UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-9824
The McClatchy Company
(Exact name of registrant as specified in its charter)
Delaware 52-2080478
(State of Incorporation) (IRS Employer
Identification Number)
2100 "Q" Street, Sacramento, CA. 95816
(Address of principal executive offices)
(916) 321-1846
(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares of each class of common stock outstanding as
of November 6, 1998:
Class A Common Stock 16,032,149
Class B Common Stock 28,655,912
THE McCLATCHY COMPANY
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
September 30, December 31,
1998 1997
ASSETS Restated
CURRENT ASSETS
Cash $ 957 $ 8,671
Trade receivables (less allowances of
$4,475 in 1998 and $2,162 in 1997) 130,197 93,069
Other receivables 7,397 2,143
Newsprint, ink and other inventories 15,678 11,735
Deferred income taxes 21,908 8,477
Other current assets 5,297 2,717
181,434 126,812
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 203,359 160,443
Equipment 436,079 371,312
639,438 531,755
Less accumulated depreciation (274,717) (246,236)
364,721 285,519
Land 56,764 34,199
Construction in progress 22,886 5,468
444,371 325,186
INTANGIBLES - NET 1,530,365 393,215
OTHER ASSETS 80,899 12,585
TOTAL ASSETS $ 2,237,069 $ 857,798
See notes to consolidated financial statements.
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands, except share amounts)
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
Restated
CURRENT LIABILITIES
Current portion of bank debt $ 6,429 $ -
Accounts payable 37,968 35,613
Accrued compensation 70,258 27,956
Income taxes 36,591 1,877
Unearned revenue 33,075 19,308
Carrier deposits 4,179 3,980
Other accrued liabilities 27,249 9,709
215,749 98,443
LONG-TERM BANK DEBT 1,026,571 94,000
OTHER LONG-TERM OBLIGATIONS 68,718 40,406
DEFERRED INCOME TAXES 137,302 57,894
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock $.01 par value:
Class A - authorized
100,000,000 shares, issued
15,955,096 in 1998 and 9,421,383
in 1997 159 94
Class B - authorized
60,000,000 shares, issued
28,655,912 in 1998 and 28,685,912
in 1997 287 287
Additional paid-in capital 268,101 74,354
Retained earnings 520,182 492,320
788,729 567,055
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 2,237,069 $ 857,798
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Restated Restated
REVENUES - NET
Newspapers:
Advertising $ 204,762 $ 125,549 $ 539,931 $ 370,509
Circulation 44,631 26,882 117,807 80,455
Other 10,636 4,391 27,054 13,025
260,029 156,822 684,792 463,989
Non-newspapers 3,100 2,778 9,307 8,512
263,129 159,600 694,099 472,501
OPERATING EXPENSES
Compensation 101,353 63,257 269,563 189,673
Newsprint and supplements 41,479 24,953 110,737 69,757
Depreciation and amortization 25,486 13,526 67,553 40,167
Other operating expenses 45,948 30,830 122,193 90,285
214,266 132,566 570,046 389,882
OPERATING INCOME 48,863 27,034 124,053 82,619
NONOPERATING (EXPENSES) INCOME
Interest expense (20,320) (2,004) (44,535) (7,005)
Partnership income (loss) 600 640 1,150 (60)
(Loss)/gain on sale of certain (971) 54 (971) 6,757
business operations
Other - net 452 595 1,840 826
INCOME BEFORE INCOME TAX PROVISION 28,624 26,319 81,537 83,137
INCOME TAX PROVISION 14,598 10,730 41,584 34,449
NET INCOME $ 14,026 $ 15,589 $ 39,953 $ 48,688
NET INCOME PER COMMON SHARE:
Basic $ 0.31 $ 0.41 $ 0.94 $ 1.28
Diluted $ 0.31 $ 0.41 $ 0.93 $ 1.28
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES:
Basic 44,598 38,035 42,726 37,926
Diluted 44,757 38,212 42,884 38,103
See notes to consolidated financial statements
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES: Restated
Net income $ 39,953 $ 48,688
Reconciliation to net cash provided:
Depreciation and amortization 69,445 40,274
Partnership(income)losses (1,150) 60
(Loss)gain on sale of certain business operations 971 (6,757)
Changes in certain assets and liabilities - net (26,055) 3,230
Other (162) (2,277)
Net cash provided by operating activities 83,002 83,218
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (23,633) (16,561)
Merger of Cowles Media Company (1,099,518) -
Proceeds from sale of certain business operations 180,903 11,400
Other - net 2,770 6
Net cash used by investing activities (939,478) (5,155)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,125,000 -
Repayment of long-term debt (267,370) (71,000)
Payment of cash dividends (12,091) (10,819)
Other - principally stock issuances in employee plans 3,223 5,266
Net cash provided (used) by financing activities 848,762 (76,553)
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,714) 1,510
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,671 5,877
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 957 $ 7,387
OTHER CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes (net of refunds) $ 36,133 $ 41,793
Interest paid (net of capitalized interest) $ 34,653 $ 7,431
MERGER
Fair value of assets acquired $ 1,542,278
Fair value of liabilities assumed (282,481)
Issuance of common stock (189,804)
Fees & expenses 31,654
Less cash acquired (2,129)
Net cash paid $ 1,099,518
See notes to consolidated financial statements
