-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MpgbtuOp3HhWWaTOFsRSH/fRDYy9wEHbXroiBTye9+MVte4lw5F2NBePuzSsILgt jpeyFsJQRNuItyAADBPfWA== 0001056087-98-000008.txt : 19980518 0001056087-98-000008.hdr.sgml : 19980518 ACCESSION NUMBER: 0001056087-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCCLATCHY CO CENTRAL INDEX KEY: 0001056087 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 522080478 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-46501 FILM NUMBER: 98621906 BUSINESS ADDRESS: STREET 1: C/0 MCCLATCHY NEWSPAPERS INC STREET 2: LEGAL DEPT., 2100 Q STREET CITY: SACRAMENTO STATE: CA ZIP: 95816 BUSINESS PHONE: 9163211846 MAIL ADDRESS: STREET 1: PILLSBURY MADISON & SUTRO LLP STREET 2: 2550 HANOVER STREET CITY: PALO ALTO STATE: CA ZIP: 94304-1115 FORMER COMPANY: FORMER CONFORMED NAME: MNI NEWCO INC DATE OF NAME CHANGE: 19980218 10-Q 1 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 31, 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 McCLATHY 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 8, 1998: Class A Common Stock 15,838,523 Class B Common Stock 28,675,912 THE McCLATCHY COMPANY INDEX TO FORM 10-Q Part I - FINANCIAL INFORMATION Page Item 1 - Financial Statements: Consolidated Balance Sheet - March 31, 1998 and December 31, 1997 (unaudited) 3 Consolidated Statement of Income for the Three Months Ended March 31, 1998 and 1997 (unaudited) 5 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (unaudited) 6 Consolidated Statement of Stockholders' Equity for the Period from December 31, 1996 to March 31, 1998 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 12 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 16 Part II - OTHER INFORMATION 17 PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements THE McCLATCHY COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) (In thousands)
March 31, December 31, 1998 1997 ASSETS Restated CURRENT ASSETS Cash $ 60,465 $ 8,671 Trade receivables (less allowances of $4,095 in 1998 and $2,162 in 1997) 121,470 93,069 Other receivables 4,393 2,143 Newsprint, ink and other inventories 16,046 11,735 Deferred income taxes 22,928 8,477 Other current assets 6,025 2,717 231,327 126,812 PROPERTY, PLANT AND EQUIPMENT Buildings and improvements 203,514 160,443 Equipment 437,840 371,312 641,354 531,755 Less accumulated depreciation (255,074) (246,236) 386,280 285,519 Land 57,024 34,199 Construction in progress 12,287 5,468 455,591 325,186 INTANGIBLES - NET 1,561,673 393,215 OTHER ASSETS 85,660 12,585 TOTAL ASSETS $ 2,334,251 $ 857,798
See notes to consolidated financial statements THE McCLATCHY COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) (In thousands, except share amounts)
March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 Restated CURRENT LIABILITIES Current bank debt $ 21,675 Accounts payable 48,490 $ 35,613 Accrued compensation 66,280 27,956 Income taxes 26,204 1,877 Unearned revenue 35,102 19,308 Carrier deposits 4,351 3,980 Other accrued liabilities 43,564 9,709 245,666 98,443 LONG-TERM BANK DEBT 1,103,325 94,000 OTHER LONG-TERM OBLIGATIONS 76,847 40,406 DEFERRED INCOME TAXES 144,725 57,894 COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Common stock $.01 par value: Class A - authorized 100,000,000 shares, issued 15,821,488 in 1998 and 9,421,383 in 1997 158 94 Class B - authorized 60,000,000 shares, issued 28,675,912 in 1998 and 28,685,912 in 1997 287 287 Additional paid-in capital 265,300 74,354 Retained earnings 497,943 492,320 763,688 567,055 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,334,251 $ 857,798
THE McCLATCHY COMPANY CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (In thousands, except per share amounts)
Three Months Ended March 31, 1998 1997 Restated REVENUES - NET Newspapers: Advertising $ 127,287 $ 116,643 Circulation 28,238 26,958 Other 5,566 4,233 161,091 147,834 Non-newspapers 2,872 2,787 163,963 150,621 OPERATING EXPENSES Compensation 68,394 63,408 Newsprint and supplements 27,067 21,346 Depreciation and amortization 14,473 13,250 Other operating expenses 31,364 29,702 141,298 127,706 OPERATING INCOME 22,665 22,915 NONOPERATING (EXPENSES) INCOME Interest expense (4,037) (2,668) Partnership income (loss) 200 (400) Gain on sale of certain business operations - 6,594 Other - net 433 103 INCOME BEFORE INCOME TAX PROVISION 19,261 26,544 INCOME TAX PROVISION 10,016 11,113 NET INCOME $ 9,245 $ 15,431 NET INCOME PER COMMON SHARE: Basic $ 0.24 $ 0.41 Diluted $ 0.24 $ 0.41 WEIGHTED AVERAGE NUMBER OF COMMON SHARES: Basic 38,989 37,823 Diluted 39,102 37,984
