ITEM 1. BUSINESS
Overview
The McClatchy Company, a Delaware corporation, is a successor in interest to McClatchy Newspapers, Inc., a Delaware corporation, and was created as a result of the Amended and Restated Agreement and Plan of Merger and Reorganization (the "merger"), dated as of February 13, 1998, between (among others) McClatchy Newspapers, Inc. and Cowles Media Company (nka, The Star Tribune Company), a Delaware corporation ("Cowles"). Pursuant to the merger agreement, McClatchy Newspapers, Inc. and Cowles each became wholly-owned subsidiaries of The McClatchy Company. All references to the "Company" herein include the predecessor in interest, McClatchy Newspapers, Inc. The Company owns and publishes 24 newspapers in four regions of the Country - Minnesota, California, the Carolinas and the Northwest (Alaska and Washington). These newspapers range from large dailies serving metropolitan areas to non-daily newspapers serving small communities. For the year ended December 31, 2000, the Company had an average paid daily circulation of 1,377,870, Sunday circulation of 1,864,021 and non-daily circulation of 64,970.
While newspaper publishing remains the Company's core business, it is supplemented by a growing array of niche products and direct marketing initiatives, including direct mail. The Company also operates leading local websites and regional online portals in each of its 11 daily newspaper markets offering readers information, comprehensive news, advertising, e-commerce and other services.
Each of the Company's newspapers is semiautonomous in its business and editorial operations so as to meet most effectively the needs of the communities it serves. Publishers and editors of the newspapers make the day-to-day decisions and within limits are responsible for their own budgeting and planning. Policies on such matters as the amount and type of capital expenditures, key personnel changes, and strategic planning and operating budgets, including wage and pricing matters, are approved or established by the Company's senior management or Board of Directors.
The Company's overall strategy is to concentrate on developing its newspapers and related businesses. Each of its eleven daily newspapers has the largest circulation of any newspaper servicing its particular metropolitan area. The Company believes that this circulation advantage is of primary importance in attracting advertising, the principal source of revenues for the Company. Advertising revenues approximated 81% of consolidated revenues in 2000 and 80% of consolidated revenues in 1999. Circulation revenues approximated 15% of consolidated revenues in 2000 and 16% of consolidated revenues in 1999.
The Company's newspaper business is somewhat seasonal, with peak revenues and profits generally occurring in the second and fourth quarters of each year as a result of increased advertising activity during the Easter holiday and spring advertising season, and Thanksgiving and Christmas periods. The first quarter is historically the weakest quarter for revenues and profits.
Other businesses owned by the Company include Nando Media, the Company's national online publishing operation, and The Newspaper Network (TNN), a national sales and marketing company. In addition, the Company is a partner (13.5% interest) in Ponderay Newsprint Company, a general partnership that owns and operates a newsprint mill in Washington State.
When used in this Report, the words "expect" and "project" and similar expressions are generally intended to identify forward looking statements. Such statements are subject to certain risks and uncertainties, including those discussed under the heading "Forward Looking Information" in Part II, Item 7, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof.
Star Tribune
The Star Tribune is the Company's largest newspaper, contributing 35.3% of 2000 revenues compared to 36.4% of 1999 revenues. The Star Tribune's daily average paid circulation in 2000 increased 0.3% to 372,856 over the1999 average of 371,907, while Sunday average paid circulation was up 0.6% to 677,141 in 2000 from 673,438 in 1999. As of December 31, 2000, approximately 76% of the daily and 75% of Sunday circulation was home delivered.
The Star Tribune's advertising volumes for the years ended December 31, 2000 and December 26, 1999 are set forth in the following table:
The Star Tribune's net revenues increased 1.8% to $402,907,000 over 1999 revenues.
California Newspapers
The three "Bee" newspapers have formed the core of the Company's operations for many years and continue to have a significant influence on the civic, political, economic and cultural life of California's Central Valley. These newspapers are summarized below:
(1) Based on calendar year average paid daily circulation.
