UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 28, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-9824
The McClatchy Company
(Exact name of registrant as specified in its charter)
Delaware 52-2080478
(State of Incorporation) (IRS Employer
Identification Number)
2100 "Q" Street, Sacramento, CA. 95816
(Address of principal executive offices)
(916) 321-1846
(Registrant's telephone number)
Indicate by check mark whether the registrant has (1) filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of shares of each class of common stock outstanding as
of May 4, 1999:
Class A Common Stock 16,234,233
Class B Common Stock 28,561,912
THE McCLATCHY COMPANY
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
March 28, December 27,
1999 1998
ASSETS
CURRENT ASSETS
Cash $ 7,736 $ 9,650
Trade receivables (less allowances of 144,626 149,685
$3,232 in 1999 and $4,835 in 1998)
Other receivables 1,900 2,762
Newsprint, ink and other inventories 16,577 16,587
Deferred income taxes 17,689 17,441
Other current assets 7,032 4,414
195,560 200,539
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 204,581 203,842
Equipment 448,169 446,236
652,750 650,078
Less accumulated depreciation (285,782) (275,230)
366,968 374,848
Land 56,609 56,593
Construction in progress 27,341 21,961
450,918 453,402
INTANGIBLES - NET 1,496,312 1,510,954
OTHER ASSETS 84,591 81,830
TOTAL ASSETS $ 2,227,381 $ 2,246,725
See notes to consolidated financial statements.
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands, except share amounts)
March 28, December 27,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES
Current portion of bank debt $ 12,000 $ -
Accounts payable 74,989 68,358
Accrued compensation 61,112 62,038
Income taxes 10,510 29,222
Unearned revenue 35,449 33,602
Carrier deposits 3,815 4,071
Other accrued liabilities 24,865 23,099
222,740 220,390
LONG-TERM BANK DEBT 975,000 1,004,000
OTHER LONG-TERM OBLIGATIONS 73,870 75,274
DEFERRED INCOME TAXES 138,221 140,056
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $.01 par value:
Class A - authorized
100,000,000 shares, issued
16,127,210 in 1999 and 16,033,763 161 160
in 1998
Class B - authorized
60,000,000 shares, issued
28,611,912 in 1999 and 28,655,912 286 287
in 1998
Additional paid-in capital 270,727 269,523
Retained earnings 546,376 537,035
817,550 807,005
TOTAL LIABILITIES AND STOCKHOLDERS' $ 2,227,381 $ 2,246,725
EQUITY
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended
March 28, March 31,
1999 1998
REVENUES - NET
Newspapers:
Advertising $ 205,520 $ 127,287
Circulation 44,482 28,238
Other 6,153 5,566
256,155 161,091
Non-newspapers 2,280 2,872
258,435 163,963
OPERATING EXPENSES
Compensation 102,074 68,394
Newsprint and supplements 40,438 27,067
Depreciation and amortization 26,572 14,473
Other operating expenses 46,065 31,364
215,149 141,298
OPERATING INCOME 43,286 22,665
NONOPERATING (EXPENSES) INCOME
Interest expense (16,889) (4,037)
Partnership income (loss) 110 200
Other - net 784 433
INCOME BEFORE INCOME TAX PROVISION 27,291 19,261
INCOME TAX PROVISION 13,700 10,016
NET INCOME $ 13,591 $ 9,245
NET INCOME PER COMMON SHARE:
Basic $ 0.30 $ 0.24
Diluted $ 0.30 $ 0.24
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES:
Basic 44,727 38,989
Diluted 44,883 39,102
See notes to consolidated financial statements
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Three Months Ended
March 28, March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,591 $ 9,245
Reconciliation to net cash provided:
Depreciation and amortization 27,438 14,506
Partnership income (110) (200)
Changes in certain assets and liabilities - net (10,244) 6,140
Other (2,076) (43)
Net cash provided by operating activities 28,599 29,648
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (10,351) (4,907)
Merger of Cowles Media Company - (1,099,070)
Proceeds from sale of certain business operations - 178,538
Other - net 32 -
Net cash used by investing activities (10,319) (925,439)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,125,000
Repayment of long-term debt (17,000) (175,370)
Payment of cash dividends (4,250) (3,622)
Other - principally stock issuances in employee plans 1,056 1,577
Net cash (used) provided by financing activities (20,194) 947,585
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,914) 51,794
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,650 8,671
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,736 $ 60,465
OTHER CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes (net of refunds) $ 34,346 $ 2,726
Interest paid (net of capitalized interest) 16,808 $ 1,382
MERGER
Fair value of assets acquired $ 1,548,238
Fair value of liabilities assumed (286,949)
