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 26, 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 November 5, 1999:
Class A Common Stock 16,416,197
Class B Common Stock 28,531,912
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands)
September 26, December 27,
1999 1998
ASSETS
CURRENT ASSETS
Cash $ 6,942 $ 9,650
Trade receivables (less allowances of 164,782
$3,505 in 1999 and $4,835 in 1998) 149,685
Other receivables 4,240 2,762
Newsprint, ink and other inventories 11,913 16,587
Deferred income taxes 16,890 17,441
Other current assets 10,415 4,414
215,182 200,539
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 205,663 203,842
Equipment 459,407 446,236
665,070 650,078
Less accumulated depreciation (307,872) (275,230)
357,198 374,848
Land 56,615 56,593
Construction in progress 33,271 21,961
447,084 453,402
INTANGIBLES - NET 1,467,317 1,510,954
OTHER ASSETS 83,080 81,830
TOTAL ASSETS $ 2,212 663 $ 2,246,725
See notes to consolidated financial statements.
THE McCLATCHY COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In thousands, except share amounts)
September 26, December 27,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES
Accounts payable $ 77,747 $ 68,358
Accrued compensation 67,395 62,038
Income taxes 8,964 29,222
Unearned revenue 37,141 33,602
Carrier deposits 3,618 4,071
Other accrued liabilities 26,558 23,099
221,423 220,390
LONG-TERM BANK DEBT 927,000 1,004,000
OTHER LONG-TERM OBLIGATIONS 70,766 75,274
DEFERRED INCOME TAXES 138,227 140,056
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock $.01 par value:
Class A - authorized
100,000,000 shares, issued
16,355,250 in 1999 and 16,033,763
in 1998 164 160
Class B - authorized
60,000,000 shares, issued
28,531,912 in 1999 and 28,655,912
in 1998 285 287
Additional paid-in capital 274,534 269,523
Retained earnings 580,264 537,035
855,247 807,005
TOTAL LIABILITIES AND STOCKHOLDERS' $ 2,212,663 $ 2,246,725
EQUITY
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 26, September 30, September 26, September 30,
1999 1998 1999 1998
REVENUES - NET
Newspapers:
Advertising $ 216,884 $ 204,762 $ 642,927 $ 539,931
Circulation 43,265 44,631 131,492 117,807
Other 6,696 10,636 19,600 27,054
266,845 260,029 794,019 684,792
Non-newspapers 2,424 3,100 7,260 9,307
269,269 263,129 801,279 694,099
OPERATING EXPENSES
Compensation 102,500 101,353 306,987 269,563
Newsprint and supplements 34,988 41,479 114,125 110,737
Depreciation and amortization 26,569 25,486 79,831 67,553
Other operating expenses 49,753 45,948 142,222 122,193
213,810 214,266 643,165 570,046
OPERATING INCOME 55,459 48,863 158,114 124,053
NON-OPERATING (EXPENSES) INCOME
Interest expense (15,963) (20,320) (49,285) (44,535)
Partnership income (loss) (350) 600 (490) 1,150
Other - net 523 (519) 1,464 869
INCOME BEFORE INCOME TAX 39,669 28,624 109,803 81,537
PROVISION
INCOME TAX PROVISION 19,297 14,598 53,803 41,584
NET INCOME $ 20,372 $ 14,026 $ 56,000 $ 39,953
NET INCOME PER COMMON SHARE:
Basic $ 0.45 $ 0.31 $ 1.25 $ 0.94
Diluted $ 0.45 $ 0.31 $ 1.25 $ 0.93
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES:
Basic 44,875 44,598 44,799 42,726
Diluted 45,052 44,757 44,974 42,884
See notes to consolidated financial statements
THE McCLATCHY COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended
September 26, September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,000 $ 39,953
Reconciliation to net cash provided:
Depreciation and amortization 82,429 69,445
Changes in certain assets and liabilities - net (20,326) (26,055)
Other (691) (341)
Net cash provided by operating activities 117,412 83,002
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (32,919) (23,633)
Merger of Cowles Media Company - (1,099,518)
Proceeds from sale of certain business operations - 180,903
Other - net (1,802) 2,770
Net cash used by investing activities (34,721) (939,478)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from long-term debt - 1,125,000
Repayment of long-term debt (77,000) (267,370)
