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 June 27, 1999
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 McClatchy 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 August 9, 1999:
Class A Common Stock 16,339,750
Class B Common Stock 28,531,912
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
June 27, December 27,
1999 1998
ASSETS
CURRENT ASSETS
Cash $ 10,552 $ 9,650
Trade receivables (less allowances of
$2,888 in 1999 and $4,835 in 1998) 160,503 149,685
Other receivables 2,302 2,762
Newsprint, ink and other inventories 13,075 16,587
Deferred income taxes 18,246 17,441
Other current assets 8,157 4,414
212,835 200,539
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 205,064 203,842
Equipment 458,756 446,236
663,820 650,078
Less accumulated depreciation (297,619) (275,230)
366,201 374,848
Land 56,615 56,593
Construction in progress 26,973 21,961
449,789 453,402
INTANGIBLES - NET 1,481,621 1,510,954
OTHER ASSETS 86,359 81,830
TOTAL ASSETS $ 2,230,604 $ 2,246,725
See notes to consolidated financial statements.
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands, except share amounts)
June 27, December 27,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES
Accounts payable $ 73,361 $ 68,358
Accrued compensation 69,444 62,038
Income taxes 20,224 29,222
Unearned revenue 34,071 33,602
Carrier deposits 3,679 4,071
Other accrued liabilities 25,218 23,099
225,997 220,390
LONG-TERM BANK DEBT 960,000 1,004,000
OTHER LONG-TERM OBLIGATIONS 71,521 75,274
DEFERRED INCOME TAXES 135,917 140,056
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $.01 par value:
Class A - authorized
100,000,000 shares, issued
16,294,662 in 1999 and 16,033,763 in
1998 163 160
Class B - authorized
60,000,000 shares, issued
28,531,912 in 1999 and 28,655,912 in
1998 285 287
Additional paid-in capital 272,566 269,523
Retained earnings 564,155 537,035
837,169 807,005
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,230,604 $ 2,246,725
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 27, June 30, June 27, June 30,
1999 1998 1999 1998
<S>
REVENUES - NET
Newspapers: <C> <C> <C> <C>
Advertising $ 220,523 $ 207,882 $ 426,043 $ 335,169
Circulation 43,745 44,938 88,227 73,176
Other 6,751 10,852 12,904 16,418
271,019 263,672 527,174 424,763
Non-newspapers 2,556 3,335 4,836 6,207
273,575 267,007 532,010 430,970
OPERATING EXPENSES
Compensation 102,413 99,816 204,487 168,210
Newsprint and supplements 38,699 42,191 79,137 69,258
Depreciation and amortization 26,690 27,594 53,262 42,067
Other operating expenses 46,404 44,881 92,469 76,245
214,206 214,482 429,355 355,780
OPERATING INCOME 59,369 52,525 102,655 75,190
NON-OPERATING (EXPENSES) INCOME
Interest expense (16,433) (20,178) (33,322) (24,215)
Partnership income (loss) (250) 350 (140) 550
Other - net 157 955 941 1,388
INCOME BEFORE INCOME TAX PROVISION 42,843 33,652 70,134 52,913
INCOME TAX PROVISION 20,806 16,970 34,506 26,986
NET INCOME $ 22,037 $ 16,682 $ 35,628 $ 25,927
NET INCOME PER COMMON SHARE:
Basic $ 0.49 $ 0.37 $ 0.80 $ 0.62
Diluted $ 0.49 $ 0.37 $ 0.79 $ 0.62
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES:
Basic 44,794 44,528 44,761 41,774
Diluted 44,967 44,660 44,931 41,905
</TABLE>
See notes to consolidated financial statements
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Six Months Ended
June 27, June 30,
1999 1998
<S>
CASH FLOWS FROM OPERATING ACTIVITIES:
<C> <C>
Net income $ 35,628 $ 25,927
Reconciliation to net cash provided:
Depreciation and amortization 54,991 42,134
Changes in certain assets and liabilities - net (11,392) (8,606)
Other (4,759) (1,082)
Net cash provided by operating activities 74,468 58,373
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,442) (11,946)
Merger of Cowles Media Company - (1,099,070)
Proceeds from sale of certain business operations - 178,538
Other - net (1,258) 133
Net cash used by investing activities (23,700) (932,345)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,125,000
Repayment of long-term debt (44,000) (249,370)
Payment of cash dividends (8,508) (7,853)
Other - principally stock issuances in employee plans 2,642 2,110
Net cash (used) provided by financing activities (49,866) 869,887
NET CHANGE IN CASH AND CASH EQUIVALENTS 902 (4,085)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,650 8,671
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,552 $ 4,586
