UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-9824
THE McCLATHY COMPANY
(Exact name of registrant as specified in its charter)
Delaware 52-2080478
(State of Incorporation) (IRS Employer
Identification Number)
2100 "Q" Street, Sacramento, CA. 95816
(Address of principal executive offices)
(916) 321-1846
(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) 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 .
The number of shares of each class of common stock outstanding as of
May 8, 1998:
Class A Common Stock 15,838,523
Class B Common Stock 28,675,912
<PAGE>
THE McCLATCHY COMPANY
INDEX TO FORM 10-Q
Part I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements:
Consolidated Balance Sheet - March 31, 1998
and December 31, 1997 (unaudited) 3
Consolidated Statement of Income for
the Three Months Ended March 31, 1998
and 1997 (unaudited) 5
Consolidated Statement of Cash Flows for
the Three Months Ended March 31, 1998
and 1997 (unaudited) 6
Consolidated Statement of Stockholders'
Equity for the Period from December 31,
1996 to March 31, 1998 (unaudited) 7
Notes to Consolidated Financial Statements
(unaudited) 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 12
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 16
Part II - OTHER INFORMATION 17
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
<CAPTION>
March 31, December 31,
1998 1997
ASSETS Restated
<S>
CURRENT ASSETS <C> <C>
Cash $ 60,465 $ 8,671
Trade receivables (less allowances
of $4,095 in 1998 and $2,162 in 1997) 121,470 93,069
Other receivables 4,393 2,143
Newsprint, ink and other inventories 16,046 11,735
Deferred income taxes 22,928 8,477
Other current assets 6,025 2,717
231,327 126,812
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 203,514 160,443
Equipment 437,840 371,312
641,354 531,755
Less accumulated depreciation (255,074) (246,236)
386,280 285,519
Land 57,024 34,199
Construction in progress 12,287 5,468
455,591 325,186
INTANGIBLES - NET 1,561,673 393,215
OTHER ASSETS 85,660 12,585
TOTAL ASSETS $ 2,334,251 $ 857,798
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands, except share amounts)
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> Restated
CURRENT LIABILITIES <C> <C>
Current bank debt $ 21,675
Accounts payable 48,490 $ 35,613
Accrued compensation 66,280 27,956
Income taxes 26,204 1,877
Unearned revenue 35,102 19,308
Carrier deposits 4,351 3,980
Other accrued liabilities 43,564 9,709
245,666 98,443
LONG-TERM BANK DEBT 1,103,325 94,000
OTHER LONG-TERM OBLIGATIONS 76,847 40,406
DEFERRED INCOME TAXES 144,725 57,894
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock $.01 par value:
Class A - authorized 100,000,000
shares, issued 15,821,488 in 1998
and 9,421,383 in 1997 158 94
Class B - authorized 60,000,000
shares, issued 28,675,912 in 1998
and 28,685,912 in 1997 287 287
Additional paid-in capital 265,300 74,354
Retained earnings 497,943 492,320
763,688 567,055
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,334,251 $ 857,798
</TABLE>
<PAGE>
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended March 31,
1998 1997
Restated
<S>
REVENUES - NET
<S>
Newspapers: <C> <C>
Advertising $ 127,287 $ 116,643
Circulation 28,238 26,958
Other 5,566 4,233
161,091 147,834
Non-newspapers 2,872 2,787
163,963 150,621
OPERATING EXPENSES
Compensation 68,394 63,408
Newsprint and supplements 27,067 21,346
Depreciation and amortization 14,473 13,250
Other operating expenses 31,364 29,702
141,298 127,706
OPERATING INCOME 22,665 22,915
NONOPERATING (EXPENSES) INCOME
Interest expense (4,037) (2,668)
Partnership income (loss) 200 (400)
Gain on sale of certain business
operations - 6,594
Other - net 433 103
INCOME BEFORE INCOME TAX PROVISION 19,261 26,544
INCOME TAX PROVISION 10,016 11,113
NET INCOME $ 9,245 $ 15,431
NET INCOME PER COMMON SHARE:
Basic $ 0.24 $ 0.41
Diluted $ 0.24 $ 0.41
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES:
Basic 38,989 37,823
Diluted 39,102 37,984
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Three Months Ended March 31,