Issuance of common stock (189,157)
Fees & expenses 29,067
Less cash acquired (2,129)
Net cash paid $ 1,099,070
See notes to consolidated financial statements
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)
Additional Retained Total
Paid-In Earnings
Capital
Par Value
Class Class
A B
BALANCES, DECEMBER 31, 1997 $ 94 $ 287 $ 74,354 $ 492,320 $ 567,055
Net income (3 months) 9,245 9,245
Dividends paid ($.095 per share) (3,622) (3,622)
Issuance of 6,305,247 Class A 63 189,094 189,157
shares for Cowles Merger
Issuance of 84,858 Class A
shares under employee stock
plans 1 1,576 1,577
Conversion of 10,000 Class B
shares to Class A - -
Tax benefit from stock plans 276 276
BALANCES, March 31, 1998 158 287 265,300 497,943 763,688
Net income (9 months) 51,806 51,806
Dividends paid ($.285 per share) (12,714) (12,714)
Issuance of 166,974 Class A 2 2,967 2,969
shares under employee stock plans
Conversion of 20,000 Class B shares - -
to Class A shares
Issuance of 25,301 Class A shares 647 647
in Cowles Merger
Tax benefit from stock plans 609 609
BALANCES, DECEMBER 27, 1998 160 287 269,523 537,035 807,005
Net income (3 months) 13,591 13,591
Dividends paid ($.095 per share) (4,250) (4,250)
Conversion of 44,000 Class B shares
to Class A 1 (1)
Issuance of 49,447 Class A shares
under employee stock plans 1,056 1,056
Tax benefit from stock plans 148 148
BALANCES, March 28, 1999 $ 161 $ 286 $ 270,727 $ 546,376 $ 817,550
See notes to consolidated financial statements
THE McCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The McClatchy Company (the Company) and its subsidiaries are
engaged primarily in the publication of newspapers located in
Minnesota, California, Washington state, Alaska and North and
South Carolina.
The consolidated financial statements include the accounts
of the Company and its subsidiaries. Significant intercompany
items and transactions have been eliminated. In preparing the
financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to present fairly the Company's financial position,
results of operations, and cash flows for the interim periods
presented. All adjustments are normal recurring entries. Such
financial statements are not necessarily indicative of the
results to be expected for the full year.
NOTE 2. MERGER WITH COWLES MEDIA COMPANY
On March 19, 1998 the Company acquired all of the
outstanding shares of Cowles Media Company (Cowles) in a
transaction valued at approximately $90.50 per Cowles share and
the assumption of $77,350,000 in existing Cowles debt. Cowles
publishes the Star Tribune newspaper, which serves the Twin
Cities of Minneapolis and St. Paul. Cowles also owned four
separate subsidiaries that publish business magazines, special-
interest magazines and home improvement books. Simultaneously
with the close of the merger, the Company sold the magazine and
book publishing subsidiaries. The combined proceeds, plus debt
and other liabilities assumed by the buyers in those
transactions, were $208.1 million. These proceeds were used to
repay debt associated with the Cowles merger.
In connection with the Cowles merger, the Company paid 15%
of the consideration by issuing 6,330,548 shares of Class A
Common Stock in exchange for Cowles shares and paid cash for the
remaining shares. The Class A shares were exchanged using a
ratio of 3.01667 shares of McClatchy Class A Common for each
Cowles share. The Company incurred bank debt through a syndicate
of banks and financial institutions to finance the cash
requirements of the merger and to refinance its existing debt
(see note 3). Results of the Star Tribune have been included in
the Company's results beginning March 20, 1998.
The non-newspaper businesses were valued at fair market
value based upon the net after-tax proceeds received by the
Company on March 19, 1998, and accordingly, no gain or loss was
realized on the sale.
The primary asset retained by the Company is the Star
Tribune, the largest newspaper in Minnesota with daily
circulation of 387,000 and Sunday circulation of 673,000 as of
March 19, 1998. The Star Tribune is now the Company's largest
newspaper.
The merger was accounted for as a purchase, and accordingly,
assets acquired and liabilities assumed have been recorded at
their fair market values. Assets retained by the Company include
approximately $58,319,000 of current assets, $143,978,000 of
property, plant and equipment, $1,166,400,000 of intangible
assets and $63,267,000 of other assets. Intangible assets
include approximately $929,000,000 of goodwill which is being
amortized over 40 years. In addition to assuming Cowles' long-
term debt, a total of $214,197,000 of deferred taxes and other
liabilities were assumed.