OTHER CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes (net of refunds) $ 48,045 $ 10,283
Interest paid (net of capitalized interest) $ 32,316 $ 15,157
MERGER
Fair value of assets acquired $ 1,544,531
Fair value of liabilities assumed (282,596)
Issuance of common stock (189,803)
Fees & expenses 29,067
Less cash acquired (2,129)
Net cash paid $ 1,099,070
</TABLE>
See notes to consolidated financial statements
<TABLE>
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)
<CAPTION>
Additional
Par Value Paid-In Retained
Class A Class B Capital Earnings Total
<S> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1997 $ 94 $ 287 $ 74,354 $ 492,320 $ 567,055
Net income (6 months) 25,927 25,927
Dividends paid ($.19 per share) (7,853) (7,853)
Conversion of 10,000 Class B - -
shares to Class A
Issuance of 117,692 Class A 1 2,109 2,110
shares under employee stock plans
Issuance of 6,326,775 Class A 63 189,740 189,803
shares for Cowles merger
Tax benefit from stock plans 404 404
BALANCES, June 30, 1998 158 287 266,607 510,394 777,446
Net income (6 months) 35,124 35,124
Dividends paid ($.19 per share) (8,483) (8,483)
Issuance of 134,140 Class A 2 2,434 2,436
shares under employee stock plans
Conversion of 20,000 Class B - -
shares to Class A shares
Issuance of 3,773 Class A shares 1 1
in Cowles Merger
Tax benefit from stock plans 481 481
BALANCES, DECEMBER 27, 1998 160 287 269,523 537,035 807,005
Net income (6 months) 35,628 35,628
Dividends paid ($0.19 per share) (8,508) (8,508)
Conversion of 124,000 Class B 2 (2)
shares to Class A
Issuance of 136,889 Class A 1 2,641 2,642
shares under employee stock plans
Tax benefit from stock plans 402 402
BALANCES, June 27, 1999 $ 163 $ 285 $ 272,566 $ 564,155 $ 837,169
</TABLE>
See notes to consolidated financial statements
THE McCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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. Such
financial statements are not necessarily indicative of the
results to be expected for the full year.
NOTE 2. MERGER WITH 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 $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 3). 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 $63,267,000 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 following table summarizes, on an unaudited pro forma
basis, the combined results of operations of the Company and its
subsidiaries for the six-month period ended June 30, 1998, as
though the Cowles merger had taken place on January 1, 1998 (in
thousands, except per share amounts):
1998
Revenues $ 513,659
Net income (12,973)
Diluted earnings per share $ (0.29)
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 six months of
1998, contributing to the dilution in the pro forma results for
the three months ended June 30, 1998.
NOTE 3. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS
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 in 1998 and 62.5 basis points in
1999, 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 in 1998 and 150
basis points in 1999 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 in 1998 and 62.5 basis points in 1999 and is
payable by March 19, 2005. Interest rates applicable to debt
drawn down at June 27, 1999, ranged from 5.6% to 6.7%. 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. The Company has 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, the Company has 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 Company has outstanding letters of credit totaling
$31,737,400 securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
Long-term debt consisted of (in thousands):
June 27, December 27,
1999 1998
Credit Agreement:
Term loans $ 859,000 $ 904,000
Revolving credit line 101,000 100,000
Total indebtedness 960,000 1,004,000
Less current portion - -
Long-term indebtedness $ 960,000 $ 1,004,000
Long-term debt matures, as of June of each year, as follows
(in thousands):
2001 $ 56,125
2002 77,242
2003 95,617
2004 169,117
2005 306,867
Thereafter 255,032
$ 960,000
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Recent Events and Trends
At the end of 1998, the Company changed from calendar year
reporting to a fiscal year ending on the last Sunday in December,
with each quarter consisting of three periods - five weeks, four
weeks and four weeks. Accordingly, the second quarter of 1999
ended on June 27, 1999, versus the calendar quarter which ended
on June 30, 1998.
