-----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, IQFaXwygMFu3BBvgf450d5cDL2g1Z4OYDMYA3HKPedIzvneJoMy135IL3x2MbbFe pQtDswiiyn7eURs4X24tUg== 0000039899-99-000011.txt : 19990323 0000039899-99-000011.hdr.sgml : 19990323 ACCESSION NUMBER: 0000039899-99-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GANNETT CO INC /DE/ CENTRAL INDEX KEY: 0000039899 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 160442930 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06961 FILM NUMBER: 99569533 BUSINESS ADDRESS: STREET 1: 1100 WILSON BLVD CITY: ARLINGTON STATE: VA ZIP: 22234 BUSINESS PHONE: 7032846000 MAIL ADDRESS: STREET 1: 1100 WILSON BLVD 28TH FLOOR CITY: ARLINGTON STATE: VA ZIP: 22234 10-K 1 GANNETT FORM 10-K Exhibit Index begins on page 11 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the fiscal year ended December 27, 1998 or ___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] for the transition period from ______________ to _____________. Commission file number 1-6961 GANNETT CO., INC. (Exact name of registrant as specified in its charter) Delaware 16-0442930 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1100 Wilson Boulevard, Arlington, Virginia 22234 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (703) 284-6000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, Par Value $1.00 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has 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 __ -1- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 26,1999 was $17,739,246,399. The number of shares outstanding (basic) of the registrant's Common Stock, Par Value $1.00, as of February 26, 1999 was 279,358,211. Documents incorporated by reference. (1) Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 27, 1998 in Parts I, II and III. (2) Portions of the registrant's Proxy Statement issued in connection with its Annual Meeting of Shareholders to be held on May 4, 1999. -2- CROSS REFERENCE SHEET The information required in Parts I, II and III of the Form 10-K is incorporated by reference to sections of the Company's 1998 Annual Report to Shareholders ("Annual Report") and its definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 1999 ("Proxy Statement") as described below: Part I Item 1. Business. Form 10-K Information (Annual Report pp. 55-69); Note 10 - Business Segment Information (Annual Report p. 55). Item 2. Properties. Properties (Annual Report pp. 59, 60 and 62); Corporate Facilities (Annual Report p. 63); Markets We Serve (Annual Report pp. 70-73). Item 3. Legal Proceedings. Note 9 - Commitments, Contingent Liabilities and Other Matters (Annual Report p. 49); Regulation (Annual Report pp. 59, 60 and 62). Item 4. Submission of Matters Not applicable. to a Vote of Security Holders. Part II Item 5. Market for Registrant's Gannett Shareholder Services (Annual Common Equity and Report, p. 76); Company Related Stockholder Profile (Annual Report, p. 1); Matters Gannett Common Stock Prices (Annual Report p. 22); Dividends (Annual Report p. 33). Item 6. Selected Financial Eleven-Year Summary and Notes to Data. Eleven-Year Summary (Annual Report pp. 52-54). Item 7. Management's Discussion Management's Discussion and Analysis and Analysis of of Results of Operations and Financial Financial Condition and Position (Annual Report pp. 23-35). Results of Operations. Item 7A. Quantitative and The Company is not subject to market risk Qualitative Disclosures associated with derivative financial about Market Risk instruments or derivative commodity instruments, as the Company is not a party to any such instruments. The Company believes that its market risk from other financial instruments, such as accounts receivable, accounts payable and debt, is not material. Item 8. Financial Statements Consolidated Financial Statements and and Supplementary Data. Notes to Consolidated Financial State- ments (Annual Report pp. 36-50). Effects of inflation and changing prices (Annual Report p. 33); Quarterly Statements of Income (Annual Report pp. 66-67). Item 9. Changes in and None. Disagreements with Accountants on Account- ing and Financial Disclosure. -3- Part III Item 10. Directors and Executive Executive Officers of the Officers of the Registrant. Company are listed below: Sara M. Bentley - President, Gannett Northwest Newspaper Group, and President and Publisher, Statesman Journal Michael C. Burrus - President, Multimedia Cablevision, Inc. Thomas L. Chapple - Senior Vice President, General Counsel, and Secretary Richard L. Clapp - Senior Vice President, Human Resources Susan Clark-Johnson - Senior Group President, Gannett Pacific Newspaper Group, and President and Publisher, Reno (Nev.) Gazette-Journal Michael J. Coleman - Senior Group President, Gannett South Newspaper Group, and President and Publisher, FLORIDA TODAY at Brevard County Robert T. Collins - President, New Jersey Newspaper Group, and President and Publisher, Asbury Park Press and Home News Tribune, East Brunswick, NJ John J. Curley - Chairman and Chief Executive Officer Thomas Curley - Senior Vice President, Administration, and President and Publisher, USA TODAY Philip R. Currie - Senior Vice President, News, Gannett Newspaper Division Ardyth R. Diercks - Senior Vice President, Gannett Television Craig A. Dubow - Executive Vice President, Gannett Television Daniel S. Ehrman, Jr. - Vice President, Planning & Development Millicent A. Feller - Senior Vice President, Public Affairs and Government Relations Lawrence P. Gasho - Vice President, Financial Analysis George R. Gavagan - Vice President and Controller Denise H. Ivey - President, Gannett Gulf Coast Newspaper Group, and President and Publisher, Pensacola News Journal John B. Jaske - Senior Vice President, Labor Relations and Assistant General Counsel Richard A. Mallary - Senior Vice President, Gannett Broadcasting Gracia C. Martore - Treasurer and Vice President, Investor Relations Douglas H. McCorkindale - Vice Chairman and President Larry F. Miller - Executive Vice President and Chief Financial Officer Craig A. Moon - President, Piedmont Newspaper Group, and President and Publisher, The Tennessean Roger Ogden - Vice President, Gannett Television, and President and General Manager, KUSA-TV, Denver W. Curtis Riddle - Senior Group President, Gannett East Newspaper Group, and President and Publisher, The News Journal (Wilmington, DE) Carleton F. Rosenburgh - Senior Vice President, Gannett Newspaper Division Gary F. Sherlock - President, Gannett Atlantic Newspaper Group, and President and Publisher, The Journal News Mary P. Stier - President, Gannett Midwest Newspaper Group, and President and Publisher, Rockford Register Star Cecil L. Walker - President, Gannett Broadcasting Division Gary L. Watson - President, Gannett Newspaper Division -4- Information concerning the Executive Officers of the Company is included in the Annual Report on pages 18 and 19. Information concerning the Board of Directors of the Company is incorporated by reference to the Company's Proxy Statement pursuant to General Instruction G(3) to Form 10-K. Item 11. Executive Compensation. Incorporated by reference to the Company's Proxy Statement pursuant to General Instruction G(3) to Form 10-K. Item 12. Security Ownership of Certain Incorporated by reference to the Beneficial Owners and Company's Proxy Statement pursuant to Management. General Instruction G(3) to Form 10-K. Item 13. Certain Relationships and Incorporated by reference to the Related Transactions. Company's Proxy Statement pursuant to General Instruction G(3) to Form 10-K. -5- Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits. (1) Financial Statements. The following financial statements of the Company and the accountants' report thereon are included on pages 36 through 51 of the Company's 1998 Annual Report to Shareholders and are incorporated herein by reference: Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997. Consolidated Statements of Income - Fiscal Years Ended December 27, 1998, December 28, 1997, and December 29, 1996. Consolidated Statements of Cash Flows - Fiscal Years Ended December 27, 1998, December 28, 1997, and December 29, 1996. Consolidated Statements of Changes in Shareholders' Equity - December 27, 1998, December 28, 1997, and December 29, 1996. Notes to Consolidated Financial Statements. Report of Independent Accountants. -6- (2) Financial Statement Schedules. The following financial statement schedules are incorporated by reference to "Schedules to Form 10-K Information" appearing on pages 68 and 69 of the Company's 1998 Annual Report to Shareholders: Schedule V - Property, Plant and Equipment. Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment. Schedule VIII - Valuation and Qualifying Accounts. Schedule X - Supplementary Income Statement Information. The Report of Independent Accountants on Financial Statement Schedules appears on page 51 of this Annual Report on Form 10-K. Note: All other schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements or related notes. (3) Pro Forma Financial Information. Not Applicable. (4) Exhibits. See Exhibit Index for list of exhibits filed with this Annual Report on Form 10-K. Management contracts and compensatory plans or arrangements are identified with asterisks on the Exhibit Index. (b) Reports on Form 8-K. None. -7- REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Shareholders of Gannett Co., Inc. Our audits of the consolidated financial statements referred to in our report dated February 1, 1999 appearing on page 51 of the 1998 Annual Report to Shareholders of Gannett Co., Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/PricewaterhouseCoopers LLP _______________________________ PRICEWATERHOUSECOOPERS, LLP Washington, D.C. February 1, 1999 -8- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 23, 1999 GANNETT CO., INC. (Registrant) By /s/Douglas H. McCorkindale ------------------------------ Douglas H. McCorkindale, Vice Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Dated: February 23, 1999 /s/John J. Curley ------------------------------ John J. Curley, Director, Chairman and Chief Executive Officer Dated: February 23, 1999 /s/Douglas H. McCorkindale ------------------------------ Douglas H. McCorkindale, Director, Vice Chairman and President Dated: February 23, 1999 /s/Larry F. Miller ------------------------------ Larry F. Miller, Executive Vice President and Chief Financial Officer Dated: February 23, 1999 /s/Meredith A. Brokaw ------------------------------ Meredith A. Brokaw, Director Dated: February 23, 1999 /s/Peter B. Clark ------------------------------ Peter B. Clark, Director Dated: February 23, 1999 /s/Stuart T.K. Ho ------------------------------ Stuart T.K. Ho, Director -9- Dated: February 23, 1999 /s/Drew Lewis ------------------------------ Drew Lewis, Director Dated: February 23, 1999 /s/Josephine P. Louis ------------------------------ Josephine P. Louis, Director Dated: February 23, 1999 /s/Samuel J. Palmisano ------------------------------ Samuel J. Palmisano, Director Dated: February 23, 1999 /s/Thomas A. Reynolds, Jr. ------------------------------ Thomas A. Reynolds, Jr., Director Dated: February 23, 1999 /s/Karen Hastie Williams ------------------------------ Karen Hastie Williams, Director -10- EXHIBIT INDEX Exhibit Number Exhibit Location 3-1 Second Restated Certificate Incorporated by reference to Exhibit of Incorporation of Gannett Co., 3-1 to Gannett Co., Inc's Form 10-K Inc. for the fiscal year ended December 26, 1993 ("1993 Form 10-K"). Amendment incorporated by reference to Exhibit 3-1 to the 1993 Form 10-K. 3-2 By-laws of Gannett Co., Inc. Incorporated by reference to Exhibit (reflects all amendments 3-1 to Gannett Co., Inc.'s Form 10-Q through September 24, 1997) for the fiscal quarter ended September 28, 1997. 4-1 $1,000,000,000 Revolving Incorporated by reference to Exhibit Credit Agreement among 4-1 to the 1993 Form 10-K. Gannett Co., Inc. and the Banks named therein. 4-2 Amendment Number One Incorporated by reference to Exhibit to $1,000,000,000 Revolving 4-2 to Gannett Co., Inc.'s Form 10-Q Credit Agreement among for the fiscal quarter ended June 26, Gannett Co., Inc. and the 1994. Banks named therein. 4-3 Amendment Number Two to Incorporated by reference to Exhibit $1,500,000,000 Revolving 4-3 to Gannett Co., Inc.'s Form 10-K Credit Agreement among for the fiscal year ended Gannett Co., Inc. and the December 31, 1995. Banks named therein. 4-4 Amendment Number Three to Incorporated by reference to Exhibit $3,000,000,000 Revolving 4-4 to Gannett Co., Inc.'s Form 10-Q Credit Agreement among for the fiscal quarter ended Gannett Co., Inc. and the Banks September 29, 1996. named therein. 4-5 Indenture dated as of March 1, Incorporated by reference to Exhibit 1983 between Gannett Co., Inc. 4-2 to Gannett Co., Inc.'s Form 10-K and Citibank, N.A., as Trustee. for the fiscal year ended December 29, 1985. 4-6 First Supplemental Indenture Incorporated by reference to Exhibit dated as of November 5, 1986 4 to Gannett Co., Inc.'s Form 8-K among Gannett Co., Inc., filed on November 9, 1986. Citibank, N.A., as Trustee, and Sovran Bank, N.A., as Successor Trustee. 4-7 Second Supplemental Indenture Incorporated by reference to dated as of June 1, 1995, Exhibit 4 to Gannett Co., Inc.'s among Gannett Co., Inc., Form 8-K filed on June 15, 1995. NationsBank, N.A., as Trustee, and Crestar Bank, as Trustee. 4-8 Rights Plan. Incorporated by reference to Exhibit 1 to Gannett Co., Inc.'s Form 8-K filed on May 23, 1990. 4-9 Amendment Number Four to Incorporated by reference to $3,000,000,000 Revolving Exhibit 4-9 to Gannett Co. Inc's Credit Agreement among Form 10-Q filed on August 12, 1998. Gannett Co., Inc. and the Banks named therein. -11- 10-1 Employment Agreement dated Incorporated by reference to Gannett December 7, 1992 between Co., Inc.'s Form 10-K for the fiscal Gannett Co., Inc. and John J. year ended December 27, 1992 ("1992 Curley.* Form 10-K"). 10-2 Employment Agreement dated Incorporated by reference to the 1992 December 7, 1992 between Form 10-K. Gannett Co., Inc. and Douglas H. McCorkindale.* 10-3 Gannett Co., Inc. 1978 Incorporated by reference to Exhibit Executive Long-Term Incentive 10-3 to Gannett Co., Inc.'s Form 10-K Plan* for the fiscal year ended December 28, 1980. Amendment No. 1 incorporated by reference to Exhibit 20-1 to Gannett Co., Inc.'s Form 10-K for the fiscal year ended December 27, 1981. Amendment No. 2 incorporated by reference to Exhibit 10-2 to Gannett Co., Inc.'s Form 10-K for the fiscal year ended December 25, 1983. Amendments Nos. 3 and 4 incorporated by reference to Exhibit 4-6 to Gannett Co., Inc.'s Form S-8 Registration Statement No. 33-28413 filed on May 1, 1989. Amendments Nos. 5 and 6 incorporated by reference to Exhibit 10-8 to Gannett Co., Inc.'s Form 10-K for the fiscal year ended December 31, 1989. Amendment No. 7 incorporated by reference to Gannett Co., Inc.'s Form S-8 Registration Statement No. 333-04459 filed on May 24, 1996. Amendment No. 8 incorporated by reference to Exhibit 10-3 to Gannett Co., Inc.'s Form 10-Q for the quarter ended September 28, 1997. Amendment dated December 9, 1997, incorporated by reference to Gannett Co., Inc.'s 1997 Form 10-K. 10-4 Description of supplemental Incorporated by reference to Exhibit insurance benefits.* 10-4 to the 1993 Form 10-K. 10-5 Gannett Co., Inc. Supplemental Incorporated by reference to Exhibit Retirement Plan, as amended.* 10-8 to Gannett Co., Inc's Form 10-K for the fiscal year ended December 27, 1986 ("1986 Form 10-K"). 10-6 Gannett Co., Inc. Retirement Incorporated by reference to Exhibit Plan for Directors.* 10-10 to the 1986 Form 10-K. 1991 Amendment incorporated by reference to Exhibit 10-2 to Gannett Co., Inc.'s Form 10-Q for the quarter ended September 29, 1991. Amendment to Gannett Co., Inc. Retirement Plan for Directors dated October 31, 1996, incorporated by reference to Exhibit 10-6 to the 1996 Form 10K. 10-7 Amended and Restated Incorporated by reference to Exhibit Gannett Co., Inc. 1987 10-1 to Gannett Co., Inc.'s Form 10-Q Deferred Compensation Plan.* for the fiscal quarter ended September 29, 1996. Amendment No. 5 incorporated by reference to Exhibit 10-2 to Gannett Co., Inc.'s Form 10-Q for the quarter ended September 28, 1997. -12- 10-8 Gannett Co., Inc. Transitional Incorporated by reference to Exhibit Compensation Plan.* 10-13 to Gannett Co., Inc.'s Form 10-K for the fiscal year ended December 30, 1990. 13 Portions of 1998 Annual Report Attached. to Shareholders incorporated by reference. 21 Subsidiaries of Gannett Co., Attached. Inc. 23 Consent of Independent Attached. Accountants. 27 Financial Data Schedules. Attached. The Company agrees to furnish to the Commission, upon request, a copy of each agreement with respect to long-term debt not filed herewith in reliance upon the exemption from filing applicable to any series of debt which does not exceed 10% of the total consolidated assets of the Company. * Asterisks identify management contracts and compensatory plans or arrangements. -13- EX-13 2 EXH. 13 - PORTIONS OF THE 1998 ANNUAL REPORT Company Profile Gannett Co., Inc. is a diversified news and information company that publishes newspapers, operates broadcasting stations and cable television systems, and is engaged in marketing, commercial printing, a newswire service, data services and news programming. Gannett is a nationwide company with headquarters in Arlington, Va., and operations in 45 states, the District of Columbia and Guam. Gannett is the USA's largest newspaper group in terms of circulation. The company's 75 daily newspapers have a combined daily paid circulation of more than 6.7 million. They include USA TODAY, the nation's largest-selling daily newspaper, with a circulation of approximately 2.2 million. In addition, Gannett owns a variety of non- daily publications, including USA WEEKEND, a weekly newspaper magazine. The company owns and operates 21 television stations covering 16.7 percent of the USA and cable television systems in major U.S. markets. Gannett was founded by Frank E. Gannett and associates in 1906 and incorporated in 1923. The company went public in 1967. Its nearly 280 million shares of common stock are held by more than 14,000 shareholders of record in all 50 states and abroad. The company has approximately 39,400 employees. -1- Board of Directors John J. Curley Chairman and chief executive officer, Gannett Co., Inc. Formerly: Chairman, president and chief executive officer, Gannett Co., Inc. (1989-1997). Age 60. (b,d,f,g) Meredith A. Brokaw Founder, Penny Whistle Toys, Inc., New York City, and author of children's books. Other directorships: Conservation International, Washington, D.C.; Women's First Health Care. Age 58. (b,d,e) Peter B. Clark Former chairman, president and chief executive officer, The Evening News Association (1969-86). Age 70. (e,g) Stuart T.K. Ho Chairman of the board and president, Capital Investment of Hawaii, Inc. Other directorships: Aloha Airgroup, Inc.; College Retirement Equities Fund; Capital Investment of Hawaii, Inc.; Pacific Century Financial Corporation. Age 63. (a,b,c) Drew Lewis Former chairman and chief executive officer, Union Pacific Corporation. Other directorships: Aegis Communications; American Express Co.; FPL Group, Inc.; Gulfstream Aerospace; Lucent Technologies; Millennium Bank; Union Pacific Resources Group Inc. Age 67. (a,d) -16- Josephine P. Louis Chairman and chief executive officer, Eximious Inc., and Eximious Ltd. Other directorships: HDO Productions, Inc.; trustee, Chicago Horticultural Society; trustee, Chicago Historical Society. Age 68. (a,b,e) Douglas H. McCorkindale Vice chairman and president, Gannett Co., Inc. Formerly: Vice chairman and chief financial and administrative officer, Gannett Co., Inc. (1985-1997). Other directorships: Continental Airlines, Inc.; Frontier Corporation; and funds which are part of the Prudential group of mutual funds. Age 59. (b,f,g) Samuel J. Palmisano Senior vice president and group executive, IBM Global Services. Age 47. Thomas A. Reynolds Jr. Chairman emeritus of Chicago law firm of Winston & Strawn. Other directorships: Union Pacific Corporation. Age 70. (a,b,c) Karen Hastie Williams Partner of Washington, D.C., law firm of Crowell & Moring. Other directorships: Crestar Financial Services Corporation; Continental Airlines, Inc.; Fannie Mae; Washington Gas Light Company. Age 54. (a,c) (a) Member of Audit Committee. (b) Member of Executive Committee. (c) Member of Executive Compensation Committee. (d) Member of Management Continuity Committee. (e) Member of Public Responsibility and Personnel Practices Committee. (f) Member of Gannett Management Committee. (g) Member of Contributions Committee. -17- Company & Divisional Officers Gannett's principal management group is the Gannett Management Committee, which coordinates overall management policies for the company. The Gannett Newspaper Operating Committee oversees operations of the company's newspaper division. The Gannett Broadcasting Operating Committee coordinates management policies for the company's television stations and cable operations. The members of these three groups are identified at right and on the previous pages. The managers of the company's various local operating units enjoy substantial autonomy in local policy, operational details, news content and political endorsements. Gannett's headquarters staff includes specialists who provide advice and assistance to the company's operating units in various phases of the company's operations. At right are brief descriptions of the business experience during the last five years of the officers of the company and the heads of its national and regional divisions. Officers serve for a term of one year and may be re-elected. Information about the two officers who serve as directors (John J. Curley and Douglas H. McCorkindale) can be found on pages 16-17. (a) Member of the Gannett Management Committee. (b) Member of the Gannett Newspaper Operating Committee. (c) Member of the Gannett Broadcasting Operating Committee Christopher W. Baldwin, Vice president, taxes. Age 55. Sara M. Bentley, President, Gannett Northwest Newspaper Group, and president and publisher, Statesman Journal, Salem, Ore. Formerly: President and publisher, Statesman Journal (1988-1994). Age 47. (b) Michael C. Burrus, President, Multimedia Cablevision. Formerly: Vice president, Multimedia, Inc., and president, Multimedia Cablevision and Multimedia Security (1993-1995). Age 44. (c) Thomas L. Chapple, Senior vice president, general counsel and secretary. Formerly: Vice president, general counsel and secretary (1991-1995). Age 51. (a) Richard L. Clapp, Senior vice president/human resources. Formerly: Vice president, compensation and benefits (1983-1995). Age 58. (a) Susan Clark-Johnson, Senior group president, Gannett Pacific Newspaper Group, and president and publisher, Reno (Nev.) Gazette-Journal. Formerly: President, Gannett West Newspaper Group, and president and publisher, Reno Gazette-Journal (1985-1994). Age 52. (b) Michael J. Coleman, Senior group president, Gannett South Newspaper Group, and president and publisher, FLORIDA TODAY at Brevard County. Formerly: President, Gannett South Newspaper Group, and president and publisher, FLORIDA TODAY (1991-1994). Age 55. (b) Robert T. Collins, President, New Jersey Newspaper Group, and president and publisher, Asbury Park Press, Home News Tribune, East Brunswick, N.J., and Ocean County Newspapers. Formerly: President and publisher, Asbury Park Press and Home News Tribune (1997-1998); president and publisher, Courier-Post, Cherry Hill, N.J. (1993-1997). Age 55. (b) -18- Thomas Curley, Senior vice president, administration, and president and publisher, USA TODAY. Formerly: President and publisher, USA Today (1991-1998). Thomas Curley is the brother of John J. Curley. Age 50. (a) Philip R. Currie, Senior vice president, news, Newspaper Division. Formerly: Vice president, news, Newspaper Division (1982-1995). Age 57. (b) Ardyth R. Diercks, Senior vice president, Gannett Television. Formerly: President and general manager, KSDK-TV, St. Louis (1996-1998); president and general manager, KVUE-TV, Austin, Texas (1994-1996); vice president and general manager, KVUE-TV (1992-1994). Age 44. (c) Craig A. Dubow, Executive vice president, Gannett Television. Formerly: President and general manager, WXIA-TV, Atlanta (1992-1996). Age 44. (c) Daniel S. Ehrman Jr., Vice president, planning and development. Formerly: Senior vice president, Gannett Broadcasting (1995-1997); vice president, finance and business affairs, Gannett Broadcasting (1984-1995). Age 52. Millicent A. Feller, Senior vice president, public affairs and government relations. Age 51. (a) Lawrence P. Gasho, Vice president, financial analysis. Age 56. George R. Gavagan, Vice president and controller. Formerly: Vice president, corporate accounting services (1993-1997). Age 52. Denise H. Ivey, President, Gannett Gulf Coast Newspaper Group, and president and publisher, Pensacola (Fla.) News Journal. Formerly: Vice president, Gannett South Newspaper Group, and president and publisher, Pensacola News Journal (1991-1994). Age 48. (b) John B. Jaske, Senior vice president, labor relations and assistant general counsel. Age 54. (a) Richard A. Mallary, Senior vice president, Gannett Broadcasting. Formerly: Vice President, news, Gannett Broadcasting (1989-1995). Age 56. (c) Gracia C. Martore, Treasurer and vice president, investor relations. Formerly: Vice president, treasury services and investor relations (1996-1998); vice president, treasury services (1993-1996). Age 46. -19- Myron Maslowsky, Vice president, internal audit. Formerly: Director, internal audit (1989-1995). Age 44. Larry F. Miller, Executive vice president and chief financial officer. Formerly: Senior vice president, financial planning and controller (1991-1997). Age 60. (a) Craig A. Moon, President, Piedmont Newspaper Group, and president and publisher, The Tennessean, Nashville. Formerly: Vice president, Gannett South Newspaper Group, and president and publisher, The Tennessean (1991-1999). Age 49. (b) Roger Ogden, Vice President, Gannett Television, and president and general manager, KUSA-TV, Denver, Colo. Age 53. (c) W. Curtis Riddle, Senior group president, Gannett East Newspaper Group, and president and publisher, The News Journal, Wilmington, Del. Formerly: President, Gannett East Newspaper Group, and president and publisher, Lansing (Mich.) State Journal (1993-1994). Age 47. (b) Carleton F. Rosenburgh, Senior vice president, Gannett Newspaper Division. Age 59. (b) Gary F. Sherlock, President, Gannett Atlantic Newspaper Group, and president and publisher, The Journal News, Westchester County, N.Y. Formerly: Vice president, Gannett Metro Newspaper Group, and president and publisher, The Journal News (1990-1994). Age 53. (b) Mary P. Stier, President, Gannett Midwest Newspaper Group, and president and publisher, Rockford (Ill.) Register Star. Age 41. (b) Wendell J. Van Lare, Vice president, senior labor counsel. Age 53. Cecil L. Walker, President, Gannett Broadcasting Division. Age 62. (a,c) Barbara W. Wall, Vice president, senior legal counsel. Age 44. Gary L. Watson, President, Gannett Newspaper Division. Age 53. (a)(b) -20- Year Quarter Low High - ---- ------- ----- ------ 1988 first $16.88 $19.75 second $14.69 $17.82 third $15.25 $17.13 fourth $16.19 $17.50 1989 first $17.32 $19.13 second $18.32 $24.25 third $21.82 $24.94 fourth $19.75 $22.63 1990 first $19.75 $22.19 second $17.75 $21.13 third $14.94 $18.75 fourth $15.32 $18.88 1991 first $17.88 $21.32 second $19.88 $22.19 third $19.69 $23.32 fourth $17.94 $21.13 1992 first $21.13 $23.94 second $20.75 $24.57 third $21.94 $24.13 fourth $23.00 $26.82 1993 first $25.32 $27.69 second $23.75 $27.38 third $23.88 $25.69 fourth $23.75 $29.07 1994 first $26.69 $29.19 second $25.32 $27.44 third $24.19 $25.82 fourth $23.38 $26.69 1995 first $25.07 $27.50 second $26.00 $27.88 third $26.50 $27.75 fourth $26.44 $32.19 1996 first $29.63 $35.38 second $32.25 $35.82 third $32.00 $35.07 fourth $34.75 $39.25 1997 first $35.81 $44.75 second $40.50 $50.66 third $48.00 $53.00 fourth $51.13 $61.81 1998 first $57.25 $69.94 second $65.13 $74.69 third $55.81 $73.56 fourth $48.94 $68.06 1999 first $62.00 $70.25 * * Through Feb. 26, 1999 -22- Management's responsibility for financial statements The management of the company has prepared and is responsible for the consolidated financial statements and related financial information included in this report. These financial statements were prepared in accordance with generally accepted accounting principles. These financial statements necessarily include amounts determined using management's best judgments and estimates. The company's accounting and other control systems provide reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the company. Underlying the concept of reasonable assurance is the premise that the cost of control not exceed the benefit derived. Management believes that the company's accounting and other control systems appropriately recognize this cost/benefit relationship. The company's independent accountants, PricewaterhouseCoopers LLP, provide an independent assessment of the degree to which management meets its responsibility for fairness in financial reporting. They regularly evaluate the company's system of internal accounting control and perform such tests and other procedures as they deem necessary to reach and express an opinion on the financial statements. The PricewaterhouseCoopers LLP report appears on page 51. The Audit Committee of the Board of Directors is responsible for reviewing and monitoring the company's financial reports and accounting practices to ascertain that they are appropriate in the circumstances. The Audit Committee consists of five non-management directors, and meets to discuss audit and financial reporting matters with representatives of financial management, the internal auditors and the independent accountants. The internal auditors and the independent accountants have direct access to the Audit Committee to review the results of their examinations, the adequacy of internal accounting controls and the quality of financial reporting. Douglas H. McCorkindale Larry F. Miller Vice Chairman and President Executive Vice President and Chief Financial Officer Management's discussion and analysis of results of operations and financial position Basis of reporting Following is a discussion of the key factors that have affected the company's business over the last three fiscal years. This commentary should be read in conjunction with the company's financial statements, the 11-year summary of operations and the Form 10-K information that appear in the following sections of this report. The company's fiscal year ends on the last Sunday of the calendar year. The company's 1998 fiscal year ended on Dec. 27, 1998 and encompassed a 52-week period. The company's 1997 and 1996 fiscal years also encompassed 52-week periods. Business acquisitions, exchanges and dispositions 1998 In the first quarter of 1998, the company sold its five remaining radio stations, its alarm security business and its newspaper in St. Thomas, Virgin Islands. The company also contributed its newspaper in Saratoga Springs, N.Y., to the Gannett Foundation. The company recorded a net non-operating gain of $307 million ($184 million after- tax), principally as a result of these transactions. The company purchased television stations WCSH-TV (NBC) in Portland, Maine, and WLBZ-TV (NBC) in Bangor, Maine, early in the first quarter and WLTX-TV (CBS) in Columbia, S.C., in April 1998. In the third quarter of 1998, the company sold five small-market daily newspapers in Ohio, Illinois and West Virginia and completed the acquisition of several newspapers in New Jersey, including The Daily Record in Morristown and the Ocean County Observer in Toms River. Also in the third quarter of 1998, the company completed a transaction with TCI Communications, Inc., under which it exchanged its subscribers and certain cable system assets in the suburban Chicago area (93,000 subscribers) for subscribers and certain cable system assets of TCI in Kansas (128,000 subscribers). The aggregate purchase price for businesses and assets acquired in 1998 was approximately $370 million in cash. The acquisitions, which were accounted for under the purchase method of accounting, did not materially affect reported results of operations for the year. 1997 In January 1997, the company exchanged WLWT-TV (NBC- Cincinnati) and KOCO-TV (ABC-Oklahoma City) for WZZM-TV (ABC-Grand Rapids/Kalamazoo/Battle Creek) and WGRZ-TV (NBC- Buffalo). This exchange was necessary to comply with Federal Communications Commission (FCC) cross-ownership rules and did not materially affect broadcast operating results. -23- In May 1997, the company acquired KNAZ-TV (NBC- Flagstaff, Ariz.), KMOH-TV (WB-Kingman, Ariz.) and Printed Media Companies (Minneapolis, Minn.). In July 1997, Mary Morgan, Inc., a printing business in Green Bay, Wis., was purchased, and in August 1997, the company acquired Army Times Publishing Company in Springfield, Va., which produces military newspapers and a monthly defense publication. In October 1997, the company acquired New Jersey Press, Inc., which publishes two dailies, Asbury Park Press and the Home News Tribune of East Brunswick, and operates In Jersey, an Internet service. The aggregate purchase price for businesses acquired in 1997 was approximately $445 million in cash and liabilities assumed. The acquisitions were accounted for under the purchase method of accounting and did not materially affect reported results of operations for the year. In January 1997, the company contributed the Niagara Gazette newspaper to the Gannett Foundation. In April 1997, the company sold its newspaper in Moultrie, Ga., and in November 1997, the company sold its newspapers in Tarentum and North Hills, Pa. These newspaper dispositions did not materially affect results of operations. 