Payment of cash dividends (12,771) (12,091)
Other - principally stock issuances in employee plans 4,372 3,223
Net cash (used) provided by financing activities (85,399) 848,762
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,708) (7,714)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,650 8,671
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,942 $ 957
OTHER CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes (net of refunds) $ 74,697 $ 36,133
Interest paid (net of capitalized interest) $ 47,329 $ 34,653
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
Par Value Paid-In Retained
Class A Class B Capital Earnings Total
BALANCES, DECEMBER 31, 1997 $ 94 $ 287 $ 74,354 $ 492,320 $ 567,055
Net income (9 months) 39,953 39,953
Dividends paid ($.285 per share) (12,091) (12,091)
Conversion of 30,000 Class B - -
shares to Class A
Issuance of 205,424 Class A 2 3,221 3,223
shares under employee stock plans
Issuance of 6,328,289 Class A 63 189,741 189,804
shares for Cowles merger
Tax benefit from stock plans 785 785
BALANCES, September 30, 1998 159 287 268,101 520,182 788,729
Net income (3 months) 21,098 21,098
Dividends paid ($.095 per share) (4,245) (4,245)
Issuance of 46,408 Class A 1 1,322 1,323
shares under employee stock plans
Issuance of 2,259 Class A shares - -
in Cowles Merger
Tax benefit from stock plans 100 100
BALANCES, DECEMBER 27, 1998 160 287 269,523 537,035 807,005
Net income (9 months) 56,000 56,000
Dividends paid ($0.285 per share) (12,771) (12,771)
Conversion of 124,000 Class B 2 (2)
shares to Class A
Issuance of 197,487 Class A 2 4,370 4,372
shares under employee stock plans
Tax benefit from stock plans 641 641
BALANCES, September 26, 1999 $ 164 $ 285 $ 274,534 $ 580,264 $ 855,247
See notes to consolidated financial statements
THE McCLATCHY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The McClatchy Company (the Company) and its subsidiaries are
engaged primarily in the publication of newspapers located in
Minnesota, California, Washington state, Alaska and North and
South Carolina.
The consolidated financial statements include the accounts
of the Company and its subsidiaries. Significant intercompany
items and transactions have been eliminated. In preparing the
financial statements, management makes estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to present fairly the Company's financial position,
results of operations, and cash flows for the interim periods
presented. All adjustments are normal recurring entries. Such
financial statements are not necessarily indicative of the
results to be expected for the full year.
NOTE 2. MERGER WITH COWLES MEDIA COMPANY
On March 19, 1998 the Company acquired all of the
outstanding shares of Cowles Media Company (Cowles) in a
transaction valued at approximately $90.50 per Cowles share and
the assumption of $77,350,000 in existing Cowles debt. Cowles
publishes the Star Tribune newspaper, which serves the Twin
Cities of Minneapolis and St. Paul. Cowles also owned four
separate subsidiaries that publish business magazines, special-
interest magazines and home improvement books. Simultaneously
with the close of the merger, the Company sold the magazine and
book publishing subsidiaries. The combined proceeds, plus debt
and other liabilities assumed by the buyers in those
transactions, were $208.1 million. These proceeds were used to
repay debt associated with the Cowles merger.
In connection with the Cowles merger, the Company paid 15%
of the consideration by issuing 6,330,548 shares of Class A
Common Stock in exchange for Cowles shares and paid cash for the
remaining shares. The Class A shares were exchanged using a
ratio of 3.01667 shares of McClatchy Class A Common for each
Cowles share. The Company incurred bank debt through a syndicate
of banks and financial institutions to finance the cash
requirements of the merger and to refinance its existing debt
(see note 3). Results of the Star Tribune have been included in
the Company's results beginning March 20, 1998.
