LEE ENTERPRISES, Inc - Quarter Report: 2019 December (Form 10-Q)

 

 

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended December 29, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 1-6227

LEE ENTERPRISES, INCORPORATED

 

(Exact name of Registrant as specified in its Charter)

 

Delaware	42-0823980
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

 4600 E. 53rd Street, Davenport, Iowa 52807

(Address of principal executive offices)

  

(563) 383-2100

(Registrant's telephone number, including area code)

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $.01 per share	LEE	New York Stock Exchange

 

 

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 [X]     No [  ]

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files. 

 Yes [X]     No [  ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer", "accelerated filer", "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer	[  ]	Accelerated filer	[X]
	Non-accelerated filer	[  ]	Smaller reporting company	[X]
			Emerging growth company	[  ]

 

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

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]     No [X]

 

As of January 31, 2020, 58,136,424 shares of Common Stock of the Registrant were outstanding. 

 

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Table Of Contents				PAGE
FORWARD LOOKING STATEMENTS				1
PART I	FINANCIAL INFORMATION			2
	Item 1.	Financial Statements (Unaudited)		2
		Consolidated Balance Sheets - December 29, 2019 and September 29, 2019		2
		Consolidated Statements of Income and Comprehensive Income - 13 weeks ended December 29, 2019		4
		Consolidated Statements of Stockholder's Equity - 13 weeks ended December 29, 2019 and December 30, 2018		5
		Consolidated Statements of Cash Flows - 13 weeks ended December 29, 2019 and December 30, 2018		6
		Notes to Consolidated Financial Statements		7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		22
	Item 4.	Controls and Procedures		23
PART II	OTHER INFORMATION			23
	Item 1.	Legal Proceedings		23
	Item 6.	Exhibits		23
SIGNATURES				24

 

 

 

 

			(Unaudited)
			December 29,				September 29,
(Thousands of Dollars)		2019				2019
ASSETS
Current assets:
Cash and cash equivalents			4,468				8,645
Accounts receivable and contract assets, net			50,650				42,536
Inventories			3,373				3,769
Prepaids and other			4,659				5,353
Total current assets			63,150				60,303
Investments:
Associated companies			29,573				28,742
Other			10,847				10,684
Total investments			40,420				39,426
Property and equipment:
Land and improvements			17,028				16,979
Buildings and improvements			148,690				148,514
Equipment			230,561				237,289
Construction in process			3,432				1,980
			399,711				404,762
Less accumulated depreciation			318,598				322,723
Property and equipment, net			81,113				82,039
Operating lease right-of-use assets			10,125				—
Goodwill			250,309				250,309
Other intangible assets, net			104,395				107,393
Medical plan assets, net			14,791				14,338
Other			1,427				1,394
Total assets			565,730				555,202

			(Unaudited)
			December 29,				September 29,
(Thousands of Dollars and Shares, Except Per Share Data)		2019				2019
LIABILITIES AND EQUITY
Current liabilities:
Current portion of lease liabilities			2,341				—
Current maturities of long-term debt			1,892				2,954
Accounts payable			14,132				16,750
Compensation and other accrued liabilities			15,422				17,711
Accrued interest			10,395				1,903
Unearned revenue			22,966				21,720
Total current liabilities			67,148				61,038
Long-term debt, net of current maturities			421,248				429,391
Operating lease liabilities			7,787				—
Pension obligations			46,311				47,037
Postretirement and postemployment benefit obligations			2,569				2,550
Deferred income taxes			21,614				29,806
Income taxes payable			17,299				8,742
Warrants and other			12,724				13,469
Total liabilities			596,700				592,033
Equity (deficit):
Stockholders' equity (deficit):
Serial convertible preferred stock, no par value; authorized 500 shares; none issued			—				—
Common Stock, $0.01 par value; authorized 120,000 shares; issued and outstanding:			581				577
December 29, 2019; 58,136 shares; $0.01 par value
September 29, 2019; 57,646 shares; $0.01 par value
Class B Common Stock, $2 par value; authorized 30,000 shares; none issued			—				—
Additional paid-in capital			255,642				255,476
Accumulated deficit			(260,103	)			(265,423	)
Accumulated other comprehensive loss			(28,797	)			(29,114	)
Total stockholders' deficit			(32,677	)			(38,484	)
Non-controlling interests			1,707				1,653
Total deficit			(30,970	)			(36,831	)
Total liabilities and deficit			565,730				555,202

 

		13 Weeks Ended
		December 29,				December 30,
(Thousands of Dollars, Except Per Common Share Data)		2019				2018
Operating revenue:
Advertising and marketing services			65,727				75,962
Subscription			41,694				46,268
Other			14,922				13,971
Total operating revenue			122,343				136,201
Operating expenses:
Compensation			43,243				47,038
Newsprint and ink			4,736				6,339
Other operating expenses			48,462				49,743
Depreciation and amortization			6,719				7,529
Assets loss (gain) on sales, impairments and other, net			814				(100	)
Restructuring costs and other			1,632				62
Total operating expenses			105,606				110,611
Equity in earnings of associated companies			1,569				2,129
Operating income			18,306				27,719
Non-operating income (expense):
Interest expense			(11,115	)			(12,256	)
Debt financing and administrative costs			(1,196	)			(896	)
Other, net			1,593				665
Total non-operating expense, net			(10,718	)			(12,487	)
Income before income taxes			7,588				15,232
Income tax expense			1,871				4,513
Net income			5,717				10,719
Net income attributable to non-controlling interests			(397	)			(358	)
Income attributable to Lee Enterprises, Incorporated			5,320				10,361
Other comprehensive income (loss), net of income taxes			317				(122	)
Comprehensive income attributable to Lee Enterprises, Incorporated			5,637				10,239
Earnings per common share:
Basic:			0.09				0.19
Diluted:			0.09				0.18