1996 In December 1996, the company acquired WTSP-TV (CBS-Tampa/St. Petersburg, Fla.) in exchange for radio stations in Los Angeles, San Diego and Tampa. The company recorded the exchange as two simultaneous but separate events; that is, a sale of radio stations for which a non-cash gain was recognized, and the acquisition of the television station accounted for under the purchase method. The company reported a pre-tax, non-cash, non-operating gain of $158 million on the exchange and the television station acquired was recorded at estimated fair value or $170 million. On an after-tax basis, this accounting treatment resulted in a non-cash increase in earnings of $93 million. In August 1996, the company completed the sale of its outdoor advertising business for $713 million in cash. The company recorded an after-tax gain of $295 million. The gain and outdoor operating results for periods prior to the sale are reported as a discontinued operation. In December 1996, the company sold its television entertainment programming business, Multimedia Entertainment, which had been acquired in December 1995 as part of the acquisition of Multimedia, Inc. ("Multimedia"). The selling price for this transaction approximated the value assigned to it by the company upon acquisition. Therefore, no gain was recognized on the sale. The operating results for Multimedia Entertainment for periods prior to the sale are reported as a discontinued operation. Results of operations Consolidated summary The company achieved record operating results in 1998 in all three of its business segments. A consolidated summary is presented below. Note that this summary separates from ongoing results the first quarter 1998 net non-operating gain of $307 million ($184 million after-tax) principally from the sale of the radio and alarm security businesses, and the fourth quarter 1996 non-cash gain of $158 million ($93 million after-tax) recorded on the exchange of radio stations for a television station. In millions of dollars, except per share amounts 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Operating revenues $5,121 8% $4,729 7% $4,421 18% Operating expenses $3,677 8% $3,413 2% $3,355 15% Operating income $1,444 10% $1,316 23% $1,066 30% Income from continuing operations, excluding gains on sale/exchange of properties $ 816 15% $ 713 34% $ 531 15% After-tax gains on sale/exchange of properties $ 184 --- 0 --- $ 93 --- Income from continuing operations, as reported $1,000 40% $ 713 14% $ 624 36% Earnings per share from continuing operations, excluding gains on sale/exchange of properties Basic $ 2.88 14% $ 2.52 34% $ 1.88 15% Diluted $ 2.86 14% $ 2.50 34% $ 1.87 15% Earnings per share from gains on sale/exchange of properties Basic $ .65 --- 0 --- $ .33 --- Diluted $ .64 --- 0 --- $ .33 --- Earnings per share from continuing operations, as reported Basic $ 3.53 40% $ 2.52 14% $ 2.21 35% Diluted $ 3.50 40% $ 2.50 14% $ 2.20 35% A discussion of the operating results of each of the company's principal business segments and other factors affecting financial results follows. Operating cash flow amounts presented with business segment information represent operating income plus depreciation and amortization of intangible assets. Such cash flow amounts vary from net cash flow from operating activities presented in the Consolidated Statements of Cash Flows because cash payments for interest and taxes are not reflected therein, nor are the cash flow effects of non-operating items, discontinued operations or changes in certain operations-related balance sheet accounts. -24- Newspapers In addition to its local newspapers, the company's newspaper publishing operations include USA TODAY, USA WEEKEND and Gannett Offset commercial printing. The newspaper segment in 1998 contributed 81% of the company's revenues and 77% of its operating income. Record earnings were achieved by the newspaper segment in 1998, driven by revenue gains in all major categories. Revenue and earnings gains were reported for newspapers at large, medium and small markets, and in most geographic regions. Improved results were reported at The Detroit News, which continued its rebound from the strike initiated in mid-1995. The New Jersey newspapers acquired in October 1997 and July 1998 contributed to year-to-year earnings gains. At USA TODAY, record revenues and earnings also were reported. Advertising revenues were very strong, up 12% over 1997. Newsprint prices on average were 9% higher than in 1997. However, at the end of 1998, they were only slightly higher than year- ago levels. Newspaper operating results were as follows: In millions of dollars 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Revenues $4,159 10% $3,771 8% $3,502 7% Expenses $3,050 10% $2,769 2% $2,716 6% ------ ------ ------ ------ ------ ------ Operating income $1,109 11% $1,002 27% $ 786 12% ====== ====== ====== ====== ====== ====== Operating cash flow $1,294 11% $1,170 23% $ 948 11% Newspaper operating revenues: Newspaper operating revenues are derived principally from advertising and circulation sales, which accounted for 71% and 24%, respectively, of total newspaper revenues in 1998. Other newspaper publishing revenues are mainly from commercial printing businesses. The table below presents these components of reported revenues for the last three years. Newspaper publishing revenues, in millions of dollars 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Advertising $2,943 12% $2,634 9% $2,418 9% Circulation $1,010 7% $ 948 3% $ 918 6% Commercial printing and other $ 206 9% $ 189 13% $ 166 (3%) ------ ------ ------ ------ ------ ------ Total $4,159 10% $3,771 8% $3,502 7% ====== ====== ====== ====== ====== ====== In the tables that follow, newspaper advertising linage, circulation volume statistics and related revenue results are presented on a pro forma basis for newspapers owned at the end of 1998. Newspapers acquired in 1998 are included as if they were owned throughout the period covered by these comparisons. Advertising revenues, in millions of dollars (pro forma) 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Local $ 936 4% $ 902 4% $ 865 1% National $ 526 8% $ 489 10% $ 446 17% Classified $1,035 7% $ 963 10% $ 874 6% ------ ------ ------ ------ ------ ------ Total Run-of-Press $2,497 6% $2,354 8% $2,185 6% Preprint and other advertising $ 458 8% $ 423 5% $ 402 (2%) ------ ------ ------ ------ ------ ------ Total ad revenue $2,955 6% $2,777 7% $2,587 5% ====== ====== ====== ====== ====== ====== Advertising linage, in millions of inches, and preprint distribution (pro forma) 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Local 35.4 3% 34.3 5% 32.6 (4%) National 3.1 7% 2.9 13% 2.5 6% Classified 42.2 9% 38.7 8% 35.8 1% ------ ------ ------ ------ ------ ------ Total Run-of-Press 80.7 6% 75.9 7% 70.9 (1%) ====== ====== ====== ====== ====== ====== Preprint distribution (millions) 7,402 7% 6,923 3% 6,726 - Reported newspaper advertising revenues for 1998 were $309 million greater than in 1997, a 12% increase, while pro forma revenues presented above reflect a 6% increase. This reported/pro forma variance relates principally to newspaper acquisitions in 1997 and 1998. Pro forma local ad revenues and linage in 1998 rose 4% and 3%, respectively. Most local newspapers achieved gains in this category, particularly from medium and smaller accounts. Ad spending by major retailers was slightly lower in 1998. The overall gains in local revenues were spurred by enhanced sales and marketing efforts and by the strong economy. Pro forma national ad revenues and linage rose 8% and 7%, respectively, fueled principally by USA TODAY, which reported a 12% gain in total ad revenues and a 9% linage gain. Ad revenue growth at USA TODAY in 1998 followed a 12% gain in 1997 and a 30% gain in 1996. Pro forma classified revenues in 1998 rose 7% on a 9% linage gain. Employment advertising revenue gains were the strongest, followed by real estate and automotive. Classified sales and marketing resources were expanded and refined in 1998, which, along with the strong economy and the tight labor market, were the key factors in these revenue gains. -25- In millions, as reported Newspaper advertising Year revenues - ---- --------------------- 1989 $2,018 1990 $1,917 1991 $1,853 1992 $1,882 1993 $2,005 1994 $2,153 1995 $2,219 1996 $2,418 1997 $2,634 1998 $2,943 Looking to 1999, further ad revenue and volume growth is anticipated in all categories. Generally modest price increases are planned at most properties, and the company will continue to expand and refine sales and marketing efforts. Changes in national economic factors such as interest rates, employment levels and the rate of general economic growth will have an impact on revenues at all of the company's newspapers. Newspaper circulation revenues rose $62 million or 7% in 1998. Incremental revenue from the newspaper businesses acquired in 1997 and 1998 contributed significantly to the gains, although most of the company's local newspapers, along with USA TODAY and USA WEEKEND, reported higher circulation revenue as well. For local newspapers, morning circulation accounts for approximately 82% of total daily volume, while evening represents 18%. On a pro forma basis, local morning circulation rose 1%. Of the company's local morning circulation newspapers, 31 of 57 achieved higher average volume for 1998. Average evening circulation was 1% lower, continuing the national trend. Average Sunday circulation was 1% lower in 1998. During 1998, the Battle Creek (Mich.) Enquirer was converted from evening to morning publication, and the 10 daily Gannett Suburban Newspapers were consolidated into one morning and Sunday publication, The Journal News, based in Westchester County, N.Y. Selected circulation price increases were implemented in 1998 at certain newspapers. USA TODAY's average daily paid circulation for 1998 rose 2% to 2,271,767. USA TODAY reported an average daily paid circulation of 2,213,255 in the ABC Publisher's Statement for the six months ended Sept. 27, 1998, a 2% increase over the comparable period a year ago. In millions, as reported Newspaper circulation Year revenues - ---- --------------------- 1989 $718 1990 $730 1991 $777 1992 $807 1993 $839 1994 $849 1995 $869 1996 $918 1997 $948 1998 $1,010 The company expects modest circulation revenue growth at most of its newspaper properties in 1999. The company will continue its efforts to improve circulation single-copy sales through enhanced marketing and sales outlet selection. Circulation price increases are planned at certain newspapers in 1999. Pro forma circulation volume for the company's local newspapers is summarized in the table below: Average net paid circulation volume, in thousands (pro forma) 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Local Newspapers Morning 3,688 1% 3,634 1% 3,615 (1%) Evening 787 (1%) 794 (4%) 825 (8%) ------ ------ ------ ------ ------ ------ Total daily 4,475 1% 4,428 --- 4,440 (3%) Sunday 6,029 (1%) 6,111 (1%) 6,188 (4%) Reported newspaper ad revenues for 1997 were $216 million greater than in 1996, a 9% increase, while pro forma revenues reflect a 7% increase. This reported/pro forma variance relates to the 1997 acquisitions of Army Times Publishing Company and New Jersey Press, Inc. Pro forma local ad revenues and linage rose 4% and 5%, respectively. Most of the company's local newspapers achieved gains in this category. Pro forma national ad revenues and linage rose 10% and 13% in 1997, respectively. USA TODAY made a major impact here, reporting a 12% gain in total ad revenues and a 7% linage gain. USA WEEKEND's national revenues rose 16%, and local newspaper national revenues were up 13%. Pro forma classified revenues rose 10% in 1997 on an 8% linage gain. Employment advertising revenue gains were strongest, followed by real estate and automotive. Ad rates were higher at most newspapers for most key classified categories. Employment and classified advertising benefited from the strong economy and tight labor market and expanded sales staffing. Newspaper circulation revenues rose $30 million or 3% in 1997. Most local newspapers, along with USA TODAY and USA WEEKEND, contributed to the gain. On a pro forma basis, local morning circulation rose 1% in 1997. Average evening circulation was 4% lower, continuing the national trend. Average Sunday circulation was 1% lower. At The Detroit News, daily and Sunday circulation rose for the year, reversing the effects of the strike initiated in 1995. During 1997, the Bellingham (Wash.) Herald and the Iowa City Press-Citizen converted from evening to morning publication and the evening Rochester (N.Y.) Times-Union was consolidated with the morning publication, Democrat and Chronicle. Selected price increases were implemented in 1997 at certain newspapers. -26 USA TODAY's average daily paid circulation in 1997 rose 3% to 2,234,474. USA TODAY reported an average daily paid circulation of 2,169,860 in the ABC Publisher's Statement for the six months ended Sept. 28, 1997, a 2% increase over the comparable period in 1996. For 1996, reported newspaper ad revenues were $198 million greater than in 1995, a 9% increase, while pro forma ad revenues reflect a 5% increase. The variance in the reported/pro forma percentage increase relates to the results of the Multimedia newspapers acquired at the end of 1995. Pro forma local ad revenues rose 1% for 1996, while related linage was off 4%. Local ad rate increases were implemented at most newspapers in 1996. Strong gains in 1996 were achieved in pro forma national ad revenues, up 17%, driven by USA TODAY, which reported a 30% increase in ad revenues. USA TODAY's ad volume gains were buoyed by the Summer Olympics and to a lesser extent the fall political elections. Pro forma classified revenues rose 6% in 1996 on a 1% gain in linage. Revenue gains were achieved in the top three classified categories, automotive, employment and real estate. Employment was strongest, up 9%. Ad rates were higher in all categories. Newspaper circulation revenues rose 6% or $48 million in 1996, mainly because of added revenues from the Multimedia newspapers and gains at USA TODAY. Circulation revenues were lower in Detroit because of the strike. On a pro forma basis for 1996, local morning circulation declined 1%, evening circulation declined 8% and Sunday circulation was down 4%. Most of the evening and Sunday circulation volume loss was attributable to the strike in Detroit. USA TODAY's average daily paid circulation for 1996 rose 4% to 2,163,941 and its circulation revenues rose 4%. USA TODAY reported an average daily paid circulation of 2,130,847 in the ABC Publisher's Statement for the six months ended Sept. 29, 1996, a 3% increase over the comparable period in 1995. Newspaper operating expense: Newspaper operating expense rose $281 million or 10% in 1998. The increase was caused principally by incremental costs from newspaper properties acquired in 1997 and 1998. Newsprint expense for the year, including the effect of acquisitions, was 18% higher than in 1997. Both consumption and average prices were higher by approximately 9%. While year-to-year newsprint prices were higher for all of 1998, at year-end they were only slightly higher than at the end of 1997. Newsprint prices have declined in early 1999, and it is expected that average prices for the year will be lower than in 1998. Payroll costs for newspaper operations rose 9% in 1998, in part because of acquired properties but also because of increases in headcount, particularly in marketing and ad sales, and pay increases. For 1999, pay increases are expected to be modest and headcount levels are not expected to change significantly. Ad sales payroll spending will, however, be increased further. Newspaper operating expense rose $53 million or 2% in 1997. The company benefited from lower average newsprint costs for the year. Newsprint expense for the year, including the effect of acquisitions, was 15% lower than in 1996. Consumption was higher by 8%, but average prices were down 21%. Payroll costs for newspaper operations rose 7% in 1997, in part because of the acquired properties but also because of slight increases in headcount, particularly in ad sales, and modest pay increases. Newspaper operating expense rose $158 million or 6% for 1996. Most of this increase relates to the impact of the Multimedia newspapers and higher newsprint costs. Newsprint expense for the year, including the effect of Multimedia newspapers, rose 15%, reflecting greater consumption, up 4%, and higher average prices, up 11% from 1995. Payroll costs rose 4% in 1996, reflecting the Multimedia purchase, partially offset by savings in Detroit. Year-end employment levels were down slightly from 1995. Strike-related costs in Detroit, principally security and property damage, were significantly lower for the full year of 1996 than they were for 1995. Newspaper operating income: The company's newspapers produced record earnings in 1998. Operating profit rose $107 million or 11%. While recently acquired newspaper properties contributed significant earnings, most of the company's local newspapers also reported higher profits. Earnings gains at Detroit and at USA TODAY were among the strongest. For 1999, the company expects to achieve further operating income gains, fueled by broad-based revenue growth at its local newspapers and USA TODAY. Newspapers produced sharply higher earnings in 1997; operating profit rose $216 million or 27%. Nearly all local newspapers reported higher profits and significant gains were achieved in Detroit and other large-city markets, as well as at USA WEEKEND. At USA TODAY, operating results were sharply higher. Operating income for the newspaper segment rose $85 million or 12% for 1996, reflecting the incremental contribution of Multimedia newspapers and sharply improved results at USA TODAY and The Detroit News. Higher newsprint prices tempered these earnings gains for the full year of 1996. -27- Broadcasting Early in the first quarter of 1998, the company sold its five remaining radio stations (in Chicago, Dallas and Houston) and purchased two television stations, WCSH-TV (NBC) in Portland, Maine, and WLBZ- TV (NBC) in Bangor, Maine. In late April 1998, the company purchased WLTX-TV (CBS) in Columbia, S.C. The company's broadcasting operations at the end of 1998 included 21 television stations reaching 16.7 percent of U.S. television homes. Over the last three years, reported broadcasting revenues, expenses, operating income and operating cash flows were as follows: In millions of dollars 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Revenues $ 721 3% $ 704 2% $ 687 47% Expenses $ 377 1% $ 376 (4%) $ 390 38% ------ ------ ------ ------ ------ ------ Operating income $ 344 5% $ 328 10% $ 297 63% ====== ====== ====== ====== ====== ====== Operating cash flow $ 404 5% $ 385 10% $ 349 64% Total reported broadcasting revenues rose $18 million or 3% in 1998. On a pro forma basis (for currently owned television stations), broadcasting revenues rose 6% for the year. Pro forma local and national advertising revenues increased 6% and 8%, respectively, over 1997. This reflects strong advertising demand because of continued high ratings for NBC programming (12 of the stations owned are NBC affiliates) and overall growth in the economy. Early in 1998, advertising revenues benefited from the Super Bowl broadcast on the company's NBC stations and the Winter Olympics airing on its CBS stations. Strong political advertising contributed to the overall revenue growth as well. The stations in Minneapolis-St. Paul, Denver, Cleveland and Knoxville reported the strongest revenue gains. Revenue increases were tempered by the General Motors strike in the third quarter and overall softer demand for non-political advertising in the fourth quarter. A summary of pro forma revenues for television stations owned at the end of 1998 follows: Pro-forma broadcast revenues, in millions of dollars 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Revenues $ 725 6% $ 682 3% $ 663 12% Reported operating expenses for broadcast were up 1% compared to 1997. On a pro forma basis, operating expenses increased 2%, with payroll costs up 4% and program costs even with 1997. For the fourth consecutive year, operating income from broadcasting reached a record high, climbing $15 million to $344 million in 1998. The 5% increase reflects continued strong demand for television advertising in most markets throughout the year and cost controls. For 1999, increased revenues and operating earnings in television are expected. With the absence of the positive impact of the Winter Olympics and elections, however, gains will be tied closely to continued enhancement of locally produced news and information programming. Reported broadcasting revenues rose $17 million or 2% in 1997. On a pro forma basis, broadcasting revenues rose 3%. Pro forma television local and national advertising revenues increased 4% and 1%, respectively, over 1996. This reflects strong advertising demand because of high ratings for NBC programming and overall growth in the economy. The revenue increase was tempered by the absence of incremental revenues from 1996's Summer Olympics and political advertising. Reported operating expenses for broadcast in 1997 declined $14 million or 4%, mainly because of Olympics-related costs in 1996. On a pro forma basis, operating expenses declined 3%. Pro forma payroll increased 4%, while program expenses decreased 7%. Total broadcasting revenues rose $221 million or 47% in 1996, which includes the effect of the acquisition of five TV stations from Multimedia in December 1995. On a pro forma basis, broadcasting revenues rose 12% for the year. For television, pro forma local and national advertising revenues increased 14% and 13%, respectively, over 1995. Revenues related to NBC's carriage of the 1996 Olympic Games in Atlanta contributed a significant portion of the growth, particularly at our NBC affiliate WXIA-TV in Atlanta. The incremental effect of political advertising also boosted revenues. Reported operating expenses for broadcast rose $106 million or 38%, reflecting ownership of the Multimedia television stations for all of 1996. In millions, as reported Year Broadcast revenues - ---- ------------------ 1989 $408 1990 $397 1991 $357 1992 $371 1993 $397 1994 $407 1995 $466 1996 $687 1997 $704 1998 $721 -28- Cable and security As part of the Multimedia purchase in December 1995, the company acquired cable television and alarm security operations, both headquartered in Wichita, Kan. In early March 1998, the company sold its alarm security business, previously reported with this segment, and in late August 1998, completed an exchange of its subscribers and certain cable system assets in the suburban Chicago area (93,000 subscribers) for TCI Communications, Inc. subscribers and certain cable system assets in Kansas (128,000 subscribers). At the end of 1998, the cable television business served 514,000 subscribers in three states. Reported operating results from cable television and alarm security over the last three years were as follows: In millions of dollars 1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Revenues $241 (6%) $255 9% $233 Expenses $183 (9%) $201 8% $186 ---- ---- ---- ---- ---- Operating income $ 58 7% $ 54 15% $ 47 ==== ==== ==== ==== ==== Operating cash flow $114 (6%) $121 8% $112 On a pro forma basis, giving effect to the sale of the alarm security business, cable operating results were as follows: In millions of dollars 1998 Change 1997 Change 1996 ---- ------ ---- ------ ---- Revenues $232 11% $210 8% $193 Expenses $176 9% $162 7% $150 ---- ---- ---- ---- ---- Operating income $ 56 17% $ 48 11% $ 43 ==== ==== ==== ==== ==== Operating cash flow $106 9% $ 98 2% $ 95 Cable revenue growth of 11% in 1998 reflects the increased subscriber base from the asset exchange, higher monthly subscription rates and an increase in advertising revenues. Pay revenues decreased 2% for the year, as the number of pay subscribers was lower during 1998 because of the change in customer mix associated with the TCI asset exchange. Pay-per-view revenue also declined 2% in 1998. Cable television operating expenses increased 9% in 1998, reflecting the higher subscriber base. Program costs rose 14%, and payroll costs were up 6%. The company expects increased competition for its cable operations in the future, particularly from direct-to-home satellite providers. However, the company expects to increase its cable television revenues and earnings in 1999 from the additional subscribers from the TCI asset exchange and from new services. Cable television revenues increased 8% in 1997, reflecting a 3% increase in basic subscribers and higher monthly subscription rates. While the number of pay subscribers increased 2%, associated revenue decreased by 5% because of the timing of promotional campaigns and an overall soft pay-TV market. All other revenue categories, including advertising and pay-per-view, increased. Cable television operating expenses increased 7% in 1997. Program costs were up 16%, and payroll costs increased 9%. On a pro forma basis, cable television revenues increased 10% in 1996, reflecting a 2% increase in basic subscribers and higher monthly subscription rates. The number of pay subscribers declined 1%. All revenue categories, including advertising and pay-per-view, increased. Cable television pro forma operating expenses increased 9% in 1996. Program costs were up 11%, and payroll costs increased 5%. Consolidated operating expenses Over the last three years, the company's consolidated operating expenses were as follows: Consolidated operating expenses, in millions of dollars 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Cost of sales $2,594 10% $2,369 -- $2,368 12% Selling, general and admin. expenses $ 774 4% $ 744 6% $ 699 13% Depreciation $ 202 -- $ 201 4% $ 193 34% Amortization of intangible assets $ 109 9% $ 100 6% $ 94 91% Cost of sales for 1998 increased $225 million or 10%. Newsprint expense rose 18% for the year because of a 9% increase in consumption (including acquisitions) and 9% higher average newsprint prices. Other costs from businesses acquired in 1997 and 1998 also contributed to this increase. Selling, general and administrative costs (SG&A) were up 4% for the year, mainly because of incremental newspaper advertising expenses from properties acquired in 1997 and 1998. Depreciation expense in 1998 was even with the prior year. Increased depreciation expense from capital additions and newly acquired properties was offset by a reduction in depreciation expense from properties sold, particularly the alarm security business. Amortization of intangibles rose $9 million or 9% because of costs associated with 1997 and 1998 acquisitions. Cost of sales for 1997 was unchanged from 1996. Although newsprint consumption for 1997 increased 8% (including consumption by businesses acquired in 1997), newsprint expense declined 15% for the year because of lower newsprint prices. Newsprint savings were offset principally by the incremental costs of properties acquired in 1997. SG&A rose $44 million or 6% for 1997, primarily because of the effect of properties acquired in that year. -29- Depreciation expense rose $8 million or 4% in 1997, while amortization of intangibles increased $6 million or 6%. Both increases are attributable to newly acquired properties. Cost of sales for 1996 rose $258 million or 12%. Principal factors for the increase were incremental costs of Multimedia properties and higher average newsprint prices for the year. Newsprint expense rose 15% for the year, including the cost of Multimedia consumption. Total newsprint consumption for 1996 was 4% greater than in 1995. The overall increase in cost of goods sold in 1996 was tempered by lower strike-related costs in Detroit. SG&A rose $80 million or 13% for 1996. Most of this increase relates to incremental costs of Multimedia properties. Depreciation expense rose $49 million or 34% for 1996, while amortization of intangibles rose $45 million or 91%. Both increases are primarily the result of incremental costs associated with the Multimedia properties. Payroll and newsprint costs (along with certain other production material costs), the largest elements of the company's operating expenses, are presented below, expressed as a percentage of total pre-tax operating expenses. 