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)
Additional Restated Treasury
Par Value Paid-In Retained Stock Restated
Class Class Capital Earnings At Cost Total
A B
BALANCES, DECEMBER 31, 1996 $ 89 $ 288 $ 67,534 $ 437,527 $ (371) $ 505,067
Net income (9 months) 48,688 48,688
Dividends paid ($.285 per share) (10,819) (10,819)
Issuance of 319,545 Class A
shares under employee stock
plans 4 5,262 5,266
Conversion of 156,375 Class B
shares to Class A 1 (1)
Tax benefit from stock plans 1,225 1,225
Retirement of treasury stock (371) 371
BALANCES, September 30, 1997 94 287 73,650 475,396 - 549,427
Net income (3 months) 20,544 20,544
Dividends paid ($.095 per share) (3,620) (3,620)
Issuance of 28,812 Class A
shares under employee stock
plans 543 543
Tax benefit from stock plans 161 161
BALANCES, DECEMBER 31, 1997 94 287 74,354 492,320 - 567,055
Net income 39,953 39,953
Dividends paid ($.285 per share) (12,091) (12,091)
Conversion of 30,000 Class B
shares to Class A
Issuance of 205,424 Class A
Shares under employee stock
plans 2 3,221 3,223
Issuance of 6,328,289 Class A
shares for Cowles merger 63 189,741 189,804
Tax benefit from stock plans 785 785
BALANCES, September 30, 1998 $ 159 $ 287 $ 268,101 $ 520,182 $ - $ 788,729
See notes to consolidated financial statements
THE McCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The McClatchy Company (the "Company") and its subsidiaries are
engaged primarily in the publication of newspapers located in
Minnesota, California, Washington state, Alaska and North and
South Carolina.
The consolidated financial statements include the accounts of
the Company and its subsidiaries. Significant intercompany items
and transactions have been eliminated. In preparing the
financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to present fairly the Company's financial position,
results of operations, and cash flows for the interim periods
presented. All adjustments are normal recurring entries except
for the change in the method of accounting for inventories
discussed at note 3. Such financial statements are not
necessarily indicative of the results to be expected for the full
year.
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130
(Reporting Comprehensive Income), which requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from nonowner sources.
The Company has no items of comprehensive income, hence
comprehensive income and net income are equal.
NOTE 2. MERGER WITH COWLES MEDIA COMPANY
On March 19, 1998 the Company acquired all of the
outstanding shares of Cowles Media Company (Cowles) in a
transaction valued at approximately $90.50 per Cowles share and
the assumption of $77,350,000 in existing Cowles debt. Cowles
publishes the Star Tribune newspaper, which serves the Twin
Cities of Minneapolis and St. Paul. Cowles also owned four
separate subsidiaries that publish business magazines, special-
interest magazines and home improvement books. Simultaneously
with the close of the merger, the Company sold the magazine and
book publishing subsidiaries. The combined proceeds, plus debt
and other liabilities assumed by the buyers in those
transactions, were $208.1 million. These proceeds were used to
repay debt associated with the Cowles merger.
In connection with the Cowles merger, the Company paid 15%
of the consideration by issuing 6,328,289 shares of Class A
Common Stock in exchange for Cowles shares and paid cash for the
remaining shares. The Class A shares were exchanged using a
ratio of 3.01667 shares of McClatchy Class A Common for each
Cowles share. The Company incurred bank debt through a syndicate
of banks and financial institutions to finance the cash
requirements of the merger and to refinance its existing debt
(see note 4). Results of the Star Tribune have been included in
the Company's results beginning March 20, 1998.
The non-newspaper businesses were valued at fair market
value based upon the net after-tax proceeds received by the
Company on March 19, 1998, and accordingly, no gain or loss was
realized on the sale.
The primary asset retained by the Company is the Star
Tribune, the largest newspaper in Minnesota with daily
circulation of 387,000 and Sunday circulation of 673,000 as of
March 19, 1998. The Star Tribune is now the Company's largest
newspaper.
The merger was accounted for as a purchase, and accordingly,
assets acquired and liabilities assumed have been recorded at
their fair market values. Assets retained by the Company include
approximately $58,322,000 of current assets, $134,865,000 of
property, plant and equipment, $1,172,100,000 of intangible
assets and $63,267,000 of other assets. Intangible assets
include approximately $1,037,000,000 of goodwill which is being
amortized over 40 years. In addition to assuming Cowles' long-
term debt, a total of $213,785,000 of deferred taxes and other
liabilities were assumed. The Company is continuing to assess
the value of certain assets and liabilities, including
identifiable intangible assets, severance and other liabilities
and will adjust its carrying values as final determinations are
made.
