Note 5. Long-Term Debt and Other Financial Instruments

6 Months Ended

Jun. 24, 2012

Long Term Debt Financial Instruments And Derivatives [Text Block]

5.            On May 24 2012, the Company consummated a financing arrangement with BH Finance LLC, an affiliate of Berkshire Hathaway, that provides the Company with a $400 million term loan and a $45 million revolving credit line.  The funding of the new financing arrangement’s term loan and an initial draw of the revolving credit facility resulted in cash proceeds to the Company of $382.5 million, which were immediately used to fully repay all amounts outstanding under the Company’s existing credit facility, pay fees and expenses related to the financing and to fund working capital requirements.  The new loan was issued at a discount of 11.5% and was secured pari passu with the Company’s existing 11.75% senior secured notes due 2017.   The new term loan has an interest rate of 10.5%, which could step down to 9% if total leverage were to reach 3.50x.  While the new financing arrangement does not contain financial covenants, there are restrictions, in whole or in part, on certain activities including the incurrence of additional debt, repurchase of shares, and the payment of dividends.  The term loan may be voluntarily repaid prior to maturity, in whole or in part, at a price equal to 100% of the principal amount repaid plus accrued and unpaid interest, plus a premium as set forth in the agreement.  Other factors, such as the sale of assets may result in a mandatory prepayment or an offer to prepay a portion of the term loan without premium or penalty.  In addition, the Company may apply up to a maximum of $80 million of the proceeds from the sale of newspapers to World Media to its term loan at par without premium or penalty. The Company considers the prepayment feature to be an embedded derivative which it has bifurcated from the term loan as shown in the chart below.  The new loan and revolving credit facility will mature in May of 2020 and is guaranteed by the Company’s subsidiaries.  The revolving credit line bears interest at a rate of 10% and is subject to a 2% commitment fee.

Concurrent with the funding of the new financing arrangement and pursuant to a Warrant Agreement entered into on May 24, 2012, the Company issued warrants to Berkshire Hathaway to purchase 4.6 million shares of Class A common stock, which represented approximately 19.9% of the number of then outstanding shares of the Company’s common stock.  The warrants are exercisable immediately at a price of $0.01 per share and expire on May 24, 2020.  The Warrant Agreement contains customary anti-dilution provisions that increase the amount of shares that each warrant is exercisable for in the event that certain dilutive events occur.

In conjunction with the secured financing with Berkshire Hathaway and the repayment of the previous credit facility in the second quarter of 2012, the Company recorded debt modification and extinguishment costs of $7.7 million, primarily due to the write-off of unamortized fees related to the former credit agreement.  In addition, the Company capitalized $11 million of arrangement and legal fees related to the new financing; these fees will be amortized as interest expense over the term of the new financing arrangement.  In March of 2012, the Company amended its previous bank credit agreement which resulted in a $10.4 million of expense for debt modification and extinguishment costs including certain advisory, arrangement, and legal fees related to that refinancing. 

The previous bank credit facility had an interest rate of LIBOR (with a 1.5% floor) plus a margin of 7% and commitment fees of 2.5%, which were determined by the Company’s leverage ratio, as defined in the agreement.  In addition to this cash interest, the Company accrued payment-in-kind (PIK) interest of 1.5%.  PIK interest increased the bank term loan by nearly $1 million between March and May and was paid in cash upon repayment of the entire facility.

As of June 24, 2012, the Company had in place a $400 million term loan that was fully drawn and a revolving credit facility with an $18.5 million outstanding balance and availability of $26.5 million. Also outstanding were 11.75% senior notes with a par value of $300 million that were sold at a discount and carried on the balance sheet at quarter end at $295 million.  The new term loan with BH Finance matures in March 2020 and bears an interest rate of 10.5%, but could decrease to 9% based on the Company’s leverage ratio, as defined in the agreement.  The Company was in compliance with all provisions at June 24, 2012. The chart below summarizes the carrying value of long-term debt at June 24, 2012:

	June 24, 2012
(In thousands)	Carrying Amount
Term loan:
Face value	$	400,000
Remaining original issue discount		(45,497	)
Remaining warrant discount		(16,727	)
Embedded derivative liability		8,809
Remaining embedded derivative discount		(8,713	)
Carrying value		337,872
Revolving credit facility ($26.5 million remaining availability)		18,500
Senior notes:
Face value		300,000
Remaining original issue discount		(4,595	)
Carrying value		295,405
Capital lease liability		134
Total carrying value	$	651,911

Subsequent to the end of the second quarter, the Company completed the sale of its newspapers to World Media Enterprises (a subsidiary of Berkshire Hathaway) for $142 million in cash, subject to normal adjustments.  The Company has used the net proceeds from the newspaper sale to further reduce debt.  The Company has repaid $54 million on the term loan at par and the $18.5 million balance on the revolver.  On June 29, 2012, the Company commenced a cash tender offer to purchase up to $45 million of its 11.75% senior notes due 2017.  The tender offer expired on July 30, 2012, with only $200,000 of acceptances received.  The Company has offered and Berkshire Hathaway will accept repayment at par for the amount the noteholders elected not to take.  Any early repayment will result in additional interest expense from accelerated recognition of a pro rata portion of discounts and deferred issuance costs.

In the third quarter of 2011, the Company’s last remaining interest rate swaps matured.  Interest rate swaps were carried at fair value based on the present value of the estimated cash flows the Company would have received or paid to terminate the swaps; the Company applied a discount rate that was predicated on quoted LIBOR prices and current market spreads for unsecured borrowings.  In the first six months of 2011, $5.4 million was reclassified from Other Comprehensive Income (OCI) into interest expense on the Consolidated Condensed Statement of Operations as the effective portion of the interest rate swap.  The pretax change deferred in OCI in the first six months of 2011 was $5.0 million, which was recorded in the Consolidated Condensed Statement of Operations in the “Interest expense” line.

The following table includes information about the carrying values and estimated fair values of the Company’s financial instruments at June 24, 2012 and December 25, 2011:

	June 24, 2012				December 25, 2011
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Investments
Trading	$	180	$	180	$	205	$	205
Liabilities:
Long-term debt:
Revolving credit facility ($26.5 million available at 6/24/2012)		18,500		18,500		-		-
Term loan (including embedded derivative)		337,872		420,000		363,126		340,639
11.75% senior notes		295,405		322,500		294,919		285,000
Stockholders' Equity (Deficit):
Common stock warrants		16,912		18,585		-		-

Trading securities held by the Supplemental 401(k) Plan are carried at fair value and are determined by reference to quoted market prices.  At June 24, 2012, the fair values of the revolving credit facility and term loan were determined using a discounted cash flow analysis and an estimate of the current yield by reference to market interest rates for the Company’s senior notes.  At December 25, 2011, the fair value of the bank term loan debt was estimated using discounted cash flow analyses and the Company’s bank borrowing rate.  The fair value of the 11.75% senior notes was valued by reference to the most recent trade prior to the end of the applicable period.  The fair value of the common stock warrants at June 24, 2012, was determined by reference to a Black-Scholes model.  Under the fair value hierarchy, the Company’s trading securities fall under Level 1 (quoted prices in active markets), its senior notes, its common stock warrants, and it term loan that existed at December 25,  2011, fall under Level 2 (other observable inputs).  Its revolving credit facility and term loan at June 24, 2012, fall under Level 3 (unobservable inputs).