1998 1997 1996 ------ ------ ------ Payroll and employee benefits 43.5% 43.0% 40.2% Newsprint and other production material 20.4% 19.0% 21.4% Non-operating income and expense Interest expense for 1998 decreased $19 million or 19%, reflecting the paydown of fixed-rate debt and commercial paper borrowings from operating cash flow and the proceeds from the sale of certain businesses. The company's financing activities are discussed further in the Financial Position section of this report. Other non-operating income for 1998 includes the first quarter net non-operating gain of $307 million principally from the sale of radio and alarm security businesses. Interest expense for 1997 decreased $37 million or 28%, reflecting the paydown of commercial paper borrowings from operating cash flow and the proceeds from the sale of the outdoor and entertainment businesses in 1996. Interest expense for 1996 rose $83 million or 160%, reflecting commercial paper borrowings in December 1995 to finance the acquisition of Multimedia. Other non-operating income includes the December 1996 non-cash gain of $158 million upon the exchange of broadcast stations, which is discussed on page 24 of this report. Provision for income taxes The company's effective income tax rate for continuing operations was 40.1% in 1998, 41.1% in 1997 and 42.6% in 1996. The decrease in the effective tax rate in 1998 and 1997 reflects the diminished impact of the amortization of non-deductible intangible assets because of earnings gains. Income from continuing operations/net income The company reported net income of $1 billion or $3.50 per share (diluted) for 1998. However, this reflects the net non-operating gain principally from the sale of radio and alarm security businesses in the first quarter of the year. This net gain totaled $307 million pre-tax ($184 million after-tax or $.64 per share diluted). In 1996, the company reported a non-operating gain on the exchange of radio stations for a television station in the amount of $158 million pre-tax ($93 million after-tax or $.33 per share diluted). For purposes of evaluating the company's earnings progress, the earnings summary below excludes the effect of these non-operating gains from 1998 and 1996. In millions of dollars, except per share amounts Earnings summary excluding 1998 and 1996 non-operating gains 1998 Change 1997 Change 1996 Change ------ ------ ------ ------ ------ ------ Operating income $1,444 10% $1,316 23% $1,066 30% Non-operating income (expense) Interest expense (80) (19%) (98) (28%) (135) 160% Other (1) (87%) (9) 241% (3) -- ------ ------ ------ ------ ------ ------ Total (81) (25%) (107) (22%) (138) 185% ------ ------ ------ ------ ------ ------ Income before income taxes 1,363 13% 1,209 30% 928 20% Provision for income taxes 547 10% 496 25% 398 27% ------ ------ ------ ------ ------ ------ Income from continuing operations $ 816 15% $ 713 34% $ 530 15% ====== ====== ====== ====== ====== ====== Earnings per share from continuing operations - diluted $ 2.86 14% $ 2.50 34% $ 1.87 15% ------ ------ ------ ------ ------ ------ Excluding the non-operating gains discussed above, the company reported earnings and diluted earnings per share for 1998 of $816 million and $2.86, up 15% and 14%, respectively, both record highs. Operating income reached $1.444 billion, an increase of $128 million or 10%. Each of the company's business segments reported higher earnings for the year with record results at USA TODAY and strong improvement at The Detroit News. Lower interest costs and a lower effective tax rate also contributed. -30- Average basic shares outstanding for 1998 totaled 283,097,000 compared with 283,360,000 in 1997. Diluted shares totaled 285,711,000 for 1998 and 285,610,000 for 1997. For 1997, the company reported earnings and diluted earnings per share from continuing operations of $713 million or $2.50 per share, both record highs, up 34% from record results in 1996. The company's operating income reached $1.316 billion in 1997, an increase of $250 million or 23%. Each of the company's business segments reported higher earnings for the year, with record operating results at USA TODAY, a favorable year-to-year comparison at The Detroit News, lower interest costs and a lower effective tax rate. Excluding the non-recurring gain on the exchange of broadcast stations, earnings in 1996 from continuing operations totaled $530 million or $1.87 per diluted share, both record highs, up 15% from record results in 1995. Earnings from Multimedia properties, net of related amortization, interest and taxes, contributed to the gain. Strong results at USA TODAY and broadcast stations were also important factors, along with diminished strike-related effects in Detroit. Operating income reached $1.066 billion in 1996, an increase of $244 million or 30%. Income from continuing operations in millions Income from Year Continuing Operations - ---- --------------------- 1989 $374 1990 $355 1991 $292 1992 $341* 1993 $389 1994 $455 1995 $459 1996 $530** 1997 $713 1998 $816** * Before effect of accounting principle changes ** Before non-recurring gains from sale/exchange of businesses The company's return on shareholders' equity, based on earnings from continuing operations, is presented in the table below. Return on shareholders' equity (before non-recurring gains and accounting principle changes) in percentages Return on shareholders' Year equity - ---- ----------------------- 1989 19.8 1990 17.5 1991 16.2 1992 21.9 1993 22.3 1994 24.4 1995 23.2 1996 20.9 1997 22.2 1998 21.9 The percentage return on equity for 1998 and 1996 declined from the prior years because non-recurring gains from the sale/ exchange of businesses are included in shareholders' equity, but are excluded from the amount of earnings from continuing operations used in the calculation. Discontinued operations The company's outdoor advertising business, owned since 1979, and its television entertainment business, acquired with Multimedia in December 1995, were both sold in 1996. An after-tax gain, classified with discontinued operations, was recorded on the sale of outdoor, which totaled $295 million or $1.04 per diluted share. The selling price for the entertainment business approximated the value assigned to it upon acquisition and, therefore, no gain was recognized. Earnings from these two businesses for the period prior to the date of sale also are reported as income from discontinued operations and collectively amounted to $25 million or $.09 per diluted share in 1996. -31- Financial Position Liquidity and capital resources The principal changes in the company's financial position for 1998 include the net paydown of debt by $444 million and the purchase of treasury shares for $329 million using operating cash flow and the proceeds from the sale of certain businesses. Newspaper and television station acquisitions with an aggregate cost of $370 million also affected financial position. Changes in property, plant and equipment in 1998 reflect capital spending of $244 million plus amounts recorded in connection with acquired properties and retirements for businesses sold during the year. The increase in intangible assets reflects amounts recorded in connection with acquired properties. The increase in trade receivables results from revenue growth and amounts from newly acquired properties. Inventory balances declined because of lower quantities on hand. The company's consolidated operating cash flow (defined as operating income plus depreciation and amortization of intangible assets) totaled $1.754 billion in 1998 compared to $1.617 billion in 1997 and $1.354 billion in 1996. The cash flow increase of $137 million or 8% in 1998 reflects operating improvements for each of the company's business segments, particularly for newspapers and broadcast. The table below presents operating cash flow as a percent of revenue over the last 10 years. Operating cash flow, Year as a percent of revenue - ---- --------------------- 1989 27.4 1990 25.8 1991 23.1 1992 24.4 1993 26.1 1994 27.5 1995 27.1 1996 30.6 1997 34.2 1998 34.2 Working capital, or the excess of current assets over current liabilities, totaled $178 million at the end of 1998 and $146 million at the end of 1997. Certain key measurements of the elements of working capital for the last three years are presented in the following chart: 1998 1997 1996 -------- -------- -------- Current ratio 1.2-to-1 1.2-to-1 1.1-to-1 Accounts receivable turnover 7.9 7.8 7.7 Newsprint inventory turnover 7.5 7.3 7.1 The company's operations have historically generated strong positive cash flow, which, along with the company's program of issuing commercial paper and maintaining bank revolving credit agreements, has provided adequate liquidity to meet the company's requirements, including those for acquisitions. The company regularly issues commercial paper for cash requirements and maintains a revolving credit agreement equal to or in excess of any commercial paper outstanding. The company's commercial paper has been rated A-1+ and P-1 by Standard & Poor's and Moody's Investors Service, respectively. The company's senior unsecured long-term debt is rated AA- by Standard & Poor's and A1 by Moody's Investors Service. The company has filed a shelf registration statement with the Securities and Exchange Commission under which up to $1.5 billion of additional debt securities may be issued. The company's Board of Directors has established a maximum aggregate level of $3.5 billion for amounts which may be raised through borrowings or the issuance of equity securities. In the absence of additional major cash outlays for acquisitions or share repurchases, the company expects to repay a significant portion of its commercial paper obligations and other long-term debt from 1999 operating cash flow. Note 4 to the company's financial statements on page 43 of this report provides further information concerning commercial paper transactions and the company's $3.0 billion revolving credit agreement. The company has a capital expenditure program (not including business acquisitions) of approximately $280 million planned for 1999, including approximately $52 million for land and buildings or renovation of existing facilities, $212 million for machinery and equipment and cable systems, and $16 million for vehicles and other assets. Management reviews the capital expenditure program periodically and modifies it as required to meet current business needs. It is expected that the 1999 capital program will be funded from operating cash flow. -32- Capital stock In the third quarter of 1998, the company announced an authorization to repurchase up to $250 million of company stock. That authorization was substantially used by the end of the third quarter, and the Board approved an additional $500 million authorization on Sept. 30. During 1998, the company repurchased a total of approximately 6 million shares of common stock at a cost of $329 million. There were no share repurchases in 1997, and repurchases in 1996 were not significant. Certain of the shares previously acquired by the company have been reissued in settlement of employee stock awards. On Aug. 19, 1997, the company's Board of Directors approved a two-for-one stock split effective on Oct. 6, 1997, for shareholders of record on Sept. 12, 1997. In this report, all share and per-common- share amounts have been adjusted to reflect the stock split. In connection with the split, $162.2 million was transferred from retained earnings to common stock to reflect the par value of additional shares issued. An employee 401(k) Savings Plan was established in 1990 which includes a company matching contribution in the form of Gannett stock. To fund the company's matching contribution, an Employee Stock Ownership Plan (ESOP) was formed which acquired 2,500,000 shares of Gannett stock from the company for $50 million. The stock purchase was financed with a loan from the company. The company's common stock outstanding at Dec. 27, 1998 totaled 279,001,295 shares, compared with 283,874,479 shares at Dec. 28, 1997. Dividends Dividends declared on common stock amounted to $221 million in 1998, compared with $210 million in 1997, reflecting an increase in the dividend rate. Dividends declared Year per share - ---- ------------------ 1989 $.56 1990 $.61 1991 $.62 1992 $.63 1993 $.65 1994 $.67 1995 $.69 1996 $.71 1997 $.74 1998 $.78 In October 1998, the quarterly dividend was increased from $.19 to $.20 per share. Cash dividends Payment date Per share ------------ --------- 1998 4th Quarter Jan. 2, 1999 $.20 3rd Quarter Oct. 1, 1998 $.20 2nd Quarter July 1, 1998 $.19 1st Quarter April 1, 1998 $.19 1997 4th Quarter Jan. 2, 1998 $.19 3rd Quarter Oct. 1, 1997 $.19 2nd Quarter July 1, 1997 $.18 1st Quarter April 1, 1997 $.18 Effects of inflation and changing prices The company's results of operations and financial condition have not been significantly affected by inflation and changing prices. In all of its principal businesses, subject to normal competitive conditions, the company generally has been able to pass along rising costs through increased selling prices. Further, the effects of inflation and changing prices on the company's property, plant and equipment and related depreciation expense have been reduced as a result of an ongoing capital expenditure program and the availability of replacement assets with improved technology and efficiency. -33- Year 2000 General The "Year 2000 Issue" is the result of computer programs that were written using two digits rather than four to define the applicable year. If the company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, temporary stoppage of newspaper, broadcast and/or cable operations and the inability to process transactions, send invoices or engage in similar normal business activities. Project The company has developed a plan to ensure that all of its key computer and telecommunications systems will be Year 2000 compliant in advance of Dec. 31, 1999. The plan encompasses all operating properties, corporate headquarters and, where necessary, computer applications that directly interface elements of the company's business with business partners, customers, suppliers and service providers. The plan structure includes several phases: inventory, assessment, detailed analysis, implementation/remediation, audit and contingency planning. The first three phases of inventory, assessment and detailed analysis are complete. At this time, the company's efforts are concentrated on implementation/remediation which essentially will be completed by the end of the first quarter of 1999. Audit and contingency planning efforts are also under way and are expected to be completed in the first quarter of 1999, and will be refined and implemented up to the Year 2000. The company has more than 125 business units which generally operate independently and therefore have separate computer systems and various production and administrative equipment with embedded computer systems. Much of the hardware and software used at the business unit level is standardized and supported centrally. For these systems, Year 2000 issues are being addressed by a centrally managed Information Technology Group. Other Year 2000 issues are being addressed by local personnel at the individual business units with guidance where necessary from headquarters staff or consulting specialists. At the end of 1998, the company had achieved Year 2000 compliance in many critical systems areas. The company's business systems (i.e., marketing, sales support, customer billing and accounts receivable, accounting, accounts payable and payroll) at the majority of its local operating properties and at its headquarters are already Year 2000 compliant. This has been achieved through a systematic roll-out of Year 2000 compliant software where it was necessary. At the end of 1998, more than 85% of these business applications were Year 2000 compliant. For those few properties which still operate business systems that are not Year 2000 compliant, the company has already purchased or developed the necessary software and will be installing it through the first three quarters of 1999 according to plan. For newspaper operations, critical systems also include publishing systems (i.e., front-end editorial and classified, networks, press and mailroom/distribution systems) and other facility/administrative systems. At the end of 1998 more than 85% of such publishing systems were Year 2000 compliant. The remaining few newspapers will complete installation of publishing systems in the first half of 1999, apart from one to be completed in the third quarter of 1999. Facility/administrative systems for the newspaper group were Year 2000 compliant at the end of 1998, with the exception of a few isolated systems that will be made compliant in the first quarter of 1999. The company's 21 television stations generally use standard purchased software and systems for production and broadcasting. Each station operates these systems independently on separate hardware platforms. Nearly all critical television station systems have been modified or upgraded as necessary for Year 2000 compliance. For the few remaining systems, compliance will be achieved at various points through the third quarter of 1999 when the desired technology becomes available for purchase and installation. For the cable television business, most business applications and other critical systems for production, distribution and administration are now Year 2000 compliant, and the remainder will be made compliant during the first quarter of 1999. The company has requested confirmation of compliance from its third party vendors and, in important cases, has or will run tests to verify compliance. -34- Costs The company's efforts to address potential Year 2000 problems began within its central Information Technology Group in 1995 and were broadened to include all departments/operations in 1997. The costs specifically associated with efforts to achieve Year 2000 compliance are expected to be less than $25 million in the aggregate (exclusive of software and hardware that has been or will be replaced or upgraded in the normal course of business), and approximately 90% of such costs have been incurred and reported through the end of 1998. Year 2000 compliance costs are not material to the company's financial position or to operating results for any of the years involved and compliance efforts have not significantly affected progress of other information technology plans or programs. Risks The business risks the company would face if it were unable to achieve Year 2000 compliance for its critical systems could vary significantly in degree of seriousness, depending on the system and the business unit affected. The company may be unable to publish certain of its newspapers, broadcast from certain of its television stations and/or deliver programming and other services in certain cable markets. If this occurred, it would most likely be due to Year 2000 related failure of the company's utility, telecommunications or content service providers, not from internal company system failure. The company continues to work directly with these vendors to evaluate risk levels. If the company's operations were affected in this manner, revenue losses would result which would not be fully recovered when normal operations resumed. Incremental repair and start-up costs might also be incurred. Given the present state of its Year 2000 compliance program and its plans to complete it as described above, the company does not expect that a significant portion of its operations would be adversely impacted, and even if certain operations were so impacted, it would be only for a limited time. Consequently, management does not believe possible disruptions of this nature would have a material effect on the company's financial condition or results of operations. While the company believes its Year 2000 plan will ensure functionality of all key systems, each business unit and corporate headquarters are also preparing contingency plans. Certain factors affecting forward-looking statements Certain statements in the company's 1998 Annual Report to Shareholders and its Annual Report on Form 10-K contain forward- looking information. The words "expect," "intend," "believe," "anticipate," "likely," "will" and similar expressions generally identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties which could cause actual results and events to differ materially from those anticipated in the forward-looking statements. Potential risks and uncertainties which could adversely affect the company's ability to obtain these results include, without limitation, the following factors: (a) increased consolidation among major retailers or other events which may adversely affect business operations of major customers and depress the level of local and national advertising; (b) an economic downturn in some or all of the company's principal newspaper or television markets leading to decreased circulation or local, national or classified advertising; (c) a decline in general newspaper readership patterns as a result of competitive alternative media or other factors; (d) an increase in newsprint or syndication programming costs over the levels anticipated; (e) labor disputes which may cause revenue declines or increased labor costs; (f) acquisitions of new businesses or dispositions of existing businesses; (g) a decline in viewership of major networks and local news programming; (h) rapid technological changes and frequent new product introductions prevalent in electronic publishing; and (i) the uncertainty associated with the impact of Year 2000 issues on the company, its customers, its vendors and others with whom it does business. -35- CONSOLIDATED BALANCE SHEETS In thousands of dollars
Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- ASSETS Current assets Cash $ 60,103 $ 45,059 Marketable securities, at cost, which approximates market 6,084 7,719 Trade receivables (less allowance for doubtful receivables of $19,143 and $18,020, respectively) 664,540 638,311 Other receivables 52,619 45,316 Inventories 87,176 101,080 Prepaid expenses 35,863 47,149 ------------ ------------ Total current assets 906,385 884,634 ------------ ------------ Property, plant and equipment Land 180,786 175,884 Buildings and improvements 839,210 840,157 Cable and security systems 413,059 548,219 Machinery, equipment and fixtures 2,123,468 2,140,148 Construction in progress 110,220 50,429 ------------ ------------ Total 3,666,743 3,754,837 Less accumulated depreciation (1,602,960) (1,562,795) ------------ ------------ Net property, plant and equipment 2,063,783 2,192,042 ------------ ------------ Intangible and other assets Excess of acquisition cost over the value of assets acquired (less accumulated amortization of $749,680 and $664,666, respectively) 3,794,601 3,584,393 Investments and other assets (Note 5) 214,711 229,282 ------------ ------------ Total intangible and other assets 4,009,312 3,813,675 ------------ ------------ Total assets $ 6,979,480 $ 6,890,351 ============ ============
-36- CONSOLIDATED BALANCE SHEETS In thousands of dollars
Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current maturities of long-term debt (Note 4) $ 7,812 $ 18,375 Accounts Payable Trade 282,798 274,550 Other 29,485 25,710 Accrued liabilities Compensation 108,301 87,732 Interest 5,213 8,999 Other 114,708 137,944 Dividend payable 55,790 53,915 Income taxes (Note 7) 6,395 12,893 Deferred income 117,465 118,459 ------------ ------------ Total current liabilities 727,967 738,577 ------------ ------------ Deferred income taxes (Note 7) 442,359 402,254 Long-term debt (Note 4) 1,306,859 1,740,534 Postretirement medical and life insurance liabilities (Note 6) 308,145 312,082 Other long-term liabilities 214,326 217,168 ------------ ------------ Total liabilities 2,999,656 3,410,615 ------------ ------------ Shareholders' equity (Notes 4 and 8) Preferred stock, par value $1: Authorized, 2,000,000 shares: Issued, none Common stock, par value $1: Authorized, 400,000,000 shares: Issued, 324,420,732 shares, as to both years 324,421 324,421 Additional paid-in capital 126,045 104,366 Retained earnings 4,775,313 3,995,712 ------------ ------------ 5,225,779 4,424,499 Less Treasury stock, 45,419,437 shares and 40,546,253 shares, respectively, at cost (1,223,077) (916,708) Deferred compensation related to ESOP (Note 8) (22,878) (28,055) ------------ ------------ Total shareholders' equity 3,979,824 3,479,736 ------------ ------------ Commitments and contingent liabilities (Note 9) ------------ ------------ Total liabilities and shareholders' equity $ 6,979,480 $ 6,890,351 ============ ============
-37- CONSOLIDATED STATEMENTS OF INCOME In thousands of dollars
Fiscal year ended Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996 ------------- ------------- ------------- Net operating revenues Newspaper advertising $ 2,942,995 $ 2,634,334 $ 2,417,550 Newspaper circulation 1,010,238 948,141 917,677 Broadcasting 721,298 703,558 686,936 Cable and security 240,600 255,263 232,500 All other 206,160 188,195 166,444 ------------- ------------- ------------- Total 5,121,291 4,729,491 4,421,107 ------------- ------------- ------------- Operating expenses Cost of sales and operating expenses, exclusive of depreciation 2,593,982 2,368,572 2,367,848 Selling, general and administrative expenses, exclusive of depreciation 773,601 743,578 699,484 Depreciation 201,683 201,100 193,011 Amortization of intangible assets 108,523 99,973 94,359 ------------- ------------- ------------- Total 3,677,789 3,413,223 3,354,702 ------------- ------------- ------------- Operating income 1,443,502 1,316,268 1,066,405 ------------- ------------- ------------- Non-operating income (expense) Interest expense (79,412) (98,242) (135,563) Interest income 19,318 6,517 6,727 Other (Note 2) 286,005 (15,564) 149,098 ------------- ------------- ------------- Total 225,911 (107,289) 20,262 ------------- ------------- ------------- Income before income taxes 1,669,413 1,208,979 1,086,667 Provision for income taxes 669,500 496,300 462,700 ------------- ------------- ------------- Income from continuing operations 999,913 712,679 623,967 Discontinued operations Income from the operation of discontinued operations, net of income taxes of $17,940 24,540 Gain from the sale of discontinued operations, net of income taxes of $195,000 294,580 ------------- ------------- ------------- Total income from discontinued operations 319,120 ------------- ------------- ------------- Net income $ 999,913 $ 712,679 $ 943,087 ============= ============= ============= Earnings per share - basic Earnings from continuing operations $3.53 $2.52 $2.21 Earnings from discontinued operations: Discontinued operations, net of tax 0.09 Gain from sale of discontinued operations, net of tax 1.05 ------------- ------------ ------------- Net income per share - basic $3.53 $2.52 $3.35 ============= ============ ============= Earnings per share - diluted Earnings from continuing operations $3.50 $2.50 $2.20 Earnings from discontinued operations: Discontinued operations, net of tax 0.09 Gain from sale of discontinued operations, net of tax 1.04 ------------- ------------ ------------- Net income per share - diluted $3.50 $2.50 $3.33 ============= ============ =============
