125 | (4) | $ | 24.60 | | 2/21/2023 | | — | | $ | — | | | 4,000 | (5) | $ | 27.60 | | 2/22/2022 | | — | | $ | — | | | 550 | (6) | $ | 40.80 | | 2/23/2021 | | — | | $ | — | | | | | | | | | | | | | | Scott Manuel | | — | | $ | — | | — | | 23,124 | (1) | $ | 11,169 | | | — | | $ | — | | — | | 6,776 | (2) | $ | 3,273 | | | — | | $ | — | | — | | 668 | (3) | $ | 323 |
| (1) | One-third of the RSUs vests on each of March 1, 2020, March 1, 2021 and March 1, 2022 based on continued service. |
| (2) | One-third of the RSUs vests on each of March 1, 2019, March 1, 2020 and March 1, 2021 based on continued service. |
| (3) | One-third of the RSUs vests on each of March 1, 2018, March 1, 2019 and March 1, 2020 based on continued service. |
| (4) | One-quarter of the SARs vested on each of March 1, 2014, March 1, 2015, March 1, 2016 and March 1, 2017. |
| (5) | One-quarter of the SARs vested on each of March 1, 2013, March 1, 2014, March 1, 2015 and March 1, 2016. |
| (6) | One-quarter of the SARs vested on each of March 1, 2012, March 1, 2013, March 1, 2014 and March 1, 2015. |
| (7) | Market value calculated by multiplying the closing market price of our Class A Common Stock on December 27, 2019 ($0.483 per share) by the number of units of stock. December 27, 2019 was the last trading day of our fiscal year, which ended on December 29, 2019. |
Executive Compensation Arrangements Semi-Annual Non-Equity Incentive. The Compensation Committee believes non-equity incentives are part of a compensation package to incentivize NEOs to meet our longer-term goals by providing the officers with an ability to reach shorter-term goals over which they have more direct control. Mr. Forman was eligible to receive annual cash incentive compensation under the CEO short-term incentive non-equity income plan. In fiscal year 2019, our NEOs, other than Mr. Forman, were eligible to receive semi-annual cash incentive compensation based on performance over two six-month performance periods for each half of 2019 under our MBO Plan. Awards under the CEO short-term incentive non-equity income plan and the MBO Plan are based on achievement of financial and non-financial performance goals pre-established by the Compensation Committee. For 2019, the Compensation Committee designed a CEO short-term incentive non-equity income plan that allotted up to 150 points towards the achievement of financial and non-financial goals grouped in five categories. Achievement of 100 points would result in a bonus payout of 100% of base salary with the additional 50 points available, at the discretion of the Compensation Committee, for a total potential payout of 150% of base salary. For 2019, in addition to the financial and non-financial performance goals for non-CEO NEOs, Mr. Zieman and Mr. Manuel could also earn additional points for non-operating cash flow (the “NOCF”) objectives. The Compensation Committee approves the format of the goals, which include predetermined personal and/or leadership goals. For fiscal year 2019, Mr. Zieman and Mr. Manuel were eligible to receive the full amount of the bonus related to the achievement of financial goals if the actual operating cash flow (“OCF”) met the OCF target, 70% if the actual OCF was 97% or higher than the OCF target, and 50% of the actual OCF was 95% or higher than the OCF target. The MBO Plan was suspended after the third quarter of 2019 and replaced with a Key Employee Incentive Plan. That Key Employee Incentive Plan was nullified by the Company’s filing under Chapter 11 of the U.S. Bankruptcy Code and, thus, no amounts were paid thereunder. CEO Non-Equity Incentive Plan. For fiscal year 2019, the Compensation Committee approved the performance-based formula for the 2019 CEO Non-equity Incentive Plan in which 100 points would result in receiving a bonus at target, with an additional 50 points available,
at the discretion of the Compensation Committee, for a total payout of 150% of the base salary. The 150 points consisted of five categories of objectives: (i) enhancing overall corporate performance through sophisticated digital measurements and accelerating “One Team” corporate structure, consisting of 30 points; (ii) enhancing employee management via creation of systematic performance review architecture and succession planning, consisting of 30 points; (iii) achieving financial goals, such as achieving the budgeted operating cash flow and accelerating the rationalization of the Company’s capital structure, consisting of 30 points; (iv) maintaining and enhancing journalism quality and accelerating the digital progress of news and information operations, consisting of 30 points; and (v) achieving certain technology development and collaboration goals, consisting of 30 points. PART IIMr. Forman’s 2019 annual bonus was determined under the 2019 CEO Short-term Incentive Non-equity Income Plan. The 2019 CEO Short-term Incentive Non-equity Income Plan was suspended after the third quarter of 2019 and replaced with a Key Employee Incentive Plan. That Key Employee Incentive Plan was nullified by the Company’s filing under Chapter 11 of the U.S. Bankruptcy Code and, thus, no amounts were paid thereunder.
MBO Plan. ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.The Compensation Committee set incentive bonus targets under the MBO Plan for non-CEO NEOs for two, six-month performance periods in fiscal year 2019. The semi-annual cash incentive was targeted to a pre-determined percentage of the six-month base salary of the participating NEO, which was 75% for Mr. Zieman and 60% for Mr. Manuel. The Compensation Committee determined these targets based on the recommendation of the CEO and the Compensation Committee’s review of the Data Bank concerning target bonus levels at other media companies within the Data Bank.
On September 9,Each participating NEO’s semi-annual target bonus was based on a combination of (i) six-month OCF objectives, and (ii) strategic initiatives objectives, if, any OCF-related points were earned, and (iii) six-month NOCF objectives. For this purpose, each of first half and second half operating cash flows was determined after accruing for the semi-annual bonus. The CEO and Compensation Committee assessed the OCF, strategic and NOCF goals established for the fiscal year against corporate results, business unit results and individual performance and determined the aggregate MBO payout for each of Mr. Zieman and Mr. Manuel. The aggregate MBO payout for Mr. Zieman and Mr. Manuel in the fiscal year 2019 is reported in the Summary Compensation Table.
Frozen Pension Arrangements. We maintain a frozen qualified defined benefit plan, The McClatchy Company Retirement Plan (“Pension Plan”) and a frozen supplemental pension plan (“SERP”). We also assumed the Knight Ridder, Inc. Benefit Restoration Plan (“KR BRP”) after we receivedacquired Knight-Ridder, Inc. (“KR”) for legacy KR employees, including Mr. Zieman. Prior to freezing the plan in March 2009, Mr. Zieman participated in the Pension Plan. The Pension Plan is a noticequalified defined benefit pension plan that was open to all eligible employees of McClatchy and other participating subsidiaries who completed an hours and service requirement to become participants in the Pension Plan. Benefits accrued as a lifetime annuity payable monthly commencing at age 65, the normal retirement age under the Pension Plan. Benefits accrued at a rate of 1.3% of “average monthly earnings” times years of benefits service up to a maximum of 35 such years. For Mr. Zieman, the number of years of credited service equals his actual years of credited service with McClatchy or its subsidiaries as of March 2009. Accrued benefits become vested after five years of vesting service, or, if earlier and the participant remained an employee at the time, when the participant attains age 65, the normal retirement age for Mr. Zieman under the Pension Plan. Mr. Zieman was fully vested in his benefits under the Pension Plan as of March 2009. “Average monthly earnings” means the average monthly base pay averaged over the five consecutive calendar years that produces the highest average. Compensation earned after March 31, 2009, does not count in the determination of average monthly earnings. Upon termination of employment, Mr. Zieman generally may not commence benefits prior to age 55. The Pension Plan provided a subsidized early retirement benefit to any participating NEO with 20 or more years of eligible service who works until age 55, and pursuant to which the NEO would be eligible to receive an unreduced benefit following termination of employment beginning at age 62. Finally, the Pension Plan provides for benefits to be paid in the following annuity forms: a single life annuity, or either a 50% or 100% joint survivor annuity. Lump sum payment is not available, except for certain de minimis accruals.
The Code limits the maximum benefit that may be paid under the Pension Plan by subjecting annual earnings that can be taken into account in the pension formula to a cap ($280,000 for 2019) and by limiting the amount of benefit that can be paid from the NYSE American notifying usplan (for 2019, an annuity at normal retirement age cannot exceed $225,000). In order to provide post-retirement income commensurate with years of service to McClatchy and taking into consideration the NEO’s actual income levels, the KR BRP provided enhanced pension benefits to any participating NEOs, in addition to the amounts that were permitted to accrue under the Pension Plan. Mr. Zieman was eligible for the KR BRP benefit, and neither Mr. Forman nor Mr. Manuel were eligible for the KR BRP benefit. Accordingly, the KR BRP benefit was determined without regard to the compensation limit applicable to the Pension Plan and without regard to the maximum annuity payout limit applicable to the Pension Plan. For Mr. Zieman, the KR BRP provided a benefit accrued at normal retirement age (age 65) based on final average earnings and years of service. On January 2, 2020, we announced that we were not in compliance withwould suspend the stockholders’ equity requirements set forth in Sections 1003(a)(i)release of certain non-qualified supplemental executive retirement benefits, which include the SERP and 1003(a)(ii) of the NYSE American Company Guide.At the time,KR BRP, while 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 acceptedaddressed our compliance plan. long-term liquidity needs. On February 13, 2020, we filed voluntary petitions for reorganization under Chapter 11, of theNYSE American U.S. Bankruptcy Code. 401(k) Plan. We maintain The McClatchy Company 401(k) Plan (the “401(k) Plan”), which permits employees generally to make annual elective deferrals from salary up the maximum statutory amount, $19,000 for those younger than age 50 and $25,000 for those age 50 or older for 2019. The 401(k) Plan permits the Company to make a matching contribution. For 2019, the maximum matching contribution was up to 2% of salary (disregarding compensation in excess of $280,000, as required by the Code). Non-Qualified Retirement Compensation We maintain The McClatchy Company Benefit Restoration Plan (the “Benefit Restoration Plan”) and The McClatchy Company Bonus Recognition Plan (the “Bonus Recognition Plan” and together with the Benefit Restoration Plan, the “Plans”), in which our NEOs participate. In 2019, the Plans provided a 2% matching contribution on salary in excess of the $280,000 compensation limit under the Benefit Restoration Plan and a 2% matching contribution on the participants’ bonus under the Bonus Recognition Plan, but the matching contributions under the Plans were suspended as of January 1, 2020. No matching contribution is made under either Plan for a year in which the tradingmatching contribution under the 401(k) Plan is suspended. Participants are vested in the Benefit Restoration Plan and Bonus Recognition Plan (together, the “Plans”) after three years of employment with the Company or upon an earlier “retirement” (as defined in the Plans) or death. All of the NEOs except Mr. Manuel are vested in the Plans as of the date hereof. Except in the case of termination of employment due to a participant’s death or disability, a participant’s eligible benefits under the Plans will be distributed to vested employees following the close of each year in which benefits are earned without interest. In the case of a termination of employment due to a participant’s death, the full amount of the participant’s account will be paid to the participant’s beneficiary in a single lump sum. In 2019, we also maintained The McClatchy Company Executive Supplemental Retirement Plan (the “Executive Supplemental Plan”), in which our NEOs participate. Under the Executive Supplemental Plan, participants receive annual credits equal to 10% of base salary or 25% for Mr. Forman only. Under the Executive Supplemental Plan, full vesting occurs 10 years after first participating in the plan, with no partial vesting until 5 years have elapsed from first becoming a participant. A participant becomes fully vested immediately upon separation from service on account of disability, death, retirement on or after age 55 with ten years of service, or involuntary termination by the Company or its affiliates without “cause” (as defined in the Executive Supplemental Plan). All benefits under the Executive Supplemental Plan were forfeited as part of the Company’s filing under Chapter 11 of the U.S. Bankruptcy Code. Executive Equity Award Agreements Historically, we have granted both restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) to our eligible employees, including the NEOs, pursuant to The McClatchy Company 2012 Omnibus Incentive Plan (as it has been and may be amended and restated from time to time) (the “2012 Incentive Plan”). Pursuant to the 2012 Incentive Plan, if we experience a “change in control”: (i) immediately before the change in control, all outstanding options and SARs will vest, and all outstanding restricted stock, RSUs, and dividend equivalent rights will
vest, and all shares of Class A Common Stock upon our filingand/or cash subject to such awards will be delivered, and (ii) at the Chapter 11 petitions,Compensation Committee’s discretion, either (a) all options, SARs, restricted stock, RSUs, and our Class A Common Stock has been quoted “over-the-counter” ondividend equivalent rights will be terminated and cashed out or redeemed for securities of equivalent value, and/or all options and SARs will become exercisable for a period before the OTC Pink Market, operated by OTC Markets Group, underchange in control, or (b) the symbol MNIQQ. On February 21, 2020,Company may make a provision in writing for 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 deregistrationassumption and continuation of such awards. Performance-based awards will vest (i) if less than half of the Common Stock under Section 12(b)performance period has lapsed, at target or (ii) if half or more 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 Stockperformance period has lapsed, at actual if determinable or at target if actual is not publicly traded.determinable. UnderPursuant to 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 asform of RSU award agreement for executives, a privately held company.
Securities tradedgrantee’s outstanding, unvested RSUs become fully vested upon a “change 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 ratiocontrol” (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),2012 Incentive Plan). In addition, a grantee’s outstanding, unvested RSUs will become fully vested upon (i) a termination on account of death 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 relevantdisability, (ii) a termination by the BoardCompany without “cause,” (iii) a resignation for “good reason,” or (iv) a termination for any reason if the grantee has accumulated 10 or more continuous years of Directors.service and is age 55 or older (as such terms are defined in the 2012 Incentive Plan or the applicable award agreement).
Equity Securities:Pursuant to our form of SAR award agreement for executives, a grantee’s outstanding, unvested SARs become fully vested upon a “change in control” (as defined in the 2012 Incentive Plan). In addition, a grantee’s outstanding, unvested SARs (i) will become fully vested if the grantee ceases employment after having accumulated 10 or more continuous years of service (A) on account of death or disability or (B) for any reason when the grantee is age 62 or older, or (ii) will vest with respect to two additional time-based vesting installments if the grantee ceases employment after having accumulated 10 or more continuous years of service for any reason when the grantee is between age 55 and age 62.
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: 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 in the U.S. Bankruptcy Court for the Southern District of New York. The Chapter 11 Cases are being jointly administered under the caption In re: The McClatchy Company, et al., Case No. 20-10418. 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. Cash L-TIP Historically, we have granted cash-settled performance-based awards that could be earned based upon our free cash flow (“FCF”) over a three-year performance period (each such award, a “Cash L-TIP”). If a holder of a Cash L-TIP award terminates employment with the Company on account of (i) “retirement,” (ii) death, or (iii) disability, the holder becomes eligible for a pro-rated payment with respect to the Cash L-TIP award for each year in the performance cycle that the holder remained employed and that the Company met certain FCF budget thresholds. For this purpose, “retirement” means termination of employment if the holder has accumulated 10 or more continuous years of service and is age 55 or older. The L-TIP was voluntarily forfeited by the executives in 2019. Retention Cash Awards ITEM 6. SELECTED FINANCIAL DATA We maintained a 2018 Executive Retention Plan (the “2018 Retention Plan”). Pursuant to the 2018 Retention Plan, each NEO was eligible to receive one-third (1/3) of his applicable cash award ($2,000,000, $1,059,000, and $763,125 in the aggregate, for each Mr. Forman, Mr. Zieman, and Mr. Manuel, respectively) on each of (i) June 30, 2019, (ii) December 31, 2019, and (iii) June 30, 2020 for continued service through each such date (together, the “2018 Retention Cash Award”).
We areTo be eligible to receive payment of the 2018 Retention Cash Award, each NEO must have remained employed by the Company or a smaller reporting companysubsidiary of the Company through the applicable vesting date, but the unpaid portion(s) of the applicable Retention Cash Award will be paid earlier if the NEO’s employment is terminated due to (i) death, (ii) “disability” (as defined in the 2018 Retention Plan), or (iii)(A) an involuntary termination without “cause” or resignation for “good reason” (each as defined by Rule 12b-2in the 2018 Retention Plan), provided the NEO (B) executes, delivers and does not revoke a waiver and release agreement within 45 days of the Exchange Act and are not required to provide the information under this Item.
termination date.
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,
theNYSE 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 Herald, The Kansas City Star, The Sacramento Bee, The 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.
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.
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.
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.
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 secondfourth quarter of 2019, which temporarily impacted sales in the unpaid 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%payments of the total revenues during2018 Retention Cash Award were accelerated, and Mr. Forman and Mr. Manuel each received such payments in lump sum as of October 18, 2019, compared to 42.1%and Mr. Zieman received such payments in the same periodlump sum as of 2018.November 1, 2019.
Mr. Forman CEO Employment Agreement. 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.
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 |
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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 majorityAll of the intangible assets subject to amortization became fully amortized in the second quarterterms 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 decreasesMr. Forman’s CEO Employment Agreement 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.
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 approvalnullified 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
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) | |
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
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.
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
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 reorganizationfiling under Chapter 11 of the U.S. Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for
What is described below is what 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 toForman Employment Agreement would have provided if 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 ishad 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.
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.
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.
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.
