-----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, SKg8yxgunKLeoSkI1SIe3i4XA6fVGFQiE7OjtYE8aeIzEQy4w+Bi4Onj9GhlRtnM z2Hp0mjNqmARMfZtkbEa9g== 0001056087-99-000007.txt : 19990810 0001056087-99-000007.hdr.sgml : 19990810 ACCESSION NUMBER: 0001056087-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCCLATCHY CO CENTRAL INDEX KEY: 0001056087 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 94066175 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-46501 FILM NUMBER: 99681160 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 June 27, 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 August 9, 1999: Class A Common Stock 16,339,750 Class B Common Stock 28,531,912 PART 1 - FINANCIAL INFORMATION Item 1 - Financial Statements THE McCLATCHY COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) (In thousands) June 27, December 27, 1999 1998 ASSETS CURRENT ASSETS Cash $ 10,552 $ 9,650 Trade receivables (less allowances of $2,888 in 1999 and $4,835 in 1998) 160,503 149,685 Other receivables 2,302 2,762 Newsprint, ink and other inventories 13,075 16,587 Deferred income taxes 18,246 17,441 Other current assets 8,157 4,414 212,835 200,539 PROPERTY, PLANT AND EQUIPMENT Buildings and improvements 205,064 203,842 Equipment 458,756 446,236 663,820 650,078 Less accumulated depreciation (297,619) (275,230) 366,201 374,848 Land 56,615 56,593 Construction in progress 26,973 21,961 449,789 453,402 INTANGIBLES - NET 1,481,621 1,510,954 OTHER ASSETS 86,359 81,830 TOTAL ASSETS $ 2,230,604 $ 2,246,725 See notes to consolidated financial statements. THE McCLATCHY COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED) (In thousands, except share amounts) June 27, December 27, LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998 CURRENT LIABILITIES Accounts payable $ 73,361 $ 68,358 Accrued compensation 69,444 62,038 Income taxes 20,224 29,222 Unearned revenue 34,071 33,602 Carrier deposits 3,679 4,071 Other accrued liabilities 25,218 23,099 225,997 220,390 LONG-TERM BANK DEBT 960,000 1,004,000 OTHER LONG-TERM OBLIGATIONS 71,521 75,274 DEFERRED INCOME TAXES 135,917 140,056 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock $.01 par value: Class A - authorized 100,000,000 shares, issued 16,294,662 in 1999 and 16,033,763 in 1998 163 160 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 272,566 269,523 Retained earnings 564,155 537,035 837,169 807,005 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,230,604 $ 2,246,725 THE McCLATCHY COMPANY CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) (In thousands, except per share amounts)
Three Months Ended Six Months Ended June 27, June 30, June 27, June 30, 1999 1998 1999 1998 REVENUES - NET Newspapers: Advertising $ 220,523 $ 207,882 $ 426,043 $ 335,169 Circulation 43,745 44,938 88,227 73,176 Other 6,751 10,852 12,904 16,418 271,019 263,672 527,174 424,763 Non-newspapers 2,556 3,335 4,836 6,207 273,575 267,007 532,010 430,970 OPERATING EXPENSES Compensation 102,413 99,816 204,487 168,210 Newsprint and supplements 38,699 42,191 79,137 69,258 Depreciation and amortization 26,690 27,594 53,262 42,067 Other operating expenses 46,404 44,881 92,469 76,245 214,206 214,482 429,355 355,780 OPERATING INCOME 59,369 52,525 102,655 75,190 NON-OPERATING (EXPENSES) INCOME Interest expense (16,433) (20,178) (33,322) (24,215) Partnership income (loss) (250) 350 (140) 550 Other - net 157 955 941 1,388 INCOME BEFORE INCOME TAX PROVISION 42,843 33,652 70,134 52,913 INCOME TAX PROVISION 20,806 16,970 34,506 26,986 NET INCOME $ 22,037 $ 16,682 $ 35,628 $ 25,927 NET INCOME PER COMMON SHARE: Basic $ 0.49 $ 0.37 $ 0.80 $ 0.62 Diluted $ 0.49 $ 0.37 $ 0.79 $ 0.62 WEIGHTED AVERAGE NUMBER OF COMMON SHARES: Basic 44,794 44,528 44,761 41,774 Diluted 44,967 44,660 44,931 41,905
See notes to consolidated financial statements THE McCLATCHY COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended June 27, June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 35,628 $ 25,927 Reconciliation to net cash provided: Depreciation and amortization 54,991 42,134 Changes in certain assets and liabilities - net (11,392) (8,606) Other (4,759) (1,082) Net cash provided by operating activities 74,468 58,373 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (22,442) (11,946) Merger of Cowles Media Company - (1,099,070) Proceeds from sale of certain business operations - 178,538 Other - net (1,258) 133 Net cash used by investing activities (23,700) (932,345) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from long-term debt - 1,125,000 Repayment of long-term debt (44,000) (249,370) Payment of cash dividends (8,508) (7,853) Other - principally stock issuances in employee plans 2,642 