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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
-
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 27, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number 1-9824
The McClatchy Company
(Exact name of registrant as specified in its charter)
Delaware 52-2080478
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2100 "Q" Street, Sacramento, CA. 95816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (916) 321-1846
---------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Class A Common Stock, par value New York Stock Exchange
$.01 per share
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K /X/ .
Aggregate market value of the Company's voting stock held by
non-affiliates on March 22, 1999, based on the closing price for the Company's
Class A Common Stock on the New York Stock Exchange on such date: approximately
$651,224,010. For purposes of the foregoing calculation only, required by Form
10-K, the Registrant has included in the shares owned by affiliates the
beneficial ownership of Common Stock of officers and directors of the Registrant
and members of their families, and such inclusion shall not be construed as an
admission that any such person is an affiliate for any purpose.
Shares outstanding at March 22, 1999:
Class A Common Stock -- 16,124,622 shares
Class B Common Stock -- 28,611,912 shares
Documents incorporated by reference:
Definitive Proxy Statement for the Company's May 19, 1999 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 (incorporated in Part III to the extent provided
in Items 10, 11, 12 and 13 hereof).
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INDEX TO THE McCLATCHY COMPANY
1998 FORM 10-K
Item No. Page
- ------- ----
PART I
1. Business........................................................ 2
Star Tribune Newspaper.......................................... 3
California Newspapers........................................... 4
Carolinas Newspapers............................................ 6
Northwest Newspapers............................................ 8
Other Operations................................................ 10
Raw Materials................................................... 11
Competition..................................................... 11
Employees - Labor............................................... 12
2. Properties...................................................... 13
3. Legal Proceedings............................................... 13
4. Submission of Matters to a Vote of Security
Holders..................................................... 14
PART II
5. Market for the Registrant's Common Stock
and Related Stockholder Matters............................. 14
6. Selected Financial Data......................................... 15
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 16
7A. Quantitative and Qualitative Disclosures
About Market Risk........................................... 29
8. Financial Statements and Supplementary Data..................... 29
9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure...................... 52
PART III
10. Directors and Executive Officers of the
Registrant.................................................. 53
11. Executive Compensation.......................................... 53
12. Security Ownership of Certain Beneficial
Owners and Management....................................... 53
13. Certain Relationships and Related
Transactions................................................ 53
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................... 53
PART I
ITEM 1. BUSINESS
OVERVIEW
The McClatchy Company, a Delaware corporation, is a successor in interest
to McClatchy Newspapers, Inc., a Delaware corporation, and was created as a
result of the Amended and Restated Agreement and Plan of Merger and
Reorganization (the "merger"), dated as of February 13, 1998, between (among
others) McClatchy Newspapers, Inc. and Cowles Media Company (nka, The Star
Tribune Company), a Delaware corporation ("Cowles"). Pursuant to the merger
agreement, McClatchy Newspapers, Inc. and Cowles each became wholly-owned
subsidiaries of The McClatchy Company. All references to the "Company" herein
include the predecessor in interest, McClatchy Newspapers, Inc. The Company owns
and publishes 23 newspapers in four regions of the Country - Minnesota,
California, the Carolinas and the Northwest (Alaska and Washington). These
newspapers range from large dailies serving metropolitan areas to non-daily
newspapers serving small communities. For the year ended December 31, 1998, the
Company had an average paid daily circulation of 1,363,555, Sunday circulation
of 1,853,474 and non-daily circulation of 64,829. Please see the Recent Event
section below for a discussion of the merger with Cowles Media Company in March
1998.
Each of the Company's newspapers is semiautonomous in its business and
editorial operations so as to meet most effectively the needs of the communities
it serves. Publishers, editors and general managers of the newspapers make the
day-to-day decisions and within limits are responsible for their own budgeting
and planning. Policies on such matters as the amount and type of capital
expenditures, key personnel changes, and strategic planning and operating
budgets including wage and pricing matters, are approved or established by the
Company's senior management or Board of Directors.
The Company's overall strategy is to concentrate on developing its
newspapers and smaller related businesses. Each of its eleven daily newspapers
has the largest circulation of any newspaper servicing its particular
metropolitan area. The Company believes that this circulation advantage is of
primary importance in attracting advertising, the principal source of revenues
for the Company. Advertising revenues approximated 78% of consolidated revenues
in 1998 and 79% of consolidated revenues in 1997. Circulation revenues
approximated 17% of consolidated revenues in 1998 and 1997.
The Company's newspaper business is somewhat seasonal, with peak revenues
and profits generally occurring in the second and fourth quarters of each year
as a result of increased advertising activity during the Easter holiday and
spring advertising season, and Thanksgiving and Christmas periods. The first
quarter is historically the weakest quarter for revenues and profits.
Other businesses owned by the Company include Nando Media, the Company's
on-line publishing operation, and The Newspaper Network (TNN), a distributor of
preprinted advertising inserts and run-of-press advertising. In addition, the
Company is a partner (13.5% interest) in Ponderay Newsprint Company, a general
partnership that owns and operates a newsprint mill in Washington
2
State. In 1998, the Company sold two small commercial printing operations that
were located in California and North Carolina.
The Company is addressing the issue that many automated information systems
may not operate effectively as of January 1, 2000. Please see the discussion in
Part II, Item 7 under the heading "Year 2000 Compliance Disclosure."
When used in this Report, the words "expect" and "project" and similar
expressions are generally intended to identify forward looking statements. Such
statements are subject to certain risks and uncertainties, including those
discussed in "Risk Factors" in Part II, Item 7, that could cause actual results
to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward looking statements, which speak only as of the
date hereof.
RECENT EVENT - STAR TRIBUNE NEWSPAPER
On March 19, 1998, the Company acquired all of the outstanding shares of
Cowles Media Company (Cowles) in a transaction valued at approximately $90.50
per Cowles share and the assumption of $77,350,000 in existing Cowles debt.
Cowles publishes the STAR TRIBUNE newspaper, which serves the Twin Cities of
Minneapolis and St. Paul, Minnesota. Cowles also owned four separate
subsidiaries that publish business magazines, special-interest magazines and
home improvement books. Simultaneously with the close of the merger, the Company
sold the magazine and book publishing subsidiaries. The combined proceeds, plus
debt and other liabilities assumed by the buyers in those transactions, were
$208.1 million. These proceeds were used to repay debt associated with the
Cowles merger.
In connection with the Cowles merger, the Company paid 15% of the
consideration by issuing 6,330,548 shares of Class A Common Stock in exchange
for Cowles shares and paid cash for the remaining shares. The Class A shares
were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for
each Cowles share. The Company incurred bank debt through a syndicate of banks
and financial institutions to finance the cash requirements of the merger and to
refinance its existing debt. Results of the STAR TRIBUNE have been included in
the Company's results beginning March 20, 1998. See Item 8, notes 2 and 4 to the
consolidated financial statements for further discussion of the acquisition. The
merger was accounted for as a purchase, and accordingly, assets acquired and
liabilities assumed have been recorded at their fair market value. The primary
asset retained by the Company is the STAR TRIBUNE. A morning daily, the STAR
TRIBUNE is the largest newspaper in Minnesota and now the Company's largest
newspaper.
Daily average paid circulation in 1998 increased 1.7% to 369,738 over 1997
average of 363,733, while Sunday average paid circulation was up 0.5% to 671,978
in 1998 from 668,935 in 1997. As of December 31, 1998, approximately 71% of the
daily and 66% of Sunday circulation was home delivered.
3
The STAR TRIBUNE'S advertising lineage for the period from March 20, 1998
to December 27, 1998 is set forth in the following table:
Advertising Linage (in thousands of six-column inches):
Full Run 1,635
Part Run 271
Total Market Coverage 186
Net revenues of the STAR TRIBUNE from March 20, 1998, through December 27,
1998, were $305.9 million, up 5.7% from the same time period in 1997.
CALIFORNIA NEWSPAPERS
The three "Bee" newspapers have formed the core of the Company's operations
for many years and continue to have a significant influence on the civic,
political, economic and cultural life of California's Central Valley. These
newspapers are summarized below:
1998 Circulation (1)
----------------------------
Newspaper Daily/Weekly Sunday 1998 Revenues(2) 1997 Revenues
--------- ------------ ------ ------------- -------------
The Sacramento Bee 288,408 349,441 $194,160,000 $ 188,842,000
The Fresno Bee 157,541 192,444 84,324,000 81,439,000
The Modesto Bee 84,065 90,952 45,685,000 45,319,000
Other newspapers 4,805 n/a 1,397,000 2,627,000
(1) Based on calendar year average paid daily circulation.
(2) Revenues in 1998 have four fewer days than 1997 due to the Company's
change to period reporting in 1998.
The Bee newspapers and other California papers produced approximately 33.6%
of the total Company revenues in 1998, compared to 49.6% in 1997. In February
1997, the Company sold four of its California newspapers, leaving the CLOVIS
INDEPENDENT as California's sole non-daily paper in the region. In addition, in
each of the Bee markets the company now operates separate Hispanic newspapers
which have a combined circulation of about 70,000.
THE SACRAMENTO BEE
THE SACRAMENTO BEE is a morning newspaper serving the California state
capital and the surrounding metropolitan area. In 1998, THE SACRAMENTO BEE'S
average paid circulation increased 1.5% daily and 0.1% Sunday from 1997. As of
December 31, 1998, approximately 87% of the daily, and 82% of the Sunday
circulation was home delivered.
THE SACRAMENTO BEE'S advertising linage for the years ended December 27,
1998, and December 31, 1997, is set forth in the following table:
4
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 2,292 2,284
Part Run 309 377
Total Market Coverage 117 132
Net revenues of THE SACRAMENTO BEE increased 2.8% from 1997.
THE FRESNO BEE
THE FRESNO BEE is a morning newspaper serving the Fresno, California
metropolitan area. THE FRESNO BEE'S average paid circulation increased 1.5%
daily and was up 1.3% on Sunday versus 1997. As of December 31, 1998,
approximately 89% of THE FRESNO BEE'S daily 87% of the Sunday circulation was
home delivered.
THE FRESNO BEE'S advertising linage for the years ended December 27, 1998,
and December 31, 1997, is set forth in the following table:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 1,266 1,247
Part Run 267 192
Total Market Coverage 107 143
Net revenues of THE FRESNO BEE increased 3.5% from 1997.
THE MODESTO BEE
THE MODESTO BEE is a morning newspaper that serves the Modesto, California,
metropolitan area, located between Sacramento and Fresno. THE MODESTO BEE'S
average paid circulation increased 1.0% daily and 0.6% Sunday versus 1997. As of
December 31, 1998, approximately 88% of the daily and 87% of the Sunday
circulation was home delivered.
THE MODESTO BEE'S advertising linage for the years ended December 27, 1998,
and December 31, 1997, is set forth in the following table:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 1,072 1,083
Part Run 60 72
Total Market Coverage 340 471
5
Net revenues of THE MODESTO BEE increased 0.8% from 1997.
CAROLINAS NEWSPAPERS
In 1990, the Company purchased three daily and three non-daily newspapers
in South Carolina from The News and Observer Publishing Company (N&O). On August
1, 1995, the Company purchased the remainder of N&O, which included THE NEWS &
OBSERVER newspaper and six non-daily newspapers (and other businesses discussed
below). In mid 1997, the FORT MILL TIMES, a weekly newspaper, was purchased in
South Carolina. Several niche products, a commercial printing operation and one
weekly newspaper, all located in North Carolina, were sold in 1998.
The Carolinas newspapers are summarized below:
1998 Circulation (1)
----------------------------
Newspaper Daily/Weekly Sunday 1998 Revenues(3) 1997 Revenues
--------- ------------ ------ -------------- -------------
The News & Observer (Raleigh) 164,277 207,929 $ 129,646,000 $ 124,182,000
The Herald (Rock Hill) 30,607 32,124 13,471,000 12,761,000
The Island Packet (Hilton Head) 15,200 17,534 10,897,000 10,041,000
Beaufort Gazette 11,288 10,842 5,534,000 4,924,000
Non-daily newspapers (2) 42,215 n/a 15,142,000 15,571,000
(1) Based on calendar year average paid circulation.
(2) Four South Carolina non-daily newspapers revenues are consolidated with
revenues of THE (Rock Hill) HERALD.
(3) Revenues in 1998 have four fewer days
than 1997 due to the Company's change to period reporting in 1998.
The Carolinas newspapers produced 18.0% of total Company revenues in
1998 versus 26.1% in 1997.
THE NEWS & OBSERVER
THE NEWS & OBSERVER, the Company's third largest newspaper, is a morning
daily serving North Carolina's state capital, Raleigh, and the thriving Research
Triangle which includes Raleigh, Durham and Chapel Hill, North Carolina.
THE NEWS & OBSERVER'S average paid circulation in 1998 increased
approximately 2.6% daily and 0.6% Sunday over calendar year 1997. As of December
31, 1998 approximately 80% of the daily and 75% of the Sunday circulation was
home delivered.
THE NEWS & OBSERVER'S advertising linage for the year ended December 27,
1998, and December 31, 1997, is set forth in the following table:
6
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 2,027 2,019
Part Run 79 87
Total Market Coverage 8 9
THE NEWS & OBSERVER'S revenues for 1998 increased 4.4% over 1997.
THE HERALD
THE HERALD is a morning newspaper serving Rock Hill and surrounding
communities in York County, South Carolina. Rock Hill is a community
approximately 25 miles southwest of Charlotte, North Carolina. In 1998, THE
HERALD'S average paid circulation increased 0.5% daily and was up 1.1% Sunday
from 1997.
THE HERALD'S main competitor is a zoned edition of the CHARLOTTE OBSERVER,
whose circulation in THE HERALD'S primary circulation area is estimated to be
approximately a third of THE HERALD'S circulation. As of December 31, 1998,
approximately 79% of the daily and 77% of the Sunday circulation was home
delivered.