-38- CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands of dollars
Fiscal year ended Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996 ------------- ------------- ------------- Cash flows from operating activities Net income $ 999,913 $ 712,679 $ 943,087 Adjustments to reconcile net income to operating cash flows Discontinued operations (319,120) Depreciation 201,683 201,100 193,011 Amortization of intangibles 108,523 99,973 94,359 Deferred income taxes 40,105 (14,244) 68,254 Other, net, including gains on sales (360,944) (20,166) (117,854) Increase in receivables (29,732) (41,684) (50,046) Decrease (increase) in inventories 11,054 (6,336) 16,489 Decrease (increase) in film broadcast rights 62 (644) 1,755 Decrease in accounts payable (14,777) (40,487) (25,659) Increase (decrease) in interest and taxes payable 7,951 (26,336) 20,784 Change in other assets and liabilities, net 6,697 17,202 (218,191) ------------- ------------- ------------- Net cash flow from operating activities 970,535 881,057 606,869 ------------- ------------- ------------- Cash flows from investing activities Purchase of property, plant and equipment (244,425) (221,251) (260,047) Payments for acquisitions, net of cash acquired (369,804) (355,343) Change in other investments (16,244) (8,099) (17,513) Proceeds from sale of certain assets 665,001 40,859 778,716 Collection of long-term receivables 2,409 5,388 3,248 ------------- ------------- ------------- Net cash provided by (used for) investing activities 36,937 (538,446) 504,404 ------------- ------------- ------------- Cash flows from financing activities Payments of long-term debt (470,207) (144,903) (954,924) Dividends paid (218,853) (206,557) (197,417) Cost of common shares repurchased (328,956) (1,443) Proceeds from issuance of common stock 23,953 30,425 26,964 ------------- ------------- ------------- Net cash used for financing activities (994,063) (321,035) (1,126,820) ------------- ------------- ------------- Effect of currency exchange rate change (236) Increase (decrease) in cash and cash equivalents 13,409 21,576 (15,783) Balance of cash and cash equivalents at beginning of year 52,778 31,202 46,985 ------------- ------------- ------------- Balance of cash and cash equivalents at end of year $ 66,187 $ 52,778 $ 31,202 ============= ============= =============
-39- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY In thousands of dollars Fiscal years ended December 29, 1996 December 28, 1997 and December 27, 1998
Foreign Deferred Common stock Additional currency compensation $1 par paid-in Retained translation Treasury related value capital earnings adjustment stock to ESOP Total ------------ ------------ ------------- ----------- ------------ ------------ ------------ Balance: Dec. 31, 1995 $ 162,210 $ 76,811 $ 2,923,752 $ (12,258) $ (973,272) $ (31,595) $2,145,648 ------------ ------------ ------------- ----------- ------------ ------------ ------------ Net income, 1996 943,087 943,087 Dividends declared, 1996: $0.71 per share (200,099) (200,099) Treasury stock acquired (1,443) (1,443) Stock options exercised 585 26,225 26,810 Stock issued under incentive plan 552 5,881 6,433 Tax benefit derived from stock incentive plans 8,178 8,178 Compensation expense related to ESOP 2,005 2,005 Tax benefit from ESOP 435 435 Foreign currency translation adj./other (12,494) 12,258 (236) ------------ ------------ ------------- ----------- ------------ ------------ ------------ Balance: Dec. 29, 1996 $ 162,210 $ 86,126 $ 3,654,681 $ 0 $ (942,609) $ (29,590) $2,930,818 ------------ ------------ ------------- ----------- ------------ ------------ ------------ Net income, 1997 712,679 712,679 Dividends declared, 1997: $0.74 per share (209,867) (209,867) Stock options exercised 4,152 25,781 29,933 Stock issued under incentive plan 114 120 234 Tax benefit derived from stock incentive plans 13,974 13,974 Compensation expense related to ESOP 1,535 1,535 Tax benefit from ESOP 430 430 Par value of shares issued in 2-for-1 stock split effective Oct. 6, 1997 162,211 (162,211) ------------ ------------ ------------- ----------- ------------ ------------ ------------ Balance: Dec. 28, 1997 $ 324,421 $ 104,366 $ 3,995,712 $ 0 $ (916,708) $ (28,055) $3,479,736 ------------ ------------ ------------- ----------- ------------ ------------ ------------ Net income, 1998 999,913 999,913 Dividends declared, 1998: $.78 per share (220,718) (220,718) Treasury stock acquired (328,956) (328,956) Stock options exercised 4,870 19,285 24,155 Stock issued under incentive plan (1,255) 3,302 2,047 Tax benefit derived from stock incentive plans 18,064 18,064 Compensation expense related to ESOP 5,177 5,177 Tax benefit from ESOP 406 406 ------------ ------------ ------------- ----------- ------------ ------------ ------------ Balance: Dec. 27, 1998 $ 324,421 $ 126,045 $ 4,775,313 $ 0 $(1,223,077) $ (22,878) $3,979,824 ------------ ------------ ------------- ----------- ------------ ------------ ------------
-40- Notes to Consolidated Financial Statements Note 1 Summary of significant accounting policies Fiscal year: The company's fiscal year ends on the last Sunday of the calendar year. The company's 1998 fiscal year ended on Dec. 27, 1998, and encompassed a 52-week period. The company's 1997 and 1996 fiscal years also encompassed 52-week periods. Consolidation: The consolidated financial statements include the accounts of the company and its subsidiaries after elimination of all significant intercompany transactions and profits. Certain prior-year information has been reclassified to conform with the current year presentation. Operating agencies: Four of the company's newspaper subsidiaries were participants in joint operating agencies. Each joint operating agency performs the production, sales and distribution functions for the subsidiary and another newspaper publishing company under a joint operating agreement. The company includes its appropriate portion of the revenues and expenses generated by the operation of the agencies on a line-by-line basis in its statement of income. Inventories: Inventories, consisting principally of newsprint, printing ink, plate material and production film for the company's newspaper publishing operations, are valued at the lower of cost (first- in, first-out) or market. Property and depreciation: Property, plant and equipment is recorded at cost, and depreciation is provided generally on a straight- line basis over the estimated useful lives of the assets. The principal estimated useful lives are: buildings and improvements, 10 to 40 years; machinery, equipment and fixtures and cable systems, four to 30 years. Major renewals and improvements and interest incurred during the construction period of major additions are capitalized. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Excess of acquisition cost over fair value of assets acquired: The excess of acquisition cost over the fair value of assets acquired represents the cost of intangible assets at the time the subsidiaries were purchased. In accordance with Opinion 17 of the Accounting Principles Board of the American Institute of Certified Public Accountants, the excess acquisition cost of subsidiaries arising from acquisitions accounted for as purchases since Oct. 31, 1970 ($4.48 billion at Dec. 27, 1998) is being amortized generally over 40 years on a straight-line basis. Valuation of Long-Lived Assets: The company evaluates the carrying value of long-lived assets to be held and used, including the excess of acquisition cost over fair value of assets acquired, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying value of a long-lived asset, including the excess of acquisition cost over fair value of assets acquired, is considered impaired when the projected undiscounted future cash flows from the related business unit are less than its carrying value. The company measures impairment based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. Other assets: The company's television stations are parties to program broadcast contracts. These contracts are recorded at the gross amount of the related liability when the programs are available for telecasting. Program assets are classified as current (as a prepaid expense) or noncurrent (as an other asset) in the Consolidated Balance Sheets, based upon the expected use of the programs in succeeding years. The amount charged to expense appropriately matches the cost of the programs with the revenues associated with them. The liability for these contracts is classified as current or noncurrent in accordance with the payment terms of the contracts. The payment period generally coincides with the period of telecast for the programs, but may be shorter. Retirement plans: Pension costs under the company's retirement plans are actuarially computed. The company's policy is to fund costs accrued under its qualified pension plans. Postretirement benefits other than pensions: The company recognizes the cost of postretirement medical and life insurance benefits on an accrual basis over the working lives of employees expected to receive such benefits. Income taxes: The company accounts for certain income and expense items differently for financial reporting purposes than for income tax reporting purposes. Deferred income taxes are provided in recognition of these temporary differences. Per share amounts: In 1997, the company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Under SFAS No. 128, the company reports earnings per share on two bases, basic and diluted. All basic income per share amounts are based on the weighted average number of common shares outstanding during the year. The calculation of diluted earnings per share also considers the assumed dilution from the exercise of stock options and from stock incentive rights. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. New accounting pronouncements: In 1998, the company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which had no impact on the company's results of operations or financial position. Also in 1998, the company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The management approach, as prescribed by SFAS No. 131, designates the internal organization that is used by management for making operating decisions and assessing -41- performance as the basis for determining the company's reportable segments. The adoption of SFAS No. 131 did not change the company's previously defined reportable segments. The company also adopted SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits" in 1998. The provisions of SFAS No. 132 revise employers' disclosures about retirement plans and other postretirement benefit plans but do not change the measurement and accounting recognition principles for these plans. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. This standard is effective for fiscal periods beginning after June 15, 1999. The adoption of this standard is not expected to have a material effect on the company's results of operations or financial position. Note 2 Acquisitions, exchanges and dispositions 1998: In the first quarter of 1998, the company sold its five remaining radio stations, its alarm security business and its newspaper in St. Thomas, Virgin Islands. It also contributed its newspaper in Saratoga Springs, N.Y., to the Gannett Foundation. The company recorded a net non-operating gain of $307 million ($184 million after-tax), principally as a result of these transactions. The company purchased television stations WCSH-TV (NBC) in Portland, Maine, and WLBZ-TV (NBC) in Bangor, Maine, early in the first quarter and WLTX-TV (CBS) in Columbia, S.C., in April 1998. In the third quarter of 1998, the company sold five small-market daily newspapers in Ohio, Illinois and West Virginia and completed the acquisition of several newspapers in New Jersey, including The Daily Record in Morristown and the Ocean County Observer in Toms River. Also in the third quarter of 1998, the company completed a transaction with TCI Communications, Inc., under which it exchanged its subscribers and certain cable system assets in the suburban Chicago area (93,000 subscribers) for subscribers and certain cable system assets of TCI in Kansas (128,000 subscribers). The aggregate purchase price for businesses and assets acquired in 1998 was approximately $370 million in cash. The acquisitions, which were accounted for under the purchase method of accounting, did not materially affect reported results of operations for the year. 1997: In January 1997, the company exchanged WLWT-TV (NBC-Cincinnati) and KOCO-TV (ABC-Oklahoma City) for WZZM- TV (ABC-Grand Rapids/Kalamazoo/ Battle Creek) and WGRZ-TV (NBC-Buffalo). This exchange was necessary to comply with FCC cross-ownership rules and did not materially affect broadcast operating results. In May 1997, the company acquired KNAZ-TV (NBC- Flagstaff, Ariz.) and KMOH-TV (WB-Kingman, Ariz.). Also in May 1997, the company acquired Printed Media Companies. In July, Mary Morgan, Inc., was purchased and in August 1997, the company acquired Army Times Publishing Company. In October 1997, the company acquired New Jersey Press, Inc., which publishes two dailies, Asbury Park Press and the Home News Tribune of East Brunswick. The aggregate purchase price for businesses acquired in 1997 was approximately $445 million in cash and liabilities assumed. The acquisitions were accounted for under the purchase method of accounting, and they did not materially affect reported results of operations for the year. In January 1997, the company contributed the Niagara Gazette newspaper to the Gannett Foundation. In April 1997, the company sold its newspaper in Moultrie, Ga., and in November 1997, the company sold its newspapers in Tarentum and North Hills, Pa. These dispositions did not materially affect results of operations. 1996: In December 1996, the company acquired WTSP-TV, the CBS affiliate in Tampa, Fla., in exchange for radio stations in Los Angeles, San Diego and Tampa. For financial reporting purposes, the company recorded this exchange as two simultaneous but separate events; that is, a sale of radio stations for which a non-cash gain was recognized, and the acquisition of the television station accounted for under the purchase method. The company reported a pre-tax, non-cash, non-operating gain of $158 million on the exchange, and the television station acquired was recorded at estimated fair value or $170 million. On an after-tax basis, this accounting treatment resulted in a non-cash increase in income from continuing operations of $93 million. In August 1996, the company completed the sale of its outdoor advertising business for $713 million in cash. The company recorded an after-tax gain of $295 million. The gain and outdoor operating results for the period leading up to the sale are reported as discontinued operations in the company's financial statements. In December 1996, the company sold its television entertainment programming business, Multimedia Entertainment, which had been acquired in December 1995 as part of the acquisition of Multimedia. The selling price approximated the value assigned to the business by the company upon acquisition. Therefore, no gain was recognized on the sale. The operating results for Multimedia Entertainment for the period prior to the sale are reported as discontinued operations in the company's financial statements. Other properties sold in 1996 were radio stations WMAZ/WAYS-FM in Macon, Ga. (acquired in the Multimedia purchase), Louis Harris and Associates, Inc. and Gannett Community Directories. These dispositions did not have a material effect on the company's operating results or financial position. -42- An unaudited earnings summary of the company's income from continuing operations, excluding the net non-operating gains in 1998 and 1996 discussed above, is as follows: In millions of dollars, except per share amounts (unaudited) 1998 Change 1997 Change 1996 Change ------ -------- ----- ------- ----- ------- Income from continuing operations $ 816 15% $ 713 34% $ 530 15% Earnings per share from continuing operations -Basic $ 2.88 14% $ 2.52 34% $ 1.88 15% -Diluted $ 2.86 14% $ 2.50 34% $ 1.87 15% Pro forma results of operations, assuming the acquisitions, exchanges and dispositions noted above were made at the beginning of the year previous to the year in which the transactions were consummated, are not materially different from reported results of operations. Note 3 Statement of cash flows For purposes of this statement, the company considers its marketable securities, which are readily convertible into cash (with original maturity dates of less than 90 days) and consist of short-term investments in government securities, commercial paper and money market funds, as cash equivalents. Cash paid in 1998, 1997 and 1996 for income taxes and for interest (net of amounts capitalized) was as follows: In thousands of dollars 1998 1997 1996 -------- -------- -------- Income taxes $626,409 $506,209 $555,642 Interest $ 84,808 $102,228 $142,395 In 1996, the company reported a $93 million after-tax non-cash gain on the exchange of broadcast stations referred to in Note 2. Liabilities assumed in connection with 1998 and 1997 acquisitions totaled approximately $17 million and $56 million, respectively. In 1996, the company issued 272,874 shares in settlement of previously granted stock incentive rights and the $9.9 million compensation liability for these rights was transferred to shareholders' equity. In early January 1998, 149,148 shares were issued in settlement of stock incentive rights granted for the four-year period 1994-1997, and the $6 million compensation liability for these rights was transferred to shareholders' equity. In early January 1999, 161,646 shares were issued in settlement of stock incentive rights granted for the four-year period 1995-1998. Note 4 Long-term debt The long-term debt of the company is summarized below. In thousands of dollars Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- Unsecured promissory notes $ 1,003,328 $ 1,198,695 Notes due 3/1/98, interest at 5.25% 274,920 Notes due 5/1/00, interest at 5.85% 249,884 249,787 Other indebtedness 61,459 35,507 ------------- ------------- 1,314,671 1,758,909 Less amount included in current liabilities (7,812) (18,375) ------------- ------------- Total long-term debt $ 1,306,859 $ 1,740,534 ============= ============= The unsecured promissory notes at Dec. 27, 1998 were due from Dec. 28, 1998 to Jan. 19, 1999 with rates varying from 4.82% to 5.21%. The unsecured promissory notes at Dec. 28, 1997 were due from Dec. 31, 1997 to Jan. 27, 1998 with rates varying from 5.54% to 5.8%. The maximum amount of such promissory notes outstanding at the end of any period during 1998 and 1997 was $1.2 billion and $1.3 billion, respectively. The daily average outstanding balance was $1.047 billion during 1998 and $1.154 billion during 1997. The weighted average interest rate was 5.5% for 1998 and 1997. The other indebtedness at Dec. 27, 1998 has maturities ranging from 2000 to 2013 at interest rates ranging from 3.4% to 10%. At Dec. 27, 1998, the company had $3.0 billion of credit available under a revolving credit agreement. The agreement provides for a revolving credit period which permits borrowing from time to time up to the maximum commitment. The revolving credit period extends to July 1, 2003. The commitment fee rate may range from .07% to .175%, depending on Standard & Poor's or Moody's credit rating of the company's senior unsecured long-term debt. The rate in effect at Dec. 27, 1998 was .07%. At the option of the company, the interest rate on borrowings under the agreement may be at the prime rate, at rates ranging from .13% to .35% above the London Interbank Offered Rate or at rates ranging from .255% to .50% above a certificate of deposit- based rate. The prime rate was 7.75% at the end of 1998 and 8.5% at the end of 1997. The percentages that will apply will be dependent on Standard & Poor's or Moody's credit rating of the company's senior unsecured long-term debt. -43- The revolving credit agreement contains restrictive provisions that require the maintenance of net worth of $2.0 billion. At Dec. 27, 1998 and Dec. 28, 1997, net worth was $4.0 billion and $3.5 billion, respectively. At Dec. 27, 1998, the unsecured promissory notes were supported by the $3.0 billion revolving credit agreement and, therefore, are classified as long-term debt. Approximate annual maturities of long-term debt, assuming that the company had used the $3.0 billion revolving credit agreement as of the balance sheet date to refinance existing unsecured promissory notes and the notes due May 1, 2000, on a long-term basis, are as follows: In thousands of dollars 1999 $ 7,812 2000 0 2001 0 2002 0 2003 1,271,594 Later years 35,265 ----------- Total $ 1,314,671 =========== For financial instruments other than long-term debt, including cash and cash equivalents, trade and other receivables, current maturities of long-term debt and other long-term liabilities, the amounts reported on the balance sheet approximate fair value. The company estimates the fair value of its long-term debt, based on borrowing rates available at Dec. 27, 1998, to be $1.308 billion compared with the carrying amount of $1.307 billion. At Dec. 28, 1997, the fair value of long-term debt was estimated to be $1.740 billion, compared with the carrying amount of $1.741 billion. Note 5 Retirement plans The company and its subsidiaries have various retirement plans, including plans established under collective bargaining agreements and separate plans for joint operating agencies, under which substantially all full-time employees are covered. The Gannett Retirement Plan is the company's principal retirement plan and covers most of the employees of the company and its subsidiaries. Benefits under the Gannett Retirement Plan are based on years of service and final average pay. The company's pension plan assets include marketable securities such as common stocks, bonds and U.S. government obligations and interest-bearing deposits. The company's pension costs for 1998, 1997 and 1996 are presented in the following table: In thousands of dollars 1998 1997 1996 -------- -------- -------- Service cost - benefits earned during the period $ 51,249 $ 47,105 $ 49,552 Interest cost on benefit obligation 94,171 85,033 80,300 Expected return on plan assets (135,484) (112,040) (101,933) Amortization of transition asset (4,226) (11,008) (10,907) Amortization of prior service (credit) cost (3,773) 1,790 1,789 Amortization of actuarial loss 443 2,690 -------- -------- -------- Pension expense for company- sponsored retirement plans 2,380 10,880 21,491 Union and other pension cost 5,357 4,135 3,244 -------- -------- -------- Pension cost $ 7,737 $ 15,015 $ 24,735 ======== ======== ======== -44 The following table provides a reconciliation of benefit obligations, plan assets and funded status of the company's pension plans. The related amounts that are recognized in the Consolidated Balance Sheets for the company's retirement plans also are provided. In thousands of dollars Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- Change in benefit obligation Net benefit obligation at beginning of year $ 1,243,188 $ 1,137,039 Service cost 51,249 47,105 Interest cost 94,171 85,033 Plan amendments (3,791) 0 Actuarial loss 57,550 70,379 Acquisitions/plan mergers 102,927 (44,768) Gross benefits paid (70,883) (51,600) ------------- ------------- Net benefit obligation at end of year $ 1,474,411 $ 1,243,188 ------------- ------------- Change in plan assets Fair value of plan assets at beginning of year $ 1,269,090 $ 1,142,962 Actual return on plan assets 151,892 175,405 Employer contributions 3,813 2,323 Acquisitions/plan mergers 116,914 0 Gross benefits paid (70,883) (51,600) ------------- ------------- Fair value of plan assets at end of year $ 1,470,826 $ 1,269,090 ------------- ------------- Funded status at end of year $ (3,585) $ 25,902 Unrecognized net actuarial loss 92,081 61,341 Unrecognized prior service credit (39,790) (41,651) Unrecognized net transition asset (1,214) (3,948) ------------- ------------- Net amount recognized at end of year $ 47,492 $ 41,644 ------------- ------------- Amounts recognized in Consolidated Balance Sheet Prepaid benefit cost $ 110,531 $ 96,572 Accrued benefit cost $ 63,039 $ 54,928 ============= ============= The net benefit obligation was determined using an assumed discount rate of 6.75% and 7.125% at the end of 1998 and 1997, respectively. The assumed rate of compensation increase was 5% at the end of each of 1998 and 1997. The assumed long-term rate of return on plan assets used in determining pension cost was 10%. Pension plan assets include 1,239,800 shares of the company's common stock valued at $80 million at the end of 1998 and 1,231,400 shares valued at $76 million at the end of 1997. Note 6 Postretirement benefits other than pensions The company provides health care and life insurance benefits to certain retired employees. Employees become eligible for benefits after meeting certain age and service requirements. The cost of providing retiree health care and life insurance benefits is actuarially determined and accrued over the service period of the active employee group. Postretirement benefit cost for health care and life insurance for 1998, 1997 and 1996 included the following components: In thousands of dollars 1998 1997 1996 -------- -------- -------- Service cost - benefits earned during the period $ 3,118 $ 3,416 $ 3,212 Interest cost on net benefit obligation 14,378 15,342 14,586 Amortization of prior service credit (5,578) (5,303) (5,303) Amortization of actuarial loss (gain) 235 (171) 50 -------- -------- -------- Net periodic postretirement benefit cost $ 12,153 $13,284 $12,545 ======== ======== ======== The table below provides a reconciliation of benefit obligations and funded status of the company's postretirement benefit plans: In thousands of dollars Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- Change in benefit obligation Net benefit obligation at beginning of year $ 231,565 $ 224,336 Service cost 3,118 3,416 Interest cost 14,378 15,342 Plan particpants' contributions 4,402 4,318 Plan amendments (8,341) (20,695) Actuarial loss 13,798 14,694 Acquisitions/plan mergers 9,816 Gross benefits paid (20,574) (19,662) ------------- ------------- Net benefit obligation at end of year $ 238,346 $ 231,565 ------------- ------------- Change in plan assets Fair value of plan assets at beginning of year 0 0 Employer contributions 16,172 15,344 Plan participants' contributions 4,402 4,318 Gross benefits paid (20,574) (19,662) ------------- ------------- Fair value of plan assets at end of year 0 0 ------------- ------------- Funded status at end of year $ 238,346 $ 231,565 Unrecognized net actuarial (loss) gain (6,154) 7,500 Unrecognized prior service credit 75,953 73,017 ------------- ------------- Accrued postretirement benefit cost $ 308,145 $ 312,082 ============= ============= -45- At Dec. 27, 1998, the accumulated postretirement benefit obligation was determined using a discount rate of 6.75% and a health care cost trend rate of 8% for pre-age 65 benefits, decreasing to 5% in the year 2005 and thereafter. For post-age 65 benefits, the health care cost trend rate used was 6%, declining to 5% in the year 2001 and thereafter. At Dec. 28, 1997, the accumulated postretirement benefit obligation was determined using a discount rate of 7.125% and a health care cost trend rate of 8.5% for pre-age 65 benefits, decreasing to 5% in the year 2005 and thereafter. For post-age 65 benefits, the health care cost trend rate used was 6.5%, declining to 5% in the year 2001 and thereafter. The company's policy is to fund the above-mentioned benefits as claims and premiums are paid. The effect of a 1% increase in the health care cost trend rate used would result in increases of approximately $15 million in the 1998 postretirement benefit obligation and $1 million in the aggregate service and interest components of the 1998 expense. The effect of a 1% decrease in the health care cost trend rate used would result in decreases of approximately $13 million in the 1998 postretirement benefit obligation and $1 million in the aggregate service and interest components of the 1998 expense. The company's retiree medical insurance plan limits the company's share of the cost of such benefits it will pay to future retirees. The company's share of these benefit costs also depends on employee retirement age and length of service. Note 7 Income taxes The company's reported income before taxes is virtually all from domestic sources. The provision for income taxes on income from continuing operations consists of the following: In thousands of dollars 1998 Current Deferred Total -------- -------- -------- Federal $545,878 $ 34,783 $580,661 State and other 83,517 5,322 88,839 -------- -------- -------- Total $629,395 $ 40,105 $669,500 ======== ======== ======== In thousands of dollars 1997 Current Deferred Total -------- -------- -------- Federal $443,334 $(12,060) $431,274 State and other 67,210 (2,184) 65,026 -------- -------- -------- Total $510,544 $(14,244) $496,300 ======== ======== ======== In thousands of dollars 1996 Current Deferred Total -------- -------- -------- Federal $333,200 $ 63,255 $396,455 State and other 61,246 4,999 66,245 -------- -------- -------- Total $394,446 $ 68,254 $462,700 ======== ======== ======== In addition to the income tax provision presented above for continuing operations, the company also recorded federal and state income taxes payable on discontinued operations of $213 million in 1996 (including $195 million on the gain on the sale of the outdoor business). The provision for income taxes on