THE MCCLATCHY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | | | | | | | | Years Ended | | | December 29, | | December 30, | | | 2019 | | 2018 | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net loss | | $ | (411,107) | | $ | (79,757) | | | | | | | | Reconciliation to net cash provided by (used in) operating activities: | | | | | | | Depreciation and amortization | | | 46,021 | | | 76,242 | Gain on disposal of property and equipment (excluding other asset write-downs) | | | (2,554) | | | (4,092) | Contribution to qualified defined benefit pension plan | | | (3,088) | | | — | Retirement benefit expense | | | 23,715 | | | 11,114 | Stock-based compensation expense | | | 1,504 | | | 2,057 | Deferred income taxes | | | (5,748) | | | (7,287) | Equity (income) loss in unconsolidated companies | | | 1,039 | | | (592) | Gains related to investments in unconsolidated companies | | | — | | | (1,721) | Distributions of income from investments in unconsolidated companies | | | 1,295 | | | 2,876 | (Gain) loss on extinguishment of debt, net | | | 2,272 | | | (30,577) | Goodwill and other asset write-downs | | | 335,676 | | | 37,274 | Amortization of bond fees and other debt-related items | | | 9,980 | | | 6,215 | Noncash lease expense | | | 6,449 | | | — | Other | | | 80 | | | 3,766 | Changes in certain assets and liabilities: | | | | | | | Trade receivables | | | 25,613 | | | 16,704 | Inventories | | | 3,818 | | | (1,197) | Other assets | | | (2,598) | | | 2,475 | Accounts payable | | | (7,637) | | | 5,665 | Accrued compensation | | | (1,326) | | | (3,577) | Income taxes | | | (6,419) | | | (3,058) | Accrued interest | | | (730) | | | 18,083 | Postretirement obligations and other liabilities | | | (23,018) | | | (24,694) | Net cash provided by (used in) operating activities | | | (6,763) | | | 25,919 | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Purchases of property, plant and equipment | | | (2,729) | | | (11,120) | Proceeds from sale of property, plant and equipment and other | | | 8,773 | | | 5,679 | Purchase of certificates of deposit | | | — | | | (28,651) | Proceeds from redemption of certificates of deposit | | | 2,000 | | | 30,957 | Contributions to cost and equity investments | | | (825) | | | (2,540) | Proceeds from sale of unconsolidated companies and other-net | | | — | | | 5,301 | Net cash provided by (used in) investing activities | | | 7,219 | | | (374) | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | Repurchase of notes and related expenses | | | (41,873) | | | (464,870) | Proceeds from issuance of debt | | | — | | | 361,449 | Payment of financing costs | | | (28) | | | (17,684) | Proceeds from sale-leaseback financing obligations | | | 29,743 | | | 15,749 | Purchase of treasury shares | | | (361) | | | (436) | Other | | | (1,329) | | | (552) | Net cash used in financing activities | | | (13,848) | | | (106,344) | Decrease in cash, cash equivalents and restricted cash | | | (13,392) | | | (80,799) | Cash, cash equivalents and restricted cash at beginning of period | | | 50,555 | | | 131,354 | CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD | | $ | 37,163 | | $ | 50,555 |
See notes to consolidated financial statements.
THE MCCLATCHY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Amounts in thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | 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 31, 2017 | | $ | 52 | | $ | 24 | | $ | 2,215,109 | | $ | (1,970,097) | | $ | (449,369) | | $ | (51) | | $ | (204,332) | Cumulative effect adjustment of Topic 606 | | | — | | | — | | | — | | | (2,668) | | | — | | | — | | | (2,668) | Net loss | | | — | | | — | | | — | | | (79,757) | | | — | | | — | | | (79,757) | Other comprehensive income | | | — | | | — | | | — | | | — | | | (56,530) | | | — | | | (56,530) | Conversion of 15,000 Class B shares to Class A shares | | | — | | | — | | | — | | | — | | | — | | | — | | | — | Issuance of 162,824 Class A shares under stock plans | | | 2 | | | — | | | (1) | | | — | | | — | | | — | | | 1 | Stock compensation expense | | | — | | | — | | | 2,057 | | | — | | | — | | | — | | | 2,057 | Purchase of 46,941 shares of treasury stock | | | — | | | — | | | — | | | — | | | — | | | (436) | | | (436) | Retirement of 49,846 shares of treasury stock | | | (1) | | | — | | | (484) | | | — | | | — | | | 485 | | | — | Reclassification of accumulated other comprehensive income (loss) tax effects | | | — | | | — | | | — | | | 98,390 | | | (98,390) | | | — | | | — | Balance at December 30, 2018 | | $ | 53 | | $ | 24 | | $ | 2,216,681 | | $ | (1,954,132) | | $ | (604,289) | | $ | (2) | | $ | (341,665) | Cumulative effect adjustment of Topic 842 | | | — | | | — | | | — | | | 23 | | | — | | | — | | | 23 | Net loss | | | — | | | — | | | — | | | (411,107) | | | — | | | — | | | (411,107) | Other comprehensive income | | | — | | | — | | | — | | | — | | | 28,150 | | | — | | | 28,150 | Issuance of 182,635 Class A shares under stock plans | | | 3 | | | — | | | (3) | | | — | | | — | | | — | | | — | Stock compensation expense | | | — | | | — | | | 1,504 | | | — | | | — | | | — | | | 1,504 | Purchase of 61,264 shares of treasury stock | | | — | | | — | | | — | | | — | | | — | | | (361) | | | (361) | Retirement of 60,908 shares of treasury stock | | | (1) | | | — | | | (359) | | | — | | | — | | | 360 | | | — | Balance at December 29, 2019 | | $ | 55 | | $ | 24 | | $ | 2,217,823 | | $ | (2,365,216) | | $ | (576,139) | | $ | (3) | | $ | (723,456) |
See notes to consolidated financial statements.
Table of Contents
THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
1. BUSINESS AND BASIS OF ACCOUNTING
The McClatchy Company (the “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 Herald, The Kansas City Star, The Sacramento Bee, The Charlotte Observer, The (Raleigh) News & Observer, and the Fort Worth Star-Telegram. We are headquartered in Sacramento, California.
Our fiscal year ends on the last Sunday in December in each calendar year. The fiscal years ended December 29, 2019, and December 30, 2018, consisted of 52-week periods.
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 (“SEC”) 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 consolidated financial statements include the Company and our subsidiaries. Intercompany items and transactions are eliminated.
Reclassifications
Certain amounts in the accompanying consolidated statement of cash flows for the year ended December 30, 2018, have been reclassified to conform to the year ended December 29, 2019, presentation.
Going Concern
We have concluded our financial condition and our projected operating results, contribution amounts required on our qualified 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 Cases (see Note 2) raise substantial doubt as to our ability to continue as a going concern.
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. At December 29, 2019, 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.
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 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.
The accompanying 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.
NYSE American Continued Listing Status
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.
Table of Contents
THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
Coronavirus (COVID-19) Pandemic
Subsequent to December 29, 2019, 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. 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. We are unable to predict the duration or extent of the business disruption, or any potential financial impact. We have concluded that the COVID-19 outbreak has negatively impacted the collectability of our accounts receivables outstanding as of December 29, 2019; however, we estimate this impact to be immaterial.
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.
2. CHAPTER 11 BANKRUPTCY FILING (Subsequent Event)
Bankruptcy Petitions
On February 13, 2020 (“Petition Date”), McClatchy and each of our 53 wholly owned subsidiaries filed voluntary petitions (“Chapter 11 Cases”) for reorganization under Chapter 11 of the U.S. Bankruptcy Code (“Bankruptcy Code”Code.
Effective January 25, 2017, the Company and Mr. Forman entered into an employment agreement (the “Forman Employment Agreement”). Effective January 25, 2019, the Company and Mr. Forman entered into Amendment No. 1 (the “Amendment No. 1”) into the Forman Employment Agreement (as amended by the Amendment No. 1, the “Amended Forman Employment Agreement”). Under the Amended Forman Employment Agreement, the Forman Employment Agreement is subject to automatic renewal for additional two-year terms, commencing as of January 25, 2019, unless either the Company or Mr. Forman gives written notice of the party’s intention not to renew at least sixty (60) days prior to the expiration of any term. Mr. Forman’s annual base salary remained unchanged to 2019 at $1,000,000, which may be increased by the Compensation Committee during the term. Mr. Forman will be eligible to receive an annual short-term non-equity incentive for our fiscal years 2019 and 2020 (the “Annual Cash Incentive”) based on performance objectives established by the Committee each such fiscal year. Mr. Forman’s target Annual Cash Incentive amount for each such fiscal year will be 100% of his base salary or such higher amount as designated by the Compensation Committee. For fiscal year 2019, Mr. Forman received an Annual Cash Incentive equal to 49.9% of the target award of $499,000. For fiscal year 2020, the Annual Cash Incentive was nullified by the Company’s filing under Chapter 11 of the U.S. Bankruptcy CourtCode. Under the Amended Forman Employment Agreement, Mr. Forman is entitled to participate in any health, welfare and other benefit plans, programs or arrangements offered to him by the Company, subject to certain requirements described in the Amended Forman Employment Agreement. During the term of the Amended Forman Employment Agreement, Mr. Forman is authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties, and will be reimbursed by the Company for such expenses upon presentation of appropriate documentation. During the Southern Districtterm of New York (“Bankruptcy Court”the Amended Forman Employment Agreement, Mr. Forman will also receive a monthly supplemental business reimbursement payment in the amount of $35,000 monthly, subject to required withholding taxes. Prior to any automatic renewal of the term of the Amended Forman Employment Agreement, the Company may reevaluate the amount of the monthly supplemental payment and reset such amount of this supplemental payment, including by increasing, reducing or continuing the monthly amount. If during the term of the Amended Forman Employment Agreement, Mr. Forman’s employment is terminated (i) for any reason other than “cause” or “disability,” (ii) for “good reason,” (iii) for any reason during the sixty (60) day period beginning on the six (6) month anniversary of a Change in Control (as defined in the Company’s 2012 Omnibus Incentive Plan, as it may be amended and/or restated from time to time), or (iv) due to the Company’s providing of notice of its intention not to renew the Amended Employment Agreement, then Mr. Forman shall be entitled to receive his “accrued compensation” (defined below) and a lump-sum severance payment from the Company (the “Severance Payment”). TheThis entitlement to severance was nullified by the Company’s filing under 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 U.S. Bankruptcy FilingCode.
We and our 30 local media companiesIf not in connection with a “change in control,” the Severance Payment shall be (i) one million dollars ($1,000,000) plus (ii) target Annual Cash Incentive in the year of termination. If the termination date is within the ninety (90) days prior to or the twenty-four (24) months following a “change in control,” then the Severance Payment will continuebe (i) two million dollars ($2,000,000) plus (ii) two times target Annual Cash Incentive in the year of termination. If Mr. Forman’s employment is terminated for any reason other than “cause,” then all his unvested equity awards will be fully vested. If Mr. Forman would be entitled to operate our businesses as “debtors-in-possession”severance payments under any executive severance plan that is adopted by the jurisdictionCompany for its senior executives after the date of the Bankruptcy Court and in accordance withAmended Forman Employment Agreement, then he will receive the applicable provisionsgreater of the Bankruptcy Code and ordersbenefits provided for. This entitlement to severance was nullified by the Company’s filing under Chapter 11 of the U.S. Bankruptcy Court. We intendCode.
As a condition to continue to operate our businesses inreceive the ordinary course during the pendency of the Chapter 11 Cases. 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.
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 (“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, N.A. (see Note 7 for further discussion of our debt), provides for a secured debtor-in-possession credit facility (“DIP Facility”) consisting of a new revolving loan facility in an aggregate principal amount of up to $50.0 million, whichSeverance Payment, Mr. Forman will be in the form of revolving loans or, subjectrequired to execute and deliver a sub-limit of $3.5 million, in the form of letters of credit. Our obligations under thewaiver and release
Table of Contents THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
DIP Facility will be guaranteed by all of our assets, whether now existing or hereafter acquired. The scheduled maturity dateagreement.
If during the term of the DIP Facility will beAmended Forman Employment Agreement, Mr. Forman’s employment was terminated for “cause,” without “good reason,” or on account of death or “disability,” he is only entitled to his “accrued compensation.” For purposes of the eighteen-month anniversary following the Closing DateAmended Forman Employment Agreement: | ● | “cause” means (i) Mr. Forman’s willful failure to substantially perform his duties, other than a failure resulting from complete or partial incapacity due to physical or mental illness or impairment, or (ii) Mr. Forman’s willful act of gross misconduct that is materially injurious to the Company; |
| ● | “good reason” means (i) Mr. Forman’s demotion or reduction in his base salary by 10% or more, without his written consent, (ii) the Company’s failure to pay material compensation when due and payable, (iii) a material reduction in his responsibility or authority (including, without limitation, loss of the title or functions of the President and CEO of the Company or its successor), (iv) the Company’s material breach of any other provisions of the Forman Employment Agreement, (v) removal of Mr. Forman from the Company’s Board or failure of Mr. Forman to be re-elected to the Board, or (vi) relocation by more than fifty (50) miles of the Company’s headquarters from Sacramento, California; |
| ● | “disability” means Mr. Forman’s inability, at the time notice is given, to perform his duties under the Forman Employment Agreement for a period of not less than six consecutive months as a result of an illness or injury, as determined for purposes of the Company’s long-term disability income insurance; and |
| ● | “accrued compensation” means (i) any unpaid base salary owed to Mr. Forman for services rendered to the termination date, (ii) all vested benefits under applicable written plans and programs maintained by the Company, subject to the terms and conditions of such plans or programs, (iii) reimbursement of reasonable business expenses and disbursements in accordance with the Company’s applicable written policy, and (iv) any accrued but unpaid vacation payable in connection with a termination of employment under the Company’s applicable vacation policy. |
Executive Retention Agreement Effective May 24, 2019, we entered into an Executive Retention Agreement with Mr. Manuel (the “Executive Retention Agreement”), which provides that, if Mr. Manuel experiences an “involuntary termination” (as defined in the DIP CreditExecutive Retention Agreement and summarized below), in addition to his “accrued compensation” (as defined in the Executive Retention Agreement), he will be entitled to receive severance benefits in the form of a lump sum cash severance payment equal to one times the sum of (i) his annual base salary, plus (ii) his “annual target cash incentive” (as defined in the Executive Retention Agreement). For purposes of the Executive Retention Agreement, an “involuntary termination” means the occurrence of either of the following: (i) termination of Mr. Manuel’s employment by the Company without “cause” (as defined in the Executive Retention Agreement), other than by reason of his death or “disability” (as defined in the Executive Retention Agreement), or (ii) his resignation after the occurrence of any of the following events undertaken without his express consent: (A) a material diminution in his base compensation; (B) a material diminution in his authority, duties, or responsibilities; or (C) a material change in the geographic location at which he must perform duties, measured by distance; provided, that he must provide notice of the occurrence of such a termination event within 90 days after its initial occurrence; the Company must fail to cure the circumstances giving rise to such termination event within 30 days after receiving such notice; and he must terminate employment within 180 days after the initial occurrence of such termination event. The DIP Credit Agreement contains customary representations, warrantiesPayment of the severance benefits is conditioned upon Mr. Manuel’s execution of a release of claims, resignation from all officer and covenants that are typicaldirector positions, 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 andcontinued compliance with case milestones. The DIP Credit Agreement also contains customary events of default,certain protective covenants, including as a result of certain events occurring in the Chapter 11 Cases. The DIP Credit Agreement was subject to approval by the Bankruptcy Courtnon-solicitation, confidentiality, non-disparagement, and cooperation covenants, and is subject to customary conditions precedent.
Ongoing Negotiations on Proposed Planany “clawback” or recoupment policy of Reorganization
The Chapter 11 Cases provides immediate protection to the Company which will continuein effect as of Mr. Manuel’s termination date and generally applicable to operate in the ordinary course of business as it pursues approval of a proposed restructuring plan with its secured lenders, bondholders, and the Pension Benefit Guaranty Corporation (“PBGC”). We have included lenders holding approximately 87% of our First Lien Notes in these confidential discussions.executives.
In summary, our proposed plan of reorganization, which has been submitted to creditors for approval, provides:
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| | Our existing First Lien Notes will be exchanged for new first lien notes in an amount not more than a principal balance of $217.9M, secured by the same collateral, having the same maturity and accruing interest at a rate of 10% per annum;
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| | Our largest holder of secured debt, including First Lien Notes, the loans made under our Junior Lien Term Loan Credit Agreement dated as of July 16, 2018 (“Second Lien Term Loans”), and the 6.875% Senior Secured Junior Lien Notes due 2031 (“Third Lien Notes”) will receive $81.0 million of secured debt subordinate to the new first lien notes in exchange for a portion of its existing First Lien Notes and a commitment to provide us with $30.0 million of exit financing (such subordinated debt to accrue payment-in-kind interest of 12.5% or cash-pay interest of 10%, depending on our ratio of leverage to adjusted EBITDA);
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| | Our existing Second Lien Term Loans and Third Lien Notes will be extinguished in exchange for 97% of the equity ownership of the Company, subject to dilution for management incentives and certain warrants for up to 2.5% of the equity ownership of the Company;
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| | Certain creditors who are no longer part of our go-forward operations will share, pro rata, in a pool of $3 million or warrants to acquire up to 2.5% of the equity ownership of the Company;
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| | Our existing Class A and Class B Common Stock will be cancelled; and
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| | 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. We have proposed to settle our liabilities in connection with the Pension Plan by paying the PBGC $3.3 million each year for ten years and 3% of the equity ownership of the Company.
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The terms of the plan described above represent our good faith proposal to restructure our existing obligations. As previously announced, we have been negotiating such proposals with our largest stakeholders for some time. Certain issues, summarized below, represent the most recent bargaining position of certain of those parties.
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| | First, while the PBGC has not indicated that it disputes that the Pension Plan satisfies the standards for termination, the PBGC has requested a materially larger stream of cash payments over ten years and a materially
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Executive Severance Benefit Plan THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAll of the terms of the Executive Severance Benefit Plan defined below were nullified by the Company’s filing under Chapter 11 of the U.S. Bankruptcy Code.
YEARS ENDED DECEMBER 29,What is described below is what the Plan would have provided if the Company had not filed under Chapter 11 of the U.S. Bankruptcy Code.