The following table summarizes, on an unaudited pro forma
basis, the combined results of operations of the Company and its
subsidiaries for the three-month period ended March 31, 1998, as
though the Cowles merger had taken place on January 1, 1998 (in
thousands, except per share amounts):
1998
Revenues $ 246,652
Net income (29,655)
Diluted earnings per share $ (0.65)
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 three months ended March 31, 1998.
NOTE 3. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS
The Company entered into a bank credit agreement (Credit
Agreement) with a syndicate of banks and financial institutions
providing for borrowings of up to $1,265,000,000 to finance the
Cowles merger and refinance its existing debt. The Credit
Agreement includes term loans consisting of Tranche A of $735
million bearing interest at the London Interbank Offered Rate
(LIBOR) plus 125 basis points in 1998 and 62.5 basis points in
1999, payable in increasing quarterly installments from June 30,
1998 through March 31, 2005, and Tranche B of $330 million
bearing interest at LIBOR plus 175 basis points in 1998 and 150
basis points in 1999 and payable in semi-annual installments from
September 30, 1998 through September 30, 2008. A revolving
credit line of up to $200 million bears interest at LIBOR plus
125 basis points in 1998 and 62.5 basis points in 1999 and is
payable by March 19, 2005. Interest rates applicable to debt
drawn down at March 28, 1999, ranged from 5.57% to 6.50%. The
debt is secured by certain assets of the Company, and all of the
debt is pre-payable without penalty.
The terms of the Credit Agreement include certain operating
and financial restrictions, such as limits on the Company's
ability to incur additional debt, create liens, sell assets,
engage in mergers, make investments and pay dividends.
The Company's Credit Agreement requires a minimum of
$300,000,000 of debt be subject to interest rate protection
agreements. The Company has entered into interest rate
protection agreements to reduce the impact of changes in interest
rates on its floating rate debt. The Company is a party to three
interest rate swap agreements, expiring in 2002 to 2003, with an
aggregate notional amount of $300,000,000. The effect of these
agreements is to fix the LIBOR interest rate exposure at 5.9% on
that portion of the Company's term loans.
Also, the Company has entered into an interest rate collar
with a $200,000,000 notional amount, and a LIBOR ceiling rate of
6.5% and a floor of 5.3%.
The Company has outstanding letters of credit totaling
$30,737,000 securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
Long-term debt consisted of (in thousands):
March 28, March 31,
1999 1998
Credit Agreement:
Term loans $ 875,000 $ 1,065,000
Revolving credit line 112,000 60,000
Total indebtedness 987,000 1,125,000
Less current portion 12,000 21,675
Long-term indebtedness $ 975,000 $ 1,103,325
Long-term debt matures, as of March of each year, as follows
(in thousands):
2001 48,110
2002 73,858
2003 92,233
2004 151,952
2005 197,890
Thereafter 410,957
$ 975,000
Item 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Recent Events and Trends
At the end of 1998, the Company changed from calendar year
reporting to a fiscal year ending on the Sunday nearest December
31, with each quarter consisting of three periods - five weeks,
four weeks and four weeks. Accordingly, the first quarter of
1999 ended on March 28, 1999, versus the calendar quarter which
ended on March 31, 1998.
On March 19, 1998 the Company acquired all of the
outstanding shares of Cowles Media Company (Cowles) in a
transaction valued at $90.50 per Cowles share and the assumption
of $77.4 million in existing Cowles debt. Cowles publishes the
Star Tribune newspaper, which serves the Twin Cities of
Minneapolis and St. Paul. Cowles also owned four separate
subsidiaries that publish business magazines, special-interest
magazines and home improvement books. Simultaneously with the
closing of the Cowles merger, the Company sold the magazine and
book publishing subsidiaries. The combined proceeds, plus debt
and other liabilities assumed by the buyers in those
transactions, were $208.1 million. These proceeds were used to
repay debt associated with the Cowles merger. See note 2 to the
consolidated financial statements.
In connection with the merger, the Company paid 15% of the
consideration by issuing 6,330,548 shares of Class A Common Stock
in exchange for Cowles shares and paid cash for the remaining
shares. The Class A shares were exchanged using a ratio of
3.01667 shares of McClatchy Class A Common for each Cowles share.