The following table summarizes, on an unaudited pro forma
basis, the combined results of operations of the Company and its
subsidiaries for the nine-month periods ended September 30, 1998
and 1997, as though the Cowles merger had taken place on January
1, 1997 (in thousands, except per share amounts):
1998 1997
Revenues $ 776,788 $ 742,930
Net income 1,053 39,681
Diluted earnings per share $ 0.02 $ 0.89
Cowles Media Company donated $10,000,000 to the Cowles Media
Foundation and incurred significant investment banking, legal and
other costs associated with the transaction in the first quarter
of 1998, contributing to the dilution in the pro forma results
for the nine months ended September 30, 1998.
NOTE 3. CHANGE IN METHOD OF ACCOUNTING FOR NEWSPRINT
INVENTORY
The Company has accounted for newsprint inventories by the
first-in, first-out (FIFO) method beginning January 1, 1998,
whereas in all prior years inventories were valued using the last-
in, first-out (LIFO) method. The new method of accounting for
newsprint inventory was adopted to provide for a better matching
of revenues and expenses. Additionally, the change will enable
the financial reporting to parallel the way management assesses
the financial and operational performance of its newspapers. The
financial statements of prior years have been restated to apply
the new method retroactively, and accordingly, retained earnings
as of December 31, 1996 have been increased by $1,953,000 to
reflect the restatement. The effect of the accounting change on
net income as previously reported for the quarter and nine months
ended September 30, 1997 is as follows (in thousands):
Quarter Nine months
ended ended
September September
30, 1997 30, 1997
Net income as previously reported $ 15,525 $ 48,474
Adjustment for effect of change in
accounting for newsprint
inventories applied retroactively 64 214
Net income as adjusted $ 15,589 $ 48,688
The adjustment resulted in an increase of $0.01 to basic and
diluted net income per share for the nine-month period.
NOTE 4. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS
On July 28, 1995 the Company entered into a bank credit
agreement providing for borrowings up to $310,000,000. At
December 31, 1997, the Company had long-term bank debt of
$94,000,000 and the remaining balance of this debt was refinanced
with the new credit agreement obtained in connection with the
Cowles merger. See note 2 and the discussion below.
At December 31, 1997, the Company had an outstanding
interest rate swap that effectively converted $50,000,000 of debt
under its Credit Agreement to a fixed rate debt at a rate of
6.0%. The swap was terminated upon the closing of the Cowles
merger, with no significant loss to the Company.
The Company entered into a bank credit agreement (Credit
Agreement) with a syndicate of banks and financial institutions
providing for borrowings of up to $1,265,000,000 to finance the
Cowles merger and refinance its existing debt. The Credit
Agreement includes term loans consisting of Tranche A of $735
million bearing interest at the London Interbank Offered Rate
("LIBOR") plus 125 basis points, payable in increasing quarterly
installments from June 30, 1998 through March 31, 2005, and
Tranche B of $330 million bearing interest at LIBOR plus 175
basis points and payable in semi-annual installments from
September 30, 1998 through September 30, 2008. A revolving
credit line of up to $200 million bears interest at LIBOR plus
125 basis points and is payable by March 19, 2005. As the
Company reduces the outstanding debt relative to cash flow (as
defined in the Credit Agreement), the interest rate spread over
LIBOR will decline. Interest rates applicable to debt drawn down
at September 30, 1998, ranged from 6.8% to 7.4%. The debt is
secured by certain assets of the Company, and all of the debt is
pre-payable without penalty.
The terms of the Credit Agreement include certain operating
and financial restrictions, such as limits on the Company's
ability to incur additional debt, create liens, sell assets,
engage in mergers, make investments and pay dividends.
During the second quarter, the Company entered into interest
rate protection agreements to reduce the impact of changes in
interest rates on its floating rate debt. The Company is a party
to three interest rate swap agreements, expiring in 2002 to 2003,
with an aggregate notional amount of $300,000,000. The effect of
these agreements is to fix the LIBOR interest rate exposure at
5.9% on that portion of the Company's term loans.
Also during the second quarter, the Company entered into an
interest rate collar with a $200,000,000 notional amount, and a
LIBOR ceiling rate of 6.5% and a floor of 5.3%. The fair value
of these instruments as of September 30, 1998, are summarized as
follows (in thousands):
Notional
Amount Fair Value
Interest rate swaps $ 200,000 $ (7,079)
50,000 (2,122)
50,000 (2,089)
Interest rate collar 200,000 (2,796)
The Company's Credit Agreement requires a minimum of
$300,000,000 of debt be subject to interest rate protection
agreements.