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. 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 6,330,548 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 3 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 387,000 and Sunday
circulation of 673,000 as of March 19, 1998. It is now the
Company's largest newspaper.
During 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 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 2001. 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.
In late 1998, the Company sold several small newspaper
operations in North Carolina and commercial printing operations
in California and North Carolina. In addition, the Company
closed a small niche operation in Minneapolis. The net effect of
these transactions was not material to the Company's 1998
results, and the effects on revenue and expense comparisons are
discussed below.
Second Quarter 1999 Compared to 1998
Earnings were $22.0 million or 49 cents per share compared
to $16.7 million or 37 cents in 1998. Much of the increase was a
result of higher advertising revenues and lower newsprint expense
and interest costs.
Revenues were up 2.5% from the 1998 calendar quarter.
However, after conforming 1998 revenues to period reporting to be
consistent with 1999 and excluding revenues from several small
operations which were sold/closed in 1998 [pro forma revenues],
total revenues in the second quarter increased 3.6% and
advertising revenues increased 4.3%. Circulation revenues
declined 3.3% from pro forma 1998 primarily reflecting no rate
increases in 1999 and increased payments to carriers at certain
newspapers (recorded as a contra revenue).
OPERATING REVENUES BY REGION:
(In thousands)
Period Calendar % Change
1999 1998
Minnesota newspaper $ 98,247 $ 97,724 0.5
California newspapers 85,996 82,347 4.4
Carolinas newspapers 45,508 44,785 1.6
Northwest newspapers 41,268 38,816 6.3
Non-newspaper operations 2,556 3,335 (23.4)
$ 273,575 $ 267,007 2.5
Minnesota - The Star Tribune contributed 35.9% of the
Company's revenues in the second quarter of 1999. Revenues
increased 0.5% from calendar 1998 second quarter. However, total
revenues of $98.2 million were up 1.3% from pro forma 1998
revenues, while advertising revenues were $79.6 million, up 2.4%.
Second quarter revenues in Minnesota were held down by a slowdown
in advertising in May, especially in retail and national
categories.
California - The California newspapers contributed 31.4% or
$86.0 million of second quarter revenues, with $71.3 million in
advertising revenues. Total revenues increased 4.4% from
calendar second quarter 1998. Total revenues were up 4.1% from
pro forma 1998 revenues and advertising revenues were up 5.2%.
The increase in advertising revenues were primarily in national
and classified categories and were led by The Sacramento and
Modesto Bee newspapers.
Carolinas - The Carolinas newspapers contributed 16.6% of
second quarter revenues which totaled $45.5 million, up 1.6% from
the calendar 1998 quarter. This region included most of the
newspaper operations which were sold in 1998. On a pro forma
basis, that is, conforming to period reporting and excluding sold
operations in 1998, total revenues increased 3.8%, with
advertising revenues of $35.6 million up 4.4%. This revenue
growth is generally reflective of results of The News & Observer
newspaper which is the largest newspaper in the region.
Northwest - The Northwest newspapers contributed 15.1% of
second quarter revenues and primarily represent two daily
newspapers in Washington state and the Anchorage Daily News in
Alaska. Total revenues of $41.3 million were up 6.3% from
calendar 1998 second quarter and pro forma second quarter
revenues. Total advertising revenues at the daily newspapers
were $30.4 million, up 7.6% from pro forma 1998. As in
California, national and classified revenues were up strongly,
primarily in the Washington state newspapers.
Non-newspaper revenues - Non-newspaper revenues were $2.6
million, down from calendar 1998 by 23.4% due mostly to the sales
of the commercial printing operations in the third and fourth
quarters last year. Revenues now primarily represent those of
The Newspaper Network and Nando Media.
Operating Expenses:
Operating expenses were $214.2 million and declined
nominally from reported expenses in 1998. However, excluding
expenses from sold and closed operations and conforming ongoing
expenses to period reporting, expenses increased 1.0%.