2,110 Net cash (used) provided by financing activities (49,866) 869,887 NET CHANGE IN CASH AND CASH EQUIVALENTS 902 (4,085) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,650 8,671 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,552 $ 4,586 OTHER CASH FLOW INFORMATION Cash paid during the period for: Income taxes (net of refunds) $ 48,045 $ 10,283 Interest paid (net of capitalized interest) $ 32,316 $ 15,157 MERGER Fair value of assets acquired $ 1,544,531 Fair value of liabilities assumed (282,596) Issuance of common stock (189,803) 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 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 (6 months) 25,927 25,927 Dividends paid ($.19 per share) (7,853) (7,853) Conversion of 10,000 Class B - - shares to Class A Issuance of 117,692 Class A 1 2,109 2,110 shares under employee stock plans Issuance of 6,326,775 Class A 63 189,740 189,803 shares for Cowles merger Tax benefit from stock plans 404 404 BALANCES, June 30, 1998 158 287 266,607 510,394 777,446 Net income (6 months) 35,124 35,124 Dividends paid ($.19 per share) (8,483) (8,483) Issuance of 134,140 Class A 2 2,434 2,436 shares under employee stock plans Conversion of 20,000 Class B - - shares to Class A shares Issuance of 3,773 Class A shares 1 1 in Cowles Merger Tax benefit from stock plans 481 481 BALANCES, DECEMBER 27, 1998 160 287 269,523 537,035 807,005 Net income (6 months) 35,628 35,628 Dividends paid ($0.19 per share) (8,508) (8,508) Conversion of 124,000 Class B 2 (2) shares to Class A Issuance of 136,889 Class A 1 2,641 2,642 shares under employee stock plans Tax benefit from stock plans 402 402 BALANCES, June 27, 1999 $ 163 $ 285 $ 272,566 $ 564,155 $ 837,169
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 six-month period ended June 30, 1998, as though the Cowles merger had taken place on January 1, 1998 (in thousands, except per share amounts): 1998 Revenues $ 513,659 Net income (12,973) Diluted earnings per share $ (0.29) 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 six months of 1998, contributing to the dilution in the pro forma results for the three months ended June 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 June 27, 1999, ranged from 5.6% to 6.7%. 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 $31,737,400 securing estimated obligations stemming from workers' compensation claims, pension liabilities and other contingent claims. Long-term debt consisted of (in thousands): June 27, December 27, 1999 1998 Credit Agreement: Term loans $ 859,000 $ 904,000 Revolving credit line 101,000 100,000 Total indebtedness 960,000 1,004,000 Less current portion - - Long-term indebtedness $ 960,000 $ 1,004,000 Long-term debt matures, as of June of each year, as follows (in thousands): 2001 $ 56,125 2002 77,242 2003 95,617 2004 169,117 2005 306,867 Thereafter 255,032 $ 960,000 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 second quarter of 1999 ended on June 27, 1999, versus the calendar quarter which ended on June 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. 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. 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. Second Quarter 1999 Compared to 1998 Earnings were $22.0 million or 49 cents per share compared to $16.7 million or 37 cents in 1998. Much of the increase was a result of higher advertising revenues and lower newsprint expense and interest costs. Revenues were up 2.5% 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 second quarter increased 3.6% and advertising revenues increased 4.3%. Circulation revenues declined 3.3% from pro forma 1998 primarily reflecting no rate increases in 1999 and increased payments to carriers at certain newspapers (recorded as a contra revenue). OPERATING REVENUES BY REGION: (In thousands) Period Calendar % Change 1999 1998 Minnesota newspaper $ 98,247 $ 97,724 0.5 California newspapers 85,996 82,347 4.4 Carolinas newspapers 45,508 44,785 1.6 Northwest newspapers 41,268 38,816 6.3 Non-newspaper operations 2,556 3,335 (23.4) $ 273,575 $ 267,007 2.5 Minnesota - The Star Tribune contributed 35.9% of the Company's revenues in the second quarter of 1999. Revenues increased 0.5% from calendar 1998 second quarter. However, total revenues of $98.2 million were up 1.3% from pro forma 1998 revenues, while advertising revenues were $79.6 million, up 2.4%. Second quarter revenues in Minnesota were held down by a slowdown in advertising in May, especially in retail and national categories. California - The California newspapers contributed 31.4% or $86.0 million of second quarter revenues, with $71.3 million in advertising revenues. Total revenues increased 4.4% from