The Company has outstanding letters of credit totaling
$29,154,372 securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
At September 30, 1998, long-term debt consisted of (in
thousands):
September 30, December 31,
1998 1997
Credit Agreement:
Term loans $ 933,000
Revolving credit line 100,000 $ 94,000
Total indebtedness 1,033,000 94,000
Less current portion 6,429 -
Long-term indebtedness $ 1,026,571 $ 94,000
Long-term debt matures, as of September 30 of each year, as
follows (in thousands):
2000 $ 44,093
2001 71,655
2002 90,030
2003 135,967
2004 191,092
Thereafter 493,734
$ 1,026,571
NOTE 5. INCOME TAXES
For the nine-month periods ended September 30, the effective
tax rate and the statutory federal income tax rate are reconciled
as follows:
1998 1997
Statutory rate 35.0% 35.0%
State taxes, net of federal benefit 6.4 4.2
Amortization of intangibles 9.2 3.3
Tax basis adjustment of intangibles sold - (1.0)
Other 0.4 -
Effective tax rate 51.0% 41.4%
Item 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Recent Events and Trends
On March 19, 1998 the Company acquired all of the
outstanding shares of Cowles Media Company (Cowles) in a
transaction valued at $90.50 per Cowles share and the assumption
of $77.4 million in existing Cowles debt. Cowles publishes the
Star Tribune newspaper, which serves the Twin Cities of
Minneapolis and St. Paul. Cowles also owned four separate
subsidiaries that publish business magazines, special-interest
magazines and home improvement books. Simultaneously with the
closing of the Cowles merger, the Company sold the magazine and
book publishing subsidiaries. The combined proceeds, plus debt
and other liabilities assumed by the buyers in those
transactions, were $208.1 million. These proceeds were used to
repay debt associated with the Cowles merger. See note 2 to the
consolidated financial statements.
In connection with the merger, the Company paid 15% of the
consideration by issuing 6,328,289 shares of Class A Common Stock
in exchange for Cowles shares and paid cash for the remaining
shares. The Class A shares were exchanged using a ratio of
3.01667 shares of McClatchy Class A Common for each Cowles share.
The Company obtained bank debt through a syndicate of banks and
financial institutions to finance the cash requirements of the
merger and to refinance its existing debt (See note 4 to the
consolidated financial statements). Results of the Star Tribune
have been included in the Company's results beginning March 20,
1998.
The non-newspaper businesses were valued at fair market
value based upon the net after-tax proceeds received by the
Company on March 19, 1998, and accordingly, no gain or loss was
realized on the sale.
The primary asset retained by the Company following the
Cowles transaction is the Star Tribune, the largest newspaper in
Minnesota with daily circulation of 387,000 and Sunday
circulation of 673,000 as of March 19, 1998. It is now the
Company's largest newspaper.
Effective January 1, 1998, the Company began accounting for
newsprint inventories by the first-in, first-out (FIFO) method,
whereas in all prior years inventories were valued using the last-
in, first-out (LIFO) method. This change is not expected to have
a material effect on 1998 results. The new method of accounting
for newsprint inventory was adopted to provide for a better
matching of revenues and expenses. Additionally, the change will
enable the financial reporting to parallel the way management
assesses the financial and operational performance of its
newspapers. The financial statements of prior years have been
restated to apply the new method retroactively and, accordingly,
retained earnings as of December 31, 1996 have been increased by
$1,953,000 to reflect the restatement. The effect of the
accounting change on net income as previously reported for the
quarter ended September 30, 1997 was not material. See note 3 to
the consolidated financial statements.
On February 28, 1997, the Company completed the sale of four
community newspapers and recorded a pre-tax gain of $6.7 million
in other non-operating (expenses) income. The after tax gain on
the 1997 sale was 10 cents per share.
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130
(Reporting Comprehensive Income), which requires that an
enterprise report, by major components and as a single total, the
change in its net assets during the period from nonowner sources.
The Company has no items of comprehensive income, hence
comprehensive income and net income are equal.
SFAS No. 131 (Disclosures about Segments of an Enterprise
and Related Information), which establishes annual and interim
reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic
area, and major customers; and No. 132 (Employers' Disclosure
about Pensions and Other Postretirement Benefits), which revises
the disclosures about pension and other postretirement benefits,
will be adopted by the Company in 1998 and are not expected to
have a material impact on the Company's financial position,
results of operations or cash flows.
Third Quarter 1998 Compared to 1997
The Company reported $14.0 million or 31 cents per share in
the third quarter of 1998 compared to $15.6 million or 41 cents
per share in 1997. The 1998 earnings reflect a one cent per
share loss on the sale of certain non-core businesses. The lower
earnings largely reflect greater expenses resulting from the
acquisition of the Star Tribune newspaper, including greater
amortization, depreciation, interest and taxes. Also, primarily
as a result of Class A stock issued in the transaction, the
number of weighted average shares increased 6.5 million from the
1997 quarter.
Revenues increased 64.9% to $263.1 million, including $96.0
million from the Star Tribune. Excluding revenues from the Star
Tribune in the 1998 quarter and revenues from operations sold in
the 1997 quarter, revenues increased 4.9% in the third quarter.
This increase primarily reflects higher advertising revenues
generated mostly by rate increases and relatively flat volumes.
Circulation revenues declined 1.5% from the third quarter of 1997
as no home-delivery rate increases were implemented in 1998.
OPERATING REVENUES BY REGION:
(Amounts in thousands)
1998 1997 % Change
Minnesota newspaper $ 95,975 NM
California newspapers 82,061 $ 78,810 4.1
Carolinas newspapers 44,146 42,190 4.6
Northwest newspapers 37,847 35,822 5.7
Non-newspaper operations 3,100 2,778 11.6
$ 263,129 $ 159,600 NM
NM - not meaningful due to the addition of the Star Tribune on
March 20, 1998.