 

(Thousands of Dollars)		Accumulated Deficit				Common Stock				Additional paid-in capital				Accumulated Other Comprehensive Loss				Total
September 30, 2019			(265,423	)			577				255,476				(29,114	)			(38,484	)
Shares issued (redeemed)			—				4				(379	)			—				(375	)
Income attributable to Lee Enterprises, Incorporated			5,320				—				—				—				5,320
Stock compensation			—				—				545				—				545
Other comprehensive loss			—				—				—				452				452
Deferred income taxes, net			—				—				—				(135	)			(135	)
December 29, 2019			(260,103	)			581				255,642				(28,797	)			(32,677	)

(Thousands of Dollars)		Accumulated Deficit				Common Stock				Additional paid-in capital				Accumulated Other Comprehensive Loss				Total
October 1, 2018			(279,691	)			572				253,511				(11,746	)			(37,354	)
Shares issued (redeemed)			—				5				(453	)			—				(448	)
Income attributable to Lee Enterprises, Incorporated			10,361				—				—				—				10,361
Stock compensation			—				—				385				—				385
Other comprehensive income			—				—				—				(163	)			(163	)
Deferred income taxes, net			—				—				—				41				41
December 30, 2018			(269,330	)			577				253,443				(11,868	)			(27,178	)

 

		13 Weeks Ended
			December 29,				December 30,
(Thousands of Dollars)		2019				2018
Cash provided by (required for) operating activities:
Net income			5,717				10,719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,719				7,529
Stock compensation expense			302				464
Distributions greater (less) than earnings of MNI			(658	)			51
Deferred income taxes			(8,328	)			204
Debt financing and administrative costs			1,196				896
Pension contributions			—				(650	)
Other, net			713				(468	)
Changes in operating assets and liabilities:
Increase in receivables and contract assets			(8,137	)			(7,479	)
Decrease in inventories and other			280				318
Increase in accounts payable and other accrued liabilities			4,016				4,088
Decrease in pension and other postretirement and postemployment benefit obligations			(709	)			(741	)
Change in income taxes payable			10,189				4,287
Other, including warrants			(939	)			189
Net cash provided by operating activities			10,361				19,407
Cash required for investing activities:
Purchases of property and equipment			(2,458	)			(1,002	)
Proceeds from sales of assets			12				585
Acquisitions			(1,121	)			—
Distributions less than earnings of TNI			(173	)			(881	)
Other, net			—				(97	)
Net cash required for investing activities			(3,740	)			(1,395	)
Cash required for financing activities:
Payments on long-term debt			(10,233	)			(7,027	)
Debt financing and administrative costs paid			(193	)			(8	)
Common stock transactions, net			(372	)			(448	)
Net cash required for financing activities			(10,798	)			(7,483	)
Net increase (decrease) in cash and cash equivalents			(4,177	)			10,529
Cash and cash equivalents:
Beginning of period			8,645				5,380
End of period			4,468				15,909

 

1	BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited, interim, Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for quarterly reports. In the opinion of management, these financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position of Lee Enterprises, Incorporated and subsidiaries (the “Company”) as of December 29, 2019 and our results of operations and cash flows for the periods presented. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2019 Annual Report on Form 10-K.

 

Because of seasonal and other factors, the results of operations for the 13 weeks ended December 29, 2019 are not necessarily indicative of the results to be expected for the full year.

 

References to “we”, “our”, “us” and the like throughout the Consolidated Financial Statements refer to the Company. References to “2020”, “2019” and the like refer to the fiscal years ended the last Sunday in September.

 

The Consolidated Financial Statements include our accounts and those of our subsidiaries, all of which are wholly-owned, except for our 82.5% interest in INN Partners, L.C. ("TownNews.com"), 50% interest in TNI Partners (“TNI”) and 50% interest in Madison Newspapers, Inc. (“MNI”).

 

Investments in TNI and MNI are accounted for using the equity method and are reported at cost, plus our share of undistributed earnings since acquisition less, for TNI, amortization of intangible assets.

 

Subsequent Events

 

Purchase Agreement with Berkshire Hathaway

 

On January 29, 2020, the Company entered into an Asset and Stock Purchase Agreement (“Purchase Agreement”) with Berkshire Hathaway Inc., a Delaware corporation (“Berkshire”) and BH Media Group, Inc., a Delaware corporation (“BHMG”). Subject to the terms and conditions of the Purchase Agreement, The Company has agreed to purchase certain assets and assume certain liabilities of BHMG’s newspapers and related community publications business (“BH Media Newspaper Business”), excluding real estate and fixtures such as production equipment, for a purchase price of $130,000,000, and all of the issued and outstanding capital stock of The Buffalo News, Inc., a Delaware corporation (“Buffalo News”) for a purchase price of $10,000,000 (collectively, the “Transactions”).