The California newspapers produced approximately 32.7% of total Company revenues in 2000, compared to 31.7% in 1999. Revenues at the California newspapers increased 8.3% from 1999.
The Sacramento Bee
The Sacramento Bee is a morning newspaper serving the California state capital and the surrounding metropolitan area. In 2000, The Sacramento Bee's average paid circulation increased 0.1% daily and 1.0% Sunday from 1999. As of December 31, 2000, approximately 87% of the daily, and 81% of the Sunday circulation was home delivered.
The Sacramento Bee's advertising volumes for the years ended December 31, 2000 and December 26, 1999, are set forth in the following table:
Net revenues of The Sacramento Bee increased 8.8% from 1999 revenues.
The Fresno Bee
The Fresno Bee is a morning newspaper serving the Fresno, California, metropolitan area. The Fresno Bee's average paid circulation increased 0.1% daily and was down 0.2% on Sunday versus 1999. As of December 31, 2000, approximately 90% of The Fresno Bee's daily and 85% of the Sunday circulation was home delivered.
The Fresno Bee's advertising volumes for the years ended December 31, 2000 and December 26, 1999 are set forth in the following table:
Net revenues of The Fresno Bee increased 6.8% from 1999.
The Modesto Bee
The Modesto Bee is a morning newspaper that serves the Modesto, California, metropolitan area, located between Sacramento and Fresno. The Modesto Bee's average paid circulation increased 0.3% daily and declined nominally Sunday versus 1999. As of December 31, 2000, approximately 87% of the daily and 85% of the Sunday circulation was home delivered.
The Modesto Bee's advertising volumes for the years ended December 31, 2000 and December 26, 1999, are set forth in the following table:
Net revenues of The Modesto Bee increased 8.5% from 1999.
The Clovis Independent is a weekly newspaper that circulates in Clovis, CA, a community east of Fresno.
Carolinas Newspapers
The Carolinas newspapers include The News & Observer, the second largest newspaper in North Carolina, and three daily newspapers in South Carolina. The Company also operates ten non-daily newspapers in North and South Carolina strategically located near its daily newspapers.
The Carolinas newspapers are summarized below:
(1) Based on calendar year average paid circulation. (2) Four South Carolina non-daily newspapers' revenues are consolidated with revenues of The (Rock Hill) Herald.
The Carolinas newspapers produced 16.6% of total Company revenues in 2000 versus 16.3% reported in 1999.
The News & Observer
The News & Observer, the Company's third largest newspaper, is a morning daily serving North Carolina's state capital, Raleigh, and the thriving Research Triangle which includes Raleigh, Durham and Chapel Hill, North Carolina.
The News & Observer's average paid circulation in 2000 increased approximately 1.3% daily and 0.2% Sunday over calendar year 1999. As of December 31, 2000 approximately 80% of the daily and 77% of the Sunday circulation was home delivered.
The News & Observer's advertising volumes for the years ended December 31, 2000 and December 26, 1999, are set forth in the following table:
The News & Observer's revenues for 2000 increased 6.4% over 1999.
The Herald
The Herald is a morning newspaper serving Rock Hill and surrounding communities in York County, South Carolina. Rock Hill is a community approximately 25 miles southwest of Charlotte, North Carolina. In 2000, The Herald's average paid circulation decreased 0.2% daily and increased 0.1% on Sunday from 1999.
The Herald's main competitor is a zoned edition of the Charlotte Observer, whose circulation in The Herald's primary circulation area is estimated to be approximately a third of The Herald's circulation. As of December 31, 2000, approximately 81% of the daily and 78% of the Sunday circulation was home delivered.
Advertising volumes for the years ended December 31, 2000 and December 26, 1999, were as follows:
Net revenues of The Herald increased 4.8% over 1999.
The Island Packet and The Beaufort Gazette
The Island Packet and The Beaufort Gazette serve Beaufort County in southeastern South Carolina. The Island Packet serves Hilton Head Island and the town of Bluffton where tourism, retirement communities and services are the economic mainstays. The Gazette serves the city of Beaufort and northern Beaufort County encompassing surrounding islands of Lady's, St. Helena, Fripp and Paris.