The Company obtained bank debt through a syndicate of banks and
financial institutions to finance the cash requirements of the
merger and to refinance its existing debt (See note 3 to the
consolidated financial statements). Results of the Star Tribune
have been included in the Company's results beginning March 20,
1998.
The non-newspaper businesses were valued at fair market
value based upon the net after-tax proceeds received by the
Company on March 19, 1998, and accordingly, no gain or loss was
realized on the sale.
The primary asset retained by the Company following the
Cowles transaction is the Star Tribune, the largest newspaper in
Minnesota with daily circulation of 387,000 and Sunday
circulation of 673,000 as of March 19, 1998. It is now the
Company's largest newspaper.
During 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 133 (Accounting for
Derivative Instruments and Hedging Activities) which requires
that all derivatives be carried at fair value on the balance
sheet. This statement will become effective in the Company's
fiscal year 2000. While adoption of this statement is not
expected to materially impact the Company's financial results,
management has not determined the impact on the Company's
consolidated financial position.
First Quarter 1999 Compared to 1998
The Company reported net income of $13.6 million or 30 cents
per share compared to $9.2 million or 24 cents per share in the
first quarter of 1998. Earnings per share were affected by an
increase of approximately 5.8 million more average shares
outstanding in the 1999 quarter primarily as a result of Class A
shares issued in the March 1998 merger with Cowles Media company
(see discussion above).
Much of the earnings growth was due to improved advertising
revenue growth, particularly at the Star Tribune and the
Company's California and Washington newspapers, coupled with
lower average newsprint prices in the first quarter of 1999.
Results from the Star Tribune were included in the entire
first quarter of 1999, but were included for only nine days in
the 1998 quarter due to the timing of the close of the merger.
In addition, the change to period reporting in the 1999 first
quarter resulted in 91 days compared to 90 days in the calendar
first quarter of 1998.
Revenues increased 57.6% to 258.4 million primarily as a
result of the inclusion of the Star Tribune in the entire quarter
of 1999. Excluding the Star Tribune's revenues from both years
and revenues from operations sold in 1998, revenues were $160.8
million, up 5.1% from 152.9 million in the first quarter of 1998,
with advertising revenues of $126.4 million, up 5.2% and
circulation revenues of 26.9 million, up 1.0%.
If the Company had reported on a 5-4-4 period in the first
quarter of 1998 (rather than calendar), revenues excluding the
Star Tribune in both years and operations sold in 1998 would have
increased 4.1% with advertising revenues up 4.4% and circulation
revenues down 0.9%.
The growth in advertising revenues reflect a combination of
increased advertising linage and preprinted inserts combined with
advertising rate increases at many newspapers. The lower
circulation revenues reflect the Company's emphasis on volume
growth and the decision to hold circulation rates to 1998 levels
at most newspapers.
OPERATING REVENUES BY REGION:
(Amounts in thousands)
1999 1998 % Change
Minnesota newspaper $ 97,639 $ 8,923 NM
California newspapers 80,106 76,361 4.9
Carolinas newspapers 42,029 41,518 1.2
Northwest newspapers 36,381 34,289 6.1
Non-newspaper operations 2,280 2,872 (20.6)
$ 258,435 $ 163,963 57.6
NM - not meaningful
Minnesota - The Star Tribune contributed 37.8% of the
Company's revenues in 1999 versus $8.9 million in the nine days
reported in 1998. The Star Tribune's revenues consisted of $79.1
million of advertising revenues, $17.6 million of circulation
revenues and $0.9 million of other revenues. On a proforma
basis, total revenues for the Star Tribune were up 5.3% with a
6.7% gain in advertising revenues, primarily reflecting strong
growth in national and retail advertising categories.
California - The California newspapers contributed 31.0% of
1999 revenues compared to 46.6% in the 1998 calendar quarter.
Total revenues increased 4.9% from calendar 1998; however, if the
1998 quarter had been reported on a 5-4-4 period consistent with
1999 reporting, total revenues would have increased 3.7% with
advertising revenues up 4.5%. Advertising growth was led by the
Sacramento and Modesto Bees. Classified advertising in the three
California dailies increased 6.2% while retail advertising was up
2.0%.
Carolinas - The Carolinas newspapers contributed 16.3% of
total revenues versus 25.3% in 1998 and were up 1.2% from the
1998 calendar levels. The Company sold a weekly newspaper and
other newspaper operations in the Carolinas in late 1998.
Excluding the revenues from these operations and conforming 1998
to period reporting, total revenues and advertising revenues
increased 2.9% in this region.