 

The Company expects that the $140,000,000 purchase price will be financed with new debt. As further discussed below, the Company has entered into an agreement for the financing of the Transactions.

 

Since July 2, 2018, The Company has managed the BH Media Newspaper Business pursuant to a Management Agreement between BHMG and the Company dated June 26, 2018 (“Management Agreement”). BHMG includes 30 daily newspapers and digital operations, in addition to 49 paid weekly newspapers with websites and 32 other print products. Buffalo News is a provider of local print and digital news to the Buffalo, NY area.

 

Consummation of the Transactions is subject to certain closing conditions, including the closing of the refinancing of the Company’s existing credit facilities under the Credit Agreement, as described below (“Debt Financing”), the execution and delivery of specified ancillary agreements, including a 10-year term lease between BHMG and the Company as described below (the “Lease”) and review by the U.S. Department of Justice. The Transactions are expected to close March 16, 2020, although there can be no assurance that the closing of the Transactions will occur by such date. Either party may terminate the Purchase Agreement if the Transactions are not consummated on or before April 30, 2020.

 

Management Agreement with BH Media Group

 

In connection with the Transactions, the Management Agreement will terminate at the closing of the Transactions. Amounts due under the Management Agreement will be credited to the purchase price of the Transactions. We expect the credits to total approximately $5,425,000, including an estimated $4,180,000 reflective of the pro-rated variable portion of the Management Agreement based on the year-to-date performance of BHMG.

 

Debt Financing

 

In connection with the Purchase Agreement, the Company entered into a Credit Agreement dated as of January 29, 2020, with BH Finance, LLC, a Nebraska limited liability company (“BH Finance”), as lender (“Credit Agreement”) pursuant to which BH Finance will provide a secured 25-year term loan in an aggregate principal amount of approximately $576,000,000, subject to the satisfaction of certain customary closing conditions, including the simultaneous closing of the Transactions and the Debt Financing. The Debt Financing under the Credit Agreement will bear interest at a per annum rate equal to 9.00%, payable monthly. Principal reductions will be required periodically in the amount equal to the Company’s excess cash flow (as defined in the Credit Agreement) for each fiscal quarter beginning with the period ended June 28, 2020, and from the proceeds of the sale of assets as they may be received from time to time. Substantially all of the proceeds of the Debt Financing will be used to finance the Transactions; refinance the Company’s existing indebtedness, including payment in full of its outstanding senior secured notes, second lien loans and revolving loan indebtedness; and provide working capital to the Company in lieu of a revolving credit facility.

 

The Credit Agreement also contains certain customary representations and warranties, certain affirmative and negative covenants and certain conditions, including restrictions on incurring additional indebtedness, creating certain liens, making certain investments or acquisitions, issuing dividends, repurchasing shares of stock of the Company and certain other capital transactions. Certain existing and future direct and indirect material domestic subsidiaries of the Company are guarantors of the Company’s obligations under the Credit Agreement.

 

 

Lease Agreement

 

In connection with the Purchase Agreement, the Company will enter into a 10-year term lease with BHMG, as landlord, of the real estate and fixtures used in the BH Media Newspaper Business. The Lease will commence upon closing of the Transactions, and requires the Company to pay annual rents of $8,000,000, payable in equal monthly installments, as well as all operating costs of the properties, including real estate taxes, insurance, maintenance and repairs. Rent payments will be subject to a credit for any leased real estate sold by BH Media during the term of the Lease equal to 8.00% of the net sales proceeds from such transactions.

 

Use of Estimates

 

The preparation of the Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates and judgments on an ongoing basis.

 

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Recently Issued Accounting Standards - Standards Adopted in 2020

 

In February 2016, the FASB issued a new standard for the accounting treatment of leases, known as Accounting Standards 842 ("ASC 842"). The new standard is based on the principle that entities should recognize assets and liabilities arising from leases. The new standard's primary change is the requirement for entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on most operating lease arrangements. We adopted the standard effective September 30, 2019, the first day of fiscal year 2020.

 

We elected the package of practical expedients which permits the Company to not reassess under the new standard the prior conclusions about lease identification, lease classification, or initial direct costs. In addition, we did reassess whether existing land easements which were previously not accounted for as leases are or contain leases under the new guidance. We have elected to combine non-lease and lease components when accounting for leases. The Company has made a policy election to exclude short-term leases, those with an original term of less than twelve months, from recognition and measurement under  ASC 842. As such, we have not recognized a right-of-use (“ROU”) asset or lease liability for these leases. Additional information and disclosures required by this new standard are contained in Note 6. 

 

Recently Issued Accounting Standards - Standards Not Yet Adopted

 

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under then current GAAP with a methodology that reflects expected credit losses and requires consideration of a wider array of reasonable and supportable information to inform and develop credit loss estimates. We will be required to use a forward-looking expected credit loss model for both accounts receivables and other financial instruments. The new standard will be adopted beginning September 28, 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

 

2

REVENUE

 

The following table presents our revenue disaggregated by source:

 

 

Recognition principles: Revenue is recognized when a performance obligation is satisfied by the transfer of control of the contracted goods or services to our customers, in an amount that reflects the consideration we expect to receive in exchange for those goods or services.