The average paid circulation increased 2.3% daily and declined 0.3% Sunday at The Island Packet, and was up 0.2% daily and declined 0.4% Sunday at The Gazette.
As of December 31, 2000, approximately 60% of the daily and Sunday circulation of The Packet was home delivered. Comparable amounts for The Gazette were 64% daily and 68% Sunday.
Advertising volumes for the years ended December 31, 2000, and December 26, 1999 for the newspapers were:
Net revenues of The Packet increased 18.1% over 1999, while The Gazette's net revenues were up 6.6%.
Carolinas Non-daily Newspapers
The South Carolina non-daily newspapers include the Clover Herald, the Yorkville Enquirer, the Lake Wylie Magazine and the Fort Mill Times, and serve small communities in Chester and York counties.
The North Carolina non-dailies are newspapers that serve small communities generally surrounding Raleigh. They are (paid circulation in parenthesis): Chapel Hill News (21,000 primarily free distribution, 900 paid circulation); Cary News (11,800); Zebulon Record, Wendall Clarion and Knightdale Times (5,800); and Smithfield Herald (14,900).
Northwest Newspapers
The Company began to diversify geographically outside of California in 1979 when it purchased the Anchorage Daily News. Later that year, the Company purchased the Tri-City Herald in Southeastern Washington. In 1986, the Company purchased its fifth largest newspaper, The (Tacoma) News Tribune. The Company now publishes four newspapers in Washington State and the largest daily newspaper in Alaska. These newspapers are summarized below:
(1) Based on calendar year average paid circulation.
The Company's northwest newspapers produced approximately 14.4% of the Company's total revenues in 2000 versus 14.6% in 1999. Revenues at the Northwest newspapers increased 3.0% over 1999.
The News Tribune
The News Tribune, a morning newspaper, primarily serves the Tacoma, Washington, metropolitan area in Pierce and South King Counties. It is the third largest newspaper in the state. In 2000, the average paid circulation of The News Tribune increased 0.2% daily and 0.1% Sunday versus 1999.
Tacoma is approximately 30 miles south of Seattle. The News Tribune competes in the northernmost fringes of its market with the major Seattle daily newspapers. As of December 31, 2000, approximately 85% of the daily and 84% of the Sunday circulation was home delivered.
The News Tribune's advertising volumes for the years ended December 31, 2000 and December 26, 1999 are set forth in the following table:
Net revenues of The News Tribune increased 5.4% from 1999.
Anchorage Daily News
The Anchorage Daily News, a morning newspaper, is Alaska's largest newspaper. The Anchorage Daily News circulates throughout the state of Alaska but its primary circulation is concentrated in the south central region of the state comprised of metropolitan Anchorage, the Kenai Peninsula and the Matanuska-Susitna Valley.
The Daily News' average paid daily circulation declined 1.7% in 2000, while Sunday circulation declined 2.2%. As of December 31, 2000, approximately 70% of the daily and 65% of the Sunday circulation was home delivered.
Comparative amounts of volumes for the years ended December 31, 2000 and December 26, 1999, are set forth in the following table:
Net revenues of the Anchorage Daily News declined 0.6% from 1999.
Tri-City Herald
The Tri-City Herald is a morning newspaper serving the Tri-Cities of Richland, Kennewick and Pasco in southeastern Washington. The Tri-Cities economy has benefited by the Department of Energy's efforts to clean up nuclear waste at nearby Hanford Nuclear reservation.
The Tri-City Herald's average paid circulation has increased 0.6% daily, and 0.3% Sunday from 1999. As of December 31, 2000, approximately 91% of the daily and 88% of the Sunday circulation was home delivered.
The Tri-City Herald's advertising volumes for the years ended December 31, 2000 and December 26, 1999, are set forth in the following table:
Net revenues of the Tri-City Herald increased 2.6% over 1999.