The (Raleigh) News & Observer is the largest of the
Company's newspapers in the region, and new retailers arriving in
the Raleigh area in 1997 and 1998 helped fuel strong revenue
growth in those years. While the underlying economy remains
strong, the lack of new retailers in 1999 and fewer classified
advertisements has held down advertising revenue growth in this
market.
Northwest - With 14.1% of total Company revenues (compared
to 20.9% in 1998), the Northwest newspapers are McClatchy's
smallest newspaper region, but exhibited the strongest revenue
growth in the first quarter. Total revenues increased 6.1% from
calendar 1998 and were up 5.0% from 1998 after restating for
period reporting. On that basis, advertising revenues increased
6.3% with retail and classified categories up 5.9% and 2.7%,
respectively.
Non-newspaper revenues (0.9% of total in 1999 and 1.8% in
1998) declined 20.6% from calendar 1998 and were down 20.2% on a
restated 1998 basis. McClatchy sold two commercial printing
operations in late 1998. Ongoing non-newspaper revenues are now
derived from The Newspaper Network (TNN), a newspaper marketing
company, and Nando Media, the Company's online publishing
division. Revenues from these operations increased 31.9%, due
primarily to growth at TNN.
Operating Expenses:
The Company's operating expenses increased 52.3% and include
the Star Tribune in the entire 91 days of the 1999 quarter versus
nine in the calendar 1998 quarter. Excluding expenses from the
Star Tribune in both years, expenses for operations sold in 1998
and conforming ongoing expenses in 1998 to period reporting,
operating expenses increased 2.2%. Operating expenses were held
down by lower newsprint prices in the 1999 quarter. Newsprint
and supplement expenses declined nominally, representing
increased newsprint usage of approximately 3.0% and higher cost
of newspaper supplements, offset by lower newsprint prices.
Compensation expense increased 4.7% on a comparable basis
reflecting slightly higher full-time equivalent employee hours,
salary rate increases of 2.0% to 4.0% and higher retirement
expenses. All other operating expenses including depreciation
and amortization were relatively flat with the 1998 quarter.
Non-Operating (Expenses) Income-Net:
These net expenses increased $12.6 million due primarily to
a $12.9 million increase in interest expense due to a full
quarter of debt service costs associated with debt incurred to
complete the acquisition of the Star Tribune.
Income Taxes:
The Company's effective tax rate was 50.2% in 1999 compared
to 52.0% in the 1998 quarter and declined primarily due to the
expected increase in annual pre-tax income relative to non-
deductible expenses in 1999.
Liquidity & Capital Resources
Operations generated $28.6 million in cash during the three-
month period ending March 28, 1999. Cash was used primarily to
repay debt, pay for capital expenditures and pay dividends.
Capital expenditures are projected to be $41.0 million in 1999.
The Company entered into a bank credit agreement (Credit
Agreement) with a syndicate of banks and financial institutions
providing for borrowings of up to $1,265,000,000 to finance the
Cowles merger and refinance its existing debt. The Credit
Agreement includes term loans consisting of Tranche A of $735
million bearing interest at the London Interbank Offered Rate
(LIBOR) plus 62.5 basis points, payable in increasing quarterly
installments from June 30, 1998 through March 31, 2005, and
Tranche B of $330 million bearing interest at LIBOR plus 150
basis points and payable in increasing semi-annual installments
from September 30, 1998 through September 30, 2008. A revolving
credit line of up to $200 million bears interest at LIBOR plus
62.5 basis points and is payable by March 19, 2005. The Company
has $57.3 million of available credit at March 28, 1999 (see note
3 to the consolidated financial statements). The debt is secured
by certain assets of the Company, and all of the debt is pre-
payable without penalty. The Company intends to accelerate
payments on this debt as cash generation allows.
The terms of the Credit Agreement include certain operating
and financial restrictions, such as limits on the Company's
ability to incur additional debt, create liens, sell assets,
engage in mergers, make investments and pay dividends.
The Company has entered into interest rate protection
agreements to reduce the impact of changes in interest rates on
its floating rate debt. The Company is a party to three interest
rate swap agreements, expiring in 2002 to 2003, with an aggregate
notional amount of $300,000,000. The effect of these agreements
is to fix the LIBOR interest rate exposure at 5.9% on that
portion of the Company's term loans. Also, the Company entered
into an interest rate collar with a $200,000,000 notional amount,
and a LIBOR ceiling rate of 6.5% and a floor of 5.3%.