Advertising linage for the years ended December 27, 1998, and December 31,
1997, were as follows:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 907 945
Total Market Coverage 72 71
Net revenues of THE HERALD increased 5.6% over 1997.
THE ISLAND PACKET AND THE BEAUFORT GAZETTE
THE ISLAND PACKET and THE BEAUFORT GAZETTE serve Beaufort County in
southeastern South Carolina. THE ISLAND PACKET serves Hilton Head Island and the
town of Bluffton where tourism, retirement communities and services are the
economic mainstays. THE GAZETTE serves the city of Beaufort and northern
Beaufort County encompassing surrounding islands of Lady's, St. Helena, Fripp
and Paris.
The average paid circulation increased 4.8% daily and 5.6% Sunday at THE
ISLAND PACKET and was up 4.9% daily and declined 4.2% Sunday at THE GAZETTE.
As of December 31, 1998, approximately 65% of the daily and 57% of the
Sunday circulation of THE PACKET was home delivered. Comparable amounts for THE
GAZETTE were 69% daily and 72% Sunday.
7
Advertising linage for the years ended December 27, 1998, and December 31,
1997, for the newspapers were:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Packet Full Run 744 754
Packet Part Run 27 37
Packet Total Market Coverage 7 4
Gazette Full Run 439 547
Gazette Total Market Coverage 54 51
Net revenues of THE PACKET increased 12.4% over 1997, while THE GAZETTE'S
net revenues were up 8.5%.
CAROLINAS NON-DAILY NEWSPAPERS
The South Carolina non-daily newspapers include the CLOVER HERALD, the
YORKVILLE ENQUIRER, the LAKE WYLIE MAGAZINE and since mid 1997 the FORT MILL
TIMES, and serve small communities in Chester and York counties.
The North Carolina non-dailies are newspapers that serve small communities
generally surrounding Raleigh. They are (circulation in parenthesis): CHAPEL
HILL NEWS (21,000 primarily free distribution), CARY NEWS (12,300), ZEBULON
RECORD (3,100), GOLD LEAF FARMER (3,000) and SMITHFIELD HERALD (14,500). N&O
also published Business North Carolina, a monthly magazine distributed to
approximately 24,000 homes throughout North Carolina and the Mount Olive
Tribune, both of which were sold in 1998.
NORTHWEST NEWSPAPERS
The Company began to diversify geographically outside of California in 1979
when it purchased the ANCHORAGE DAILY NEWS. Later that year, the Company
purchased the TRI-CITY HERALD in Southeastern Washington. In 1986, the Company
purchased its fifth largest newspaper, THE (Tacoma) NEWS TRIBUNE. In June 1995,
the Company acquired the PENINSULA GATEWAY in Gig Harbor, Washington. The
Company now publishes four newspapers in Washington State and the largest daily
newspaper in Alaska. These newspapers are summarized below:
1998 Circulation (1)
-------------------------------
Newspaper Daily/Weekly Sunday 1998 Revenues(2) 1997 Revenues
--------- ------------ ------ -------------- -------------
The News Tribune (Tacoma) 129,557 148,166 $ 73,867,000 $ 70,561,000
Anchorage Daily News 72,970 88,769 53,499,000 50,689,000
Tri-City Herald 39,904 43,295 19,336,000 18,939,000
Other newspapers 17,807 n/a 3,953,000 3,968,000
(1) Based on calendar year average paid circulation.
(2) Revenues in 1998 have four fewer days than 1997 due to the Company's
change to period reporting in 1998.
8
The Company's northwest newspapers produced approximately 15.6% of the
Company's total revenues in 1998 versus 22.5% in 1997.
THE NEWS TRIBUNE
THE NEWS TRIBUNE, a morning newspaper, primarily serves the Tacoma,
Washington metropolitan area in Pierce and South King Counties. It is the third
largest newspaper in the state. In 1998 the average paid circulation of THE NEWS
TRIBUNE increased 0.8% daily and increased 0.1% Sunday versus 1997.
Tacoma is approximately 30 miles south of Seattle. THE NEWS TRIBUNE
competes in the northern most fringes of its market with the major Seattle daily
newspapers. As of December 31, 1998 approximately 84% of the daily and 82% of
the Sunday circulation was home delivered.
THE NEWS TRIBUNE'S advertising linage for the years ended December 27,
1998, and December 31, 1997, is set forth in the following table:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 1,084 1,080
Part Run 38 32
Total Market Coverage 131 75
Net revenues of THE NEWS TRIBUNE increased 4.7% from 1997.
ANCHORAGE DAILY NEWS
The ANCHORAGE DAILY NEWS, a morning newspaper, is Alaska's largest
newspaper. The ANCHORAGE DAILY NEWS circulates throughout the state of Alaska
but its primary circulation is concentrated in the south central region of the
state comprised of metropolitan Anchorage, the Kenai Peninsula and the
Matanuska-Susitna Valley.
The DAILY NEWS' average paid daily circulation declined 0.4% in 1998, while
Sunday circulation declined 1.6%. As of December 31, 1998, approximately 72% of
the daily and 67% of the Sunday circulation was home delivered.
Comparative amounts of linage for the years ended December 27, 1998, and
December 31, 1997, are set forth in the following table:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 1,101 1,100
Total Market Coverage 22 28
9
Net revenues of the Anchorage Daily News increased 5.5% over 1997.
TRI-CITY HERALD
The TRI-CITY HERALD is a morning newspaper serving the Tri-Cities of
Richland, Kennewick and Pasco in southeastern Washington. The Tri-Cities economy
has benefited by the Department of Energy's (DOE) efforts to clean up nuclear
waste at nearby Hanford Nuclear reservation.
The TRI-CITY HERALD'S average paid circulation has increased 0.9% daily,
but declined 0.4% Sunday from 1997. As of December 31, 1998, approximately 92%
of the daily and 86% of the Sunday circulation was home delivered.
The TRI-CITY HERALD'S advertising linage for the years ended December 27,
1998, and December 31, 1997, is set forth in the following table:
1998 1997
---- ----
Advertising Linage (in thousands of six-column inches):
Full Run 804 860
Total Market Coverage 40 39
Net revenues of the TRI-CITY HERALD increased 2.1% over 1997.
OTHER NORTHWESTERN NEWSPAPERS
The Company's other non-daily newspapers include the PENINSULA GATEWAY in
South Puget Sound and the PIERCE COUNTY HERALD which circulates twice a week in
Puyallup, near Tacoma.
OTHER OPERATIONS
The Company continues to expand the distribution of preprinted advertising
inserts and run-of-press advertising nationally under The Newspaper Network,
Inc. The Newspaper Network has launched a business of offering advertisers
one-order, one-bill sales of advertising in newspapers throughout the country
and has developed into a national sales and marketing company providing services
to both advertisers and newspapers. The Company believes that this initiative is
important for both McClatchy and the newspaper industry in competing with direct
mail on a national basis.
As a result of the Company's continued research and development of new
technologies for its news and data, all of its daily papers are providing
subscriber and advertiser services through various forms of electronic
distribution. All eleven of the Company's largest newspapers are available
online through the World Wide Web.
Nando Media is the Company's new media subsidiary which has two roles.
First, as a stand alone internet publisher it generates revenues based on
audience on its websites, Nando Times and
10
Nando Sports Server. Secondly, Nando Media serves as a technology partner to
McClatchy and other newspapers, providing hosting, programming and customized
news services.
Commercial printing operations located in Clovis, California, and Benson,
N.C., were sold in 1998.
Revenues for all other operations were $11.8 million, down 2.1% from 1997,
and declined mostly due to the sale of the commercial printing operations.
Revenues from these other ventures represent 1.2% of total revenues in 1998 and
1.8% in 1997.
RAW MATERIALS
In 1998, the Company consumed approximately 242,500 metric tons of
newsprint compared to 169,000 metric tons in 1997, with the bulk of the increase
due to the addition of the Star Tribune. The Company currently obtains its
supply of newsprint from a number of suppliers under long-term contracts.
Newsprint and supplement expense accounted for approximately 19.6% of
operating expenses in 1998 compared to 18.3% in 1997. Management believes its
newsprint sources of supply under existing arrangements are adequate for its
anticipated needs. Significant increases in the price of newsprint would
adversely affect the operating results of the Company to the extent that it was
not offset by advertising and circulation volume and/or rate increases.
The Company, through a wholly-owned subsidiary, Newsprint Ventures, Inc.,
and four other publishers and a major newsprint manufacturer, are partners in
Ponderay Newsprint Company, a general partnership which owns and operates a
newsprint mill located sixty miles northeast of Spokane, Washington. The mill
became operational in late 1989 and has a production capacity in excess of
240,000 metric tons annually. The publisher partners have committed to take
126,000 metric tons of this anticipated production on a "take-if-tendered" basis
with the balance to be sold on the open market. The Company's annual commitment
is 28,400 metric tons. See Part II, Items 7 and 8 for further discussion of the
impact of this investment on the Company's business.
COMPETITION
The Company faces competition for advertising revenues from television,
radio and direct mail programs, suburban neighborhood and national newspapers
and other publications. Competition for advertising is based upon circulation
levels, readership demographics, price and advertiser results, while competition
for circulation is generally based upon the content, journalistic quality and
price of the newspaper. The Company's major daily newspapers are well ahead of
their newspaper competitors in both advertising linage and general circulation
in all of their markets.
11
EMPLOYEES - LABOR
As of December 27, 1998, the Company had 10,201 full and part-time
employees, of whom approximately 23% were represented by unions. The addition of
the Star Tribune brought 2,975 employees, 55% of which are represented by
unions. In March 1998, the Star Tribune signed two labor agreements for five and
ten years, respectively, which cover 60% of the Star Tribune's union represented
employees. Most of the other union represented employees are currently working
under labor agreements expiring in various years.
While the Company's newspapers have not had a strike since 1978 and they do
not currently anticipate a strike occurring, the Company cannot preclude the
possibility that a strike may occur at one or more of its newspapers when future
negotiations occur. The Company believes that, in the event of a newspaper
strike, it would be able to continue to publish and deliver to subscribers, a
capability which is critical to retaining revenues from advertising and
circulation.
12
ITEM 2. PROPERTIES
The corporate headquarters of the Company are located at 2100 "Q" Street,
Sacramento, California. The general character, location and approximate size of
the principal physical properties used by the Company at December 27, 1998, are
set forth below.
Approximate Area
in Square Feet
--------------
Owned Leased
----- ------
Printing plants, business and editorial
offices and warehouse space located in:
Minneapolis, Minnesota 812,484 341,692
Sacramento, California 685,914 184,256
Fresno, California 406,000 43,748
Tacoma, Washington 319,599
Raleigh, North Carolina 212,700 49,580
Modesto, California 148,816 19,574
Garner, North Carolina 131,500
Anchorage, Alaska 129,926
Kennewick, Washington 98,081
Rock Hill, South Carolina 49,000
Beaufort, South Carolina 16,500
Gig Harbor, Washington 13,200
Chapel Hill, North Carolina 10,504
Hilton Head, South Carolina 9,700
Puyallup, Washington 6,500 9,481
Durham, North Carolina 21,000
Other 13,949 53,453
The Company believes that its current facilities are adequate to meet the
present and immediately foreseeable needs of its newspapers.
ITEM 3. LEGAL PROCEEDINGS
The Company becomes involved from time to time in claims and lawsuits
incidental to the ordinary course of its business, including such matters as
libel, invasion of privacy and wrongful termination actions, and complaints
alleging discrimination. In addition, the Company is involved from time to time
in governmental and administrative proceedings concerning labor, environmental
and other claims. Management believes that the outcome of pending claims or
proceedings will not have a material adverse effect upon the Company's
consolidated results of operations or financial condition.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The McClatchy Company's Class A Common Stock is listed on the New York
Stock Exchange (NYSE symbol - MNI). A small amount of Class A Stock is also
traded on the Midwest Stock Exchange and the Pacific Stock Exchange. The
Company's Class B Stock is not publicly traded. The following table lists
dividends paid on Common Stock and the prices of the Company's Class A Common
Stock as reported by the New York Stock Exchange for 1998 and 1997:
1998 1997
----------------------------------------------- ----------------------------------------------
High Low Dividends High Low Dividends
---- --- --------- ---- --- ---------
1st Quarter $30.44 $25.13 $.095 $28.00 $23.75 $.095
2nd Quarter $35.88 $27.88 $.095 $30.50 $23.38 $.095
3rd Quarter $39.56 $28.19 $.095 $35.19 $29.25 $.095
4th Quarter $35.56 $24.94 $.095 $34.69 $26.50 $.095
The Company's Board of Directors does not anticipate reducing the present
level of quarterly dividend payments. However, the payment and amount of future
dividends remain within the discretion of the Board of Directors and will depend
upon the Company's future earnings, financial condition and requirements, and
other factors considered relevant by the Board.
The number of record holders of Class A and Class B Common Stock at March
22, 1999 was 2,281 and 26, respectively.