Northwestern Non-daily Newspapers
The Company's other non-daily newspapers include the Peninsula Gateway in South Puget Sound and The Puyallup Herald which circulates weekly in South Pierce County, near Tacoma.
Other Operations
The Company continues to grow its national sales and marketing company, The Newspaper Network, Inc. (TNN). This separate subsidiary provides third-party placement service with state-of-the-art one-order, one-bill service for the distribution of preprinted advertising inserts and run-of-press advertising. It also offers its clients sophisticated marketing analysis to profile and target potential new customers. The company believes that this work is important to McClatchy and the newspaper industry as we look for new ways to meet the growing needs of our customers.
The Company's rapidly expanding Internet activities have produced robust local websites and regional internet portals at each of our 11 daily newspaper markets. These efforts are supported by Nando Media, the Company's interactive media operation which has two primary roles: First, Nando Media serves as a technology partner to McClatchy and to other newspapers, providing hosting, programming, and customized news services. Second, as a stand-alone Internet publisher, it generates revenues based on audience on its websites, Nando Times and Nando Sports Server.
Revenues for all other operations, primarily TNN and Nando Media, were $12.6 million, up 22.3% from 1999 and represent 1.1% of total revenues in 2000 versus 0.9% in 1999.
Raw Materials
In 2000, the Company consumed approximately 274,500 metric tons of newsprint compared to 267,000 metric tons in 1999. The Company currently obtains its supply of newsprint from a number of suppliers under long-term contracts.
Newsprint and supplement expense accounted for approximately 18.6% of operating expenses in 2000 compared to 17.7% in 1999. Management believes its newsprint sources of supply under existing arrangements are adequate for its anticipated needs. Significant increases in the price of newsprint would adversely affect the operating results of the Company to the extent that it was not offset by advertising and circulation volume and/or rate increases.
The Company, through a wholly-owned subsidiary, Newsprint Ventures, Inc., and four other publishers and a major newsprint manufacturer are partners in Ponderay Newsprint Company, a general partnership which owns and operates a newsprint mill located sixty miles northeast of Spokane, Washington. The mill became operational in late 1989 and has a production capacity in excess of 240,000 metric tons annually. The publisher partners have committed to take 126,000 metric tons of this anticipated production on a "take-if-tendered" basis with the balance to be sold on the open market. The Company's annual commitment is 28,400 metric tons. See Part II, Items 7 and 8 for further discussion of the impact of this investment on the Company's business.
Competition
The Company's newspaper and Internet sites compete for advertising revenues and readers' time with television, radio, the Internet and other computer services, direct mail programs, free shoppers, suburban neighborhood and national newspapers and other publications, and billboard companies. Competition for advertising is based upon circulation levels, readership demographics, price and advertiser results, while competition for circulation is generally based upon the content, journalistic quality and price of the newspaper. In some of its markets, the Company's newspapers also compete with other newspapers published in nearby cities and towns. The Company's major daily newspapers are well ahead of their newspaper competitors in both advertising linage and general circulation in all of their markets, and its Internet sites are the leading local sites in all but one of its 11 daily newspaper markets, based upon various independent and Company research.
Employees - Labor
As of December 31, 2000, the Company had 9,939 full and part-time employees, of whom approximately 24.6% were represented by unions. Most of the Company's union represented employees are currently working under labor agreements expiring in various years.
While the Company's newspapers have not had a strike since 1980, and they do not currently anticipate a strike occurring, the Company cannot preclude the possibility that a strike may occur at one or more of its newspapers when future negotiations occur. The Company believes that, in the event of a newspaper strike, it would be able to continue to publish and deliver to subscribers, a capability which is critical to retaining revenues from advertising and circulation.
ITEM 2.
ITEM 2. PROPERTIES
The corporate headquarters of the Company are located at 2100 "Q" Street, Sacramento, California. The general character, location and approximate size of the principal physical properties used by the Company at December 31, 2000, are set forth below.
