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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 26, 2004
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 or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, par value $.01 per share | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:
None
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. x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 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. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x Yes ¨ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Based on the closing price of the Company’s Class A Common Stock on the New York Stock Exchange on June 25, 2004: approximately $1,488,467,000. For purposes of the foregoing calculation only, as 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.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Shares outstanding as of February 17, 2005:
Class A Common Stock | 20,329,813 Shares | |
Class B Common Stock | 26,244,147 Shares |
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company’s May 18, 2005 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (incorporated in Part II and Part III to the extent provided in Items 10, 11, 12, 13 and 14 hereof).
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INDEX TO THE McCLATCHY COMPANY
2004 FORM 10-K
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The Company maintains a website which includes an investor relations page available to all interested parties atwww.mcclatchy.com. All filings with the United States Securities and Exchange Commission, along with any amendments thereto, are available free of charge on our website atwww.mcclatchy.com/investor/. In addition, paper copies of any such filings are available free of charge by contacting us at the address listed on the cover page of this filing. The contents of this website are not incorporated into this filing. Further, our reference to the URL for this website is intended to be an inactive textual reference only.
The McClatchy Company (the “Company”) was formed in 1998 as a Delaware corporation serving as a holding company owning McClatchy Newspapers, Inc. and Cowles Media Company. All references to the “Company” in this Report include McClatchy Newspapers, Inc., the predecessor in interest to the Company prior to the acquisition of Cowles Media Company.
The Company dates from the California Gold Rush era of 1857. Its three original California newspapers -The Sacramento Bee, The Fresno Beeand The Modesto Bee - were the core of the Company until 1979 when the Company began to diversify geographically outside of California. At that time it purchased two newspapers in the Northwest, theAnchorage Daily News and theTri-City Herald in Southeastern Washington. In 1986, the Company purchasedThe (Tacoma)News Tribune. The Company expanded into the Carolinas when it purchased newspapers in South Carolina in 1990 and The News and Observer Publishing Company in North Carolina in 1995. In 1998 the Company expanded into Minnesota with the acquisition of The Star Tribune Company and expanded further in California with the purchase of theMerced Sun-Star and five related non-daily newspapers (the Merced Group) in 2004.
During 2004, the Company owned and published 30 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 fiscal year 2004 the Company had an average paid daily circulation of 1,419,311, Sunday circulation of 1,847,242, and non-daily circulation of 69,379.
Each of the Company’s newspapers is largely autonomous in its business and editorial operations so as to meet most effectively the needs of the communities it serves. Publishers and editors 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 and/or Board of Directors.
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Each of the Company’s daily newspapers has the largest circulation of any newspaper serving its particular community. 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 84% of consolidated net revenues in fiscal 2004 and 83% of consolidated net revenues in fiscal 2003. Circulation revenues approximated 14% of consolidated net revenues in fiscal 2004 and 15% of consolidated net revenues in fiscal 2003.
The Company’s newspapers supplement their newspaper publishing operations with an array of niche products and direct marketing initiatives, including direct mail. While the direct marketing programs are financially successful in their own right, they also help retain advertising in the newspapers. The newspapers also operate leading local websites in each daily newspaper market, offering users information, comprehensive news, advertising, e-commerce and other services. Online advertising, particularly classified advertising, has become one of the Company’s fastest growing revenue sources, albeit still a small part of each newspaper’s operations. Together with the mass reach of its in-paper advertising, these lines of business help each of the Company’s newspapers maintain its position as a leading media outlet in each daily newspaper market.
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 spring advertising season, and the Thanksgiving and Christmas holidays. The first quarter is historically the weakest quarter for revenues and profits.
The Company also owns McClatchy Interactive (formerly known as Nando Media), an interactive media operation whose primary mission is to be a technology and content partner to the Company’s newspaper internet sites. 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 State.
Recent Acquisition and Divestiture- On January 7, 2004, the Company purchased the assets of theMerced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $41.0 million in cash. Revenues of the Merced Group from the date of purchase through the end of fiscal 2004 were $13.8 million. The purchase included $37.2 million in intangible assets, the most significant of which was $31.0 million of goodwill. Amortization of the goodwill and other identifiable intangibles will be deductible for tax purposes. The useful lives associated with the $6.2 million of identifiable intangible assets range from eight to 17 years.
On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company. The Associated Press purchased TNN’s ad processing operations and, separately, Vertis, Inc. purchased TNN’s sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The revenues and operating results of TNN are included in discontinued operations in the Consolidated Statement of Income in fiscal 2003.
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Forward-Looking Statements-When used in this Report, the words “believes,” “expects,” “anticipates,” “estimates,” and similar expressions are generally intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed under the heading “Risk Factors that Could Affect Operating Results” 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 of this Report.
TheStar Tribune, a morning newspaper serving Minneapolis-St. Paul and the surrounding metropolitan area, is the Company’s largest newspaper, contributing 32.7% of fiscal 2004 revenues compared to 33.1% of fiscal 2003 revenues. In fiscal 2004 theStar Tribune’s daily average paid circulation increased 0.3% to 380,422 and Sunday average paid circulation decreased 0.5% to 671,831. As of December 26, 2004, approximately 74% of the daily and 74% of Sunday circulation was home delivered. TheStar Tribune competes in the eastern portion of its market with thePioneer Press, which operates in St. Paul, Minnesota, and whose daily circulation is approximately one half and whose Sunday circulation is approximately one third of theStar Tribune’scirculation.
TheStar Tribune’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 1,895 | 1,930 | ||
Preprints distributed in millions | 1,223 | 1,176 |
TheStar Tribune’s fiscal 2004 net revenues increased 4.3% to $380,103,000 from fiscal 2003 revenues of $364,288,000.
The California newspapers include the three “Bee” newspapers, theMerced Sun-Star, six weekly newspapers and two Spanish-language, non-daily newspapers. The net revenues and circulation of these newspapers are summarized below:
2004 Circulation (1) | Net Revenues | |||||||||
Newspaper | Daily/Weekly | Sunday | 2004 | 2003 | ||||||
The Sacramento Bee | 298,908 | 346,186 | $ | 249,866,000 | $ | 239,828,000 | ||||
The Fresno Bee | 163,381 | 192,474 | $ | 101,017,000 | $ | 93,856,000 | ||||
The Modesto Bee | 84,852 | 91,246 | $ | 61,993,000 | $ | 58,513,000 | ||||
Merced Sun-Star | 17,518 | — | $ | 10,657,000 | — | |||||
Non-daily newspapers | 15,530 | — | $ | 5,878,000 | $ | 2,077,000 |
(1) | Based on fiscal year average paid circulation. |
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The California newspapers produced approximately 36.9% of total Company net revenues in fiscal 2004, compared to 35.9% in fiscal 2003. Fiscal 2004 net revenues at the California newspapers increased 8.9% from fiscal 2003. Revenues at the California newspapers, excluding the Merced Group, increased 5.4% in fiscal 2004.
The Sacramento Bee
The Sacramento Bee is a morning newspaper serving the California state capital and the surrounding region. In fiscal year 2004,The Sacramento Bee’s average paid circulation increased 1.0% daily and decreased 1.9% Sunday. As of December 26, 2004, approximately 84% of the daily and 79% of Sunday circulation was home delivered.
The Sacramento Bee’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six column inches | 2,586 | 2,574 | ||
Preprints distributed in millions | 718 | 705 |
The Sacramento Bee’s fiscal 2004 net revenues increased 4.2% from fiscal 2003 revenues.
The Fresno Bee
The Fresno Bee is a morning newspaper serving the Fresno, California metropolitan area. In 2004,The Fresno Bee’s fiscal year 2004 average paid circulation increased 0.5% daily and decreased 0.3% Sunday. As of December 26, 2004, approximately 86% ofThe Fresno Bee’s daily and 85% of Sunday circulation was home delivered.
The Fresno Bee’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 1,303 | 1,318 | ||
Preprints distributed in millions | 336 | 313 |
The Fresno Bee’s fiscal 2004 net revenues increased 7.6% from 2003.
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 fiscal year 2004 average paid circulation decreased 2.0% daily and 2.1% Sunday. As of December 26, 2004, approximately 82% of the daily and 84% of Sunday circulation was home delivered.
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The Modesto Bee’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003, are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 1,299 | 1,327 | ||
Preprints distributed in millions | 189 | 170 |
The Modesto Bee’s fiscal 2004 net revenues increased 5.9% from fiscal 2003.
Merced Sun-Star
TheMerced Sun-Staris a morning newspaper that serves the Merced, California metropolitan area, which is located between Modesto and Fresno. Merced publishes a daily newspaper Monday through Friday and a weekend edition on Saturday. Average daily paid circulation is calculated using a six-day average. As of December 26, 2004, approximately 80% of the daily circulation was home delivered.
TheMerced Sun-Star’s advertising volumes for the fiscal year ended December 26, 2004 are set forth in the following table:
2004 | ||
Full Run advertising linage in thousands of six-column inches | 600 | |
Preprints distributed in millions | 44 |
The Carolina newspapers includeThe News & Observer, the second largest newspaper in North Carolina, and three daily newspapers in South Carolina. The Company also operates eight non-daily newspapers in North and South Carolina strategically located near its daily newspapers.
The net revenues and circulation of the Carolina newspapers are summarized below:
2004 Circulation (1) | Net Revenues | |||||||||
Newspaper | Daily/Weekly | Sunday | 2004 | 2003 | ||||||
The News & Observer (Raleigh) | 171,089 | 211,039 | $ | 136,778,000 | $ | 128,878,000 | ||||
The Herald (Rock Hill) | 31,574 | 32,955 | $ | 13,726,000 | $ | 13,209,000 | ||||
The Island Packet (Hilton Head) | 18,953 | 19,806 | $ | 16,805,000 | $ | 15,902,000 | ||||
The Beaufort Gazette | 12,449 | 11,276 | $ | 6,855,000 | $ | 6,475,000 | ||||
Non-daily newspapers | 40,315 | NA | $ | 12,001,000 | $ | 12,232,000 |
(1) | Based on fiscal year average paid circulation. |
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The Carolina newspapers produced 16.0% of total Company net revenues in fiscal 2004, compared to 16.1% in 2003. Net revenues of the Carolina newspapers increased 5.4% from fiscal 2003.
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 Research Triangle, which includes Raleigh, Durham and Chapel Hill, North Carolina.
The News & Observer’s average paid circulation in fiscal year 2004 increased approximately 0.6% daily and 0.5% Sunday. As of December 26, 2004 approximately 80% of the daily and 76% of Sunday circulation was home delivered.
The News & Observer’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 1,900 | 1,935 | ||
Preprints distributed in millions | 404 | 375 |
The News & Observer’s fiscal 2004 net revenues increased 6.1% from fiscal 2003.
The Herald
The Herald is a morning newspaper serving Rock Hill and surrounding communities in York County, South Carolina. Rock Hill is approximately 25 miles southwest of Charlotte, North Carolina. In 2004,The Herald’s fiscal year 2004 average paid circulation decreased 0.9% daily and decreased 1.7% on Sunday.
The Herald’s main competitor is a zoned edition of theCharlotte Observer, whose circulation inThe Herald’s primary circulation area is estimated to be approximately a third ofThe Herald’s circulation. As of December 26, 2004, approximately 76% of the daily and 76% of Sunday circulation of the Herald was home delivered.
Advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 743 | 782 | ||
Preprints distributed in millions | 58 | 57 |
The Herald’sfiscal 2004 net revenues increased 4.8% from fiscal 2003.
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The Island Packet and The Beaufort Gazette
The Island Packet andThe 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 Beaufort Gazette serves the city of Beaufort and northern Beaufort County encompassing surrounding islands of Lady’s, St. Helena, Fripp and Parris. The management and many business functions of the two newspapers are combined to pursue regional strategies and operational synergies.
From fiscal year 2003 to fiscal year 2004, the average paid circulation increased 2.4% daily and 3.1% Sunday atThe Island Packet, and increased 4.9% daily and 1.1% Sunday atThe Beaufort Gazette.
As of December 26, 2004, approximately 64% of the daily and 62% of Sunday circulation ofThe Island Packet was home delivered. Comparable amounts forThe Beaufort Gazette were 56% daily and 64% Sunday.
Advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
The Island Packet: | ||||
Full-Run advertising linage in thousands of six-column inches | 930 | 934 | ||
Preprints distributed in millions | 25 | 23 | ||
The Beaufort Gazette: | ||||
Full-Run advertising linage in thousands of six-column inches | 379 | 403 | ||
Preprints distributed in millions | 18 | 17 |
The Island Packet’s fiscal 2004 net revenues increased 5.7% over fiscal 2003, andThe Beaufort Gazette’s net revenues increased 5.9%.
Carolina Non-daily Newspapers
The North Carolina non-dailies are newspapers that serve communities generally surrounding Raleigh. They are:Chapel Hill News,Cary News,Eastern Wake News, andSmithfield Herald. Their combined paid average fiscal year 2004 non-daily circulation is 32,120.
The South Carolina non-daily newspapers include theClover Herald, theYorkville Enquirer, theLake Wylie Magazine and theFort Mill Times, and serve small communities generally surrounding Rock Hill, South Carolina. Their combined paid average fiscal year 2004 non-daily circulation is 8,114.
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The Company publishes five newspapers in Washington State and the largest daily newspaper in Alaska. The net revenues and circulation of these newspapers are summarized below:
2004 Circulation (1) | Net Revenues | |||||||||
Newspaper | Daily/Weekly | Sunday | 2004 | 2003 | ||||||
The News Tribune | 129,129 | 143,845 | $ | 79,274,000 | $ | 79,306,000 | ||||
Anchorage Daily News | 68,953 | 81,291 | $ | 57,574,000 | $ | 55,708,000 | ||||
Tri-City Herald | 42,083 | 45,293 | $ | 24,932,000 | $ | 23,518,000 | ||||
Non-daily newspapers | 13,204 | NA | $ | 4,973,000 | $ | 4,629,000 |
(1) | Based on fiscal year average paid circulation. |
The Company’s Northwest newspapers produced 14.3% of the Company’s total net revenues in fiscal 2004, compared to 14.8% in 2003. Net revenues in fiscal 2004 at the Northwest newspapers increased 2.2% versus fiscal 2003.
The News Tribune
The News Tribune, a morning newspaper, primarily serves the Tacoma, Washington, metropolitan area in Pierce and southern King counties. It is the third largest newspaper in Washington State. Tacoma is approximately 30 miles south of Seattle.The News Tribune competes in the northernmost fringes of its market with the Seattle metropolitan newspapers. In fiscal year 2004, the average paid circulation ofThe News Tribune increased 0.1% daily and decreased 1.6% Sunday. As of December 26, 2004, approximately 85% of the daily and 84% of Sunday circulation was home delivered.
The News Tribune’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 1,266 | 1,363 | ||
Preprints distributed in millions | 257 | 263 |
The News Tribune’s fiscal 2004 net revenues decreased nominally from fiscal 2003.