14
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share amounts)
December 27, Restated December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
CONSOLIDATED INCOME STATEMENT DATA:
REVENUES - NET:
Advertising $ 756,052 $ 504,745 $ 484,460 $ 418,841 $ 368,068
Circulation 162,433 107,298 108,317 95,248 85,017
Other 50,166 29,907 31,456 26,790 18,333
------------ ------------ ------------ ------------ ------------
Total 968,651 641,950 624,233 540,879 471,418
OPERATING EXPENSES:
Depreciation and amortization 93,786 53,269 52,954 44,000 38,140
Other costs and expenses 694,007 472,195 490,224 429,935 360,014
------------ ------------ ------------ ------------ ------------
Total 787,793 525,464 543,178 473,935 398,154
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 180,858 116,486 81,055 66,944 73,264
Partnership income (losses) 1,450 (500) 3,024 (630) (5,469)
Other non-operating (expenses) income (60,205) 1,005 (10,344) (2,729) 3,166
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX PROVISION 112,103 116,991 73,735 63,585 70,961
Income tax provision 61,052 47,759 31,629 27,362 23,501
------------ ------------ ------------ ------------ ------------
NET INCOME $ 61,051 $ 69,232 $ 42,106 $ 36,223 $ 47,460
============ ============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 1.41 $ 1.82 $ 1.12 $ 0.97 1.28
============ ============ ============ ============ ============
Diluted $ 1.41 $ 1.81 $ 1.11 $ 0.97 1.28
============ ============ ============ ============ ============
DIVIDENDS PER COMMON SHARE $ 0.380 $ 0.380 $ 0.323 $ 0.304 $ 0.264
============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEET DATA:
Total assets $2,246,725 $ 857,798 $ 878,952 $ 900,424 $ 589,533
Long-term bank debt 1,004,000 94,000 190,000 243,000 -
Stockholders' equity 807,005 567,055 505,067 470,034 443,955
The Company changed its fiscal reporting to a 52/53 week year in 1998. This
change did not have a material impact on reported results. All earnings and
earnings per share amounts have been adjusted for a change in the method of
accounting for inventories. Results for 1997 include a pre-tax gain of $9.3
million for the sale of certain business operations and real estate. Results for
1996 include a pre-tax gain of $2.8 million on the sale of a newspaper and other
business operations. Results for 1995 include a $2.7 million pre-tax charge
related to early retirement programs while 1994 includes a $6.0 million
favorable adjustment (included in the income tax provision) related to the
resolution of income tax audits. The financial information also gives effect to
the acquisitions of the STAR TRIBUNE in March 1998 and The News and Observer
Publishing Company in August 1995. This summary should be read in conjunction
with the consolidated financial statements and notes thereto.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT EVENTS AND TRENDS
In 1998, the Company changed from a calendar year to a fiscal year
ending on the Sunday nearest December 31. Accordingly, the Company's 1998
results are reported through December 27, versus December 31 for 1997. This
change did not materially affect 1998 net income.
On March 19, 1998 the Company acquired all of the outstanding shares of
Cowles Media Company (Cowles) in a transaction valued at $90.50 per Cowles share
and the assumption of $77.4 million in existing Cowles debt. Cowles publishes
the STAR TRIBUNE newspaper, which serves the Twin Cities of Minneapolis and St.
Paul. Cowles also owned four separate subsidiaries that publish business
magazines, special-interest magazines and home improvement books. Simultaneously
with the closing of the Cowles merger, the Company sold the magazine and book
publishing subsidiaries. The combined proceeds, plus debt and other liabilities
assumed by the buyers in those transactions, were $208.1 million. The Company
used these proceeds to repay debt associated with the Cowles merger. See note 2
to the consolidated financial statements. The Company valued the non-newspaper
businesses at fair market value based upon the net after-tax proceeds received
by the Company on March 19, 1998, and accordingly, did not realize a gain or
loss on the sale.
In connection with the merger, the Company paid 15% of the
consideration by issuing 6,330,548 shares of Class A Common Stock in exchange
for Cowles shares and paid cash for the remaining shares. The Class A shares
were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for
each Cowles share. The Company obtained bank debt through a syndicate of banks
and financial institutions to finance the cash requirements of the merger and to
refinance its existing debt (See note 4 to the consolidated financial
statements). Results of the STAR TRIBUNE have been included in the Company's
results beginning March 20, 1998.
The primary asset retained by the Company following the Cowles
transaction is the STAR TRIBUNE, the largest newspaper in Minnesota with daily
circulation of 387,000 and Sunday circulation of 673,000 as of March 19, 1998.
It is now the Company's largest newspaper.
On December 4, 1996 the Company declared a five-for-four stock split in
the form of a 25% stock dividend which was paid on January 2, 1997. All
outstanding shares and per share amounts have been restated in this discussion
to reflect the stock dividend.
In October 1996, the Company announced that it had entered into
agreements in principle to sell five community newspapers. In December 1996, the
Company completed the sale of the Ellensburg DAILY RECORD and recorded a pre-tax
gain of $3.2 million in other non-operating (expenses) income. In February 1997,
the sale of the remaining four newspapers was completed. Also in the fourth
quarter of 1997, the Company sold Legi-Tech, its on-line legislative tracking
company as well as other non-strategic real estate assets. The Company recorded
a nonrecurring pre-tax gain of $9.3 million in non-operating (expenses) income
for its 1997 dispositions.
16
In the third and fourth quarters of 1998, the Company sold two
commercial printing operations, a weekly newspaper, a monthly magazine and two
niche publications with 1998 revenues totaling $8.7 million. The net gain on
these sales was not material to 1998 results.
Effective January 1, 1998, the Company began accounting for newsprint
inventories by the first-in, first-out (FIFO) method, whereas in all prior years
inventories were valued using the last-in, first-out (LIFO) method. The Company
adopted FIFO accounting for newsprint inventory to provide for a better matching
of revenues and expenses. Additionally, the change will enable the financial
reporting to parallel the way management assesses the financial and operational
performance of its newspapers. The Company has restated financial statements of
prior years to apply the new method retroactively and, accordingly, retained
earnings as of December 31, 1995 increased by $4,340,000 to reflect the
restatement. The effect of the accounting change on 1998 results and results for
prior years is not material. See note 3 to the consolidated financial
statements.
During 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130 (Reporting
Comprehensive Income), which requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from non-owner sources. The Company has no items of comprehensive income, hence
comprehensive income and net income are equal.
SFAS No. 131 (Disclosures about Segments of an Enterprise and Related
Information), which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic area, and major customers; and No. 132 (Employers'
Disclosure about Pensions and Other Post-retirement Benefits), which revises the
disclosures about pension and other post-retirement benefits, have been adopted
by the Company in 1998 and did not have a material impact on the Company's
financial position, results of operations or cash flows.
During 1998, the FASB issued SFAS 133 (Accounting for Derivative
Instruments and Hedging Activities) which requires that all derivatives be
carried at fair value on the balance sheet. This statement will become effective
in the Company's fiscal year 2000. While adoption of this statement is not
expected to materially impact the Company's financial results, management has
not determined the impact on the Company's consolidated financial position.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Net income was $61.1 million or $1.41 per share in 1998 compared to
$69.2 million or $1.81 per share in 1997. Results in 1997 includes a gain of 14
cents per share on sales of operations. The 1998 results include the STAR
TRIBUNE newspaper's results and reflect dilution from acquisition-related
expenses including amortization of intangibles, depreciation, interest and
higher income taxes. Also, the number of weighted average shares outstanding
increased in 1998, primarily as a result of Class A stock issued in connection
with the acquisition of the STAR TRIBUNE.
17
Revenues increased $326.7 million, with $305.9 million coming from the
STAR TRIBUNE (March 20 - December 27, 1998). Total revenues excluding the Star
Tribune increased 3.2%. However, management estimates that excluding operations
sold in 1998 and 1997, and giving effect to the four days of December 28 through
December 31, 1998, to make the years comparable, revenue would have increased
4.5 to 5.0% ("underlying revenue growth").
Much of the underlying revenue growth at the Company's operations
reflect advertising rate increases at most newspapers and growth in other
revenues such as online services, direct mail, commercial printing and
non-newspaper revenues (primarily from The Newspaper Network).
OPERATING REVENUES (in thousands):
1998 1997 % Change
----------- ----------- -----------
California newspapers $ 325,566 $ 318,227 2.3
Minnesota newspaper 305,905 - NM
Carolinas newspapers 174,690 167,479 4.3
Northwest newspapers 150,655 144,157 4.5
Non-newspaper operations 11,835 12,087 (2.1)
=========== ============
$ 968,651 $ 641,950 NM
=========== ============
NM - not meaningful
CALIFORNIA - The California newspapers generated 33.6% of 1998 revenues
and increased $7.3 million or 2.3%, and would have increased 2.6% excluding the
four community newspapers sold in February 1997. THE SACRAMENTO BEE, THE FRESNO
BEE and THE MODESTO BEE newspapers are the Company's primary operations in
California and recorded $8.3 million in higher advertising revenues. Circulation
revenues declined $1.1 million as the newspapers did not implement circulation
price increases in 1998, but rather discounted prices to increase subscriber
volume. Management estimates that revenues in the region would have increased in
the 3% range if it had not changed to fiscal year reporting.
MINNESOTA - The STAR TRIBUNE'S revenues of $305.9 million include
advertising revenues of $232.0 million and circulation revenues of $57.1
million. On a proforma basis, the STAR TRIBUNE'S revenues were up 5.7%. The
change in the Company's period reporting had little affect on revenue
comparisons as the STAR TRIBUNE was on a similar fiscal period in 1997.
CAROLINAS - The Carolinas newspapers contributed 18.0% of total Company
revenue and reported a $7.2 million or 4.3% increase in total revenues. THE NEWS
& OBSERVER in Raleigh and the Company's three smaller dailies in South Carolina
generate the majority of revenues in this region. Advertising revenues were up
$7.6 million or 5.7% in this region, and circulation revenues were down
nominally. Most of the 1998 sales of news operations affected this region.
Management estimates that excluding properties sold in 1998 and 1997, and giving
effect for the change in period reporting, revenues from the Carolinas
newspapers would have increased in the 5.0% range in 1998.
18
NORTHWEST - The Northwest newspapers reported the strongest revenue
growth percentage of all regions in 1998, although it is the Company's smallest
region at 15.6% of total revenues. Revenues from the Anchorage and Washington
State newspapers increased $6.5 million or 4.5%. Advertising revenues increased
$4.7 million or 4.4%, circulation revenues declined $465,000 or 1.7% and other
revenues, primarily commercial printing, increased $2.2 million or nearly 25.0%.
Management estimates that revenues adjusted for the change in period reporting
would have grown between 5.0% to 5.5%.
Non-newspaper - Non-newspaper revenues (1.2% of total revenues) were
primarily derived from The Newspaper Network (TNN), Nando Media, The McClatchy
Printing Company and Benson Printing Company. Both printing companies were sold
in late 1998. Revenues from ongoing operations were $7.5 million in 1998, up
39.2% from 1997 primarily due to higher revenues at TNN.
OPERATING EXPENSES:
Total operating expenses increased 49.9% and include STAR TRIBUNE's
expenses from March 20 through December 27, 1998. Excluding STAR TRIBUNE in 1998
and expenses from operations sold in 1998 and 1997, expenses from the Company's
ongoing businesses increased 2.4%. Compensation increased 3.1%, newsprint and
supplement expenses increased 10.6% (due mostly to higher newsprint prices) and
all other operating expenses, including depreciation and amortization, increased
less than 1.0%. Management estimates that, had it not changed to period
reporting, operating expenses would have risen between 2.0% to 4.0%, mostly
reflecting general inflation.
NON-OPERATING (EXPENSE) INCOME - NET:
The Company's net interest expense increased to $62.2 million from $8.6
million in 1997, reflecting service on the debt incurred to complete the Star
Tribune transaction. Its share of the Ponderay Newsprint Company (Ponderay)
income (see note 1 to the consolidated financial statements) was $1.5 million
versus a loss of $500,000 in 1997 when newsprint prices were lower.
The 1998 non-operating (expense) income-net includes gains on the sales
of certain investments and amortization of unearned covenant revenue (from the
Star Tribune) totaling $2.0 million, while the 1997 results include pre-tax
gains of $9.3 million on the sale of business operations and real estate
holdings.
INCOME TAXES:
The Company's effective tax rate is 50.0% in 1998, up from a 40.8% rate
in 1997 due primarily to the non-deductible expenses associated with the Star
Tribune transaction. See note 5 to the consolidated financial statements.
1997 COMPARED TO 1996
Net income was $69.2 million or $1.81 per diluted share in 1997
compared to $42.1 million or $1.11 per diluted share in 1996 (both restated for
the change in inventory accounting). Net
19
income from ongoing operations -- excluding the gains on the sales of community
newspapers, other businesses and non-strategic assets in 1997 and 1996 -- was
$63.8 million or $1.67 per share in 1997 versus $40.5 million or $1.08 per share
in 1996.
Much of the increase in earnings reflect higher revenues at the
Company's newspapers in the Carolinas, The Sacramento Bee and The Modesto Bee,
and lower average newsprint prices in 1997 than 1996. Net income also benefited
from lower interest expense as the Company repaid debt.
Revenues increased $17.7 million to $641.9 million, up 2.8% in 1997,
but were up $26.1 million excluding the sold community newspapers from the
comparisons. At ongoing operations, advertising revenues increased 5.6% --
mostly reflecting rate increases. Circulation revenues were up nominally as only
one of the Company's newspapers implemented a home delivery rate increase in
1997.
OPERATING REVENUES (in thousands):
1997 1996 % Change
----------- ----------- -----------
California newspapers $ 318,227 $ 310,719 2.4
Carolinas newspapers 167,479 153,674 9.0
Northwest newspapers 144,157 143,569 0.4
Non-newspaper operations 12,087 16,271 (25.7)
=========== ===========
$ 641,950 $ 624,233 2.8
=========== ===========
CALIFORNIA - The California newspapers generated 49.6% of total
revenues in 1997 and increased $7.5 million over 1996. Revenues were up $14.1
million or 4.7% excluding the four community newspapers sold in February 1997.
The three Bee newspapers, located in Sacramento, Fresno and Modesto, California
are the Company's primary businesses in this region and recorded $12.0 million
in higher advertising revenues. Circulation revenues declined nominally in 1997,
while revenues from non-traditional sources, i.e. niche products, on-line
services, etc., increased $2.0 million (primarily at THE SACRAMENTO BEE).
CAROLINAS - The Carolina newspapers generated 26.1% of total revenues
in 1997 and increased $13.8 million, with $12.2 million from the North Carolina
newspapers -- primarily THE NEWS & OBSERVER in Raleigh, and the remainder from
the Company's three South Carolina dailies. Advertising revenues increased $12.2
million in 1997 while circulation revenues were up $918,000.