 

Arrangements with multiple performance obligations: We have various advertising and subscription agreements which include both print and digital performance obligations. Revenue from sales agreements that contain multiple performance obligations are allocated to each obligation based on the relative standalone selling price. We determine standalone selling prices based on observable prices charged to customers.

 

Contract Assets and Liabilities: The Company’s primary source of unearned revenue is from subscriptions paid in advance of the service provided. The Company expects to recognize the revenue related to unsatisfied performance obligations over the next twelve months in accordance with the terms of the subscriptions and other contracts with customers. The unearned revenue balances described herein are the Company's only contract liability. Unearned revenue was $22,966,000 as of December 29, 2019 and $21,720,000 as of September 29, 2019. Revenue recognized in the 13 weeks ended December 29, 2019 that was included in the contract liability as of September 29, 2019 was $13,399,000.

 

Contract asset balances relate to our Management Agreement revenue and were $3,589,000 as of December 29, 2019 and $1,107,000 as of September 29, 2019 and consisted solely of the variable portion of the contract.These contract asset balances are included in accounts receivable and contract assets, net. There are no other contract assets recorded. Accounts receivable, excluding allowance for doubtful accounts and contract assets, was $53,481,000 and $47,863,000 as of December 29, 2019 and September 29, 2019, respectively. Allowance for doubtful accounts was $6,420,000 and $6,434,000 as of December 29, 2019 and September 29, 2019, respectively.

 

 

Practical expedients: Sales commissions are expensed as incurred as the associated contractual periods are one year or less. These costs are recorded within compensation. The vast majority of our contracts have original expected lengths of one year or less and revenue is earned at a rate and amount that corresponds directly with the value to the customer.

 

 

3	INVESTMENTS IN ASSOCIATED COMPANIES

 

TNI Partners

 

In Tucson, Arizona, TNI, acting as agent for our subsidiary, Star Publishing Company (“Star Publishing”), and Citizen Publishing Company (“Citizen”), a subsidiary of Gannett Co. Inc., is responsible for printing, delivery, advertising, and subscription activities of the Arizona Daily Star as well as the related digital platforms and specialty publications. TNI collects all receipts and income and pays substantially all operating expenses incident to the partnership's operations and publication of the newspaper and other media.

 

Income or loss of TNI (before income taxes) is allocated equally to Star Publishing and Citizen.

 

Summarized results of TNI are as follows:

 

 

TNI makes weekly distributions of its earnings and for the 13 weeks ended December 29, 2019 and December 30, 2018, we received $738,000 and $549,000 in distributions, respectively. 

 

Madison Newspapers, Inc.

 

We have a 50% ownership interest in MNI, which publishes daily and Sunday newspapers, and other publications in Madison, Wisconsin, and other Wisconsin locations, and operates their related digital platforms. Net income or loss of MNI (after income taxes) is allocated equally to us and The Capital Times Company (“TCT”). MNI conducts its business under the trade name Capital Newspapers.

 

Summarized results of MNI are as follows:

 

 

MNI makes quarterly distributions of its earnings and in the 13 weeks ended December 29, 2019 and December 30, 2018, we received dividends of $0 and $750,000, respectively. 

 

 

4	GOODWILL AND OTHER INTANGIBLE ASSETS

 

Changes in the carrying amount of goodwill are as follows:

 

 

 

Identified intangible assets consist of the following:

 

 

Annual amortization of intangible assets for the 12 months ending December 2021 to December 2025 is estimated to be $16,128,000, $14,225,000, $12,683,000 $12,033,000 and $9,599,000, respectively.

 

 

5

DEBT

 

On March 31, 2014, we completed a comprehensive refinancing of our debt (the "2014 Refinancing"), which included the following:

 

•

$400,000,000 aggregate principal amount of 9.5% Senior Secured Notes (the “Notes”), pursuant to an Indenture dated as of March 31, 2014 (the “Indenture”).

 

•

$250,000,000 first lien term loan (the "1st Lien Term Loan") and $40,000,000 revolving facility (the "Revolving Facility") under a First Lien Credit Agreement dated as of March 31, 2014 (together the “1st Lien Credit Facility”).

 

•

$150,000,000 second lien term loan under a Second Lien Loan Agreement dated as of March 31, 2014 (the “2nd Lien Term Loan”).

 

In November 2018, we repaid, in full, the remaining balance of the 1^st Lien Term Loan.

 

In November 2019, we amended our 1^st Lien Credit Facility to amend and extend our $23,120,000 Revolving Facility (the "Amendment") through December 28, 2020. Our Revolving Facility was undrawn at the time of the amendment. 

 

Debt is summarized as follows:

 

 

Our weighted average cost of debt, excluding amortization of debt financing costs at December 29, 2019, is 9.9%.

 

At December 29, 2019, aggregate minimum required maturities of debt excluding amounts required to be paid from future excess cash flow computations total $1,892,000 for the remainder of 2020, $0 in 2021, $356,141,000 in 2022 and $75,361,000 in 2023.