The non-newspaper businesses were valued at fair market
value based upon the net after-tax proceeds received by the
Company on March 19, 1998, and accordingly, no gain or loss was
realized on the sale.
The primary asset retained by the Company is the Star
Tribune, the largest newspaper in Minnesota with daily
circulation of 387,000 and Sunday circulation of 673,000 as of
March 19, 1998. The Star Tribune is now the Company's largest
newspaper.
The merger was accounted for as a purchase, and accordingly,
assets acquired and liabilities assumed have been recorded at
their fair market values. Assets retained by the Company include
approximately $55,319,000 of current assets, $143,978,000 of
property, plant and equipment, $1,166,400,000 of intangible
assets and $63,267,000 of other assets. Intangible assets
include approximately $929,000,000 of goodwill which is being
amortized over 40 years. In addition to assuming Cowles' long-
term debt, a total of $214,197,000 of deferred taxes and other
liabilities were assumed.
The following table summarizes, on an unaudited pro forma
basis, the combined results of operations of the Company and its
subsidiaries for the nine-month period ended September 30, 1998,
as though the Cowles merger had taken place on January 1, 1998
(in thousands, except per share amounts):
1998
Revenues $ 776,788
Net income 1,053
Diluted earnings per share $ 0.02
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 1998, contributing
to the dilution in the pro forma results for the nine months
ended September 30, 1998.
NOTE 3. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS
The Company entered into a bank credit agreement (Credit
Agreement) with a syndicate of banks and financial institutions
providing for borrowings of up to $1,265,000,000 to finance the
Cowles merger and refinance its existing debt. The Credit
Agreement includes term loans consisting of Tranche A of $735
million bearing interest at the London Interbank Offered Rate
(LIBOR) plus 125 basis points in 1998 and 62.5 basis points in
1999, payable in increasing quarterly installments from June 30,
1998 through March 31, 2005, and Tranche B of $330 million
bearing interest at LIBOR plus 175 basis points in 1998 and 150
basis points in 1999 and payable in semi-annual installments from
September 30, 1998 through September 30, 2008. A revolving
credit line of up to $200 million bears interest at LIBOR plus
125 basis points in 1998 and 62.5 basis points in 1999 and is
payable by March 19, 2005. Interest rates applicable to debt
drawn down at September 26, 1999, ranged from 5.82% to 7.02%.
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 collar arrangement terminates in
the fourth quarter of 2000.
The Company has outstanding letters of credit totaling
$31,680,000 securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
Long-term debt consisted of (in thousands):
September 26, December 27,
1999 1998
Credit Agreement:
Term loans $ 804,000 $ 904,000
Revolving credit line 123,000 100,000
Total indebtedness 927,000 1,004,000
Less current portion - -
Long-term indebtedness $ 927,000 $ 1,004,000
Long-term debt matures, as of September of each year, as
follows (in thousands):
2001 $ 55,672
2002 76,615
2003 108,771
2004 173,083
2005 274,127
Thereafter 238,732
$ 927,000
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Recent Events and Trends
At the end of 1998, the Company changed from calendar year
reporting to a fiscal year ending on the last Sunday in December,
with each quarter consisting of three periods - five weeks, four
weeks and four weeks. Accordingly, the third quarter of 1999
ended on September 26, 1999, versus the calendar quarter which
ended on September 30, 1998.
On March 19, 1998 the Company acquired all of the
outstanding shares of Cowles Media Company (Cowles) in a
transaction valued at $90.50 per Cowles share and the assumption
of $77.4 million in existing Cowles debt. Cowles publishes the
Star Tribune newspaper, which serves the Twin Cities of
Minneapolis and St. Paul. Cowles also owned four separate
subsidiaries that publish business magazines, special-interest
magazines and home improvement books. Simultaneously with the
closing of the Cowles merger, the Company sold the magazine and
book publishing subsidiaries. The combined proceeds, plus debt
and other liabilities assumed by the buyers in those
transactions, were $208.1 million. These proceeds were used to
repay debt associated with the Cowles merger. See note 2 to the
consolidated financial statements.