Expenses were generally held down by lower newsprint prices
in 1999. Newsprint and supplement expense declined 6.0% from pro
forma costs in 1998, reflecting lower newsprint prices partially
offset by increased newsprint usage and higher supplement costs.
Compensation costs were up 3.9% on a pro forma basis reflecting
salary rate increases and higher retirement costs. All other
operating expenses, including depreciation and amortization,
increased 1.0%, in line with inflation.
Non-Operating (Expenses) Income-Net:
Non-operating expenses net declined $2.3 million. Interest
expense declined $3.7 million due to lower interest rates and the
pay down of bank debt. This saving was partially offset by a
loss of $250,000 from the Company's portion of The Ponderay
Newsprint Mill joint venture results, versus income of $350,000
in 1998. Other non-operating expenses declined about $700,000
partially reflecting the write-down of the value of an investment
in an internet company's stock.
Income Taxes:
In the second quarter of 1999, the Company adjusted its full-
year effective tax rate to 49.2% from 50.2%, resulting in an
effective tax rate of 48.6% in the second quarter of 1999. The
effective tax rate is lower than the 1998 effective tax rate of
50.4%, due to higher projected income before taxes in 1999
relative to a set amount of non-deductible expenses.
Six-Month Period 1999 Compared To 1998
Earnings in the first half of 1999 were $35.6 million or 79
cents per share and include the results of the Star Tribune
newspaper, which was purchased on March 19, 1998. Earnings in
the first half of 1998 were $25.9 million or 62 cents per share
and include three months and nine days of Star Tribune's results.
McClatchy had approximately three million more weighted average
shares outstanding in the 1999 six-month period due primarily to
shares issued in the Star Tribune purchase.
Revenues for the first half of 1999 were $532.0 million with
$426.0 million in advertising and $88.2 million in circulation
revenues. Revenues increased 23.4% over reported 1998 revenues,
due mostly to the addition of the Star Tribune. After adjusting
1998 revenues for acquisitions, divestitures and period
reporting, total revenues for the six-month period ended June 27,
1999 were up 4.1% with advertising up 4.8%, due primarily to the
same factors that affected second quarter comparisons described
above. Factors differing from second quarter trends are
discussed below.
OPERATING REVENUES BY REGION:
(In thousands)
Period Calendar % Change
1999 1998
Minnesota newspaper $ 195,886 $ 106,647 83.7
California newspapers 166,102 158,708 4.7
Carolinas newspapers 87,537 86,303 1.4
Northwest newspapers 77,649 73,105 6.2
Non-newspaper operations 4,836 6,207 (22.1)
$ 532,010 $ 430,970 23.4
Minnesota - The Star Tribune contributed 36.8% of 1999
revenues. As was noted above, the Star Tribune's revenues are
included for full six months in 1999 and only three months and
nine days in 1998. If the Star Tribune's revenues had been
included for the full six months of 1998, total revenues in 1999
would have been up 3.4% from pro forma 1998. Advertising
revenues in the 1999 period were $158.7 million, up 4.5% from pro
forma 1998 revenues. Much of this increase reflects stronger
national advertising in the first four months of 1999.
California - California contributed 31.2% of revenues which
totaled $166.1 million, up 4.7% from calendar 1998 and up 3.9%
from pro forma revenues. Advertising revenues totaled $136.2
million at the three California dailies, up 4.9% from pro forma
1998 advertising revenues.
Carolinas - The Company's Carolinas newspapers contributed
16.5% or $87.5 million of total revenues in 1999. This
represents an increase of 1.4% over calendar revenues reported in
1998. Revenues were up 3.4% over pro forma 1998 revenues
(adjusted for divestitures and period reporting). Advertising
revenues at the Carolinas daily newspapers totaled $67.8 million
and grew 3.7% over 1998 pro forma revenues.
Northwest - This is the Company's smallest region --
contributing 14.6% or $77.6 million of revenues in 1999, but also
its fastest growing region in revenues in the six-month period.
Total revenues exceeded 1998 calendar first-half revenues by
6.2%, and were up 5.7% from 1998 pro forma revenues. Advertising
revenues at the Northwest daily newspapers were $56.5 million, up
7.0% from 1998 pro forma advertising revenues.