The Star Tribune contributed 36.5% or $96.0 million of the
Company's third quarter revenues, with advertising revenues of
$72.6 million and circulation revenues of $18.2 million. On a
proforma basis, advertising revenues were up 7.2% from 1997 and
total revenues were up 6.0%.
The California newspapers, which largely consist of the
three Bee daily newspapers located in Sacramento, Modesto and
Fresno, contributed 31.2% of total revenues. Most of the growth
was in advertising revenues which were up $3.3 million or 5.2% at
the three Bee newspapers, largely attributable to higher
classified advertising. Circulation revenues declined $315,000
or 2.3% at the California daily newspapers.
The Carolinas newspapers contributed 16.8% of third quarter
revenues and were up 4.6%. Advertising revenues reflect strong
growth in retail and classified advertising; total advertising
revenues were $36.7 million up 5.6%. Circulation revenues
declined nominally.
The Company's newspapers in the Northwest (Washington State
and Alaska) contributed 14.4% of total third quarter revenues and
increased 5.7% over 1997, lead by the Anchorage Daily News and
The News Tribune (Tacoma, WA). Advertising revenues were $28.2
million, up 5.4% as both retail and classified advertising gained
over 1997. Circulation revenues were down nominally in this
region as well.
The Company's non-newspaper operations include McClatchy
Printing Company and Benson Printing Company, The Newspaper
Network and Nando Media, and were up 11.6% in the quarter. In
September 1998, McClatchy Printing Company was sold and Benson
Printing Company is expected to be sold in the fourth quarter of
1998.
OPERATING EXPENSES:
Operating expenses increased 80.7%, including the expenses
of the Star Tribune newspaper. Expenses excluding the Star
Tribune increased primarily due to higher newsprint costs and
higher compensation. Compensation costs were up due partially to
adjustments to workers' compensation reserves resulting from an
audit and several large claims at the Company's California
dailies.
NON OPERATING (EXPENSES) INCOME - NET:
Interest expense increased $18.3 million reflecting the cost
of the new debt associated with the Cowles Media merger (see
Liquidity and Capital Resources below). Also included in non
operating expense area was a pre-tax charge of $971,000 resulting
from a loss on the sale of McClatchy Printing Company and other
non-core assets.
INCOME TAXES:
The Company's effective tax rate for the quarter was 51.0%
compared to 40.8 in 1997. The higher rate generally reflects the
non-deductible amortization and depreciation created in the
Cowles merger.
Nine-Month Period 1998 Compared to 1997
Earnings in the nine-month period ending September 30, 1998,
were $40.0 million or 93 cents (diluted) per share compared to
$48.7 million or $1.28 (diluted) in 1997. Revenues and expenses
generally reflect the same factors as described in the third
quarter comparisons, except for two factors:
1) The Cowles merger was completed late in the first quarter of
1998 and had less effect on the nine-month period than the third
quarter.
2) Newsprint prices were substantially higher in the first two
quarters of 1998 than 1997, while prices in the third quarter
were up in the 5.0% range.
OPERATING REVENUES BY REGION:
(Amounts in thousands)
1998 1997 % Change
California newspapers $ 240,769 $ 234,704 2.6
Minnesota newspaper 202,622 - NM
Carolinas newspapers 130,449 123,483 5.6
Northwest newspapers 110,952 105,802 4.9
Non-newspaper operations 9,307 8,512 9.3
$ 694,099 $ 472,501 NM
NM - not meaningful due to the addition of the Star Tribune on
March 20, 1998.
The California newspapers' revenue growth was 2.6% for the
nine-month period versus 4.1% in the third quarter and was slowed
by prolonged rainy weather throughout most of the first quarter
of 1998. Also, 1997 revenues include $1.1 million of revenues
from four community newspapers that were sold in February 1997.
Excluding them, revenues were up 3.1%.
The Carolinas and Northwest newspapers' revenues were
generally up for the same factors discussed above, and the Star
Tribune's revenues reflect nine days in the month of March and
all of the second and third quarters.
OPERATING EXPENSES:
Operating expenses were up 50.2%, but were up 4.6% after
excluding the Star Tribune's expense from 1998 and sold
operations from 1997. Excluding those operations, newsprint and
supplement costs were higher by 12.0% reflecting higher prices in
1998 and an approximate one percent increase in newsprint usage.
After excluding expenses associated with the Star Tribune and
operations sold in 1997, all other operating expenses, including
depreciation and amortization, were up 2.9%, which is in line
with inflation.
NON OPERATING (EXPENSE) INCOME - NET:
Interest expense increased $37.5 million reflecting the
higher debt level, and the Company's share of Ponderay's income
was $1.15 million versus a $60,000 loss in 1997. The 1998 period
includes a pre-tax loss of $971,000 on the sale of non-core
operations while the 1997 non-operating income included a $6.7
million pre-tax gain on the sale of four community newspapers.
INCOME TAXES:
The Company's effective tax rate was 51.0% for the nine-
month period in 1998 compared to 41.4% in 1997, primarily
reflecting non-deductible expenses associated with the Cowles
merger. See note 5 to the consolidated financial statements.