On August 7, 2019, AND DECEMBER 30, 2018 larger percentage of equity ownership in the Company in settlement of the PBGC’s claims relating to termination of the qualified pension plan; and
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| | Second, the parties continue to negotiate the final details surrounding governance and senior management.
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Confirmation of a plan of reorganization could materially alter the classifications and amounts reportedwe adopted an Executive Severance Benefit Plan (the “Executive Severance Benefit Plan”), in our consolidated financial statements. The financial statements as of and for the year ended December 29, 2019, do not give effect to any adjustmentswhich Mr. Zieman participated. Pursuant to the carrying values of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization or other arrangement, or the effect of any operational changes that may be implemented.
3. 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
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| Unadjusted quoted prices available in active markets for identical investments as of the reporting date.
| | Level 2
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| 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
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| 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.
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Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer. During 2018, as a result of the refinancing transactions discussed in Note 7, we transferred our DebenturesExecutive Severance Benefit Plan, if Mr. Zieman experienced an “involuntary termination” (as defined in Note 7) from Level 2the Executive Severance Benefit Plan and summarized below), in addition to Level 3his “accrued compensation” (as defined in the fair value hierarchy. No similar transactions occurredExecutive Severance Benefit Plan), he would be entitled to receive severance benefits in 2019.the form of a lump sum cash severance payment equal to two times the sum of (i) his annual base salary, plus (ii) his “annual target cash incentive” (as defined in the Executive Severance Benefit Plan).
For purposes of the Executive Severance Benefit Plan, an “involuntary termination” means the occurrence of either of the following during the period beginning 90 days prior to a “change in control” (as defined in the Executive Severance Benefit Plan) and ending on the date that is the second anniversary of such change in control: (i) termination of the participant’s employment by the Company without “cause” (as defined in the Executive Severance Benefit Plan), other than by reason of his death or “disability” (as defined in the Executive Severance Benefit Plan), or (ii) his resignation after the occurrence of any of the following events undertaken without his express consent: (A) a material diminution in his base compensation; (B) a material diminution in his authority, duties, or responsibilities; or (C) a material change in the geographic location at which he must perform duties, measured by distance; provided, that he must provide notice of the occurrence of such a termination event within 90 days after its initial occurrence; the Company must fail to cure the circumstances giving rise to such termination event within 30 days after receiving such notice; and he must terminate employment within 180 days after the initial occurrence of such termination event. Payment of the severance benefits is conditioned upon Mr. Zieman’s execution of a release of claims and continued compliance with certain protective covenants, including non-solicitation, confidentiality, non-disparagement, and cooperation covenants and is subject to any “clawback” or recoupment policy of the Company in effect as of the participant’s termination date and generally applicable to executives. In addition, the Executive Severance Benefit Plan provides that if Mr. Zieman would receive any amount, whether under the Executive Severance Benefit Plan or otherwise, that is a “parachute payment” within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended, the amount to be paid to Mr. Zieman will be reduced to the extent such reduction would result in greater after-tax payments to Mr. Zieman. Potential Payments Upon Termination of Employment and Change in Control The following methods and assumptions were usedtable sets forth quantitative information with respect to estimatepotential payments to each of the fair value of each class of financial instruments: Cash and cash equivalents, accounts receivable and accounts payable. As ofNEOs (or the NEO’s beneficiaries) upon termination in various circumstances as described below or upon a change in control, assuming termination or consummation, as applicable, on December 29, 2019, and December 30, 2018, the carrying amount of these items approximates fair value because of the short maturity of these financial instruments.2019.
Long‑term debt. At December 29, 2019 the carrying value and the estimated fair value of our 2026 Notes (as defined in Note 7) was $249.8 million and $240.5 million, respectively. As of December 30, 2018, the carrying value and the estimated fair value of the 2026 Notes was $287.2 million and $302.4 million, respectively. The fair value of our 2026 Notes as 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.
At December 29, 2019, the carrying value and the estimated fair value of our Debentures, Junior Term Loan and 2031 Notes (as defined in Note 7), was $357.9 million and $213.3 million, respectively. At December 30, 2018, the carrying value and the estimated fair value of our Debentures, Junior Term Loan and 2031 Notes, was $350.4 million and $296.5 million, respectively. Market evidence 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 December 29, 2019. These are considered to be Level 3 inputs under the fair value measurements and disclosure guidance and may not be representative of actual value.
| | | | | | | | | | | | | | | | | | | | | Voluntary | | | | | | | | | | | Not-for- | | | | | | (including | | | | | | | | For | | Cause or for | | Change-in- | Name / Type of Compensation | | Retirement) | | Disability | | Death | | Cause | | Good Reason | | Control | Craig I. Forman | | | | | | | | | | | | | | | | | | | Cash Severance Benefit(1) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2,000,000 | | $ | 4,000,000 | RSUs(2) | | $ | — | | $ | 65,430 | | $ | 65,430 | | $ | — | | $ | 65,430 | | $ | 65,430 | Cash L-TIP Awards(4) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,500,014 | Deferred Compensation(6) | | $ | — | | $ | 351,019 | | $ | 351,019 | | $ | — | | $ | 351,019 | | $ | — | Total | | $ | — | | $ | 416,449 | | $ | 416,449 | | $ | — | | $ | 2,416,449 | | $ | 5,565,444 | Mark Zieman | | | | | | | | | | | | | | | | | | | Cash Severance Benefit(1) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 2,520,420 | RSUs(2)(3) | | $ | 9,311 | | $ | 23,803 | | $ | 23,803 | | $ | — | | $ | 23,803 | | $ | 23,803 | Cash L-TIP Awards(4)(5) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 540,102 | Deferred Compensation(6) | | $ | 141,933 | | $ | 141,933 | | $ | 141,933 | | $ | — | | $ | 141,933 | | $ | — | Total | | $ | 151,244 | | $ | 165,736 | | $ | 165,736 | | $ | — | | $ | 165,736 | | $ | 3,084,325 |
Scott Manuel | | | | | | | | | | | | | | | | | | | Cash Severance Benefit(1) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 638,000 | | $ | — | RSUs(2) | | $ | — | | $ | 14,764 | | $ | 14,764 | | $ | — | | $ | 14,764 | | $ | 14,764 | Cash L-TIP Awards(4) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 416,256 | Deferred Compensation(6) | | $ | — | | $ | 108,094 | | $ | 108,094 | | $ | — | | $ | 108,094 | | $ | — | Total | | $ | — | | $ | 122,858 | | $ | 122,858 | | $ | — | | $ | 760,858 | | $ | 431,020 |
| (1) | For Mr. Forman, value represents the severance he would be entitled to pursuant to the Amended Forman Employment Agreement. For Mr. Zieman, value represents the severance he would be entitled to pursuant to the Executive Severance Benefit Plan. For Mr. Manuel, value represents the severance he would be entitled to pursuant to the Executive Retention Agreement. This table does not include payments and benefits to the extent they are provided on a non-discriminatory basis to salaried employees generally upon termination of employment, including without limitation payments with respect to accrued but unused vacation. |
| (2) | Value of the accelerated vesting is calculated by multiplying the closing market price of our Class A Common Stock on December 27, 2019 ($0.483 per share) by the number of units. December 27, 2019 was the last trading day of our fiscal year, which ended on December 29, 2019. For more information about the RSUs, please see Executive Compensation Arrangements above. |
| (3) | Only Mr. Zieman has accumulated 10 or more continuous years of service and is age 55 or older, and his respective outstanding, unvested RSUs became fully vested upon his termination of employment. |
| (4) | For the change in control column, as a performance-based award under the 2012 Incentive Plan, upon a change in control where less than half of the performance period was completed through the presumed change in control date, the 2019 Cash L-TIP would vest and become payable upon presumed achievement of target performance. For more information about the Cash L-TIP and the 2012 Incentive Plan, please see Executive Compensation Arrangements above. |
| (5) | Only Mr. Zieman has accumulated 10 or more continuous years of service and is age 55 or older and upon termination of employment became eligible for a pro-rated payment with respect to the Cash L-TIP award for each year in the performance cycle that the holder remained employed and that the Company met certain FCF budget thresholds. |
| (6) | For each of Messrs. Forman and Manuel, value upon death includes the accelerated vesting of his rights under the Plans. As of the presumed termination date, Messrs. Forman and Manuel had not met the service requirement to qualify for “retirement” under the Plans. For more information about the Plans, please see Executive Compensation Arrangements above. |
THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
Pension plan. For all NEOs, value includes the partial year contribution and accelerated vesting of the company supplemental contribution to the Executive Supplemental Plan. As of December 29, 2019,the presumed termination date, neither Mr. Forman nor Mr. Manuel have met the service requirement to qualify for “retirement” under the Executive Supplemental Plan, but Mr. Zieman has accumulated 10 or more continuous years of service and Decemberis age 55 or older and upon termination of employment was eligible for retirement vesting under the Executive Supplemental Plan. For more information about the Executive Supplemental Plan, please see Executive Compensation Arrangements above.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Principal Shareholders Class A Common Stock The following table shows information about the beneficial ownership of shares of Class A Common Stock as of March 30, 2018, we had assets related2020, by each director; our President and Chief Executive Officer; our other named executive officers other than the Chief Executive Officer; all other executive officers of McClatchy as a group; and each person known by McClatchy to our Pension Plan measured at fair value. The required disclosures, including assets valued with Level 3 inputs, are presented in Note 9. 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 are 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 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 impairments recorded during 2019. We incurred impairment charges during 2018 on our newspaper masthead intangible assets. See below in Note 3 and Note 6 for further information.
Revenue recognition
We recognize revenues when controlbeneficially own more than 5% of the promised goods is transferred to our customers or when the services are performed, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. All revenue recognized on the 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, as these are outside the scope of Topic 606. See Note 4.
Concentrations of credit risks
Financial instruments, which potentially subject us to concentrations of credit risks, are principally cash and cash equivalents and trade accounts receivables. Cash and cash equivalents are placed with major financial institutions. As of December 29, 2019, substantially all of our cash and cash equivalents are in excessoutstanding shares of the FDIC insured limits. We have not experienced any losses related to amountsClass A Common Stock.
Beneficial ownership is determined in excess of FDIC limits. We routinely assess the financial strength of significant customers and this assessment, combinedaccordance with the large numberrules of the SEC and geographic diversity of our customers, limits our concentration of riskgenerally includes voting or investment power with respect to trade accounts receivable. Allowancesecurities. All shares of Class A Common Stock subject to options, SARs or RSUs that are exercisable or vest within 60 days following March 30, 2020, are deemed beneficially owned by the person holding those options, SARs or RSUs. Also, each holder of Class B Common Stock is deemed to be the beneficial owner of the same number of shares of Class A Common Stock under the SEC rules, on the basis that he or she has the right, subject to the terms of the shareholders’ agreement described later in this amendment to Form 10-K, to convert Class B Common Stock into Class A Common Stock. See the section entitled “Agreement Among Class B Shareholders.” For purposes of calculating the percentage of outstanding shares of Class A Common Stock beneficially owned by each shareholder, the shares of Class A Common Stock deemed to be owned by each shareholder because of his or her ownership of either Class B Common Stock or options to acquire Class A Common Stock are treated as outstanding only for doubtful accounts
We maintain an allowance account for estimated losses resulting fromthat shareholder. As a result, the risk that our customers willcolumn showing the percentage of deemed beneficial ownership of Class A Common Stock does not make required payments. At certainnecessarily reflect the beneficial ownership of our media companies, we establish our allowances basedClass A Common Stock actually outstanding as of the close of business on collection experience, aging of our receivables and significant individual account credit risk. At the remaining media companies, we use the aging of accounts receivable, reserving for all accounts due 90 days or longer, to establish allowances for losses on accounts receivable; however, if we become aware that the financial condition of specific customers has deteriorated, additional allowances are provided.
We provide an allowance for doubtful accounts as follows:
| | | | | | | | | Years Ended | | | December 29, | | December 30, | (in thousands) | | 2019 | | 2018 | Balance at beginning of year | | $ | 3,008 | | $ | 3,225 | Charged to costs and expenses | | | 7,134 | | | 8,995 | Amounts written off | | | (8,388) | | | (9,212) | Balance at end of year | | $ | 1,754 | | $ | 3,008 |
March 30,
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
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. There have been no write-downs of newsprint, ink or other inventories during 2019 or 2018.
Property, plant and equipment
Property, plant and equipment (“PP&E”) are recorded at cost. Additions and substantial improvements, as well as interest expense incurred during construction, are capitalized. Capitalized interest was not material in 2019 or 2018. Expenditures for maintenance and repairs are charged to expense as incurred. When PP&E is sold or retired, the asset and related accumulated depreciation are removed from the accounts and the associated gain or loss is recognized.
Property, plant and equipment consisted of the following:2020.
| | | | | | | | | | | | | | | December 29, | | December 30, | | Estimated | | (in thousands) | | 2019 | | 2018 | | Useful Lives | | Land | | $ | 27,869 | | $ | 32,335 | | | | | | | Building and improvements | | | 245,748 | | | 268,157 | | 5 | - | 60 | years | | Equipment | | | 462,449 | | | 506,307 | | 2 | - | 25 | years | (1) | Construction in process | | | 324 | | | 1,890 | | | | | | | | | | 736,390 | | | 808,689 | | | | | | | Less accumulated depreciation | | | (532,815) | | | (574,997) | | | | | | | Property, plant and equipment, net | | $ | 203,575 | | $ | 233,692 | | | | | | |
| | | | | | | | | | | | Deemed Beneficial Ownership | | | | | | of Class A Common Stock(2) | | | | Number of | | Number of | | | | Directors and Nominees for Director; Named Executive Officers; | | Shares | | Shares | | | | Directors and Executive Officers as a Group; Beneficial Owners of More | | of Class A | | of Class A | | Percent of | | Than 5% of Total Shares of Class Outstanding(1) | | Common Stock | | Common Stock | | Class | | Kevin McClatchy | | 24,620 | | 1,410,319 | (3)(4) | 20.46 | % | William McClatchy | | 13,505 | | 1,304,003 | (3)(5) | 19.19 | % | Theodore Mitchell | | 14,620 | | 1,264,618 | (3) | 18.72 | % | Molly Maloney Evangelisti | | 31,007 | | 485,087 | | 8.14 | % | Craig Forman | | 66,625 | | 66,625 | | 1.21 | % | Mark Zieman | | 23,188 | | 34,863 | (6) | * | | Elizabeth Ballantine | | 23,343 | | 24,728 | | * | | Clyde Ostler | | 23,000 | | 23,000 | | * | | Leroy Barnes, Jr. | | 22,425 | | 22,425 | | * | | Brown McClatchy Maloney | | 22,355 | | 22,755 | | * | | Maria Thomas | | 14,500 | | 14,500 | | * | | Anjali Joshi | | 9,000 | | 9,000 | | * | | Scott Manuel | | 2,940 | | 2,940 | | * | | Chatham Asset Management, LLC | | 1,287,264 | (7) | N/A | | 23.38 | % | Bluestone Financial Ltd. | | 777,000 | (8) | N/A | | 14.11 | % | Bestinver Gestion S.A., SGIIC | | 308,025 | (9) | N/A | | 5.59 | % | All executive officers and directors as a group (17 persons) | | 331,632 | | 2,225,371 | (10) | 30.09 | % |
*Represents less than 1%. | (1) | (1)All addresses are c/o The McClatchy Company, 2100 Q Street, Sacramento, CA 95816, except as follows: (i) Chatham Asset Management, LLC, 26 Main Street, Suite 204, Chatham, New Jersey 10151; (ii) Bluestone Financial Ltd., Vanterpool Plaza, 2nd Floor, Wickhams Cay I, Road Town, Tortola, British Virgin Islands; (iii) Bestinver Gestion S.A., SGIIC, Madrid, Spain, Calle Juan de Mena, no. 8, 28014; and (iv) Leon G. Cooperman, St. Andrew’s Country Club, 7118 Melrose Castle Lane, Boca Raton, FL 33496.
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| (2) | Represents all shares of Class A Common Stock plus (i) all shares of Class A Common Stock subject to options that are exercisable or vest within 60 days following March 30, 2020, and (ii) shares of Class A Common Stock deemed to be owned because of the shareholder’s ownership of Class B Common Stock. Applicable percentage of ownership is based on 5,506,185 shares of Class A Common Stock outstanding as of March 30, 2020, for such shareholder or group of shareholders, as applicable. |
| (3) | PressesIncludes 1,249,998 shares of Class B Common Stock held under three separate trusts, all of which hold 416,666 shares each. Each of the trusts has different income beneficiaries. Kevin McClatchy, William McClatchy, and Theodore R. Mitchell share joint voting and investment control with respect to these trusts. Kevin McClatchy and William McClatchy disclaim beneficial ownership of the shares held in trusts for which they are 9 - 25 yearsnot beneficiaries.
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| (4) | Includes 44,952 shares of Class B Common Stock held by a trust of which Kevin McClatchy is one of three trustees but not a beneficiary. Kevin McClatchy has joint voting and investment control with the other trustees with respect to this trust. Kevin McClatchy disclaims beneficial ownership of these shares. |
| (5) | Includes 40,500 shares of Class B Common stock held by William McClatchy as custodian for his minor children. Anthony Boas has sole voting and investment control with respect to these shares. William McClatchy disclaims beneficial ownership of these shares. |
| (6) | Includes 11,675 shares subject to SARs which are currently exercisable. |
| (7) | Based on a Form 4 filed on April 8, 2019 by Chatham Asset Management, LLC. Chatham Asset Management, LLC is the investment manager to Chatham Asset High Yield Master Fund, Ltd., a Cayman Islands exempted company ("Chatham Master Fund"), and other equipmentaffiliated funds. Anthony Melchiorre is 2 - 15 yearsthe managing member of the Chatham Asset Management, LLC. As of April 5, 2019, Chatham Master Fund held 625,465 shares of Class A Common Stock of McClatchy and certain other affiliated funds held an aggregate of 661,799 shares of Class A Common Stock of McClatchy. |
| (8) | Based on a Schedule 13D/A filed on November 22, 2019. Bluestone Financial Ltd. has sole voting power with respect to 770,000 shares. |
| (9) | Based on a Schedule 13G filed on September 29, 2015. Bestinver Gestion S.A., SGIIC has sole voting power and sole dispositive power with respect to 3,080,257 shares, adjusted to 308,025 shares reflecting the one-for-ten reverse stock split that occurred in June 2016. |
| (10) | Includes those shares subject to SARs indicated in note (6). |
We record depreciation using the straight‑line method over estimated useful lives. The useful lives are estimated at the time the assets are acquired and are based on historical experience with similar assets and anticipated technological changes. Our depreciation expense was $21.9 million and $28.6 million in 2019 and 2018, respectively.