Anchorage Daily News
The Anchorage Daily News, a morning newspaper, is Alaska’s largest newspaper. TheAnchorage Daily News circulates throughout the state of Alaska but its primary circulation is concentrated in the south central region of the state comprising metropolitan Anchorage, the Kenai Peninsula and the Matanuska-Susitna Valley.
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TheAnchorage Daily News’ fiscal year 2004 average paid circulation decreased 3.5% daily and 4.0% Sunday. As of December 26, 2004, approximately 67% of the daily and 64% of Sunday circulation was home delivered.
Advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003, are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 947 | 918 | ||
Preprints distributed in millions | 91 | 85 |
Anchorage Daily News’ fiscal 2004 net revenues increased 3.3% from fiscal 2003.
Tri-City Herald
TheTri-City Herald is a morning newspaper serving the Tri-Cities of Richland, Kennewick and Pasco in southeastern Washington. For fiscal year 2004, theTri-City Herald’s average paid circulation increased 1.2% daily and decreased 0.3% Sunday. As of December 26, 2004 approximately 88% of the daily and 87% of Sunday circulation was home delivered.
TheTri-City Herald’s advertising volumes for the fiscal years ended December 26, 2004 and December 28, 2003 are set forth in the following table:
2004 | 2003 | |||
Full-Run advertising linage in thousands of six-column inches | 843 | 787 | ||
Preprints distributed in millions | 94 | 92 |
TheTri-City Herald’s fiscal 2004 net revenues increased 6.0% from fiscal 2003.
Northwestern Non-daily Newspapers
The Company’s other non-daily newspapers include thePeninsula Gateway in southern Puget Sound andThe Puyallup Herald, which circulates weekly in southern Pierce County, near Tacoma.
The Company’s rapidly expanding internet activities have produced robust local websites in each of its daily newspaper markets. These efforts are supported by McClatchy Interactive, the Company’s interactive media operation that provides newspapers with content, publishing tools and software development. The primary mission of McClatchy Interactive is to be a technology and content partner to the Company’s newspaper internet sites. McClatchy Interactive also provides hosting and programming services to other newspapers.
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During fiscal 2004, the Company consumed approximately 241,000 metric tons of newsprint compared to 241,700 metric tons in fiscal 2003. The Company currently obtains its supply of newsprint from a number of suppliers primarily under long-term contracts.
Newsprint expense accounted for 14.5% of operating expenses in fiscal 2004 compared to 13.9% in fiscal 2003. Consequently, the Company’s earnings are sensitive to changes in newsprint prices. All other things being equal, a hypothetical $10 per metric ton change in newsprint prices affects earnings per share by three cents annually. Management believes its newsprint sources of supply under existing arrangements are adequate for its anticipated current needs. Significant increases in the price of newsprint would adversely affect the operating results of the Company to the extent that they were 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 has a production capacity in excess of 260,000 metric tons annually. The publisher partners have committed to take a total of 126,000 metric tons of this anticipated production with the balance to be sold on the open market. The Company’s annual commitment is 28,400 metric tons. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations “ and the financial statements and accompanying notes for further discussion of the impact of this investment on the Company’s business.
The Company’s newspapers, direct marketing programs and internet sites compete for advertising revenues and readers’ time with television, radio, the internet, direct mail companies, free shoppers, suburban neighborhood and national newspapers and other publications, and billboard companies, among others. In some of its markets (primarily Minneapolis, Minnesota; Tacoma, Washington; and Rock Hill, South Carolina), the Company’s newspapers also compete with other newspapers published in nearby cities and towns. Competition for advertising is generally based upon circulation levels, readership demographics, price and advertiser results, while competition for circulation and readership is generally based upon the content, journalistic quality, service and the price of the newspaper. The Company’s major daily newspapers lead their direct local newspaper competitors in both advertising linage and general circulation and readership in their respective markets, and its internet sites are leading local sites in each of the Company’s major daily newspaper markets, based upon research conducted by the Company and various independent sources.
As of December 26, 2004, the Company had 9,171 full and part-time employees (equating to 7,657 full-time equivalent employees), of whom approximately 25% were represented by unions including 58% at theStar Tribune and 23% atThe Sacramento Bee, the Company’s two largest
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newspapers. Most of the Company’s union-represented employees are currently working under labor agreements expiring in various years. Seven of the Company’s 12 daily papers have no unions.
While the Company’s newspapers have not had a strike since 1980 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, although there can be no assurance of this.
The corporate headquarters of the Company are located at 2100 “Q” Street, Sacramento, California. At December 26, 2004 the Company had newspaper production facilities in 12 markets situated in six states. These facilities vary in size and in total occupy about 4.3 million square feet. Approximately 840,000 of the total square footage is leased from others. The Company owns substantially all of its production equipment, although certain office equipment is leased.
The Company maintains its properties in good condition and believes that its current facilities are adequate to meet the present needs of its newspapers.
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, intellectual property infringement, wrongful termination actions, and complaints alleging discrimination. In addition, the Company is involved from time to time in governmental and administrative proceedings concerning employment, labor, environmental and other claims. Historically, such claims and proceedings have not had a material adverse effect upon the Company’s consolidated results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The 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 per share dividends paid on both classes of Common Stock and the prices of the Company’s Class A Common Stock as reported by these exchanges for fiscal 2004 and 2003:
2004 | 2003 | |||||||||||||||||
High | Low | Dividends | High | Low | Dividends | |||||||||||||
1st Quarter | $ | 72.05 | $ | 67.50 | $ | 0.12 | $ | 58.35 | $ | 51.39 | $ | 0.11 | ||||||
2nd Quarter | $ | 74.38 | $ | 68.90 | $ | 0.12 | $ | 62.39 | $ | 52.70 | $ | 0.11 | ||||||
3rd Quarter | $ | 73.10 | $ | 67.50 | $ | 0.13 | $ | 62.15 | $ | 55.58 | $ | 0.11 | ||||||
4th Quarter | $ | 72.60 | $ | 67.14 | $ | 0.13 | $ | 70.14 | $ | 59.35 | $ | 0.11 |
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 February 17, 2005 was 1,405 and 22, respectively. The Company did not repurchase any of its common shares in fiscal 2004 and currently has no authorized stock repurchase program in place.
Equity Compensation Plan Information
Information regarding McClatchy’s equity compensation plans, including both shareholder approved plans and non-shareholder approved plans, is set forth in the section entitled “Securities Authorized for Issuance Under Equity Compensation Plans” in the definitive Proxy Statement for the Company’s 2005 Annual Meeting of Shareholders, which information is incorporated into Item 12 herein by reference.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY
(In thousands, except per share amounts)
December 26, 2004 | December 28, 2003 | December 29, 2002 | December 30, 2001 | December 31, 2000 | ||||||||||||||||
REVENUES - NET: | ||||||||||||||||||||
Advertising | $ | 972,808 | $ | 910,628 | $ | 877,838 | $ | 871,375 | $ | 926,745 | ||||||||||
Circulation | 166,623 | 165,552 | 166,050 | 168,462 | 175,429 | |||||||||||||||
Other | 23,945 | 23,211 | 26,072 | 28,302 | 28,915 | |||||||||||||||
Total | 1,163,376 | 1,099,391 | 1,069,960 | 1,068,139 | 1,131,089 | |||||||||||||||
OPERATING EXPENSES: | ||||||||||||||||||||
Depreciation and amortization | 66,532 | 70,139 | 73,189 | 109,029 | 109,169 | |||||||||||||||
Other operating expenses | 827,535 | 780,311 | 752,966 | 787,092 | 789,698 | |||||||||||||||
Total | 894,067 | 850,450 | 826,155 | 896,121 | 898,867 | |||||||||||||||
OPERATING INCOME | 269,309 | 248,941 | 243,805 | 172,018 | 232,222 | |||||||||||||||
NON-OPERATING (EXPENSES) INCOME: | ||||||||||||||||||||
Interest expense | (9,095 | ) | (18,090 | ) | (26,448 | ) | (44,045 | ) | (64,677 | ) | ||||||||||
Refinancing related charge | (3,737 | ) | — | — | — | — | ||||||||||||||
Partnership income (loss) | 929 | 368 | (1,341 | ) | 527 | (60 | ) | |||||||||||||
Loss on internet investment | — | (1,008 | ) | (1,000 | ) | (10,556 | ) | — | ||||||||||||
Other - net | 155 | 448 | 652 | 937 | 1,927 | |||||||||||||||
Total | (11,748 | ) | (18,282 | ) | (28,137 | ) | (53,137 | ) | (62,810 | ) | ||||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION | 257,561 | 230,659 | 215,668 | 118,881 | 169,412 | |||||||||||||||
INCOME TAX PROVISION | 101,685 | 86,462 | 85,119 | 61,944 | 81,407 | |||||||||||||||
INCOME FROM CONTINUING OPERATIONS | 155,876 | 144,197 | 130,549 | 56,937 | 88,005 | |||||||||||||||
DISCONTINUED OPERATION: | ||||||||||||||||||||
Income from discontinued operation (including $10,224 gain on disposal in 2003) | — | 10,076 | 1,217 | 1,821 | 1,608 | |||||||||||||||
Income tax provision | — | 4,051 | 550 | 761 | 683 | |||||||||||||||
Income from discontinued operation | — | 6,025 | 667 | 1,060 | 925 | |||||||||||||||
NET INCOME | $ | 155,876 | $ | 150,222 | $ | 131,216 | $ | 57,997 | $ | 88,930 | ||||||||||
NET INCOME PER COMMON SHARE: | ||||||||||||||||||||
Basic: | ||||||||||||||||||||
Income from continuing operations | $ | 3.36 | $ | 3.13 | $ | 2.86 | $ | 1.26 | $ | 1.95 | ||||||||||
Income from discontinued operation | — | 0.13 | 0.01 | 0.02 | 0.02 | |||||||||||||||
Net income per share | $ | 3.36 | $ | 3.26 | $ | 2.87 | $ | 1.28 | $ | 1.97 | ||||||||||
Diluted: | ||||||||||||||||||||
Income from continuing operations | $ | 3.33 | $ | 3.10 | $ | 2.83 | $ | 1.25 | $ | 1.95 | ||||||||||
Income from discontinued operation | — | 0.13 | 0.01 | 0.02 | 0.02 | |||||||||||||||
Net income per share | $ | 3.33 | $ | 3.23 | $ | 2.84 | $ | 1.27 | $ | 1.97 | ||||||||||
DIVIDENDS PER COMMON SHARE | $ | 0.50 | $ | 0.44 | �� | $ | 0.40 | $ | 0.40 | $ | 0.40 | |||||||||
CONSOLIDATED BALANCE SHEET DATA: | ||||||||||||||||||||
Total assets | $ | 2,049,400 | $ | 1,875,298 | $ | 1,981,561 | $ | 2,104,160 | $ | 2,165,658 | ||||||||||
Long-term debt | 267,200 | 204,923 | 471,615 | 594,714 | 778,102 | |||||||||||||||
Stockholders’ equity | 1,423,004 | 1,216,017 | 1,057,329 | 998,165 | 958,851 |
On January 7, 2004 the Company purchased the assets of theMerced Sun-Star and five related non-daily newspapers. On June 10, 2003, the Company sold the assets of The Newspaper Network, a national sales and marketing company. Prior year data has been reclassified for this discontinued operation. In fiscal 2002 the Company adopted SFAS No. 142 and No. 144 and in accordance with these statements, eliminated the amortization of goodwill and recorded a pre-tax charge of $1.6 million to write down the value of certain land. Amortization expense that would have been excluded had SFAS No. 142 been effective for fiscal years 2001and 2000 was $34.7 million and $35.4 million, respectively. Results in 2001 include pre-tax charges totaling $12.0 million to write down certain internet investments and reserve for an environmental clean up. Results in fiscal 2000 include 53 weeks while all other years include 52 weeks. This summary should be read in conjunction with the consolidated financial statements and notes thereto.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company owns and publishes 30 newspapers in four regions of the country - Minnesota, California, the Carolinas and the Northwest (Alaska and Washington). The Company’s newspapers range from large dailies serving metropolitan areas to non-daily newspapers serving small communities. The Company supplements its newspaper publishing with an array of niche products and direct marketing initiatives, including direct mail. The Company also operates leading local websites in each of its daily newspaper markets offering users information, comprehensive news, advertising, e-commerce and other services. The Company also owns and operates McClatchy Interactive (formerly known as Nando Media), an interactive media operation that provides newspapers with content, publishing tools and software development.
The Company’s primary source of revenue is advertising. While percentages vary from year to year, and from newspaper to newspaper, local retail advertising carried as a part of newspapers (“run-of-press” or “ROP” advertising) or in advertising inserts placed in newspapers (preprint advertising), generally contributes roughly 40% of advertising revenues at the Company’s newspapers. Recent trends have been for certain national or regional retailers to use greater preprint advertising and less ROP advertising, although that trend shifts from time to time. Nonetheless, ROP advertising still makes up the majority of retail advertising. Classified advertising, primarily in automotive, employment and real estate categories, generally contributes about 40% of advertising revenue and national advertising generally contributes about 10% of total advertising. Online advertising, direct marketing and other advertising make up the remainder of the Company’s advertising revenues. Circulation revenues contribute roughly 15% of the Company’s newspaper revenues, depending upon the size and locale of the newspaper. Most newspapers are delivered by independent contractors. Circulation revenues are recorded net of direct delivery costs.
See “Results of Operations” below for a discussion of the Company’s revenue performance and contribution by categories for fiscal 2004, 2003 and 2002.
Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and
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the best estimates and judgments routinely require adjustment. The most significant areas involving estimates and assumptions are revenue recognition, allowance for uncollectible accounts, amortization and/or impairment of intangibles, pension and post-retirement expenses, insurance reserves, and the Company’s tax provision. We believe the following critical accounting policies, in particular, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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. Circulation revenues are recorded net of direct delivery costs. Other revenue is recognized when the related product or service has been delivered. Revenues are recorded net of estimated incentive offerings including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are charged to income in the period in which the facts that give rise to the revision become known.
Allowance for Uncollectible Accounts - The Company maintains an allowance account for estimated losses resulting from the risk its customers will not make required payments. Generally, the Company uses the aging of accounts receivable, reserving for all accounts due 90 days or longer, to establish allowances for losses on accounts receivable. However, if the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, additional allowances are reserved. To illustrate the impact of a change to the allowance for uncollectible accounts, hypothetically, if the amount of receivables that are 90 days or longer were to increase by 10%, the Company’s allowance for estimated losses would have increased $292,000 at the end of fiscal 2004.
Goodwill and Intangible Impairment - In assessing the recoverability of the Company’s goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company periodically analyzes its goodwill and intangible assets with indefinite lives for impairment. No material impairment loss was recorded in fiscal 2004, 2003 or 2002.
Pension and Post-retirement Benefits - The Company has significant pension and post-retirement benefit costs and credits that are developed from actuarial valuations. Inherent in these valuations are key assumptions including salary rate increases, discount rates and expected return on plan assets. The Company is required to consider current market conditions, including changes in interest rates, in establishing these assumptions. Changes in the related pension and post-retirement benefit costs or credits may occur in the future because of changes resulting from fluctuations in the Company’s employee headcount and/or changes in the various assumptions.