In connection with the merger, the Company paid 15% of the
consideration by issuing 6,330,548 shares of Class A Common Stock
in exchange for Cowles shares and paid cash for the remaining
shares. The Class A shares were exchanged using a ratio of
3.01667 shares of McClatchy Class A Common for each Cowles share.
The Company obtained bank debt through a syndicate of banks and
financial institutions to finance the cash requirements of the
merger and to refinance its existing debt (See note 3 to the
consolidated financial statements). Results of the Star Tribune
have been included in the Company's results beginning March 20,
1998.
The non-newspaper businesses were valued at fair market
value based upon the net after-tax proceeds received by the
Company on March 19, 1998, and accordingly, no gain or loss was
realized on the sale.
The primary asset retained by the Company following the
Cowles transaction is the Star Tribune, the largest newspaper in
Minnesota with daily circulation of 387,000 and Sunday
circulation of 673,000 as of March 19, 1998. It is now the
Company's largest newspaper.
In late 1998, the Company sold several small newspaper
operations in North Carolina and commercial printing operations
in California and North Carolina. In addition, the Company
closed a small niche operation in Minneapolis. The net effect of
these transactions was not material to the Company's 1998
results, and the effects on revenue and expense comparisons are
discussed below.
During 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard 133 (Accounting for
Derivative Instruments and Hedging Activities) which requires
that all derivatives be carried at fair value on the balance
sheet. This statement will become effective in the Company's
fiscal year 2001. While adoption of this statement is not
expected to materially impact the Company's financial results,
management has not determined the impact on the Company's
consolidated financial position.
Third Quarter 1999 Compared to 1998
Earnings were $20.4 million or 45 cents per share in the
third quarter of 1999 compared to $14.0 million or 31 cents per
share in 1998. The higher earnings are largely due to growth in
advertising revenues and lower newsprint costs. Earnings in the
quarter also benefited from lower interest expense as the Company
continued to pay down its debt.
Revenues were up 2.3% from the 1998 calendar quarter.
However, after conforming 1998 revenues to period reporting to be
consistent with 1999 and excluding revenues from several small
operations which were sold/closed in 1998 (pro forma revenues),
total revenues in the third quarter increased 4.0% and
advertising revenues increased 4.9%. Circulation revenues
declined 3.2% from 1998 pro forma primarily reflecting the fact
that there were no rate increases in 1999 and that certain
newspapers increased payments to carriers (recorded as a contra
revenue).
OPERATING REVENUES BY REGION:
(In thousands)
Period Calendar % Change
1999 1998
Minnesota newspaper $ 97,378 $ 95,975 1.5
California newspapers 86,031 82,061 4.8
Carolinas newspapers 43,890 44,146 (0.6)
Northwest newspapers 39,546 37,847 4.5
Non-newspaper operations 2,424 3,100 (21.8)
$ 269,269 $ 263,129 2.3
Minnesota - The Star Tribune contributed 36.2% of third
quarter 1999 revenues. Total revenues increased 1.5% from
calendar 1998 and were up 2.0% from pro forma 1998 revenues.
Advertising revenues increased 3.3% to $78.8 million reflecting
weaker advertising revenue from major retail advertisers but
improving trends in classified advertising.
California - The California newspapers contributed 31.9% of
total revenues. Total revenues increased 4.8% from calendar 1998
but were up 5.4% from pro forma 1998 revenues. Advertising
revenues at the Company's California dailies totaled $71.3
million and were up 6.2% from pro forma advertising revenues in
the prior year. The growth in advertising revenues was generally
strong in all categories: retail, classified and national
advertising.