See notes to consolidated financial statements THE McCLATCHY COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Three Months Ended March 31, 1998 1997 Restated CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,245 $ 15,431 Reconciliation to net cash provided: Depreciation and amortization 14,506 13,287 Partnership (income) losses (200) 400 Gain on sale of certain business operations - (6,594) Changes in certain assets and liabilities - net 6,140 12,124 Other (43) (675) Net cash provided by operating activities 29,648 33,973 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (4,907) (6,938) Merger of Cowles Media Company (1,099,070) Proceeds from sale of certain business operations 178,538 11,400 Other - net - 1 Net cash (used) provided by investing activities (925,439) 4,463 CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from long-term debt 1,125,000 - Repayment of long-term debt (175,370) (35,000) Payment of cash dividends (3,622) (3,597) Other - principally stock issuances in employee plans 1,577 1,607 Net cash provided (used) by financing activities 947,585 (36,990) NET CHANGE IN CASH AND CASH EQUIVALENTS 51,794 1,446 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,671 5,877 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 60,465 $ 7,323 OTHER CASH FLOW INFORMATION Cash paid during the period for: Income taxes (net of refunds) $ 2,726 $ 5,624 Interest paid (net of capitalized interest) $ 1,382 $ 2,702 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 Restated Treasury Par Value Paid-In Retained Stock Restated Class A Class B Capital Earnings At Cost Total BALANCES, DECEMBER 31, 1996 $ 89 $288 $ 67,534 $437,527 $ (371) $505,067 Net income (3 months) 15,431 15,431 Dividends paid ($.095 per share) (3,597) (3,597) Issuance of 101,457 Class A shares under employee stock plans 1 1,606 1,607 Tax benefit from stock plans 320 320 Retirement of treasury stock (371) 371 BALANCES, MARCH 31, 1997 90 288 69,089 449,361 - 518,828 Net income (9 months) 53,801 53,801 Dividends paid ($.285 per share) (10,842) (10,842) Conversion of 156,375 Class B shares to Class A 1 (1) Issuance of 246,900 Class A shares under employee stock plans 3 4,199 4,202 Tax benefit from stock plans 1,066 1,066 BALANCES, DECEMBER 31, 1997 94 287 74,354 492,320 - 567,055 Net income 9,245 9,245 Dividends paid ($.095 per share) (3,622) (3,622) Conversion of 10,000 Class B shares to Class A - - Issuance of 84,858 Class A shares under employee stock plans 1 1,576 1,577 Issuance of 6,305,247 Class A shares for Cowles merger 63 189,094 189,157 Tax benefit from stock plans 276 276 BALANCES, MARCH 31, 1998 $ 158 $287 $265,300 $497,943 $ - $763,688
See notes to consolidated financial statements THE McCLATCHY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 adopted 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 which differ from its net income. Accordingly, adoption of this statement in 1998 has not impacted the Company's consolidated financial position, results of operations or cash flows. NOTE 2. MERGER OF 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 $1.4 billion, including 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 6,305,247 shares of Class A Common Stock in exhange for Cowles shares, and paid cash for the remaining shares at a value of $90.50 per Cowles share. 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). 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 373,000 and Sunday circulation of 673,000. 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 included approximately $53,564,000 of current assets, $134,865,000 of property, plant and equipment, $1,173,597,000 of intangible assets and $69,901,000 of other assets. Intangible assets include approximately $1,038,000,000 of goodwill which is being amortized over 40 years. In addition to assuming Cowles' long-term debt, a total of $209,599,000 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 three month periods ended March 31, 1998 and 1997, as though the Cowles merger had taken place on January 1, 1997:
1998 1997 Revenues $ 246,652 $ 237,580 Net (loss) income (29,655) 4,247 Diluted earnings per share $ (0.65) $ 0.10
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 a loss in the pro forma results. 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 ended March 31, 1997 is as follows (in thousands): Net income as previously reported $ 15,357 Adjustment for effect of change in accounting for newsprint inventories applied retroactively 74 Net income as adjusted $ 15,431