The Company has outstanding letters of credit totaling $30.7
million securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
While the Company expects that most of its free cash flow
generated from operations in 1999 and in the foreseeable future
will be used to repay debt, management is of the opinion that
operating cash flow and its present and future credit lines as
described above are adequate to meet the liquidity needs of the
Company, including currently planned capital expenditures and
other investments.
YEAR 2000 COMPLIANCE
The Company's Year 2000 Compliance Plan includes a
definition of Year 2000 conformity, compliance certification
standards, reporting and risk management structures. The
Company's target date for completion of all remediation projects
is generally July 1, 1999. At the time of this filing, the
Company expects most of its systems to be Y2K compliant by the
target date with exceptions as noted.
A corporate task force and task forces at each of our
newspapers have assessed Year 2000 issues and are monitoring
changes to the Company's many different systems. A Year 2000
Compliance Coordinator is facilitating our progress in meeting
our internal deadlines for compliance. This coordinator reports
to the Corporate Director of Information Systems and the
Company's Vice President, Finance.
For purposes of achieving remediation, a combination of
internal effort, upgrades from vendors, external programmers and
consultants, replacement systems or, in a few cases, retirement
of systems are being used. To date, the Company has completed an
inventory and analysis of systems and equipment with date-related
logic, and is currently in the remediation and testing phases.
Historical costs incurred in bringing systems to Year 2000
compliance through March 28, 1999, are estimated to be $800,000.
At present, we estimate that the incremental cost of making
required changes will be approximately $700,000 in additional
costs through 1999. Capital projects, previously budgeted for
business reasons, which include Year 2000 compliance, total
approximately $13 million throughout the Company.
The Company's 11 daily newspapers generate over 95% of our
revenues and profits. The following describes these newspapers'
state of readiness for Year 2000, the associated risks and the
state of our contingency plans.
NEWSPAPER PRODUCTION FACILITIES AND PROCESSES:
Production Systems:
The Company has reviewed its computer and mechanical systems
at all material production facilities, and the Company believes
the systems have been made Year 2000 compliant. As of this
writing, we believe our press and post-press systems at all
locations are Year 2000 compliant.
If the Company's presses succumb to Year 2000 problems, it
would be difficult in our larger markets to print on a timely
basis. Although all of our papers have reciprocal printing
agreements with other papers in each area, our largest papers,
which contribute the greatest revenues, are too large to be
printed in their entirety at another location. Hence, these
newspapers could be printed late, with smaller editions and with
less circulation. This risk would have significant negative
revenue implications for the Company. Also, there are no
assurances that other newspapers with which the Company has
reciprocal printing arrangements will be Year 2000 compliant.
Year 2000 contingency plans at each property outline procedures
for off-site printing and special year-end press schedules.
Third Party Suppliers:
One of the most significant risks associated with the
Company's production systems in the Year 2000 may be the
Company's ability to receive electrical power from the various
utility companies that serve the communities in which it produces
newspapers. None of the Company's newspapers currently have
electrical generators sufficiently large enough to run printing
presses. Hence, if electrical service is unavailable, the
Company may have to rely on reciprocal printing agreements
(discussed above) or may not be able to produce a daily
newspaper. The Company is continuing to monitor the status of
its utility providers as to their Year 2000 readiness, but must
rely on representations from such vendors. If the Company's
utility providers are unable to supply electrical power, it could
have significant negative revenue implications for the Company.
Current reports from power utility companies have been promising
and have led to an increased level of confidence that significant
power failures are unlikely. Nonetheless, Company contingency
plans and procedures are in place for short-term outages.
The Company has contacted its newsprint vendors, and we have
received written statements that the Company's major newsprint
suppliers generally expect to be Year 2000 compliant before
January 1, 2000. In addition, we plan to determine in the first
half of 1999 whether we will increase our stock of newsprint
during the last months of 1999 as additional insurance against
potential Year 2000 problems that might be experienced by vendors
or delivery systems. The same inquiry process and determinations
are being made for all other major material sources, such as ink
and plate suppliers.
EDITORIAL SYSTEMS:
The Company uses editorial systems from various vendors. We
maintain software and hardware maintenance contracts with vendors
of critical components, and many systems at our newspapers have
been made Year 2000 compliant. Minor upgrades at a few
newspapers are expected to make all editorial systems Year-2000
ready by July 1, 1999.