Non-Newspaper - The Company's non-newspaper revenues were
$4.8 million, down 22.1% from 1998 revenues due mostly to the
sales of commercial printing operations in 1998.
Operating Expenses:
Operating expenses were $429.4 million and increased 20.7%
from 1998 reported expenses, due mostly to the inclusion of the
Star Tribune's expenses for the full period in 1999 versus three
months and nine days in 1998. Adjusting 1998 expenses to include
the Star Tribune for the full six-month period, exclude sold or
closed operations in 1998 and conform to period reporting, 1998
expenses were $420.8 million. The 2.0% increase in 1999 expenses
over pro forma 1998 expenses primarily reflects the lower
newsprint prices offset by increases in other expenses which were
affected by the factors discussed in the second quarter
comparisons.
Non-Operating (Expense) Income - Net:
Non-operating (expenses) income - net reflect higher net
expenses by $10.2 million or 46.0%, due primarily to higher
interest expense of $9.1 million. The Company incurred debt to
complete the Star Tribune acquisition on March 19, 1998,
resulting in higher interest from that time forward. In
addition, the Company's portion of Ponderay's results was a
$140,000 loss in 1999 versus a $550,000 gain in 1998.
Income Taxes:
The Company's effective tax rate in 1999 is 49.2% versus
51.0% in 1998, due primarily to higher pre-tax income in 1999
relative to a set amount of non-deductible expenses.
Liquidity & Capital Resources
Operations generated $74.5 million in cash during the six-
month period ending June 27, 1999. Cash was used primarily to
repay debt, pay for capital expenditures and pay dividends.
Capital expenditures are projected to be $42.0 million in 1999.
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 62.5 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 150
basis points and payable in increasing 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
62.5 basis points and is payable by March 19, 2005. The Company
has $67.3 million of available credit at June 27, 1999 (see note
3 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 Company has 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, 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 Company has outstanding letters of credit totaling $31.7
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 1999 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's Year 2000 Compliance Plan includes a
definition of Year 2000 conformity, compliance certification
standards, reporting and risk management structures. At the time
of this filing, the Company believes it has largely completed its
Year 2000 remediation activities, only 30 of 562 remediation
projects company-wide remain unfinished, and are discussed below.
The company expects only four Year 2000 remediation projects to
be outstanding at the end of the third quarter of 1999, and the
final project (a system replacement) to be completed by November
1, 1999.
A corporate task force and task forces at each of our
newspapers have assessed Year 2000 issues and are monitoring
changes to the Company's many different systems. A Year 2000
Compliance Coordinator is facilitating 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 July 20, 1999, are estimated to be $1,116,000.
At present, we estimate that the additional incremental cost of
making required changes will be approximately $463,000. Capital
projects, previously budgeted for business reasons, which 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 material production facilities, and the Company believes
the systems have been made Year 2000 compliant. As of this
writing, we believe our press and post-press systems at all
locations are Year 2000 compliant.
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 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 schedules.
Third Party Suppliers:
One of the most significant risks associated with the
Company's production systems in the Year 2000 may be our ability
to receive electrical power from the various utility companies
that serve the communities in which we produce 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, the Company believes it has contingency plans and
procedures 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. McClatchy's newspapers will maintain
inventories at an appropriate level for continued operation. 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, as of this writing, we believe all
our editorial systems at our newspapers have been made Year 2000
compliant.
The Company has contracted to replace existing editorial
systems at two California dailies (The Sacramento 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). The vendor
warrants the new systems to be Year 2000 compliant.
Notwithstanding the new system implementations, the two
newspapers have performed interim software 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 Year 2000 compliant, extensive
testing by the application vendor and both newspapers indicates
that the existing systems can operate into the year 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
was expensed as incurred.
For the reasons noted above, we believe at this time that
the risks of editorial system failure are not material. 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:
The majority of the Company's circulation systems are
supported by vendor maintenance agreements and in some cases, we
rely on the vendor to provide timely releases of compliant
versions. Currently, all vendor-supported circulation systems
are on the vendor's current release of software. Three Company
newspapers use custom, internally written circulation
applications. Two are currently considered compliant, based on
thorough internal testing. The third, at The Modesto Bee, will
be replaced by a new system that the Company has selected for
eventual installation at all its newspapers. The Company expects
that the Modesto installation will be complete by November 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 now believed to be in compliance. 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 believes all material systems that it uses to
produce graphics for run-of-press (display) advertising are now
compliant.