 

On January 29, 2020, we entered into a definitive agreement with BHMG and Berkshire Hathaway to acquire BHMG's publications and the Buffalo News for $140,000,000 in cash. BH Finance LLC, an affiliate of Berkshire Hathaway, is providing approximately $576,000,000 in long-term financing to Lee at a 9% annual rate, (the "Debt Refinancing"). The proceeds from the Debt Refinancing will be used to pay for the acquisition, refinance Lee's $433,394,000 in existing debt, and provide enough cash on Lee's balance sheet to allow for the termination of Lee's revolving credit facility. Subsequent to this deal closing, BH Finance will be Lee's sole lender. We expect the refinancing to close on or after March 16, 2020. Additional information and disclosures are included in Note 1.

 

Notes

 

The Notes are senior secured obligations of the Company and mature on March 15, 2022. At December 29, 2019, the principal balance of the Notes totaled $356,141,000.

 

Interest

 

The Notes require payment of interest semiannually on March 15 and September 15 of each year, at a fixed annual rate of 9.5%.

 

 

Redemption

 

We may redeem some, or all, of the principal amount of the Notes at any time as follows:

 

 

If we sell certain of our assets or experience specific kinds of changes of control, we must, subject to certain exceptions, offer to purchase the Notes at 101% of the principal amount. Any redemption of the Notes must also satisfy any accrued and unpaid interest thereon.

 

We may repurchase Notes in the open market at any time. In the 13 weeks ended December 29, 2019 we purchased $7,279,000 principal amount of Notes in privately negotiated transactions. The transactions resulted in a gain on extinguishment of debt totaling $25,000 in the 13 weeks ended December 29, 2019 which is recorded in Other, net in the Consolidated Statements of Income and Comprehensive Income.

 

Covenants and Other Matters

 

The Indenture and the 1^st Lien Credit Facility contain restrictive covenants as discussed more fully below. However, certain of these covenants will cease to apply if the Notes are rated investment grade by either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Group and there is no default or event of default under the Indenture.

 

1^st Lien Credit Facility

 

The 1^st Lien Credit Facility documents the primary terms of the 1^st Lien Term Loan and the Revolving Facility. The $23,120,000 Revolving Facility matures on December 28, 2020 and may be used for working capital and general corporate purposes (including letters of credit). At September 29, 2019, after consideration of letters of credit, we have approximately $17,644,000 available for future use under the Revolving Facility.

 

Interest

 

Interest on the Revolving Facility, which is undrawn at December 29, 2019, accrues, at our option, at either (A) LIBOR plus 5.5%, or (B) 4.5% plus the higher of (i) the prime rate at the time, (ii) the federal funds rate plus 0.5%, or (iii) one month LIBOR plus 1.0%.

 

Covenants and Other Matters

 

The 1^st Lien Credit Facility requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including a maximum total leverage ratio.

 

The 1^st Lien Credit Facility restricts us from paying dividends on our Common Stock. This restriction no longer applies if Lee Legacy Leverage is below 3.25x before and after such payments. Lee Legacy Leverage as defined is 4.37x at December 29, 2019. Further, the 1^st Lien Credit Facility restricts or limits, among other things, subject to certain exceptions, the ability of the Company and its subsidiaries to: (i) incur indebtedness, (ii) enter into mergers, acquisitions and asset sales, (iii) incur or create liens and (iv) enter into transactions with certain affiliates. The 1^st Lien Credit Facility contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 1^st Lien Credit Facility also contains cross-default provisions tied to the terms of each of the Indenture and 2^nd Lien Term Loan.

 

2^nd Lien Term Loan

 

The 2^nd Lien Term Loan, which has a balance of $77,253,000 at December 29, 2019, bears interest at a fixed annual rate of 12.0%, payable quarterly, and matures in December 2022.

 

Principal Payments

 

Excluding excess cash flow payments, there are no scheduled mandatory amortization payments required under the 2^nd Lien Term Loan.

 

Quarterly, we are required to prepare a calculation of excess cash flow of the Pulitzer Subsidiaries ("Pulitzer Excess Cash Flow"). Pulitzer Excess Cash Flow is generally determined as the cash earnings of the Pulitzer Subsidiaries including adjustments for changes in working capital, capital spending, pension contributions, debt principal payments and income tax payments. Pulitzer Excess Cash Flow also includes a deduction for interest costs incurred under the 2^nd Lien Term Loan.

 

Pulitzer Excess Cash Flow is used to prepay the 2nd Lien Term Loan, at par, and is required to be paid 45 days after the end of the quarter.

 

Payments will also be made on the 2^nd Lien Term Loan, at par, with proceeds from asset sales by the Pulitzer Subsidiaries that are not reinvested subject to certain other conditions.

 

During the 13 weeks ended December 29, 2019, payments on the 2^nd Lien Term Loan totaled $2,954,000. For the 13 weeks ended December 29, 2019, Pulitzer Excess Cash Flow totaled $1,892,000, which will be used to make a payment on the 2^nd Lien Term Loan in February 2020, at par.

 

Voluntary payments under the 2^nd Lien Term Loan are no longer subject to call premiums and are payable at par. The Indenture includes certain restrictions on voluntary payments on the 2^nd Lien Term Loan.