Carolinas - The Carolinas contributed 16.3% of third quarter
revenue. Total revenues declined 0.6% from the 1998 calendar
quarter, reflecting the sale of certain newspaper operations in
this region in 1998, and the adverse affects of Hurricane Floyd
in the third quarter of 1999. On a pro forma basis, that is,
conforming to period reporting and excluding sold operations in
1998, total revenues increased 3.8%. Advertising revenues at the
Company's Carolina dailies were $34.4 million, up 5.3% from pro
forma revenues. The Company estimates that advertising revenues
would have increased 7.6% over pro forma 1998 without the
negative impact of Hurricane Floyd on its 1999 operations.
Northwest - The Northwest newspapers contributed 16.3% of
third quarter revenues and increased 4.5% over calendar 1998, but
was up 5.2% from pro forma 1998 revenues. Advertising revenues
at the Company's dailies in Alaska and the state of Washington
totaled $29.2 million, up 7.7% from pro forma 1998 advertising
revenues. Like California, advertising revenue growth was strong
in all major categories.
Non-newspaper revenues - Non-newspaper revenues represented
less than 1.0% of total revenues in the third quarter of 1999 and
declined $676,000 from calendar 1998. These revenues increased
$551,000 from pro forma revenue, which exclude commercial
printing operations sold during 1998.
Operating Expenses:
Operating expenses totaled $213.8 million and declined
nominally from the 1998 calendar quarter. On a pro forma basis,
that is conforming to period reporting and excluding sold
operations, operating expenses increased 1.8%.
Expenses were generally held down by lower newsprint prices
in the third quarter of 1999. Newsprint and supplement expense
declined 15.8% from pro forma 1998. The lower newsprint prices
were partially offset by higher newsprint usage, up about 3.0%
due to increased advertising and circulation volumes and some
product enhancements, as well as, increased use of supplements.
Compensation costs increased 3.5% from pro forma 1998 reflecting
salary increases of 2.0% to 4.0% and higher retirement costs.
All other operating expenses, including depreciation and
amortization, were up 8.2%, and were affected by hurricane-
related expenses in the Carolinas and promotion of new editorial
products, primarily at the Star Tribune.
Non-Operating (Expenses) Income-Net:
Non-operating expenses declined $4.4 million due primarily
to a drop in interest expense as the Company continued to repay
its debt in 1999. The Company recorded a loss of $350,000 as its
portion of The Ponderay Newsprint Mill (Ponderay) joint venture's
results versus income of $600,000 in 1999. In the 1998 quarter,
the Company recorded a pre-tax loss of $971,000 on the sale of a
magazine operation in North Carolina and a commercial printing
operation in California.
Income Taxes:
In the third quarter of 1999, the Company adjusted its full-
year effective tax rate to 49.0% from 49.2%, resulting in a
quarterly provision of 48.6%. The Company's effective tax rate
in 1999 is lower than 1998 (51.0% for the quarter) due to higher
projected income before taxes in 1999 relative to a set amount of
non-deductible expenses.
Nine-Month Period 1999 Compared To 1998
Earnings in the nine months ending September 26, 1999, were
$56.0 million or $1.25 per share compared to $40.0 million or 93
cents in 1998. The 1999 earnings include a full year of the Star
Tribune newspaper's operations versus six months and nine days of
those operations in 1998 (the Star Tribune purchase was completed
on March 19, 1998).
Revenues and expenses were generally affected by the same
factors in the nine-month period that were discussed in the
quarterly comparisons above. Exceptions are noted below.
Operating revenues totaled $801.3 million, up 15.4% from
1998 calendar revenues of $694.1 million and were largely
affected by the inclusion of the Star Tribune in all of 1999
versus the partial period in 1998.
OPERATING REVENUES BY REGION:
(In thousands)
Period Calendar % Change
1999 1998
Minnesota newspaper $ 293,264 $ 202,622 44.7
California newspapers 252,133 240,769 4.7
Carolinas newspapers 131,427 130,449 0.7
Northwest newspapers 117,195 110,952 5.6
Non-newspaper operations 7,260 9,307 (22.0)
$ 801,279 $ 694,099 15.4
Newspaper Operations - The Star Tribune revenues reflect the
inclusion of the first quarter in 1999 and only six days of the
first quarter in 1998. On a pro forma basis, revenues at the
Star Tribune are up 2.9% in 1999 and reflect those trends
discussed in the quarterly comparisons.