NORTHWEST - The Northwest newspapers generated 22.5% of total revenues
and reported a $588,000 increase in revenues. Revenues were up $2.2 million or
1.6% excluding the Ellensburg DAILY RECORD which was sold in December 1996.
Retailer consolidation in the two Washington markets, Tacoma and Tri-Cities, and
lower commercial printing revenues at the ANCHORAGE DAILY NEWS slowed the growth
in revenues in this region. Advertising revenues increased $2.1 million
(excluding Ellensburg) while circulation revenues declined $446,000 at the
ongoing operations.
20
NON-NEWSPAPER - Revenues at the Company's non-newspaper operations
declined $4.2 million. These operations which account for 1.8% of total company
revenues included The Newspaper Network, N&O's New Media Division (primarily
Nando Media, the Company's on-line publishing company), McClatchy Printing
Company, Benson Printing Company, and Legi-Tech. Revenues declined due mostly to
the sale of Nando Media's internet access business and a reorganization at
McClatchy Printing Company.
OPERATING EXPENSES:
Operating expenses were down 3.3% in 1997. However, excluding the
operating expenses of the sold community newspapers, expenses were down 1.6%. At
the Company's ongoing operations, newsprint and supplement cost declined 17.2%
due primarily to lower average newsprint prices. Excluding newsprint and
supplement cost and expenses of the sold newspapers, total other operating
expenses were up 2.7% reflecting increased costs associated with new product
development and promotions in 1997. Other expense increases were tempered by the
low rate of inflation in 1997.
NON-OPERATING (EXPENSES) INCOME - NET:
Interest expense declined $4.6 million as the Company paid down debt.
Ponderay reported a loss in 1997 due to lower newsprint prices. Hence, the
Company recorded a loss of $500,000 in 1997 versus income of $3.0 million in
1996 as its share of Ponderay's results.
A pre-tax gain of $6.7 million was realized on the sale of four
community newspapers in 1997 versus a pre-tax gain of $2.8 million on the sale
of the Ellensburg DAILY RECORD in 1996. Also, a pre-tax gain of $2.5 million was
recorded on the sale of Legi-Tech and other non-strategic real estate assets.
INCOME TAXES:
The Company's effective tax rate was 40.8% in 1997 versus 42.9% in
1996. The tax rate was lower primarily because of a difference in the book and
tax basis of intangibles at some of the sold operations -- see note 5 to the
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $9.7 million at December
27, 1998, versus $8.7 million at the end of 1997. See notes 2 and 4 to the
consolidated financial statements (and below) for a discussion of the impact of
the acquisition of the STAR TRIBUNE on the Company's liquidity and capital
resources.
The Company generated $134.5 million of cash from operating activities
in 1998 and has generated an aggregate of $352.1 million over the last three
years. During 1998, the Company received $184.3 million in proceeds from the
sale of businesses and assets, and $1.25 billion in proceeds from long-term debt
(discussed below). The major uses of cash over the three year period
21
have been to consummate the STAR TRIBUNE acquisition ($1.1 billion), to purchase
property, plant and equipment (see below), and to repay debt. Cash has also been
used to pay dividends. In 1998, the Company repaid $296.4 million of bank debt
and paid $16.3 million in dividends. Proceeds from issuing Class A stock under
employee stock plans totaled $4.5 million in 1998. See the Company's Statement
of Cash Flows on page 34.
The Company expended a total of $35.1 million in 1998 for capital
projects and equipment to improve productivity and keep pace with growth and new
technology. Capital expenditures over the last three years have totaled $90.1
million and planned expenditures in 1999 are estimated to be approximately $42
million at existing operations.
See notes 1 and 9 to the consolidated financial statements for a
discussion of the Company's commitments to Ponderay.
A syndicate of banks and financial institutions have provided the debt
financing of the Cowles merger under a new Bank Credit Agreement (Credit
Agreement). The Credit Agreement consists of the following: A term loan
consisting of Tranche A of $735 million bore interest at the London Interbank
Offered Rate ("LIBOR") plus 125 basis points, and is payable in seven years, and
Tranche B of $330 million bore interest at LIBOR plus 175 basis points and is
payable in nine and one-half years. A revolving credit line of up to $200
million bore interest at LIBOR plus 125 basis points and is payable in seven
years. As the Company reduces the outstanding debt relative to cash flow (as
defined in the Credit Agreement), the interest rate spread over LIBOR will
decline (see below). The debt is secured by certain assets of the Company, and
all of the debt is pre-payable without penalty. The Company intends to
accelerate payments on this debt as cash generation allows.
Beginning in 1999, the interest rate spread over LIBOR declined to 62.5
basis points for Tranche A and the revolving credit line, and declined to 150
basis points for Tranche B.
The definitive terms of the Credit Agreement include certain operating
and financial restrictions, such as limits on the Company's ability to incur
additional debt, create liens, sell assets, engage in mergers, make investments
and pay dividends.
While the Company expects that most of its free cash flow generated
from operations in 1999 and in the foreseeable future will be used to repay
debt, management is of the opinion that operating cash flow and its credit
facilities as described above are adequate to meet the liquidity needs of the
Company, including currently planned capital expenditures and other investments.
The Company had $70.2 million of available credit under its current
bank credit agreement at December 27, 1998.
22
YEAR 2000 COMPLIANCE
The Company's Year 2000 Compliance Plan includes a definition of Year
2000 conformity, compliance certification standards, reporting and risk
management structures. The Company's target date for completion of all
remediation projects is July 1, 1999. At the time of this filing, the Company
remains on schedule and fully expects to meet this date of completion.
A corporate task force and task forces at each of our newspapers are in
place to assess Year 2000 issues and the necessary changes to the Company's many
different systems. A Year 2000 Compliance Coordinator has been named to
facilitate our progress in meeting our internal deadlines for compliance. This
coordinator reports to the Corporate Director of Information Systems and the
Company's Vice President, Finance.
For purposes of achieving remediation, a combination of internal
effort, upgrades from vendors, external programmers and consultants, replacement
systems or, in a few cases, retirement of systems are being used. To date, the
Company has completed an inventory and analysis of systems and equipment with
date-related logic and is currently in the remediation and testing phases.
Historical costs incurred in bringing systems to Year 2000 compliance through
December 27, 1998, are estimated to be $500,000. At present, we estimate the
incremental cost of making required changes will be approximately $800,000 in
additional costs through 1999. Capital projects, previously budgeted for
business reasons, which, incidentally, include Year 2000 compliance, total
approximately $13 million throughout the Company.
The Company's 11 daily newspapers generate over 95% of our revenues and
profits. The following describes these newspapers' state of readiness for Year
2000, the associated risks and the state of our contingency plans:
NEWSPAPER PRODUCTION FACILITIES AND PROCESSES:
Production Systems:
The Company has reviewed its computer and mechanical systems at all
production facilities and many such systems have been made Year 2000 compliant
or will be remediated by the Company's target date. The STAR TRIBUNE will
upgrade their press control systems in February 1999. Also, an upgrade on the
press control system for one of the four presses at THE SACRAMENTO BEE has been
ordered and is expected to be installed during February 1999. These upgrades are
considered minor and their absence would not prohibit printing of the daily
newspaper.
If the Company's presses succumb to Year 2000 problems, it would be
difficult in our larger markets to print on a timely basis. Although all of our
papers have reciprocal printing agreements with other papers in each area, our
largest papers, which contribute the greatest revenues, are too large to be
printed in their entirety at another location. Hence, these newspapers could be
printed late, with smaller editions and with less circulation. This risk would
have significant negative revenue implications for the Company. Also, there are
no assurances that the other newspapers with which the Company has reciprocal
printing arrangements will be Year 2000 compliant. Year 2000 contingency plans
at each property outline procedures for off-site printing and special year-end
press
23
schedules.
Third Party Suppliers:
One of the most significant risks associated with the Company's
production systems in the Year 2000 may be the Company's ability to receive
electrical power from the various utility companies that serve the communities
in which it produces newspapers. None of the Company's newspapers currently have
electrical generators sufficiently large enough to run printing presses. Hence,
if electrical service is unavailable, the Company may have to rely on reciprocal
printing agreements (discussed above) or may not be able to produce a daily
newspaper. The Company is continuing to monitor the status of its utility
providers as to their Year 2000 readiness, but must rely on representations from
such vendors. If the Company's utility providers are unable to supply electrical
power, it could have significant negative revenue implications for the Company.
Current reports from power utility companies have been promising and have led to
an increased level of confidence that significant power failures are unlikely.
Nonetheless, Company contingency plans and procedures are in place for
short-term outages.
The Company has contacted its newsprint vendors, and we have received
written statements that the Company's major newsprint suppliers generally expect
to be Year 2000 compliant before January 1, 2000. In addition, we plan to
determine in the first half of 1999 whether we will increase our stock of
newsprint during the last months of 1999, as additional insurance against
potential Year 2000 problems that might be experienced by vendors or delivery
systems. The same inquiry process and determinations are being made for all
other major material sources, such as ink and plate suppliers.
EDITORIAL SYSTEMS:
The Company uses editorial systems from various vendors. We maintain
software and hardware maintenance contracts with vendors of critical components,
and many systems at our newspapers have been made Year 2000 compliant. Our
largest newspaper, the STAR TRIBUNE completed upgrades to their editorial system
in September 1998. Minor upgrades at a few other newspapers are expected to
bring all editorial systems into compliance by July 1, 1999.
The Company has budgeted to replace existing editorial systems at our
California dailies (THE SACRAMENTO BEE, THE MODESTO Bee and THE FRESNO BEE) in
1999 with newer systems which offer increased functionality, including the
ability to paginate pages (electronically assemble all elements on a page).
These systems are expected to be Year 2000 compliant. THE SACRAMENTO BEE has
performed, and THE FRESNO BEE and THE MODESTO BEE will perform, interim software
and/or hardware upgrades on the existing editorial systems to meet our Year 2000
compliance standards. Although the hardware vendor has declined to certify
certain pieces of hardware as Y2K compliant, extensive testing by the
application vendor and THE SACRAMENTO BEE indicates that the existing systems
can operate into 2000 without problems should installation of the new systems
extend beyond December 31,1999. Replacement of the editorial systems was already
planned and budgeted; therefore, they are not directly a Year 2000 compliance
expense. Costs to upgrade existing software will be expensed as incurred.
24
For the reasons noted above, we believe at this time that the risks of
editorial system failure are minimal. For backup purposes, our newspapers
possess enough Apple Macintosh workstations (generally immune to Year 2000
issues) with input, processing and output capabilities that, in an emergency,
could be used to complete an edition, or even produce new editions for several
days, while problems were being resolved. In the case of several newspapers, the
primary editorial system functions are currently produced on Macintosh
workstations, further reducing risk. In all cases, complications could result in
smaller newspapers with less editorial content.
CIRCULATION SYSTEMS:
It is expected that all circulation systems will be upgraded and be
Year 2000 compliant by mid-1999. The majority of these systems are supported by
vendor maintenance agreements and in some cases, we rely on the vendor to
provide timely releases of compliant versions. Two newspapers, the STAR TRIBUNE
and THE MODESTO BEE, utilize custom, in-house circulation systems that require
internal re-coding. Several components of the circulation system requiring
re-coding at the STAR TRIBUNE were completed and moved into production in
November 1998. The remaining portion of the remediated code will be put into
production by the end of March 1999. THE MODESTO BEE remains on target to
achieve compliance on their circulation system by July 1, 1999.
In the event that a circulation system should fail, Company contingency
plans provide for backup delivery lists to be created immediately prior to the
end of 1999.
Post-press (packaging and distribution) systems and mechanical
equipment are believed to be either already in compliance or are in the process
of being replaced as part of regular cyclical system replacements. We expect all
to be Year 2000 compliant by mid-1999. We currently believe our newspapers
delivery transportation fleets to be immune from Year 2000 issues.
The inability to deliver our print products would have negative impact
on both circulation and advertising revenues, the primary sources of revenue for
the Company.
ADVERTISING SYSTEMS/CUSTOMERS:
Display Systems:
The Company's newspapers use various systems to produce graphics for
run-of-press (display) advertising. While we believe most newspapers'
advertising systems are compliant, three of our newspapers, the STAR TRIBUNE,
ANCHORAGE DAILY NEWS and THE NEWS & OBSERVER, rely on graphic processing
subsystems from a vendor which has not yet provided Year 2000 readiness
solutions. Progress on these highly customized systems was made during the
fourth quarter of 1998, although full compliance has not been achieved. These
three newspapers may be required to replace the systems if they do not achieve
Year 2000 compliance, and detailed contingency plans are being developed.
Classified Systems:
The classified advertising systems at the Company's newspapers are
under software and
25
hardware maintenance contracts with vendors, and in most cases, have received or
expect to receive upgrades that the Company believes will provide Year 2000
compatibility. Two newspapers, however, will be replacing their classified
systems with newer, more functional models. THE NEWS & OBSERVER installed a new,
Year 2000 compliant, classified system during the fourth quarter of 1998. The
ANCHORAGE DAILY NEWS applied a Year 2000 upgrade to its existing classified
system, and we currently believe the system is Year 2000 compliant; nonetheless,
a replacement system is in the process of being installed and is expected to be
completed by March 1999.
General:
If advertising systems at our newspapers are not brought into
compliance, our newspapers may have to retrieve hard-copy proofs of advertising
contents of the respective databases in advance and manually input graphics,
which could delay the production of the newspaper. Moreover, many advertisers
currently send advertising materials to the Company's newspapers electronically.
If advertisers are unable to create advertising material due to their own Year
2000 issues, or external communication systems are affected, it is possible that
the newspapers would have additional advertising makeup costs.
The Company is currently reviewing a plan to address the issue of Year
2000 readiness with our major advertisers, as they represent a critical source
of revenue. Lack of Year 2000 compliance among major advertisers could result in
lost advertising revenues.