The adjustment did not result in a change to basic net income per share for the period but increased diluted net income per share by $0.01. 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 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, along with $77,350,000 of Cowles 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 June 30, 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 March 31, 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 March 31, 1998, ranged from 6.9% to 7.4%. 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 Credit Agreement requires the Company to enter into one or more interest rate protection agreements within 180 days of signing the Credit Agreement, fixing interest costs on a minimum of $300,000,000 of outstanding debt. The Company had not entered into any such agreements as of March 31, 1998. The Company has outstanding letters of credit totaling $29,510,480 securing estimated obligations stemming from workers' compensation claims, pension liabilities and other contingent claims. At March 31, 1998, long-term debt consisted of (in thousands):
March 31, December 31, 1998 1997 Credit Agreement: Term loans $ 1,065,000 Revolving credit line 60,000 $ 94,000 Total indebtedness 1,125,000 94,000 Less current portion 21,675 - Long-term debt $ 1,103,325 $ 94,000
Long-term debt matures, as of March 31 of each year, as follows (in thousands): 2000 $ 40,050 2001 76,800 2002 95,175 2003 113,550 2004 187,050 Thereafter 590,700 $ 1,103,325
NOTE 5. INCOME TAXES 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 6.1 4.5 Amortization of intangibles 10.3 3.2 Tax basis adjustment of intangibles sold - (1.0) Other 0.6 0.1 Effective tax rate 52.0% 41.8%
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 approximately $1.4 billion, including 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 6,305,247 shares of Class A Common Stock in exchange for Cowles shares and paid cash for the remaining shares at a value of $90.50 per Cowles share. 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 373,000 and Sunday circulation of 675,000 at March 31, 1998. It is the 16th largest newspaper on a daily basis and the 12th largest Sunday newspaper in the nation and is now the Company's largest newspaper. 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. 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 March 31, 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 $6.6 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 adopted Statement of Financial Accounting Standard (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 that differ from its net income. Accordingly, adoption of this statement in 1998 has not impacted the Company's consolidated financial position, results of operations or cash flows. 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 in 1998 and are not expected to have a material impact on the Company's financial position, results of operations or cash flows. First Quarter 1998 Compared to 1997 Net income in the first quarter of 1998 was $9.2 million or 24 cents per share compared to $15.4 million or 41 cents per share in the first quarter of 1997. The 1998 income included the impact of the Cowles merger and Star Tribune's results for nine business days, while the 1997 quarter included the operating results and gain on the sale of four community newspapers and results of Legi-Tech, a non-newspaper operation sold in late 1997. Excluding the impact of the merger from 1998 and the operations and gain for the sold properties in 1997, net income would have been slightly ahead of last year, despite substantially higher newsprint costs. Revenues increased 8.9% to $164.0 million due primarily to the inclusion of $8.9 million of Star Tribune revenues. Excluding the Star Tribune, revenues at McClatchy's ongoing operations were up 3.9% to $155.0 million, with advertising revenues up 4.2% to $120.8 million and circulation revenues down nominally. Advertising revenues increased primarily due to rate increases, generally implemented in the first quarter of 1998. The switch of Easter to April 1998 (versus March 1997) depressed first quarter retail advertising at many of the Company's newspapers. Circulation revenues were lower as no home-delivery rate increases were implemented in 1998 and because of promotional discounting at most newspapers. OPERATING REVENUES BY REGION: (Amounts in thousands)
1998 1997 % Change California newspapers $ 76,361 $ 75,555 1.1 Carolinas newspapers 41,518 39,069 6.3 Northwest newspapers 34,289 33,210 3.2 Minnesota newspaper 8,923 - NM Non-newspaper operations 2,872 2,787 3.0 $ 163,963 $ 150,621 8.9