calendar second quarter 1998. Total revenues were up 4.1% from pro forma 1998 revenues and advertising revenues were up 5.2%. The increase in advertising revenues were primarily in national and classified categories and were led by The Sacramento and Modesto Bee newspapers. Carolinas - The Carolinas newspapers contributed 16.6% of second quarter revenues which totaled $45.5 million, up 1.6% from the calendar 1998 quarter. This region included most of the newspaper operations which were sold in 1998. On a pro forma basis, that is, conforming to period reporting and excluding sold operations in 1998, total revenues increased 3.8%, with advertising revenues of $35.6 million up 4.4%. This revenue growth is generally reflective of results of The News & Observer newspaper which is the largest newspaper in the region. Northwest - The Northwest newspapers contributed 15.1% of second quarter revenues and primarily represent two daily newspapers in Washington state and the Anchorage Daily News in Alaska. Total revenues of $41.3 million were up 6.3% from calendar 1998 second quarter and pro forma second quarter revenues. Total advertising revenues at the daily newspapers were $30.4 million, up 7.6% from pro forma 1998. As in California, national and classified revenues were up strongly, primarily in the Washington state newspapers. Non-newspaper revenues - Non-newspaper revenues were $2.6 million, down from calendar 1998 by 23.4% due mostly to the sales of the commercial printing operations in the third and fourth quarters last year. Revenues now primarily represent those of The Newspaper Network and Nando Media. Operating Expenses: Operating expenses were $214.2 million and declined nominally from reported expenses in 1998. However, excluding expenses from sold and closed operations and conforming ongoing expenses to period reporting, expenses increased 1.0%. Expenses were generally held down by lower newsprint prices in 1999. Newsprint and supplement expense declined 6.0% from pro forma costs in 1998, reflecting lower newsprint prices partially offset by increased newsprint usage and higher supplement costs. Compensation costs were up 3.9% on a pro forma basis reflecting salary rate increases and higher retirement costs. All other operating expenses, including depreciation and amortization, increased 1.0%, in line with inflation. Non-Operating (Expenses) Income-Net: Non-operating expenses net declined $2.3 million. Interest expense declined $3.7 million due to lower interest rates and the pay down of bank debt. This saving was partially offset by a loss of $250,000 from the Company's portion of The Ponderay Newsprint Mill joint venture results, versus income of $350,000 in 1998. Other non-operating expenses declined about $700,000 partially reflecting the write-down of the value of an investment in an internet company's stock. Income Taxes: In the second quarter of 1999, the Company adjusted its full- year effective tax rate to 49.2% from 50.2%, resulting in an effective tax rate of 48.6% in the second quarter of 1999. The effective tax rate is lower than the 1998 effective tax rate of 50.4%, due to higher projected income before taxes in 1999 relative to a set amount of non-deductible expenses. Six-Month Period 1999 Compared To 1998 Earnings in the first half of 1999 were $35.6 million or 79 cents per share and include the results of the Star Tribune newspaper, which was purchased on March 19, 1998. Earnings in the first half of 1998 were $25.9 million or 62 cents per share and include three months and nine days of Star Tribune's results. McClatchy had approximately three million more weighted average shares outstanding in the 1999 six-month period due primarily to shares issued in the Star Tribune purchase. Revenues for the first half of 1999 were $532.0 million with $426.0 million in advertising and $88.2 million in circulation revenues. Revenues increased 23.4% over reported 1998 revenues, due mostly to the addition of the Star Tribune. After adjusting 1998 revenues for acquisitions, divestitures and period reporting, total revenues for the six-month period ended June 27, 1999 were up 4.1% with advertising up 4.8%, due primarily to the same factors that affected second quarter comparisons described above. Factors differing from second quarter trends are discussed below. OPERATING REVENUES BY REGION: (In thousands) Period Calendar % Change 1999 1998 Minnesota newspaper $ 195,886 $ 106,647 83.7 California newspapers 166,102 158,708 4.7 Carolinas newspapers 87,537 86,303 1.4 Northwest newspapers 77,649 73,105 6.2 Non-newspaper operations 4,836 6,207 (22.1) $ 532,010 $ 430,970 23.4 Minnesota - The Star Tribune contributed 36.8% of 