The Company has contracted to replace existing editorial
systems at our California dailies (The Sacramento Bee, The
Modesto Bee and The Fresno Bee) in 1999 with newer systems which
offer increased functionality, including the ability to paginate
pages (electronically assemble all elements on a page). The
vendor warrants the new systems to be Year 2000 compliant.
Notwithstanding the new system implementations, The Sacramento
Bee has performed, and The Fresno Bee and The Modesto Bee will
perform before July 1, 1999, interim software and/or hardware
upgrades on the existing editorial systems to meet our Year 2000
compliance standards. Although the hardware vendor has declined
to certify certain pieces of hardware as Year 2000 compliant,
extensive testing by the application vendor and The Sacramento
Bee indicates that the existing systems can operate into the year
2000 without problems should installation of the new systems
extend beyond December 31,1999. Replacement of the editorial
systems was already planned and budgeted; therefore, they are not
directly a Year 2000 compliance expense. Costs to upgrade
existing software will be expensed as incurred.
For the reasons noted above, we believe at this time that
the risks of editorial system failure are minimal. For backup
purposes, our newspapers possess enough Apple Macintosh
workstations (generally immune to Year 2000 issues) with input,
processing and output capabilities that, in an emergency, could
be used to complete an edition, or even produce new editions for
several days, while problems were being resolved. In the case of
several newspapers, the primary editorial system functions are
currently produced on Macintosh workstations, further reducing
risk. In all cases, complications could result in smaller
newspapers with less editorial content.
CIRCULATION SYSTEMS:
The majority of the Company's circulation systems are
supported by vendor maintenance agreements and in some cases, we
rely on the vendor to provide timely releases of compliant
versions. Currently, all vendor-supported circulation systems
are on the vendor's current release of software, except The
(Tacoma) News Tribune, which expects to be upgraded by June 30,
1999. Three Company newspapers use custom, internally written
circulation applications. Two are currently considered
compliant, based on thorough internal testing. For strategic
reasons, The Modesto Bee (the third paper with a custom
application) has elected to terminate remediation on its current
in-house system and replace it with a new system that the Company
has selected for eventual installation at all its newspapers.
The Company expects that installation will be complete by
November 1, 1999.
In the event that a circulation system should fail, Company
contingency plans provide for backup delivery lists to be created
immediately prior to the end of 1999.
Post-press (packaging and distribution) systems and
mechanical equipment are now believed to be in compliance or are
in the process of being replaced as part of regular cyclical
system replacements. We expect all to be Year 2000 compliant by
mid-1999. We currently believe our newspapers delivery
transportation fleets to be immune from Year 2000 issues.
The inability to deliver our print products would have
negative impact on both circulation and advertising revenues, the
primary sources of revenue for the Company.
ADVERTISING SYSTEMS/CUSTOMERS:
Display Systems:
The Company's newspapers use various systems to produce
graphics for run-of-press (display) advertising. While we
believe most newspapers' advertising systems are compliant, three
of our newspapers, the Star Tribune, Anchorage Daily News and The
News & Observer, rely on graphic processing subsystems from a
vendor that has just recently provided Year 2000 remediation
plans for the three newspapers,which now expect to be compliant
by June 30, 1999.
Classified Systems:
The classified advertising systems at the Company's
newspapers are under software and hardware maintenance contracts
with vendors, and all material such systems have received or
expect to receive upgrades that the Company believes will provide
Year 2000 compatibility. A replacement system for the Anchorage
Daily News has been installed and is considered compliant.
General:
The Star Tribune will complete an advertising gateway
remediation project in June that ties their various systems
together. Individually, their advertising systems are now
believed to be Year 2000 compliant as stated above.
If advertising systems at our newspapers are not brought
into compliance, our newspapers may have to retrieve hard-copy
proofs of advertising contents of the respective databases in
advance and manually input graphics, which could delay the
production of the newspaper. Moreover, many advertisers
currently send advertising materials to the Company's newspapers
electronically. If advertisers are unable to create advertising
material due to their own Year 2000 issues, or external
communication systems are affected, it is possible that the
newspapers would have additional advertising makeup costs.
The Company is currently reviewing a plan to address the
issue of Year 2000 readiness with our major advertisers, as they
represent a critical source of revenue. Lack of Year 2000
compliance among major advertisers could result in lost
advertising revenues.
ACCOUNTING, ADMINISTRATION AND GENERAL:
In 1997, the Company, in the course of reviewing the
effectiveness of its financial and human resource systems,
determined to replace the systems at all newspapers with a
centralized system. The vendor has warranted this system to be
Year 2000 compliant. All of our newspapers have now switched to
the new financial system, and all but three of our newspapers
have moved to the new payroll and human resources system, with
the remainder scheduled to convert by July 1999.