 

 

Covenants and Other Matters

 

The 2^nd Lien Term Loan requires that we comply with certain affirmative and negative covenants customary for financing of this nature, including the negative covenants under the 1^st Lien Credit Facility discussed above. The 2^nd Lien Term Loan contains various representations and warranties and may be terminated upon occurrence of certain events of default. The 2^nd Lien Term Loan also contains cross-default provisions tied to the terms of the Indenture and 1^st Lien Credit Facility.

 

In connection with the 2^nd Lien Term Loan, we entered into a Warrant Agreement dated as of March 31, 2014 (the “Warrant Agreement”). Under the Warrant Agreement, certain affiliates or designees of the 2^nd Lien Lenders received on March 31, 2014 their pro rata share of warrants to purchase, in cash, an initial aggregate of 6,000,000 shares of Common Stock, subject to adjustment pursuant to anti-dilution provisions (the “Warrants”). The Warrants represent, when fully exercised, approximately 10.4% of shares of Common Stock outstanding at March 30, 2014 on a fully diluted basis. The exercise price of the Warrants is $4.19 per share.

 

The Warrant Agreement contains provisions requiring the Warrants to be measured at fair value and included in warrants and other liabilities in our Consolidated Balance Sheets. We re-measure the fair value of the liability each reporting period, with changes reported in other, net non-operating income (expense). The initial fair value of the Warrants was $16,930,000. See Note 11.

 

In connection with the issuance of the Warrants, we entered into a Registration Rights Agreement dated as of March 31, 2014 (the “Registration Rights Agreement”). The Registration Rights Agreement requires, among other matters, that we use our commercially reasonable efforts to maintain the effectiveness for certain specified periods of a shelf registration statement related to the shares of Common Stock to be issued upon exercise of the Warrants.

 

Security

 

The Notes and the 1^st Lien Credit Facility are fully and unconditionally guaranteed on a joint and several first-priority basis by each of the Company's material domestic subsidiaries, excluding MNI, the Pulitzer Subsidiaries and TNI (the "Lee Legacy Assignors"), pursuant to a first lien guarantee and collateral agreement dated as of March 31, 2014 (the "1^st Lien Guarantee and Collateral Agreement").

 

The Notes, the 1^st Lien Credit Facility and the subsidiary guarantees are secured, subject to certain exceptions, priorities and limitations, by perfected security interests in all property and assets, including certain real estate, of the Lee Legacy Assignors, other than the capital stock of MNI and any property and assets of MNI (the “Lee Legacy Collateral”), on a first-priority basis, equally and ratably with all of the Lee Legacy Assignors' existing and future obligations. The Lee Legacy Collateral includes, among other things, equipment, inventory, accounts receivables, depository accounts, intellectual property and certain of their other tangible and intangible assets.

 

Also, the Notes and the 1^st Lien Credit Facility are secured, subject to certain exceptions, priorities and limitations in the various agreements, by first-priority security interests in the capital stock of, and other equity interests owned by, the Lee Legacy Assignors (excluding the capital stock of MNI). The Notes and 1^st Lien Credit Facility are subject to a Pari Passu Intercreditor Agreement dated March 31, 2014.

 

The Notes, the 1^st Lien Credit Facility and the subsidiary guarantees are also secured, subject to permitted liens, by a second-priority security interest in the property and assets of the Pulitzer Subsidiaries that become subsidiary guarantors (the "Pulitzer Assignors") other than assets of or used in the operations or business of TNI (collectively, the “Pulitzer Collateral”). In June 2015 the Pulitzer Assignors became a party to the 1^st Lien Guarantee and Collateral Agreement on a second lien basis.

 

Also, the Notes and the 1^st Lien Credit Facility are secured, subject to certain exceptions, priorities, and limitations in the various agreements, by second-priority security interests in the capital stock of, and other equity interests in, the Pulitzer Assignors and Star Publishing’s interest in TNI.

 

The 2^nd Lien Term Loan is fully and unconditionally guaranteed on a joint and several first-priority basis by the Pulitzer Assignors, pursuant to a Second Lien Guarantee and Collateral Agreement dated as of March 31, 2014 (the “2^nd Lien Guarantee and Collateral Agreement”) among the Pulitzer Assignors and the 2^nd Lien collateral agent.

 

Under the 2^nd Lien Guarantee and Collateral Agreement, the Pulitzer Assignors have granted (i) first-priority security interests, subject to certain priorities and limitations in the various agreements, in the Pulitzer Collateral and (ii) have granted first-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2^nd Lien Term Loan.

 

Also, under the 2^nd Lien Guarantee and Collateral Agreement, the Lee Legacy Assignors have granted (i) second-priority security interests, subject to certain priorities and limitations in the various agreements, in the Lee Legacy Collateral, and (ii) have granted second-priority lien mortgages or deeds of trust covering certain real estate, as collateral for the payment and performance of their obligations under the 2^nd Lien Term Loan. Assets of, or used in the operations or business of, MNI are excluded.

 

The rights of each of the collateral agents with respect to the Lee Legacy Collateral and the Pulitzer Collateral are subject to customary intercreditor and intercompany agreements.