1999 revenues. As was noted above, the Star Tribune's revenues are included for full six months in 1999 and only three months and nine days in 1998. If the Star Tribune's revenues had been included for the full six months of 1998, total revenues in 1999 would have been up 3.4% from pro forma 1998. Advertising revenues in the 1999 period were $158.7 million, up 4.5% from pro forma 1998 revenues. Much of this increase reflects stronger national advertising in the first four months of 1999. California - California contributed 31.2% of revenues which totaled $166.1 million, up 4.7% from calendar 1998 and up 3.9% from pro forma revenues. Advertising revenues totaled $136.2 million at the three California dailies, up 4.9% from pro forma 1998 advertising revenues. Carolinas - The Company's Carolinas newspapers contributed 16.5% or $87.5 million of total revenues in 1999. This represents an increase of 1.4% over calendar revenues reported in 1998. Revenues were up 3.4% over pro forma 1998 revenues (adjusted for divestitures and period reporting). Advertising revenues at the Carolinas daily newspapers totaled $67.8 million and grew 3.7% over 1998 pro forma revenues. Northwest - This is the Company's smallest region -- contributing 14.6% or $77.6 million of revenues in 1999, but also its fastest growing region in revenues in the six-month period. Total revenues exceeded 1998 calendar first-half revenues by 6.2%, and were up 5.7% from 1998 pro forma revenues. Advertising revenues at the Northwest daily newspapers were $56.5 million, up 7.0% from 1998 pro forma advertising revenues. Non-Newspaper - The Company's non-newspaper revenues were $4.8 million, down 22.1% from 1998 revenues due mostly to the sales of commercial printing operations in 1998. Operating Expenses: Operating expenses were $429.4 million and increased 20.7% from 1998 reported expenses, due mostly to the inclusion of the Star Tribune's expenses for the full period in 1999 versus three months and nine days in 1998. Adjusting 1998 expenses to include the Star Tribune for the full six-month period, exclude sold or closed operations in 1998 and conform to period reporting, 1998 expenses were $420.8 million. The 2.0% increase in 1999 expenses over pro forma 1998 expenses primarily reflects the lower newsprint prices offset by increases in other expenses which were affected by the factors discussed in the second quarter comparisons. Non-Operating (Expense) Income - Net: Non-operating (expenses) income - net reflect higher net expenses by $10.2 million or 46.0%, due primarily to higher interest expense of $9.1 million. The Company incurred debt to complete the Star Tribune acquisition on March 19, 1998, resulting in higher interest from that time forward. In addition, the Company's portion of Ponderay's results was a $140,000 loss in 1999 versus a $550,000 gain in 1998. Income Taxes: The Company's effective tax rate in 1999 is 49.2% versus 51.0% in 1998, due primarily to higher pre-tax income in 1999 relative to a set amount of non-deductible expenses. Liquidity & Capital Resources Operations generated $74.5 million in cash during the six- month period ending June 27, 1999. Cash was used primarily to repay debt, pay for capital expenditures and pay dividends. Capital expenditures are projected to be $42.0 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 $67.3 million of available credit at June 27, 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 $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's Year 2000 Compliance Plan includes a definition of Year 2000 conformity, compliance certification standards, reporting and risk management structures. At the time of this filing, the Company believes it has largely completed its Year 2000 remediation activities, only 30 of 562 remediation projects company-wide remain unfinished, and are discussed below. The company expects only four Year 2000 remediation projects to be outstanding at the end of the third quarter of 1999, and the final project (a system replacement) to be completed by November 1, 1999. 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 July 20, 1999, are estimated to be $1,116,000. At present, we estimate that the additional incremental cost of making required changes will be approximately $463,000. 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: 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 our ability to receive electrical power from the various utility companies that serve the communities in which we produce 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, the Company believes it has contingency plans and procedures 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. McClatchy's newspapers will maintain inventories at an appropriate level for continued operation. 