During 2019 and 2018, we incurred $0.3 million and $0.6 million, respectively, in accelerated depreciation related to production equipment that was no longer needed due to outsourcing of our printing process at certain of our media companies.
We review the carrying amount of long‑lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events that result in an impairment review include the decision to close a location or a significant decrease in the operating performance of the long‑lived asset. Long‑lived assets are considered impaired if the estimated undiscounted future cash flows of the asset or asset group are less than the carrying amount. For impaired assets, we recognize a loss equal to the difference between the carrying amount of the asset or asset group and its estimated fair value, which is recorded in operating expenses in the consolidated statements of operations. The estimated fair value of the asset or asset group is based on the discounted future cash flows of the asset or asset group. The asset group is defined as the lowest level for which identifiable cash flows are available.
Assets held for sale
As of December 29, 2019, we have land and/or buildings classified as assets held for sale at five of our media companies compared to only three as of December 30, 2018. During 2019, we began to actively market for sale five properties, which includes land and/or buildings, at four of our media companies. In connection with classifying properties as assets held for the sale, we reduce the carrying value of the land and building to its estimated fair value less selling costs, if applicable. As a result, during 2019, we recorded a $0.7 million impairment charge at one of our properties which is included in goodwill and other asset write-downs on our consolidated statement of operations.
During the year ended December 29, 2019, we sold land and buildings in Kennewick, Washington, Belleville, Illinois, and Miami, Florida. We recorded gains of $3.3 million, which are included in other operating expenses on our consolidated statements of operations.
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Goodwill and intangible impairmentClass B Common Stock
Goodwill represents the excess of cost of a business acquisition over the fair value of the net assets acquired. In accordance with FASB ASC 350 " Intangibles - Goodwill and Other " goodwill is not amortized. An impairment loss is recognized when the carrying amount of the reporting unit's net assets exceed the estimated fair value of the reporting unit. We test for impairment of goodwill 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 operating segments, which are also considered our 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 the East and Southeast regions
We test for goodwill impairment 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 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. We performed interim and annual impairment tests during 2019 and only annual impairment tests for 2018. See Note 6 for discussion of our goodwill impairment testing results.
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 a discounted cash flow model to determine the fair value of each newspaper masthead. Individual newspaper masthead fair values were estimated using the present value of expected future cash flows, using estimates, judgments and assumptions discussed above that we believe were appropriate in the circumstances. We performed interim and annual impairment tests during 2019 and 2018. See Note 6 for discussion of our newspaper masthead 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 impairments of long‑lived assets subject to amortization during 2019 or 2018.
Investments in unconsolidated companies
Investments in unconsolidated companies are accounted for using either the equity method or 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 were no impairments of our investments in unconsolidated companies during 2019 or 2018.
In the year ended December 29, 2019, we received distributions totaling $1.3 million, which primarily relates to cost or equity method investees who are winding down their operations.
On September 13, 2018, we sold our remaining 3.0% ownership interest in CareerBuilder, LLC (“CareerBuilder”) and received gross proceeds of $5.3 million. As a result of this sale, we recognized a gain on sale of investments in unconsolidated companies of $1.7 million in the year ended December 30, 2018. In the year ended December 30, 2018, we also received distributions totaling approximately $2.8 million from CareerBuilder, which relate to returns of earnings. Our 3.0% ownership interest in CareerBuilder was accounted for under the cost method.
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
Financial obligations
Financial obligations (also known as failed sale and leaseback transactions) consist of contributions of real properties to the Pension Plan in 2016 and 2011 (see Note 9), 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.
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 during 2019 and 2018, both operating segments reported 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 company operations in the Carolinas and the East and Southeast regions.
Stock‑based compensation
All stock‑based compensation, including grants of stock appreciation rights, restricted stock units and common stock under equity incentive plans, is recognized in the financial statements based on their fair values. At December 29, 2019, we had two stock‑based compensation plans. See Note 12.
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.
During 2018, we elected to early adopt new guidance that allowed for certain stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (“Tax Act”) to be reclassified from accumulated other comprehensive income to retained earnings. As such, we recorded a reclass of $98.4 million of stranded tax effects from accumulated other comprehensive income to retained earnings in 2018.
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 had 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. 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
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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 record accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recorded as a component of income tax expense.
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases” (“Topic 842”) which replaces the existing guidance in ASC 840, “Leases.” Topic 842 requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. We adopted Topic 842 as of December 31, 2018, without restating periods prior to the adoption date using a modified retrospective transition method, as allowed under ASU 2018-11, “Targeted Improvements to ASC 842.”
As a result of the adoption of Topic 842, on December 31, 2018, we recorded operating lease right-of-use (“ROU”) assets of $51.6 million and lease liabilities of $61.2 million. Finance leases were not impacted by the adoption of Topic 842, as capital lease liabilities and the corresponding assets were already recorded in the balance sheet under the ASC 840 guidance. The adoption of Topic 842 had an inconsequential impact on our consolidated statement of operations and consolidated statement of cash flows in 2019.
The new standard provides a number of optional practical expedients that we adopted. We elected the “package of practical expedients” which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides expedients for our ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. For those leases that qualified, we did not recognize ROU assets or liabilities. We also elected the practical expedient allowing us to combine lease and non-lease components for our real estate leases. Additional information and disclosures required by this new standard are contained in Note 5.
In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal -Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). It is effective for us for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We early adopted this standard as of April 1, 2019, and it did not have an impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 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 and 2019-05, which provide further guidance and clarification on specific items within the previously issued update. In November 2019, the FASB issued ASU 2019-11, that grants private companies, not-for-profit organizations and certain small public companies an effective date delay for its credit loss standard. As a result, ASU 2016-13 and the subsequent updates will be 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 consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 adds, removes and modifies various disclosure requirements within Topic 820. It is effective for us for interim and annual reporting periods beginning after
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December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. We are currently in the process of evaluating the impact of the adoption on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 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 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 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.
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 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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
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.
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 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
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.
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 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 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 nine years, except for one parking lot lease with 43 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 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 which is not included in Financing Obligations discussed above in Note 3) for office furniture and fixtures located at one of our office facilities. The total financing lease payments are calculated to be approximately $1.0 million and $1.1 million as of December 29, 2019, and December 30, 2018, respectively. As of December 29, 2019, the payments run over the course of the remaining 5.9 years and are not material to the future lease payments schedules presented below. The finance lease asset is recorded within the other assets line item of the 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 consolidated balance sheet, respectively.
As our lease contracts do not provide an implicit interest rate, for 2019, we used the effective yield of our secured debt that we refinanced in July 2018 as our 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
The cost components of our operating and financing leases were as follows:
| | | | | | Year Ended | | | December 29, | (in thousands) | | 2019 | Financing lease costs: | | | | Amortization of ROU asset | | $ | 96 | Interest on lease liabilities | | | 78 | Operating lease costs | | | 13,624 | Short-term lease cost | | | 2,119 | Variable lease cost | | | 2,444 | Sublease income | | | (5,931) | Total lease costs | | $ | 12,430 |
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 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.
As of December 29, 2019, the aggregate future lease payments for operating leases are as follows:
| | | | | | Operating | (in thousands) | | Leases | 2020 | | | 12,879 | 2021 | | | 10,776 | 2022 | | | 10,947 | 2023 | | | 10,350 | 2024 | | | 9,004 | Thereafter | | | 21,858 | Total undiscounted cash flows | | | 75,814 | Less imputed interest | | | (20,976) | Total lease liability | | $ | 54,838 |
Our future minimum lease commitments, net of sub-lease rental income, as of December 30, 2018, under ASC 840, the predecessor to Topic 842, was as follows:
| | | | | | | | | | | | Operating | | Sublease | | Net Lease | (in thousands) | | Leases | | Income | | Obligation | 2019 | | $ | 16,408 | | $ | (4,044) | | $ | 12,364 | 2020 | | | 11,921 | | | (1,306) | | | 10,615 | 2021 | | | 9,797 | | | (379) | | | 9,418 | 2022 | | | 10,178 | | | (334) | | | 9,844 | 2023 | | | 10,160 | | | (232) | | | 9,928 | Thereafter | | | 31,139 | | | — | | | 31,139 | Total | | $ | 89,603 | | $ | (6,295) | | $ | 83,308 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
The weighted average remaining lease terms and discount rates for all of our operating and financing leases were as follows:
| | | | | | | | December 29, 2019 | | | | Operating | | Financing | | | | Leases | | Lease | | Weighted average remaining lease term (years) | | 6.90 | | 5.84 | | Weighted average discount rate | | 9.19 | % | 10.50 | % |
Supplemental cash flow information related to our operating and financing leases was as follows:
| | | | | | Year Ended
| | | December 29,
| (in thousands)
| | 2019
| Cash paid for amounts included in the measurement of lease liabilities:
| | | | Operating cash outflow from operating leases
| | $
| 14,198
| Operating cash outflow from financing lease
| | | 78
| Financing cash outflow from financing lease
| | | 71
| ROU assets obtained in exchange for new operating lease liabilities
| | | 3,154
|
As of December 29, 2019, we do not have any new financing leases or significant additional operating leases that have not yet commenced.
6. INTANGIBLE ASSETS AND GOODWILL
Changes in identifiable intangible assets and goodwill consisted of the following:
| | | | | | | | | | | | | | | | | | | December 30, | | Disposition | | Impairment | | Amortization | | December 29, | | (in thousands) | | 2018 | | Adjustment | | Charges | | Expense | | 2019 | | Intangible assets subject to amortization | | $ | 838,336 | | $ | — | | $ | — | | $ | — | | $ | 838,336 | | Accumulated amortization | | | (807,725) | | | — | | | — | | | (24,153) | | | (831,878) | | | | | 30,611 | | | — | | | — | | | (24,153) | | | 6,458 | | Mastheads | | | 112,736 | | | — | | | (49,941) | | | — | | | 62,795 | | Goodwill | | | 705,174 | | | — | | | (284,996) | | | — | | | 420,178 | | Total | | $ | 848,521 | | $ | — | | $ | (334,937) | | $ | (24,153) | | $ | 489,431 | |
| | | | | | | | | | | | | | | | | | | December 31, | | Disposition | | Impairment | | Amortization | | December 30, | | (in thousands) | | 2017 | | Adjustment | | Charges | | Expense | | 2018 | | Intangible assets subject to amortization | | $ | 839,284 | | $ | (948) | | $ | — | | $ | — | | $ | 838,336 | | Accumulated amortization | | | (761,013) | | | 948 | | | — | | | (47,660) | | | (807,725) | | | | | 78,271 | | | — | | | — | | | (47,660) | | | 30,611 | | Mastheads | | | 149,951 | | | — | | | (37,215) | | | — | | | 112,736 | | Goodwill | | | 705,174 | | | — | | | — | | | — | | | 705,174 | | Total | | $ | 933,396 | | $ | — | | $ | (37,215) | | $ | (47,660) | | $ | 848,521 | |
Impairment of Goodwill and Intangible Assets
During the year ended December 29, 2019, we performed an interim and annual testing of impairment of goodwill and intangible newspaper mastheads due to the continuing challenging business conditions 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 goodwill impairment charges of $258.1 million and $285.0 million during the third quarter and the full year ended December 29, 2019, respectively. We also recorded an intangible newspaper masthead impairment charges of $37.2 million and $49.9 million in third quarter and full year ended December 29, 2019, respectively. These impairments were recorded in the goodwill and other asset write-downs line item on our consolidated statements of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
During the third quarter and full year ended December 30, 2018, based on our interim and annual impairment testing of intangible newspaper mastheads, we recorded $14.1 million and $37.2 million, respectively, in masthead impairments. These impairment charges were recorded in other asset write-downs line item on our consolidated statements of operations. There were no goodwill impairment charges during 2018.
Accumulated changes in indefinite lived intangible assets and goodwill as of December 29, 2019, and December 30, 2018, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | December 29, 2019 | | | December 30, 2018 | | | | Original Gross | | Accumulated | | Carrying | | | Original Gross | | Accumulated | | Carrying | | (in thousands) | | Amount | | Impairment | | Amount | | | Amount | | Impairment | | Amount | | Mastheads | | $ | 684,500 | | $ | (621,705) | | $ | 62,795 | | | $ | 684,500 | | $ | (571,764) | | $ | 112,736 | | Goodwill | | | 3,571,111 | | | (3,150,933) | | | 420,178 | | | | 3,571,111 | | | (2,865,937) | | | 705,174 | | Total | | $ | 4,255,611 | | $ | (3,772,638) | | $ | 482,973 | | | $ | 4,255,611 | | $ | (3,437,701) | | $ | 817,910 | |
Amortization expense was $24.2 million and $47.7 million in 2019 and 2018, respectively. A majority of the intangible assets subject to amortization became fully amortized in the second quarter of 2019 and therefore amortization expense during the last six months of 2019 was significantly lower. The estimated amortization expense for the five succeeding fiscal years is as follows:
| | | | | | | Amortization | | | | Expense | | Year | | (in thousands) | | 2020 | | $ | 803 | | 2021 | | | 680 | | 2022 | | | 655 | | 2023 | | | 667 | | 2024 | | | 640 | |
7. LONG‑TERM DEBT
In connection with the Chapter 11 Cases, we entered into the DIP Credit Agreement. See Note 2. The DIP Credit Agreement replaces the ABL Credit Agreement, defined below, except for certain provisions related to the letters of credit under the LOC Facility (defined below).
The commencement of the Chapter 11 Cases constituted an event of default under, and caused the automatic and immediate acceleration of all debt outstanding under or in respect of, a number of our 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 December 29, 2019, all of our long‑term debt is in fixed rate obligations. As of December 29, 2019, and December 30, 2018, our outstanding long‑term debt consisted of senior secured notes, unsecured notes, and loans. They are stated net of unamortized debt issuance costs and unamortized discounts, if applicable, totaling $95.6 million and $107.4 million as of December 29, 2019, and December 30, 2018, 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 the 2018 debt refinancing discussed below. Our ABL Credit Agreement has unamortized debt issuance costs of $1.4 million and $1.8 million as of December 29, 2019, and December 30, 2018, respectively, that are included in other assets on our consolidated balance sheets.
The face values of the notes, as well as the carrying values are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
| | | | | | | | | | | | Face Value at | | Carrying Value | | | December 29, | | December 29, | | December 30, | (in thousands) | | 2019 | | 2019 | | 2018 | ABL Credit Agreement | | $ | — | | $ | — | | $ | — | Notes: | | | | | | | | | | 9.000% senior secured notes due in 2026 | | | 262,851 | | | 249,793 | | | 287,249 | 7.795% junior term loan due in 2030 | | | 157,083 | | | 126,148 | | | 123,213 | 6.875% senior secured junior lien notes due in 2031 | | | 268,423 | | | 217,392 | | | 141,447 | 7.150% debentures due in 2027 | | | 7,105 | | | 6,855 | | | 6,824 | 6.875% debentures due in 2029 | | | 7,807 | | | 7,484 | | | 78,962 | Long-term debt | | $ | 703,269 | | $ | 607,672 | | $ | 637,695 | Less current portion | | | — | | | — | | | 4,312 | Total long-term debt, net of current | | $ | 703,269 | | $ | 607,672 | | $ | 633,383 |
Debt Maturities, Repurchases, Redemptions and Extinguishment of Debt
In March 2019, we issued $75.0 million aggregate principal amount of additional 6.875% senior secured junior lien notes due in 2031 (“2031 Notes”). The additional 2031 Notes were issued in exchange for an equal principal amount of the unsecured 6.875% debentures due in 2029 (“2029 Debentures”). See Junior Lien Term Loan Agreement section below for additional discussion. This exchange was accounted for as a modification of debt with no gain or loss recorded in earnings.
During the year ended December 29, 2019, we redeemed $41.8 million aggregate principal amount of our 9.000% senior secured notes due in 2026 (“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). As a result of these transactions, we recorded a loss on extinguishment of debt of $2.3 million during the year ended December 29, 2019.
During 2018, we recorded a net gain on the extinguishment of debt of $30.6 million as a result of the following transactions that occurred in 2018, as described below.
During the quarter ended September 30, 2018, in conjunction with our 2018 refinancing discussed below, we redeemed $344.1 million of our 2022 senior secured notes due in 2022 (“2022 Notes”). We also executed a non-cash exchange of most of our 7.150% debentures due November 1, 2027 (“2027 Debentures”) and 6.875% debentures due March 15, 2029 (“2029 Debentures” and together with the 2027 Debentures, the “Debentures”) for new Tranche A and Tranche B Junior Term Loans (as defined below).
The non-cash exchange of the Debentures discussed above was executed with a single lender and its affiliates. We reviewed all of our debt instruments held by this lender prior to and after the refinancing and determined that the new debt instruments were substantially different from the previously held instruments. We concluded that the exchange of the Debentures for the Junior Term Loans should be accounted for as an extinguishment of the Debentures. As a result, during 2018, we recorded a gross gain of $68.7 million, which represents the difference between the carrying value of the Debentures and the fair market value of the Junior Term Loans at time of the exchange. This gain was partially offset by a $32.3 million write-off of the unamortized discounts on the Debentures, unamortized debt issuance costs on the 2022 Notes, and premiums paid on the 2022 Notes for a net gain of $30.6 million.