 

Other

 

In connection with the 2014 Refinancing, we capitalized $37,819,000 of debt financing costs. Amortization of debt financing costs totaled $1,028,000 in the 13 weeks ended December 29, 2019. Amortization of such costs is estimated to total $3,070,000 for the remainder of 2020, $4,254,000 in 2021, $2,690,000 in 2022 and $240,000 in 2023. At December 29, 2019, we have $10,254,000 of unamortized debt financing costs recorded as a reduction of Long-term debt in our Consolidated Balance Sheets.

 

 

Liquidity

 

At December 29, 2019, after consideration of letters of credit, we have approximately $17,644,000 available for future use under our Revolving Facility. Including cash, our liquidity at December 29, 2019 totals $22,112,000. This liquidity amount excludes any future cash flows. We expect all interest and principal payments due in the next twelve months will be satisfied by existing cash and our cash flows, which will allow us to maintain an adequate level of liquidity. The Warrants, if and when exercised, would provide additional liquidity in an amount up to $25,140,000 subject to a reduction for any amounts the Company may elect to use to repay our 1^st Lien Term Loan and/or the Notes.

 

Pursuant to the terms of the financing agreement with BH Finance, our new debt will not include a revolver. Our current Revolving Facility will be terminated upon close of the Debt Refinancing. The Debt Refinancing covenants provide for increased cash on hand which will satisfy our liquidity needs in lieu of a revolver.

 

There are numerous potential consequences under the Notes, 1^st Lien Credit Facility and 2^nd Lien Term Loan, if an event of default, as defined, occurs and is not remedied. Many of those consequences are beyond our control. The occurrence of one or more events of default would give rise to the right of the applicable lender(s) to exercise their remedies under the Notes, 1^st Lien Credit Facility and 2^nd Lien Term Loan, respectively, including, without limitation, the right to accelerate all outstanding debt and take actions authorized in such circumstances under applicable collateral security documents.

 

Our ability to operate as a going concern is dependent on our ability to remain in compliance with debt covenants and to repay, refinance or amend our debt agreements as they become due. The Notes, 1^st Lien Credit Facility and 2^nd Lien Term Loan have only limited affirmative covenants with which we are required to maintain compliance. We are in compliance with our debt covenants at December 29, 2019.

 

 

6

LEASES

 

Effective September 30, 2019, the first day of fiscal year 2020, we adopted FASB ASU 2016-02, “Leases (ASC 842)” using the modified retrospective method as of the adoption date. As a result of utilizing the modified retrospective approach, we have not restated prior year financial statements to conform with the new guidance. Our operating lease portfolio primarily includes real estate, office equipment, and vehicles. 

 

Total lease expense consists of the following:

 

 

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

 

 

As a result of the adoption of ASC 842, on September 30, 2019, we recorded operating lease right-of-use assets of $10,709,000, current portion of lease liabilities of $2,281,000, and long-term operating lease liabilities of $8,353,000 in a non-cash operating activity. 

 

 As of December 30, 2019, maturities of lease liabilities were as follows:

 

As of the year ended September 29, 2019, minimum lease payments during the five years ending September 2024 and thereafter were $3,403,000, $2,290,000, $2,238,000, $1,637,000, $1,367,000 and $4,991,000, respectively. 

 

 

Our lease contracts are discounted using the incremental borrowing rate for the Company. We determined the incremental borrowing rate based on a senior secured collateral adjusted yield curve for the Company.  This yield curve reflects the estimated rate that would have been paid by the Company to borrow on a collateralized basis over a similar term of the 5 year lease in a similar economic environment. We will assess this rate annually to determine whether it needs to be updated. The weighted average revolving lease terms and discount rates for all of our operating leases were as follows.

 

 

 

7	PENSION, POSTRETIREMENT AND POSTEMPLOYMENT DEFINED BENEFIT PLANS

 

We have several noncontributory defined benefit pension plans that together cover selected employees. Benefits under the plans were generally based on salary and years of service. Effective in 2012, substantially all benefits are frozen and only a small amount of additional benefits are being accrued. Our liability and related expense for benefits under the plans are recorded over the service period of employees based upon annual actuarial calculations. Plan funding strategies are influenced by government regulations. Plan assets consist primarily of domestic and foreign corporate equity securities, government and corporate bonds, hedge fund investments and cash.

 

In addition, we provide retiree medical and life insurance benefits under postretirement plans at several of our operating locations. The level and adjustment of participant contributions vary depending on the specific plan. In addition, St. Louis Post-Dispatch LLC, provides postemployment disability benefits to certain employee groups prior to retirement. Our liability and related expense for benefits under the postretirement plans are recorded over the service period of active employees based upon annual actuarial calculations. We accrue postemployment disability benefits when it becomes probable that such benefits will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid.

 

We use a fiscal year end measurement date for all of our pension and postretirement medical plan obligations.

 

The net periodic postretirement cost (benefit) components for our postretirement plans are as follows:

 

 

 

In the 13 weeks ended December 29, 2019 we did not contribute to our pension plans. Based on our forecast at December 29, 2019, we expect to make contributions of $6,718,000 to our pension trust during the remainder of fiscal 2020.

 

 

8	INCOME TAXES

 

We recorded income tax expense of $1,871,000 related to income before taxes of $7,588,000 for the 13 weeks ended December 29, 2019. For the 13 weeks ended December 30, 2018, we recorded $4,513,000 in income tax expenses related to income before taxes of $15,232,000. 