continuing operations exceeds the U.S. federal statutory tax rate as a result of the following differences: Fiscal year 1998 1997 1996 ------ ------ ------ U.S. statutory tax rate 35.0% 35.0% 35.0% Increase in taxes resulting from: State/other income taxes net of federal income tax benefit 3.5 3.5 4.0 Goodwill amortization not deductible for tax purposes 2.3 2.5 2.7 Other, net (0.7) 0.1 0.9 ------ ------ ------ Effective tax rate 40.1% 41.1% 42.6% ====== ====== ====== Deferred income taxes reflect temporary differences in the recognition of revenue and expense for tax reporting and financial statement purposes. Deferred tax liabilities and assets were composed of the following at the end of 1998 and 1997: In thousands of dollars Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- Liabilities Accelerated depreciation $ 392,374 $ 410,264 Accelerated amortization of deductible intangibles 109,807 106,498 Pension 16,211 16,883 Other 120,475 52,073 ------------- ------------- Total deferred tax liabilities 638,867 585,718 ------------- ------------- Assets Accrued compensation costs (55,718) (41,615) Postretirement medical and life (120,177) (121,712) Other (20,613) (20,137) ------------- ------------- Total deferred tax assets (196,508) (183,464) ------------- ------------- Net deferred tax liabilities $ 442,359 $ 402,254 ============= ============= -46- Note 8 Capital stock, stock options, incentive plans On Aug. 19, 1997, the company's Board of Directors approved a two- for-one stock split effective on Oct. 6, 1997, for shareholders of record on Sept. 12, 1997. In this report, all share and per-common-share amounts have been adjusted to reflect the stock split. The company's earnings per share from continuing operations (basic and diluted) for 1998, 1997 and 1996 are presented below: In thousands, except per share amounts 1998 1997 1996 ---- ---- ---- Income from continuing operations $999,913 $712,679 $623,967 Weighted average number of common shares outstanding (basic) 283,097 283,360 281,782 Effect of dilutive securities Stock options 2,197 1,768 1,024 Stock incentive rights 417 482 620 Weighted average number of common shares outstanding (diluted) 285,711 285,610 283,426 Earnings per share from continuing operations (basic) $3.53 $2.52 $2.21 Earnings per share from continuing operations (diluted) $3.50 $2.50 $2.20 The 1998 and 1997 diluted earnings per share amounts exclude the effects of 2,500,210 and 1,750,100 stock options outstanding, respectively, as their inclusion would be antidilutive. In the third quarter of 1998, the company announced an authorization to repurchase up to $250 million of company stock. That authorization was substantially used by the end of the third quarter, and the Board approved an additional $500 million authorization on Sept. 30. During 1998, the company repurchased a total of approximately 6 million shares of common stock for $329 million. The company's 1978 Executive Long-term Incentive Plan (the Plan) provides for the granting of stock options, stock incentive rights and option surrender rights to executive officers and other key employees. During 1996, the Plan was amended to incorporate the following changes: (i) extend from the last day of the company's 1997 fiscal year to the last day of the company's 2007 fiscal year the time during which awards may be made; (ii) increase the maximum aggregate number of shares of Gannett common stock that may be issued by 24,000,000; (iii) restrict the granting of options to any participant in any fiscal year to no more than 350,000 shares of common stock; (iv) extend the exercise period for any stock options to be issued under the Plan from eight to 10 years after the date of the grant thereof; and (v) provide that shares of common stock subject to a stock option or other award that is canceled or forfeited again be available for issuance under the Plan. Stock options are granted to purchase common stock of the company at not less than 100% of the fair market value on the day the option is granted. The exercise period is eight years for options granted prior to Dec. 10, 1996 and 10 years for options granted on that date and subsequent. The options become exercisable at 25% per year after a one-year waiting period. Stock incentive rights entitle the employee to receive one share of common stock at the end of an incentive period, conditioned upon the employee's continued employment throughout the incentive period. The incentive period is normally four years. During the incentive period, the employee receives cash payments equal to the cash dividend the company would have paid had the employee owned the shares of common stock issuable under the incentive rights. Under the Plan, all outstanding awards will be vested if there is a change in control of the company. Stock options become 100% exercisable immediately upon a change in control. Option surrender rights have been awarded, which relate one-for-one to all outstanding stock options. These rights are effective only upon a change in control and entitle the employee to receive cash for option surrender rights equal to 100% of the difference between the exercise price of the related stock option and the change-in-control price (which is the highest price paid for a share of stock as part of the change in control). The Plan also provides for the payment in cash of the value of stock incentive rights based on the change-in-control price. A summary of the status of the company's stock option and stock incentive rights plans as of Dec. 27, 1998, Dec. 28, 1997 and Dec. 29, 1996 and changes during the years then ended is presented below and on the following page: Weighted average 1998 Stock Options Shares exercise price ---------- ---------------- Outstanding at beginning of year 9,234,421 $36.00 Granted 2,514,210 65.00 Exercised (931,604) 26.91 Canceled (244,291) 40.49 Outstanding at end of year 10,572,736 43.59 Options exercisable at year end 5,365,913 31.93 Weighted average fair value of options granted during the year $17.32 Weighted average 1997 Stock Options Shares exercise price ---------- ---------------- Outstanding at beginning of year 8,866,658 $29.64 Granted 1,789,460 59.20 Exercised (1,237,089) 24.68 Canceled (184,608) 31.28 Outstanding at end of year 9,234,421 36.00 Options exercisable at year end 4,557,488 27.90 Weighted average fair value of options granted during the year $14.71 -47- Weighted average 1996 Stock Options Shares exercise price ---------- ---------------- Outstanding at beginning of year 7,932,084 $25.92 Granted 2,482,960 37.26 Exercised (1,298,838) 21.72 Canceled (249,548) 28.18 Outstanding at end of year 8,866,658 29.64 Options exercisable at year end 4,019,854 25.23 Weighted average fair value of options granted during the year $ 8.93 The following table summarizes information about stock options outstanding at Dec. 27, 1998: Weighted average Weighted Weighted Range of Number remaining average Number average exercise outstanding contractual exercise exercisable exercise prices at 12/27/98 life (yrs) price at 12/27/98 price - -------- ----------- ----------- -------- ----------- -------- $21-28 2,700,933 2.9 $25.22 2,700,933 $25.22 32-35 1,560,707 5.0 $32.06 1,170,530 $32.06 36-38 2,083,451 8.0 $37.38 1,041,726 $37.38 41-49 36,960 8.0 $45.88 18,480 $45.88 50-60 1,676,975 9.0 $59.50 419,244 $59.50 60-68 2,513,710 10.0 $65.00 15,000 $64.85 ----------- ----------- -------- ----------- -------- 10,572,736 6.6 $43.59 5,365,913 $31.93 =========== =========== ======== =========== ======== Stock Incentive Rights Awards made under the 1978 Plan for stock incentive rights were as follows: 1998 1997 1996 -------- -------- -------- Awards granted 168,785 173,325 258,340 Awards for 1996 are for the four-year period 1997-2000. Awards for 1997 are for the four-year period 1998-2001. Awards for 1998 are for the four-year period 1999-2002. In January 1999, 161,646 shares of common stock were issued in settlement of previously granted stock incentive rights for the incentive period ended December 1998. Shares available: Shares available for future grants under the 1978 Plan totaled 19,974,278 at Dec. 27, 1998. Pro forma results: SFAS No. 123, "Accounting for Stock- Based Compensation," establishes a fair value-based method of accounting for employee stock-based compensation plans, and encourages companies to adopt that method. However, it also allows companies to continue to apply the intrinsic value-based method currently prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The company has chosen to continue to report stock-based compensation in accordance with APB 25, and provides the following pro forma disclosure of the effects of applying the fair value method to all applicable awards granted. Under APB Opinion 25 and related Interpretations, no compensation cost has been recognized for its stock options. The compensation cost that has been charged against income for its stock incentive rights was $7 million for 1998 and $8 million for 1997 and 1996. Those charges were based on the grant price of the stock incentive rights recognized over the four-year earnout periods. Had compensation cost for the company's stock options been determined based on the fair value at the grant date for those awards as permitted (but not required) under the alternative method of SFAS No. 123, the company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 ----------- ---------- ---------- Net income (in thousands) As reported $999,913 $712,679 $943,087 Pro forma $991,385 $707,717 $941,226 Earnings per share - basic As reported $3.53 $2.52 $3.35 Pro forma $3.50 $2.50 $3.34 The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 1.69%, 2.15% and 2.34%; expected volatility of 20.62%, 16.28% and 15.25%; risk-free interest rates of 4.66%, 5.87% and 5.95%; and expected lives of seven years each. SFAS No. 123 applies to stock compensation awards granted in fiscal years that begin after Dec. 15, 1994. Options are granted by the company primarily in December and begin vesting over a four-year period. Options granted in December 1995 and thereafter are subject to the pronouncement. To calculate the pro forma amounts shown above, compensation cost was recognized over the four-year period of service during which the options will be earned. As a result, options granted in December of each year (beginning with December 1995) impact pro forma amounts for following years but not the year in which they were granted. Because the calculations do not take into consideration pro forma compensation expense related to grants made prior to 1995, the pro forma effect on net income shown for the years above is not representative of the pro forma effect on net income in future years. 401(k) Savings Plan On July 1, 1990, the company established a 401(k) Savings Plan. Most employees of the company (other than those covered by a collective bargaining agreement) who are scheduled to work at least 1,000 hours during each year of employment are eligible to participate in the Plan. Employees may elect to save up to 15% of compensation on a pre-tax basis subject to certain limits. Through 1997, the company matched, with company common stock, 25% of -48- the first 4% of employee contributions. Beginning Jan. 1, 1998, the company match increased to 50% of the first 6% of employee contributions. To fund the company's matching contribution, an Employee Stock Ownership Plan (ESOP) was formed in 1990 which acquired 2,500,000 shares of Gannett stock from the company for $50 million. The stock purchase was financed with a loan from the company, and the shares are pledged as collateral for the loan. The company makes monthly contributions to the ESOP equal to the ESOP's debt service requirements less dividends. All dividends received by the ESOP are used to pay debt service. As the debt is paid, shares are released as collateral and are available for allocation to participants. The company follows the shares allocated method in accounting for its ESOP. The cost of shares allocated to match employee contributions or to replace dividends that are used for debt service are accounted for as compensation expense. The cost of unallocated shares is reported as deferred compensation in the financial statements. The company, at its option, may repurchase shares from employees who leave the Plan. The shares are purchased at fair market value, and the difference between the original cost of the shares and fair market value is expensed at the time of purchase. All of the shares initially purchased by the ESOP are considered outstanding for earnings per share calculations. Dividends on allocated and unallocated shares are recorded as reductions of retained earnings. Compensation expense for the 401(k) match and repurchased shares was $7.3 million in 1998, $2.4 million in 1997 and $2.8 million in 1996. The ESOP shares as of the end of 1998 and 1997 were as follows: 1998 1997 ---------- ---------- Allocated shares 1,335,933 1,097,214 Shares released for allocation 40,950 14,470 Unreleased shares 1,103,117 1,388,316 Shares distributed to terminated participants (40,454) (23,993) ---------- ---------- ESOP shares 2,439,546 2,476,007 ========== ========== In May 1990, the Board of Directors declared a dividend distribution of one Preferred Share Purchase Right ("Right") for each common share held, payable to shareholders of record on June 8, 1990. The Rights become exercisable when a person or group of persons acquires or announces an intention to acquire ownership of 15% or more of the company's common shares. Holders of the Rights may acquire an interest in a new series of junior participating preferred stock, or they may acquire an additional interest in the company's common shares at 50% of the market value of the shares at the time the Rights are exercised. The Rights are redeemable by the company at any time prior to the time they become exercisable, at a price of $.01 per Right. Note 9 Commitments and contingent liabilities Litigation: The company and a number of its subsidiaries are defendants in judicial and administrative proceedings involving matters incidental to their business. The company's management does not believe that any material liability will be imposed as a result of these matters. Leases: Approximate future minimum annual rentals payable under non-cancelable operating leases are as follows: In thousands of dollars 1999 $ 36,195 2000 34,265 2001 31,861 2002 17,595 2003 14,588 Later years 63,883 -------- Total $198,387 ======== Total minimum annual rentals have not been reduced for future minimum sublease rentals aggregating approximately $4 million. Total rental costs reflected in continuing operations were $45 million for 1998, $43 million for 1997 and $41 million for 1996. Program broadcast contracts: The company has commitments under program broadcast contracts totaling $53.8 million for programs to be available for telecasting in the future. The company presently owns a 51% interest in WKYC-TV and National Broadcasting Company (NBC) owns a 49% interest. In December 1998, the company entered into a Put-Call agreement with NBC. Terms of the agreement permit (but don't require) either party to initiate a purchase/sale of some or all of NBC's shares in WKYC-TV over a four-year period. The company's maximum aggregate potential commitment under the agreement is approximately $200 million. In December 1990, the company adopted a Transitional Compensation Plan ("Plan'') which provides termination benefits to key executives whose employment is terminated under certain circumstances within two years following a change in control of the company. Benefits under the Plan include a severance payment of up to three years' compensation and continued life and medical insurance coverage. -49- Note 10 Business operations and segment information The company has determined that its reportable segments based on its management and internal reporting structure are: newspaper publishing, which is the largest segment of its operations; broadcasting (television), the second-largest component; and cable. Virtually all of the company's operations are in the U.S. The newspaper segment at the end of 1998 consisted of 75 daily newspapers in 38 states and one U.S. territory, including USA TODAY, a national, general-interest daily newspaper; and USA WEEKEND, a magazine supplement for newspapers. The newspaper segment also includes non-daily publications, a nationwide network of offset presses for commercial printing and several smaller businesses. Newsprint, which is the principal product used in newspaper publishing, has been and may continue to be subject to significant price changes from time to time. The broadcasting segment's activities for 1998 include the operation of 21 television stations. The cable segment (formerly cable and alarm security), which was acquired in connection with the Multimedia purchase, is headquartered in Wichita, Kan., and serves 514,000 cable television subscribers in three states. Separate financial data for each of the company's three business segments is presented on page 55 under the heading "Business segment financial information." The accounting policies of the segments are those described in Note 1. The company evaluates the performance of its segments based on operating income and operating cash flow. Operating income represents total revenue less operating expenses, depreciation and amortization of intangibles. In determining operating income by industry segment, general corporate expenses, interest expense, interest income, and other income and expense items of a non- operating nature are not considered, as such items are not allocated to the company's segments. Operating cash flow represents operating income plus depreciation and amortization of intangible assets. Corporate assets include cash and marketable securities, certain investments, long-term receivables and plant and equipment primarily used for corporate purposes. Interest capitalized has been included as a corporate capital expenditure for purposes of segment reporting. -50- Report of independent accountants To the Board of Directors and Shareholders of Gannett Co., Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of changes in shareholders' equity present fairly, in all material respects, the financial position of Gannett Co., Inc. and its subsidiaries at Dec. 27, 1998 and Dec. 28, 1997, and the results of their operations and their cash flows for each of the three years in the period ended Dec. 27, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Washington, D.C. February 1, 1999 -51- 11-Year Summary In thousands of dollars, except per share amounts
1998 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- ---------- Net operating revenues Newspaper advertising $2,942,995 $2,634,334 $2,417,550 $2,219,250 $2,152,671 $2,005,037 Newspaper circulation 1,010,238 948,141 917,677 869,173 849,461 838,706 Broadcasting 721,298 703,558 686,936 466,187 406,608 397,204 Cable and security 240,600 255,263 232,500 17,831 0 0 All other 206,160 188,195 166,444 171,426 174,655 169,903 ---------- ---------- ---------- ---------- ---------- ---------- Total (Notes a and b, see page 54) 5,121,291 4,729,491 4,421,107 3,743,867 3,583,395 3,410,850 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses Costs and expenses 3,367,583 3,112,150 3,067,332 2,728,868 2,597,556 2,520,278 Depreciation 201,683 201,100 193,011 143,739 146,054 147,248 Amortization of intangible assets 108,523 99,973 94,359 49,328 44,110 43,771 ---------- ---------- ---------- ---------- ---------- ---------- Total 3,677,789 3,413,223 3,354,702 2,921,935 2,787,720 2,711,297 ---------- ---------- ---------- ---------- ---------- ---------- Operating income 1,443,502 1,316,268 1,066,405 821,932 795,675 699,553 Non-operating income (expense) Interest expense (79,412) (98,242) (135,563) (52,175) (45,624) (51,250) Other 305,323 (9) (9,047) 155,825 (7) 3,754 14,945 5,350 ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 1,669,413 1,208,979 1,086,667 773,511 764,996 653,653 Provision for income taxes 669,500 496,300 462,700 314,100 309,600 264,400 ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations 999,913 (9) 712,679 623,967 (7) 459,411 455,396 389,253 ---------- ---------- ---------- ---------- ---------- ---------- Discontinued operations: Income from the operation of discontinued businesses (net of income taxes) 0 0 24,540 17,851 10,003 8,499 Gain on disposal of Outdoor business (net of income taxes) 0 0 294,580 0 0 0 ---------- ---------- ---------- ---------- ---------- ---------- Total 0 0 319,120 17,851 10,003 8,499 ---------- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of accounting principle changes 999,913 712,679 943,087 477,262 465,399 397,752 Cumulative effect on prior years of accounting principle changes for: Income taxes 0 0 0 0 0 0 Retiree health and life insurance benefits 0 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 999,913 $712,679 $943,087 $477,262 $465,399 $397,752 ========== ========== ========== ========== ========== ========== Operating cash flow (5) $1,753,708 $1,617,341 $1,353,775 $1,014,999 $985,839 $890,572 ---------- ---------- ---------- ---------- ---------- ---------- Per share amounts (1) Income from continuing operations before cumulative effect of accounting principle changes: basic/diluted $3.53/3.50(9) $2.52/2.50 $2.21/2.20(7) $1.64/1.63 $1.58/1.57 $1.33/1.32 Net income: basic/diluted $3.53/3.50 $2.52/2.50 $3.35/3.33 $1.70/1.69 $1.61/1.60 $1.36/1.35 Dividends declared (2) .78 .74 .71 .69 .67 .65 Weighted average number of common shares outstanding in thousands (2): Basic 283,097 283,360 281,782 280,312 288,552 292,948 Diluted 285,711 285,610 283,426 282,323 290,148 294,659 Financial position Working capital $ 178,418 $ 146,057 $ 47,609 $ 41,312 $ 123,783 $ 302,818 Long-term debt excluding current maturities 1,306,859 1,740,534 1,880,293 2,767,880 767,270 850,686 Shareholders' equity 3,979,824 3,479,736 2,930,818 2,145,648 1,822,238 1,907,920 Total assets 6,979,480 6,890,351 6,349,597 6,503,800 3,707,052 3,823,798 Selected financial percentages and ratios Percentage increase (decrease) Earnings from continuing operations, after tax (4) 14.5%(8) 34.3%(6) 15.5%(6) 0.9% 17.0% 14.1% Earnings from continuing operations, after tax, per share (4): Basic 14.3%(8) 34.0%(6) 14.8%(6) 3.8% 18.8% 12.3% Diluted 14.4%(8) 33.7%(6) 14.7%(6) 3.8% 18.9% 11.9% Dividends declared per share 5.4% 4.2% 2.9% 3.0% 3.1% 3.2% Return on equity (3) 21.9% 22.2% 20.9% 23.2% 24.4% 22.3% Credit ratios Long-term debt to shareholders' equity 32.8% 50.0% 64.2% 129.0% 42.1% 44.6% Times interest expense earned 22.0x 13.3x 9.0x 15.8x 17.8x 13.8x 1992 1991 1990 1989 1988 ---------- ---------- ---------- ---------- ---------- Net operating revenues Newspaper advertising $1,882,114 $1,852,591 $1,917,477 $2,018,076 $1,908,566 Newspaper circulation 807,093 777,221 730,426 718,087 685,663 Broadcasting 370,613 357,383 396,693 408,363 390,507 Cable and security 0 0 0 0 0 All other 167,824 134,720 125,659 115,773 103,217 ---------- ---------- ---------- ---------- ---------- Total (Notes a and b, see page 54) 3,227,644 3,121,915 3,170,255 3,260,299 3,087,953 ---------- ---------- ---------- ---------- ---------- Operating expenses Costs and expenses 2,440,275 2,399,930 2,353,281 2,368,160 2,277,254 Depreciation 139,080 139,268 135,294 134,119 122,439 Amortization of intangible assets 39,197 39,621 39,649 39,100 39,445 ---------- ---------- ---------- ---------- ---------- Total 2,618,552 2,578,819 2,528,224 2,541,379 2,439,138 ---------- ---------- ---------- ---------- ---------- Operating income 609,092 543,096 642,031 718,920 648,815 Non-operating income (expense) Interest expense (50,817) (71,057) (71,567) (90,638) (88,557) Other 7,814 14,859 10,689 (18,364) 8,292 ---------- ---------- ---------- ---------- ---------- Income before income taxes 566,089 486,898 581,153 609,918 568,550 Provision for income taxes 224,900 194,400 226,600 235,500 228,000 ---------- ---------- ---------- ---------- ---------- Income from continuing operations 341,189 292,498 354,553 374,418 340,550 ---------- ---------- ---------- ---------- ---------- Discontinued operations: Income from the operation of discontinued businesses (net of income taxes) 4,491 9,151 22,410 23,091 23,910 Gain on disposal of Outdoor business (net of income taxes) 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- Total 4,491 9,151 22,410 23,091 23,910 ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of accounting principle changes 345,680 301,649 376,963 397,509 364,460 Cumulative effect on prior years of accounting principle changes for: Income taxes 34,000 0 0 0 0 Retiree health and life insurance benefits (180,000) 0 0 0 0 ---------- ---------- ---------- ---------- ---------- Net income $199,680 $301,649 $376,963 $397,509 $364,460 ========== ========== ========== ========== ========== Operating cash flow (5) $787,369 $721,985 $816,974 $892,139 $810,699 ---------- ---------- ---------- ---------- ---------- Per share amounts (1) Income from continuing operations before cumulative effect of accounting principle changes: basic/diluted $1.18/1.18 $.97/.96 $1.11/1.10 $1.16/1.16 $1.05/1.05 Net income: basic/diluted $.69/.69 $1.00/.99 $1.18/1.17 $1.23/1.23 $1.13/1.13 Dividends declared (2) .63 .62 .61 .56 .51 Weighted average number of common shares outstanding in thousands (2): Basic 288,296 301,566 320,094 322,506 323,244 Diluted 290,174 303,267 322,830 323,932 323,882 Financial position Working capital $ 199,896 $ 192,266 $ 168,487 $ 193,208 $ 164,196 Long-term debt excluding current maturities 1,080,756 1,335,394 848,633 922,470 1,134,737 Shareholders' equity 1,580,101 1,539,487 2,063,077 1,995,791 1,786,441 Total assets 3,609,009 3,684,080 3,826,145 3,782,848 3,792,820 Selected financial percentages and ratios Percentage increase (decrease) Earnings from continuing operations, after tax (4) 16.6% (17.5%) (5.3%) 9.9% 14.0% Earnings from continuing operations, after tax, per share (4): Basic 22.0% (12.4%) (4.6%) 10.2% 14.0% Diluted 22.9% (12.7%) (5.2%) 10.5% 14.1% Dividends declared per share 1.6% 2.5% 9.0% 8.8% 8.5% Return on equity (3) 21.9% 16.2% 17.5% 19.8% 20.1% Credit ratios Long-term debt to shareholders' equity 68.4% 86.7% 41.1% 46.2% 63.5% Times interest expense earned 12.1x 7.9x 9.1x 7.7x 7.4x (1) Per share amounts have been based upon average number of shares outstanding during each year, giving retroactive effect to adjustment in (2). (2) Shares outstanding and dividends declared have been converted to a comparable basis by reflecting retroactively the 2-for-1 stock split effective Oct. 6, 1997. (3) Based upon average shareholders' equity (before non-recurring gains and accounting principle changes). (4) Before cumulative effect of accounting principle changes. (5) Operating cash flow represents operating income plus depreciation and amortization of intangible assets. (6) Before 1996 gain on exchange of broadcast stations of $93 million or $.33 per share. (7) Includes pre-tax gain on exchange of broadcast stations of $158 million (after-tax gain of $93 million or $.33 per share). (8) Before 1998 $184 million after-tax net non-operating gain principally from the disposition of the radio and alarm security businesses ($.65 per share-basic and $.64 per share-diluted). (9) Includes pre-tax net non-operating gain principally from the disposition of the radio and alarm security businesses of $307 million (after-tax gain of $184 million or $.65 per share-basic and $.64 per share-diluted). -52/53-