The net gain on extinguishment of debt recorded on the above transactions was partially offset by a loss on extinguishment of debt recorded in conjunction with our notes redemptions and repurchases during 2018. During 2018, we (i) redeemed $0.5 million of our 2022 Notes through a tender offer that expired on May 22, 2018, (ii) redeemed $75.0 million of our 2022 Notes, which we had previously announced in December 2017, (iii) repurchased $20.0 million of the 2022 Notes through a privately negotiated transaction, and (iv) redeemed $5.3 million of our 2026 Notes, which was previously announced in October 2018. We recorded any applicable premiums that were paid and wrote off the associated debt issuance costs on the above transactions.
In December 2018, we entered into an indenture (“2031 Notes Indenture”) in the amount of $193.5 million aggregate principal amount of our 2031 Notes. The 2031 Notes were issued in exchange for an equal principal amount of Tranche B Junior Term Loans (as defined below). These 2031 Notes have substantially the same terms as the Tranche B Junior Term Loan. As a result of this transaction, the Tranche B Junior Term Loan has been fully extinguished.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
ABL Credit Agreement
The ABL Credit Agreement entered into in July 2018, among the Company, the subsidiaries of the Company party thereto, as borrowers, the lenders party thereto, and Wells Fargo Bank, N.A. (“Wells Fargo”), as administrative agent (“ABL Credit Agreement”) provides for up to $65.0 million secured asset-backed revolving credit facility with a letter of credit subfacility and a swing line subfacility. In addition, the ABL Credit Agreement provides for a $35.0 million cash secured letter of credit facility (“LOC Facility”). The commitments under the ABL Credit Agreement expire July 16, 2023. As of December 29, 2019, our obligations under the ABL Credit Agreement are guaranteed by us and by certain of our subsidiaries meeting materiality thresholds set forth in the ABL Credit Agreement as described below.
The proceeds of the loans under the ABL Credit Agreement may be used for working capital and general corporate purposes. We have the right to prepay loans under the ABL Credit Agreement in whole or in part at any time without penalty. Subject to availability under the Borrowing Base, amounts repaid may be reborrowed.
As of December 29, 2019, under the ABL Credit Agreement we had $36.6 million of available credit. The Borrowing Base is recalculated monthly and is subject to seasonality of advertising sales around year-end holiday periods (and resulting growth in advertising accounts receivable balances). As of December 29, 2019, we had a $26.7 million standby letters of credit secured under the LOC Facility. We are required to provide cash collateral equal to 100% of the aggregate undrawn stated amount of each outstanding letter of credit. Cash collateral associated with the LOC Facility is classified in our consolidated balance sheets in other assets and considered restricted cash.
Loans under the ABL Credit Agreement bear interest, at our option, at either a rate based on the London Interbank Offered Rate (“LIBOR”) for the applicable interest period or a base rate, in each case plus a margin. The base rate is the highest of Wells Fargo’s publicly announced prime rate, the federal funds rate plus 0.50% and one-month LIBOR plus 1.0%. The margin ranges from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans and is determined based on average excess availability. Interest on the loans is payable quarterly in arrears with respect to base rate loans and at the end of an interest period (and at three-month intervals if the interest period exceeds three months) in the case of LIBOR loans.
The ABL Credit Agreement requires us, at any time the availability under our revolving credit facility falls below the greater of 12.5% of the total facility size or approximately $8.1 million, to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 until such time as the availability under our revolving credit facility exceeds such threshold for 30 consecutive days.
The ABL Credit Agreement contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the ABL Credit Agreement contains customary negative covenants limiting our ability and the ability of our subsidiaries, among other things, to incur debt, grant liens, make investments, make certain restricted payments and sell assets, subject to certain exceptions. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued and unpaid interest under the ABL Credit Agreement immediately due and payable and may exercise the other rights and remedies provided for under the ABL Credit Agreement and related loan documents. The events of default under the ABL Credit Agreement include, subject to grace periods in certain instances, payment defaults, cross defaults with certain other indebtedness, breaches of covenants or representations and warranties, change in control of us and certain bankruptcy and insolvency events with respect to us and our subsidiaries meeting a materiality threshold set forth in the ABL Credit Agreement.
2026 Senior Secured Notes and Indenture
We entered into the 2026 Notes Indenture in July 2018, among the Company, guarantor subsidiaries of the Company and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (“2026 Notes Trustee”), pursuant to which we issued $310.0 million aggregate principal amount of 2026 Notes. 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). As of December 30, 2018, we determined the excess cash flow due was $4.6 million aggregate principal amount and as such the carrying value of $4.3 million was classified as current portion of long-term debt on the
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
consolidated balance sheet. The redemption was made on April 5, 2019.
If we experience specified changes of control triggering events, we must offer to repurchase the 2026 Notes at a repurchase price equal to 101% of the principal amount of the 2026 Notes repurchased, plus accrued and unpaid interest, if any, to, but excluding the applicable repurchase date.
The 2026 Notes Indenture contains covenants that, among other things, restrict our ability and our restricted subsidiaries to:
| ·
| | incur certain additional indebtedness and issue preferred stock;
|
| ·
| | make certain distributions, investments and other restricted payments;
|
| ·
| | agree to any restrictions on the ability of restricted subsidiaries to make payments to us;
|
| ·
| | merge, consolidate or sell substantially all of our assets, taken as a whole; and
|
| ·
| | enter into certain transactions with affiliates.
|
These covenants are subject to a number of other limitations and exceptions set forth in the 2026 Notes Indenture.
The 2026 Notes Indenture provides for customary events of default, including, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements, or conditions, and certain events of bankruptcy or insolvency involving us and our significant subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding 2026 Notes under the 2026 Notes Indenture will become due and payable immediately without further action or notice. If any other event of default under the 2026 Notes Indenture occurs or is continuing, the 2026 Notes Trustee or holders of at least 25% in aggregate principal amount of the then outstanding 2026 Notes under the 2026 Notes Indenture may declare all of such 2026 Notes to be due and payable immediately.
The 2026 Notes mature on July 15, 2026, and bear interest at a rate of 9.000% per annum. Interest on the 2026 Notes is payable semi-annually in arrears on January 15 and July 15 of each year and commenced on January 15, 2019.
2031 Senior Secured Junior Lien Notes and Indenture
Under the terms of the Junior Term Loan Agreement (discussed below), affiliates of Chatham Asset Management, LLC (“Chatham”) could elect to convert up to $75.0 million in aggregate principal amount of 2029 Debentures owned by them into an equal principal amount of Tranche B Junior Term Loans or notes with terms substantially similar to the Tranche B Junior Term Loans upon written notice to us. As discussed previously, in March 2019, Chatham notified us of their election to convert approximately $75.0 million aggregate principal amount of 2029 Debentures to additional 2031 Notes. The additional 2031 Notes have identical terms, other than with respect to the date of issuance, to the 2031 Notes and will be treated as a single class for all purposes under the applicable indenture, together referred to hereafter as the 2031 Notes. These 2031 Notes have substantially the same terms as the Tranche A Junior Term Loan.
We have the right to prepay notes under the 2031 Notes, in whole or in part, at any time, at a price equal to 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest, if any. Amounts prepaid may not be reborrowed.
The 2031 Notes bear interest at a rate per annum of 6.875%. Interest on the loan is payable semi-annually in arrears on January 15 and July 15 of each year and commenced on January 15, 2019.
Junior Lien Term Loan Agreement
We entered into a Junior Lien Term Loan Credit Agreement in July 2018, among the Company, the guarantors party thereto, the lenders party thereto and The Bank of New York Mellon, as administrative agent and collateral agent (“Junior Term Loan Agreement”). The Junior Term Loan Agreement provided for a $157.1 million secured term loan (“Junior Term Loan”) that matures on July 15, 2030. Our obligations under the Junior Term Loan Agreement are guaranteed by our subsidiaries that guarantee the 2026 Notes.
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THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
We have the right to prepay loans under the Junior Term Loan Agreement, in whole or in part, at any time, at specified prices that decline over time, plus accrued and unpaid interest, if any, of the Junior Term Loan. We have the right to prepay notes under the 2031 Notes, in whole or in part, at any time, at a price equal to 100% of the principal amount thereof, plus a “make-whole” premium and accrued and unpaid interest, if any. Amounts prepaid may not be reborrowed.
The Junior Term Loan bears interest at a rate per annum equal to 7.795% payable semi-annually in arrears on January 15 and July 15 of each year, commencing on January 15, 2019.
The Junior Term Loan Agreement and the 2031 Notes contains customary affirmative covenants, including covenants regarding the payment of taxes and other obligations, maintenance of insurance, reporting requirements and compliance with applicable laws and regulations. Further, the Junior Term Loan Agreement and 2031 Notes contains customary negative covenants limiting the ability of us and our subsidiaries, among other things, to incur debt, grant liens, make investments, make certain restricted payments and sell assets, subject to certain exceptions. Upon the occurrence and during the continuance of an event of default, the lenders may declare all outstanding principal and accrued and unpaid interest under the Junior Term Loan Agreement immediately due and payable and may exercise the other rights and remedies provided for under the Junior Term Loan Agreement and related loan documents. In general, the affirmative and negative covenants of the Junior Term Loan Agreement are substantially the same as the covenants in the 2026 Notes Indenture.
Other Debt
After giving effect to the 2031 Notes, we have $7.1 million aggregate principal amount of 2027 Debentures and $7.8 million aggregate principal amount of 2029 Debentures outstanding as of December 29, 2019.
Maturities
The following table presentsshows information about the approximate annual maturitiesbeneficial ownership of outstanding long‑term debt asshares of December 29, 2019, based upon our required payments, for the next five years and thereafter: | | | | | | Payments | Year | | (in thousands) | 2020 | | $ | — | 2021 | | | — | 2022 | | | — | 2023 | | | — | 2024 | | | — | Thereafter | | | 703,269 | Debt principal | | $ | 703,269 |
8. INCOME TAXES
Income tax provision (benefit) consisted of:
| | | | | | | | | | Years Ended | | | | December 29, | | December 30, | | (in thousands) | | 2019 | | 2018 | | Current: | | | | | | | | Federal | | $ | (24) | | $ | 5,546 | | State | | | (507) | | | (429) | | Deferred: | | | | | | | | Federal | | | (4,729) | | | (961) | | State | | | (1,019) | | | (6,326) | | Income tax provision (benefit) | | $ | (6,279) | | $ | (2,170) | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
As of December 30, 2018, we completed our accounting for the tax effects of enactment of the Tax Act and noted no significant adjustments were required. During 2019 and 2018, we re-measured certain deferred tax assets and liabilities based on the rates at which we expect them to reverse in the future.
The effective tax rate expense (benefit) and the statutory federal income tax rate are reconciled as follows:
| | | | | | | | Years Ended | | | December 29, | | December 30, | | | | 2019 | | 2018 | | Statutory rate | | (21.0) | % | (21.0) | % | State taxes, net of federal benefit | | 0.1 | | (4.3) | | Changes in estimates | | — | | 0.8 | | Changes in unrecognized tax benefits | | (0.3) | | (4.3) | | Other | | 0.5 | | 2.8 | | Impact of valuation allowance | | 6.5 | | 23.0 | | Impact of tax rate changes | | — | | — | | Goodwill impairment | | 12.6 | | — | | Stock compensation | | 0.1 | | 0.3 | | Effective tax rate | | (1.5) | % | (2.7) | % |
The components of deferred tax assets and liabilities consisted of the following:
| | | | | | | | | | December 29, | | December 30, | | (in thousands) | | 2019 | | 2018 | | Deferred tax assets: | | | | | | | | Compensation benefits | | $ | 150,893 | | $ | 157,715 | | State taxes | | | 1,533 | | | 1,909 | | State loss carryovers | | | 9,398 | | | 4,006 | | Federal loss carryovers | | | 4,899 | | | — | | Investments in unconsolidated subsidiaries | | | 4,478 | | | 4,242 | | Deferred interest expense | | | 33,069 | | | 15,342 | | Leases | | | 15,564 | | | — | | Other | | | 3,353 | | | 3,407 | | Total deferred tax assets | | | 223,187 | | | 186,621 | | Valuation allowance | | | (176,069) | | | (143,764) | | Net deferred tax assets | | | 47,118 | | | 42,857 | | Deferred tax liabilities: | | | | | | | | Depreciation and amortization | | | 28,386 | | | 45,239 | | Debt discount | | | 17,874 | | | 17,876 | | Leases ROU Asset | | | 15,419 | | | — | | Other | | | 466 | | | 517 | | Total deferred tax liabilities | | | 62,145 | | | 63,632 | | Net deferred tax liabilities | | $ | (15,027) | | $ | (20,775) | |
The valuation allowance increased by $32.3 million and $34.0 million in 2019 and 2018, respectively.
The timing of recording or releasing a valuation allowance requires significant judgment. A valuation allowance is required when it is more-likely-than-not that all or a portion of deferred tax assets may not be realized. Establishment and removal of a valuation allowance requires us to consider all positive and negative evidence and to make a judgmental decision regarding the timing and 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 performed an assessment of the deferred tax assets quarterly during 2019 and 2018, weighing the positive and negative evidence as outlined in ASC 740, Income Taxes. As we have incurred three years of cumulative pre-tax losses, such
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
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 30, 2018, our valuation allowance against a majority of our deferred tax assets was $143.8 million. For the year ended December 29, 2019, we recorded valuation allowance charges of $32.3 million due to changes to the deferred tax balances. Of this amount, $28.5 million was included as income tax expense and $3.8 million was recorded as an offset to other comprehensive income for changes related to our pension deferred tax asset. Our valuation allowance as of December 29, 2019, was $176.1 million.
We will continue to maintain a valuation allowance against our deferred tax assets until 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 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.
As of December 29, 2019, we have net operating loss federal carryforwards totaling approximately $23.3 million, which do not expire. As of December 29, 2019, we have net operating loss carryforwards in various states totaling approximately $395.2 million, which expire in various years between 2024 and 2038, if not used. We also have state tax credits of $0.4 million which expire between 2025 and 2028, if not utilized.
As of December 29, 2019, we had approximately $13.9 million of uncertain tax positions consisting of approximately $11.3 million in gross unrecognized tax benefits (primarily state tax positions before the offsetting effect of federal income tax) and $2.6 million in gross accrued interest and penalties. If recognized, approximately $5.4 million of the net unrecognized tax benefits would impact the effective tax rate, with the remainder impacting other accounts, primarily deferred taxes. It is reasonably possible that up to $2.2 million reduction of unrecognized tax benefits and related interest may occur within the next 12 months as a result of the expiration of statutes of limitations.
We record interest on unrecognized tax benefits as a component of interest expense, while penalties are recorded as part of income tax expense. Related to the unrecognized tax benefits noted below, we recorded interest expense (benefit) of ($0.5) million and ($0.6) million for 2019 and 2018, respectively. We recorded penalty expense (benefit) of ($0.2) million and ($0.3) million during 2019 and 2018, respectively. Accrued interest and penalties at December 29, 2019 and December 30, 2018 were approximately $2.6 million and $3.3 million, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits consists of the following:
| | | | | | | | | | Years Ended | | | | December 29, | | December 30, | | (in thousands) | | 2019 | | 2018 | | Balance at beginning of fiscal year | | $ | 13,822 | | $ | 20,764 | | Increases based on tax positions in prior year | | | 231 | | | 84 | | Decreases based on tax positions in prior year | | | (2,296) | | | (4,261) | | Increases based on tax positions in current year | | | 801 | | | 1,124 | | Settlements | | | — | | | (511) | | Lapse of statute of limitations | | | (1,277) | | | (3,378) | | Balance at end of fiscal year | | $ | 11,281 | | $ | 13,822 | |
As of December 29, 2019, the following tax years and related taxing jurisdictions were open:
| | | | | | | | Open
| | Years Under
| | Taxing Jurisdiction
| | Tax Year
| | Exam
| | Federal
| | 2016-2019
| | —
| | California
| | 2015-2019
| | —
| | Other States
| | 2006-2019
| | 2015-2017
| |
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THE MCCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
9. EMPLOYEE BENEFITS
We maintain a qualified defined benefit pension plan (“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.
We also have a limited number of supplemental retirement plans to provide certain key employees and retirees with additional retirement benefits. These plans are funded on a pay‑as‑you‑go basis and the accrued pension obligation is largely included in pension and post retirement obligations. We paid $8.8 million and $8.9 million in 2019 and 2018, respectively, for these plans. We also provide or subsidize certain life insurance benefits for employees.