The Carolinas newspapers revenue decline is affected by the
sales of operations in 1998. On a pro forma basis, total
revenues increased 3.5%. Pro forma revenues at the California
and Northwest newspapers were up 4.4% and 5.5%, respectively.
These newspapers were generally affected by the same trends
explained in the quarterly comparisons.
Non-newspaper Operations - Revenues at the Company's non-
newspaper businesses declined $2.0 million as the result of the
sales of commercial printing operations, but were up $1.9 million
on a pro forma basis. This pro forma growth reflects improved
results at The Newspaper Network, the Company's national
newspaper marketing company, and Nando Media, the Company's
national on-line publishing operation.
Operating Expenses:
Operating expenses increased 27.5% from calendar 1998, but
were up 1.9% from pro forma 1998 expenses and generally reflect
the trends discussed above.
Non-Operating (Expenses) Income:
Non-operating (expenses) income reflected $5.8 million more
in expenses due largely to a $4.8 million increase in interest
costs related to the debt incurred on the March 19, 1998 purchase
of the Star Tribune. Also, the Company's portion of Ponderay
results reflect a $490,000 loss in 1999 versus $1.2 million in
income in 1998.
Income Taxes:
The Company's effective tax rate in 1999 is 49.0% versus
51.0% in 1998, as discussed above.
Liquidity & Capital Resources
Operations generated $117.4 million in cash during the nine-
month period ending September 26, 1999. Cash was used primarily
to repay debt, pay for capital expenditures and pay dividends.
Capital expenditures are projected to be $44.0 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 $58.3 million of available credit at September 26, 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 collar
arrangement terminates in the fourth quarter of 2000.
The Company has outstanding letters of credit totaling $31.7
million securing estimated obligations stemming from workers'
compensation claims, pension liabilities and other contingent
claims.
While the Company expects that most of its free cash flow
generated from operations in 1999 and in the foreseeable future
will be used to repay debt, management is of the opinion that
operating cash flow and its present and future credit lines as
described above are adequate to meet the liquidity needs of the
Company, including currently planned capital expenditures and
other investments.
YEAR 2000 COMPLIANCE
The Company has largely completed its Year 2000 remediation
activities. At the time of this filing, only 4 of 562
remediation projects remain unfinished. The company expects
those remaining projects will be completed by November 30, 1999.
A corporate task force and task forces at each of our
newspapers are monitoring remediation activities. A Year 2000
Compliance Coordinator reports to the Corporate Director of
Information Systems and the Company's Vice President, Finance.
To achieve Year 2000 compliance, a combination of internal
effort, upgrades from vendors, external programmers and
consultants, replacement systems or, in a few cases, retirement
of systems has been used. Remediation costs incurred through
October 1, 1999, are estimated to be $1.4 million; we estimate
that the additional incremental costs through the end of the year
to be $247,000. Capital projects, previously budgeted for
business reasons, which include Year 2000 compliance, total
approximately $13 million throughout the Company.
The Company's 11 daily newspapers generate over 95% of our
revenues and profits. The following describes these newspapers'
state of readiness for Year 2000, the associated risks and the
state of our contingency plans.
NEWSPAPER PRODUCTION FACILITIES AND PROCESSES:
Production Systems:
All daily newspapers have completed rigorous end-to-end
publishing system tests. The purpose of these tests were to
verify that McClatchy's newspapers can publish on January 1,
2000, and thereafter, with minimal disruptions due to Year 2000
technology issues.
The Company believes its computer and mechanical systems at
all material production facilities (including press and post-
press systems) have been made 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, which could have a significant revenue impact on the
company. Our papers have reciprocal printing agreements with
other papers in each area, but newspapers could be printed late,
with smaller editions and with less circulation. Year 2000
contingency plans at each property outline procedures for off-
site printing and special year-end press schedules.