Notes to 11-year Summary (a) The company and its subsidiaries made the acquisitions listed below during the period. The results of operations of these acquired businesses are included in the accompanying financial information from the date of acquisition. Note 2 of the consolidated financial statements on page 42 contains further information concerning certain of these acquisitions. (b) During the period, the company sold or otherwise disposed of substantially all of the assets or capital stock of certain other subsidiaries and divisions of other subsidiaries. Note 2 of the consolidated financial statements on page 42 contains further information concerning certain of these dispositions. Acquisitions 1988-1998 1988 Feb. 1 WFMY-TV, Greensboro, N.C. WTLV-TV, Jacksonville, Fla. July 1 New York Subways Advertising Co., Inc. and related companies 1989 Oct. 31 Rockford Magazine Nov. 6 Outdoor advertising displays merged into New Jersey Outdoor 1990 March 28 Great Falls (Mont.) Tribune May 17 Ye Olde Fishwrapper June 18 The Shopper Advertising, Inc. Sept. 7 Desert Community Newspapers Dec. 27 North Santiam Newspapers Dec. 28 Pensacola Engraving Co. 1991 Feb. 11 The Add Sheet April 3 New Jersey Publishing Co. Aug. 30 The Times Journal Co., including The Journal Newspapers, The Journal Printing Co. (now Springfield Offset) and Telematch Oct. 3 Gulf Breeze Publishing Co. 1992 April 24 Graphic Publications, Inc. 1993 Jan. 30 The Honolulu Advertiser April 24 Tulare Advance-Register 1994 May 2 Nursing Spectrum June 9 Altoona Herald-Mitchellville Index and the Eastern ADvantage Dec. 1 KTHV-TV, Little Rock 1995 Dec. 4 Multimedia, Inc. 1996 Dec. 9 WTSP-TV, Tampa-St. Petersburg, Fla. 1997 Jan. 31 WZZM-TV, Grand Rapids, Mich. Jan. 31 WGRZ-TV, Buffalo, N.Y. May 5 Printed Media Companies May 27 KNAZ-TV, Flagstaff, Ariz. May 27 KMOH-TV, Kingman, Ariz. July 18 Mary Morgan, Inc. Aug. 1 Army Times Publishing Co., Inc. Oct. 24 New Jersey Press, Inc. 1998 Jan. 5 WCSH-TV, Portland, Maine Jan. 5 WLBZ-TV, Bangor, Maine April 30 WLTX-TV, Columbia, S.C. May 31 Classified Gazette, San Rafael, Calif. July 7 Ocean County Observer, Toms River, N.J. July 7 Daily Record, Morristown, N.J. July 7 Manahawkin Newspapers, Manahawkin, N.J. Aug. 31 TCI Cable Kansas Aug. 31 New Castle County Shopper's Guide, Brandywine Valley Weekly and Autos plus, Wilmington, Del. -54- Form 10-K information Business of the company Gannett Co., Inc. is a diversified information company that operates primarily in the U.S. Approximately 99% of its revenues are from domestic operations. Its limited foreign operations are in certain European and Asian markets. Its corporate headquarters is in Arlington, Va., near Washington, D.C. It was incorporated in New York in 1923 and was reincorporated in Delaware in 1972. The company reports three principal business segments: newspaper publishing, television broadcasting and cable television. The company's newspapers make up the largest newspaper group in the U.S. in circulation. At the end of 1998, the company operated 75 daily newspapers, with a total average daily circulation of approximately 6.7 million for 1998, including USA TODAY. The company also publishes USA WEEKEND, a weekend newspaper magazine, and a number of non-daily publications. On Dec. 27, 1998, the broadcasting division included 21 television stations in markets with more than 16.5 million households. The cable business (Multimedia Cablevision) serves 514,000 subscribers in three states. The company also owns the following: Gannett News Service, which provides news services for its newspaper operations; Gannett Retail Advertising Group, which represents the company's newspapers, other than USA TODAY, in the sale of advertising to national and regional retailers and service providers; and Gannett Offset, which is composed of the Gannett Offset print group and Gannett Marketing Services Group. The Gannett Offset print group includes seven non- heatset printing plants and two heatset printing facilities, including the recent acquisition of Printed Media Companies of Minneapolis, Minn., which offers seven web and three sheetfed presses. Gannett Offset's dedicated commercial printing plants are located in Atlanta, Ga.; Chandler, Ariz.; Minneapolis, Minn.; Miramar, Fla.; Nashville, Tenn.; Norwood, Mass.; Pensacola, Fla.; St. Louis, Mo.; and Springfield, Va. Gannett Marketing Services Group coordinates the sale of direct- marketing services through: Telematch, a database management and data enhancement company; Gannett Direct Marketing Services, a direct-marketing company with operations in Louisville, Ky.; and Gannett TeleMarketing, a telephone sales and marketing company. The company also owns USATODAY.com and other Internet services at many of its local newspapers and broadcast properties; Gannett Media Technologies International, which develops and markets software and other products for the publishing industry; Nursing Spectrum, publisher of biweekly periodicals specializing in advertising for nursing employment; and Army Times Publishing Company, which publishes military and defense newspapers. Business segment financial information Selected financial information for the company's business segments is presented below. For a description of the accounting policies related to this information, see Note 10 to the company's consolidated financial statements. In thousands of dollars Business segment financial information 1998 1997 1996 ---------- ---------- ---------- Operating revenues: Newspaper publishing $4,159,393 $3,770,670 $3,501,671 Broadcasting 721,298 703,558 686,936 Cable and security 240,600 255,263 232,500 ---------- ---------- ---------- $5,121,291 $4,729,491 $4,421,107 ---------- ---------- ---------- Operating income: Newspaper publishing $1,109,221 $1,001,965 $ 786,235 Broadcasting 343,512 328,311 297,332 Cable and security 57,688 54,026 47,127 Corporate (3) (66,919) (68,034) (64,289) ---------- ---------- ---------- $1,443,502 $1,316,268 $1,066,405 ---------- ---------- ---------- Depreciation and amortization: Newspaper publishing $ 184,718 $ 168,526 $ 161,886 Broadcasting 60,023 56,459 51,561 Cable and security 56,743 67,368 64,606 Corporate (3) 8,722 8,720 9,317 ---------- ---------- ---------- $ 310,206 $ 301,073 $ 287,370 ---------- ---------- ---------- Operating cash flow (4): Newspaper publishing $1,293,939 $1,170,491 $ 948,121 Broadcasting 403,535 384,770 348,893 Cable and security 114,431 121,394 111,733 Corporate (3) (58,197) (59,314) (54,972) ---------- ---------- ---------- $1,753,708 $1,617,341 $1,353,775 ---------- ---------- ---------- Identifiable assets: Newspaper publishing $3,682,839 $3,593,932 $3,151,385 Broadcasting 1,872,351 1,725,019 1,622,469 Cable and security 1,069,054 1,223,057 1,210,000 Corporate (3) 355,236 348,343 351,526 ---------- ---------- ---------- $6,979,480 $6,890,351 $6,335,380(1) ---------- ---------- ---------- Capital expenditures: Newspaper publishing $ 164,479 $ 123,343 $ 114,114 Broadcasting 25,548 13,157 14,400 Cable and security 22,366 81,256 77,991 Corporate (3) 32,032 3,495 46,874 ---------- ---------- ---------- $ 244,425 $ 221,251 $ 253,379(2) ---------- ---------- ---------- (1) Excludes assets related to discontinued operations totaling $14,217 in 1996. (2) Excludes capital expenditures made for discontinued operations totaling $6,668 for 1996. (3) Corporate amounts represent those not directly related to the company's three business segments. (4) Operating cash flow amounts represent operating income plus depreciation and amortization of intangible assets. Such cash flow amounts in total vary from net cash flow from operating activities presented in the Consolidated Statements of Cash Flows. -55- Newspaper publishing On Dec. 27, 1998, the company operated 75 daily newspapers, including USA TODAY, and a number of non-daily local publications, in 38 states and Guam. The Newspaper Division is headquartered in Arlington, Va., and on Dec. 27, 1998, it had approximately 34,700 full- time and part-time employees. Newspaper operating revenues accounted for 81% of the company's net operating revenues in 1998, 80% in 1997 and 79% in 1996. During 1998, the company sold several of its smaller-market newspapers, including ones in the Virgin Islands, Ohio, West Virginia and Illinois, and contributed its newspaper in Saratoga Springs, N.Y., to the Gannett Foundation. The company acquired several newspapers in New Jersey, including dailies in Morristown and Toms River. These transactions did not significantly affect reported newspaper operations for 1998. USA TODAY was introduced in 1982 as the country's first national, general-interest daily newspaper. It is available in all 50 states and is available to readers on the day of publication in the top 100 metropolitan markets in the U.S. USA TODAY is produced at facilities in Arlington, Va., and is transmitted via satellite to offset printing plants around the country. It is printed at Gannett plants in 21 U.S. markets and under contract at offset plants in 12 other U.S. markets. It is sold at newsstands and vending machines generally at 50 cents a copy. Mail subscriptions are available nationwide and abroad, and home and office delivery is offered in many markets. Approximately 67% of its net paid circulation results from single-copy sales at newsstands or vending machines and the remainder is from home and office delivery, mail and other sales. For 1998, USA TODAY's advertising revenues and volume rose 12% and 9%, respectively. Its circulation revenues and volume rose 3% and 2%, respectively. USA TODAY reported a solid improvement in operating income in 1998. USA TODAY International is printed from satellite transmission under contract in London, Frankfurt and Hong Kong, and is distributed in Europe, the Middle East, Africa and Asia. It is available in more than 60 foreign countries. The Gannett News Service (GNS) is headquartered in Arlington, Va., and has bureaus in nine other states (see page 72 for more information). GNS provides national and regional news coverage and sports, features, photo and graphic services to Gannett newspapers. GNS also is distributed by syndication to several non- Gannett newspapers, including ones in Chicago, Salt Lake City, Boston and Seattle. The newspaper publishing segment also includes USA WEEKEND, which is distributed as a weekend newspaper supplement in 541 newspapers throughout the country, with a total circulation of 21.2 million at the end of 1998. At the end of 1998, 58 of the company's daily newspapers, including USA TODAY, were published in the morning and 17 were published in the evening. Individually, Gannett newspapers are the leading news and information source with strong brand recognition in their markets. Their durability lies in the quality of their management, their flexibility, their focus on such customer-directed programs as NEWS 2000, ADvance and ADQ, and their capacity to invest in new technology. Collectively, they form a powerful network to distribute news and advertising information across the nation. News departments across Gannett emphasized coverage of critical areas of their markets with considerable attention paid to suburban and rural communities surrounding the central cities. The newspapers also presented more coverage to help readers cope in an ever-changing society, and they provided many public-service news efforts, several of which were recognized with national awards. The corporate NEWS 2000 program, aimed at meeting the changing needs of readers, concentrated on core journalistic values and blending newsroom efforts with overall strategic goals of the newspapers. Training seminars to improve writing were conducted across the company, and the first Gannett National Conference for Reporters and Editors was held in Arlington, Va. The session for nearly 200 participants focused on building reporter expertise and reporter- editor relationships to better serve readers. In 1998, the company continued to implement strategies to increase its revenues from medium and smaller advertisers in each market it serves. Revenues from these types of advertisers increased 7% during the year on top of 5% growth in 1997. Numerous programs introduced by Gannett newspapers in 1998 accomplished these results. The initiatives focused on sales and rate management, among other areas. Sales management initiatives included allocating proper resources to increase the number and quality of sales calls, improving sales compensation and providing consistent sales training. Rate management programs focused on selling multiple advertising insertions and reviewing rates and rate structures to assure they match the opportunities in the market. The company regularly calculates market potential and develops strategic plans to capitalize on that potential. Significant efforts will continue to be taken in 1999 to make the company's personnel increasingly competitive in their leadership, strategic thinking and marketing skills. The newspaper division's quality initiative, known as ADQ, produced for the fourth consecutive year improved ad and billing quality. With ROP ad count increasing 2% and total ad revenues up 6% in 1998 over 1997, Gannett newspapers produced higher volume, greater quality and reduced credit adjustments. All of the company's daily newspapers receive the Gannett News Service. In addition, all subscribe to The Associated Press, and some receive various supplemental news and syndicated features services. -56- The senior executive of each newspaper is the publisher, and the newspapers have advertising, business, information systems, circulation, news, market development, human resources and production departments. Technological advances in recent years have had an impact on the way newspapers are produced. Computer-based text editing systems capture drafts of reporters' stories and then are used to edit and produce type for transfer by a photographic process to printing plates. All of the company's daily newspapers are produced by this method. "Pagination" enables editors to create a newspaper page by computer, avoiding all or part of the manual "paste-up" of the page before it can be converted into a printing plate. The company uses pagination systems at 69 newspaper plants. The Mobile Advertising Sales System, or MASS, is Gannett's sales force automation software. This laptop technology provides sales executives with up-to-date customer, contract and sales revenue information; productivity tools for managing their schedules; and software for sales presentations. MASS is currently installed at 54 newspapers, with more than 1,270 laptops deployed. In 1998, the company's newspapers began moving toward a more streamlined order entry process. Ad orders now can be electronically uploaded directly into the business billing system, rather than manually entered. This process is in place at one newspaper, and more will switch over in 1999. Celebro Advertising Solutions, originally developed by the company in 1994 as AdLink, is a suite of software applications that enables major real estate agents to control the design, scheduling and content of their advertising in the newspaper and market their properties on the Internet, and with audio text/fax back. The Celebro Real Estate System has been installed at 28 Gannett newspapers and at an additional 16 non-Gannett newspapers by Gannett Media Technologies International (GMTI). Celebro auto advertising systems are installed at five Gannett and one non-Gannett newspaper. The Digital Collections integrated text/photo archive system has been installed at 43 Gannett newspapers, including Rochester, Des Moines, Louisville, Honolulu, Wilmington and Tucson. The system stores, retrieves and distributes text, photos and full-page images of the newspaper in a digital form that can be searched using an easy-to-use interface. GMTI, licensed by DiGiCol, the U.S. subsidiary of Gannett and Digital Collections Verlagsges.mbH, sells and installs Digital Collections systems in North and South America. Non-Gannett customers include The Milwaukee Journal, America Online, O'Globo (Rio De Janiero, Brazil), Copesa (Santiago, Chile), The University of Missouri, Journal Newspapers (Virginia), Lance Newspapers (Rio De Janiero and Sao Paulo), Prensa Libre (Guatemala) and Kohla de Sao Paulo (Brazil). Installation of a "light" version employing a central server based at Gannett's Maryland Operations Center began at 17 Gannett sites in the last quarter of 1998. The online effort at Gannett's newspapers involves a strategy that is consistent with the overall Gannett philosophy of serving our newspapers' communities. The role of the local newspaper is to serve the local reader and advertiser and its information products and services, including local online products, must be designed to serve their needs. An aggressive approach is being taken to providing online information products that enable the company's local newspapers to maintain and grow their franchises as the leading information providers in their communities. There is no single approach or model to online publishing. Different approaches and different levels of activity in various newspaper markets are used based on understanding the specific needs and opportunities in each market. The company takes an intelligent business approach to all products and services, including Internet products. There are carefully prepared detailed business plans for these new activities to generate new revenue from new sources. The main online achievement of 1998 was growth at an increasing rate. By Dec. 31, 1998, 58 newspaper division publications and operations had online projects. This is up from 33 at the end of 1997. Revenue grew 84% in 1998 and will grow significantly again in 1999. Gannett newspapers are offering more than 200 separate online information products designed to offer deep specific information on important subjects in their markets. These products not only include local news but home buying guides, employment and job information, automotive guides, entertainment guides, tourism guides and other specialty products such as Space Online in Brevard County, Fla., or the Kentucky Derby in Louisville, Ky., that target specific community or market information needs or opportunities. The company also is pursuing opportunities to develop national Internet businesses where this makes sense for Gannett. By partnering with other companies, and using the strength of its local franchises added to the efficiencies of the Internet to deliver information both locally and nationally, the company has unique opportunities to develop new national businesses. In addition, these partnerships enhance local efforts by providing additional content, advertising opportunities and technical resources that help Gannett's local newspapers improve the products and services they offer to their local customers. For example, the company's CareerPath partnership offers the opportunity to build a strong national employment service. At the same time, CareerPath makes local employment sites richer for local users and allows local companies to broaden their employment searches by electronically distributing their advertisements to potential candidates that they cannot reach currently. The partnership in Classified Ventures creates similar benefits in real estate and auto buying in local markets. -57- Our InfiNet partnership allows newspapers to have better, more reliable Internet hosting technology that they could not provide for themselves at the same cost, as well as additional services they can offer to enhance their local products. The company's online activities and investments are not material in relation to its operations taken as a whole. With respect to newspaper production, 56 daily newspaper plants print by the offset process, and 15 plants print using various letterpress processes. In recent years, improved technology for all of the newspapers has resulted in greater speed and accuracy and in a reduction in the number of production hours worked per page. The company expects this trend to continue in 1999. The principal sources of newspaper revenues are circulation and advertising. Circulation: The table that follows summarizes the circulation volume and revenues of the newspapers owned by the company at the end of 1998. USA TODAY circulation is included in this table. This table assumes that all newspapers owned by the company at the end of 1998 were owned during all years shown: Circulation: newspapers owned on Dec. 27, 1998 Circulation Daily Sunday revenues net paid net paid in thousands circulation circulation ------------ ------------ ------------ 1998 $1,011,009 6,747,000 6,029,000 1997 $ 992,143 6,662,000 6,111,000 1996 $ 972,212 6,604,000 6,188,000 1995 $ 942,165 6,639,000 6,466,000 1994 $ 915,520 6,678,000 6,662,000 Thirty-eight of the company's local newspapers reported gains in daily circulation in 1998, and 17 increased Sunday circulation. Home-delivery prices for the company's newspapers are established individually for each newspaper and range from $1.50 to $2.86 per week in the case of daily newspapers and from $.71 to $2.35 per copy for Sunday newspapers. The company implemented circulation price increases at 23 newspapers in 1998 and plans increases at additional newspapers in 1999. Additional information about the circulation of the company's newspapers may be found on pages 26-27 and 70-72 of this annual report. Advertising: The newspapers have advertising departments that sell retail, classified and national advertising. The Gannett Retail Advertising Group also sells advertising on behalf of the company's newspapers, other than USA TODAY, to national and regional retailers and service providers. The company also contracts with outside representative firms that specialize in the sale of national advertising. A detailed analysis of newspaper advertising revenues is presented on this page and on page 25 of this report. Retail advertising is display advertising associated with local merchants, such as department and grocery stores. Classified advertising includes ads listed together in sequence by the nature of the ads, such as automobile sales, real estate sales and "help wanted." National advertising is display advertising principally from advertisers who are promoting products or brand names nationally. Retail and national advertising may appear in the newspaper itself or in preprinted sections. Generally there are different rates for each category of advertising, and the rates for each newspaper are set independently, varying from city to city. The newspapers have made continuing efforts to serve their readers and advertisers by introducing complete market coverage programs and by targeting specific market segments desired by many advertisers through the use of specially zoned editions and other special publications. Total newspaper ad revenues on a pro forma basis rose 6% in 1998. All major advertising classifications showed substantial year- over-year growth during 1998. Retail advertising revenues produced a strong performance, driven by medium and smaller advertisers. Revenues from these types of advertisers increased 7% during the year. Classified advertising revenues grew 7% on the strength of help wanted, real estate and automotive categories. Preprint revenues grew 8%. For 1999, the company expects further advertising revenue growth at most of its newspaper properties because of enhanced sales and marketing activities. Changes in national economic factors such as interest rates, employment levels and the rate of general economic growth will have an impact on revenue at all of the company's newspaper operations. The following chart summarizes the advertising linage (in six- column inches) and advertising revenues of the newspapers owned by the company at the end of 1998. This chart assumes that all of the newspapers owned at the end of 1998 were owned throughout the years shown: Advertising: newspapers owned on Dec. 27, 1998 Advertising Inches of revenues (ROP) advertising, in thousands excluding preprints ------------ ------------------- 1998 $2,497,102 80,714,000 1997 $2,354,096 75,872,000 1996 $2,184,813 70,933,000 1995 $2,063,710 71,800,000 1994 $1,984,758 70,559,000 Competition: The company's newspapers compete with other media for advertising principally on the basis of their advertising rates and their performance in helping sell the advertisers' products or services. They compete for circulation principally on the basis of their content and price. While most of the company's newspapers do not have daily newspaper competitors that are published in the same city, in certain of the company's larger markets, there is such direct competition. -58- Most of the company's newspapers compete with other newspapers published in nearby cities and towns and with free distribution and paid advertising weeklies, as well as other print and non-print media. The rate of development of opportunities in and competition from emerging electronic communications services, including those related to the Internet and the World Wide Web, is increasing. Through internal development programs, acquisitions and partnerships, the company's efforts to explore new opportunities in news, information and communications businesses have expanded. At the end of 1998, The Cincinnati Enquirer, The Detroit News, The Honolulu Advertiser and the Tucson (Ariz.) Citizen were published under joint operating agreements with non-Gannett newspapers located in the same cities. All of these agreements provide for joint business, advertising, production and circulation operations and a contractual division of profits. The editorial and reporting staffs of the company's newspapers, however, are separate and autonomous from those of the non-Gannett newspapers. Properties: Generally, the company owns the plants that house all aspects of the newspaper publication process. In the case of USA TODAY, at Dec. 27, 1998, 12 non-Gannett printers were used to print the newspaper in U.S. markets where there are no company newspapers with appropriate facilities. Three non-Gannett printers in foreign countries are used to print USA TODAY International. USA WEEKEND and Nursing Spectrum also are printed under contracts with commercial printing companies. Many of the company's newspapers also have outside news bureaus and sales offices, which generally are leased. In a few cities, two or more of the company's newspapers share combined facilities; and in certain locations, facilities are shared with other newspaper properties. The company's newspaper properties have rail siding facilities or access to main roads for newsprint delivery purposes and are conveniently located for distribution purposes. During the past five years, new or substantial additions or remodeling of existing newspaper facilities have been completed or are at some stage of construction at 19 of the company's newspaper operations. Gannett continues to make significant investments in the renovation of existing or new facilities where the investment will help to improve the products for its readers and advertisers as well as improve productivity and operating efficiencies. The company's facilities are adequate for present operations. Raw materials: Newsprint is the basic raw material used to publish newspapers. During 1998, the company's newsprint consumption was approximately 970,000 metric tons, including the company's portion of newsprint consumed at joint operating agencies, consumption by USA WEEKEND and USA TODAY tonnage consumed at non-Gannett print sites. Newsprint consumption was up 9% in 1998 because of incremental consumption by newspaper properties acquired during the year and generally higher page count throughout the newspaper group. The company purchases newsprint from 28 North American and offshore suppliers under contracts, which expire at various times through 2010. During 1998, all of the company's newspapers consumed some recycled newsprint. For the year, more than 75% of the company's newsprint purchases contained recycled content. In 1998, newsprint supplies were adequate. The company believes that the available sources of newsprint, together with present inventories, will continue to be adequate to supply the needs of its newspapers. The average cost per ton of newsprint consumed in 1998 increased 9% compared to the 1997 average cost. Newsprint prices, however, at the end of 1998 were only slightly higher than year-ago levels. The company expects newsprint prices on average to be lower in 1999 than in 1998. Regulation: Gannett is committed to protecting the environment. The company's goal is to ensure its facilities comply with federal, state and local environmental laws and to incorporate appropriate environmental practices and standards in our newspaper, broadcast and cable operations. The company employs a corporate environmental manager responsible for overseeing not only regulatory compliance but also preventive measures. The company is one of the industry leaders in the use of recycled newsprint. The company increased its purchase of newsprint containing some recycled content from 42,000 metric tons in 1989 to 730,000 metric tons in 1998. The company's newspapers use inks, photographic chemicals, solvents and fuels. The use and disposal of these substances may be regulated by federal, state and local agencies. Through its environmental compliance plan, the company is taking effective measures to comply with environmental laws. Any release into the environment may create obligations to private and governmental entities under a variety of statutes and rules regulating the environment. Several of the company's newspaper subsidiaries have been included among the potentially responsible parties in connection with the alleged disposal of ink or other chemical wastes at disposal sites which have been subsequently identified as inactive hazardous waste sites by the U.S. Environmental Protection Agency ("EPA") or comparable state agencies. At one of these sites, one of the company's subsidiaries settled a dispute with the EPA with a payment of $270,000. Another subsidiary is a defendant in a case brought by the EPA where the amount in controversy is approximately $160,000. The company believes its liability is substantially less and is defending the case. The company provides for costs associated with these matters in accordance with generally accepted accounting principles. The company does not believe that these matters will have any significant impact on its financial position or results of operations. Additional information about the company's newspapers may be found on pages 70-73 of this report. -59- Broadcasting On Dec. 27, 1998, the company's television division, headquartered in Arlington, Va., included 21 television stations in markets with a total of more than 16.5 million households. The company sold its last five radio stations in early 1998 and then acquired NBC-affiliated stations in Bangor and Portland, Maine. In April 1998, the CBS-affiliated station in Columbia, S.C., was purchased, bringing the company's complement of television stations to 21. At the end of 1998, the broadcasting division had approximately 3,100 full-time and part-time employees. Broadcasting revenues accounted for 14% of the company's reported operating revenues in 1998, 15% in 1997 and 16% in 1996. The principal sources of the company's broadcasting revenues are: 1) local advertising focusing on the immediate geographic area of the stations; 2) national advertising; 3) compensation paid by the networks for carrying commercial network programs; and 4) payments by advertisers to television stations for other services, such as the production of advertising material. The advertising revenues derived from a station's local news programs make up a significant part of its total revenues. Advertising rates charged by a television station are based primarily upon the station's ability to attract viewers, demographics and the number of television households in the area served by the station. Practically all national advertising is placed through independent advertising representatives. Local advertising time is sold by each station's own sales force. Generally, a network