1998 1997
Restated
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C>
Net income $ 9,245 $ 15,431
Reconciliation to net cash provided:
Depreciation and amortization 14,506 13,287
Partnership (income) losses (200) 400
Gain on sale of certain
business operations - (6,594)
Changes in certain assets and
liabilities - net 6,140 12,124
Other (43) (675)
Net cash provided by operating activities 29,648 33,973
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant
and equipment (4,907) (6,938)
Merger of Cowles Media Company (1,099,070)
Proceeds from sale of certain
business operations 178,538 11,400
Other - net - 1
Net cash (used) provided by investing
activities (925,439) 4,463
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,125,000 -
Repayment of long-term debt (175,370) (35,000)
Payment of cash dividends (3,622) (3,597)
Other - principally stock issuances in
employee plans 1,577 1,607
Net cash provided (used) by financing
activities 947,585 (36,990)
NET CHANGE IN CASH AND CASH EQUIVALENTS 51,794 1,446
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,671 5,877
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 60,465 $ 7,323
OTHER CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes (net of refunds) $ 2,726 $ 5,624
Interest paid (net of capitalized
interest) $ 1,382 $ 2,702
MERGER
Fair value of assets acquired $ 1,548,238
Fair value of liabilities assumed (286,949)
Issuance of common stock (189,157)
Fees & expenses 29,067
Less cash acquired (2,129)
Net cash paid $ 1,099,070
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)
<CAPTION>
Additional Restated Treasury
Par Value Paid-In Retained Stock Restated
Class A Class B Capital Earnings At Cost Total
BALANCES,
<C> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 $ 89 $288 $ 67,534 $437,527 $ (371) $505,067
Net income (3 months) 15,431 15,431
Dividends paid
($.095 per share) (3,597) (3,597)
Issuance of 101,457
Class A shares
under employee
stock plans 1 1,606 1,607
Tax benefit
from stock plans 320 320
Retirement of
treasury stock (371) 371
BALANCES,
MARCH 31, 1997 90 288 69,089 449,361 - 518,828
Net income (9 months) 53,801 53,801
Dividends paid
($.285 per share) (10,842) (10,842)
Conversion of 156,375
Class B shares
to Class A 1 (1)
Issuance of 246,900
Class A shares
under employee
stock plans 3 4,199 4,202
Tax benefit from
stock plans 1,066 1,066
BALANCES,
DECEMBER 31, 1997 94 287 74,354 492,320 - 567,055
Net income 9,245 9,245
Dividends paid
($.095 per share) (3,622) (3,622)
Conversion of 10,000
Class B shares
to Class A - -
Issuance of 84,858
Class A shares
under employee
stock plans 1 1,576 1,577
Issuance of
6,305,247 Class A
shares for Cowles
merger 63 189,094 189,157
Tax benefit from
stock plans 276 276
BALANCES,
MARCH 31, 1998 $ 158 $287 $265,300 $497,943 $ - $763,688
</TABLE>
See notes to consolidated financial statements
<PAGE>
THE McCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The McClatchy Company (the "Company") and its subsidiaries are engaged
primarily in the publication of newspapers located in Minnesota, California,
Washington state, Alaska and North and South Carolina.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany items and transactions have
been 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.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position, results of operations, and cash flows for the
interim periods presented. All adjustments are normal recurring entries except
for the change in the method of accounting for inventories discussed at note 3.
Such financial statements are not necessarily indicative of the results to be
expected for the full year.
During 1997, the Financial Accounting Standards Board adopted 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 nonowner sources.
The Company has no items of comprehensive income which differ from its net
income. Accordingly, adoption of this statement in 1998 has not impacted the
Company's consolidated financial position, results of operations or cash flows.