The Company used a discount rate of 6.25%, assumed salary rate increases of 3.5% to 5.0% and an assumed long-term return on assets of 9.0% to calculate its retirement expenses in fiscal 2004, based upon consultation with its outside actuaries. See note 5 to the consolidated financial statements for a more in-depth discussion of the Company’s policies in setting its key assumptions related to these obligations. For fiscal 2004, a change in the weighted average rates would have had the following impact on our net benefit cost:
• | A decrease of 50 basis points in the long-term rate of return would have increased our net benefit cost by approximately $2.8 million; |
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• | A decrease of 25 basis points in the discount rate would have increased our net benefit cost by approximately $2.4 million; and |
• | An increase of 50 basis points in the future compensation rate would have increased our net benefit cost by approximately $2 million. |
The Company has revised certain assumptions for its 2005 pension expense calculation. Please see “Recent Events and Trends - Operating Expenses” discussion below.
Tax Provision -The Company’s current and deferred tax provisions are calculated based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments between the Company’s estimates and the actual results of filed returns are recorded when identified, which is generally in the third quarter of the subsequent year for U.S. federal and state provisions.
The amount of income taxes paid is subject to audits by federal and state authorities, which may result in proposed assessments. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. Management believes that the Company has adequately provided for any reasonably foreseeable outcome related to these matters based upon currently available information. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire. Additionally, earnings or deductions estimated to be in each jurisdiction by the Company may differ from actual amounts. As a result of these potential adjustments, the Company’s effective tax rate may fluctuate significantly on a quarterly basis.
Self-Insurance - The Company is self-insured for workers’ compensation in California and Alaska. The Company relies on claims experience and the advice of consulting actuaries and administrators in determining an adequate provision for self-insurance claims.
The Company used a discount rate of 6.0% to calculate workers’ compensation reserves as of December 26, 2004. A decrease of 25 basis points in the discount rate would have an immaterial effect on total workers’ compensation reserves. Additionally, a 10% increase in claims would have increased total workers’ compensation reserves by approximately $470,000 at the end of fiscal 2004.
Recent Events and Trends
Recent Acquisition and Divestiture:
On January 7, 2004, the Company purchased the assets of theMerced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $41.0 million in cash.
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The purchase included $37.2 million in intangible assets, the most significant of which was $31.0 million of goodwill. The acquisition and results of the Merced Group are included in the Company’s financial statements beginning on January 7, 2004. See Note 1 to the Consolidated Financial Statements.
On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company. The Associated Press purchased TNN’s ad processing operations and, separately, Vertis, Inc. purchased TNN’s sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The revenues and operating results of TNN are included in discontinued operations in the Consolidated Statement of Income in fiscal 2003.
Refinancing of Debt:
On May 10, 2004, the Company entered into a five-year, senior unsecured revolving credit facility (Credit Agreement), which provides for borrowings of up to $500 million from a syndicate of banks through May 11, 2009. The primary purpose of the Credit Agreement is to support the issuance of unsecured promissory notes under a commercial paper program (commercial paper) of up to $500 million and for general corporate purposes. Initially, however, the Company used the Credit Agreement to refinance all of its existing term debt and principal outstanding under the previous bank credit facility. This debt was subsequently retired with proceeds of commercial paper during the second quarter of fiscal 2004.
Debt under the Credit Agreement bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 29.5 basis points to 77.5 basis points plus a utilization fee of 12.5 basis points if borrowings exceed $250 million. Applicable rates are based upon the Company’s ratings on its long-term debt from Moody’s and Standard & Poor’s. A facility fee for the revolving credit facility ranges from 8.0 basis points to 22.5 basis points depending on the Company’s ratings, and such fees are currently at 12.5 basis points. No debt was outstanding under the Credit Agreement at December 26, 2004.
The Company’s commercial paper outstanding at December 26, 2004 had maturities ranging from overnight to 46 days, with interest rates ranging from 2.10% to 2.48%. The weighted average interest rate on commercial paper outstanding since May 12, 2004 (inception of the program) through December 26, 2004 was 1.45%. Because the Company’s Credit Agreement provides backup for its commercial paper, and in accordance with the Company’s ability and intent, the commercial paper is classified as long-term debt.
In the second quarter of fiscal 2004, the Company recognized a charge, primarily consisting of previously capitalized loan fees, of $3.7 million related to its previous debt agreement. The write-off was $2.25 million after taxes.
Advertising Revenues:
The most significant trend in revenues for the newspaper industry and the Company in recent years has been the decline in employment advertising revenues since 2000. The Company’s employment advertising revenues, which reached $190.8 million in 2000, declined 41.6% to $111.4 million in 2002, and declined an additional 12.0% to $98.0 million in fiscal 2003. Employment advertising improved in 2004 to $107.8 million.
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In fiscal 2004, total advertising revenues grew 6.8% to $972.8 million compared to fiscal 2003. A rebound in employment revenues of 9.9% from fiscal 2003, together with growth in national revenue and continued growth of internet and direct marketing revenues, contributed to the increase in advertising revenue for fiscal 2004. In addition, the Merced Group contributed $12.3 million in advertising revenues for fiscal 2004. Please see the revenue discussions below under “Results of Operations”.
Operating Expenses:
The Company incurred three newsprint price increases in 2003 and two in 2004, resulting in an average increase of 9.5% in newsprint prices in fiscal 2004 compared to fiscal 2003. An additional price increase has been announced for the first quarter of 2005; however, the ultimate amount and/or timing of any price increase is uncertain at this time. Newsprint pricing is largely dependent on global demand and supply for newsprint. All other things being equal, a hypothetical $10 per metric ton change in newsprint prices affects earnings per share by three cents annually. The impact of newsprint price increases on the Company’s expenses is discussed under “Results of Operations” below.
The Company’s fringe benefit costs increased 10.7% over fiscal 2003 due primarily to higher retirement and medical costs. With regard to the Company’s retirement expenses, historically low long-term interest rates caused the Company to use a 6.25% discount rate to calculate its pension and post-retirement expenses in fiscal 2004 compared to a 6.75% rate used in fiscal 2003. In addition, with an economic recovery anticipated by many analysts over the next several years, the Company increased its assumed rate of salary increase from a range of 3.0% to 5.0% used in 2003 to a range of 3.5% to 5.0% in 2004 for its pension plans. These factors have increased the Company’s pension expense in fiscal 2004 compared to 2003. The Company contributed $60.0 million to its pension plans in early fiscal 2004, and expected earnings on this contribution partially offset these increases.
In 2005, for purposes of calculating retirement expenses, the Company has reduced its discount rate to 6.0% and its expected return on assets to 8.5% from 9.0% used in 2004, due to a continued decline in long-term interest rates and expected lower investment returns on plan assets. The Company did not change the assumed range of salary rate increases for 2005. These changes are expected to increase retirement expenses and obligations. As a result, the Company voluntarily contributed $40.0 million to its pension plans in early fiscal 2005, and expects earnings on this contribution to partially offset these increases. See Note 4 to the Consolidated Financial Statements.
Recent Accounting Pronouncements:
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock Issued to Employees.”
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SFAS 123R requires all share-based payments to employees, including grants of employee stock options and purchases under the employee stock purchase plan, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R in our third quarter of fiscal 2005. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded at the beginning of the first quarter of adoption of SFAS 123R for all unvested stock options and restricted stock based upon the previously disclosed SFAS 123 methodology and amounts. The retroactive methods would record compensation expense beginning with the first period restated for all unvested stock options and restricted stock. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption. If the Company were to expense the value of stock options for the full fiscal year 2005, it would reduce earnings by an estimated 10 to 12 cents per share. This estimate is based upon currently available information and actual results may differ when SFAS 123R is adopted.
RESULTS OF OPERATIONS
FISCAL 2004 COMPARED TO FISCAL 2003
The Company reported net income of $155.9 million or $3.33 per share for fiscal 2004, which included the non-cash charge of $2.25 million after-tax related to its debt refinancing ($0.05 per share). Earnings from continuing operations for fiscal 2003 were $144.2 million or $3.10 per share, and were $150.2 million or $3.23 per share including income from a discontinued operation.
Revenues:
Revenues in fiscal 2004, including $13.8 million from the Merced Group, were $1.2 billion, up 5.8% from revenues in fiscal 2003. Advertising revenues were up 6.8% to $972.8 million and circulation revenue was up 0.6% to $166.6 million.
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The following table summarizes the Company’s revenue by category for fiscal 2004 compared to fiscal 2003. In order to allow an analysis of the categories on a comparable basis to fiscal 2003 operations, advertising revenues from the Merced Group are excluded from the advertising categories, and are discussed separately below. Management believes such an analysis is helpful to enable investors to understand the underlying advertising performance of the Company’s historical business.
Fiscal Year Ended | |||||||||
(Dollars in thousands)
| December 26, 2004 | December 28, 2003 | % Change | ||||||
Advertising revenues: | |||||||||
Retail | $ | 408,404 | $ | 397,415 | 2.8 | % | |||
National | 100,220 | 95,214 | 5.3 | % | |||||
Classified: | |||||||||
Automotive | 117,038 | 119,014 | -1.7 | % | |||||
Employment | 107,765 | 98,028 | 9.9 | % | |||||
Real estate | 97,620 | 89,110 | 9.5 | % | |||||
Other | 36,867 | 36,796 | 0.2 | % | |||||
Total classified | 359,290 | 342,948 | 4.8 | % | |||||
Other | 92,627 | 75,051 | 23.4 | % | |||||
Total advertising excluding Merced | 960,541 | 910,628 | 5.5 | % | |||||
Merced total advertising | 12,267 | — | NM | ||||||
Total advertising | 972,808 | 910,628 | 6.8 | % | |||||
Circulation | 166,623 | 165,552 | 0.6 | % | |||||
Other | 23,945 | 23,211 | 3.2 | % | |||||
Total revenues | $ | 1,163,376 | $ | 1,099,391 | 5.8 | % | |||
NM – Not Meaningful
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While the Company reviews and evaluates the operations of each individual newspaper, for purposes of organization and ease of understanding, the following table summarizes the fiscal 2004 revenues at its newspapers operations by region with year-over-year changes (in thousands):
Minnesota | California (1) | Carolinas | Northwest | |||||||||||||||||||||
Revenues | % Change | Revenues | % Change | Revenues | % Change | Revenues | % Change | |||||||||||||||||
Revenues | ||||||||||||||||||||||||
Advertising | $ | 309,506 | 5.0 | % | $ | 372,232 | 10.0 | % | $ | 155,616 | 6.0 | % | $ | 135,454 | 3.8 | % | ||||||||
Circulation | 66,294 | 0.2 | % | 51,210 | 1.7 | % | 24,328 | 0.8 | % | 24,791 | -0.4 | % | ||||||||||||
Other | 4,303 | 34.5 | % | 5,969 | 9.5 | % | 6,221 | 7.2 | % | 6,508 | -16.4 | % | ||||||||||||
Total | $ | 380,103 | 4.3 | % | $ | 429,411 | 8.9 | % | $ | 186,165 | 5.4 | % | $ | 166,753 | 2.2 | % | ||||||||
(1) | The California region includes the 2004 revenues of $13.8 million of the Merced Group. Excluding the Merced Group, advertising revenues in this region increased 6.4% and total revenues were up 5.4%. |
Retail advertising, excluding the Merced Group, grew $11.0 million over fiscal 2003 due to growth in preprinted advertising inserts placed into the newspapers, which was up $8.1 million or 5.1% and in ROP advertising, which increased $2.9 million or 1.2%. Much of the revenue increase was from theStar Tribune in Minneapolis ($5.4 million) and the Company’s three dailyBee newspapers in California ($4.8 million).
National advertising, excluding the Merced Group, increased $5.0 million, reflecting strong advertising from the airline, banking, entertainment and automotive categories ($4.2 million), partially offset by a $1.5 million decline in telecommunications (primarily in the California region). The net increase in national revenues was spread among the California, Minnesota and Carolinas regions, while the Northwest newspapers reported a decline in national advertising.
Classified advertising, excluding the Merced Group, increased $16.3 million over fiscal 2003, mostly from employment and real estate advertising growth. Employment advertising was up in all regions and gained momentum as the year progressed. Real estate advertising was up in all regions reflecting the national trend in this category. Automotive advertising revenues declined $2.0 million over fiscal 2003, and generally declined throughout the industry in 2004.
Other advertising revenues, excluding the Merced Group, increased $17.6 million and primarily consisted of online advertising and direct marketing revenues. Online advertising grew $13.2 million or 48.7% with strong growth in all regions. Direct marketing revenues increased $4.5 million with gains in most regions, led by strong growth at the Company’s threeBee newspapers. Direct mail revenues declined at theStar Tribune where certain unprofitable products were discontinued in 2004.
The Merced Group contributed $12.3 million in advertising revenues for fiscal 2004, including $5.6 million in retail advertising, $4.4 million in classified advertising and $1.8 million in direct mail advertising revenues.
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Consolidated circulation revenues increased $1.1 million with much of the growth from the Merced Group. Excluding the Merced Group, circulation revenues were up $60,000.
Operating Expenses:
Operating expenses increased 5.1% and were up 3.7% excluding $11.8 million of expenses from the Merced Group. The following review of expense categories excludes the expenses of the Merced Group. Management believes such an analysis is helpful to enable investors to understand the underlying performance of the Company’s historical business.
Newsprint and supplement expense was up 8.9% with newsprint prices up 9.5% and newsprint consumption down 1.0%. Supplement costs were up $2.2 million. Compensation costs were up 4.4%, primarily reflecting salary increases and higher fringe benefit costs. Salaries increased 3.2% reflecting merit increases, which were offset somewhat by a decline in head count. However, fringe benefit costs rose 9.7%, largely due to $7.5 million in additional retirement and medical costs. Other operating expenses increased 2.3% primarily due to increased postage costs associated with the Company’s direct mail programs, while other costs were held in check through company-wide cost controls. Depreciation and amortization decreased $4.3 million, or 6.2%, largely reflecting lower capital expenditures over the last several years and the expiration of useful lives of certain intangible assets.
Non-Operating (Expenses) Income - Net:
Interest expense was $9.1 million for fiscal 2004. This is a 49.7% decline from fiscal 2003, as the Company benefited from lower interest rates, the expiration of three interest rate swap agreements in June 2003 and one in June 2004, and debt repayment from free cash flow. The Company also recorded $3.7 million as a pre-tax charge to write off costs related to its previous debt agreement. See Note 2 to the consolidated financial statements and “Refinancing of Debt” discussion under “Recent Events and Trends” above.
The Company recorded $929,000 as its share of Ponderay’s income for fiscal 2004 compared to $368,000 in fiscal 2003, reflecting the positive impact of newsprint price increases on Ponderay’s results.
Income Taxes:
The Company’s effective income tax rate was 39.5% for fiscal 2004 compared to 37.5% in fiscal 2003, when the Company realized a greater impact from the effect of the successful resolution of certain state tax positions it had taken in connection with past acquisitions.