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, as of this writing, we believe all our editorial systems at our newspapers have been made Year 2000 compliant. The Company has contracted to replace existing editorial systems at two California dailies (The Sacramento 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 two newspapers have performed interim software 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 both newspapers 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 was 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 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. Three Company newspapers use custom, internally written circulation applications. Two are currently considered compliant, based on thorough internal testing. The third, at The Modesto Bee, will be replaced by a new system that the Company has selected for eventual installation at all its newspapers. The Company expects that the Modesto 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. 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 believes all material systems that it uses to produce graphics for run-of-press (display) advertising are now compliant. Classified Systems: The classified advertising systems at the Company's newspapers are under software and hardware maintenance contracts with vendors, and all material systems have received upgrades that the Company believes will provide Year 2000 compatibility. General: The Star Tribune is now performing just-released, vendor supplied software upgrades for its page output equipment, and will complete this project in September, 1999. Individually, their advertising and editorial systems are now believed to be Year 2000 compliant as stated above. If any advertising system experienced Year 2000 failures, our newspapers would 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 and human resource systems. 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, the Company has not identified any such impact. Most McClatchy newspapers have been notified of or have received re-releases of previously remediated and Year 2000 certified software; the impact of these secondary releases has been significant at a number of newspapers. The Company recognizes that software vendors may release updated software throughout 1999 that they identify as their Year 2000 compliant version. This has and may continue to 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. As an added measure, the Company is conducting, at all locations, start-to-finish functional tests of its production systems and significant financial systems. As of this writing, eight of our 11 daily newspapers have completed their production systems tests; the remaining three newspapers will perform their production system tests, and the Company will complete its start- to-finish financial system tests by mid-September 1999. 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; 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 $0.06 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: The Company held its annual shareholders meeting on May 19, 1999 to vote on two proposals. Shareholders approved all of the proposals by voting as follows: 1. Election of Directors of the Board VOTES FOR WITHHELD Nominees for Class A Directors voted by Class A Stockholders Elizabeth Ballantine 12,608,193 73,969 Larry Jinks 12,606,455 75,707 S. Donley Ritchey, Jr. 12,611,986 70,176 Frederick R. Ruiz 12,611,910 70,252 Nominees for Class B Directors voted by Class B Stockholders William K. Coblentz 26,744,705 0 Molly Maloney Evangelisti 26,744,705 0 Joan F. Lane 26,744,705 0 Kevin S. McClatchy 26,744,705 0 James B. McClatchy 26,744,705 0 William Ellery McClatchy 26,744,705 0 Erwin Potts 26,744,705 0 Gary B. Pruitt 26,744,705 0 William M. Roth 26,744,705 0 2. To ratify the appointment of Deloitte & Touche LLP as the Company's Independent Auditors for the 1999 Fiscal Year FOR AGAINST ABSTAIN BROKER NON-VOTED 28,007,173 596 5,150 0 Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibit: Financial Data Schedule for the six-months ended June 27, 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: August 9, 1999 /s/ James P. Smith James P. Smith Vice President, Finance and Treasurer EX-27 2
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. 1,000 6-MOS DEC-26-1999 DEC-28-1998 JUN-27-1999 10,552 0 163,391 2,888 13,075 212,835 747,408 297,619 2,230,604 225,997 0 0 0 448 836,721 2,230,604 532,010 532,010 0 429,355 (801) 0 33,322 70,134 34,506 35,628 0 0 0 35,628 0.80 0.79
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