Third Party Suppliers:
The Company relies on commercial electric power to print its
newspapers. 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
providers are unable to supply electrical power, it could have
significant negative revenue implications for the Company.
Recent reports from utilities have led to an increased level of
confidence that significant power failures are unlikely.
Nonetheless, the Company believes it has contingency plans and
procedures in place for short-term outages.
The Company has contacted its primary suppliers of
newsprint, ink, plates and other production materials, and the
Company has received written statements that our major suppliers
generally expect to be Year 2000 compliant before January 1,
2000. In addition, the Company maintains sufficient quantities
of production supplies to alleviate any short-term Year 2000
problems that might be experienced by vendors or delivery
systems.
EDITORIAL SYSTEMS:
As of this writing, we believe all our editorial systems at
our newspapers have been made Year 2000 compliant.
The Company has scheduled replacement of existing editorial
systems at its California dailies (The Sacramento Bee, The
Modesto Bee and The Fresno Bee) with newer systems that offer
increased functionality. These systems are expected to be Year
2000 compliant. Notwithstanding, all three papers have performed
interim software and/or hardware upgrades on their 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 newspapers indicates that the
existing systems can operate into 2000 without problems.
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 were expensed as
incurred.
For the reasons noted above, we believe at this time that
the risks of editorial system failure are not material. For
backup purposes, our newspapers possess other 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. Complications could
result in smaller newspapers with less editorial content.
CIRCULATION SYSTEMS:
The Company believes that its circulation systems are now
Year 2000 compliant. All vendor-supported circulation systems
are on the vendor's current release of software. The two Company
newspapers that use custom, internally written circulation
applications have completed their internal remediation efforts.
In the event that a circulation system should fail, Company
contingency plans provide for backup delivery lists to be created
immediately prior to the end of 1999.
Post-press (packaging and distribution) systems and
mechanical equipment are now believed to be in compliance. We
currently believe our 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:
The Company believes all systems that it uses to schedule
and produce graphics for run-of-press (display) advertising, for
classified advertising and pre-print advertising are now
compliant.
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 in the process of incorporating
into its contingency plans alternate methods by which the
newspapers can receive advertisers' materials.
ACCOUNTING, ADMINISTRATION AND GENERAL:
The Company's new centralized financial and human resources
systems are believed to be Year 2000 compliant.
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. Certain advertising
and circulation functions could be delayed while manual processes
were activated.
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, requesting compliance
statements from material vendors and suppliers, content
providers, utility companies, financial organizations and other
business partners. To date, the Company has not identified any
third party vendor unable to provide necessary services,
materials or financing required to operate the Company's
business.
The Company recognizes that software vendors have released
and may continue to 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 Year 2000 compliance status and when material, we
will continue to update software as released by the vendor.
CONTINGENCY PLANS:
In addition to contingency plans noted in the various
systems above, our newspapers have developed contingency plans to
cope with the possibility that major systems could develop
problems. The contingency plans are being reviewed, based on
whether the start-to-finish testing indicate need for further
refinement.
FORWARD LOOKING INFORMATION
Management has made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-
looking statements include the information concerning possible or
assumed future results of operations of McClatchy. Forward-
looking statements are generally preceded by, followed by or are
a part of sentences that include the words believes, expects,
anticipates or similar expressions. For those statements, the
Company claims the protection of the safe harbor for forward-
looking statements contained in the Private Securities Litigation
Reform Act of 1995. The following important factors, in addition
to those discussed elsewhere in this document, could affect the
future results of McClatchy, and could cause those future results
to differ materially from those expressed in the forward-looking
statements: general economic, market or business conditions;
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 $0.03 to $0.05 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 nine-months ended September 26,
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: November 8, 1999 /s/ James P. Smith
James P. Smith
Vice President, Finance and
Treasurer