FISCAL 2003 COMPARED TO FISCAL 2002
The Company reported net income from continuing operations of $144.2 million, or $3.10 per share, compared to the fiscal year 2002 earnings from continuing operations of $130.5 million, or $2.83 per share. Total fiscal 2003 earnings from continuing operations included a pre-tax charge of $1.0 million to write down a certain internet investment. Net income including the discontinued operation was $150.2 million in fiscal 2003, or $3.23 per share, compared to $131.2 million, or $2.84 per share, in fiscal 2002.
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Revenues:
Revenues in fiscal year 2003 increased 2.8% to $1.1 billion with advertising revenues up 3.7% to $910.6 million and circulation revenues down 0.3% to $165.6 million.
The following table summarizes the Company’s revenue by category for fiscal 2003 compared to fiscal 2002 (in thousands):
2003 | 2002 | % Change | |||||||
Advertising revenues: | |||||||||
Retail | $ | 397,415 | $ | 382,467 | 3.9 | % | |||
National | 95,214 | 85,749 | 11.0 | % | |||||
Classified: | |||||||||
Automotive | 119,014 | 120,933 | -1.6 | % | |||||
Employment | 98,028 | 111,359 | -12.0 | % | |||||
Real estate | 89,110 | 77,374 | 15.2 | % | |||||
Other | 36,796 | 38,149 | -3.5 | % | |||||
Total classified | 342,948 | 347,815 | -1.4 | % | |||||
Other | 75,051 | 61,807 | 21.4 | % | |||||
Total advertising | 910,628 | 877,838 | 3.7 | % | |||||
Circulation | 165,552 | 166,050 | -0.3 | % | |||||
Other | 23,211 | 26,072 | -11.0 | % | |||||
Total revenues | $ | 1,099,391 | $ | 1,069,960 | 2.8 | % | |||
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While the Company reviews and evaluates the operations of each individual newspaper, for purposes of organization and ease of understanding, the following table summarizes fiscal 2003 revenues at its newspaper operations by region with year over year changes (in thousands):
Minnesota | California | Carolinas | Northwest | |||||||||||||||||||||
Revenues | % Change | Revenues | % Change | Revenues | % Change | Revenues | % Change | |||||||||||||||||
Revenues | ||||||||||||||||||||||||
Advertising | $ | 294,894 | 2.3 | % | $ | 338,485 | 7.3 | % | $ | 146,769 | 0.6 | % | $ | 130,480 | 1.9 | % | ||||||||
Circulation | 66,194 | -0.9 | % | 50,338 | 0.3 | % | 24,126 | -3.4 | % | 24,894 | 3.3 | % | ||||||||||||
Other | 3,200 | -19.6 | % | 5,451 | 6.0 | % | 5,801 | -10.2 | % | 7,787 | -14.2 | % | ||||||||||||
Total | $ | 364,288 | 1.4 | % | $ | 394,274 | 6.3 | % | $ | 176,696 | -0.3 | % | $ | 163,161 | 1.2 | % | ||||||||
Retail advertising grew $14.9 million over fiscal 2002 due primarily to growth in preprinted advertising inserts placed into the newspapers, which was up $13.5 million or 9.3%. Much of this growth was from the Company’s three dailyBeenewspapers in California ($8.2 million) and from theStar Tribune in Minneapolis ($5.4 million).
National advertising increased $9.5 million reflecting strong advertising from telecommunication companies at most newspapers, and banking and automotive advertising atThe Sacramento Bee. In fact, $3.7 million of the increase in national advertising was atThe Sacramento Bee, and the California newspapers as a group contributed $6.7 million of the increase.
Classified advertising declined $4.9 million, due primarily to a $13.3 million decline in employment advertising, offset somewhat by strong advertising growth of $11.7 million in classified real estate advertising. Automotive and other classified advertising declined $3.2 million with only the California newspapers showing growth in these areas. The decline in automotive is partially due to difficult comparisons to strong growth in this category in 2002.
Employment advertising was down at all newspapers as this industry-wide trend of lower employment advertising continued, especially at larger metropolitan newspapers. TheStar Tribune in Minnesota andThe Sacramento Bee recorded most of these declines by virtue of being the Company’s two largest newspapers.The News & Observer in Raleigh, NC, had significant losses of employment advertising over the last few years; however, it was one of the Company’s first newspapers to show an improving trend in the second half of fiscal 2003. Employment revenue declined $5.3 million at theStar Tribune, $3.6 million atThe Sacramento Bee, and $464,000 atThe News & Observer.
Real estate advertising was strong at all newspapers except for those in the Carolina region, where they declined nominally due to local market conditions. The increase in real estate advertising at the Company’s other newspapers reflects the national trend in this category.
Other advertising revenues increased $13.2 million and primarily consisted of direct marketing and internet advertising revenues, two of the fastest growing revenue sources at the
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Company’s newspapers. Direct marketing revenues increased $4.4 million with much of the growth coming from the Company’s California newspapers ($3.2 million) where the threeBee newspapers have combined to offer direct mail programs to advertisers. Online advertising grew $8.7 million or 47.5% with strong growth at all newspapers, but with particularly strong growth atThe Sacramento Bee (up $2.9 million) and theStar Tribune (up $2.2 million).
Circulation revenues declined nominally as increases at some newspapers were offset by declines at others. Each newspaper pursues its own mix of rate changes and promotional programs. The most significant declines in circulation revenues were at theStar Tribune, which reflected changes in the sales mix between single copy and home delivery and promotional programs, and atThe Island Packet andThe Beaufort Gazette, where reclassifications of certain delivery costs to a contra-revenue account decreased net circulation revenues.
Other revenues declined $2.9 million with much of the decline in the Northwest newspapers ($1.2 million) due to lower commercial printing revenues and at McClatchy Interactive ($437,000) due to the Company’s decision to discontinue the sale of news and information content to third parties.
Operating Expense:
Total operating expenses increased by 2.9% in fiscal 2003 due primarily to higher newsprint, retirement and medical costs. Compensation costs were up 3.1% reflecting salary increases and higher fringe benefit costs. Salaries increased 1.7% reflecting merit increases which were offset somewhat by a 1.2% decline in head count. However, fringe benefit costs rose by 9.5%, largely due to $7.0 million in additional retirement and medical costs. Newsprint and supplement expense was up 5.0% for fiscal 2003, with newsprint prices up 5.3% and consumption down 0.9%. Other operating expenses increased 3.9% due primarily to higher postage costs associated with the Company’s direct mail programs and to the write-off of certain software fixed assets. Depreciation and amortization costs declined $3.1 million, or 4.2%, primarily reflecting lower capital expenditures over the last several years and the expiration of useful lives of certain assets.
Non-Operating (Expenses) Income – Net:
Interest expense was $18.1 million for the fiscal year 2003. This is a 31.6% decline from the fiscal year 2002 as the Company benefited from lower interest rates, the expiration of two interest rate swaps and debt repayment from free cash flow. The Company also recorded $368,000 as its share of Ponderay’s income for the fiscal year 2003 compared to $1.3 million of loss in the fiscal year 2002. The additional income from Ponderay primarily reflects the favorable impact of higher newsprint prices. The Company recorded losses on the writedown of an internet investment of $1 million in fiscal 2003 as it determined that the carrying value of the investment was permanently impaired. Also, in fiscal 2002 the Company purchased a significant portion of the assets of an internet company in which it had previously invested, and as a result of the asset purchase, the Company was required to write down its investment, recording a loss of $1 million.
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Income Taxes:
The Company’s effective income tax rate was 37.5% for the fiscal year 2003 compared to 39.5% for fiscal year 2002. The lower effective tax rate in 2003 primarily relates to successful resolution of certain state tax positions the Company took in connection with past acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Liquidity and Capital Resources:
The Company’s cash and cash equivalents were $4.9 million at December 26, 2004, versus $3.4 million at the end of fiscal 2003. The Company generated $185.9 million of cash from operating activities in fiscal 2004 even after the voluntary contribution of $60.0 million to its pension plans (discussed below). The major non-operating uses of cash for fiscal 2004 were $41.0 million to purchase the Merced Group, purchase property, plant and equipment, and pay dividends. On May 10, 2004 the Company received net proceeds of $375.0 million for the issuance of debt under its new Credit Agreement, and repaid $347.0 million of debt under its previous debt agreements. Debt under the Credit Agreement was subsequently retired with proceeds from issuing commercial paper. See the discussion of debt refinancing below. The Company paid $23.2 million in dividends for fiscal 2004, while proceeds from issuing Class A stock under employee stock plans totaled $8.2 million. See the Company’s Statement of Cash Flows on page 40.
The Company increased its quarterly dividend twice in 2004. The second quarter dividend payable on July 1, 2004 was increased to 12 cents per share from 11 cents per share. The third quarter dividend payable on October 1, 2004 was raised to 13 cents per share.
During fiscal 2004, the Company made voluntary contributions of $60.0 million to its defined benefit pension plans to reduce the unfunded liability of its qualified pension plans and to help reduce pension expense with the earnings on the contributions. Given the anticipated increase in its pension obligations in 2004 resulting from pension expense and low interest rates, management considered the $60.0 million contribution to be prudent. The Company also made a voluntary contribution of $40.0 million to the plans in early 2005 when it became apparent that long-term interest rates were continuing to remain at historical lows, resulting in a lower discount rate, and thus, higher retirement expenses and pension obligations. The Company may be required to, or may voluntarily opt to, make additional contributions to its pension plans in future years.
The Company expended a total of $47.2 million in fiscal 2004 for capital projects and equipment to improve productivity, keep pace with new technology and maintain existing operations. Capital expenditures over the last three years have totaled $112.9 million and planned expenditures in fiscal 2005 are estimated to be $55 to $60 million at existing facilities. The Company has purchase obligations through 2010 totaling $43.1 million primarily for capital expenditures.
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Debt and Related Matters:
On May 10, 2004 the Company entered into a five-year, senior unsecured revolving credit facility (Credit Agreement), which provides borrowings of up to $500 million from a syndicate of banks through May 11, 2009. The primary purpose of the Credit Agreement is to support the issuance of unsecured promissory notes under a commercial paper program (commercial paper) of up to $500 million and for general corporate purposes. Initially, however, the Company used the Credit Agreement to refinance all of its existing term debt and principal outstanding under the previous bank credit facility. This debt was subsequently retired with commercial paper during the second quarter of fiscal 2004.
Debt under the Credit Agreement bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 29.5 basis points to 77.5 basis points plus a utilization fee of 12.5 basis points if borrowings exceed $250 million. Applicable rates are based upon the Company’s ratings on its long-term debt from Moody’s and Standard & Poor’s. A facility fee for the revolving credit ranges from 8.0 basis points to 22.5 basis points depending on the Company’s ratings, and such fees are currently at 12.5 basis points. No debt was outstanding under the Credit Agreement at December 26, 2004.
The revolving credit facility contains financial covenants including a minimum interest coverage ratio (as defined) of 3:1 and a maximum leverage ratio (as defined) of 4:1.
The Company’s commercial paper outstanding at December 26, 2004 had maturities ranging from overnight to 46 days, with interest rates ranging from 2.10% to 2.48%. The weighted average interest rate on commercial paper outstanding since May 12, 2004 (inception of the program) through December 26, 2004 was 1.45%. Because the Company’s Credit Agreement provides backup for its commercial paper, and in accordance with the Company’s ability and intent, the commercial paper was classified as long-term debt.
The Company intends to use the $500 million of borrowing capacity under the commercial paper program and its back-up Credit Agreement, along with its operating cash flow, to meet its short and long-term liquidity needs. The amount of outstanding commercial paper will fluctuate at any given point in time depending on the current liquidity needs of the Company and cash generated from operations. The Company considers these fluctuations in its outstanding borrowings to be in the normal course of business and to be not material given its borrowing capacity of $500 million under the commercial paper program as supported by the Credit Agreement. The Company may use its commercial paper program and /or revolving credit facility for strategic investments or acquisitions in the future.
The Company currently has outstanding letters of credit totaling $7.9 million securing estimated obligations stemming from workers’ compensation claims and other contingent claims. The Company had $224.9 million of available credit under its current Credit Agreement at December 26, 2004.
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The Company does not have, nor does it intend to enter into, derivative contracts for trading purposes. The Company has not attempted to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Currently there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink, and other inventories, leases of equipment and facilities, or business insurance contracts.
The Company previously had one interest rate swap agreement designated as a cash flow hedge specifically designed to hedge the variability in the expected cash flows that were attributable to interest rate fluctuations on $100.0 million of its variable rate bank debt which expired in June 2004. The effect of this agreement was to fix the LIBOR interest rate exposure at approximately 3.8% on that portion of the Company’s term loans.
Contractual Obligations:
The following table summarizes specific financial obligations under the Company’s contractual obligations and commercial commitments as of December 26, 2004 (in thousands):
Payments Due By | |||||||||||||||
Total | 1 Year or Less | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||
Included in the Company’s balance sheet: | |||||||||||||||
Long-term debt | $ | 267,200 | $ | 267,200 | |||||||||||
Pension obligations (a) | 23,769 | $ | 1,396 | $ | 2,791 | 2,791 | $ | 16,791 | |||||||
Post-retirement obligations | 17,270 | 2,130 | 4,261 | 4,261 | 6,618 | ||||||||||
Other long-term obligations (b) | 19,101 | 7,889 | 9,915 | 1,154 | 143 | ||||||||||
Other obligations: | |||||||||||||||
Purchase obligations (c) | 43,127 | 23,599 | 19,502 | 26 | |||||||||||
Operating leases | 19,228 | 5,896 | 8,458 | 3,269 | 1,605 | ||||||||||
Stand by letters of credit (d) | 7,885 | 7,885 | |||||||||||||
Guarantee of Ponderay debt | 9,662 | 9,662 | |||||||||||||
Total | $ | 407,242 | $ | 40,910 | $ | 54,589 | $ | 286,586 | $ | 25,157 | |||||
The Company has no material capital lease obligations.
(a) | Non-qualified pension plans. |
(b) | Primarily deferred compensation and workers’ compensation obligations. |
(c) | Primarily capital expenditures for property, plant and equipment. |
(d) | In connection with the Company’s insurance program, letters of credit are required to support certain projected claims and obligations. |
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RISK FACTORS THAT COULD AFFECT OPERATING RESULTS
Forward-Looking Information:
This annual report on Form 10-K contains forward-looking statements regarding the Company’s actual and expected financial performance and operations. These statements are based upon our current expectations and knowledge of factors impacting our business, including, without limitation, statements about return on pension plan assets and assumed salary increases, newsprint costs, amortization expense, assumed medical cost trends, stock option expenses, prepayment of debt, capital expenditures, sufficiency of capital resources and possible acquisitions. Such statements are subject to risks, trends and uncertainties. Forward-looking statements are generally preceded by, followed by or are a part of sentences that include the words “believes,” “expects,” “anticipates,” “estimates,” 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, especially in any of the markets where we operate newspapers; geo-political uncertainties including the risk of war; changes in newsprint prices and/or printing and distribution costs from anticipated levels; changes in interest rates; changes in pension assets and liabilities; increased competition from newspapers or 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; changes in our ability to negotiate and obtain favorable terms under collective bargaining arrangements with our employees; competitive actions by other companies; difficulties in servicing our debt obligations; 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.