The Company believes that its current facilities are adequate to meet the present and immediately foreseeable needs of its newspapers.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company becomes involved from time to time in claims and lawsuits incidental to the ordinary course of its business, including such matters as libel, invasion of privacy and wrongful termination actions, and complaints alleging discrimination. In addition, the Company is involved from time to time in
governmental and administrative proceedings concerning employment, labor, environmental and other claims. Management believes that the outcome of pending claims or proceedings will not have a material adverse effect upon the Company's consolidated results of operations or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The McClatchy Company's Class A Common Stock is listed on the New York Stock Exchange (NYSE symbol - MNI). A small amount of Class A Stock is also traded on the Midwest Stock Exchange and the Pacific Stock Exchange. The Company's Class B Stock is not publicly traded. The following table lists dividends paid on Common Stock and the prices of the Company's Class A Common Stock as reported by these exchanges for 2000 and 1999:
The Company's Board of Directors does not anticipate reducing the present level of quarterly dividend payments. However, the payment and amount of future dividends remain within the discretion of the Board of Directors and will depend upon the Company's future earnings, financial condition and requirements, and other factors considered relevant by the Board.
The number of record holders of Class A and Class B Common Stock at March 19, 2001 was 2,022 and 23, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY (Dollars in thousands, except per share amounts)
The Company changed its fiscal reporting to a 52/53 week year in 1998. This change did not have a material impact on reported results. Results for 1997 include a pre-tax gain of $9.3 million for the sale of certain business operations and real estate. Results for 1996 include a pre-tax gain of $2.8 million on the sale of a newspaper and other business operations. Results for 1995 include a $2.7 million pre-tax charge related to early retirement programs. The financial information also gives effect to the acquisitions of the Star Tribune in March 1998 and The News and Observer Publishing Company in August 1995. This summary should be read in conjunction with the consolidated financial statements and notes thereto.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT EVENTS AND TRENDS
Newsprint prices began to rise with an October 1999 newsprint price increase, followed by April and September 2000 increases. Hence, the newspaper industry is now paying higher prices per ton than last year. Higher newsprint pricing will result in higher costs to the Company in 2001, which are expected to be at least partially offset with advertising revenue growth.
On March 19, 1998 the Company acquired all of the outstanding shares of Cowles Media Company (Cowles) in a transaction valued at $90.50 per Cowles share and the assumption of $77.4 million in existing Cowles debt. Cowles publishes the Star Tribune newspaper, which serves the Twin Cities of Minneapolis and St. Paul. Cowles also owned four separate subsidiaries that publish business magazines, special-interest magazines and home improvement books. Simultaneously with the closing of the Cowles merger, the Company sold those subsidiaries. The combined proceeds, plus debt and other liabilities assumed by the buyers in those transactions, were $208.1 million. The Company used these proceeds to repay debt associated with the Cowles merger. See note 2 to the consolidated financial statements. The Company valued the non-newspaper businesses at fair market value based upon the net after-tax proceeds received by the Company on March 19, 1998, and accordingly, did not realize a gain or loss on the sale.
In connection with the merger, the Company paid 15% of the consideration by issuing 6,330,548 shares of Class A Common Stock in exchange for Cowles shares and paid cash for the remaining shares. The Class A shares were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for each Cowles share. The Company obtained bank debt through a syndicate of banks and financial institutions to finance the cash requirements of the merger and to refinance its existing debt (See note 3 to the consolidated financial statements). Results of the Star Tribune have been included in the Company's results beginning March 20, 1998.
In the third and fourth quarters of 1998, the Company sold two commercial printing operations, a weekly newspaper, a monthly magazine and two niche publications with 1998 revenues totaling $8.7 million. The net gain on these sales was not material to 1998 results.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. This accounting bulletin, as amended in June 2000, is effective for the Company beginning the fourth quarter of the Company's fiscal year beginning December 27, 1999. The adoption of SAB 101 had no material impact on its financial statements.