ACCOUNTING, ADMINISTRATION AND GENERAL:
In 1997, the Company, in the course of reviewing the effectiveness of
its financial and human resource systems, determined to replace the systems at
all newspapers with a centralized system that we believe to be Year 2000
compliant. All but two of our newspapers have now switched to the new financial
system, and half of our newspapers have moved to the new payroll and human
resources system. By February 1999, the financial systems and by July 1999 the
human resource systems at all newspapers within the Company are expected to
operate on this centralized platform.
We believe financial reporting and accounting responsibilities can be
met without the use of automated financial systems. A failure in the Company's
financial systems would result in delays in processing payables, receivables,
payroll and reporting Company performance while manual (contingency) processes
were activated.
If the automated advertising or circulation management and billing
systems fail (see previous discussions of advertising and circulation systems),
contingency plans will be implemented that would revert to a manual accounting
system. Billing would also be manual, labor intensive and would experience
significant delays. Advertising orders would be created using hard copy
advertising tickets. A local database or spreadsheet would be used to create run
lists for pagination.
The McClatchy Year 2000 Compliance Plan addressed the need to verify
the Year 2000 readiness of any third party that could cause a material impact on
the Company. Each McClatchy property identified and requested Year 2000
compliance statements from material vendors and
26
suppliers, content providers, utility companies, financial organizations and
other business partners. Where written representations of Year 2000 compliance
have not been forthcoming, we assume that the service or product will not be
Year 2000 compliant. In the event that any of the Company's material vendors,
suppliers or financial institutions are unable to provide the Company with
services, materials or financing required to operate the Company's business, it
could have a material impact on our operations. To date, no such impact has been
identified.
CONTINGENCY PLANS:
In addition to contingency plans noted in the various systems above,
each of our newspapers has developed contingency plans to cope with the
possibility that major systems could develop problems. These plans are being
reviewed and modified locally and at our corporate office throughout the first
half of 1999 as testing of major systems indicate need for further refinement.
As an added measure, the Company will conduct, at all locations, start-to-finish
functional tests of its production systems in mid-1999 and other significant
systems in the fall of 1999.
RISK FACTORS
We have made "forward-looking statements" in this document that are
subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of
McClatchy. Forward-looking statements are generally preceded by, followed by or
are a part of sentences that include the words "believes," "expects,"
"anticipates" or similar expressions. For those statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. You should understand that the
following important factors, in addition to those discussed elsewhere in this
document and in the documents which we incorporate by reference, could affect
the future results of McClatchy, and could cause those future results to differ
materially from those expressed in our forward-looking statements: general
economic, market or business conditions; financial, reliance on customer and
vendor assurances as to their Year 2000 compliance, the completeness of the
Company's internal efforts to identify systems that are not Year 2000 compliant
and its remediation efforts associated with such systems; increases in newsprint
prices and/or printing and distribution costs over anticipated levels; increases
in interest rates; competition from other forms of media in our principal
markets; increased consolidation among major retailers in our newspaper markets
or other events depressing the level of advertising; an economic downturn in the
economies of Minnesota, California's Central Valley, the Carolinas, Washington
State and Alaska; changes in our ability to negotiate and obtain favorable terms
under collective bargaining arrangements with our employees; competitive actions
by other companies; other occurrences leading to decreased circulation and
diminished revenues from both display and classified advertising; and other
factors, many of which are beyond our control. Consequently, there can be no
assurance that the actual results or developments we anticipate will be realized
or that these results or developments will have the expected consequences.
SUBSTANTIAL LEVERAGE; NEGATIVE NET TANGIBLE ASSETS; LIQUIDITY. On March
19, 1998, we completed a reorganization (the "Reorganization") pursuant to which
we implemented a holding company structure and also acquired the STAR TRIBUNE by
way of a merger with Cowles Media
27
Company (the "Cowles Merger"). To finance the Reorganization, we borrowed enough
cash to fund payment of the cash due to Cowles stockholders, pay the fees and
expenses incurred in connection with the Reorganization and refinance debt
assumed from Cowles and pre-existing debt of McClatchy. As of December 27, 1998,
we had $1.0 billion of long-term debt. In contrast, our pre-Reorganization
consolidated indebtedness was $94.0 million. Furthermore, because $1.2 billion
of the purchase price of the Cowles Merger was allocated to intangible assets,
such as goodwill, we now have negative net tangible assets. Our net tangible
assets as of December 27, 1998, were $(704.0) million.
This high leverage may have important consequences for us in the
future, including the following: (a) our ability to obtain additional financing
for future acquisitions (if any), working capital, capital expenditures or other
purposes may be impaired or, if we are able to obtain additional financing, it
may not be on favorable terms; (b) a substantial portion of our cash flow
available from operations, after satisfying certain liabilities arising in the
ordinary course of business, will be dedicated to the payment of principal and
interest on this indebtedness, thereby reducing funds that would otherwise be
available to us; (c) a substantial decrease in our net operating cash flows or a
substantial increase in our expenses could make it difficult for us to meet our
debt service requirements, or could force us to modify our operations; and (d)
our leverage may make us more vulnerable to a downturn in our business or the
economy generally. In addition, the terms of the Reorganization borrowing
agreements include operating and financial restrictions, such as limits on our
ability to incur indebtedness, create liens, sell assets, engage in mergers or
consolidations, make investments and pay dividends. The Reorganization debt is
secured by certain assets of McClatchy. All of the Reorganization debt is
pre-payable without penalty. Although we have no present plan in place for early
repayment of this debt, we intend to accelerate payments on this debt as cash
generation allows.
Our principal sources of liquidity are cash flow from operations and
borrowings under a revolving credit facility. Our principal uses of liquidity
will be to provide working capital, to meet debt service requirements and other
liabilities arising in the ordinary course and to finance our strategic plans. A
revolving credit facility is available for our working capital needs. A term
loan facility has been drawn in full.
EARNINGS DILUTION AS A RESULT OF THE COWLES MERGER. Our net income and
earning per share for the next several years will be reduced due to increased
interest expense as a result of the incurrence of additional long-term debt in
the Cowles Merger, the amortization of the identifiable intangibles and goodwill
associated with the Cowles Merger, and the issuance of shares of our Class A
Common Stock in the Cowles Merger. Assuming that the Cowles Merger had occurred
on January 1, 1997, our pro forma income from continuing operations for the
fiscal year ended December 31, 1997 would have been approximately $32.5 million,
as compared to $69.2 million of income from continuing operations for McClatchy
Newspapers, Inc. for the same period on a historical basis (restated for a
change in inventory accounting - see note 3 to the consolidated financial
statements). Similarly, our pro forma interest expense for fiscal 1997 would
have been approximately $83.8 million, as compared to approximately $8.7 million
for McClatchy Newspapers, Inc. for the same period on a historical basis.
Assuming that the Cowles Merger had occurred on January 1, 1998, our pro forma
income from continuing operations for the year ended
28
December 27, 1998, would have been approximately $22.2 million as compared to
$61.1 million of income from continuing operations for The McClatchy Company for
the same period on a historical basis. Similarly, pro forma interest expense for
1998 would have been approximately $78.6 million, as compared to approximately
$62.8 million for The McClatchy Company for the same period on a historical
basis. There can be no assurance that this reduction in earnings per share and
net income from continuing operations will not have a negative impact on the
market price of our Class A Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In addition to normal business risks discussed above, the Company
utilizes interest rate protection agreements to help maintain the overall
interest rate parameters set by management. None of these agreements were
entered into for trading purposes. (See notes 4 and 11 to the consolidated
financial statements.) As a result of this interest rate mix, a hypothetical 10
percent change in interest rates would have a $0.04 to $0.07 per share increase
or decrease in the Company's results of operations. It would also impact the
fair values of its market risk sensitive financial instruments, but would not
materially affect the Company's financial position taken as a whole.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Report of Deloitte & Touche LLP 30
Consolidated Statement of Income 31
Consolidated Balance Sheet 32
Consolidated Statement of Cash Flows 34
Consolidated Statement of Stockholders' Equity 35
Notes to Consolidated Financial Statements 36
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts 57
All other schedules are omitted as not applicable under the rules of Regulation
S-X.
29
INDEPENDENT AUDITORS' REPORT
The McClatchy Company:
We have audited the accompanying consolidated balance sheets of The
McClatchy Company and its subsidiaries as of December 27, 1998, and December 31,
1997, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended December
27, 1998. Our audits also included the financial statement schedule listed in
the Index to Financial Statements and Financial Statement Schedules at Item 8.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of The McClatchy Company and
its subsidiaries at December 27, 1998 and December 31, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 27, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 3 to the consolidated financial statements, in 1998
the Company changed its method of accounting for newsprint inventory.
Deloitte & Touche LLP
Sacramento, California
February 2, 1999
30
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts) Year Ended
-------------------------------------------
December 27, December 31,
------------ -------------------------
1998 1997 1996
------------ --------- ---------
Restated Restated
REVENUES - NET Newspapers:
Advertising $ 756,052 $ 504,745 $ 484,460
Circulation 162,433 107,298 108,317
Other 38,331 17,820 15,185
--------- --------- ---------
956,816 629,863 607,962
Non-newspapers 11,835 12,087 16,271
--------- --------- ---------
968,651 641,950 624,233
OPERATING EXPENSES
Compensation 365,760 254,048 253,327
Newsprint and supplements 154,778 96,138 116,896
Depreciation and amortization 93,786 53,269 52,954
Other operating expenses 173,469 122,009 120,001
--------- --------- ---------
787,793 525,464 543,178
--------- --------- ---------
OPERATING INCOME 180,858 116,486 81,055
NON-OPERATING (EXPENSES) INCOME
Interest expense (62,820) (8,698) (13,321)
Investment income 651 83 102
Partnership income (loss) 1,450 (500) 3,024
Gain (loss) on sale of newspaper operations and
other business operations/assets (111) 9,254 2,840
Other - net 2,075 366 35
--------- --------- ---------
(58,755) 505 (7,320)
--------- --------- ---------
INCOME BEFORE INCOME TAX PROVISION 122,103 116,991 73,735
INCOME TAX PROVISION 61,052 47,759 31,629
--------- --------- ---------
NET INCOME $ 61,051 $ 69,232 $ 42,106
========= ========= =========
NET INCOME PER COMMON SHARE:
Basic $ 1.41 $ 1.82 $ 1.12
Diluted $ 1.41 $ 1.81 $ 1.11
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic 43,199 37,971 37,593
Diluted 43,349 38,155 37,812
See notes to consolidated financial statements
31
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts) December 27, December 31,
1998 1997
--------------- ------------
ASSETS Restated
CURRENT ASSETS
Cash $ 9,650 $ 8,671
Trade receivables (less allowances of $4,835 in 1998
and $2,162 in 1997) 149,685 93,069
Other receivables 2,762 2,143
Newsprint, ink and other inventories 16,587 11,735
Deferred income taxes 17,441 8,477
Other current assets 4,414 2,717
-------------- -------------
200,539 126,812
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 203,842 160,443
Equipment 446,236 371,312
-------------- -------------
650,078 531,755
Less accumulated depreciation (275,230) (246,236)
-------------- -------------
374,848 285,519
Land 56,593 34,199
Construction in progress 21,961 5,468
-------------- -------------
453,402 325,186
INTANGIBLES - NET 1,510,954 393,215
OTHER ASSETS 81,830 12,585
-------------- -------------
TOTAL ASSETS $ 2,246,725 $ 857,798
============== =============
See notes to consolidated financial statements
32
December 27, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- -------------
Restated
CURRENT LIABILITIES
Accounts payable $ 68,358 $ 35,613
Accrued compensation 62,038 27,956
Income taxes 29,222 1,877
Unearned revenue 33,602 19,308
Carrier deposits 4,071 3,980
Other accrued liabilities 23,099 9,709
------------- ------------
220,390 98,443
LONG-TERM BANK DEBT 1,004,000 94,000
OTHER LONG-TERM OBLIGATIONS 75,274 40,406
DEFERRED INCOME TAXES 140,056 57,894
COMMITMENTS AND CONTINGENCIES (NOTE 9)
STOCKHOLDERS' EQUITY Common stock $.01 par value:
Class A - authorized
100,000,000 shares, issued
16,033,763 in 1998 and 9,421,383 in 1997 160 94
Class B - authorized
60,000,000 shares, issued
28,655,912 in 1998 and 28,685,912 in 1997 287 287
Additional paid-in capital 269,523 74,354
Retained earnings 537,035 492,320
------------- ------------
807,005 567,055
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,246,725 $ 857,798
============= ============
33
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands) Year Ended
-------------------------------------------
December 27, December 31,
--------------------------
1998 1997 1996
------------ ----------- ------------
Restated Restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,051 $ 69,232 $ 42,106
Reconciliation to net cash provided:
Depreciation and amortization 96,556 53,411 53,110
Deferred income taxes 3,607 (2,031) (3,441)
Partnership (income) losses (1,450) 500 (3,024)
Loss (gain) on sale of newspaper operations
and other business operations/assets 111 (9,254) (2,840)
Changes in certain assets and liabilities - net (25,646) 5,806 13,694
Other 249 (221) 585
------------ ----------- ------------
Net cash provided by operating activities 134,478 117,443 100,190
CASH FLOWS FROM INVESTING ACTIVITIES:
Merger of Cowles Media Company (1,099,518) - -
Purchases of property, plant and equipment (35,111) (23,243) (31,737)
Other acquisitions - (1,813) (1,844)
Sale of newspaper and other business operations 184,290 14,340 6,808
Other - net - 732 (85)
------------ ----------- ------------
Net cash used by investing activities (950,339) (9,984) (26,858)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 1,125,000 - -
Repayment of long-term debt (296,370) (96,000) (63,000)
Payment of cash dividends (16,336) (14,439) (12,163)
Other - principally stock issuances 4,546 5,774 4,456
------------ ----------- ------------
Net cash provided (used) by financing activities 816,840 (104,665) (70,707)
NET CHANGE IN CASH AND CASH EQUIVALENTS 979 2,794 2,625
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,671 5,877 3,252
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,650 $ 8,671 $ 5,877
============ =========== ============
See notes to consolidated financial statements.