The following tables provide reconciliations of the pension and post‑ retirement benefit plans’ benefit obligations, fair value of assets and funded status as of December 29, 2019, and December 30, 2018:
| | | | | | | | | | | | | | | | Pension Benefits | | Post-retirement Benefits | | (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Change in Benefit Obligation | | | | | | | | | | | | | | Benefit obligation, beginning of year | | $ | 1,920,987 | | $ | 2,080,013 | | $ | 6,827 | | $ | 7,625 | | Interest cost | | | 79,309 | | | 79,154 | | | 262 | | | 256 | | Plan participants’ contributions | | | — | | | — | | | 7 | | | 10 | | Actuarial (gain)/loss | | | 181,506 | | | (126,540) | | | (1,020) | | | (417) | | Gross benefits paid | | | (149,859) | | | (111,640) | | | (584) | | | (647) | | Special termination benefits | | | 6,835 | | | — | | | — | | | — | | Benefit obligation, end of year | | $ | 2,038,778 | | $ | 1,920,987 | | $ | 5,492 | | $ | 6,827 | |
| | | | | | | | | | | | | | | | Pension Benefits | | Post-retirement Benefits | | (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Change in Plan Assets | | | | | | | | | | | | | | Fair value of plan assets, beginning of year | | $ | 1,259,979 | | $ | 1,477,926 | | $ | — | | $ | — | | Actual return on plan assets | | | 271,332 | | | (115,192) | | | — | | | — | | Employer contribution | | | 11,815 | | | 8,885 | | | 577 | | | 637 | | Plan participants’ contributions | | | — | | | — | | | 7 | | | 10 | | Gross benefits paid | | | (149,859) | | | (111,640) | | | (584) | | | (647) | | Fair value of plan assets, end of year | | $ | 1,393,267 | | $ | 1,259,979 | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | | Pension Benefits | | Post-retirement Benefits | | (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Funded Status | | | | | | | | | | | | | | Fair value of plan assets | | $ | 1,393,267 | | $ | 1,259,979 | | $ | — | | $ | — | | Benefit obligations | | | (2,038,778) | | | (1,920,987) | | | (5,492) | | | (6,827) | | Funded status and amount recognized, end of year | | $ | (645,511) | | $ | (661,008) | | $ | (5,492) | | $ | (6,827) | |
Amounts recognized in the consolidated balance sheets at December 29, 2019, and December 30, 2018, consist of:
| | | | | | | | | | | | | | | | Pension Benefits | | Post-retirement Benefits | | (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Current liability | | $ | (124,200) | | $ | (11,510) | | $ | (793) | | $ | (1,015) | | Noncurrent liability | | | (521,311) | | | (649,498) | | | (4,699) | | | (5,812) | | | | $ | (645,511) | | $ | (661,008) | | $ | (5,492) | | $ | (6,827) | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
Amounts recognized in accumulated other comprehensive income for the years ended December 29, 2019, and December 30, 2018, consist of:
| | | | | | | | | | | | | | | | Pension Benefits | | Post-retirement Benefits | | (in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | Net actuarial loss/(gain) | | $ | 781,063 | | $ | 811,063 | | $ | (7,464) | | $ | (7,334) | | Prior service cost/(credit) | | | — | | | — | | | (2,482) | | | (4,456) | | | | $ | 781,063 | | $ | 811,063 | | $ | (9,946) | | $ | (11,790) | |
The elements of retirement and post‑retirement costs are as follows:
| | | | | | | | | | Years Ended | | | | December 29, | | December 30, | | (in thousands) | | 2019 | | 2018 | | Pension plans: | | | | | | | | Interest Cost | | $ | 79,309 | | $ | 79,154 | | Expected return on plan assets | | | (83,820) | | | (90,495) | | Prior service cost amortization | | | 6,834 | | | — | | Actuarial loss | | | 23,995 | | | 25,181 | | Net pension expense | | | 26,318 | | | 13,840 | | Net post-retirement benefit credit | | | (2,603) | | | (2,726) | | Net retirement expenses | | $ | 23,715 | | $ | 11,114 | |
Our discount rate was determined by matching a portfolio of long‑term, non‑callable, high-quality bonds to the plans’ projected cash flows.
Weighted average assumptions used for valuing benefit obligations were:
| | | | | | | | | | | | Pension Benefit | | Post-retirement | | | | Obligations | | Obligations | | | | 2019 | | 2018 | | 2019 | | 2018 | | Discount rate | | 3.48 | % | 4.42 | % | 3.15 | % | 4.15 | % |
Weighted average assumptions used in calculating expense:
| | | | | | | | | | | | | | Pension Benefit Expense | | Post-retirement Expense | | | | December 29, | | December 30, | | | December 29, | | December 30, | | | | | 2019 (1) | | 2018 | | | 2019 | | 2018 | | | Expected long-term return on plan assets | | 7.75 | % | 7.75 | % | | N/A | | N/A | | | Discount rate | | 4.42 | % | 3.91 | % | | 4.15 | % | 3.60 | % | |
_____________________
| (1)
| | As discussed below, we performed an interim remeasurement of the Pension Plan on March 22, 2019, and used the assumptions described below. The expected long-term return on plan assets of 7.75% and discount rate of 4.42% presented in the table were used for the year end 2019 assumptions.
|
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 eligible 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
retirement plan assets and benefit obligationsClass B Common Stock as of March 22, 2019, using a discount rate of 4.10% and an expected return on plan assets of 7.75%. The remeasurement and the special termination benefits resulted in a net reduction to the pension liability and the recognition of a one-time non-cash charge of $6.8 million for the special termination benefits, presented in retirement benefit expense on the statement of operations during the three months ended March 31, 2019. These are included in pension and postretirement obligations on the statements of operations.
Contributions and Cash Flows
We made a required cash minimum contribution of $3.1 million to the Pension Plan in the fourth quarter of 2019. We did not have a required cash minimum contribution to the Pension Plan in 2018 and made no voluntary cash contributions.
Minimum required contributions for fiscal year30, 2020, 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 2020. On January 14, 2020, we entered into a Standstill Agreement (“Agreement”) with the PBGC. The Agreement relates to our Pension Plan and the minimum required payments of approximately $4.0 million due on January 15, 2020 (“Payment Date”).
Pursuant to the Agreement, the PBGC agreed not to exercise the remedies available to it despite the fact that we were not making our scheduled Pension Plan contribution on the Payment Date. Under the Agreement, the PBGC agreed to a forbearance period until February 18, 2020 (“Forbearance Period”), unless terminated earlier, subject to customary terms and conditions. During the Forbearance Period, we continued to work towards a permanent solution under which the PBGC would assume our Pension Plan and we filed for Chapter 11 Bankruptcy protection on February 13, 2020. See Note 2 related to the Chapter 11 Cases.
As of December 29, 2019, the expected benefit payments to retirees under our retirement and post‑retirement plans over the next 10 years are summarized below:
| | | | | | | | | | Retirement | | Post-retirement | | (in thousands) | | Plans (1) | | Plans | | 2020 | | $ | 105,047 | | $ | 806 | | 2021 | | | 126,706 | | | 712 | | 2022 | | | 118,914 | | | 629 | | 2023 | | | 119,193 | | | 556 | | 2024 | | | 120,023 | | | 488 | | 2025-2029 | | | 612,922 | | | 1,663 | | Total | | $ | 1,202,805 | | $ | 4,854 | |
| (1)
| | Largely to be paid from the qualified defined benefit pension plan.
|
Pension Plan Assets
Our investment policies are designed to maximize Pension Plan returns within reasonable and prudent levels of risk, with an investment horizon of greater than 10 years so that interim investment returns and fluctuations are viewed with appropriate perspective. The policy also aims to maintain sufficient liquid assets to provide for the payment of retirement benefits and plan expenses, hence, small portions of the equity and debt investments are held in marketable mutual funds.
Our policy seeks to provide an appropriate level of diversification of assets, as reflected in its target allocations, as well as limits placed on concentrations of equities in specific sectors or industries. It uses a mix of active managers and passive index funds and a mix of separate accounts, mutual funds, common collective trusts and other investment vehicles.
Our assumed long‑term return on assets was developed using a weighted average return based upon the Pension Plan’s portfolio of assets and expected returns for each asset class, considering projected inflation, interest rates and market returns. The assumed return was also reviewed in light of historical and recent returns in total and by asset class.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
As of December 29, 2019, and December 30, 2018, the target allocations for the Pension Plan assets were 61% equity securities, 33% debt securities and 6% real estate securities.
The table below summarizes the Pension Plan’s financial instruments that are carried at fair value on a recurring basis by the fair value hierarchy levels discussed in Note 3, as of the year ended December 29, 2019
| | | | | | | | | | | | | | | | | | | 2019 | | | | Plan Assets | | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Cash and cash equivalents | | $ | 9,355 | | $ | — | | $ | — | | $ | — | | $ | 9,355 | | Mutual funds | | | 139,021 | | | — | | | — | | | — | | | 139,021 | | Common collective trusts | | | — | | | — | | | — | | | 1,178,230 | | | 1,178,230 | | Real estate | | | — | | | — | | | 55,874 | | | — | | | 55,874 | | Private equity funds | | | — | | | — | | | 10,787 | | | — | | | 10,787 | | Total | | $ | 148,376 | | $ | — | | $ | 66,661 | | $ | 1,178,230 | | $ | 1,393,267 | |
The table below summarizes changes in the fair value of the Pension Plan’s Level 3 investment assets held for the year ended December 29, 2019:
| | | | | | | | | | | (in thousands) | | Real Estate | | Private Equity | | Total | | Beginning Balance, December 30, 2018 | | $ | 55,398 | | $ | 9,609 | | $ | 65,007 | | Realized gains (losses), net | | | 2,738 | | | 3 | | | 2,741 | | Transfer in or out of level 3 | | | (4,953) | | | — | | | (4,953) | | Unrealized gains (losses), net | | | 2,691 | | | 1,175 | | | 3,866 | | Ending Balance, December 29, 2019 | | $ | 55,874 | | $ | 10,787 | | $ | 66,661 | |
The table below summarizes the Pension Plan’s financial instruments that are carried at fair value on a recurring basis by the fair value hierarchy levels discussed in Note 3, as of the year ended December 30, 2018:
| | | | | | | | | | | | | | | | | | | 2018 | | | | Plan Assets | | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Cash and cash equivalents | | $ | 9,366 | | $ | — | | $ | — | | $ | — | | $ | 9,366 | | Mutual funds | | | 139,978 | | | — | | | — | | | — | | | 139,978 | | Common collective trusts | | | — | | | — | | | — | | | 1,045,628 | | | 1,045,628 | | Real estate | | | — | | | — | | | 55,398 | | | — | | | 55,398 | | Private equity funds | | | — | | | — | | | 9,609 | | | — | | | 9,609 | | Total | | $ | 149,344 | | $ | — | | $ | 65,007 | | $ | 1,045,628 | | $ | 1,259,979 | |
The table below summarizes changes in the fair value of the Pension Plan’s Level 3 investment assets held for the year ended December 30, 2018:
| | | | | | | | | | | (in thousands) | | Real Estate | | Private Equity | | Total | | Beginning Balance, December 31, 2017 | | $ | 58,050 | | $ | 9,509 | | $ | 67,559 | | Realized gains (losses), net | | | 4,528 | | | 3 | | | 4,531 | | Transfer in or out of level 3 | | | (8,601) | | | — | | | (8,601) | | Unrealized gains (losses), net | | | 1,421 | | | 97 | | | 1,518 | | Ending Balance, December 30, 2018 | | $ | 55,398 | | $ | 9,609 | | $ | 65,007 | |
Cash and cash equivalents: Held primarily in a short-term investment fund (“STIF”) are categorized as Level 1. They are valued at the daily closing price as reported by the fund. These funds are required to publish their daily net asset value and to transact at that price. The STIFif applicable, held by each director; our Chief Executive Officer; our most highly compensated executive officers other than the Pension Plan is deemedChief Executive Officer; all other executive officers of McClatchy as a group; and each person known by McClatchy to be actively traded. With a readily determinable fair market value.
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
Mutual funds: Valued at the daily closing price as reported by the fund. Mutual funds held by the Pension Plan are open-ended mutual funds that are registered with the Securities and Exchange Commission. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the Pension Plan are deemed to be actively traded.
Common collective trusts: Stated at fair value as determined by the issuersbeneficially own more than 5% of the funds on the fair market value of the underlying investments, which is valued at net asset value (“NAV”) as a practical expedient to estimate fair value. The practical expedient would not be used if it is determined to be probable that the funds will sell the investment for an amount different from the reported NAV. NAV for these funds represent the quoted price in a non-market environment. The attributes relating to the nature and risk of such investments are as follows:
| | | | | | | | | | | | (in thousands) | 2019 | | 2018 | | Unfunded Commitments | | Redemption Frequency (if Currently Eligible) | | Redemption Notice Period | Common collective trust funds: | | | | | | | | | | | | U.S equity funds (1) | $ | 358,088 | | $ | 296,135 | | N/A | | Daily | | None | International equity funds (2) | | 373,764 | | | 311,119 | | N/A | | Daily - Monthly | | None | Emerging markets equity funds (3) | | 179,707 | | | 153,927 | | N/A | | Daily | | None - 5-Day | Fixed income funds (4) | | 126,900 | | | 146,197 | | N/A | | Daily | | 2-Day | Total common collective trust | $ | 1,038,459 | | $ | 907,378 | | | | | | | Fixed income credit fund (4) | | 139,771 | | | 138,250 | | N/A | | Weekly | | 2-Day | Total investments measured at NAV | $ | 1,178,230 | | $ | 1,045,628 | | | | | | |
________________
| (1)
| | U.S. equity fund strategies - Investments in U.S. equities are defined as commitments to U.S. dollar-denominated, publicly traded common stocks of U.S. domiciled companies and securities convertible into common stock. The aggregate U.S. equity portfolio is expected to exhibit characteristics comparable to, but not necessarily equal to, that of the Russell 3000 Index.
|
| (2)
| | International equity funds strategies - Investments in international developed markets equities are defined as commitments to publicly traded common stocks and securities convertible into common stock issued by companies primarily domiciled in countries outside of the U.S.
|
| (3)
| | Emerging markets equity fund strategies - Investments in emerging equities may include commitments to publicly traded common stocks and securities convertible into common stock issued by companies domiciled in countries considered emerging by one or more benchmark providers.
|
| (4)
| | Fixed income fund strategies - Fixed income investments may include debt instruments issued by both U.S. and non-U.S. governments, agencies, “quasi Government” agencies, corporations, and any other public or private regulated debt security.
|
Real estate: In 2016 and 2011, we contributed certain of our real property to our Pension Plan, and we entered into leaseback arrangements for the contributed facilities. These contributions were measured at fair value using Level 3 inputs, which primarily consisted of expected cash flows and discount rate that we estimated market participants would seek for bearing the risk associated with such assets. The accounting treatment for both contributions is described below.
The contributions and leasebacks of these properties are treated 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 contributions of any property until the sale of the property by the Pension Plan. At the time of our contributions, our pension obligation was reduced, and our financing obligations were recorded equal to the fair market value of the properties. The financing obligations are reduced by a portion of the lease payments made to the Pension Plan each month and increased for imputed interest expense on the obligations to the extent imputed interest exceeds monthly payments.
Certain of the contributed properties have been sold by the Pension Plan and others may be sold by the Pension Plan in the future.
In August 2019, the Pension Plan sold real property in Macon, Georgia, for approximately $0.8 million, and we terminated our lease on the property. The property was included in the real property contributions that we made to the Pension Plan in fiscal year 2011. As a result of the sale by the Pension Plan, we recognized a $0.6 million loss on the sale of the Macon
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
property in other operating expenses on the consolidated statement of operations in 2019.
In May 2018, the Pension Plan sold real property in the Lexington, Kentucky, for approximately $4.1 million and we terminated our lease on the property. The property was included in the real property contributions that we made to the Pension Plan in fiscal year 2011. As a result of the sale by the Pension Plan, we recognized a $0.2 million loss on the sale of the Lexington property in other operating expenses on the consolidated statement of operations in 2018.
Private equity funds: Private equity funds represent investments in limited partnerships, which invest in start‑up or other private companies. Fair value is estimated based on valuations of comparable public companies, recent sales of comparable private and public companies, and discounted cash flow analysis of portfolio companies and is included as a Level 3 investment in the table above.
401(k) Plan
We have a deferred compensation plan (“401(k) plan”), which enables eligible employees to defer compensation. In the year ended December 29, 2019, and December 30, 2018, our matching contributions were $2.1 million and $2.5 million, respectively. Matching contributions recorded in our compensation line item of our consolidated statement of operations.
10. CASH FLOW INFORMATION
Reconciliation of cash, cash equivalents and restricted cash as reporting in the consolidated balance sheets to the total of the same such amounts show above:
| | | | | | | | | December 29, | | December 30, | (in thousands) | | 2019 | | 2018 | Cash and equivalents | | $ | 10,514 | | $ | 21,906 | Restricted cash included in other assets (1) | | | 26,649 | | | 28,649 | Total cash, cash equivalents and restricted cash | | $ | 37,163 | | $ | 50,555 |
(1)Restricted cash balances are time deposit accounts secured against letters of credit primarily related to contractual agreements with our workers’ compensation insurance carrier and one of our property leases.
Cash paid for interest and income taxes and other non-cash activities consisted of the following:
| | | | | | | | | Year Ended | | | December 29, | | December 30, | (in thousands) | | 2019 | | 2018 | Interest paid (net of amount capitalized) | | $ | 57,909 | | $ | 43,313 | Income taxes paid (net of refunds) | | | 7,476 | | | 13,935 | | | | | | | | Other non-cash investing and financing activities related to pension plan transactions: | | | | | | | Reduction of financing obligation due to sale of real properties by pension plan | | | (1,037) | | | (2,667) | Reduction of PP&E due to sale of real properties by pension plan | | | (1,593) | | | (2,854) |
Other non-cash financing activities includes the issuance of $75.0 million of additional 2031 Notes in exchange for $75.0 million of our 2029 Debentures during March 2019.
Other non-cash investing and financing activities related to pension plan transactions consists of the sale of properties by the Pension Plan in 2019 and 2018, described further in Note 9.
During 2018, we completed a debt-for-debt exchange of a majority of the existing 2027 Debentures and 2029 Debentures for newly issued Tranche A Junior Term Loans and Tranche B Junior Term Loans. This transaction included a non-cash discount of $68.7 million recorded within the gain on extinguishment of debt. See Note 7 for definitions and further information.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
11. COMMITMENTS AND CONTINGENCIES
We have certain other obligations for various contractual agreements that secure future rights to goods and services to be used in the normal course of operations. These include purchase commitments for printing outsource agreements, planned capital expenditures, lease commitments and self‑insurance obligations.