Liquidity & Capital Resources
Operations generated $83.0 million in cash during the nine-
month period ending September 30, 1998, and the Company received
$178.5 million in cash proceeds from the sale of Cowles' non-
newspaper subsidiaries. Additionally, the Company borrowed
$1.125 billion to finance the cash requirements of the Cowles
merger. In addition to the Cowles merger, cash was used
primarily to pay for capital expenditures and pay dividends.
Capital expenditures are projected to be $40.0 million in 1998.
The Company entered into a bank credit agreement (Credit
Agreement) with a syndicate of banks and financial institutions
providing for borrowings of up to $1,265,000,000 to finance the
Cowles merger and refinance its existing debt. The Credit
Agreement includes term loans consisting of Tranche A of $735
million bearing interest at the London Interbank Offered Rate
("LIBOR") plus 125 basis points, payable in increasing quarterly
installments from June 30, 1998 through March 31, 2005, and
Tranche B of $330 million bearing interest at LIBOR plus 175
basis points and payable in increasing semi-annual installments
from September 30, 1998 through September 30, 2008. A revolving
credit line of up to $200 million bears interest at LIBOR plus
125 basis points and is payable by March 19, 2005. As the
Company reduces the outstanding debt relative to cash flow (as
defined in the Credit Agreement), the interest rate spread over
LIBOR will decline. The Company has $70.8 million of available
credit at September 30, 1998 (see note 4 to the consolidated
financial statements). The debt is secured by certain assets of
the Company, and all of the debt is pre-payable without penalty.
The Company intends to accelerate payments on this debt as cash
generation allows.
The terms of the Credit Agreement include certain operating
and financial restrictions, such as limits on the Company's
ability to incur additional debt, create liens, sell assets,
engage in mergers, make investments and pay dividends.
During the second quarter, the Company entered into interest
rate protection agreements to reduce the impact of changes in
interest rates on its floating rate debt. The Company is a party
to three interest rate swap agreements, expiring in 2002 to 2003,
with an aggregate notional amount of $300,000,000. The effect of
these agreements is to fix the LIBOR interest rate exposure at
5.9% on that portion of the Company's term loans. Also during
the second quarter, the Company entered into an interest rate
collar with a $200,000,000 notional amount, and a LIBOR ceiling
rate of 6.5% and a floor of 5.3%. Please see footnote 4 for a
discussion of the fair value of these instruments as of September
30, 1998.
The Company has outstanding letters of credit totaling $29.2
million securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
While the Company expects that most of its free cash flow
generated from operations in 1998 and in the foreseeable future
will be used to repay debt, management is of the opinion that
operating cash flow and its present and future credit lines as
described above are adequate to meet the liquidity needs of the
Company, including currently planned capital expenditures and
other investments.
Year 2000 Compliance Disclosure
The Company's Year 2000 Compliance Plan includes a
definition of Year 2000 conformity, compliance certification
standards, reporting and risk management structures. Management
believes this plan adheres to recommendations set forth by the
Newspaper Association of America. A summary of the plan is
available on the McClatchy web site at http://www.mcclatchy.com.
A corporate task force and task forces at each of our
newspapers are in place to assess Year 2000 issues and the
necessary changes to the Company's many different systems. A
Year 2000 Compliance Coordinator has been named to facilitate our
progress in meeting our internal deadlines for compliance. This
coordinator reports to the Corporate Director of Information
Systems and the Company's Vice President, Finance.
For purposes of achieving remediation, a combination of
internal effort, upgrades from vendors, external programmers and
consultants, replacement systems or in a few cases retirement of
systems are being used. To date, the Company has completed an
inventory and analysis of systems and equipment with date-related
logic. Historical costs incurred in bringing systems to Year 2000
compliance through September 30, 1998, are estimated to be less
than $1 million. At present, we estimate the incremental cost of
evaluating and making required changes will be approximately $1.5
million in additional costs through December 31, 1999.
The Company's 11 daily newspapers generate over 95% of our
revenues and profits. The following describes these newspapers'
state of readiness for Year 2000, the associated risks and the
state of our contingency plans:
NEWSPAPER PRODUCTION FACILITIES AND PROCESSES:
Production Systems:
The Company has reviewed its computer and mechanical systems
at its production facilities. Of the 10 newspapers that have
press and post-press systems, one press at The Tri-City Herald
was deemed to be non-compliant and the Company believes that it
has been remediated. Also, the press control system for one of
the four presses at The Sacramento Bee is expected to be
remediated by mid-1999. This condition would not, however, be
expected to prohibit The Sacramento Bee from printing its daily
newspaper.
If the Company's presses succumbed to Year 2000 problems, it
would be difficult in our larger markets to print on a timely
basis. Although all of our papers have reciprocal printing
agreements with other papers in each area, our largest papers,
which contribute the greatest revenues, are too large to be
printed in their entirety at another location. Hence, these
newspapers could be printed late, with smaller editions and with
less circulation. This risk would have significant negative
revenue implications for the Company. Also, there are no
assurances that the other newspapers with which the Company has
reciprocal printing arrangements will be Year 2000 compliant.