Additional Information Regarding Certain Risks:
Newsprint is the major component of our cost of raw materials. Newsprint accounted for 14.5% of McClatchy’s operating expenses for fiscal 2004. Accordingly, our earnings are sensitive to changes in newsprint prices. We have not attempted to hedge fluctuations in the normal purchases of newsprint or enter into contracts with embedded derivatives for the purchase of newsprint. If the price of newsprint increases materially, our operating results could be adversely affected. For a discussion of the impact of a change in newsprint prices on the Company’s earnings per share, please see the newsprint discussion above at “Recent Events and Trends.” If our newsprint suppliers experience labor unrest, transportation difficulties or other supply disruptions, our ability to produce and deliver newspapers could be impaired and/or the cost of the newsprint could increase, both of which would negatively affect our operating results.
If McClatchy experiences labor unrest, our ability to produce and deliver newspapers would be impaired. The results of future labor negotiations could harm our operating results. Our newspapers have not endured a labor strike since 1980. However, we cannot ensure that a strike will not occur at one or more of our newspapers in the future. As of December 26, 2004,
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approximately a quarter of our full- and part-time employees were represented by unions including 58% at theStar Tribune and 23% atThe Sacramento Bee, the Company’s two largest newspapers. Most of the Company’s union-represented employees are currently working under labor agreements, which expire at various times. McClatchy faces collective bargaining upon the expirations of these labor agreements. Even if our newspapers do not suffer a labor strike, the Company’s operating results could be harmed if the results of labor negotiations restrict our ability to maximize the efficiency of its newspaper operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All things being equal, a hypothetical 25 basis point change in LIBOR for a fiscal year would increase or decrease in the Company’s annual net income by $300,000 to $400,000, less than one cent per share.
See the discussion at “Recent Events and Trends - Operating Expenses” for the impact of market changes on the Company’s newsprint and pension costs.
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MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of The McClatchy Company (“Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of the Company’s financial statements presented in accordance with generally accepted accounting principles in the United States of America.
An internal control system over financial reporting has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting as of December 26, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on management’s assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 26, 2004.
The McClatchy Company’s independent auditors have issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. This report appears on page 33.
/s/ Gary B. Pruitt | /s/ Patrick J. Talamantes | |||
Gary B. Pruitt | Patrick J. Talamantes | |||
Chairman of the Board, President and | Vice President, Finance and | |||
Chief Executive Officer | Chief Financial Officer | |||
February 24, 2005 | February 24, 2005 |
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
Page | ||
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | 33 | |
35 | ||
36 | ||
37 | ||
39 | ||
40 | ||
41 | ||
Financial Statement Schedule: | ||
68 |
All other schedules are omitted as not applicable under the rules of Regulation S-X.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders of The McClatchy Company:
We have audited management’s assessment, included in the accompanying “Management Report on Internal Control Over Financial Reporting” that The McClatchy Company and subsidiaries maintained effective internal control over financial reporting as of December 26, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 26, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 26, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 26, 2004 of the Company and our report dated February 24, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ Deloitte & Touche LLP |
Sacramento, California |
February 24, 2005 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The McClatchy Company:
We have audited the accompanying consolidated balance sheet of The McClatchy Company and subsidiaries as of December 26, 2004 and December 28, 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 26, 2004. Our audits also included the financial statement schedule listed in the Index to Financial Statements and Financial Statements 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 the standards of the Public Company Accounting Oversight Board (United States). 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 subsidiaries at December 26, 2004 and December 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 26, 2004, in conformity with accounting principles generally accepted in the United States of America. 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 26, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP |
Sacramento, California |
February 24, 2005 |
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CONSOLIDATED STATEMENT OF INCOME
(In thousands, except for share amounts)
Year Ended | ||||||||||||
December 26, 2004 | December 28, 2003 | December 29, 2002 | ||||||||||
REVENUES - NET: | ||||||||||||
Advertising | $ | 972,808 | $ | 910,628 | $ | 877,838 | ||||||
Circulation | 166,623 | 165,552 | 166,050 | |||||||||
Other | 23,945 | 23,211 | 26,072 | |||||||||
1,163,376 | 1,099,391 | 1,069,960 | ||||||||||
OPERATING EXPENSES: | ||||||||||||
Compensation | 471,289 | 445,901 | 432,448 | |||||||||
Newsprint and supplements | 151,134 | 137,384 | 130,841 | |||||||||
Depreciation and amortization | 66,532 | 70,139 | 73,189 | |||||||||
Other operating expenses | 205,112 | 197,026 | 189,677 | |||||||||
894,067 | 850,450 | 826,155 | ||||||||||
OPERATING INCOME | 269,309 | 248,941 | 243,805 | |||||||||
NON-OPERATING (EXPENSES) INCOME: | ||||||||||||
Interest expense | (9,095 | ) | (18,090 | ) | (26,448 | ) | ||||||
Refinancing related charge | (3,737 | ) | — | — | ||||||||
Partnership income (loss) | 929 | 368 | (1,341 | ) | ||||||||
Loss on internet investments | — | (1,008 | ) | (1,000 | ) | |||||||
Other - net | 155 | 448 | 652 | |||||||||
(11,748 | ) | (18,282 | ) | (28,137 | ) | |||||||
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION | 257,561 | 230,659 | 215,668 | |||||||||
INCOME TAX PROVISION | 101,685 | 86,462 | 85,119 | |||||||||
INCOME FROM CONTINUING OPERATIONS | 155,876 | 144,197 | 130,549 | |||||||||
DISCONTINUED OPERATION : | ||||||||||||
Income from discontinued operation (including $10,224 gain on disposal in 2003) | — | 10,076 | 1,217 | |||||||||
Income tax provision | — | 4,051 | 550 | |||||||||
Income from discontinued operation | — | 6,025 | 667 | |||||||||
NET INCOME | $ | 155,876 | $ | 150,222 | $ | 131,216 | ||||||
NET INCOME PER COMMON SHARE: | ||||||||||||
Basic: | ||||||||||||
Income from continuing operations | $ | 3.36 | $ | 3.13 | $ | 2.86 | ||||||
Income from discontinued operation | — | $ | 0.13 | $ | 0.01 | |||||||
Net income per share | $ | 3.36 | $ | 3.26 | $ | 2.87 | ||||||
Diluted: | ||||||||||||
Income from continuing operations | $ | 3.33 | $ | 3.10 | $ | 2.83 | ||||||
Income from discontinued operation | — | $ | 0.13 | $ | 0.01 | |||||||
Net income per share | $ | 3.33 | $ | 3.23 | $ | 2.84 | ||||||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES: | ||||||||||||
Basic | 46,382 | 46,127 | 45,795 | |||||||||
Diluted | 46,815 | 46,456 | 46,178 |
See notes to consolidated financial statements.
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(In thousands, except share amounts)
December 26, 2004 | December 28, 2003 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 4,857 | $ | 3,384 | ||||
Trade receivables (less allowance of $2,769 in 2004 and $3,084 in 2003) | 138,467 | 129,066 | ||||||
Other receivables | 3,735 | 3,859 | ||||||
Newsprint, ink and other inventories | 17,032 | 15,518 | ||||||
Deferred income taxes | 18,661 | 18,366 | ||||||
Prepaid income taxes | 7,265 | 10,355 | ||||||
Other current assets | 13,746 | 7,910 | ||||||
203,763 | 188,458 | |||||||
PROPERTY, PLANT AND EQUIPMENT: | ||||||||
Building and improvements | 237,304 | 230,502 | ||||||
Equipment | 520,122 | 513,134 | ||||||
757,426 | 743,636 | |||||||
Less accumulated depreciation | (469,059 | ) | (440,110 | ) | ||||
288,367 | 303,526 | |||||||
Land | 53,630 | 51,373 | ||||||
Construction in progress | 25,236 | 15,429 | ||||||
367,233 | 370,328 | |||||||
INTANGIBLE ASSETS: | ||||||||
Identifiable intangibles - net | 62,712 | 81,921 | ||||||
Goodwill-net | 1,249,053 | 1,218,047 | ||||||
1,311,765 | 1,299,968 | |||||||
PREPAID PENSION ASSETS | 149,483 | — | ||||||
OTHER ASSETS | 17,156 | 16,544 | ||||||
TOTAL ASSETS | $ | 2,049,400 | $ | 1,875,298 | ||||
See notes to consolidated financial statements.
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LIABILITIES AND STOCKHOLDERS’ EQUITY
December 26, 2004 | December 28, 2003 | |||||||
CURRENT LIABILITIES: | ||||||||
Current portion of debt | $ | — | $ | 142,077 | ||||
Accounts payable | 31,486 | 31,841 | ||||||
Accrued compensation | 65,031 | 60,833 | ||||||
Unearned revenue | 43,344 | 40,424 | ||||||
Carrier deposits | 1,530 | 2,435 | ||||||
Other accrued liabilities | 15,499 | 19,044 | ||||||
156,890 | 296,654 | |||||||
LONG-TERM DEBT | 267,200 | 204,923 | ||||||
OTHER LONG-TERM OBLIGATIONS | 48,725 | 58,702 | ||||||
DEFERRED INCOME TAXES | 153,581 | 99,002 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 6) | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Common stock $.01 par value: | ||||||||
Class A - authorized 100,000,000 shares, issued 20,200,107 in 2004 and 19,896,011 in 2003 | 202 | 199 | ||||||
Class B - authorized 60,000,000 shares, issued 26,264,147 in 2004 and 26,384,147 in 2003 | 263 | 264 | ||||||
Additional paid-in capital | 335,489 | 325,599 | ||||||
Retained earnings | 1,088,679 | 956,003 | ||||||
Accumulated other comprehensive loss | (1,629 | ) | (66,048 | ) | ||||
1,423,004 | 1,216,017 | |||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 2,049,400 | $ | 1,875,298 | ||||
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year Ended | ||||||||||||
December 26, 2004 | December 28, 2003 | December 29, 2002 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Income from continuing operations | $ | 155,876 | $ | 144,197 | $ | 130,549 | ||||||
Reconciliation to net cash provided: | ||||||||||||
Depreciation and amortization | 66,532 | 70,139 | 73,189 | |||||||||
Deferred income taxes | 11,331 | 18,313 | 6,060 | |||||||||
Partnership (income) losses | (929 | ) | (368 | ) | 1,341 | |||||||
Contribution to pension plans | (60,000 | ) | (50,000 | ) | (10,000 | ) | ||||||
Refinancing related charge | 3,737 | — | — | |||||||||
Loss on internet investments | — | 1,008 | 1,000 | |||||||||
Changes in certain assets and liabilities - net | 7,642 | (4,015 | ) | (7,090 | ) | |||||||
Other | 1,748 | 4,593 | 1,631 | |||||||||
Net cash provided by continuing operations | 185,937 | 183,867 | 196,680 | |||||||||
Income from discontinued operation | — | 6,025 | 667 | |||||||||
Reconciliation to net cash used: | ||||||||||||
Gain on sale of discontinued operation | — | (10,224 | ) | — | ||||||||
Other - net | — | 1,331 | (31,742 | ) | ||||||||
Net cash used by discontinued operation | — | (2,868 | ) | (31,075 | ) | |||||||
Net cash provided by operating activities | 185,937 | 180,999 | 165,605 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchases of property, plant and equipment | (47,206 | ) | (34,149 | ) | (31,566 | ) | ||||||
Purchase of Merced Group | (40,984 | ) | — | — | ||||||||
Proceeds from sale of discontinued operation | — | 9,785 | — | |||||||||
Other - net | 580 | 500 | 158 | |||||||||
Net cash used by investing activities | (87,610 | ) | (23,864 | ) | (31,408 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Net proceeds of commercial paper | 267,200 | — | — | |||||||||
Repayment of debt | (347,000 | ) | (149,000 | ) | (142,000 | ) | ||||||
Payment of financing costs | (2,045 | ) | — | — | ||||||||
Payment of cash dividends | (23,200 | ) | (20,305 | ) | (18,331 | ) | ||||||
Other - principally stock issuances | 8,191 | 10,197 | 12,608 | |||||||||
Net cash used by financing activities | (96,854 | ) | (159,108 | ) | (147,723 | ) | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 1,473 | (1,973 | ) | (13,526 | ) | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 3,384 | 5,357 | 18,883 | |||||||||
CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 4,857 | $ | 3,384 | $ | 5,357 | ||||||
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
Par Value | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||
Class A | Class B | |||||||||||||||||||||
BALANCES, DECEMBER 30, 2001 | $ | 189 | $ | 267 | $ | 296,220 | $ | 713,201 | $ | (11,712 | ) | $ | 998,165 | |||||||||
Net income | 131,216 | 131,216 | ||||||||||||||||||||
Change in fair value of swaps | 471 | |||||||||||||||||||||
Change in minimum pension liability | (71,229 | ) | ||||||||||||||||||||
Other | (68 | ) | ||||||||||||||||||||
Other comprehensive loss | (70,826 | ) | (70,826 | ) | ||||||||||||||||||
Total comprehensive income | 60,390 | |||||||||||||||||||||
Dividends paid ($.40 share) | (18,331 | ) | (18,331 | ) | ||||||||||||||||||
Conversion of 104,500 Class B shares to Class A | 1 | (1 | ) | — | ||||||||||||||||||
Issuance of 422,241 Class A shares under stock plans | 5 | 12,603 | 12,608 | |||||||||||||||||||
Tax benefit from stock plans | 4,497 | 4,497 | ||||||||||||||||||||
BALANCES, DECEMBER 29, 2002 | 195 | 266 | 313,320 | 826,086 | (82,538 | ) | 1,057,329 | |||||||||||||||
Income from continuing operations | 144,197 | 144,197 | ||||||||||||||||||||
Income from discontinued operation | 6,025 | 6,025 | ||||||||||||||||||||
Change in fair value of swaps | 3,132 | |||||||||||||||||||||
Change in minimum pension liability | 13,250 | |||||||||||||||||||||
Other | 108 | |||||||||||||||||||||
Other comprehensive income | 16,490 | 16,490 | ||||||||||||||||||||
Total comprehensive income | 166,712 | |||||||||||||||||||||
Dividends paid ($.44 share) | (20,305 | ) | (20,305 | ) | ||||||||||||||||||
Conversion of 160,000 Class B shares to Class A | 2 | (2 | ) | — | ||||||||||||||||||
Issuance of 264,704 Class A shares under stock plans | 2 | 10,195 | 10,197 | |||||||||||||||||||
Tax benefit from stock plans | 2,084 | 2,084 | ||||||||||||||||||||
BALANCES, DECEMBER 28, 2003 | 199 | 264 | 325,599 | 956,003 | (66,048 | ) | 1,216,017 | |||||||||||||||
Net income | 155,876 | 155,876 | ||||||||||||||||||||
Change in fair value of swaps | 782 | |||||||||||||||||||||
Change in minimum pension liability | 63,677 | |||||||||||||||||||||
Other | (40 | ) | ||||||||||||||||||||
Other comprehensive income | 64,419 | 64,419 | ||||||||||||||||||||
Total comprehensive income | 220,295 | |||||||||||||||||||||
Dividends paid ($.50 per share) | (23,200 | ) | (23,200 | ) | ||||||||||||||||||
Conversion of 120,000 Class B shares to Class A | 1 | (1 | ) | — | ||||||||||||||||||
Issuance of 184,096 Class A shares under stock plans | 2 | 8,228 | 8,230 | |||||||||||||||||||
Tax benefit from stock plans | 1,662 | 1,662 | ||||||||||||||||||||
BALANCES, DECEMBER 26, 2004 | $ | 202 | $ | 263 | $ | 335,489 | $ | 1,088,679 | $ | (1,629 | ) | $ | 1,423,004 | |||||||||
See notes to consolidated financial statements.