34
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
Par Value Additional Restated Treasury
------------------- Paid-In Retained Stock Restated
Class A Class B Capital Earnings At Cost Total
---------- -------- ------------ ------------- ---------- --------------
BALANCES, DECEMBER 31, 1995 $ 85 $ 289 $ 62,447 $ 407,584 $ (371) $ 470,034
Net income 42,106 42,106
Dividends paid ($.323 per share) (12,163) (12,163)
Conversion of 71,875 Class B
shares to Class A 1 (1)
Issuance of 307,376 Class A shares
under employee stock plans 3 4,453 4,456
Tax benefit from stock plans 634 634
---------- -------- ------------ ------------- ---------- --------------
BALANCES, DECEMBER 31, 1996 89 288 67,534 437,527 (371) 505,067
Net income 69,232 69,232
Dividends paid ($.38 per share) (14,439) (14,439)
Conversion of 156,375 Class B
shares to Class A 1 (1)
Issuance of 348,357 Class A shares
under employee stock plans 4 5,805 5,809
Tax benefit from stock plans 1,386 1,386
Retirement of treasury stock (371) 371
---------- -------- ------------ ------------- ---------- --------------
BALANCES, DECEMBER 31, 1997 94 287 74,354 492,320 - 567,055
Net income 61,051 61,051
Dividends paid ($.38 per share) (16,336) (16,336)
Conversion of 30,000 Class B - -
shares to Class A
Issuance of 251,832 Class A shares
under employee stock plans 3 4,543 4,546
Issuance of 6,330,548 Class A shares
for Cowles merger 63 189,741 189,804
Tax benefit from stock plans 885 885
---------- -------- ------------ ------------- ---------- --------------
BALANCES, DECEMBER 27, 1998 $ 160 $ 287 $269,523 $ 537,035 $ - $ 807,005
========== ======== ============ ============= ========== ==============
See notes to consolidated financial statements
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The McClatchy Company (the "Company") and its subsidiaries are engaged
primarily in the publication of newspapers located in Minnesota, California, the
Northwest (Washington and Alaska) and the Carolinas.
The consolidated financial statements include the Company and its
subsidiaries. Significant inter-company items and transactions are eliminated.
In preparing the financial statements, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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 from those estimates.
FISCAL YEAR-END - In 1998, the Company changed from a calendar year to
a fiscal year ending on the Sunday nearest December 31. Accordingly, the
Company's results are reported through December 27, 1998 versus December 31, in
prior years. This change did not materially affect 1998 net income.
REVENUE RECOGNITION - Advertising revenues are recorded when
advertisements are placed in the newspaper and circulation revenues are recorded
as newspapers are delivered over the subscription term. Unearned revenues
represent prepaid circulation subscriptions.
CASH EQUIVALENTS are highly liquid debt investments with maturities of
three months or less when acquired.
CONCENTRATIONS OF CREDIT RISKS - Financial instruments which
potentially subject the Company 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. Accounts
receivable are with customers located primarily in the immediate area of each
city of publication. The Company routinely assesses the financial strength of
significant customers and this assessment, combined with the large number and
geographic diversity of its customers, limits the Company's concentration of
risk with respect to trade accounts receivable.
INVENTORIES are stated at the lower of cost (based principally on the
first-in, first-out method) or current market value. See note 3 for a discussion
of a change in the method of accounting for newsprint inventory.
RELATED PARTY TRANSACTIONS - The Company owns a 13.5% interest in
Ponderay Newsprint Company ("Ponderay") which owns and operates a newsprint mill
in the State of Washington. The investment is accounted for using the equity
method, under which the Company's share of earnings of Ponderay is reflected in
income as earned. The Company guarantees certain bank debt used to
36
construct the mill (see note 9) and is required to purchase 28,400 metric tons
of annual production on a "take-if-tendered" basis until the debt is repaid. The
Company satisfies this obligation by direct purchase (1998: $16,732,000, 1997:
$18,221,000 and 1996: $20,714,000) or reallocation to other buyers.
PROPERTY, PLANT AND EQUIPMENT are stated at cost. Major renewals and
betterments, as well as interest incurred during construction, are capitalized.
No interest was capitalized in 1998. Capitalized interest aggregated $36,000 in
1997 and $536,000 in 1996.
DEPRECIATION is computed generally on a straight-line basis over
estimated useful lives of:
- 10 to 60 years for buildings
- 9 to 25 years for presses
- 3 to 15 years for other equipment
INTANGIBLES consist of the unamortized excess of the cost of acquiring
newspaper operations over the fair values of the newspapers' tangible assets at
the date of purchase. Identifiable intangible assets, consisting primarily of
lists of advertisers and subscribers, covenants not to compete and commercial
printing contracts, are amortized over three to forty years. The excess of
purchase prices over identifiable assets is amortized over forty years.
Management periodically evaluates the recoverability of intangible assets by
reviewing the current and projected cash flows of each of its newspaper
operations.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees.
DEFERRED INCOME TAXES result from temporary differences between amounts
of assets and liabilities reported for financial and income tax reporting
purposes. See note 5.
COMPREHENSIVE INCOME - The Company has no changes in its net assets
during any period presented from non-owner sources. Hence, comprehensive income
is equal to net income.
SEGMENT REPORTING - The Company's primary business is the publication
of newspapers. The Company aggregates its newspapers into a single segment
because each has similar economic characteristics, products, customers and
distribution methods.
EARNINGS PER SHARE (EPS) - Basic EPS excludes dilution 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 (stock options --
equivalents calculated using the treasury stock method, no adjustment to net
income required) in the period. See note 10.
NOTE 2. MERGER WITH COWLES MEDIA COMPANY
On March 19, 1998 the Company acquired all of the outstanding shares of
Cowles Media
37
Company (Cowles) in a transaction valued at approximately $90.50 per Cowles
share and the assumption of $77,350,000 in existing Cowles debt. Cowles
publishes the STAR TRIBUNE newspaper, which serves the Twin Cities of
Minneapolis and St. Paul. Cowles also owned four separate subsidiaries that
publish business magazines, special-interest magazines and home improvement
books. Simultaneously with the close of the merger, the Company sold the
magazine and book publishing subsidiaries. The combined proceeds, plus debt and
other liabilities assumed by the buyers in those transactions, were $208.1
million. These proceeds were used to repay debt associated with the Cowles
merger.
In connection with the Cowles merger, the Company paid 15% of the
consideration by issuing 6,330,548 shares of Class A Common Stock in exchange
for Cowles shares and paid cash for the remaining shares. The Class A shares
were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for
each Cowles share. The Company incurred bank debt through a syndicate of banks
and financial institutions to finance the cash requirements of the merger and to
refinance its existing debt (see note 4). Results of the STAR TRIBUNE have been
included in the Company's results beginning March 20, 1998.
The non-newspaper businesses were valued at fair market value based
upon the net after-tax proceeds received by the Company on March 19, 1998, and
accordingly, no gain or loss was realized on the sale.
The primary asset retained by the Company is the STAR TRIBUNE, the
largest newspaper in Minnesota with daily circulation of 387,000 and Sunday
circulation of 673,000 as of March 19, 1998. The STAR TRIBUNE is now the
Company's largest newspaper.
The merger was accounted for as a purchase, and accordingly, assets
acquired and liabilities assumed have been recorded at their fair market values.
Assets retained by the Company include approximately $55,319,000 of current
assets, $143,978,000 of property, plant and equipment, $1,166,400,000 of
intangible assets and $165,788,000 of other assets. Intangible assets include
approximately $929,000,000 of goodwill which is being amortized over 40 years.
In addition to assuming Cowles' long-term debt, a total of $214,197,000 of
deferred taxes and other liabilities were assumed. The Company is continuing to
assess the value of certain assets and liabilities, including identifiable
intangible assets, severance and other liabilities and will adjust its carrying
values as final determinations are made.
The following table summarizes, on an unaudited proforma basis, the
combined results of operations of the Company and its subsidiaries for the years
ended December 27, 1998 and December 31, 1997, as though the Cowles merger had
taken place on January 1, 1997 (in thousands, except per share amounts):
1998 1997
------------ ------------
Revenues $ 1,051,340 $ 1,011,784
Net income 22,151 32,536
Diluted earnings per share $ 0.49 $ 0.73
38
Cowles Media Company donated $10,000,000 to the Cowles Media Foundation
and incurred significant investment banking, legal and other costs associated
with the transaction in the first quarter of 1998, contributing to the dilution
in the pro forma results for the year ended December 27, 1998.
NOTE 3. CHANGE IN METHOD OF ACCOUNTING FOR NEWSPRINT
INVENTORY
The Company has accounted for newsprint inventories by the first-in,
first-out (FIFO) method beginning January 1, 1998, whereas in all prior years
inventories were valued using the last-in, first-out (LIFO) method. The new
method of accounting for newsprint inventory was adopted to provide for a better
matching of revenues and expenses. Additionally, the change will enable the
financial reporting to parallel the way management assesses the financial and
operational performance of its newspapers. The financial statements of prior
years have been restated to apply the new method retroactively, and accordingly,
retained earnings as of December 31, 1995 have been increased by $4,340,000 to
reflect the restatement. The effect of the accounting change on net income as
previously reported for the years ended December 31, 1997 and 1996, is as
follows (in thousands):
1997 1996
----------- -----------
Net income as previously reported $ 68,799 $ 44,493
Adjustment for effect of change in
accounting for newsprint
inventories applied retroactively 433 (2,387)
=========== ===========
Net income as adjusted $ 69,232 $ 42,106
=========== ===========
The adjustment resulted in an increase of $0.01 to basic and diluted
net income per share in 1997 and a reduction of $0.06 to basic and diluted net
income per share in 1996.
NOTE 4. LONG-TERM BANK DEBT AND OTHER LONG-TERM
OBLIGATIONS
On July 28, 1995 the Company entered into a bank credit agreement
providing for borrowings up to $310,000,000. At December 31, 1997, the Company
had long-term bank debt of $94,000,000 and the remaining balance of this debt
was refinanced with the new credit agreement obtained in connection with the
Cowles merger. See note 2 and the discussion below.
At December 31, 1997, the Company had an outstanding interest rate swap
that effectively converted $50,000,000 of debt under its Credit Agreement to a
fixed rate debt at a rate of 6.0%. The swap was terminated upon the closing of
the Cowles merger, with no significant loss to the Company.
39
The Company entered into a bank credit agreement (Credit Agreement)
with a syndicate of banks and financial institutions providing for borrowings of
up to $1,265,000,000 to finance the Cowles merger and refinance its existing
debt. The Credit Agreement includes term loans consisting of Tranche A of $735
million bearing interest at the London Interbank Offered Rate ("LIBOR") plus 125
basis points, payable in increasing quarterly installments from June 30, 1998
through March 31, 2005, and Tranche B of $330 million bearing interest at LIBOR
plus 175 basis points and payable in semi-annual installments from September 30,
1998 through September 30, 2008. A revolving credit line of up to $200 million
bears interest at LIBOR plus 125 basis points and is payable by March 19, 2005.
As the Company reduces the outstanding debt relative to cash flow (as defined in
the Credit Agreement), the interest rate spread over LIBOR will decline.
Interest rates applicable to debt drawn down at December 27, 1998, ranged from
6.19% to 7.28%. The debt is secured by certain assets of the Company, and all of
the debt is pre-payable without penalty.
The terms of the Credit Agreement include certain operating and
financial restrictions, such as limits on the Company's ability to incur
additional debt, create liens, sell assets, engage in mergers, make investments
and pay dividends.
The Company's Credit Agreement requires a minimum of $300,000,000 of
debt be subject to interest rate protection agreements. During the second
quarter, the Company entered into interest rate protection agreements to reduce
the impact of changes in interest rates on its floating rate debt. The Company
is a party to three interest rate swap agreements, expiring in 2002 to 2003,
with an aggregate notional amount of $300,000,000. The effect of these
agreements is to fix the LIBOR interest rate exposure at 5.9% on that portion of
the Company's term loans.
Also during the second quarter, the Company entered into an interest
rate collar with a $200,000,000 notional amount, and a LIBOR ceiling rate of
6.5% and a floor of 5.3%. The fair value of these instruments as of December 27,
1998, is summarized in note 11. Payments and receipts under such agreements are
recorded as adjustments to interest expense.
At December 27 1998, the Company had outstanding letters of credit
totaling $29,822,000 securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent claims.