Classified Systems:
The classified advertising systems at the Company's
newspapers are under software and hardware maintenance contracts
with vendors, and all material systems have received upgrades
that the Company believes will provide Year 2000 compatibility.
General:
The Star Tribune is now performing just-released, vendor
supplied software upgrades for its page output equipment, and
will complete this project in September, 1999. Individually,
their advertising and editorial systems are now believed to be
Year 2000 compliant as stated above.
If any advertising system experienced Year 2000 failures,
our newspapers would 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. The vendor has warranted this system to be
Year 2000 compliant. All of our newspapers have now switched to
the new financial and human resource systems.
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 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, the Company has not
identified any such impact.
Most McClatchy newspapers have been notified of or have
received re-releases of previously remediated and Year 2000
certified software; the impact of these secondary releases has
been significant at a number of newspapers. The Company
recognizes that software vendors may release updated software
throughout 1999 that they identify as their Year 2000 compliant
version. This has and may continue to occur after the Company
has completed remediation based on software previously provided
by the vendor as a Year 2000 compliant release. The Company will
continue to monitor these changes to its Year 2000 compliance
status and when material, we will continue to update software as
released by the vendor.
CONTINGENCY PLANS:
In addition to contingency plans noted in the various
systems above, our newspapers have developed contingency plans to
cope with the possibility that major systems could develop
problems. As an added measure, the Company is conducting, at all
locations, start-to-finish functional tests of its production
systems and significant financial systems. As of this writing,
eight of our 11 daily newspapers have completed their production
systems tests; the remaining three newspapers will perform their
production system tests, and the Company will complete its start-
to-finish financial system tests by mid-September 1999. The
contingency plans are being reviewed, based on whether the start-
to-finish testing indicate need for further refinement.
FORWARD LOOKING INFORMATION
Management has 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, the
Company claims the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation
Reform Act of 1995. The following important factors, in addition
to those discussed elsewhere in this document, could affect the
future results of McClatchy, and could cause those future results
to differ materially from those expressed in the forward-looking
statements: general economic, market or business conditions;
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
the Company's ability to negotiate and obtain favorable terms
under collective bargaining arrangements with its 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 management's control. Consequently, there can
be no assurance that the actual results or developments
anticipated will be realized or that these results or
developments will have the expected consequences.
Item 3 - 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 note 3 to the consolidated financial statements.) As a
result of this interest rate mix, a hypothetical 10 percent
change in interest rates would have a $0.03 to $0.06 per share
increase or decrease in the Company's annual 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.
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 its annual shareholders meeting on
May 19, 1999 to vote on two proposals. Shareholders approved all of
the proposals by voting as follows:
1. Election of Directors of the Board
VOTES
FOR WITHHELD
Nominees for Class A Directors voted by
Class A Stockholders
Elizabeth Ballantine 12,608,193 73,969
Larry Jinks 12,606,455 75,707
S. Donley Ritchey, Jr. 12,611,986 70,176
Frederick R. Ruiz 12,611,910 70,252
Nominees for Class B Directors voted by
Class B Stockholders
William K. Coblentz 26,744,705 0
Molly Maloney Evangelisti 26,744,705 0
Joan F. Lane 26,744,705 0
Kevin S. McClatchy 26,744,705 0
James B. McClatchy 26,744,705 0
William Ellery McClatchy 26,744,705 0
Erwin Potts 26,744,705 0
Gary B. Pruitt 26,744,705 0
William M. Roth 26,744,705 0
2. To ratify the appointment of Deloitte & Touche LLP as the
Company's Independent Auditors for the 1999 Fiscal Year
FOR AGAINST ABSTAIN BROKER NON-VOTED
28,007,173 596 5,150 0
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit:
Financial Data Schedule for the six-months ended June 27, 1999.
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 McClatchy Company
Registrant
Date: August 9, 1999 /s/ James P. Smith
James P. Smith
Vice President, Finance and
Treasurer
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This schedule contains financial information extracted from SEC filing
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