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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 intercompany 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.
Acquisition - On January 7, 2004, the Company purchased the assets of theMerced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $41.0 million in cash. Revenues of the Merced Group in fiscal 2004 were $13.8 million. The purchase included $37.2 million in intangible assets, the most significant of which was $31.0 million of goodwill. Amortization of the goodwill and other identifiable intangibles will be deductible for tax purposes. The useful lives associated with the $6.2 million of identifiable intangible assets range from eight to 17 years. See the discussion of intangibles and goodwill below. The acquisition and results of the Merced Group are included in the Company’s financial statements beginning on January 7, 2004. The results of the acquisition on the Company’s pro forma combined results of operations for the fiscal year ended December 28, 2003, or any interim period in the 2003 fiscal year (assuming the acquisition was made at the beginning of fiscal year 2003), were not material.
Discontinued operation - On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company. The Associated Press purchased TNN’s ad processing operations and, separately, Vertis, Inc. purchased TNN’s sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The revenues and operating results of TNN are included in discontinued operations in the Company’s Consolidated Statement of Income in fiscal 2003.
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. 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.
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Inventories are stated at the lower of cost (based principally on the first-in, first-out method) or current market value.
Related party transactions - The Company owns a 13.5% interest in Ponderay Newsprint Company (“Ponderay”), a general partnership, 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 construct the mill (see Note 6) and is required to purchase 28,400 metric tons of annual production on a “take-if-tendered” basis at prevailing market prices until the debt is repaid. The Company satisfies this obligation by direct purchase (payments made in 2004: $15,378,000, 2003: $14,381,000 and 2002: $12,546,000) or reallocation to other buyers.
Property, plant and equipment are stated at cost. Major improvements, as well as interest incurred during construction, are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Depreciationis 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 and goodwill 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. Management periodically evaluates the recoverability of intangible assets by reviewing the current and projected cash flows of each of its newspaper operations. Based upon these reviews, no impairments of intangible assets have been incurred in fiscal 2002 through 2004. The increase in goodwill from December 28, 2003 resulted from the acquisition of the Merced Group as discussed above.
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Information regarding the Company’s identifiable assets as of December 26, 2004 and December 28, 2003 is as follows (in thousands):
December 26, 2004 | |||||||||||
Average Useful Life | Carrying Amount | Accumulated Amortization | Net | ||||||||
Advertiser and subscriber lists | 16 Years | $ | 256,150 | $ | 199,307 | $ | 56,843 | ||||
Other | 4 Years | 15,886 | 10,017 | 5,869 | |||||||
Identifiable intangible assets | $ | 272,036 | $ | 209,324 | $ | 62,712 | |||||
December 28, 2003 | |||||||||||
Average Useful Life | Carrying Amount | Accumulated Amortization | Net | ||||||||
Advertiser and subscriber lists | 16 Years | $ | 249,971 | $ | 181,346 | $ | 68,625 | ||||
Other | 8 Years | 38,178 | 24,882 | 13,296 | |||||||
Identifiable intangible assets | $ | 288,149 | $ | 206,228 | $ | 81,921 | |||||
Amortization expense was $18,273,000, $19,508,000 and $19,604,000 in fiscal 2004, 2003 and 2002, respectively. Estimated amortization expenses related to intangible assets existing as of December 26, 2004 for the five succeeding fiscal years is as follows (in thousands):
Year | Estimated Amortization Expense | ||
2005 | $ | 17,909 | |
2006 | 7,601 | ||
2007 | 3,753 | ||
2008 | 3,743 | ||
2009 | 3,713 |
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Stock-based compensation- At December 26, 2004, the Company had six stock-based compensation plans. 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.” No material amounts of compensation have been recorded for these plans.
Had compensation costs for the Company’s 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 SFAS 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):
2004 | 2003 | 2002 | ||||||||||
Net income: | ||||||||||||
As reported | $ | 155,876 | $ | 150,222 | $ | 131,216 | ||||||
Deduct stock-based compensation under SFAS No. 123, net of taxes | (4,650 | ) | (4,705 | ) | (3,828 | ) | ||||||
Pro forma | $ | 151,226 | $ | 145,517 | $ | 127,388 | ||||||
Earnings per common share: | ||||||||||||
As reported | ||||||||||||
Basic | $ | 3.36 | $ | 3.26 | $ | 2.87 | ||||||
Diluted | $ | 3.33 | $ | 3.23 | $ | 2.84 | ||||||
Pro forma | ||||||||||||
Basic | $ | 3.26 | $ | 3.15 | $ | 2.78 | ||||||
Diluted | $ | 3.23 | $ | 3.13 | $ | 2.76 |
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options and purchases under the employee stock purchase plan, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS 123, no longer will be an alternative to financial statement recognition. We are required to adopt SFAS 123R in our third quarter of fiscal 2005. Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive options, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded at the beginning of the first quarter of adoption of SFAS 123R for all unvested stock options and restricted stock based upon the previously disclosed SFAS 123 methodology and amounts. The retroactive methods would record compensation expense beginning with the first period restated
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for all unvested stock options and restricted stock. We are evaluating the requirements of SFAS 123R and have not yet determined the method of adoption. If the Company were to expense the value of stock options for the full fiscal year 2005, it would reduce earnings by an estimated 10 to 12 cents per share. This estimate is based upon currently available information and actual results may differ when SFAS 123R is adopted.
Derivative instruments - The Company records its derivative instruments, primarily interest rate protection agreements (swaps), at fair value in its financial statements. See Notes 2 and 8.
Deferred income taxes result from temporary differences between amounts of assets and liabilities reported for financial and income tax reporting purposes. See Note 3.
Comprehensive income (loss) - The Company records changes in its net assets from non-owner sources in its Statement of Stockholders’ Equity. Such changes relate primarily to valuing its pension liabilities and interest rate protection agreements, net of tax effects.
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The following table summarizes the changes in other comprehensive income (loss) (in thousands):
Pre-Tax | Tax | After Tax | ||||||||||
Year Ended December 26, 2004 | ||||||||||||
Minimum pension liability | $ | 106,128 | $ | (42,451 | ) | $ | 63,677 | |||||
Fair value of swaps | 1,303 | (521 | ) | 782 | ||||||||
Other | (67 | ) | 27 | (40 | ) | |||||||
$ | 107,364 | $ | (42,945 | ) | $ | 64,419 | ||||||
Year Ended December 28, 2003 | ||||||||||||
Minimum pension liability | $ | 22,083 | $ | (8,833 | ) | $ | 13,250 | |||||
Fair value of swaps | 5,220 | (2,088 | ) | 3,132 | ||||||||
Other | 180 | (72 | ) | 108 | ||||||||
$ | 27,483 | $ | (10,993 | ) | $ | 16,490 | ||||||
Year Ended December 29, 2002 | ||||||||||||
Minimum pension liability | $ | (118,715 | ) | $ | 47,486 | $ | (71,229 | ) | ||||
Fair value of swaps | 1,197 | (726 | ) | 471 | ||||||||
Other | (113 | ) | 45 | (68 | ) | |||||||
$ | (117,631 | ) | $ | 46,805 | $ | (70,826 | ) | |||||
The following table summarizes the accumulated other comprehensive loss balances as of December 26, 2004 (in thousands):
December 28, 2003 | Current Period Change | December 26, 2004 | ||||||||||
Minimum pension liability | $ | (65,306 | ) | $ | 63,677 | $ | (1,629 | ) | ||||
Fair value of swaps | (782 | ) | 782 | — | ||||||||
Other | 40 | (40 | ) | — | ||||||||
Accumulated other comprehensive loss | $ | (66,048 | ) | $ | 64,419 | $ | (1,629 | ) | ||||
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 from common stock equivalents 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 in the period. Common stock equivalents arise from dilutive stock options and are computed using the treasury stock method. The antidilutive stock options that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation were 16,786 in 2004, 85,554 in 2003 and 26,754 in 2002.
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NOTE 2. LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS
Long-term debt consisted of (in thousands):
December 26, 2004 | December 28, 2003 | ||||||
Unsecured promissory notes | $ | 267,200 | — | ||||
Term Loans | — | $ | 329,000 | ||||
Revolving credit line | — | 18,000 | |||||
Total debt | 267,200 | 347,000 | |||||
Less current portion | — | (142,077 | ) | ||||
Long-term debt | $ | 267,200 | $ | 204,923 | |||
On May 10, 2004, the Company entered into a five-year, senior unsecured revolving credit facility (Credit Agreement), which provides for borrowings of up to $500 million from a syndicate of banks through May 11, 2009. The primary purpose of the Credit Agreement is to support the issuance of unsecured promissory notes under a commercial paper program (commercial paper) of up to $500 million and for general corporate purposes. Initially, however, the Company used the Credit Agreement to refinance all of its existing term debt and principal outstanding under the previous bank credit facility. This debt was subsequently retired with proceeds from the issuance of commercial paper during the second quarter of fiscal 2004. As a result of the refinancing, the Company wrote off capitalized loan fees of $3.7 million related to its previous bank credit facility.
Debt under the Credit Agreement bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 29.5 basis points to 77.5 basis points plus a utilization fee of 12.5 basis points if borrowings exceed $250 million. Applicable rates are based upon the Company’s ratings on its long-term debt from Moody’s and Standard & Poor’s. A facility fee for the Credit Agreement ranges from 8.0 basis points to 22.5 basis points depending on the Company’s ratings, and such fees are currently at 12.5 basis points. No amounts were outstanding under the Credit Agreement at December 26, 2004.
The revolving credit facility contains financial covenants including a minimum interest coverage ratio (as defined) of 3:1 and a maximum leverage ratio (as defined) of 4:1.
The commercial paper outstanding at December 26, 2004 had maturities ranging from overnight to 46 days, with interest rates ranging from 2.10% to 2.48%. The weighted average interest rate on commercial paper outstanding since May 12, 2004 (inception of the program) through December 26, 2004 was 1.45%. Because the Company’s Credit Agreement provides backup for its commercial paper, and in accordance with the Company’s ability and intent, the commercial paper is classified as long-term debt.
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The Company’s previous bank credit facility included term loans and a revolving credit line, all of which were retired from proceeds under the new debt structure described above. Interest rates applicable to debt drawn down during fiscal 2004 but prior to the refinancing of the previous bank credit facility ranged from 1.7% to 2.7% (excluding the effect of the interest rate swap discussed below).
At December 26, 2004, the Company had outstanding letters of credit totaling $7.9 million securing estimated obligations stemming from workers’ compensation claims and other contingent claims.
The Company does not have, nor does it intend to enter into, derivative contracts for trading purposes. The Company has not attempted to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Currently there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink, and other inventories, leases of equipment and facilities, or its business insurance contracts.
The Company had one interest rate swap agreement, which expired in June 2004, designated as a cash flow hedge specifically designed to hedge the variability in the expected cash flows that were attributable to interest rate fluctuations on $100.0 million of its variable rate bank debt. The effect of this agreement was to fix the LIBOR interest rate exposure at approximately 3.8% on that portion of the Company’s term loans.
As of December 26, 2004, the Company was a guarantor of $9.7 million of bank debt related to its interest in Ponderay, a general partnership that owns and operates a newsprint mill in Washington State. The guarantee amount represents the Company’s pro rata portion of Ponderay debt, which is guaranteed by the general partners. The debt is secured by the assets of Ponderay and matures on April 12, 2006.
The Company has purchase obligations primarily related to capital expenditures for property, plant and equipment expiring at various dates through 2011, totaling approximately $43.1 million.
Other long-term obligations consist of (in thousands):
December 26, 2004 | December 28, 2003 | |||||
Pension obligations | $ | 22,373 | $ | 33,366 | ||
Post retirement benefits obligation | 15,140 | 14,301 | ||||
Deferred compensation and other | 11,212 | 11,035 | ||||
$ | 48,725 | $ | 58,702 | |||
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See Note 4 for further discussion of the Company’s pension and post-retirement obligations.
NOTE 3. INCOME TAXES
Income tax provisions related to continuing operations consist of (in thousands):
Year Ended | |||||||||
December 26, 2004 | December 28, 2003 | December 29, 2002 | |||||||
Current: | |||||||||
Federal | $ | 77,504 | $ | 59,563 | $ | 68,466 | |||
State | 12,849 | 8,585 | 10,594 | ||||||
Deferred: | |||||||||
Federal | 8,695 | 13,988 | 4,504 | ||||||
State | 2,637 | 4,326 | 1,555 | ||||||
Income tax provision | $ | 101,685 | $ | 86,462 | $ | 85,119 | |||
The effective tax rate and the statutory federal income tax rate are reconciled as follows:
Year Ended | |||||||||
December 26, 2004 | December 28, 2003 | December 29, 2002 | |||||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
State taxes, net of federal benefit | 4.2 | % | 2.2 | % | 4.2 | % | |||
Amortization of intangibles | 0.1 | % | 0.1 | % | 0.1 | % | |||
Other | 0.2 | % | 0.2 | % | 0.2 | % | |||
Effective tax rate | 39.5 | % | 37.5 | % | 39.5 | % | |||
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The components of deferred tax liabilities (benefits) recorded in the Company’s Consolidated Balance Sheet on December 26, 2004 and December 28, 2003 are (in thousands):
2004 | 2003 | |||||||
Depreciation and amortization | $ | 73,501 | $ | 82,372 | ||||
Partnership losses | 3,416 | 3,692 | ||||||
State taxes | 18,816 | 16,502 | ||||||
Pension and post-retirement | 52,977 | (6,617 | ) | |||||
Deferred compensation | (12,849 | ) | (13,323 | ) | ||||
Mark-to-market of interest rate swaps | — | (521 | ) | |||||
Other | (941 | ) | (1,469 | ) | ||||
Deferred tax liability (net of $18,661 in 2004 and $18,366 in 2003 reported as current assets) | $ | 134,920 | $ | 80,636 | ||||
NOTE 4. EMPLOYEE BENEFITS
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. The Company made $60.0 million in voluntary contributions to its plans in fiscal 2004 and made an additional $40.0 million voluntary contribution in early fiscal 2005. No other contributions to these plans are currently contemplated for fiscal 2005.