NOTE 2. MERGER OF COWLES MEDIA COMPANY
On March 19, 1998 the Company acquired all of the outstanding shares of
Cowles Media Company (Cowles) in a transaction valued at approximately $1.4
billion, including 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 6,305,247 shares of Class A Common Stock in exhange
for Cowles shares, and paid cash for the remaining shares at a value of $90.50
per Cowles share. 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). Results of the Star Tribune have been included in the Company's
results beginning March 20, 1998.
<PAGE>
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 373,000 and Sunday circulation
of 673,000. 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 included approximately $53,564,000 of current
assets, $134,865,000 of property, plant and equipment, $1,173,597,000 of
intangible assets and $69,901,000 of other assets. Intangible assets include
approximately $1,038,000,000 of goodwill which is being amortized over 40 years.
In addition to assuming Cowles' long-term debt, a total of $209,599,000 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 pro forma basis, the
combined results of operations of the Company and its subsidiaries for the three
month periods ended March 31, 1998 and 1997, as though the Cowles merger had
taken place on January 1, 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Revenues $ 246,652 $ 237,580
Net (loss) income (29,655) 4,247
Diluted earnings per share $ (0.65) $ 0.10
</TABLE>
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 a loss in the pro
forma results.
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, 1996 have been increased by $1,953,000 to
reflect the restatement. The effect of the accounting change on net income as
previously reported for the quarter ended March 31, 1997 is as follows (in
thousands):
<TABLE>
<S> <C>
Net income as previously reported $ 15,357
Adjustment for effect of change
in accounting for newsprint
inventories applied retroactively 74
Net income as adjusted $ 15,431
</TABLE>
The adjustment did not result in a change to basic net income per share for
the period but increased diluted net income per share by $0.01.
<PAGE>
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 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.
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,
along with $77,350,000 of Cowles 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 June 30, 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 March 31,
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 March 31, 1998, ranged from 6.9% to 7.4%. 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.
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 Credit Agreement requires the Company to enter into one or more
interest rate protection agreements within 180 days of signing the Credit
Agreement, fixing interest costs on a minimum of $300,000,000 of outstanding
debt. The Company had not entered into any such agreements as of March 31,
1998.
The Company has outstanding letters of credit totaling $29,510,480 securing
estimated obligations stemming from workers' compensation claims, pension
liabilities and other contingent claims.
<PAGE>
<TABLE>
At March 31, 1998, long-term debt consisted of (in thousands):
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Credit Agreement:
Term loans $ 1,065,000
Revolving credit line 60,000 $ 94,000
Total indebtedness 1,125,000 94,000
Less current portion 21,675 -
Long-term debt $ 1,103,325 $ 94,000
</TABLE>
<TABLE>
<CAPTION>
Long-term debt matures, as of March 31 of each year, as follows (in thousands):
<S> <C>
2000 $ 40,050
2001 76,800
2002 95,175
2003 113,550
2004 187,050
Thereafter 590,700
$ 1,103,325
</TABLE>
NOTE 5. INCOME TAXES
The effective tax rate and the statutory federal income tax rate are
reconciled as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Statutory rate 35.0% 35.0%
State taxes, net of federal benefit 6.1 4.5
Amortization of intangibles 10.3 3.2
Tax basis adjustment of intangibles sold - (1.0)
Other 0.6 0.1
Effective tax rate 52.0% 41.8%
</TABLE>
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Recent Events and Trends
On March 19, 1998 the Company acquired all of the outstanding shares of
Cowles Media Company (Cowles) in a transaction valued at approximately $1.4
billion, including 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. These proceeds were used to repay debt associated with
the Cowles merger. See note 2 to the consolidated financial
statements.
In connection with the merger, the Company paid 15% of the consideration
by issuing 6,305,247 shares of Class A Common Stock in exchange for Cowles
shares and paid cash for the remaining shares at a value of $90.50 per Cowles
share. 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 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 following the Cowles transaction
is the Star Tribune, the largest newspaper in Minnesota with daily circulation
of 373,000 and Sunday circulation of 675,000 at March 31, 1998. It is the 16th
largest newspaper on a daily basis and the 12th largest Sunday newspaper in the
nation and is now the Company's largest newspaper.