provides programs to its affiliated television stations, sells commercial advertising announcements within the network programs and compensates the local stations by paying an amount based on the television station's network affiliation agreement. Programming: The costs of locally produced and purchased syndicated programming are a significant portion of television operating expenses. Syndicated programming costs are determined based upon largely uncontrollable market factors, including demand from the independent and affiliated stations within the market and in some cases from cable operations. In recent years, the company's television stations have emphasized their locally produced news and entertainment programming in an effort to provide programs that distinguish the stations from the competition and to better control costs. Properties: The company's broadcasting facilities are adequately equipped with the necessary television broadcasting equipment. The company owns transmitter sites in 22 locations and leases sites in seven others. During the past five years, new broadcasting facilities or substantial improvements to existing facilities were completed in Austin, Greensboro, N.C., Little Rock, Phoenix, Jacksonville, Atlanta and Washington, D.C. Substantial remodeling is under way in Knoxville, and a new facility is being planned in Cleveland. The company's broadcast facilities are adequate for present purposes. Competition: In each of its broadcasting markets, the company's stations compete for revenues with other network-affiliated and independent television and radio broadcasters and with other advertising media, such as cable television, newspapers, magazines and outdoor advertising. The company's broadcasting stations compete principally on the basis of their market share, advertising rates and audience composition. Local news is most important to a station's success, and there is a growing emphasis on other forms of programming that relate to the local community. Network and syndicated programming constitute the majority of all other programming broadcast on the company's television stations, and the company's competitive position is directly affected by viewer acceptance of this programming. Other sources of present and potential competition for the company's broadcasting properties include pay cable, home video and audio recorders and video disc players, direct broadcast satellite and low power television. Some of these competing services have the potential of providing improved signal reception or increased home entertainment selection, and they are continuing development and expansion. Regulation: The company's television stations are operated under the authority of the Federal Communications Commission (FCC) under the Communications Act of 1934, as amended (Communications Act), and the rules and policies of the FCC (FCC Regulations). Television broadcast licenses are granted for a period of eight years. They are renewable by broadcasters upon application to the FCC and usually are renewed except in rare cases in which a conflicting application, a petition to deny, a complaint or an adverse finding as to the licensee's qualifications results in loss of the license. The company believes it is in substantial compliance with all applicable provisions of the Communications Act and FCC Regulations. -60- FCC Regulations also prohibit concentrations of broadcasting control and regulate network programming. FCC Regulations governing multiple ownership prohibit the common ownership or control of most communications media serving common market areas (for example, television and radio; television and daily newspapers; radio and daily newspapers; or television and cable television). These restrictions are subject to ongoing review by the FCC and, in some cases, by Congress. Pursuant to the Telecommunications Act of 1996 (the 1996 Act), permanent waivers can be sought for television and radio ownership in the top 50 markets, however. Also, the 1996 Act limits the television broadcast interests held by any person to assure that stations under common control do not exceed an aggregate national audience reach of 35 percent. Legislation is expected to be introduced in 1999 proposing an increase in this cap. Presently, the company's 21 television stations reach an aggregate of 16.7% of U.S. TV households. The FCC's consent to the company's December 1995 acquisition of control of five television stations and two radio stations owned by Multimedia, Inc. was conditioned on the company's compliance (within 12 months) with various FCC rules. In addition to trading two television stations for two other television stations and selling the radio stations, on Nov. 12, 1996, the company filed a request to extend its existing waiver for ownership of both the Macon and Atlanta TV stations. The FCC granted an interim extension on July 30, 1997; however, the company believes that upon completion of the FCC's ongoing review of its ownership rules, the company will be able to maintain ownership of both the Macon and Atlanta TV stations. The 1996 Act deregulated radio and television ownership rules to permit larger ownership groups and, in the top 50 television markets, more TV-radio combinations than were permitted under prior FCC rules. Also, competing applications will not be accepted at the time of license renewal, and will not be entertained at all unless the FCC first concludes that license renewal would not serve the public interest. FCC review of existing FCC Regulations to implement the 1996 Act continues as an ongoing process. Additional information about the company's television stations may be found on page 73 of this annual report. Cable On Dec. 27, 1998, the company's cable division, headquartered in Wichita, Kan., operated cable television systems serving 514,000 subscribers in Kansas, Oklahoma and North Carolina. The cable division was acquired on Dec. 4, 1995 as part of the Multimedia purchase. In August 1998, Multimedia Cablevision exchanged cable systems and assets serving approximately 128,000 subscribers in Kansas from TCI Communications, Inc., for its cable systems and assets serving approximately 93,000 subscribers in suburban Chicago. At the end of 1998, the cable division had approximately 1,100 full- time and part-time employees. Cable television is the distribution of a wide variety of television and special information programs over a network of fiber-optic and coaxial cable to subscribers within a community. The principal sources of the company's cable division revenues are: 1) monthly fees paid by subscribers for primary services generally consisting of local and distant broadcast stations and public, educational and governmental channels required by local franchising authorities and a variety of satellite-delivered entertainment and information channels; 2) monthly and per-event fees paid by subscribers for premium television services which provide special programs such as recently released movies, entertainment programs or selected sports events. Subscribers can receive these programs on a designated channel of the cable system which is restricted with electronic security devices to isolate the pay television signal so that only subscribers to the service can receive it; and 3) local advertising revenues. It is expected that a significant part of future cable revenue growth will be generated from new services such as high-speed Internet access, digital cable service, video on demand pay-per-view and a variety of data transmission applications. The company holds 171 franchises from local governing authorities which permit the company to operate cable systems in the granting communities. These franchises, which expire at varying dates ranging from one to 17 years, are generally non-exclusive and may be terminated for failure to comply with specified conditions. In most cases, the company is required to pay fees generally ranging from 3% to 5% of a system's revenues to the local governing authority granting a franchise. At the end of 1998, more than 75% of the company's subscribers were served under franchise agreements expiring in the year 2003 and beyond. -61- The following table shows certain cable division information as of the end of 1998, 1997 and 1996. 1998 1997 1996 -------- -------- -------- Homes passed 827,000 774,000 761,000 Basic subscribers 514,000 478,000 465,000 Pay subscribers 310,000 340,000 333,000 Basic penetration 62.2% 61.8% 61.1% Pay-to-basic ratio 60.3% 71.1% 71.6% Average monthly revenue per cable subscriber $38.85 $37.31 $35.00 The company's strategy is to develop clusters of cable television systems in suburban communities of major metropolitan markets and other areas with favorable demographics. Management believes clustering of cable systems produces operating, marketing and servicing efficiencies. Management believes that clustering also will enable the company to achieve efficiencies in the future deployment of new services such as video on demand and interactive multimedia. Properties: The company's cable systems and facilities are adequately equipped with the necessary cable equipment. Prior to acquisition by the company, the cable division began a major rebuild program to install fiber-optic cable and upgrade the technical capabilities of its cable systems. The rebuild program enhances services through improved picture quality and reliability and provides the ability to offer additional services to subscribers. The core rebuild program was completed in 1998. However, for systems acquired from TCI in 1998, upgrades are still in progress and are scheduled for completion in 2000. At Dec. 27, 1998, approximately 85% of the company's cable subscribers had advanced technical facilities (550MHZ to 750MHZ) capable of 80 and 110 channels of analog capacity, respectively. When the current rebuild program is completed, more than 98% of the company's customers will be served by advanced technical facilities. The rebuild plans include the future integration of digital compression and the installation of interactive converter boxes where they provide a direct financial return. The company estimates that approximately 50% of its subscribers might have the new converters within the next five years. The company believes its technological upgrades will prepare it for new competitors and potential revenue opportunities. Competition: The company's cable division competes with other companies and individuals in the submission of applications for additional franchises, in the renewal of existing franchises and in seeking to acquire operating cable systems and under-developed franchises. Since franchises are granted on a non-exclusive basis, other applicants may obtain franchises in areas where the company presently operates systems or holds franchises. The cable division competes with over-the-air television and radio broadcasting, newspapers, movie theaters, live entertainment and sporting events and home video products. Subscription television competition also includes expanding direct broadcast satellite services, multichannel, multipoint distribution services and private satellite master antenna television systems serving condominiums, apartment complexes and other private residential developments. The company's cable division competes for subscription revenues principally on the basis of quality of service, programming options and pricing. The cable division competes for advertising revenues principally on the basis of price and performance in helping sell the advertisers' products or services. Regulation: The cable television industry is subject to extensive federal, local and, in some cases, state regulation. The Cable Communications Policy Act of 1984 (the 1984 Act) and its amendments (the 1992 Act and the 1996 Act) govern cable television. The FCC has the principal federal responsibility for regulating cable matters, including rates, customer service, ownership, carriage of broadcast signals and other programming, technical matters, leased access, franchises and consumer equipment standards. FCC Regulations prohibit common ownership or control of a television station and a cable system in the station's Grade B signal coverage area. The 1992 Act requires mandatory carriage of certain local over- the-air television stations ("must-carry" rules) and allows television stations to prohibit the carriage of their programs by cable systems absent consent ("retransmission consent"). Television stations may elect either must-carry or retransmission consent on local cable systems. The company's cable systems have accommodated those stations electing mandatory carriage and have entered into retransmission consent agreements with others. The 1992 Act rate regulations apply to basic service (which includes broadcast signals) unless a cable system is subject to "effective competition." Most cable systems are subject to rate regulation. To regulate rates for basic service, local officials must follow detailed FCC guidelines and procedures. The 1992 Act also regulates non-basic (cable programming) rates. FCC rules also limit rates for consumer equipment. The rules permit cable companies periodic rate increases for inflation and certain external costs. Rates for per-channel or per- program premium services are not subject to regulation. -62- The 1984 Act requires a cable operator to obtain a franchise prior to instituting service, and state and local officials become involved in cable operator selection, system design and construction, safety, rates, consumer services and community programming issues. Franchising authorities may not award an exclusive franchise or unreasonably deny a competitive franchise. Local authorities may operate their own cable system, though, notwithstanding the existence of a cable franchise. The 1984 Act permits local authorities to charge up to 5% of revenues per year as a franchising fee and to require certain public cable channels. The 1984 Act provides an incumbent cable operator with protections against denial of its franchise renewal, including the right to a fair hearing and a right of appeal. Nevertheless, franchise renewal is not assured. Upon renewal, new or more onerous requirements may occur, such as upgrading of facilities and services or higher franchising fees. Cable systems are subject to federal copyright licensing in connection with the carriage of television signals, and they receive blanket permission to retransmit copyrighted material in exchange for royalty payments. The amount of the royalty payments varies. While the present rate structure for basic tiers has been retained, the 1996 Act deregulates rates for non-basic services for the company's cable systems, effective March 31, 1999. However, Congress has indicated that this date may be revisited. Deregulation of rates also will occur immediately where a telephone company enters the cable franchising area and offers comparable video programming. Telephone companies and cable operators in the same market are prohibited from entering into joint ventures to provide programming or telecommunication services directly to subscribers. Telephone companies and cable operators each are prohibited from acquiring more than a 10% financial interest, or any management interest, in the other's operations in its service area. For certain small and/or rural service areas, telephone or cable companies may acquire an interest in the other in its service area, however. Corporate facilities The company leases office space for its headquarters in Arlington, Va., and also owns data processing facilities in nearby Maryland. The capital expenditure program for 1996, 1997 and 1998 included amounts for leasehold improvements, land, building, furniture, equipment and fixtures for headquarters operations. Headquarters facilities are adequate for present operations. In September 1996, the company purchased 30 acres of land in Fairfax County, Va., for use as a future site for corporate headquarters. Building construction is scheduled to begin in 1999 and be completed in 2001. Employee relations At the end of 1998, the company and its subsidiaries had 39,400 full- time and part-time employees. On the basis of hours worked, the company employed the equivalent of 35,000 full-time employees. Four of the company's newspapers were published in 1998 together with non-company newspapers pursuant to joint operating agreements, and the employment numbers above include the company's pro-rata share of employees at those joint production and business operations. Approximately 12% of those employed by the company and its subsidiaries are represented by labor unions. They are represented by 86 local bargaining units affiliated with nine international unions under collective bargaining agreements. These agreements conform generally with the pattern of labor agreements in the newspaper and broadcasting industries. The company does not engage in industrywide or companywide bargaining. The company strives to maintain good relationships with its employees. On July 13, 1995, approximately 2,500 workers from six unions began a strike against the company's largest local newspaper, The Detroit News, the Detroit Newspaper Agency and the Detroit Free Press, its agency partner. The strike was precipitated by unrealistic and excessive demands by the unions for wage increases and position levels. The strike ended in mid-February 1997 when the six striking unions made an unconditional offer to return to work. They continue to attempt a subscriber and advertiser boycott. Throughout the strike and despite union efforts at stopping delivery of the newspapers through intimidation and frequent violence, the newspapers published every day. More than 800 of the original strikers have now returned to work and approximately 900 replacement workers have been employed to fill other necessary positions. Litigation before the National Labor Relations Board and in the federal courts concerning the strike and its aftermath continues. In February 1999, a 10-year agreement was reached with the Detroit Typographical Union, one of the unions previously on strike, under which its members will work at the Detroit Newspapers. The company provides competitive group life and medical insurance programs for full-time employees at each location. The company pays a substantial portion of these costs and employees contribute the balance. Virtually all of the company's units provide retirement or profit-sharing plans which cover eligible full-time employees. In 1990, the company established a 401(k) Savings Plan, which is available to most of its non-union employees. -63- Acquisitions 1994-1998 The growth of the company has resulted from acquisitions of businesses, as well as from internal expansion. Its significant acquisitions since the beginning of 1994 are shown below. The company has disposed of several businesses during this period, which are presented on the following page.
Year Publication times acquired Name Location or business - -------- ------------------------ -------------- ----------------- 1994 Nursing Spectrum Various Biweekly periodicals Altoona Herald - Altoona, Iowa Weekly; Weekly Mitchellville Index and advertising shopper the Eastern ADvantage KTHV-TV Little Rock, Ark. Television station 1995 Multimedia, Inc. Greenville, S.C. Ten daily newspapers, various non-dailies, five television stations, two radio stations, cable television franchises in five states, alarm security business, television entertainment programming 1996 WTSP-TV Tampa-St. Television station Petersburg, Fla. 1997 WZZM-TV Grand Rapids, Mich. Television station WGRZ-TV Buffalo, N.Y. Television station Printed Media Companies Minneapolis, Minn. Commercial printing KNAZ-TV Flagstaff, Ariz. Television station KMOH-TV Kingman, Ariz. Television station Mary Morgan, Inc. Green Bay, Wis. Commercial printing Army Times Publishing Co., Inc. Springfield, Va. Weekly and Monthly periodicals New Jersey Press, Inc. Asbury Park and East Brunswick, N.J. Two daily newspapers 1998 WCSH-TV Portland, Maine Television station WLBZ-TV Bangor, Maine Television station WLTX-TV Columbia, S.C. Television station Ocean County Observer Toms River, N.J. Daily newspaper Daily Record Morristown, N.J. Daily newspaper Manahawkin Newspapers Manahawkin, N.J. Weekly newspapers Classified Gazette San Rafael, Calif. Semi-weekly newspaper New Castle County Shopper's Guide Wilmington, Del. Weekly advertising shopper Brandywine Valley Weekly Wilmington, Del. Weekly advertising shopper Autos plus Wilmington, Del. Weekly advertising shopper TCI Cable Kansas Kansas Cable television systems
-64- Dispositions 1994-1998
Year Publication times disposed Name Location or business - -------- ------------------------ -------------- ----------------- 1994 The Stockton Record Stockton, Calif. Daily and Sunday 1995 The Add Sheet Columbia, Mo. Weekly advertising shopper 1996 WMAZ/WAYS-FM Macon, Ga. Radio stations Gannett Outdoor Group Various major Outdoor advertising markets, U.S. and Canada Multimedia Entertainment New York, N.Y. Television enter- tainment programming Louis Harris and Associates, Inc. New York, N.Y. Polling and research Gannett Community Directories Paramus, N.J. Community directories KIIS/KIIS-FM Los Angeles, Calif. Radio stations KSDO/KKBH-FM San Diego, Calif. Radio stations WDAE/WUSA-FM Tampa, Fla. Radio stations 1997 WLWT-TV Cincinnati, Ohio Television station KOCO-TV Oklahoma City, Okla. Television station Niagara Gazette Niagara Falls, N.Y. Daily newspaper The Observer Moultrie, Ga. Daily newspaper North Hills News Record North Hills, Pa. Daily newspaper Valley News Dispatch Tarentum, Pa. Daily newspaper 1998 The Virgin Islands Daily News St. Thomas, V.I. Daily newspaper WGCI/WGCI-FM Chicago, Ill. Radio stations KKBQ/KKBQ-FM Houston, Texas Radio stations KHKS-FM Dallas, Texas Radio station The Saratogian Saratoga Springs, N.Y. Daily newspaper Multimedia Security Service Wichita, Kan. Alarm security business Commercial-News Danville, Ill. Daily newspaper Chillicothe Gazette Chillicothe, Ohio Daily newspaper Gallipolis Daily Tribune Gallipolis, Ohio Daily newspaper The Daily Sentinel Pomeroy, Ohio Daily newspaper Point Pleasant Register Point Pleasant, W.Va. Daily newspaper Multimedia Cable Illinois Suburban Chicago, Ill. Cable television systems -65-
QUARTERLY STATEMENTS OF INCOME In thousands of dollars
Fiscal year ended December 27, 1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ----------- ----------- ----------- ----------- ----------- Net operating revenues Newspaper advertising $ 669,994 $ 746,675 $ 707,347 $ 818,979 $2,942,995 Newspaper circulation 254,079 252,762 251,534 251,863 1,010,238 Broadcasting 160,692 198,799 159,125 202,682 721,298 Cable and security 64,062 57,228 58,231 61,079 240,600 All other 51,083 48,673 49,825 56,579 206,160 ----------- ----------- ----------- ----------- ----------- Total 1,199,910 1,304,137 1,226,062 1,391,182 5,121,291 ----------- ----------- ----------- ----------- ----------- Operating expenses Cost of sales and operating expenses, exclusive of depreciation 642,980 646,755 648,320 655,927 2,593,982 Selling, general and administrative expenses, exclusive of depreciation 189,206 190,905 188,076 205,414 773,601 Depreciation 53,030 50,365 49,878 48,410 201,683 Amortization of intangible assets 26,451 26,253 27,122 28,697 108,523 ----------- ----------- ----------- ----------- ----------- Total 911,667 914,278 913,396 938,448 3,677,789 ----------- ----------- ----------- ----------- ----------- Operating income 288,243 389,859 312,666 452,734 1,443,502 Non-operating (expense) income Interest expense (23,229) (20,348) (17,190) (18,645) (79,412) Other 307,356(2) 2,498 (877) (3,654) 305,323(2) ----------- ----------- ----------- ----------- ----------- Total 284,127 (17,850) (18,067) (22,299) 225,911 ----------- ----------- ----------- ----------- ----------- Income before income taxes 572,370 372,009 294,599 430,435 1,669,413 Provision for income taxes 229,520 149,200 118,080 172,700 669,500 ----------- ----------- ----------- ----------- ----------- Net income $ 342,850(2) $ 222,809 $ 176,519 $ 257,735 $ 999,913(2) =========== =========== =========== =========== =========== Net income per share - basic $1.21(2) $0.78 $0.62 $0.92 $3.53(2) =========== =========== =========== =========== =========== Net income per share - diluted (1) $1.20(2) $0.78 $0.62 $0.92 $3.50(2) =========== =========== =========== =========== =========== (1) As a result of rounding, the total of the four quarters' earnings per share does not equal the earnings per share for the year. (2) Includes first quarter net gain on sale of certain businesses, including radio and alarm security ($307 million pre-tax, $184 million after tax, $.65 per share-basic and $.64 per share-diluted).
-66- QUARTERLY STATEMENTS OF INCOME In thousands of dollars
Fiscal year ended December 28, 1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total ----------- ----------- ----------- ----------- ----------- Net operating revenues Newspaper advertising $ 593,552 $ 656,306 $ 633,019 $ 751,457 $2,634,334 Newspaper circulation 233,370 232,237 235,439 247,095 948,141 Broadcasting 150,606 189,245 164,895 198,812 703,558 Cable and security 61,546 64,363 63,502 65,852 255,263 All other 37,683 45,676 49,235 55,601 188,195 ----------- ----------- ----------- ----------- ----------- Total 1,076,757 1,187,827 1,146,090 1,318,817 4,729,491 ----------- ----------- ----------- ----------- ----------- Operating expenses Cost of sales and operating expenses, exclusive of depreciation 566,522 575,646 602,418 623,986 2,368,572 Selling, general and administrative expenses, exclusive of depreciation 174,791 179,787 184,092 204,908 743,578 Depreciation 49,782 49,976 49,979 51,363 201,100 Amortization of intangible assets 24,842 24,898 24,900 25,333 99,973 ----------- ----------- ----------- ----------- ----------- Total 815,937 830,307 861,389 905,590 3,413,223 ----------- ----------- ----------- ----------- ----------- Operating income 260,820 357,520 284,701 413,227 1,316,268 Non-operating (expense) income Interest expense (25,618) (24,783) (23,418) (24,423) (98,242) Other (5,088) (1,004) (1,573) (1,382) (9,047) ----------- ----------- ----------- ----------- ----------- Total (30,706) (25,787) (24,991) (25,805) (107,289) ----------- ----------- ----------- ----------- ----------- Income before income taxes 230,114 331,733 259,710 387,422 1,208,979 Provision for income taxes 95,050 137,000 107,250 157,000 496,300 ----------- ----------- ----------- ----------- ----------- Net income $ 135,064 $ 194,733 $ 152,460 $ 230,422 $ 712,679 =========== =========== =========== =========== =========== Net income per share - basic $0.48 $0.69 $0.54 $0.81 $2.52 =========== =========== =========== =========== =========== Net income per share - diluted (1) $0.48 $0.68 $0.53 $0.80 $2.50 =========== =========== =========== =========== =========== (1) As a result of rounding, the total of the four quarters' earnings per share does not equal the earnings per share for the year.
-67- SCHEDULES TO FORM 10-K INFORMATION In thousands of dollars Property, plant & equipment
Balance at beginning Additions Retirements Other Balance at end Classification of period at cost or sales changes of period - -------------------------------- -------------- ------------------------- -------------- ---------------- -------------- Dec. 29, 1996 Land $ 138,601 $ 47,982 $11,067 $ (678) $ 174,838 Buildings & improvements 739,510 54,419 28,455 4,982 770,456 Cable and security systems and advertising display structures 665,471 91,953 276,162 (209) 481,053 Machinery, equipment & fixtures 1,894,893 150,005 114,865 (3,975) 1,926,058 Construction in progress and deposits on contracts 121,191 (50,696) (913) (413) 70,995 -------------- ------------------------- -------------- ---------------- -------------- $3,559,666 $293,663 (A)(E) $429,636 $ (293) (D) $3,423,400 ============== ========================= ============== ================ ============== Dec. 28, 1997 Land $ 174,838 $ 2,544 $ 1,435 $ (63) $ 175,884 Buildings & improvements 770,456 73,581 7,265 3,385 840,157 Cable and security systems 481,053 76,574 13,383 3,975 548,219 Machinery, equipment & fixtures 1,926,058 260,814 46,508 (216) 2,140,148 Construction in progress and deposits on contracts 70,995 3,637 17,122 (7,081) 50,429 -------------- ------------------------- -------------- ---------------- -------------- $3,423,400 $417,150 (B)(E) $ 85,713 $ 0 $3,754,837 ============== ========================= ============== ================ ============== Dec. 27, 1998 Land $ 175,884 $7,769 $ 987 $(1,880) $180,786 Buildings & improvements 840,157 10,022 13,790 2,821 839,210 Cable and security sytems 548,219 24,218 159,634 256 413,059 Machinery, equipment & fixtures 2,140,148 126,006 140,424 (2,262) 2,123,468 Construction in progress and deposits on contracts 50,429 58,859 133 1,065 110,220 -------------- ------------------------- -------------- ---------------- -------------- $3,754,837 $226,874 (C)(E) $ 314,968 $ 0 $3,666,743 ============== ========================= ============== ================ ============== Notes (A) Includes assets at acquisition net of adjustments for prior years' acquisitions $ 33,616 (B) Includes assets at acquisition net of adjustments for prior years' acquisitions $ 195,899 (C) Includes assets at acquisition net of adjustments for prior years' acquisitions $ (17,551) (D) Principally the effect of current foreign currency translation adjustment. (E) Includes capitalized interest of $3,643 in 1996, $1,624 in 1997 and $1,610 in 1998. (F) Generally the rates of depreciation range from 2.5% to 10% for buildings and improvements, 3.3% to 20% for cable and security systems and 4% to 30% for machinery, equipment and fixtures. (G) Includes depreciation expense reflected with earnings from discontinued operations of $10,676 in 1996.