The Company also has a limited 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 largely included in other long-term obligations.
The elements of pension costs are as follows (in thousands):
December 26, 2004 | December 28, 2003 | December 29, 2002 | ||||||||||
Cost of benefits earned during the year | $ | 19,418 | $ | 16,275 | $ | 13,808 | ||||||
Interest on projected benefit obligation | 32,616 | 30,214 | 28,983 | |||||||||
Expected return on plan assets | (47,367 | ) | (41,934 | ) | (39,137 | ) | ||||||
Prior service cost amortization | 670 | 632 | 739 | |||||||||
Actuarial loss | 5,955 | 747 | 37 | |||||||||
Net pension expense | $ | 11,292 | $ | 5,934 | $ | 4,430 | ||||||
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The Company contributed $1,990,000 in 2004, $2,024,000 in 2003 and $1,964,000 in 2002 to multi-employer retirement plans.
The Company also provides or subsidizes certain life insurance benefits for employees of McClatchy Newspapers, Inc. and provides certain life insurance and retiree health care benefits for The Star Tribune Company’s employees. The elements of post-retirement expenses are as follows (in thousands):
December 26, 2004 | December 28, 2003 | December 29, 2002 | ||||||||||
Service cost | $ | 1,151 | $ | 1,227 | $ | 622 | ||||||
Interest cost | 1,485 | 1,611 | 1,052 | |||||||||
Prior service cost amortization | (113 | ) | (113 | ) | — | |||||||
Actuarial loss (gain) | 614 | 753 | (47 | ) | ||||||||
Net post-retirement benefit expense | $ | 3,137 | $ | 3,478 | $ | 1,627 | ||||||
Expected benefit payments to retirees under the Company’s retirement and post-retirement plans over the next ten years are summarized below (in thousands):
Retirement Plans | Post-retirement Plans | |||||
2005 | $ | 21,872 | $ | 2,334 | ||
2006 | 22,837 | 2,533 | ||||
2007 | 24,201 | 2,727 | ||||
2008 | 25,783 | 2,914 | ||||
2009 | 27,617 | 3,088 | ||||
2010-2014 | 176,592 | 17,974 | ||||
Total | $ | 298,902 | $ | 31,570 | ||
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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 26, 2004 and December 28, 2003 are as follows (in thousands):
Retirement Plans | Post-retirement Plans | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Change in projected benefit obligations: | ||||||||||||||||
Beginning of year | $ | 527,965 | $ | 461,808 | $ | 26,156 | $ | 15,799 | ||||||||
Service cost | 19,418 | 16,275 | 1,152 | 1,227 | ||||||||||||
Interest costs | 32,616 | 30,214 | 1,485 | 1,611 | ||||||||||||
Plan amendments | — | 485 | — | |||||||||||||
Actuarial loss | 24,918 | 40,389 | 48 | 9,081 | ||||||||||||
Benefits paid | (21,763 | ) | (21,206 | ) | (2,134 | ) | (1,562 | ) | ||||||||
End of year | 583,154 | 527,965 | 26,707 | 26,156 | ||||||||||||
Change in fair market value of assets: | ||||||||||||||||
Beginning of year | 431,304 | 314,912 | — | — | ||||||||||||
Return on assets | 55,754 | 86,308 | — | — | ||||||||||||
Contributions | 61,348 | 51,290 | 2,134 | 1,562 | ||||||||||||
Benefit payments | (21,763 | ) | (21,206 | ) | (2,134 | ) | (1,562 | ) | ||||||||
End of year | 526,643 | 431,304 | — | — | ||||||||||||
Funded status | (56,511 | ) | (96,661 | ) | (26,707 | ) | (26,156 | ) | ||||||||
Unrecognized net loss | 181,334 | 170,758 | 9,756 | 10,321 | ||||||||||||
Prior service costs | 4,459 | 5,129 | (319 | ) | (432 | ) | ||||||||||
Prepaid (accrued) cost | $ | 129,282 | $ | 79,226 | $ | (17,270 | ) | $ | (16,267 | ) | ||||||
Amounts recognized: | ||||||||||||||||
Prepaid benefit cost | $ | 149,483 | $ | 97,579 | — | — | ||||||||||
Accrued benefit liability | (20,201 | ) | (18,353 | ) | $ | (17,270 | ) | $ | (16,267 | ) | ||||||
Additional liability | (3,155 | ) | �� | (113,534 | ) | — | — | |||||||||
Intangible asset | 440 | 4,684 | — | — | ||||||||||||
Accumulated other comprehensive income | 2,715 | 108,850 | — | — | ||||||||||||
Net amount recognized | $ | 129,282 | $ | 79,226 | $ | (17,270 | ) | $ | (16,267 | ) | ||||||
See Note 1 for a discussion of the change in comprehensive income arising from the change in the additional minimum pension liabilities.
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The assets of the plans are commingled in a Master Trust and, as of December 26, 2004 and December 28, 2003, the measurement dates for the plans, assets and related target allocations are as follows (dollars in thousands):
December 26, 2004 | December 28, 2003 | Target Allocation | |||||||
Equity securities | $ | 366,034 | $ | 310,993 | 69 | % | |||
Debt securities | 140,673 | 105,815 | 28 | % | |||||
Real estate securities | 19,689 | 14,496 | 3 | % | |||||
Cash equivalents | 248 | — | — | ||||||
$ | 526,644 | $ | 431,304 | 100 | % | ||||
The Company’s investment policies are designed to maximize plans returns within reasonable and prudent levels of risk, with an investment horizon of greater than ten years so that interim investment returns and fluctuations are viewed with appropriate perspective. The policy also aims to maintain sufficient liquid returns to provide for the payment of retirement benefits and plan expenses, hence, small portions of the equity and debt investments are held in marketable mutual funds.
The Company’s policy seeks to provide an appropriate level of diversification of assets, as reflected in its target allocations, as well as limits placed on concentrations of equities in specific sectors or industries. It uses a mix of active managers and passive index funds. The Company’s expected return on long-term assets was determined through consultation with the Company’s actuaries and investment consultants by using projected returns for each asset class, factoring in both passive and active management of funds where appropriate, and developing a weighted average return based upon its target asset allocations as discussed above. This return was also compared to 30 and 50-year market returns and the plans’ actual ten-year returns to gain additional assurance of reasonableness.
The Company’s discount rate was determined by a review of long-term, non-callable, high quality bonds, as well as, consultation with the Company’s actuaries. The rate was compared to discount rates expected to be used by peer companies in the industry, to the extent known, as well as to other companies included in surveys conducted by the Company’s actuaries to gain additional assurance of its reasonableness.
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Weighted average assumptions used for valuing benefit obligations were:
2004 | 2003 | |||||
Retirement and Post-retirement Plans: | ||||||
Discount rate in determining benefit obligation | 6.0 | % | 6.25 | % | ||
Retirement Plans: | ||||||
Rates of salary increase | 3.6 | % | 3.6 | % |
Weighted average assumptions for pension and post-retirement expense were:
2004 | 2003 | |||||
Discount rate | 6.25 | % | 6.75 | % | ||
Expected long-term return on assets | 9.0 | % | 9.0 | % | ||
Rates of salary increase | 3.6 | % | 3.1 | % |
The accumulated benefit obligation for all defined benefit pension plans was $511,203,000 and $465,413,000 at December 26, 2004 and December 28, 2003, respectively. The following table summarizes data for pension plans with accumulated benefit obligations in excess of plan assets, (in thousands):
December 26, 2004 | December 28, 2003 | |||||
Projected benefit obligation | $ | 28,852 | $ | 527,965 | ||
Accumulated benefit obligation | 23,355 | 465,413 | ||||
Fair value of plan assets | — | 431,304 |
For theStar Tribune post-retirement plan, the medical cost trend rates are expected to decline from 10.0% in 2005 to 5.0% by the year 2010. For theStar Tribune’s plan (benefit obligation of $12.6 million and expense of $2.9 million), a 1.0% increase in the assumed health care cost trend rate would increase the benefit obligation and expense by $2.0 million and $259,000, respectively. A 1.0% decrease in the assumed health care cost trend rate would decrease the benefit obligation and expense by $1.8 million and $228,000, 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 $7,047,000 in 2004, $6,724,000 in 2003, and $6,768,000 in 2002.
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NOTE 5. CASH FLOW INFORMATION
The cash paid in connection with the acquisition of the Merced Group on January 7, 2004 consists of (in thousands):
Fair value of assets acquired | $ | 42,041 | ||
Fair value of liabilities assumed | (1,750 | ) | ||
Fees and expenses | 693 | |||
Net cash paid | $ | 40,984 | ||
Cash paid during the years ended December 26, 2004, December 28, 2003 and December 29, 2002 for interest and income taxes were (in thousands):
2004 | 2003 | 2002 | |||||||
Interest paid (net of amount capitalized) | $ | 8,269 | $ | 15,113 | $ | 26,384 | |||
Income taxes paid (net of refunds) | $ | 85,601 | $ | 78,059 | $ | 88,082 |
Cash provided or used by continuing operations, excluding cash used for the acquisition of the Merced Group, was affected by changes in certain assets and liabilities were as follows (in thousands):
December 26 2004 | December 28, 2003 | December 29, 2002 | ||||||||||
Increase (decrease) in assets: | ||||||||||||
Trade receivables | $ | 7,492 | $ | 4,029 | $ | 3,729 | ||||||
Inventories | 1,354 | 907 | 494 | |||||||||
Other assets | 147,483 | 11,316 | (80,479 | ) | ||||||||
Total | 156,329 | 16,252 | (76,256 | ) | ||||||||
Increase (decrease) in liabilities: | ||||||||||||
Accounts payable | (1,148 | ) | 5,557 | (1,293 | ) | |||||||
Accrued compensation | 4,198 | 6,687 | 21 | |||||||||
Income taxes | — | (4,051 | ) | (10,558 | ) | |||||||
Other liabilities | 160,921 | 4,044 | (71,516 | ) | ||||||||
Total | 163,971 | 12,237 | (83,346 | ) | ||||||||
Net cash increase (decrease) from changes in certain assets and liabilities | $ | 7,642 | $ | (4,015 | ) | $ | (7,090 | ) | ||||
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Certain amounts in 2002 above have been reclassified to be consistent with the 2004 and 2003 presentation.
The significant increase in other assets and other liabilities is the result of the Company reversing its comprehensive losses and minimum pension liabilities related to its qualified pension plans. Recent plan contributions coupled with the investment return on assets have resulted in plans’ assets exceeding the plans’ accumulated benefit liabilities. Hence, prepaid pension assets which were previously netted against minimum liabilities, were reclassified to assets on the balance sheet, and the minimum liabilities were reversed. The minimum liabilities were initially recorded in fiscal 2002; see the discussion below.
The significant reduction in other assets and other liabilities in 2002 is the result of two separate events: At December 31, 2001, the Company had $78.2 million of prepaid pension assets related to three qualified pension plans (included in other assets in our Consolidated Balance Sheet) and separately had $34.8 million of liabilities related to a fourth qualified pension plan. During 2002 the Company merged two of its qualified pension plans. At the time the plans were merged, the Company had recorded a $63.4 million prepaid asset related to one plan and had an accrued liability related to the other. Given that these plans became one legal entity, the Company reduced its prepaid assets and liabilities to record a net pension prepaid asset of $33.5 million for the merged plan. Separately, prepaid pension assets were reduced to zero at year-end 2002 when the Company recorded its additional minimum liability in accordance with SFAS No. 87, which resulted in netting the assets against the minimum liability to record a net unfunded accumulated benefit obligation for its defined benefit plans.
NOTE 6. COMMITMENTS AND CONTINGENCIES
As of December 26, 2004, the Company was a guarantor of $9.7 million of bank debt related to its interest in Ponderay, a general partnership that owns and operates a newsprint mill in Washington State. The guarantee amount represents the Company’s pro rata portion of Ponderay debt, which is guaranteed by the general partners. The partnership was formed in 1985 and began operations in 1989. The debt is secured by the assets of Ponderay and is payable by Ponderay on April 12, 2006.
The Company has purchase obligations primarily related to capital expenditures for property, plant and equipment expiring at various dates through 2010, totaling $43.1 million.
The Company and its subsidiaries rent certain facilities and equipment under operating leases expiring at various dates through December 2013. Total rental expense amounted to $6,018,000 in 2004, $6,122,885 in 2003 and $6,592,000 in 2002.
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Minimum rental commitments under operating leases with non-cancelable terms in excess of one year are (in thousands):
2005 | $ | 5,896 | |
2006 | 4,941 | ||
2007 | 3,517 | ||
2008 | 2,074 | ||
2009 | 1,195 | ||
Thereafter | 1,605 | ||
Total | $ | 19,228 | |
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 7. COMMON STOCK AND STOCK PLANS
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.
The holders of shares of Class B Common Stock are parties to an agreement, the intent of which is to preserve control of the Company by the McClatchy family. Under the terms of the agreement, the Class B shareholders have agreed to restrict the transfer of any shares of Class B Common Stock to one or more “Permitted Transferees,” subject to certain exceptions. A “Permitted Transferee” is any current holder of shares of Class B Common Stock of the Company; any lineal descendant of Charles K. McClatchy; or a trust for the exclusive benefit of, or in which all of the remainder beneficial interests are owned by, one or more lineal descendants of Charles K. McClatchy
In the event that a Class B shareholder attempts to transfer any shares of Class B Common Stock in violation of the agreement, or upon the happening of certain other events enumerated in the agreement as “Option Events,” each of the remaining Class B shareholders has an option to purchase a percentage of the total number of shares of Class B Common Stock proposed to be transferred equal to such remaining Class B shareholder’s ownership percentage of the total number of outstanding shares of Class B Common Stock. If all the shares proposed to be transferred are not purchased by the remaining Class B shareholders, the Company has the option of purchasing the remaining shares. In general, any shares not purchased under this procedure will be converted into shares of Class A Common Stock and then transferred freely (unless, following conversion, the outstanding shares of Class B Common Stock would
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constitute less than 25% of the total number of all outstanding shares of common stock of the Company). The agreement can be terminated by the vote of the holders of 80% of the outstanding shares of Class B common Stock who are subject to the agreement. The agreement will terminate on September 17, 2047, unless terminated earlier in accordance with its terms.
At December 26, 2004, the Company has six 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 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 26, 2004, a total of 1,327,929 shares of Class A common stock have been issued under the Purchase Plan.
The Company has two stock option plans which reserve 4,062,500 Class A common shares for issuance to key employees — the 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 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. The 1994 plan (which has l,869,325 outstanding grants at December 26, 2004) expired in January 2004 and has been replaced by the 2004 stock incentive plan (see the discussion below).
The Company’s two amended and restated stock option plans for outside directors (the 1990 Stock Option Plan and the 2001 Director Plan, together the “Directors’ Plans”) provide for the issuance of up to 687,500 shares of Class A stock. Under these plans each non-employee director is granted, at the conclusion of each regular annual meeting of stockholders, an option to purchase shares of Class A common stock at fair market value on the date of the grant. In 2004, each such director was granted an option to purchase 3,000 shares of Class A common stock. Terms of the Directors’ Plans are similar to the terms of the Employee Plans.