40
At the end of 1998 and 1997, long-term debt consisted of (in thousands):
December 27, December 31,
1998 1997
---------------- -------------
Credit Agreement:
Term loans $ 904,000
Revolving credit line 100,000 $ 94,000
---------------- -------------
Total indebtedness 1,004,000 94,000
Less current portion - -
================ =============
Long-term indebtedness $ 1,004,000 $ 94,000
================ =============
Long-term debt matures, as of December of each year, as follows (in thousands):
2000 $ 56,625
2001 76,653
2002 95,028
2003 154,747
2004 200,684
Thereafter 420,263
----------
$1,004,000
==========
Other long-term obligations consist of (in thousands):
December 27, December 31,
1998 1997
---------------- -------------
Pension obligations $ 41,976 $ 28,639
Post retirement benefits obligation 17,736 7,895
Deferred compensation and other 15,562 3,872
---------------- -------------
Total other long-term obligations $ 75,274 $ 40,406
================ =============
41
NOTE 5. INCOME TAXES
Income tax provisions consist of (in thousands):
Year Ended
--------------------------------------
December 27, December 31,
1998 1997 1996
------------ --------- --------
Restated Restated
Current:
Federal $ 46,348 $ 42,994 $ 31,449
State 11,097 6,796 3,621
Deferred:
Federal 2,977 (2,084) (6,212)
State 630 53 2,771
--------- --------- --------
Income tax provision $ 61,052 $ 47,759 $ 31,629
========= ========= ========
The effective tax rate and the statutory federal income tax rate are reconciled
as follows:
Year Ended
------------------------------
December 27, December 31,
------------ ------------
1998 1997 1996
------------ ---- ----
Statutory rate 35% 35% 35%
State taxes, net of federal benefit 6 4 5
Amortization of intangibles 9 3 4
Tax basis adjustment of intangibles sold - (1) -
Other - - (1)
Effective tax rate 50% 41% 43%
42
The components of deferred tax liabilities (benefits) recorded in the
Company's Consolidated Balance Sheet on December 27, 1998, and December 31,
1997, are (in thousands):
1998 1997
--------- --------
Restated
Depreciation and amortization $ 115,030 $ 55,571
Partnership losses 7,275 7,897
State taxes 8,871 762
Deferred compensation (13,492) (18,630)
Other 4,931 3,817
--------- ---------
Deferred tax liability (net of $17,441
in 1998 and $8,477 in 1997 reported
as current assets) $ 122,615 $ 49,417
========= ========
NOTE 6. INTANGIBLES
Intangibles consist of (in thousands):
December 27, December 31,
1998 1997
------------ ------------
Identifiable intangible assets,
primarily customer lists $ 385,073 $ 147,196
Excess purchase prices over
identifiable intangible assets 1,290,291 362,098
------------ ------------
Total 1,675,364 509,294
Less accumulated amortization 164,410 116,079
------------ ------------
Intangibles - net $ 1,510,954 $ 393,215
============ ============
NOTE 7. EMPLOYEE BENEFITS
RETIREMENT PLANS:
The Company sponsors defined benefit pension plans (retirement plans)
which cover a majority of its employees. Benefits are based on years of service
and compensation. Contributions to the plans are made by the Company in amounts
deemed necessary to provide benefits. Plan assets consist primarily of
investments in marketable securities including common stocks, bonds and U.S.
government obligations, and other interest bearing accounts. The Company
contributed $1.2 million to multi-employer retirement plans in 1998.
43
The Company also has a number of supplemental retirement plans to
provide key employees with additional retirement benefits. The terms of the
plans are generally the same as those of the retirement plans, except that the
supplemental retirement plans are limited to key employees and benefits under
them are reduced by benefits received under the retirement plans. These plans
are funded on a pay-as-you-go basis and the accrued pension obligation is
included in other long-term obligations.
The elements of pension costs are as follows (in thousands):
December 27, December 31,
------------------ ---------------------------
1998 1997 1996
------------------ ------------- -------------
Cost of benefits earned during the year $ 12,603 $ 7,409 $ 7,451
Interest on projected benefit obligation 21,793 10,456 9,367
Expected return on plan assets (30,818) (10,836) (9,715)
Prior service cost amortization 741 558 566
Actuarial (gain) loss (532) 11 (27)
Transition amount amortization (547) (547) (547)
------------------ ------------- -------------
Net pension cost $ 3,240 $ 7,051 $ 7,095
================== ============= =============
The Company also provides or subsidizes certain retiree health care and
life insurance benefits. In 1997, the Company terminated certain life insurance
benefits for employees retiring on or after January 1, 1998, and accordingly,
recorded a curtailment gain of $417,000. The elements of post-retirement
expenses are as follows (in thousands):
December 27, December 31,
------------ ----------------------
1998 1997 1996
------- ------- -------
Service $ 445 $ 3 $ 22
Interest 890 351 401
Actuarial gain (665) (654) (184)
Curtailment gain - (417) -
------- ------- -------
Net post-retirement
benefit expense (income) $ 670 $ (717) $ 239
======= ======= =======
44
A reconciliation of the plans' benefit obligations, fair value of
assets, funded status and amounts recognized in the Company's Consolidated
Balance Sheet at December 27, 1998, and December 31, 1997, are as follows (in
thousands):
Retirement Plans Post-retirement Plans
---------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Change in benefit obligations:
Beginning of year $ 158,823 $ 136,492 $ 4,895 $ 5,535
Service cost 12,579 7,414 445 3
Interest costs 21,817 10,465 890 351
Acquisition 173,499 - 9,008 -
Plan amendments 2,506 - 142 (417)
Actuarial loss (gain) 15,397 10,361 668 (112)
Benefits paid (16,671) (5,909) (1,299) (465)
--------- --------- -------- --------
End of year 367,950 158,823 14,749 4,895
--------- --------- -------- --------
Change in fair market value of assets:
Beginning of year 150,582 131,371 - -
Acquisition 225,250 - - -
Return on assets 49,171 23,916 - -
Contributions 562 1,204 1,299 465
Benefit payments (16,671) (5,909) (1,299) (465)
--------- --------- -------- --------
End of year 408,894 150,582 - -
--------- --------- -------- --------
Funded status 40,944 (8,241) (14,749) (4,895)
Unrecongnized net gain (23,191) (20,767) (3,222) (3,215)
Transition asset (1,642) (2,189) - -
Prior service costs 4,727 2,962 - -
--------- --------- -------- --------
Prepaid (accrued ) cost $ 20,838 $ (28,235) $(17,971) $ (8,110)
========= ========= ======== ========
Amounts recognized:
Prepaid benefit cost $ 61,630
Accrued benefit liability (40,792) $ (28,235) $(17,971) $ (8,110)
Additional liability (1,184) - - -
Intangible asset 1,184 - - -
--------- --------- -------- --------
Net amount recognized $ 20,838 $ (28,235) $(17,971) $ (8,110)
========= ========= ======== ========
45
Weighted average assumptions used for valuing benefit obligations were:
1998 1997
---------- ----------
Retirement and Post-retirement Plans:
Discount rate in determining benefit
obligation 6.75% 7.25%
Retirement Plans:
Expected long-term rate of return
on assets 9.00% 9.00%
Rates of compensation increase 3.5% - 5.0% 3.5% - 5.0%
For pension plans with accumulated benefit obligations in excess of
plan assets, the projected benefit obligation, the accumulated benefit
obligation and the fair value of plan assets were $20.3 million, $18.4 million
and $0, respectively, as of December 27, 1998, and $11.0 million, $9.0 million
and $0, respectively, as of December 31, 1997.
For the McClatchy Newspaper, Inc., post-retirement plan (benefit
obligation of $4.9 million, income of $292,000), the medical care cost trend
rates are estimated to decline from 8.75% in 1998 to 5.8% by the year 2002. A
1.0% change in the assumed health care cost trend rate would have increased the
APBO and the annual service cost by 1.4 %. For the STAR TRIBUNE post-retirement
plan, the medical cost trend rates are expected to decline form 8.8% in 1998 to
5.5% by the year 2004. For the Star Tribune's plan (benefit obligation of $9.8
million and expense of $962,000), a 1.0% change in the assumed health care cost
trend rate would have increased the benefit obligation and expense by 9.2% and
12.5%, respectively, and decreased each by 8.1% and 10.8%, respectively.
The Company has deferred compensation plans (401(k) plans and other
savings plans) which enable qualified employees to voluntarily defer
compensation. The Company's mandatory matching contributions to the 401(k) plans
were $6,010,000 in 1998, $5,123,000 in 1997 and $4,704,000 in 1996.
NOTE 8. CASH FLOW INFORMATION
Net cash paid in connection with the Cowles merger in 1998 consists of
(in thousands):
Fair value of assets acquired $ 1,542,690
Fair value of liabilities assumed (282,893)
Issuance of Class A common stock (189,804)
Fees and expenses 31,654
Less cash acquired (2,129)
===============
$ 1,099,518
===============
No significant acquisitions were made in 1997 and 1996.
46
Cash paid during the years ended December 27, 1998, and December 31,
1997 and 1996, for interest and income taxes were (in thousands):
1998 1997 1996
-------- -------- --------
Interest paid
(net of amount capitalized) $ 53,626 $ 9,255 $ 13,699
Income taxes paid
(net of refunds) 47,508 51,262 27,543
Cash provided or used by operations was affected by changes in certain
assets and liabilities, net of the effects of acquired newspaper operations, as
follows (in thousands):
December 27, December 31,
----------------- ---------------------------
1998 1997 1996
----------------- ------------- -------------
Restated Restated
Increase (decrease) in assets:
Trade receivables $ 27,837 $ 11,875 $ 12,419
Inventories 2,066 738 (9,838)
Other assets 2,005 391 (5,895)
----------------- ------------- -------------
Total 31,908 13,004 (3,314)
----------------- ------------- -------------
Increase (decrease) in liabilities:
Accounts payable 11,985 12,831 2,656
Accrued compensation (19,637) 5,408 6,024
Income taxes 9,987 (1,474) 5,371
Other liabilities 3,927 2,045 (3,671)
----------------- ------------- -------------
Total 6,262 18,810 10,380
----------------- ------------- -------------
Net cash (decrease) increase from changes in
certain assets and liabilities $ (25,646) $ 5,806 $ 13,694
================= ============= =============
NOTE 9. COMMITMENTS AND CONTINGENCIES
The Company guarantees $20,539,000 of bank debt related primarily to
its joint venture in the Ponderay newsprint mill.
The Company and its subsidiaries rent certain facilities and equipment
under operating leases expiring at various dates through January 2009. Total
rental expense amounted to $5,355,000 in 1998, $2,838,000 in 1997 and $2,584,000
in 1996. Minimum rental commitments under operating leases with non-cancelable
terms in excess of one year are (in thousands):
47
1999 $ 6,112
2000 4,183
2001 2,865
2002 1,927
2003 1,201
Thereafter 1,546
-----------
Total $ 17,834
===========
There are libel and other legal actions that have arisen in the
ordinary course of business and are pending against the Company. From time to
time, the Company is involved as a party in various governmental proceedings,
including environmental matters. Management believes, after reviewing such
actions with counsel, that the outcome of pending actions will not have a
material adverse effect on the Company's consolidated results of operations or
financial position.
NOTE 10. COMMON STOCK AND STOCK PLANS
On December 4, 1996, the Board of Directors of the Company declared a
five-for-four split on its Class A and Class B common stock in the form of a
special 25% stock dividend, which was paid on January 2, 1997 to the holders of
record of the common stock as of the close of business on December 16, 1996. All
share and per share amounts have been adjusted in the financial statements to
reflect the stock split.
The Company's Class A and Class B common stock participate equally in
dividends. Holders of Class B common stock are entitled to one vote per share
and to elect as a class 75% of the Board of Directors, rounded down to the
nearest whole number. Holders of Class A common stock are entitled to one-tenth
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 at
the option of the holder into Class A common stock on a share-for-share basis.
At December 27, 1998 the Company has five stock-based compensation
plans, which are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. No significant amounts of
compensation costs have been recognized for its fixed stock option plans and its
stock purchase plan.
The Company's Amended Employee Stock Purchase Plan (the Purchase Plan)
reserved 1,875,000 shares of Class A common stock for issuance to employees.
Eligible employees may purchase shares at 85% of "fair market value" (as
defined) through payroll deductions. The Purchase Plan can be automatically
terminated by the Company at any time. As of December 27, 1998, 867,150 shares
of Class A common stock have been issued under the Purchase Plan.
The Company has three stock option plans which reserve 3,312,500 Class
A common shares for issuance to key employees -- the 1987, 1994 and 1997 plans
("Employee Plans"). Terms of each of the Employee Plans are substantially the
same. Options are granted at the market price of the Class A common stock on the
date of grant. The options vest in installments over four years, and
48
once vested are exercisable up to 10 years from the date of grant. Although the
plans permit the Company, at its sole discretion, to settle unexercised options
by granting stock appreciation rights, the Company does not intend to avail
itself of this alternative except in limited circumstances.
The Company's amended and restated stock option plan for outside
directors (the Directors' Plan) provides for the issuance of up to 187,500
shares of Class A stock. Under the plan each outside director was granted an
option at fair market value at the conclusion of each regular annual meeting of
stockholders for 2,500 shares. Terms of the Directors' Plan are similar to the
terms of the Employee Plans. Outstanding options are summarized as follows:
Employee Plans Directors' Plan
---------------------------------- --------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------------- ---------------- -------------- -----------------
December 31, 1995 989,000 $ 15.88 75,000 $ 17.22
Granted 203,000 25.10 15,000 18.90
Exercised (215,382) 13.77 (5,625) 16.83
Forfeited (2,032) 16.94 - -
----------------- --------------
Outstanding,
December 31, 1996 974,586 18.29 84,375 17.54
Granted 204,000 28.19 16,875 25.75
Exercised (270,307) 15.83 (7,500) 16.58
----------------- --------------
Outstanding,
December 31, 1997 908,279 21.24 93,750 19.09
Granted 558,362 29.10 27,500 30.00
Exercised (175,955) 15.41 (1,875) 16.60
Forfeited (48,528) 23.82 (2,500) 30.00
----------------- --------------
Outstanding,
December 27, 1998 1,242,158 25.48 116,875 21.47
================= ==============
Employee Directors'
Plans Plan
---------------- -----------------
Options exercisable:
December 31, 1996 367,737 50,166
December 31, 1997 298,834 55,792
December 27, 1998 337,494 71,260
49
The following tables summarize information about fixed stock options
outstanding in the stock plans at December 27, 1998:
EMPLOYEE PLANS
- ----------------------------------------------------------------------------------------------------------------------
Average Weighted Weighted
Remaining Average Average
Range of Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 6.35 - $ 18.10 368,190 5.38 $ 16.90 281,457 $ 15.74
$ 19.20 - $ 28.19 451,468 8.31 $ 26.52 56,037 $ 24.26
$ 29.75 - $ 30.63 60,000 9.32 $ 29.96 - -
$ 32.88 362,500 9.93 $ 32.88 - -
DIRECTORS' PLAN
- ----------------------------------------------------------------------------------------------------------------------
Average Weighted Weighted
Remaining Average Average
Range of Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 14.60 - $ 18.20 46,875 3.66 $ 17.05 46,875 $ 17.05
$ 18.40 - $ 25.75 45,000 7.47 $ 21.32 24,385 $ 20.27
$ 30.00 25,000 9.40 $ 30.00 - $ -
Had compensation costs for the Company's five stock-based compensation
plans been determined based upon the fair value at the grant dates for awards
under those plans consistent with the method of FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands, except per share amounts):
1998 1997 1996
-------- -------- --------
Net income: Restated Restated
As reported $ 61,051 $ 69,232 $ 42,106
Pro forma $ 59,402 $ 68,406 $ 41,855
Earnings per common share:
As reported
Basic $ 1.41 $ 1.82 $ 1.12
Diluted $ 1.41 $ 1.81 $ 1.11
Pro forma
Basic $ 1.38 $ 1.80 $ 1.11
Diluted $ 1.37 $ 1.79 $ 1.10
50
The impact of outstanding non-vested stock options granted prior to
1995 has been excluded from the pro forma calculation; accordingly, the 1998,
1997 and 1996 pro forma adjustments are not indicative of future period pro
forma adjustments, when the calculation will apply to all applicable stock
options.