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. This change
is not expected to have a material effect on 1998 results. 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, 1996 have been increased by $1,953,000 to reflect
the restatement. The effect of the accounting change on net income as
previously reported for the quarter ended March 31, 1997 was not material. See
note 3 to the consolidated financial statements.
On February 28, 1997, the Company completed the sale of four community
newspapers and recorded a pre-tax gain of $6.6 million in other non-operating
(expenses) income. The after tax gain on the 1997 sale was 10 cents per share.
During 1997, the Financial Accounting Standards Board adopted Statement of
Financial Accounting Standard (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 nonowner sources.
The Company has no items of comprehensive income that differ from its net
income. Accordingly, adoption of this statement in 1998 has not impacted the
Company's consolidated financial position, results of operations or cash flows.
<PAGE>
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 Postretirement Benefits), which revises the
disclosures about pension and other postretirement benefits, will be adopted in
1998 and are not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
First Quarter 1998 Compared to 1997
Net income in the first quarter of 1998 was $9.2 million or 24 cents per
share compared to $15.4 million or 41 cents per share in the first quarter of
1997. The 1998 income included the impact of the Cowles merger and Star
Tribune's results for nine business days, while the 1997 quarter included the
operating results and gain on the sale of four community newspapers and results
of Legi-Tech, a non-newspaper operation sold in late 1997. Excluding the impact
of the merger from 1998 and the operations and gain for the sold properties in
1997, net income would have been slightly ahead of last year, despite
substantially higher newsprint costs.
Revenues increased 8.9% to $164.0 million due primarily to the inclusion of
$8.9 million of Star Tribune revenues. Excluding the Star Tribune, revenues at
McClatchy's ongoing operations were up 3.9% to $155.0 million, with advertising
revenues up 4.2% to $120.8 million and circulation revenues down nominally.
Advertising revenues increased primarily due to rate increases, generally
implemented in the first quarter of 1998. The switch of Easter to April 1998
(versus March 1997) depressed first quarter retail advertising at many of the
Company's newspapers. Circulation revenues were lower as no home-delivery rate
increases were implemented in 1998 and because of promotional discounting at
most newspapers.
<TABLE>
OPERATING REVENUES BY REGION:
(Amounts in thousands)
<CAPTION>
1998 1997 % Change
<S> <C> <C> <C>
California newspapers $ 76,361 $ 75,555 1.1
Carolinas newspapers 41,518 39,069 6.3
Northwest newspapers 34,289 33,210 3.2
Minnesota newspaper 8,923 - NM
Non-newspaper operations 2,872 2,787 3.0
$ 163,963 $ 150,621 8.9
</TABLE>
NM - not meaningful due to the addition of the Star Tribune on March 20, 1998.
The California newspaper comparison includes revenues of the sold community
newspapers in 1997. Pro forma revenues were up 2.5%, led by a 2.7% increase in
advertising revenues at the Company's three Bee newspapers (located in
Sacramento, Fresno and Modesto, CA). Advertising revenues were affected by
prolonged rainy weather in the region and the later Easter. Full-run run-of-
press (ROP) advertising linage, found in the body of the newspaper and the
largest contributor to advertising revenues, was down 0.8% at the three Bees.
<PAGE>
Circulation revenues were down nominally, despite gains in daily subscribers of
2.1% and Sunday of 0.6%.
The Carolina newspapers revenue growth reflects a strong advertising
environment in both classified and retail, particularly at the North Carolina
newspapers. The News & Observer (the Company's third largest newspaper) and its
six sister nondailies had advertising revenues up 8.5%, while advertising
revenues were up 8.2% for the whole region. Full-run ROP linage was down
slightly at the daily Carolina newspapers, but was up 2.3% at The News &
Observer. Circulation revenues were down nominally. The number of daily
subscribers increased 4.5% and Sunday was up 1.5% at the Carolina dailies.