NM - not meaningful due to the addition of the Star Tribune on March 20, 1998. The California newspaper comparison includes revenues of the sold community newspapers in 1997. Pro forma revenues were up 2.5%, led by a 2.7% increase in advertising revenues at the Company's three Bee newspapers (located in Sacramento, Fresno and Modesto, CA). Advertising revenues were affected by prolonged rainy weather in the region and the later Easter. Full-run run-of- press (ROP) advertising linage, found in the body of the newspaper and the largest contributor to advertising revenues, was down 0.8% at the three Bees. Circulation revenues were down nominally, despite gains in daily subscribers of 2.1% and Sunday of 0.6%. The Carolina newspapers revenue growth reflects a strong advertising environment in both classified and retail, particularly at the North Carolina newspapers. The News & Observer (the Company's third largest newspaper) and its six sister nondailies had advertising revenues up 8.5%, while advertising revenues were up 8.2% for the whole region. Full-run ROP linage was down slightly at the daily Carolina newspapers, but was up 2.3% at The News & Observer. Circulation revenues were down nominally. The number of daily subscribers increased 4.5% and Sunday was up 1.5% at the Carolina dailies. The Northwest newspapers revenues recovered somewhat from sluggish trends in 1997. Advertising revenues at the three daily newspapers (The News Tribune (Tacoma, WA), Anchorage Daily News and Tri-City Herald (Kennewick, WA)) increased 3.1%, with the largest newspaper - The News Tribune - up 4.8%. Full- run ROP linage at these dailies declined 4.7%. Circulation revenues also declined nominally in this region, with the number of daily subscribers up 0.9%, but Sunday subscriptions down 0.3%. Revenues from the Star Tribune included $6.5 million in advertising revenues, $1.5 million in circulation revenues and $852,000 in other revenues (primarily direct marketing). Non newspaper revenues increased $85,000 or 3.0%, but excluding revenues from Legi-Tech (which was sold in late 1997), revenues were up $391,000 or 15.8%. These revenues include The Newspaper Network, McClatchy and Benson Printing (commercial printing operations) and New Media revenues. OPERATING EXPENSES: Operating expenses increased 10.6% and reflect expenses of the Star Tribune in nine days of the quarter. Excluding Star Tribune expenses in 1998 and the expenses of sold operations in 1997, expenses at the Company's ongoing operations increased 6.1%, led by substantially higher newsprint costs. Newsprint and supplement costs increased 20.8% at ongoing operations due almost entirely to higher newsprint prices in 1998. Non newsprint costs at the ongoing operations increased 3.1%, in line with inflation. NON OPERATING (EXPENSES) INCOME - NET: Interest expense increased $1.4 million, but would have declined approximately $1.5 million without the interest on the new debt associated with the Cowles merger (see Liquidity and Capital Resources below). The Company's share of income from its Ponderay newsprint mill joint venture increased $600,000 due to higher newsprint prices. The Company also recorded $433,000 of other income related mostly to the gain on the sale of some small investments. INCOME TAXES: The Company's effective income tax rate was 52.0% in 1998 compared to 41.8% in 1997. The higher tax rate is primarily due to nondeductible depreciation and amortization of goodwill and other purchase price allocations created in the Cowles merger. See note 5 to the consolidated financial statements. Liquidity & Capital Resources Operations generated $29.6 million in cash, and the Company received $178.5 million in cash proceeds from the sale of Cowles' non newspaper subsidiaries. In addition, the Company borrowed $1.125 billion to finance the cash requirements of the Cowles merger. Cash was used primarily to complete the Cowles merger which included refinancing Cowles and McClatchy existing debt; paying for capital expenditures and paying 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, along with $77.4 million of Cowles 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 June 30, 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 March 31, 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 $110.5 million of available credit at March 31, 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. The Credit Agreement requires the Company to enter into one or more interest rate protection agreements within 180 days of signing the Credit Agreement, fixing interest costs on a minimum of $300,000,000 of outstanding debt. The Company had not entered into any such agreements as of March 31, 1998. The Company has outstanding letters of credit totaling $29.5 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 The Company is currently in the process of addressing a potential problem that is facing all users of automated information systems. The problem is that many computer systems process transactions based on two digits for the year of the transaction (for example, "97" for 1997), rather than a full four digits. These computer systems may not operate effectively when the last two digits become "00", as occurs on January 1, 2000. In some cases the new date will cause computers to stop operating, while in other cases incorrect output may result. The problem could affect a wide variety of automated information systems, such as mainframe applications, personal computers and