The following table summarizes our minimum annual contractual obligations as of December 29, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | Payments Due By Period | | (in thousands) | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | | Purchase obligations (1) | | $ | 33,237 | | $ | 9,482 | | $ | 3,751 | | $ | 2,565 | | $ | 3 | | $ | 4 | | $ | 49,042 | | Operating leases (2) | | | | | | | | | | | | | | | | | | | | | | | Lease obligations | | | 12,879 | | | 10,776 | | | 10,947 | | | 10,350 | | | 9,004 | | | 21,858 | | | 75,814 | | Sublease income | | | (3,493) | | | (1,498) | | | (389) | | | (211) | | | (59) | | | (10) | | | (5,660) | | Net lease obligation | | | 9,386 | | | 9,278 | | | 10,558 | | | 10,139 | | | 8,945 | | | 21,848 | | | 70,154 | | Workers’ compensation obligations (3) | | | 1,994 | | | 1,371 | | | 1,039 | | | 826 | | | 665 | | | 5,785 | | | 11,680 | | Total | | $ | 44,617 | | $ | 20,131 | | $ | 15,348 | | $ | 13,530 | | $ | 9,613 | | $ | 27,637 | | $ | 130,876 | |
| (1)
| | Represents our purchase obligations primarily related to printing outsource agreements and capital expenditures for PP&E expiring at various dates through 2025.
|
| (2)
| | Represents minimum rental commitments under operating leases with non‑cancelable terms in excess of one year and sublease income from leased space with non-cancelable terms in excess of one year. We rent certain facilities and equipment under operating leases expiring at various dates through 2028 and one parking lot through 2062. Total rental expense, included in other operating expenses, amounted to $17.6 million and $14.3 million in 2019 and 2018, respectively. Most of the leases provide that we pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased premises in addition to the minimum monthly payments. Some of the operating leases have built in escalation clauses. We sublease office space to other companies under non-cancellable agreements that expire at various dates through 2025. Sublease income from operating leases totaled $4.4 million and $5.0 million in 2019 and 2018, respectively.
|
| (3)
| | We retain the risk for workers’ compensation resulting from uninsured deductibles per accident or occurrence that are subject to annual aggregate limits. Losses up to the deductible amounts are accrued based upon known claims incurred and an estimate of claims incurred but not reported. For the year ended December 29, 2019, we compiled our historical data pertaining to the self‑insurance experiences and actuarially developed the ultimate loss associated with our self‑insurance programs for workers’ compensation liability. We believe that the actuarial valuation provides the best estimate of the ultimate losses to be expected under these programs. At December 29, 2019, the undiscounted ultimate losses of all our self‑insurance reserves related to our workers’ compensation liabilities were $11.7 million, net of estimated insurance recoveries of approximately $1.6 million. At December 30, 2018, the undiscounted ultimate losses of all our self-insurance reserves related to workers’ compensation liabilities were $12.3 million, net of estimated insurance recoveries of approximately $1.9 million.
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We discount the net amounts above to present value using an approximate risk‑free rate over the average life of our insurance claims. For the years ended December 29, 2019, and December 30, 2018, the discount rate used was 1.6% and 3.1%, respectively. The present value of all self‑insurance reserves, net of estimated insurance recoveries, for our workers’ compensation liability recorded at December 29, 2019, and December 30, 2018, was $10.6 million and $10.7 million, respectively.
Legal Proceedings and other contingent claims
Chapter 11 Cases
As discussed more fully in Note 2, 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 Bankruptcy Code in the 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.
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
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 go forward goods and services.
We will continue to pursue approval of a proposed restructuring plan with our secured lenders, bondholders, and the PBGC.
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 are unable to predict when we will emerge from this Chapter 11 process.
Other Legal Proceedings
In December 2008, carriers of The Fresno Bee filed a class action lawsuit against us and The Fresno Bee in the Superior Court of the State of California in Fresno County captioned Becerra v. The McClatchy Company (“Fresno case”) alleging that the carriers were misclassified as independent contractors and seeking mileage reimbursement. In February 2009, a substantially similar lawsuit, Sawin v. The McClatchy Company, involving similar allegations was filed by carriers of The Sacramento Bee (“Sacramento case”) in the Superior Court of the State of California in Sacramento County. The class consists of roughly 5,000 carriers in the Sacramento case and 3,500 carriers in the Fresno case. The plaintiffs in both cases are seeking unspecified restitution for mileage reimbursement. With respect to the Sacramento case, in September 2013, all wage and hour claims were dismissed, and the only remaining claim is an equitable claim for mileage reimbursement under the California Civil Code. In the Fresno case, in March 2014, all wage and hour claims were dismissed, and the only remaining claim is an equitable claim for mileage reimbursement under the California Civil Code.
The court in the Sacramento case trifurcated the trial into three separate phases, independent contractor status, liability and restitution. On September 22, 2014, the court in the Sacramento case issued a tentative decision following the first phase, finding that the carriers that contracted directly with The Sacramento Bee during the period from February 2005 to July 2009 were misclassified as independent contractors. We objected to the tentative decision, but the court ultimately adopted it as final. In June 2016, The McClatchy Company was dismissed from the lawsuit, leaving The Sacramento Bee as the sole defendant. On August 30, 2017, the court issued a statement of decision ruling that the court would not hold a phase two trial but would, instead, assume liability from the evidence previously submitted and from the independent contractor agreements. We objected to this decision, but the court adopted it as final. The third phase began on June 20, 2019, and is ongoing.
The court in the Fresno case bifurcated the trial into two separate phases: the first phase addressed independent contractor status and liability for mileage reimbursement and the second phase was designated to address restitution, if any. The first phase of the Fresno case began in the fourth quarter of 2014 and concluded in late March 2015. On April 14, 2016, the court in the Fresno case issued a statement of final decision in favor of us and The Fresno Bee. Accordingly, there will be no second phase. The plaintiffs filed a Notice of Appeal on November 10, 2016.
We continue to defend these actions vigorously and expect that we will ultimately prevail. As a result, we have not established a reserve in connection with the cases. While we believe that a material impact on our consolidated financial position, results of operations or cash flows from these claims is unlikely, given the inherent uncertainty of litigation, a possibility exists that future adverse rulings or unfavorable developments could result in future charges that could have a material impact. We have and will continue to periodically reexamine our estimates of probable liabilities and any associated expenses and make appropriate adjustments to such estimates based on experience and developments in litigation.
Other than the cases described above, we are subject to a variety of legal proceedings (including libel, employment, wage and hour, independent contractor and other legal actions) and governmental proceedings (including environmental matters) that arise from time to time in the ordinary course of our business. We are unable to estimate the amount or range of
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
reasonably possible losses for these matters. However, we currently believe, after reviewing such actions with counsel, that the expected outcome of pending actions will not have a material effect on our consolidated financial statements. No material amounts for any losses from litigation that may ultimately occur have been recorded in the consolidated financial statements as we believe that any such losses are not probable.
We have certain indemnification obligations related to the sale of assets including, but not limited to, insurance claims and multi‑employer pension plans of disposed newspaper operations. We believe the remaining obligations related to disposed assets will not be material to our financial position, results of operations or cash flows.
As of December 29, 2019, we had $26.7 million of standby letters of credit secured under the LOC Facility.
12. SUPPLEMENTAL EQUITY INFORMATION
Accumulated other comprehensive loss
We record changes in our net assets from non‑owner sources in our consolidated statements of stockholders’ deficit. Such changes relate primarily to valuing our pension liabilities, net of tax effects.
Our accumulated other comprehensive loss (“AOCL”) and reclassifications from AOCL, net of tax, consisted of the following:
| | | | | | | | | | | | | | | | Other | | | | | | | Minimum | | Comprehensive | | | | | | | Pension and | | Loss | | | | | | | Post- | | Related to | | | | | | | Retirement | | Equity | | | | | (in thousands) | | Liability | | Investments | | Total | | Balance at December 31, 2017 | | $ | (442,406) | | $ | (6,963) | | $ | (449,369) | | Amounts reclassified from AOCL | | | (153,414) | | | (1,506) | | | (154,920) | | Other comprehensive income | | | (153,414) | | | (1,506) | | | (154,920) | | Balance at December 30, 2018 | | $ | (595,820) | | $ | (8,469) | | $ | (604,289) | | Other comprehensive income (loss) before reclassifications | | | 7,021 | | | — | | | 7,021 | | Amounts reclassified from AOCL | | | 21,129 | | | — | | | 21,129 | | Other comprehensive income | | | 28,150 | | | — | | | 28,150 | | Balance at December 29, 2019 | | $ | (567,670) | | $ | (8,469) | | $ | (576,139) | |
| | | | | | | | | | | | Amount Reclassified from AOCL (in thousands) | | | | | | Year Ended | | Year Ended | | | | | | December 29, | | December 30, | | Affected Line in the | | AOCL Component | | 2019 | | 2018 | | Consolidated Statements of Operations | | Minimum pension and post-retirement liability | | $ | 21,129 | | $ | (56,530) | | Retirement benefit expense (1) | | Reclassification of AOCL tax effects | | | — | | | (98,390) | | Retained earnings (2) | | | | $ | 21,129 | | $ | (154,920) | | Net of tax | |
_____________________
| (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.
|
| (2)
| | See Note 3, Income Taxes regarding the Tax Act.
|
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
Earnings per share (EPS)
Basic EPS excludes dilution from common stock equivalents and reflects income divided by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents in the period. Common stock equivalents arise from dilutive stock appreciation rights and restricted stock units and are computed using the treasury stock method. Anti-dilutive common stock equivalents are excluded from diluted EPS. The weighted average anti‑dilutive common stock equivalents that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation, consisted of the following:
| | | | | | | Years Ended | | | December 29, | | December 30, | (shares in thousands) | | 2019 | | 2018 | Anti-dilutive common stock equivalents | | 471 | | 199 |
Common Stock
We have two classes of stock; Class A and Class B Common Stock. Both classes of stock participate equally in dividends. Holders of Class B are entitled to one vote per share and to elect as a class 75% of the Board of Directors, rounded downPursuant to the nearest whole number. Holdersshareholders’ agreement described below, only current holders of Class A Common Stock are entitled to one-tenthshares of a vote per share and to elect as a class 25% of the Board of Directors, rounded up to the nearest whole number.
Class B Common Stock is convertible atof McClatchy; any lineal descendant of Charles K. McClatchy (1858 to 1936); or a trust for the optionexclusive benefit of, or in which all of the holder intoremainder beneficial interests are owned by, one or more lineal descendants of Charles K. McClatchy may hold shares of Class AB Common Stock on a share‑for‑share basis.of McClatchy. Accordingly, other than as listed below, no officer or director beneficially owns shares of the Class B Common Stock. | | | | | | | | Number of | | | | | | Shares | | | | | | of Class B | | | | Directors and Nominees for Director; Named Executive Officers; | | Common Stock | | | | Directors and Executive Officers as a Group; | | Beneficially | | Percent of | | Beneficial Owners of More Than 5% of Total Shares of Class Outstanding(1) | | Owned | | Class | | Kevin McClatchy | | 1,385,699 | (2)(3) | 57.07 | % | William McClatchy | | 1,290,498 | (2)(4) | 53.15 | % | Theodore Mitchell | | 1,249,998 | (2) | 51.48 | % | Molly Maloney Evangelisti | | 452,850 | | 18.65 | % | All executive officers and directors as a group (17 persons) | | 1,879,049 | (5) | 77.38 | % |
| (1) | All addresses are c/o The McClatchy Company, 2100 Q Street, Sacramento, CA 95816. |
| (2) | Includes 1,249,998 shares of Class B Common Stock held under three separate trusts, all of which hold 416,666 shares each. Each of the trusts has different income beneficiaries. Kevin McClatchy, William McClatchy, and Theodore R. Mitchell share joint voting and investment control with respect to these trusts. |
| (3) | Includes 44,952 shares of Class B Common Stock held by a trust of which Kevin McClatchy is one of three trustees but not a beneficiary. Kevin McClatchy has joint voting and investment control with respect to this trust. Kevin McClatchy disclaims beneficial ownership of these shares. |
| (4) | Includes 40,500 shares of Class B Common stock held by William McClatchy as custodian for his minor children. Anthony Boas has sole voting and investment control with respect to these shares. William McClatchy disclaims beneficial ownership of these shares. |
| (5) | Includes those shares of Class B Common Stock indicated in notes (2), (3), and (4) above. |
Agreement Among Class B Shareholders The holders of shares of Class B Common Stock are parties to an agreement, the intent of which is to preserve control of the Company by the McClatchy family. Under the terms of the agreement, the Class B shareholders have agreed to restrict the transfer of any shares of Class B Common Stock to one or more “Permitted Transferees,” subject to certain exceptions. A “Permitted Transferee” is generally any of our current holdersholder of shares of Class B Common Stock;Stock of McClatchy; any lineal descendant of Charles K. McClatchy (1858 to 1936); or a trust for the exclusive benefit of, or in which all of the remainder beneficial interests are owned by, one or more lineal descendants of Charles K. McClatchy. Generally, Class B shares can be converted into shares of Class A Common Stock and then transferred freely (unless following conversion, the outstanding shares of Class B Common Stock would constitute less than 25% of the total numbermember of all our outstanding shares of common stock)stock of the Company, in which case additional steps must be taken). In the event that a Class B shareholder attempts to transfer any shares of Class B Common Stock in violation of the agreement, or upon the happening of certain other events enumerated in the agreement as “Option Events,” each of the remaining Class B shareholders has an option to purchase a percentage of the total number of shares of Class B Common Stock proposed to be transferred equal to such remaining Class B shareholder’s ownership percentage of the total number of outstanding shares of Class B Common Stock. If all the shares proposed to be transferred are not purchased by the remaining Class B shareholders, we haveMcClatchy has the option of purchasing the remaining shares. The agreement can be terminated by the vote of the holders of 80% of the outstanding shares of Class B Common Stock who are subject to the agreement. The agreement will terminate on September 17, 2047, unless terminated earlier in accordance with its terms. See discussion in Note 2“Ongoing Negotiations on Proposed Plan of Reorganization” for potential impact on our existing Common Stock.
Stock Plans
During 2019, we had two stock‑based compensation plans, which are described below. We have suspended the issuance of Class A Common Stock as a result of vesting in our stock plans pending the outcome of our Chapter 11 Cases. It is expected that as a result of our restructuring, the Class A and Class B Common Stock will be eliminated upon emergence
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
from bankruptcy. See Note 2Securities Authorized for an expanded discussionIssuance under Equity Compensation Plans
The following table summarizes our equity plan information as of December 29, 2019. Pursuant to the Chapter 11 Cases andprovisions of the expected impact it may have on our Class A and Class B Common Stock. The McClatchy Company 2004 Stock Incentive Plan (“2004 Plan”) reserved 900,000 Class A Common shares for issuance to key employees and outside directors. The options vested in installments over four years, and once vested are exercisable up to 10 years from the date of grant. In addition, the 2004 Plan permitted the following type of incentive awards in addition to common stock, stock options and stock appreciation rights (“SARs”): restricted stock, unrestricted stock, stock units and dividend equivalent rights. The 2004 Plan was frozen in May 2012 so that no additional awards could be granted under the plan.
The McClatchy Company 2012 Omnibus Incentive Plan, (“2012 Plan”) was adopted in 2012 and 500,000 shares of Class A Common Stock were reserved for issuance under the 2012 Plan plus the number of shares available for future awards under the 2004 Plan as of the date of May 16, 2012 (the shareholder meeting date) plus the number of shares subject to awards outstanding under the 2004 Plan as of May 16, 2012, which terminate by expiration, forfeiture, cancellation or otherwise without the issuance of such shares. The 2012 Plan was further amended in May 2017 and May 2019, among other things, to increase the number of shares of Class A Common Stock reserved for issuance by 500,000 sharessubject to outstanding stock appreciation rights (“SARs”) and 750,000 shares, respectively. The 2012 Plan, as amended, generally provides for granting of stock options or SARs only at an exercise price at least equal to fair market value on the grant date; a 10-year maximum term for stock options and SARs; no re-pricing of stock options or SARs without prior shareholder approval; and no reload or “evergreen” share replenishment features.
Stock Plans Activity
In 2019, no shares of the Class A Common Stock were granted to any non-employee director.
In 2018, we granted 4,500 shares of Class A Common Stock to each non-employee director under the 2012 Plan. In accordance with The McClatchy Company Director Deferral Program (“Deferral Program”), five directors elected to defer issuance of their 2018 grants. As such, 27,000 shares were issued and 22,500 were deferred until the director terminates from the board of directors.