Third Party Suppliers:
One of the most significant risks associated with the
Company's production systems in the Year 2000 may be the
Company's ability to receive electrical power from the various
utility companies that serve the communities in which it produces
newspapers. None of the Company's newspapers currently have
electrical generators sufficiently large enough to run printing
presses. Hence, if electrical service is unavailable, the
Company may have to rely on reciprocal printing agreements
(discussed above) or may not be able to produce a daily
newspaper. The Company will query its utility providers, as to
their Year 2000 readiness, and must rely on representations from
such vendors. If the Company's utility providers are unable to
supply electrical power, it could have significant negative
revenue implications for the Company.
The Company has contacted its newsprint vendors, and we have
received written statements that the Company's major newsprint
suppliers generally expect to be Year 2000 compliant before
January 1, 2000. In addition, we plan to determine in early 1999
whether we will increase our stock of newsprint in the last
months of 1999, as additional insurance against vendor(s) non-
compliance with Year 2000 remediations. The same inquiry process
and determinations are being made for all other major material
sources, such as ink and plates.
EDITORIAL SYSTEMS:
The Company uses editorial systems from various vendors. We
maintain software and hardware maintenance contracts with vendors
of critical components, and we believe many systems at our
newspapers have been made Year 2000 compliant already. Our
largest newspaper, the Star Tribune is expected to complete its
upgrades in early 1999. Minor upgrades in a few other newspapers
are expected to bring all editorial systems into compliance.
Although we believe that the editorial systems at our
California dailies (The Sacramento Bee, The Modesto Bee and The
Fresno Bee) are currently Year 2000 compliant, the Company has
budgeted to replace existing editorial systems at these
newspapers in 1999 with newer systems which offer increased
functionality, including the ability to paginate pages
(electronically assemble all elements on a page). These systems
are expected to be Year 2000 compliant. The papers have or will
perform interim software upgrades on existing editorial systems
expected to keep them Year 2000 compliant. The testing by the
application vendor and The Sacramento Bee conducted to date
indicates that the existing systems can operate into 2000 without
problems, should installation of the new systems extend beyond
December 31,1999. Replacement of the editorial systems was
already planned and budgeted; therefore, they are not directly a
Year 2000 compliance expense. Costs to upgrade existing software
will be expensed as incurred.
For the reasons noted above, we believe that the risks of
editorial system failure are minimal at this time. For backup
purposes, our newspapers possess enough Apple Macintosh
workstations (generally immune to Year 2000 issues) with input,
processing and output capabilities that, in an emergency, could
be used to complete an edition, or even produce new editions for
several days while problems were being resolved. In the case of
several newspapers, the primary editorial system functions are
currently produced on Macintosh workstations, further reducing
risk. In all cases, complications could result in smaller
newspapers with less editorial content.
CIRCULATION SYSTEMS:
It is expected that all circulation systems will be upgraded
and be Year 2000 compliant by mid-1999. The majority of these
systems will be compliant well before this date; however, two
newspapers, The Modesto Bee and the Star Tribune in Minneapolis,
utilize custom, in-house circulation systems that will require
internal re-coding. The Company expects circulation code
components to be re-coded by the end of the first quarter of 1999
at the Star Tribune. Management expects the code at The Modesto
Bee to be modified, tested and compliant by mid-1999.
Post-press (packaging and distribution) systems and
mechanical equipment are believed to be either already in
compliance or are in the process of being replaced as part of
regular cyclical system replacements. We expect all to be Year
2000 compliant by mid-1999.
The inability to deliver our print products would have
negative impact on both circulation and advertising revenues, the
primary sources of revenue for the Company.
ADVERTISING SYSTEMS/CUSTOMERS:
Display Systems:
The Company's newspapers use various systems to produce
graphics for run-of-press (display) advertising. While we
believe most newspapers' advertising systems are compliant, three
of our newspapers, the Star Tribune, Anchorage Daily News and The
News & Observer (Raleigh, NC) rely on graphic processing
subsystems from a vendor that is not yet Year 2000 compliant.
These three newspapers may be required to replace the systems if
the systems are not determined to be Year 2000 compliant before
mid-1999.
Classified Systems:
The classified advertising systems at the Company's
newspapers are under software and hardware maintenance contracts
with vendors, and in most cases, have received or expect to
receive upgrades that the Company believes will provide Year 2000
compatibility. Two newspapers, however, will be replacing their
classified systems with newer, more functional models. The first
system at The News & Observer (Raleigh, NC) is scheduled to be
installed by the end of 1998, and we believe it will be Year 2000
compliant. The other, at the Anchorage Daily News, recently
applied a Year 2000 upgrade to its existing classified system,
and we currently believe the system is Year 2000 compliant.
Nonetheless, a replacement system, which provides added
functionality and we believe it to be Year 2000 compliant, is in
the process of being installed and is expected to be completed by
March 1999.
General:
If advertising systems at our newspapers are not brought
into compliance, our newspapers may have to retrieve hard-copy
proofs of advertising contents of the respective databases in
advance and manually input graphics, which could delay the
production of the newspaper. Moreover, many advertisers
currently send advertising materials to the Company's newspapers
electronically. If advertisers are unable to create advertising
material due to their own Year 2000 issues, or external
communication systems are affected, it is possible that the
newspapers would have additional advertising makeup costs.