communications systems. A corporate task force is in place to assess the needed changes to the Company's many different information systems and an implementation plan is expected to be completed by mid-1998. A dedicated Year 2000 Compliance Coordinator has been named to ensure the Company meets its own internal deadlines for compliance. Many of the necessary changes in computer instructional code are expected to be acquired during the course of normal upgrading of systems that are budgeted between now and the year 2000, and in the course of normal maintenance. Other changes will necessitate re-writing of computer instructional code, the majority of which is expected to occur in 1998 and the first half of 1999. At present, the Company does not have an estimate of the total cost of evaluating and making required changes. The costs incurred in addressing the Year 2000 problem will be expensed as incurred, in compliance with generally accepted accounting principles. The project may also impact capital expenditure budgets, through increased expenditures for vendor- supplied software and computer hardware. Forward-Looking Information The preceding management discussion contains estimates and other forward- looking statements covering subjects related to financial operating results. These forward-looking statements, and any other statements going beyond historical facts that McClatchy management has discussed, are subject to risks and uncertainties that could cause actual results to differ. These include increases in newsprint prices and/or printing and distribution costs over anticipated levels, competition from other forms of media in the Company's principal markets, increased consolidation among major retailers in the Company's newspaper markets or other events depressing the level of advertising, an economic downturn in the local economies of California's Central Valley, Washington state, Alaska, the Carolinas or Minnesota, or other occurrences leading to decreased circulation and diminished revenues from both display and classified advertising. Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: NOT REQUIRED PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Default Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders: The Company held a special shareholders meeting on March 19, 1998 to vote on the Cowles merger. Shareholders approved the merger by voting as follows: For Against Abstain Broker Non-Votes 26,909,761 22,763 12,264 0 Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits Exhibit 18 Deloitte & Touche LLP Letter of Preferability Exhibit 27 Financial Data Schedule for the Quarter Ended March 31, 1998 (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K dated January 29, 1998, to report under Item 5 of Form 8-K its fourth quarter and year-end 1997 results. The Company filed a Current Report on Form 8-K dated March 19, 1998, to report under Item 2 of Form 8-K the closing of the Cowles merger transaction. 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 McCLATCY COMPANY Registrant Date: May 15, 1998 /s/ James P. Smith James P. Smith Vice President, Finance and Treasurer EX-18 2 April 30, 1998 The McClatchy Company 2100 Q Street Sacramento, California 95816 Dear Sirs/Madams: At your request, we have read the description included in your Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarter ended March 31, 1998, of the facts relating to the change in accounting method for newsprint inventory from last-in, first-out (LIFO) to first-in, first-out (FIFO). We believe, on the basis of the facts so set forth and other information furnished to us by appropriate officials of the Company, that the accounting change described in your Form 10-Q is to an alternative accounting principle that is preferable under the circumstances. We have not audited any consolidated financial statements of The McClatchy Company and its consolidated subsidiaries as of any date or for any period subsequent to December 31, 1997. Therefore, we are unable to express, and we do not express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on the related information furnished to us by officials of the Company, or on the financial position, results of operations, or cash flows of The McClatchy Company and its consolidated subsidiaries as of any date or for any period subsequent to December 31, 1997. Yours truly, /s/ DELOITTE & TOUCHE LLP Sacramento, California EX-27 3 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains financial information extracted from SEC filing Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1998 60,465 0 129,958 4,905 16,046 231,327 840,623 255,074 2,334,251 245,666 0 445 0 0 763,243 2,334,251 163,963 163,963 0 141,298 (633) 0 4,037 19,261 10,016 9,245 0 0 0 9,245 0.24 0.24
-----END PRIVACY-ENHANCED MESSAGE-----