We believe financial reporting and accounting
responsibilities can be met without the use of automated
financial systems. A failure in the Company's financial systems
would result in delays in processing payables, receivables,
payroll and reporting Company performance while manual
(contingency) processes were activated.
If the automated advertising or circulation management and
billing systems fail (see previous discussions of advertising and
circulation systems), contingency plans will be implemented that
would revert to a manual accounting system. Billing would also
be manual, labor intensive and would experience significant
delays. Advertising orders would be created using hard copy
advertising tickets. A local database or spreadsheet would be
used to create run lists for pagination.
The McClatchy Year 2000 Compliance Plan addressed the need
to verify the Year 2000 readiness of any third party that could
cause a material impact on the Company. Each McClatchy property
identified and requested Year 2000 compliance statements from
material vendors and suppliers, content providers, utility
companies, financial organizations and other business partners.
Where written representations of Year 2000 compliance have not
been forthcoming, we assume that the service or product will not
be Year 2000 compliant. In the event that any of the Company's
material vendors, suppliers or financial institutions are unable
to provide the Company with services, materials or financing
required to operate the Company's business, it could have a
material impact on our operations. To date, no such impact has
been identified.
The Star Tribune and several other McClatchy newspapers have
been notified of or have received re-releases of previously
remediated and Y2K certified software; the impact of these
secondary releases is not known yet. The Company recognizes that
software vendors may release updated software throughout 1999
that they identify as their Year 2000 compliant version. This
may occur after the Company has completed remediation based on
software previously provided by the vendor as a Year 2000
compliant release. The Company will continue to monitor these
changes to its Y2K compliance status and when material, we will
continue to update software as released by the vendor.
CONTINGENCY PLANS:
In addition to contingency plans noted in the various
systems above, our newspapers have developed contingency plans to
cope with the possibility that major systems could develop
problems. These plans are being reviewed and modified locally
and at our corporate office throughout the first half of 1999 as
testing of major systems indicate need for further refinement.
As an added measure, the Company will conduct, at all locations,
start-to-finish functional tests of its production systems in mid-
1999 and significant financial systems in the September 1999.
FORWARD LOOKING INFORMATION
Management has made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-
looking statements include the information concerning possible or
assumed future results of operations of McClatchy. Forward-
looking statements are generally preceded by, followed by or are
a part of sentences that include the words believes, expects,
anticipates or similar expressions. For those statements, the
Company claims the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation
Reform Act of 1995. The following important factors, in addition
to those discussed elsewhere in this document, could affect the
future results of McClatchy, and could cause those future results
to differ materially from those expressed in the forward-looking
statements: general economic, market or business conditions;
financial, reliance on customer and vendor assurances as to their
Year 2000 compliance, the completeness of the Company's internal
efforts to identify systems that are not Year 2000 compliant and
its remediation efforts associated with such systems; increases
in newsprint prices and/or printing and distribution costs over
anticipated levels; increases in interest rates; competition from
other forms of media in our principal markets; increased
consolidation among major retailers in our newspaper markets or
other events depressing the level of advertising; an economic
downturn in the economies of Minnesota, California's Central
Valley, the Carolinas, Washington State and Alaska; changes in
the Company's ability to negotiate and obtain favorable terms
under collective bargaining arrangements with its employees;
competitive actions by other companies; other occurrences leading
to decreased circulation and diminished revenues from both
display and classified advertising; and other factors, many of
which are beyond management's control. Consequently, there can
be no assurance that the actual results or developments
anticipated will be realized or that these results or
developments will have the expected consequences.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
In addition to normal business risks discussed above, the
Company utilizes interest rate protection agreements to help
maintain the overall interest rate parameters set by management.
None of these agreements were entered into for trading purposes.
(See note 3 to the consolidated financial statements.) As a
result of this interest rate mix, a hypothetical 10 percent
change in interest rates would have a $0.04 to $0.07 per share
increase or decrease in the Company's annual results of
operations. It would also impact the fair values of its market
risk sensitive financial instruments, but would not materially
affect the Company's financial position taken as a whole.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Default Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -
None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit:
Financial Data Schedule for the three-months ended
March 28, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereto duly authorized.
The McClatchy Company
Registrant
Date: May 10, 1999 /s/ James P. Smith
James P. Smith
Vice President, Finance and
Treasurer