The Company has a stock incentive plan (the 2004 plan) which reserves 3,000,000 Class A common shares for issuance to key employees and outside directors. Terms of the 2004 plan are similar to the Employee and Directors’ Plans, except that the 2004 plan permits the following type of incentive awards in addition to stock options and stock appreciation rights: restricted stock, unrestricted stock, stock units and dividend equivalent rights.
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Outstanding options are summarized as follows:
Options | Weighted Average Exercise Price | |||||
Outstanding December 30, 2001 | 2,056,055 | $ | 37.23 | |||
Granted | 588,000 | $ | 57.46 | |||
Exercised | (356,325 | ) | $ | 27.14 | ||
Forfeited | (37,250 | ) | $ | 39.78 | ||
Outstanding December 29, 2002 | 2,250,480 | $ | 44.07 | |||
Granted | 589,500 | $ | 66.62 | |||
Exercised | (203,305 | ) | $ | 35.96 | ||
Forfeited | (50,625 | ) | $ | 42.49 | ||
Outstanding December 28, 2003 | 2,586,050 | $ | 49.88 | |||
Granted | 515,000 | $ | 70.99 | |||
Exercised | (130,550 | ) | $ | 39.33 | ||
Forfeited | (51,375 | ) | $ | 56.99 | ||
Outstanding December 26, 2004 | 2,919,125 | $ | 53.95 | |||
Options exercisable: | ||||||
December 29, 2002 | 592,105 | |||||
December 28, 2003 | 785,175 | |||||
December 26, 2004 | 1,125,375 |
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The following tables summarize information about stock options outstanding in the stock plans at December 26, 2004:
Range of Exercise Prices | Options Outstanding | Average Contractual | Weighted Exercise Price | Options Exercisable | Weighted Exercise Price | |||||||
$17.80 - $45.98 | 1,291,125 | 5.64 | $ | 40.09 | 963,500 | $ | 38.66 | |||||
$51.59 - $67.31 | 1,112,000 | 8.42 | $ | 62.14 | 161,875 | $ | 57.71 | |||||
$68.25 - $71.10 | 516,000 | 9.91 | $ | 70.99 | — | — |
Pro forma compensation costs are calculated for the fair value of the employees’ purchase rights, which was estimated using the Black-Scholes model with the following weighted average assumptions:
2004 | 2003 | 2002 | |||||||
Dividend yield | 0.74 | 0.65 | 0.70 | ||||||
Expected life in years | 5.2 | 5.2 | 5.3 | ||||||
Volatility | .14 | .16 | .23 | ||||||
Risk-free interest rate | 3.61 | 3.07 | 3.29 | ||||||
Weighted average fair value of options granted | $ | 13.62 | $ | 13.05 | $ | 14.80 |
See Note 1 for a description of the effect of the pro forma compensation expense derived using the fair value method on the Company’s results.
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVE DISCLOSURES
The following estimates were developed using available market data for instruments held as of December 26, 2004 and December 28, 2003 (in thousands):
2004 | 2003 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Cash and cash equivalents | $ | 4,857 | $ | 4,857 | $ | 3,384 | $ | 3,384 | ||||||||
Trade receivables | 138,467 | 138,467 | 129,066 | 129,066 | ||||||||||||
Accounts payable | (31,486 | ) | (31,486 | ) | (31,841 | ) | (31,841 | ) | ||||||||
Long-term debt | (267,200 | ) | (267,200 | ) | (204,923 | ) | (204,923 | ) | ||||||||
Interest rate swap agreements | — | — | (1,304 | ) | (1,304 | ) |
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The Company does not have, nor does it intend to enter into derivative contracts for trading purposes. The Company does not attempt to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Hence, there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink and other inventories, leases of equipment and facilities, or its business insurance contracts.
The Company had one interest rate swap agreement designated as a cash flow hedge and is specifically designed to hedge the variability in the expected cash flows that is attributable to interest rate fluctuations of its variable rate bank debt on $100.0 million through June 2004. The effect of this agreement was to fix LIBOR interest rate exposure of approximately 3.8% on that portion of the Company’s term loans.
NOTE 9. 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 Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||
2004 | ||||||||||||
Net revenues | $ | 272,283 | $ | 296,270 | $ | 286,672 | $ | 308,151 | ||||
Operating income | 51,799 | 72,126 | 65,697 | 79,687 | ||||||||
Net income | 28,929 | 40,095 | 39,072 | 47,780 | ||||||||
Net income per common share | 0.62 | 0.86 | 0.83 | 1.02 | ||||||||
2003 | ||||||||||||
Net revenues | $ | 257,881 | $ | 276,370 | $ | 272,100 | $ | 293,040 | ||||
Operating income | 47,261 | 66,095 | 61,266 | 74,319 | ||||||||
Net income | 25,310 | 43,448 | 35,838 | 45,626 | ||||||||
Net income per common share | 0.55 | 0.94 | 0.77 | 0.98 |
In June 2003 the Company sold the assets of The Newspaper Network, Inc., a discontinued operation, and recorded an after-tax gain equal to 13 cents per share. All revenues and operating income have been reclassified to reflect only those from continuing operations. This reclassification had no material impact on the amounts of revenues and operating income in 2003, nor was the results of the discontinued operation material to any quarterly results other than the second quarter of 2003.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a - 15(e) or 15d - 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective at that time.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during our last fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
See Management’s Report on Internal Control Over Financial Reporting on page 31.
Not Applicable
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 2005 Annual Meeting of Shareholders (the Proxy Statement) is incorporated herein by reference.
In addition, the names of each member of the Company’s standing Audit Committee contained under the caption “Audit Committee” under the heading “Corporate Governance and Board Matters” in the Proxy Statement are incorporated herein by reference.
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Audit Committee Financial Experts - The Board of Directors of McClatchy has determined that S. Donley Ritchey, Chair of the Audit Committee, and Leroy Barnes, Audit Committee member, are audit committee financial experts as defined by Item 401(h) of Regulation S-K of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and are independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Codes of Conduct - The Board of Directors of McClatchy has adopted a Code of Ethics for Senior Officers for the Company’s senior financial and accounting officers and the CEO. In addition, the Board has adopted a Code of Business Conduct and Ethics for all officers, directors and employees. The Code of Business Conduct and Ethics and the Code of Ethics for Senior Officers are available on the Company’s website atwww.mcclatchy.com and are also available in print to any shareholder requesting copies. The Company will disclose on its website when there have been any waivers of, or amendments to, the Code of Ethics for Senior Officers.
Corporate Government Guidelines - The Board of Directors of McClatchy has adopted Corporate Governance Guidelines which are available on the Company’s website atwww.mcclatchy.com. The Guidelines are also available in print to any shareholder requesting a copy.
Policy Regarding Director Recommendations by Security Holders - Information contained under the caption “Consideration of Director Nominees” under the heading “Corporate Governance and Board Matters” in the Proxy Statement is incorporated herein by reference.
Section 16(a) Beneficial Ownership - Information contained under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings “Directors Compensation,” “Executive Compensation,” “Stock Option Awards,” “Stock Option Exercises and Holdings,” “Long-Term Incentive Awards,” “Pension Plans” and “Employment Agreements and Changes-in-Control Agreement” under the “Compensation” section in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information contained under the heading “Principal Shareholders” and under the sub-heading “Securities Authorized for Issuance Under Equity Compensation Plans” of the section entitled “Compensation” in the Proxy Statement is incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the headings “Certain Relationships and Related Transactions” in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accounting fees and services is set forth under the headings “Fees Billed to McClatchy by Deloitte & Touche LLP” and “Audit Committee Pre-Approval Policy” under the section entitled “Ratification of Deloitte & Touche LLP as McClatchy’s Independent Auditors” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1 | )&(2) | Financial Statements and Financial Statement Schedules filed as a part of this Report are listed in the Index to Financial Statements and Financial Statement Schedules on page 32 hereof. | |
(3 | ) | Exhibits filed as part of this Report are listed in the Exhibit Index beginning on Page 69 hereof. |
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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.
The McClatchy Company
By: | /s/ Gary B. Pruitt | |
Gary B. Pruitt, Chairman, President and Chief Executive Officer | ||
Date | February 24, 2005 |
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.
Principal Executive Officer:
By: | /s/ Gary B. Pruitt | |
Gary B. Pruitt, Chairman of the Board, President, Chief Executive Officer and Director | ||
Date: | February 24, 2005 | |
Principal Financial Officer: | ||
By: | /s/ Patrick J. Talamantes | |
Patrick J. Talamantes, Vice President, Finance and Chief Financial Officer | ||
Date: | February 24, 2005 | |
Principal Accounting Officer: | ||
By: | /s/ Robert W. Berger | |
Robert W. Berger, Controller and Assistant Treasurer | ||
Date: | February 24, 2005 | |
Directors: | ||
By: | /s/ Elizabeth Ballantine | |
Elizabeth Ballantine, Director | ||
Date: | February 24, 2005 |
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Directors (continued):
By: | /s/ Leroy T. Barnes, Jr. | |
Leroy T. Barnes, Jr., Director | ||
Date: | February 24, 2005 | |
By: | /s/ William K. Coblentz | |
William K. Coblentz, Director | ||
Date: | February 24, 2005 | |
By: | /s/ Molly Maloney Evangelisti | |
Molly Maloney Evangelisti, Director | ||
Date: | February 24, 2005 | |
By: | /s/ R. Larry Jinks | |
R. Larry Jinks, Director | ||
Date: | February 24, 2005 | |
By: | /s/ Joan F. Lane | |
Joan F. Lane, Director | ||
Date: | February 24, 2005 | |
By: | /s/ Brown McClatchy Maloney | |
Brown McClatchy Maloney, Director | ||
Date: | February 24, 2005 | |
By: | /s/ Kevin McClatchy | |
Kevin McClatchy, Director | ||
Date: | February 24, 2005 | |
By: | /s/ William McClatchy | |
William McClatchy, Director | ||
Date: | February 24, 2005 | |
By: | /s/ Theodore Reed Mitchell | |
Theodore Reed Mitchell, Director | ||
Date: | February 24, 2005 |
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Directors (continued):
By: | /s/ S. Donley Ritchey, Jr. | |
S. Donley Ritchey, Jr., Director | ||
Date: | February 24, 2005 | |
By: | /s/ Frederick R. Ruiz | |
Frederick R. Ruiz, Director | ||
Date: | February 24, 2005 | |
By: | /s/ Maggie Wilderotter | |
Maggie Wilderotter, Director | ||
Date: | February 24, 2005 |
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THE McCLATCHY COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 26, 2004
(in thousands)
Balance | Additions | Deductions for for which were set up (1) | Balance at End of Period | ||||||||||||||
Charged to Costs and Expenses | Charged to Other Accounts | ||||||||||||||||
Year Ended December 29, 2002: | |||||||||||||||||
Allowance for uncollectible accounts | $ | (5,059 | ) | $ | (8,370 | ) | — | $ | 8,557 | $ | (4,872 | ) | |||||
Year Ended December 28, 2003: | |||||||||||||||||
Allowance for uncollectible accounts | $ | (4,872 | ) | $ | (6,737 | ) | — | $ | 8,525 | $ | (3,084 | ) | |||||
Year Ended December 26, 2004: | |||||||||||||||||
Allowance for uncollectible accounts | $ | (3,084 | ) | $ | (6,211 | ) | — | $ | 6,526 | $ | (2,769 | ) |
(1) | Amounts written off net of bad debt recoveries. |
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TABLE OF EXHIBITS
Exhibit | Description | |
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 as amended on December 4, 2002 included as Exhibit 3.2 to the Company’s 2002 Form 10-K. | |
4.1* | Form of Physical Note for Commercial Paper Program included as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004. | |
10.1* | 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. | |
10.2* | 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. | |
**10.3* | The McClatchy Company Management by Objective Plan Description included as Exhibit 10.4 in the Company’s Report filed on Form 10-K for the Year ending December 31, 2000. | |
**10.4* | Amended and Restated Supplemental Executive Retirement Plan effective January 1, 2002 included as Exhibit 10.4 to the Company’s 2001 Form 10-K. | |
**10.5* | 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. | |
**10.6 * | Amended and Restated 1994 Stock Option Plan dated February 1, 1998 included as Exhibit 10.15 to the Company’s Report on Form 10-Q filed for the Quarter Ending on July 1, 2001. | |
**10.7* | Amended and Restated 1997 Stock Option Plan included as Exhibit 10.7 to the Company’s 2002 Report on Form 10-K. | |
**10.8* | Executive Performance Plan adopted on January 1, 1990 included in Exhibit 10.13 to McClatchy Newspapers, Inc. 1989 Report on Form 10-K. | |
**10.9* | The Company’s Amended and Restated 1990 Directors’ Stock Option Plan dated February 1, 1998 included as Exhibit 10.12 to the Company’s 1997 Form 10-K. | |
**10.10* | Amended and Restated Employment Agreement between the Company and Gary B. Pruitt dated October 22, 2003 included as Exhibit 10.10 to the Company’s 2003 Form 10-K. | |
**10.11* | 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. | |
**10.12* | The Company’s Amended and Restated Chief Executive Bonus Plan, dated March 19, 2003 included as Exhibit 10.12 to the Company’s Report on Form 10-Q for the Quarter Ending June 29, 2003. | |
**10.13 | The Company’s Amended and Restated 2001 Director Stock Option Plan. | |
**10.14* | Credit Agreement dated May 10, 2004 by and among the Company, lenders party thereto, Bank of America, N.A. as Administrative Agent, Swing Line Lender and Letter of Credit Issuer, JPMorgan Chase Bank as Syndication Agent and Banc of America Securities LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Managers, included as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004. | |
**10.15* | The Company’s 2004 Stock Incentive Plan included as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 27, 2004. | |
**10.16* | Form of McClatchy’s 2005 Director Option Agreement included as Exhibit 99.2 to the Company’s Current Report on Form 8-K filed December 16, 2004. | |
**10.17* | Form of Restricted Stock Agreement related to the Company’s 2004 Stock Incentive Plan, included as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed January 28, 2005 | |
10.18 | Form of Indemnification Agreement between the Company and each of its officers and directors. | |
21* | Subsidiaries of the Company | |
23 | Consent of Deloitte & Touche LLP | |
31.1 | Certification of the Chief Executive Officer of The McClatchy Company pursuant to Rule 13a-14(a) under the Exchange Act. | |
31.2 | Certification of the Chief Financial Officer of The McClatchy Company pursuant to Rule 13a-14(a) under the Exchange Act. | |
32.1 | Certification of the Chief Executive Officer of The McClatchy Company pursuant to 18 U.S.C. Section 1350. | |
32.2 | Certification of the Chief Financial Officer of The McClatchy Company pursuant to 18 U.S.C. Section 1350. |
* | Incorporated by reference |
** | Compensation plans or arrangements for the Company’s executive officers and directors |
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