-68- SCHEDULES TO FORM 10-K INFORMATION In thousands of dollars Accumulated depreciation and amortization of property, plant and equipment
Balance at Additions charged beginning to costs Retirements Other Balance at end of period and expenses or sales changes of period - -------------------------------- -------------- ------------------------- -------------- ---------------- -------------- Dec. 29, 1996 Buildings and improvements $ 295,233 $ 25,103 $ 15,139 $(4,422) $ 300,775 Cable and security systems and advertising display structures 161,946 25,761 169,625 14,515 32,597 Machinery, equipment and fixtures 1,031,800 152,823 87,239 (1,416) 1,095,968 -------------- ------------------------- -------------- ---------------- -------------- $1,488,979 $203,687 (F)(G) $272,003 $ 8,677 (D) $1,429,340 ============== ========================= ============== ================ ============== Dec. 28, 1997 Buildings and improvements $ 300,775 $ 24,396 $ 5,148 $ 4,057 $ 324,080 Cable and security systems 32,597 60,377 5,976 (3,892) 83,106 Machinery, equipment and fixtures 1,095,968 116,327 56,521 (165) 1,155,609 -------------- ------------------------- -------------- ---------------- -------------- $1,429,340 $201,100 (F) $ 67,645 $ 0 $1,562,795 ============== ========================= ============== ================ ============== Dec. 27, 1998 Buildings and improvements $ 324,080 $ 25,434 $ 12,941 $9,318 $ 345,891 Cable and security systems 83,106 31,134 36,369 (196) 77,675 Machinery, equipment and fixtures 1,155,609 145,115 112,208 (9,122) 1,179,394 -------------- ------------------------- -------------- ---------------- -------------- $1,562,795 $201,683 (F) $161,518 $ 0 $1,602,960 ============== ========================= ============== ================ ============== (D)(F) and (G) See page 68
Valuation and qualifying accounts
Balance at Additions charged Additions/(reductions) Allowance for doubtful beginning to costs for acquisitions/ Deductions Balance at end receivables of period and expenses dispositions from reserves of period -------------- ------------------ ---------------------- ---------------- -------------- Year ended Dec. 29, 1996 $22,182 $22,847 $(1,706) $24,381 $18,942 Year ended Dec. 28, 1997 $18,942 $22,333 $ 618 $23,873 $18,020 Year ended Dec. 27, 1998 $18,020 $22,077 $(1,240) $19,714 $19,143
Supplementary income statement information (from continuing operations)
Fiscal year ended Dec. 27, 1998 Dec. 28, 1997 Dec. 29, 1996 ------------------ --------------- ---------------- Maintenance and repairs $48,511 $50,631 $47,879 Taxes other than payroll and income tax Property $24,474 $20,426 $19,344 Other $ 9,118 $10,601 $10,120 ------------------ --------------- ---------------- Total $33,592 $31,027 $29,464 ------------------ --------------- ----------------
-69- MARKETS WE SERVE NEWSPAPERS AND NEWSPAPER DIVISION
Daily newspapers State Circulation Circulation Circulation Joined Territory City Newspaper Morning Afternoon Sunday Founded Gannett * - -------------- --------------------- ------------------------------- ----------- ------------ ----------- ------- ------------- Alabama Montgomery The Montgomery Advertiser 56,310 71,436 1829 1995 (66) Arizona Tucson Tucson Citizen 42,452 1870 1976 (32) Arkansas Mountain Home The Baxter Bulletin 10,927 1901 1995 (67) California Marin County Marin Independent Journal 40,906 41,756 1861 1980 (50) Palm Springs The Desert Sun 50,240 52,584 1927 1986 (60) Salinas The Californian 19,626 1871 1977 (38) San Bernardino The San Bernardino County Sun** 78,505 86,228 1894 1969 (11) Tulare Tulare Advance-Register 8,263 1882 1993 (65) Visalia Visalia Times-Delta 22,033 1859 1977 (39) Colorado Fort Collins Fort Collins Coloradoan 29,324 36,328 1873 1977 (40) Connecticut Norwich Norwich Bulletin 31,656 37,738 1791 1981 (53) Delaware Wilmington The News Journal 125,882 148,921 1871 1978 (45) Florida Brevard County FLORIDA TODAY 88,752 112,418 1966 1966 ( 9) Fort Myers News-Press 89,812 107,800 1884 1971 (25) Pensacola Pensacola News Journal 62,919 83,613 1889 1969 (12) Georgia Gainesville The Times 22,444 26,847 1947 1981 (52) Guam Agana Pacific Daily News 24,307 23,708 1944 1971 (24) Hawaii Honolulu The Honolulu Advertiser 106,870 190,366 1856 1993 (64) Idaho Boise The Idaho Statesman 65,816 87,424 1864 1971 (17) Illinois Rockford Rockford Register Star 72,858 84,994 1855 1967 (10) Indiana Lafayette Journal and Courier 37,119 44,474 1829 1971 (18) Marion Chronicle-Tribune 19,934 22,559 1867 1971 (21) Richmond Palladium-Item 19,588 23,624 1831 1976 (31) Iowa Des Moines The Des Moines Register 161,888 263,737 1849 1985 (57) Iowa City Iowa City Press-Citizen 15,379 1860 1977 (42) Kentucky Louisville The Courier-Journal 230,008 307,407 1868 1986 (62) Louisiana Monroe The News-Star 38,125 42,926 1890 1977 (44) Shreveport The Times 75,886 93,305 1871 1977 (43) Michigan Battle Creek Battle Creek Enquirer 26,176 35,359 1900 1971 (19) Detroit The Detroit News 242,915 1873 1986 (59) The Detroit News and Free Press 802,934 Lansing Lansing State Journal 70,329 92,303 1855 1971 (16) Port Huron Times Herald 31,143 42,794 1900 1970 (13) Minnesota St. Cloud St. Cloud Times 28,406 38,218 1861 1977 (37) Mississippi Hattiesburg Hattiesburg American 23,922 28,367 1897 1982 (55) Jackson The Clarion-Ledger 106,793 126,479 1837 1982 (54) Missouri Springfield Springfield News-Leader 65,278 97,928 1893 1977 (36) Montana Great Falls Great Falls Tribune 33,835 39,779 1885 1990 (63) Nevada Reno Reno Gazette-Journal 67,405 83,801 1870 1977 (33) New Jersey Asbury Park Asbury Park Press 157,639 223,879 1879 1997 (72) Bridgewater The Courier-News 43,667 43,957 1884 1927 (4) Cherry Hill Courier-Post 86,467 99,597 1875 1959 (7) East Brunswick Home News Tribune 73,236 79,991 1879 1997 (73) Morristown Daily Record 49,457 54,755 1900 1998 (74) Toms River Ocean County Observer 13,992 13,333 1850 1998 (75) Vineland The Daily Journal 17,274 1864 1986 (61) New York Binghamton Press & Sun-Bulletin 64,396 82,295 1904 1943 (6) Elmira Star-Gazette 31,193 43,900 1828 1906 (1) Ithaca The Ithaca Journal 19,207 1815 1912 (2) Poughkeepsie Poughkeepsie Journal 42,752 57,101 1785 1977 (35) Rochester Rochester Democrat and Chronicle 175,920 244,181 1833 1928 (5) Utica Observer-Dispatch 48,969 59,489 1817 1922 (3) Westchester County The Journal News 150,822 179,054 1829 1964 ( 8) North Carolina Asheville Asheville Citizen-Times 60,264 72,459 1870 1995 (68) Ohio Cincinnati The Cincinnati Enquirer 206,874 331,549 1841 1979 (46) Fremont The News-Messenger 14,033 1856 1975 (29) Marietta The Marietta Times 12,544 1864 1974 (28) Port Clinton News Herald 5,994 1864 1975 (30) Oklahoma Muskogee Muskogee Daily Phoenix and Times-Democrat 19,856 20,772 1888 1977 (41) Oregon Salem Statesman Journal 61,047 68,438 1851 1974 (27) Pennsylvania Chambersburg Public Opinion 21,474 1869 1971 (15) Lansdale The Reporter 19,354 1870 1980 (51) South Carolina Greenville The Greenville News 97,973 133,766 1874 1995 (69) South Dakota Sioux Falls Argus Leader 52,007 73,344 1881 1977 (34) Tennessee Clarksville The Leaf-Chronicle 20,776 25,283 1808 1995 (70) Jackson The Jackson Sun 40,333 44,903 1848 1985 (58) Nashville The Tennessean 180,531 272,221 1812 1979 (47) Texas El Paso El Paso Times 81,683 98,950 1879 1972 (26) Vermont Burlington The Burlington Free Press 51,661 62,864 1827 1971 (14) Virginia Arlington USA TODAY 2,271,767 1982 1982 (56) Staunton The Daily News Leader 18,324 21,933 1904 1995 (71) Washington Bellingham The Bellingham Herald 27,226 34,155 1890 1971 (22) Olympia The Olympian 39,704 46,510 1889 1971 (20) West Virginia Huntington The Herald-Dispatch 38,790 44,463 1909 1971 (23) Wisconsin Green Bay Green Bay Press-Gazette 60,990 86,194 1915 1980 (48) Wausau Wausau Daily Herald 24,321 31,647 1903 1980 (49) * Number in parentheses notes chronological order in which existing newspapers joined Gannett. ** On March 3, 1999, the company entered into an agreement to transfer The San Bernadino County Sun to a partnership of California newspapers in exchange for a partnership interest.
Army Times Publishing Co. Headquarters: Springfield, Va. Publications: Army Times, Navy Times, Marine Corps Times, Air Force Times, Federal Times, Defense News, Space News, Military Market Nursing Spectrum Offices: Falls Church, Va. (serving Washington, D.C./Baltimore); Barrington, Ill. (serving Illinois and Indiana); Ft. Lauderdale, Fla. (serving Ft. Lauderdale and Tampa); King of Prussia, Pa. (serving Philadelphia and the Delaware Valley); Westbury, N.Y. (serving New York and New Jersey); Lexington, Mass. (serving New England states) Non-daily publications Weekly, semi-weekly or monthly publications in Alabama,Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Guam, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri,Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, Wisconsin and Juarez, Mexico. USA WEEKEND Circulation 21.2 million in 541 newspapers Headquarters: Arlington, Va. Advertising offices: Chicago; Detroit; Los Angeles; New York Gannett Media Technologies International Cincinnati, Ohio Gannett Offset Headquarters: Springfield, Va. Offset sites: Atlanta; Chandler, Ariz.; Minneapolis, Minn.; Miramar, Fla.; Nashville, Tenn.; Norwood, Mass.; Olivette, Mo.; Pensacola, Fla.; Springfield, Va. Gannett Offset Marketing Services Group Gannett Direct Marketing Services, Inc. Louisville, Ky. Gannett TeleMarketing, Inc. Headquarters: Springfield, Va. Operations: Cincinnati, Ohio; Louisville, Ky.; Nashville, Tenn.; Silver Spring, Md. Telematch Springfield, Va. Gannett Retail Advertising Group Chicago Gannett Satellite Information Network Arlington, Va. Gannett News Service Headquarters: Arlington, Va. Bureaus: Albany, N.Y.; Baton Rouge, La.; Columbus, Ohio; Harrisburg, Pa.; Indianapolis, Ind.; Olympia, Wash.; Sacramento, Calif.; Springfield, Ill.; Tallahassee, Fla. - 70, 71, 72 - USA TODAY Headquarters: Arlington, Va. Print sites: Arlington, Texas; Atlanta; Batavia, N.Y.; Brevard County, Fla.; Chandler, Ariz.; Chicago; Columbia, S.C.; Fort Collins, Colo.; Fort Myers, Fla.; Gainesville, Ga.; Hattiesburg, Miss.; Kankakee, Ill.; Lawrence, Kan.; Mansfield, Ohio; Marin County, Calif.; Miramar, Fla.; Nashville, Tenn.; Newark, Ohio; Norwood, Mass.; Olympia, Wash.; Pasadena, Texas; Port Huron, Mich.; Richmond, Ind.; Rockaway, N.J.; St. Cloud, Minn.; St. Louis; Salisbury, N.C.; Salt Lake City; San Bernardino, Calif.; Springfield, Va.; Tarentum, Pa.; White Plains, N.Y.; Wilmington, Del. International print sites: Frankfurt, Germany; Hong Kong; London, England Regional offices: Atlanta; Boston; Buffalo, N.Y.; Charlotte, N.C.; Chicago; Cincinnati; Cleveland; Columbus, Ohio; Dallas; Denver; Detroit; Houston; Indianapolis; Kansas City, Mo.; Los Angeles; Milwaukee; Minneapolis-St. Paul; Miramar, Fla.; Mountainside, N.J.; Nashville, Tenn.; New Orleans; Orlando, Fla.; Philadelphia; Phoenix, Ariz.; Pittsburgh; Port Washington, N.Y.; St. Louis; San Francisco; Seattle; Springfield, Va. International offices: Hong Kong; London, England; Paris, France; Singapore Advertising offices: Arlington, Va.; Atlanta; Chicago; Dallas; Detroit; London, England; Los Angeles; New York; San Francisco USA TODAY Baseball Weekly Circulation 296,000 Editorial and advertising offices Arlington, Va. USA TODAY.com Arlington, Va. BROADCASTING AND CABLE DIVISIONS Television stations
** Weekly Joined State City Station Channel/Network Audience Founded Gannett - ---------------- --------------------- ------------ ----------------- ----------- -------- ------- Arizona Flagstaff KNAZ-TV Channel 2/NBC 63,000 1970 1997 Kingman KMOH-TV Channel 6/WB * 1988 1997 Phoenix KPNX-TV Channel 12/NBC 1,123,000 1953 1979 Arkansas Little Rock KTHV-TV Channel 11/CBS 406,000 1955 1994 Colorado Denver KUSA-TV Channel 9/NBC 1,233,000 1952 1979 District of Columbia Washington WUSA-TV Channel 9/CBS 1,953,000 1949 1986 Florida Jacksonville WTLV-TV Channel 12/NBC 463,000 1957 1988 Tampa-St. Petersburg WTSP-TV Channel 10/CBS 1,211,000 1965 1996 Georgia Atlanta WXIA-TV Channel 11/NBC 1,503,000 1948 1979 Macon WMAZ-TV Channel 13/CBS 205,000 1953 1995 Maine Bangor WLBZ-TV Channel 2/NBC 126,000 1954 1998 Portland WCSH-TV Channel 6/NBC 345,000 1953 1998 Michigan Grand Rapids WZZM-TV Channel 13/ABC 419,000 1962 1997 Minnesota Minneapolis-St. Paul KARE-TV Channel 11/NBC 1,301,000 1953 1983 Missouri St. Louis KSDK-TV Channel 5/NBC 1,050,000 1947 1995 New York Buffalo WGRZ-TV Channel 2/NBC 499,000 1954 1997 North Carolina Greensboro WFMY-TV Channel 2/CBS 575,000 1949 1988 Ohio Cleveland WKYC-TV Channel 3/NBC 1,357,000 1948 1995 South Carolina Columbia WLTX-TV Channel 19/CBS 260,000 1953 1998 Tennessee Knoxville WBIR-TV Channel 10/NBC 411,000 1956 1995 Texas Austin KVUE-TV*** Channel 24/ABC 382,000 1971 1986 * Audience numbers fall below minimum reporting standards. ** Weekly audience for television stations is number of TV households reached, according to the November 1998 Nielsen book. *** On Feb. 25, 1999, Gannett announced an agreement with A.H. Belo Corporation to acquire KXTV at Sacramento/Stockton/Modesto, Calif., and to receive other consideration in exchange for KVUE-TV. The transaction is subject to FCC approval.
Multimedia Cablevision Co. Headquarters: Wichita, Kan. Regional offices: Edmond, Okla.; Rocky Mount, N.C.; Wichita, Kan. -73- Gannett on the Net News and information about Gannett is available on our Web site, www.gannett.com. The following Gannett properties also offer online services or informational sites on the Internet: Newspapers and Newspaper Division USA TODAY www.usatoday.com USA WEEKEND www.usaweekend.com Asbury Park (N.J.) Press www.injersey.com/app Asheville (N.C.) Citizen-Times www.carolinamountains.com The Bellingham (Wash.) Herald www.bellinghamherald.com Press & Sun-Bulletin, Binghamton, N.Y. www.pressconnects.com FLORIDA TODAY, Brevard County www.flatoday.com The Courier-News, Bridgewater, N.J. www.injersey.com/c-n The Idaho Statesman, Boise www.idahostatesman.com The Burlington (Vt.) Free Press www.burlingtonfreepress.com Courier-Post, Cherry Hill, N.J. www.courierpostonline.com The Cincinnati Enquirer enquirer.com The Des Moines Register www.dmregister.com The Detroit News detnews.com Home News Tribune, East Brunswick, N.J. www.injersey.com/hnt Star-Gazette, Elmira, N.Y. www.star-gazette.com El Paso (Texas) Times www.elpasotimes.com Fort Collins Coloradoan www.coloradoan.com News-Press, Fort Myers, Fla. www.southwestfloridaonline.com Green Bay (Wis.) Press-Gazette www.greenbaypressgazette.com The Greenville (S.C.) News greenvilleonline.com The Honolulu Advertiser www.surfhawaii.com The Herald-Dispatch, Huntington, W.Va. www.hdonline.com The Clarion-Ledger, Jackson, Miss. www.clarionledger.com Journal and Courier, Lafayette, Ind. www.jconline.com Lansing (Mich.) State Journal www.lansingstatejournal.com The Courier-Journal, Louisville, Ky. www.courier-journal.com Marin (County, Calif.) Independent Journal www.marinij.com The Montgomery (Ala.) Advertiser www.accessmontgomery.com Daily Record, Morristown, N.J. www.dailyrecord.com The Tennessean, Nashville www.tennessean.com The Olympian, Olympia, Wash. www.theolympian.com The Desert Sun, Palm Springs, Calif. www.desertsunonline.com Pensacola (Fla.) News Journal www.gulfcoastgateway.com Poughkeepsie (N.Y.) Journal www.pojonews.com NevadaNet (Reno Gazette-Journal) www.nevadanet.com Rochester (N.Y.) Democrat and Chronicle www.DemocratandChronicle.com Rockford (Ill.) Register Star www.rrstar.com *San Bernadino County (Calif.) Sun www.sbcsun.com Argus Leader, Sioux Falls, S.D. www.argusleader.com St. Cloud (Minn.) Times www.sctimes.com Statesman Journal, Salem, Ore. www.statemansjournal.com The Times, Shreveport, La. www.nwlouisiana.com Springfield (Mo.) News-Leader www.ozarksgateway.com Ocean County Observer, Toms River, N.J. www.injersey.com/app/ocean Tucscon (Ariz.) Citizen www.tucsoncitizen.com The Journal News, Westchester County, N.Y. www.nyjournalnews.com The News Journal, Wilmington, Del. www.delawareonline.com Army Times www.armytimes.com Navy Times www.navytimes.com Marine Corps Times www.marinetimes.com Air Force Times www.airforcetimes.com Federal Times www.federaltimes.com Defense News www.defensenews.com Space News www.spacenews.com Miltary City www.militarycity.com Nursing Spectrum www.nursingspectrum.com Gannett Direct Marketing Services www.gdms.com Gannett Media Technologies International www.gmti.com Broadcasting and Cable WXIA-TV, Atlanta www.11alive.com ** KVUE-TV, Austin, Texas www.kvue.com WLBZ-TV, Bangor, Maine www.wlbz.com KUSA-TV, Denver www.9news.com WTLV-TV, Jacksonville, Fla. www.wtlv.com WMAZ-TV, Macon, Ga. www.13wmaz.com KARE-TV, Minneapolis-St. Paul www.kare11.com WTSP-TV, Tampa-St. Petersburg, Fla. www.wtsp.com WUSA-TV, Washington, D.C. www.wusatv9.com Multimedia Cablevision www.mmckansas.com and www.mmcoklahoma.com * On March 3, 1999, the company entered into an agreement to transfer The San Bernadino County Sun to a partnership of California newspapers in exchange for a partnership interest. ** On Feb. 25, 1999, Gannett announced an agreement with A.H. Belo Corporation to acquire KXTV at Sacramento/Stockton/Modesto, Calif., and to receive other consideration in exchange for KVUE-TV. The transaction is subject to FCC approval. -74- Shareholder Services Gannett stock Gannett Co., Inc. shares are traded on the New York Stock Exchange with the symbol GCI. The company's transfer agent and registrar is Norwest Bank Minnesota, N.A. General inquiries and requests for enrollment materials for the programs described below should be directed to Norwest's Shareowner Services,P.O. Box 64854, St. Paul, MN 55164-0854 or by telephone at 1-800-778-3299. Gannett is pleased to offer the following shareholder services: Dividend reinvestment plan The Dividend Reinvestment Plan (DRP) provides Gannett shareholders the opportunity to purchase additional shares of the Company's common stock free of brokerage fees or service charges through automatic reinvestment of dividends and optional cash payments. Cash payments may range from a minimum of $10 to a maximum of $5,000 per month. Automatic cash investment service for the DRP This service provides a convenient, no-cost method of having money automatically withdrawn from your checking or savings account each month and invested in Gannett stock through your DRP account. Direct deposit service Gannett shareholders may have their quarterly dividends electronically credited to their checking or savings accounts on the payment date at no additional cost. Form 10-K Information provided by Gannett in its Form 10-K annual report to the Securities and Exchange Commission has been incorporated in this report. Copies of the complete Form 10-K annual report may be obtained by writing the Secretary, Gannett Co., Inc., 1100 Wilson Blvd., Arlington, VA 22234. Annual meeting The annual meeting of shareholders will be held at 10 a.m. Tuesday, May 4, 1999 at Gannett headquarters. For more information News and information about Gannett is available on our Web site (www.gannett.com). Quarterly earnings information will be available around the middle of April, July and October 1999. Shareholders who wish to contact the Company directly about their Gannett stock should call Shareholder Services at Gannett headquarters, 703-284-6960. Gannett Headquarters 1100 Wilson Boulevard Arlington, VA 22234 703-284-6000 -76- EX-21 3 EXH. 21 SUBSIDIARY LIST SUBSIDIARY LIST State of Subsidiary Incorporation THE ADVERTISER COMPANY ALABAMA ARKANSAS TELEVISION COMPANY ARKANSAS ARMY TIMES PUBLISHING COMPANY DELAWARE ASBURY PARK PRESS INC. NEW JERSEY BAXTER COUNTY NEWSPAPERS, INC. ARKANSAS CALIFORNIA NEWSPAPERS, INC. CALIFORNIA CAPE PUBLICATIONS, INC. KENTUCKY CITIZEN PUBLISHING COMPANY ARIZONA COMBINED COMMUNICATIONS CORPORATION ARIZONA COMBINED COMMUNICATIONS CORPORATION OF OKLAHOMA, INC. OKLAHOMA DES MOINES REGISTER AND TRIBUNE COMPANY IOWA THE DESERT SUN PUBLISHING COMPANY CALIFORNIA THE DETROIT NEWS, INC. MICHIGAN DETROIT NEWSPAPER AGENCY MICHIGAN DIGIFARM, LLC MINNESOTA EL PASO TIMES, INC. DELAWARE FEDERATED PUBLICATIONS, INC. DELAWARE FORT COLLINS NEWSPAPERS INC. COLORADO GANNETT COLORADO BROADCASTING, INC. DELAWARE GANNETT DIRECT MARKETING SERVICES, INC. KENTUCKY GANNETT GEORGIA L.P. GEORGIA GANNETT GEORGIA PUBLISHING, INC. DELAWARE GANNETT HAWAII, INC. HAWAII GANNETT KENTUCKY LIMITED PARTNERSHIP KENTUCKY GANNETT MINNESOTA BROADCASTING, INC. DELAWARE GANNETT NATIONAL NEWSPAPER SALES, INC. DELAWARE GANNETT PACIFIC CORPORATION HAWAII GANNETT RIVER STATES PUBLISHING CORPORATION ARKANSAS GANNETT SATELLITE INFORMATION NETWORK, INC. DELAWARE GANNETT SUPPLY CORPORATION DELAWARE GANNETT TELEMARKETING, INC. DELAWARE GANNETT TENNESSEE L.P. TENNESSEE GUAM PUBLICATIONS, INCORPORATED HAWAII HAWAII NEWSPAPER AGENCY LIMITED PARTNERSHIP DELAWARE KPNX BROADCASTING COMPANY ARIZONA KVUE-TV, INC. MICHIGAN LEAF CHRONICLE COMPANY, INC. TENNESSEE MARY MORGAN, INC. WISCONSIN MCCLURE NEWSPAPERS, INC. DELAWARE MID-KANSAS, INC. KANSAS MULTIMEDIA, INC. SOUTH CAROLINA MULTIMEDIA CABLEVISION, INC. SOUTH CAROLINA MULTIMEDIA OF CINCINNATI, INC. OHIO MULTIMEDIA GEORGIA BROADCASTING, INC. SOUTH CAROLINA MULTIMEDIA KSDK, INC. SOUTH CAROLINA MULTIMEDIA PUBLISHING OF NORTH CAROLINA, INC. SOUTH CAROLINA MULTIMEDIA PUBLISHING OF SOUTH CAROLINA, INC. SOUTH CAROLINA MULTIMEDIA TENNESSEE BROADCASTING, INC. SOUTH CAROLINA MULTIMEDIA TENNESSEE PUBLISHING, INC. DELAWARE NEW JERSEY PRESS, INC. NEW JERSEY NEWS-PRESS PUBLISHING COMPANY FLORIDA OKLAHOMA PRESS PUBLISHING COMPANY OKLAHOMA P&S GEORGIA BROADCASTING, INC. DELAWARE PACIFIC MEDIA, INC. DELAWARE PACIFIC AND SOUTHERN COMPANY, INC. DELAWARE PENSACOLA NEWS-JOURNAL INC. FLORIDA PRESS-CITIZEN COMPANY INC. IOWA RENO NEWSPAPERS, INC. NEVADA ST. CLOUD NEWSPAPERS INC. MINNESOTA SALINAS NEWSPAPERS INC. CALIFORNIA SIOUX FALLS NEWSPAPERS INC. SOUTH DAKOTA SPEIDEL NEWSPAPERS INC. DELAWARE THE STATESMAN-JOURNAL COMPANY OREGON STI TENNESSEE PUBLISHING, INC. DELAWARE SUMNER TIMES, INC. TENNESSEE THE SUN COMPANY OF SAN BERNARDINO, CALIFORNIA CALIFORNIA TELEVISION 12 OF JACKSONVILLE, INC. FLORIDA THE TIMES HERALD COMPANY MICHIGAN THE TIMES JOURNAL CO. FSC, INC. VIRGIN ISLANDS TNI PARTNERS ARIZONA USA TODAY INTERNATIONAL CORPORATION DELAWARE USA WEEKEND, INC. DELAWARE VISALIA NEWSPAPERS INC. CALIFORNIA WFMY TELEVISION CORP. NORTH CAROLINA WKYC HOLDINGS, INC. DELAWARE WKYC-TV, INC. DELAWARE The company has omitted the names of 60 wholly-owned subsdiaries, which in the aggregate would not constitute a significant subsidiary of the company. EX-23 4 EXH. 23 - CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Nos. 33-63673, 33-58686 and 33-53159) and in the Registration Statements on Form S-8 (Nos. 2-63038, 2-84088, 33-15319, 33-16790, 33-28413, 33-35305, 33-50813, 33-64959, 333-04459 and 333-03941) of Gannett Co., Inc. of our report dated February 1, 1999 appearing on page 51 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules, which appears on page 8 of this Form 10-K. /s/PricewaterhouseCoopers LLP ________________________________ PRICEWATERHOUSECOOPERS LLP Washington, D.C. March 22, 1999 EX-27 5 EXH. 27 - FINANCIAL DATA SCHEDULES - 1998
5 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income for Gannett Co., Inc. and is qualified in its entirety by reference to such financial statements. YEAR DEC-27-1998 DEC-29-1997 DEC-27-1998 60,103,000 6,084,000 683,683,000 19,143,000 87,176,000 906,385,000 3,666,743,000 1,602,960,000 6,979,480,000 727,967,000 0 324,421,000 0 0 3,655,403,000 6,979,480,000 5,121,291,000 5,121,291,000 2,593,982,000 3,677,789,000 0 0 79,412,000 1,669,413,000 669,500,000 999,913,000 0 0 0 999,913,000 3.53 3.50
EX-27 6 EXH. 27 - RESTATED FINANCIAL DATA SCHEDULES - 1997
5 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income for Gannett Co., Inc. and is qualified in its entirety by reference to such financial statements. YEAR DEC-28-1997 DEC-30-1996 DEC-28-1997 45,059,000 7,719,000 656,331,000 18,020,000 101,080,000 884,634,000 3,754,837,000 1,562,795,000 6,890,351,000 738,577,000 0 324,421,000 0 0 3,155,315,000 6,890,351,000 4,729,491,000 4,729,491,000 2,368,572,000 3,413,223,000 15,564,000 0 98,242,000 1,208,979,000 496,300,000 712,679,000 0 0 0 712,679,000 2.52 2.50
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