The Northwest newspapers revenues recovered somewhat from sluggish trends in
1997. Advertising revenues at the three daily newspapers (The News Tribune
(Tacoma, WA), Anchorage Daily News and Tri-City Herald (Kennewick, WA))
increased 3.1%, with the largest newspaper - The News Tribune - up 4.8%. Full-
run ROP linage at these dailies declined 4.7%. Circulation revenues also
declined nominally in this region, with the number of daily subscribers up 0.9%,
but Sunday subscriptions down 0.3%.
Revenues from the Star Tribune included $6.5 million in advertising
revenues, $1.5 million in circulation revenues and $852,000 in other revenues
(primarily direct marketing).
Non newspaper revenues increased $85,000 or 3.0%, but excluding revenues
from Legi-Tech (which was sold in late 1997), revenues were up $391,000 or
15.8%. These revenues include The Newspaper Network, McClatchy and Benson
Printing (commercial printing operations) and New Media revenues.
OPERATING EXPENSES:
Operating expenses increased 10.6% and reflect expenses of the Star Tribune
in nine days of the quarter. Excluding Star Tribune expenses in 1998 and the
expenses of sold operations in 1997, expenses at the Company's ongoing
operations increased 6.1%, led by substantially higher newsprint costs.
Newsprint and supplement costs increased 20.8% at ongoing operations due almost
entirely to higher newsprint prices in 1998. Non newsprint costs at the ongoing
operations increased 3.1%, in line with inflation.
NON OPERATING (EXPENSES) INCOME - NET:
Interest expense increased $1.4 million, but would have declined
approximately $1.5 million without the interest on the new debt associated with
the Cowles merger (see Liquidity and Capital Resources below). The Company's
share of income from its Ponderay newsprint mill joint venture increased
$600,000 due to higher newsprint prices. The Company also recorded $433,000 of
other income related mostly to the gain on the sale of some small investments.
INCOME TAXES:
The Company's effective income tax rate was 52.0% in 1998 compared to 41.8%
in 1997. The higher tax rate is primarily due to nondeductible depreciation and
amortization of goodwill and other purchase price allocations created in the
Cowles merger. See note 5 to the consolidated financial statements.
Liquidity & Capital Resources
Operations generated $29.6 million in cash, and the Company received $178.5
million in cash proceeds from the sale of Cowles' non newspaper subsidiaries.
In addition, the Company borrowed $1.125 billion to finance the cash
<PAGE>
requirements of the Cowles merger. Cash was used primarily to complete the
Cowles merger which included refinancing Cowles and McClatchy existing debt;
paying for capital expenditures and paying dividends. Capital expenditures
are projected to be $40.0 million in 1998.
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,
along with $77.4 million of Cowles 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 June 30, 2005, and
Tranche B of $330 million bearing interest at LIBOR plus 175 basis points and
payable in increasing semi-annual installments from September 30, 1998 through
March 31, 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. The Company has
$110.5 million of available credit at March 31, 1998 (see note 4 to the
consolidated financial statements). 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.
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 Credit Agreement requires the Company to enter into one or more interest
rate protection agreements within 180 days of signing the Credit Agreement,
fixing interest costs on a minimum of $300,000,000 of outstanding debt. The
Company had not entered into any such agreements as of March 31, 1998.
The Company has outstanding letters of credit totaling $29.5 million
securing estimated obligations stemming from workers' compensation claims,
pension liabilities and other contingent claims.
While the Company expects that most of its free cash flow generated from
operations in 1998 and in the foreseeable future will be used to repay debt,
management is of the opinion that operating cash flow and its present and future
credit lines as described above are adequate to meet the liquidity needs of the
Company, including currently planned capital expenditures and other investments.
Year 2000 Compliance
The Company is currently in the process of addressing a potential problem
that is facing all users of automated information systems. The problem is that
many computer systems process transactions based on two digits for the year of
the transaction (for example, "97" for 1997), rather than a full four digits.