 

The effective income tax rate for the 13 weeks ended December 29, 2019 was 24.6%. The effective income tax rate for the 13 weeks ended December 30, 2018 was 29.6%.

 

The primary differences between these rates and the U.S. federal statutory rate of 21% are due to the effect of state taxes, non-deductible expenses, adjustments to reserves for uncertain tax positions, including any related interest, and mark-to-market adjustments to value the Warrants. 

 

We file a consolidated federal tax return, as well as combined and separate tax returns in approximately 27 state and local jurisdictions. We do not currently have any federal tax examinations in progress. Our income tax returns have generally been audited or closed to audit through 2014. See Note 12 for a discussion of our tax audits.

 

At September 29, 2019, we had approximately $63,338,000 of state net operating loss benefits. The Company consumed its federal net operating losses in the year ended September 30, 2018.

 

 

 

9	EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share:

 

 

For the 13 weeks ended December 29, 2019 and December 30, 2018, 6,384,000 and 6,448,000, weighted average shares, respectively, were not considered in the computation of diluted earnings per common share because the exercise prices of the related stock options and Warrants were in excess of the fair market value of our Common Stock.

 

 

10	STOCK OWNERSHIP PLANS

 

A summary of stock option activity during the 13 weeks ended December 29, 2019 follows:

 

 

Restricted Common Stock

 

The table below summarizes restricted Common Stock activity during the 13 weeks ended December 29, 2019:

 

Total unrecognized compensation expense for unvested restricted Common Stock at December 29, 2019 is $2,016,000, which will be recognized over a weighted average period of 2.0 years.

 

 

11	FAIR VALUE MEASUREMENTS

 

We utilize FASB ASC Topic 820, Fair Value Measurements and Disclosures, to measure and report fair value. FASB ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC Topic 820 establishes a three-level hierarchy of fair value measurements based on whether the inputs to those measurements are observable or unobservable, which consists of the following levels:

 

Level 1 - Quoted prices for identical instruments in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets.

 

Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

 

The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value.

 

 

The carrying amounts of cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of those instruments. Investments totaling $6,068,000, including our 17% ownership of the non-voting common stock of TCT and a private equity investment, are carried at cost. As of December 29, 2019, based on the most recent data available, the approximate fair value of the private equity investment is $10,268,000 which is a level 3 fair value measurement. Fair value of the remaining investments approximates book value.

 

Our fixed rate debt consists of $356,141,000 principal amount of the Notes and $77,253,000 principal amount under the 2^nd Lien Term Loan. At December 29, 2019, based on private market price quotations, the fair values were $344,789,000 and $76,481,000 for the Notes and 2^nd Lien Term Loan, respectively. These represent level 2 fair value measurements.

 

As discussed more fully in Note 5, we recorded a liability for the Warrants issued in connection with the Warrant Agreement. The liability was initially measured at its fair value and we remeasure the liability to fair value each reporting period, with changes reported in other non-operating income (expense). The initial fair value of the Warrants was $16,930,000. The fair value of Warrants at December 29, 2019 and September 29, 2019 are $178,000 and $1,195,000, respectively. Fair value is determined using the Black-Scholes option pricing model. These represent level 2 fair value measurements.

 

 

12	COMMITMENTS AND CONTINGENT LIABILITIES

 

Income Taxes

 

Commitments exclude unrecognized tax benefits to be recorded in accordance with FASB ASC Topic 740, Income Taxes. We are unable to reasonably estimate the ultimate amount or timing of cash settlements with the respective taxing authorities for such matters. See Note 8.

 

We file income tax returns with the Internal Revenue Service ("IRS") and various state tax jurisdictions. From time to time, we are subject to routine audits by those agencies and those audits may result in proposed adjustments. We have considered the alternative interpretations that may be assumed by the various taxing agencies, believe our positions taken regarding our filings are valid, and that adequate tax liabilities have been recorded to resolve such matters. However, the actual outcome cannot be determined with certainty and the difference could be material, either positively or negatively, to the Consolidated Statements of Operations and Comprehensive Income (Loss) in the periods in which such matters are ultimately determined. We do not believe the final resolution of such matters will be material to our consolidated financial position or cash flows.

 

We have various income tax examinations ongoing and at various stages of completion, but generally our income tax returns have been audited or closed to audit through 2014.

 

Legal Proceedings

 

We are involved in a variety of legal actions that arise in the normal course of business. Insurance coverage mitigates potential loss for certain of these matters. While we are unable to predict the ultimate outcome of these legal actions, it is our opinion that the disposition of these matters will not have a material adverse effect on our Consolidated Financial Statements, taken as a whole.

 

Multiemployer Pension Plans

 

We effectuated a total withdrawal from CWA/ITU plan in 2019. As a result, we are subject to a claim from the multiemployer pension plan for a withdrawal liability. The amount and timing of such liability will be dependent on actions taken, or not taken, by the Company and the pension plan, as well as the future investment performance and funding status of the plan. In 2019, we accrued a liability of $3,255,000 related to this withdrawal. The withdrawal liability determined to be due under this plan will be funded over a period of 20 years.