We have a plan in place to address the issue of Year 2000
readiness with our major advertisers, as they represent a
critical source of revenue. The Company is in the process of
querying key advertisers, and expects responses will be received
and evaluated by the end of 1998. Lack of Year 2000 compliance
among major advertisers could result in lost advertising
revenues.
ACCOUNTING, ADMINISTRATION AND GENERAL:
In 1997, the Company, in the course of reviewing the
effectiveness of its financial and human resource systems
determined to replace the systems at all newspapers with a
centralized system which we believe to be Year 2000 compliant.
Several of our newspapers have now switched to the new system. By
January 1999, the financial systems and by July 1999 the human
resource systems at all newspapers within the Company are
expected to operate on this centralized platform.
We believe financial reporting and accounting
responsibilities can be met without the use of automated
financial systems. A failure in the Company's financial systems
would result in delays in processing payables, receivables,
payroll and reporting Company performance while manual
(contingency) processes were activated.
If the automated advertising or circulation management and
billing systems fail (see previous discussions of advertising and
circulation systems), contingency plans will be implemented that
would revert to a manual accounting system. Advertising orders
would be created using hard copy advertising tickets. Charges
would be manually computed. A local database or spreadsheet would
be used to create run lists for pagination. Billing would also be
manual, labor intensive and would experience significant delays.
The McClatchy Year 2000 Compliance Plan addresses the need
to verify the Year 2000 readiness of any third-party that could
cause a material impact on the Company by requiring each
McClatchy property to identify and collect Year 2000 compliance
statements from material vendors and suppliers, content
providers, utility companies, financial organizations and other
business partners. In the absence of written representations of
Year 2000 compliance, we will assume that the service or product
will not be Year 2000 compliant, and we will weigh alternatives.
In the event that any of the Company's material vendors,
suppliers or financial institutions are unable to provide the
Company with services, materials or financing required to operate
the Company's business it could have a material impact on our
operations.
CONTINGENCY PLANS:
In addition to contingency plans noted in the various
systems above, each of our newspapers are developing contingency
plans to cope with the possibility that major systems could
develop problems and are expected to have more detailed
contingency plans developed by the end of 1998. These plans will
be reviewed and modified throughout the first half of 1999 as
testing of major systems occur. As an added measure, the Company
will conduct, at all locations, start-to-finish functional tests
of its production systems in mid-1999 and other significant
systems in the fall of 1999.
Forward Looking Information
We have made "forward-looking statements" in this document
that are subject to risks and uncertainties. Forward-looking
statements include the information concerning possible or assumed
future results of operations of McClatchy. Forward-looking
statements are generally preceded by, followed by or are a part
of sentences that include the words "believes," "expects,"
"anticipates" or similar expressions. For those statements, we
claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995. You should understand that the following important
factors, in addition to those discussed elsewhere in this
document and in the documents which we incorporate by reference,
could affect the future results of McClatchy, and could cause
those future results to differ materially from those expressed in
our forward-looking statements: general economic, market or
business conditions; reliance on customer and vendor assurances
as to their Year 2000 compliance; the completeness of the
Company's internal efforts to identify systems that are not Year
2000 compliant and its remediation efforts associated with such
systems; increases in newsprint prices and/or printing and
distribution costs over anticipated levels; increases in interest
rates; competition from other forms of media in our principal
markets; increased consolidation among major retailers in our
newspaper markets or other events depressing the level of
advertising; an economic downturn in the economies of Minnesota,
California's Central Valley, the Carolinas, Washington State and
Alaska; changes in our ability to negotiate and obtain favorable
terms under collective bargaining arrangements with our
employees; competitive actions by other companies; other
occurrences leading to decreased circulation and diminished
revenues from both display and classified advertising; and other
factors, many of which are beyond our control. Consequently,
there can be no assurance that the actual results or developments
we anticipate will be realized or that these results or
developments will have the expected consequences.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. Not Applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - Submission of Stockholder Proposals
for 1999 Annual Meeting
To be considered for inclusion in the Company's proxy
statement and form of proxy for our 1999 Annual Meeting
of Stockholders, a stockholder proposal must be received
at the principal executive offices of the Company not
later than December 1, 1998. If a stockholder does not
wish to have a proposal included in the Company's proxy
statement and form of proxy for the 1999 Annual Meeting,
but still wishes to have a proposal considered at our
1999 Annual Meeting, if the stockholder does not notify
the Company of his or her proposal by February 14, 1999,
then the persons appointed as proxies by Company
management may use their discretionary voting authority
to vote on the proposal when the proposal is considered
at the 1999 Annual Meeting, even though there is no
discussion of the proposal in the proxy statement for
that meeting.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit:
27 Financial Data Schedule for the nine-months ended
September 30, 1998
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated
September 21, 1998, to report under Item 8 of Form 8-
K the Board of Directors approval of a change,
effective December 1, 1998, in its fiscal year from
a calendar year to a 52/53 week fiscal year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereto duly authorized.
The McClatchy Company
Registrant
Date: November 12, 1998 /s/ James P. Smith
James P. Smith
Vice President, Finance and
Treasurer