These computer systems may not operate effectively when the last two digits
become "00", as occurs on January 1, 2000. In some cases the new date will
cause computers to stop operating, while in other cases incorrect output may
result. The problem could affect a wide variety of automated information
systems, such as mainframe applications, personal computers and communications
systems. A corporate task force is in place to assess the needed changes to the
Company's many different information systems and an implementation plan is
expected to be completed by mid-1998. A dedicated Year 2000 Compliance
Coordinator has been named to ensure the Company meets its own internal
deadlines for compliance. Many of the necessary changes in computer
instructional code are expected to be acquired during the course of normal
upgrading of systems that are budgeted between now and the year 2000, and in the
course of normal maintenance. Other changes will necessitate re-writing of
computer instructional code, the majority of which is expected to occur in 1998
<PAGE>
and the first half of 1999. At present, the Company does not have an estimate
of the total cost of evaluating and making required changes. The costs
incurred in addressing the Year 2000 problem will be expensed as incurred, in
compliance with generally accepted accounting principles. The project may also
impact capital expenditure budgets, through increased expenditures for vendor-
supplied software and computer hardware.
Forward-Looking Information
The preceding management discussion contains estimates and other forward-
looking statements covering subjects related to financial operating results.
These forward-looking statements, and any other statements going beyond
historical facts that McClatchy management has discussed, are subject to risks
and uncertainties that could cause actual results to differ. These include
increases in newsprint prices and/or printing and distribution costs over
anticipated levels, competition from other forms of media in the Company's
principal markets, increased consolidation among major retailers in the
Company's newspaper markets or other events depressing the level of advertising,
an economic downturn in the local economies of California's Central Valley,
Washington state, Alaska, the Carolinas or Minnesota, or other occurrences
leading to decreased circulation and diminished revenues from both display and
classified advertising.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
NOT REQUIRED
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders:
The Company held a special shareholders meeting on March 19, 1998 to vote on
the Cowles merger. Shareholders approved the merger by voting as follows:
For Against Abstain Broker Non-Votes
26,909,761 22,763 12,264 0
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit 18 Deloitte & Touche LLP Letter of Preferability
Exhibit 27 Financial Data Schedule for the Quarter Ended
March 31, 1998
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated January 29,
1998, to report under Item 5 of Form 8-K its fourth quarter and
year-end 1997 results.
The Company filed a Current Report on Form 8-K dated March 19,
1998, to report under Item 2 of Form 8-K the closing of the Cowles
merger transaction.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
THE McCLATCY COMPANY
Registrant
Date: May 15, 1998 /s/ James P. Smith
James P. Smith
Vice President, Finance and Treasurer
<PAGE>
April 30, 1998
The McClatchy Company
2100 Q Street
Sacramento, California 95816
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
March 31, 1998, of the facts relating to the change in accounting method for
newsprint inventory from last-in, first-out (LIFO) to first-in, first-out
(FIFO). We believe, on the basis of the facts so set forth and other
information furnished to us by appropriate officials of the Company, that the
accounting change described in your Form 10-Q is to an alternative accounting
principle that is preferable under the circumstances.
We have not audited any consolidated financial statements of The McClatchy
Company and its consolidated subsidiaries as of any date or for any period
subsequent to December 31, 1997. Therefore, we are unable to express, and we do
not express, an opinion on the facts set forth in the above-mentioned Form 10-Q,
on the related information furnished to us by officials of the Company, or on
the financial position, results of operations, or cash flows of The McClatchy
Company and its consolidated subsidiaries as of any date or for any period
subsequent to December 31, 1997.
Yours truly,
/s/ DELOITTE & TOUCHE LLP
Sacramento, California
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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This schedule contains financial information extracted from SEC filing Form 10-Q
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1998
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<RECEIVABLES> 129,958
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<CURRENT-ASSETS> 231,327
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<OTHER-SE> 763,243
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