We granted restricted stock units (“RSUs”) at, the grant date fair value to certain key employees underper share exercise price of outstanding SARs, and the 2012 Plan as summarizedtotal number of shares reserved and available for issuance were adjusted in connection with the one-for-ten reverse stock split that occurred on June 7, 2016. Accordingly, the share totals and exercise prices shown in the table below. Fair value for RSUs is based on our Class A Common Stock closing price, as reported bybelow reflect the NYSE American, on the date of grant. The RSUs generally vest over three years after grant date but terms of each grant are at the discretion of the compensation committee of the board of directors.post-reverse stock split holdings.
| | | | | | | | | | | | | | | Securities Remaining | | | | | | | | Available for Future | | | | Securities to be Issued | | Weighted Average | | Issuance under Equity | | | | upon Exercise of | | Exercise Price of | | Compensation Plans | | | | Outstanding Options, | | Outstanding Options, | | (excluding securities | | | | Warrants and | | Warrants and Rights | | reflected in column | | | | Rights (#)(1) | | ($/Share)(3) | | (a)) (#) | | Plan Category | | (a) | | (b) | | (c) | | Equity compensation plans approved by shareholders | | | | | | | | 2004 Stock Incentive Plan | | 57,300 | | $ | 35.00 | | — | | 2012 Omnibus Incentive Plan | | 363,175 | | $ | 25.46 | | 892,629 | | Total | | 420,475 | (2) | | | | 892,629 | |
| (1) | Amount includes RSUs and SARs. |
| (2) | Of this total, outstanding SARs awards total 88,875, and the 413,466 balance consists of outstanding RSU awards. The 88,875 SARs outstanding are underwater (that is, their exercise price is greater than the Company’s stock price). No SARs have been issued since 2013. Such SARs have ten-year terms and exercise prices ranging from $24.60 to $40.80. |
| (3) | The weighted average prices relate only to outstanding SARs. |
The following table summarizes the RSUs stock activity:
| | | | | | | | | | | Weighted | | | | | | Average Grant | | | | | | Date Fair | | | | RSUs | | Value | | Nonvested — December 31, 2017 | | 245,794 | | $ | 11.55 | | Granted | | 278,130 | | $ | 8.90 | | Vested | | (167,722) | | $ | 11.38 | | Forfeited | | (24,602) | | $ | 9.54 | | Nonvested — December 30, 2018 | | 331,600 | | $ | 9.56 | | Granted | | 285,771 | | $ | 5.58 | | Vested | | (172,297) | | $ | 9.59 | | Forfeited | | (31,608) | | $ | 6.96 | | Nonvested — December 29, 2019 | | 413,466 | | $ | 7.00 | |
For the fiscal year ended December 29, 2019, the total fair value of the RSUs that vested was $1.0 million. As of December 29, 2019, there were $1.8 million of unrecognized compensation costs for non-vested RSUs, which are expected to be recognized over 1.7 years. As a result of the filing of our Chapter 11 Cases, we expect that all of these awards will be cancelled.
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YEARS ENDED DECEMBER 29, 2019 AND DECEMBER 30, 2018
When SARs are granted, they are granted at grant date fair value to certain key employees from the 2012 Plan. Fair value for SARs is determined using a Black-Scholes option valuation model that uses various assumptions, including expected life in years, volatility and risk-free interest rate. The SARs generally vest four years after grant date, but the terms of each grant are at the discretion of the compensation committee of the board of directors.
Outstanding SARs are summarized as follows:
| | | | | | | | | | | | | | Weighted | | Aggregate | | | | | | Average | | Intrinsic Value | | | | SARs | | Exercise Price | | (in thousands) | | Outstanding December 31, 2017 | | 156,175 | | $ | 32.12 | | $ | — | | Expired | | (42,875) | | $ | 32.09 | | | | | Outstanding December 30, 2018 | | 113,300 | | $ | 32.13 | | $ | — | | Expired | | (24,425) | | $ | 34.02 | | | | | Outstanding December 29, 2019 | | 88,875 | | $ | 31.61 | | $ | — | | SARs exercisable: | | | | | | | | | | December 30, 2018 | | 113,300 | | | | | $ | — | | December 29, 2019 | | 88,875 | | | | | $ | — | |
As of December 29, 2019, there were no unrecognized compensation costs related to SARs granted under our plans. The weighted average remaining contractual life of SARs vested and exercisable at December 29, 2019, was 1.5 years. As a result of the filing of our Chapter 11 Cases, we expect that all of these awards will be cancelled.
The following tables summarize information about SARs outstanding in the stock plans at December 29, 2019:
| | | | | | | | | | | | | | | | | | Average | | | | | | | | | | | | | | Remaining | | Weighted | | | | Weighted | | Range of Exercise | | SARs | | Contractual | | Average | | SARs | | Average | | Prices | | Outstanding | | Life | | Exercise Price | | Exercisable | | Exercise Price | | $24.60 – $40.80 | | 88,875 | | 1.50 | | $ | 31.61 | | 88,875 | | $ | 31.61 | | Total | | 88,875 | | 1.50 | | $ | 31.61 | | 88,875 | | $ | 31.61 | |
Stock‑Based Compensation
Total stock‑based compensation expense consisted of the following:
| | | | | | | | | Years Ended | | | December 29, | | December 30, | (in thousands) | | 2019 | | 2018 | Stock-based compensation expense | | $ | 1,504 | | $ | 2,057 |
ITEM 1ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a ‑ 15(e) or 15d ‑ 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10‑K. Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective at that time to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission Rules and Forms.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting that occurred during the fourth fiscal quarter of fiscal 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934, as amended Rules 13a‑15(f). The Company’s internal control system over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of the Company’s financial statements presented in accordance with generally accepted accounting principles in the United States of America.
An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of December 29, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the Internal Control – Integrated Framework (2013 framework). Based on management’s assessment and those criteria, management believes that the Company’s internal control over financial reporting was effective as of December 29, 2019.
ITEM 9B. OTHER INFORMATION
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated herein by reference from the definitive proxy statement to be filed pursuant to Regulation 14A or from an amendment to Form 10-K within 120 days after our fiscal year‑end of December 29, 2019.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the definitive proxy statement to be filed pursuant to Regulation 14A or from an amendment to Form 10-K within 120 days after our fiscal year‑end of December 29, 2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from the definitive proxy statement to be filed pursuant to Regulation 14A or from an amendment to Form 10-K within 120 days after our fiscal year‑end of December 29, 2019.
ITEM 13.3. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference fromCertain Relationships and Related Transactions
Our Audit Committee is responsible for reviewing and approving the definitive proxy statement to be filed pursuant to Regulation 14Aterms of all related party transactions. Our policy for the review, approval or from anratification of related party transactions states that the Audit Committee must review any related party transaction that meets the minimum threshold for disclosure in the amendment to Form 10-K under the relevant SEC rules (generally, transactions involving amounts that exceed the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years in which a related person has a direct or indirect material interest). Related persons include executive officers and directors of the Company or their immediate family members or shareholders owning 5% or greater of our securities. We have not had any related party transactions during the last two completed fiscal years. Board Independence The Board has determined that each of the current directors, other than Mr. Forman, President and Chief Executive Officer, has no material relationship with the Company and is “independent” within 120 days after our fiscal year‑endthe meaning of December 29, 2019. the applicable requirements set forth in the Exchange Act and the applicable SEC and listing ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Incorporated herein by reference fromrules , as currently in effect. Accordingly, the definitive proxy statementBoard has affirmatively determined that Messrs. Barnes, Maloney, K. McClatchy, W. McClatchy, Mitchell and Ostler, and Mmes. Ballantine, Evangelisti, Joshi and Thomas are independent within the meaning of the applicable requirements set forth in the Exchange Act and the applicable SEC and listing rules. In making its independence determination with respect to be filed pursuantthe directors who are members of the McClatchy family, the Board considered the overall nature of these familial relationships and concluded that these relationships were not material with respect to Regulation 14A or from an amendment to Form 10-Kthe independence of the directors who are members of the McClatchy family. Furthermore, the Board has determined that each of the members of the Audit Committee, the Compensation Committee, the Committee on the Board and the Nominating Committee is “independent” within 120 days after our fiscal year‑endthe meaning of December 29, 2019.
the applicable requirements set forth in the Exchange Act and the applicable SEC and listing rules, as currently in effect.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Fees Billed to McClatchy by Deloitte & Touche LLP The following table shows the fees paid or accrued by McClatchy for the audit and other services provided by Deloitte & Touche LLP for fiscal 2019 and 2018: | | | | | | | | | 2019 | | 2018 | Audit Fees(1) | | $ | 2,631,900 | | $ | 2,690,000 | Audit-Related Fees(2) | | | 58,000 | | | 115,000 | Tax Fees | | | — | | | — | All Other Fees | | | — | | | 200,000 | Total | | $ | 2,689,900 | | $ | 3,005,000 |
| (1) | Audit fees represent fees for professional services provided in connection with the audit of our financial statements and our controls over financial reporting and review of our quarterly financial statements and audit services provided in connection with other statutory or regulatory filings. |
| (2) | Audit-related fees consisted primarily of accounting consultations, employee benefit plan audits and other attestation services. |
In considering the services provided by Deloitte & Touche LLP, the Audit Committee discussed the nature of the services with the independent auditors and management and determined that the services were compatible with the provision of independent audit services permitted under the rules and regulations of the SEC and the Sarbanes-Oxley Act of 2002. All of the amounts reflected in the table above were approved according to the Audit Committee’s pre-approval policy described below. Audit Committee Pre-approval Policy To ensure the independence of our independent accountants and to comply with applicable securities laws, listing rules and the Audit Committee charter, the Audit Committee is responsible for reviewing, deliberating and, if appropriate, pre-approving all audit, audit-related, and non-audit services to be performed by the independent accountants. For that purpose, the Audit Committee has established a policy and related procedures regarding the pre-approval of all audit, audit-related, and non-audit services to be performed by our Company’s independent accountants (“Pre-Approval Policy”). The Pre-Approval Policy provides that our independent accountants may not perform any audit, audit-related, or non-audit service for McClatchy, subject to those exceptions that may be permitted by applicable law, unless: (1) the service has been pre-approved by the Audit Committee; or (2) subject to the procedure established by the Audit Committee or by the chairman of the Audit Committee if the fees for services involved are less than $50,000.
PART IV ITEM 15PART IV ITEM 15.. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed as part of this report: 1.Financial1.Financial Statements
Our consolidated financial statements are as set forth under Item 8 of this report on Form 10-K. 2. Financial Statement Schedules All schedules are omitted because they are not applicable, not required or the information is included in the consolidated financial statements. 3. Exhibits | | | |
|---|
| Exhibit
Number | | | | Description |
|---|
3.1 | | The Company’s Restated Certificate of Incorporation, dated June 26, 2006 | 3.2 | | The Company’s Bylaws as amended and restated effective March 20, 2012 | 3.3 | | Amended and restated Certificate of Incorporation of The McClatchy Company | 4.1 | #
| Description of Securities | 10.1 | | Third Amended and Restated Credit Agreement dated December 18, 2012, among the Company, the lenders from time to time party thereto, and Bank of America, N.A., Administrative Agent, Swing Line Lender and L/C Issuer | 10.2 | | Amendment No. 1 to the Third Amended and Restated Credit Agreement and Amendment No. 1 to the Security Agreement, dated October 21, 2014, between the Company and Bank of America, N.A., as Administrative Agent. | 10.3 | | Amendment No. 4 to the Third Amended and Restated Credit Agreement and Amendment No. 1 to the Security Agreement, dated January 10, 2017, by and between the Company and Bank of America, N.A., as Administrative Agent. | 10.4 | | Collateralized Issuance and Reimbursement Agreement, dated October 21, 2014, between the Company and Bank of America, N.A | 10.5 | | Indenture dated December 18, 2012, among The McClatchy Company, the subsidiary guarantors party thereto and the Bank of New York Mellon Trust Company, N.A. relating to the 9.00% Senior Secured Notes due 2022 | 10.6 | | Registration Rights Agreement dated December 18, 2012, between The McClatchy Company and J.P. Morgan Securities LLC, relating to the 9.00% Senior Secured Notes due 2022 | 10.7 | | Term Loan Framework Agreement, dated as of April 26, 2018, between The McClatchy Company and Chatham Asset Management, LLC | 10.8 | | Purchase Agreement, dated as of June 29, 2018, by and among the Company, certain of the Company’s subsidiaries, J.P. Morgan Securities LLC and Credit Suisse Securities (USA) LLC | 10.9 | | Amended and Restated Term Loan Framework Agreement, dated as of June 26, 2018, between the Company and Chatham Asset Management, LLC | 10.10 | | Credit Agreement dated July 16, 2018, among the Company, the lenders from time to time party thereto, and Wells Fargo Bank, N.A., as administrative agent | 10.11 | | Fifth Supplemental Indenture, dated as of July 13, 2018, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee for the Notes | 10.12 | | Indenture dated July 16, 2018, among the Company, certain subsidiaries of the Company and The Bank of New York Mellon Trust Company, N.A., relating to the 9.000% Senior Secured Notes due 2026 | 10.13 | | First Supplemental Indenture, dated as of March 15, 2019, among the Company, subsidiaries of the Company party thereto as guarantors and The Bank of New York Mellon, as trustee and collateral agent |
| | |
|---|
Exhibit
Number | | Description |
|---|
10.15 | | Form of Global 9.000% Senior Secured Notes due 2026 (included in Exhibit 10.17) | 10.16 | | Junior Lien Term Loan Agreement dated July 16, 2018, among the Company, the lenders party thereto, the guarantors party thereto, and The Bank of New York Mellon, N.A., as administrative agent, tranche A collateral agent and tranche B collateral agent | 10.17 | | Indenture, dated as of December 18, 2018, among the Company, subsidiaries of the Company party thereto as guarantors and The Bank of New York Mellon, as trustee and collateral agent | 10.18 | | Form of Note (included in Exhibit 10.20) | 10.19 | * | The McClatchy Company Management Objective Plan Description. | 10.20 | * | Amended and Restated Supplemental Executive Retirement Plan | 10.21 | * | Amendment Number 1 to The McClatchy Company Supplemental Executive Retirement Plan | 10.22 | * | Amended and Restated McClatchy Company Benefit Restoration Plan | 10.23 | * | Amended and Restated McClatchy Company Bonus Recognition Plan | 10.24 | * | The Company’s 2004 Stock Incentive Plan, as amended and restated | 10.25 | * | The McClatchy Company 2012 Omnibus Incentive Plan (as amended and restated March 23, 2017 and further amended May 16, 2019) | 10.26 | * | Form of Restricted Stock Unit Agreement under The McClatchy Company 2012 Omnibus Incentive Plan, as amended and restated | 10.27 | * | Form of Stock Appreciation Right Agreement under The McClatchy Company 2012 Omnibus Incentive Plan, as amended and restated | 10.28 | * | Form of Indemnification Agreement between the Company and each of its officers and directors | 10.29 | * | The McClatchy Company Director Deferral Program under The McClatchy Company 2012 Omnibus Incentive Plan | 10.30 | * | Form of Stock Award Deferral Election Agreement under The McClatchy Company 2012 Omnibus Incentive Plan | 10.31 | * | The McClatchy Company Executive Supplemental Retirement Plan | 10.32 | * | The McClatchy Company Executive Severance Benefit Plan | 10.33 | * | Employment Agreement dated January 25, 2017 by and between Craig I. Forman and the Company | 10.34 | * | Form of Amendment No. 1 to Executive Employment Agreement, dated January 25, 2019, by and between Craig I. Forman and The McClatchy Company | 10.35 | *# | Executive Retention Agreement dated May 24, 2019 by and between Scott Manuel and the Company | 10.36 | | Standstill Agreement dated January 14, 2020 by and between the Company and the Pension Benefit Guaranty Corporation | 10.3610.37
| | Form of Debtor-in-Possession Credit Agreement, dated February 12, 2020, among Encina Business Credit, LLC, as administrative agent for each member of the Lender Group and the Bank Product Providers, the Company, as a debtor and debtor-in-possession, and certain of the Borrowers party thereto | 21 | | Subsidiaries of the Company | 23 | | Consent of Deloitte & Touche LLP | 31.1 | # | Certification of the ChiefPrincipal Executive Officer of The McClatchy Companyand Principal Financial Officer pursuant to Rule 13a‑14(a) under the Exchange Act | 31.2
| | Certification of the Chief Financial Officer of The McClatchy Company pursuant to Rule 13a‑14(a)13a-14(a) under the Exchange Act
| 32 | **
| Certification of the ChiefPrincipal Executive Officer and the ChiefPrincipal Financial Officer of The McClatchy Company pursuant to 18 U.S.C. Section 1350 | 101.INS | | XBRL Instance Document | 101.SCH | | XBRL Taxonomy Extension Schema | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | 101.DEF | | XBRL Extension Definition Linkbase | 101.LAB | | XBRL Taxonomy Extension Label Linkbase | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
* | Compensation plans or arrangements for the Company’s executive officers and directors |
*Compensation plans or arrangements for the Company’s executive officers and directors
**Furnished, not filed | Furnished, not filed |
# Filed herewith ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURESIGNATURESS Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MCCLATCHYJCK LEGACY COMPANY
(Registrant) |
President, Chief Executive Officer
and Director | | /s/ Craig I. Forman Craig I. Forman
President and Chief Executive Officer
and Director | March 30,September 29, 2020
| |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. | | | Signature | Title | Date | Signature
| Title
| Date
| | | | /s/ Craig I. Forman Craig I. Forman | President and Chief Executive Officer
And Director
(Principal Executive, Officer) | March 30, 2020
| | | | /s/ Peter R. Farr
| Vice President‑Finance, Chief Financial
Officer
| March 30, 2020
| Peter R. Farr
| (Principal Financial and Accounting Officer)
| September 29, 2020 | | | | /s/ Kevin S. McClatchy Kevin S. McClatchy | Chairman of the Board
| March 30,September 29, 2020
| | | | /s/ Elizabeth Ballantine Elizabeth Ballantine | Director | March 30,September 29, 2020
| | | | /s/ Leroy Barnes, Jr. Leroy Barnes, Jr. | Director | March 30,September 29, 2020
| | | | /s/ Molly Maloney Evangelisti Molly Maloney Evangelisti | Director | March 30,September 29, 2020
| | | | /s/ Anjali Joshi Anjali Joshi | Director | March 30,September 29, 2020
| | | | /s/ Brown McClatchy Maloney Brown McClatchy Maloney | Director | March 30,September 29, 2020
| | | | /s/ William B. McClatchy William B. McClatchy | Director | March 30,September 29, 2020
| | | | /s/ Theodore R. Mitchell Theodore R. Mitchell | Director | March 30,September 29, 2020
| | | | /s/ Clyde W. Ostler Clyde W. Ostler | Director | March 30,September 29, 2020
| | | | /s/ Maria Thomas Maria Thomas | Director | March 30,September 29, 2020
| | | | | | |
|