Compensation costs are calculated for the fair value of the employees'
purchase rights, which was estimated using the Black-Scholes model with the
following assumptions for 1998, 1997, and 1996 respectively: dividend yield of
1.2% to 1.4% for all years; an expected life of one to seven years for all
years; expected volatility of .2868, .2838 and .2791; and risk-free interest
rates of 4.5% to 5.8% in 1998, 5.72 % to 6.62 % in 1997 and 5.4% to 6.4% in
1996. The weighted-average fair value of those purchase rights granted in 1998,
1997, and 1996 was $9.58, $8.99 and $8.31, respectively for Employee Plans and
$9.33, $8.28 and $5.61, respectively for the Directors' Plan.
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments",
requires the determination of fair value for certain of the Company's assets,
liabilities and contingent liabilities. In 1997, the fair market value and
carrying value of the Company's financial instruments were approximately equal.
The following estimates were developed using available market data for
instruments held as of December 27, 1998, (in thousands):
Carrying Estimated
Amount Fair Value
-------------- --------------
Cash and cash equivalents $ 9,650 $ 9,650
Long-term debt 1,004,000 1,004,000
Interest rate protection
agreements - (8,009)
NOTE 12. SALE OF NEWSPAPER AND OTHER BUSINESS
OPERATIONS
In 1998, the Company sold The McClatchy Printing Company, Benson
Printing Company, the MOUNT OLIVE TRIBUNE (a twice-weekly newspaper in North
Carolina) and several niche publications. Total revenues for the sold businesses
were $8.6 million in 1998, and the Company reported a net pre-tax loss of
$111,000 in non-operating income - (expense) - net.
On February 28, 1997, the Company completed the sale of the GILROY
DISPATCH, THE HOLLISTER FREE LANCE, the MORGAN HILL TIMES and the AMADOR LEDGER
DISPATCH. These newspapers had combined daily circulation of approximately
10,150 and weekly circulation of 12,800, and generated $7.6 million in revenues
in 1996. The Company reported a $6,748,000 pre-tax gain on the sale which is
included in non-operating (expenses) income. The Company sold Legi-Tech, its
on-line legislative tracking company and certain real estate and recorded a
$2,506,000 pre-tax gain in this area.
51
The Ellensburg DAILY RECORD in Washington state was sold in December
1996 and a pre-tax gain of $3,218,000 was recorded in non-operating income. The
Company also sold Nando's internet access operations and Legi-Tech's Florida
operations in 1996 and recorded a pre-tax loss of $378,000 on the sales.
NOTE 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's business is somewhat seasonal, with peak revenues and
profits generally occurring in the second and fourth quarters of each year as a
result of increased advertising activity during the spring holiday and Christmas
periods. The first quarter is historically the weakest quarter for revenues and
profits. The Company's quarterly results are summarized as follows (in
thousands, except per share amounts):
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
1998:
Revenues-net $ 163,963 $ 267,007 $ 263,129 $ 274,552
Operating income 22,665 52,525 48,863 56,805
Net income 9,245 16,682 14,026 21,098
Net income per common share 0.24 0.37 0.31 0.47
1997 RESTATED:
Revenues-net $ 150,621 $ 162,280 $ 159,600 $ 169,449
Operating income 22,915 32,670 27,034 33,867
Net income (1) 15,431 17,668 15,589 20,544
Net income per common share (1) 0.41 0.46 0.41 0.54
(1) Net income and net income per share have been adjusted to reflect
FIFO inventory accounting (see note 3) and reflect basic and diluted EPS, except
the second quarter when basic EPS is $0.47 and diluted EPS is $0.46.
In February 1997, the Company recorded an after-tax gain of 10 cents
per share on the sale of four community newspapers, while in the third and
fourth quarters of 1997 the Company recorded an after-tax gain of one cent per
share and three cents per share, respectively, on the sale of a non-newspaper
business and certain real estate assets. In 1998, the Company sold operations
and recorded a one cent per share loss in the third quarter and a one cent per
share gain in the fourth quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Biographical information for Class A Directors, Class B Directors and
executive officers contained under the captions "Nominees for Class A
Directors", "Nominees for Class B Directors" and "Other Executive Officers"
under the heading "Election of Directors" in the definitive Proxy Statement for
the Company's 1999 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Compensation", "Executive
Compensation", "Stock Option Awards", "Option Exercises and Holdings", "Pension
Plans" and "Employment Agreement" in the definitive Proxy Statement for the
Company's 1999 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Stock Ownership" in the
definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the headings "Certain Relationships and
Related Transactions" in the definitive Proxy Statement for the Company's 1999
Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
a) (1)&(2) Financial Statements and Financial Statement
Schedules filed as a part of this Report as listed in the
Index to Financial Statements and Financial Statement
Schedules on page 29 hereof.
(3) Exhibits filed as part of this Report as listed in the Exhibit
Index beginning on page 58 hereof.
b) Reports on Form 8-K - The Company filed a Form 8-K dated October 8, 1998,
to report the change in the Company's fiscal year under Item 8 of Form 8-K.
53
SIGNATURES
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 ON MARCH 29, 1999.
THE McCLATCHY COMPANY
By /S/ GARY B. PRUITT
---------------------------------------
Gary B. Pruitt
President and Chief Executive Officer
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
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICERS:
/S/ GARY B. PRUITT President, Chief Executive March 29, 1999
- -------------------------------------------------- Officer and Director
(Gary B. Pruitt)
PRINCIPAL FINANCIAL OFFICER:
/S/ JAMES P. SMITH Vice President, March 29, 1999
- -------------------------------------------------- Finance, Treasurer
(James P. Smith)
PRINCIPAL ACCOUNTING OFFICER:
/S/ ROBERT W. BERGER Controller March 29, 1999
- --------------------------------------------------
(Robert W. Berger)
54
SIGNATURES-(CONTINUED)
SIGNATURE TITLE DATE
--------- ----- ----
DIRECTORS:
/S/ ELIZABETH BALLANTINE Director March 29, 1999
- --------------------------------------------------
(Elizabeth Ballantine)
/S/ WILLIAM K. COBLENTZ Director March 29, 1999
- --------------------------------------------------
(William K. Coblentz)
/S/ MOLLY MALONEY EVANGELISTI Director March 29, 1999
- -----------------------------------------
(Molly Maloney Evangelisti)
/S/ JOAN F. LANE Director March 29, 1999
- --------------------------------------------------
(Joan F. Lane)
/S/ R. LARRY JINKS Director March 29, 1999
- --------------------------------------------------
(R. Larry Jinks)
/S/ JAMES B. MCCLATCHY Publisher and March 29, 1999
- -------------------------------------------------- Director
(James B. McClatchy)
/S/ KEVIN MCCLATCHY Director March 29, 1999
- --------------------------------------------------
(Kevin McClatchy)
/S/ WILLIAM ELLERY MCCLATCHY Director March 29, 1999
- --------------------------------------------------
(William Ellery McClatchy)
55
SIGNATURES-(CONTINUED)
SIGNATURE TITLE DATE
--------- ----- ----
DIRECTORS:
/S/ ERWIN POTTS Chairman of the Board and March 29, 1999
- -------------------------------------------------- Director
(Erwin Potts)
/S/ S. DONLEY RITCHEY, JR. Director March 29, 1999
- --------------------------------------------------
(S. Donley Ritchey, Jr.)
/S/ WILLIAM M. ROTH Director March 29, 1999
- --------------------------------------------------
(William M. Roth)
/S/ FREDERICK R. RUIZ Director March 29, 1999
- --------------------------------------------------
(Frederick R. Ruiz)
56
SCHEDULE II
MCCLATCHY NEWSPAPERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 27, 1998
(in thousands)
COLUMN A Column B Column C Column D Column E
-------- ----------- ---------------------------- --------------- ----------------
Additions Deductions(1)
---------------------------- for Purposes
Balance Charged to Charged to for Which Balance at End
Beginning Costs and Other Accounts of Period
of Period Expenses Accounts Were Set Up
----------- ------------ ------------ --------------- ----------------
YEAR ENDED DECEMBER 31, 1996:
Deduct from assets to which
they apply:
Uncollectible accounts $ (2,327) $ (5,567) $ - $ 5,454 $ (2,440)
YEAR ENDED DECEMBER 31, 1997:
Deduct from assets to which
they apply:
Uncollectible accounts $ (2,440) $ (4,793) $ - $ 5,071 $ (2,162)
YEAR ENDED DECEMBER 27, 1998:
Deduct from assets to which
they apply:
Uncollectible accounts $ (2,162) $ (4,958) $ (2,011) $ 4,296 $ (4,835)
(1) Amounts written off net of bad debt recoveries.
57
INDEX OF EXHIBITS
EXHIBIT
------
3.1* The Company's Restated Certificate of Incorporation dated
March 18, 1998, included as Exhibit 3.1 in the Company's 1997
Form 10-K.
3.2* The Company's By-laws included as Exhibit 3.2 in the
Company's Registration Statement No. 333-46501 on Form S-4.
10.1* Amended and Restated Agreement and Plan of Merger and
Reorganization between The McClatchy Company and Cowles Media
Company dated February 13, 1998 included as Exhibit 2.1 in
the Company's Registration Statement No. 333-46501 on Form
S-4.
10.2* Credit Agreement dated March 10, 1998 between The McClatchy
Company (formerly MNI Newco, Inc.), the lenders party
thereto, Salomon Brothers, Inc., as Arranger and Syndication
Agent and Bank of America National Trust and Savings
Association as Swingline Lender, Administrative Agent and
Collateral Agent, included as Exhibit 10.2 in the Company's
1997 Form 10-K.
10.3* Ponderay Newsprint Company Partnership Agreement dated as of
September 12, 1985 between Lake Superior Forest Products,
Inc., Central Newsprint Company, Inc., Bradley Paper Company,
Copley Northwest, Inc., Puller Paper Company, Newsprint
Ventures, Inc., Wingate Paper Company, Tribune Newsprint
Company and Nimitz Paper Company included in Exhibit 10.10 to
McClatchy Newspapers, Inc. Registration Statement No.
33-17270 on Form S-1.
**10.4* McClatchy Newspapers, Inc. Management by Objective Plan
Description included in Exhibit 10.1 to McClatchy Newspapers,
Inc. Registration Statement No. 33-17270 on Form S-1.
**10.5* Supplemental Executive Retirement Plan included in Exhibit
10.7 to McClatchy Newspapers, Inc. 1988 Report on Form 10-K.
**10.6*+ Amended and Restated 1987 Stock Option Plan dated August 15,
1996 included as Exhibit 10.7 to the McClatchy Newspapers,
Inc. 1996 Report on Form 10-K.
**10.7*+ Amended and Restated 1994 Stock Option Plan dated February 1,
1998 included as Exhibit 10.8 to the Company's Report on Form
10-Q filed for the Quarter Ending on June 30, 1998.
10.8*+ 1997 Stock Option Plan dated December 10, 1997 included as
Exhibit 10.8 in the Company's 1997 Form 10-K.
**10.9* Group Executive Life Insurance Plan included in Exhibit 10.9
to McClatchy Newspapers, Inc. Registration Statement No.
33-17270 on Form S-1.
**10.10* Group Executive Long Term Disability Insurance Plan included
in Exhibit 10.8 to McClatchy Newspapers, Inc. Registration
Statement No. 33-17270 on Form S-1.
**10.11* Executive Performance Plan adopted on January 1, 1990
included in Exhibit 10.13 to McClatchy Newspapers, Inc. 1989
Report on Form 10-K.
**10.12*+ The Company's Amended and Restated 1990 Directors' Stock
Option Plan dated February 1, 1998 included as Exhibit 10.12
in the Company's 1997 Form 10-K.
**10.13+ Employment Agreement between the Company and Gary B. Pruitt
dated June 1, 1996 included as Exhibit 10.13 to the McClatchy
Newspapers, Inc. 1996 Report on Form 10-K.
**10.14* The Company's Long-Term Incentive Plan, dated January 1, 1998
included as Exhibit 10.2 to the Company's Report on Form 10-Q
for the Quarter Ending on June 30, 1998.
**10.15* The Company's Chief Executive Bonus Plan, dated January 1,
1998 included as Exhibit 10.3 to the Company's Report on Form
10-Q for the Quarter Ending on June 30, 1998.
21* Subsidiaries of the Company included as Exhibit 21 in the
Company's 1997 Form 10-K.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule for the Year Ended December 27, 1998.
- --------------------
* Incorporated by reference
** Compensation plans or arrangements for the Company's executive officers and
directors.
+ Assumed by the Company from McClatchy Newspapers, Inc. on March 19, 1998.
59