During 1998, the FASB issued SFAS 133 (Accounting for Derivative Instruments and Hedging Activities) which requires that all derivatives be carried at fair value on the balance sheet. This statement will become effective in the Company's fiscal year 2001. The adoption of this statement is not expected to materially impact the Company's financial results. See note 10 to the consolidated financial statements.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
The Company's fiscal year included 53 weeks in 2000 versus 52 weeks in 1999, increasing revenues and expenses, but having no material effect on net income. Net income in 2000 was a record $88.9 million or $1.97 per share, up 7.8% from 1999 earnings of $82.5 million or $1.83 per share. Higher advertising revenues, primarily from the California and Carolinas regions, more than offset higher newsprint prices resulting in earnings growth.
Revenues in fiscal year 2000 increased 5.0% to $1.14 billion with advertising revenues up 5.9% to $926.7 million and circulation revenues down 0.1% to $175.4 million. Excluding the 53rd week in 2000, total revenues were up an estimated 3.3% with advertising revenues up about 4.2% and circulation revenues down approximately 2.1%.
Advertising revenue growth reflects a mix of rate increases and volume growth. The decline in circulation revenues largely reflects two actions. Many newspapers lowered the wholesale price of the newspaper to carriers to increase their earnings and improve carrier retention. Secondly, The Sacramento Bee converted from employee delivery to contract carrier delivery in its outlying regions with the effect of saving compensation, while lowering circulation revenues.
Operating Revenues (in thousands):
Minnesota - The Star Tribune generated about 35% of the Company's revenues. Total revenues at the Star Tribune were up l.8%, while advertising revenues totaled $327.8 million, up 2.2% from 1999. Much of the Star Tribune's retail advertising was soft throughout 2000, particularly in the grocery category. However, retail preprint revenues grew 10.4% resulting in an overall increase of 1.5% in total retail advertising. National revenues increased 8.2% over 1999 and classified revenues were up 2.0%. Excluding the 53rd week in 2000, total revenues increased approximately 0.2% and advertising revenues were up about 0.8%.
California - The Company's California newspapers - The Sacramento Bee, The Fresno Bee and The Modesto Bee - generated about 33% of the Company's revenues, posting the strongest revenue gain of any region. Total revenues at the California newspapers were up 8.3% and advertising revenues increased 9.8%. Advertising revenue growth was strong in all categories: retail up 7.4%, classified up 9.7% and national up 17.3%. Total revenue growth was slowed by a decline in circulation revenues of
1.1%, primarily reflecting the reasons discussed above. Excluding the 53rd week from 2000, total revenues and advertising revenues increased an estimated 6.5% and 8.1%, respectively.
Carolinas - The Carolinas newspapers' revenues represents about 17% of the Company's revenues and were up 6.5%. Advertising revenues at the daily newspapers in the region totaled $148.2 million, up 7.6%. Like the California region, advertising revenues were strong across all categories: retail up 8.0%, classified up 5.6% and national up 6.6%. Excluding the 53rd week in 2000, total revenues were up about 5.0% and advertising revenues grew approximately 6.1%.
The Northwest - The Northwest newspapers generated about 14% of total Company revenues. Total revenues increased 3.0% and advertising revenues grew 4.7%. Advertising revenue growth was led by classified which was up 7.3% over 1999, while retail and national were each up 1.8%. Excluding the 53rd week, total revenues were up about 1.1% and advertising was up approximately 3.2%. These slower rates of growth reflect tougher comparisons to 1999 when this was the Company's fastest growing region in terms of advertising revenues.
Non-Newspaper Operations - Revenues primarily reflect those at The Newspaper Network (TNN), the Company's national sales and marketing subsidiary, where revenues increased 19.5%, and Nando Media, the Company's national online publishing operation, where revenues grew 52.1%. Excluding the 53rd week, revenues at these operations grew approximately 20.1%.
OPERATING EXPENSES:
Total operating expenses increased 5.2% over 1999 and were up approximately 3.4% excluding the 53rd week. The largest increase in operating costs were in newsprint and supplements, up 10.7% (up approximately 8.7% on a 52-week comparable basis). Most of this increase was attributable to the newsprint price increases discussed above. Newsprint usage increased 2.8% over 1999, and was up an estimated 1.0% on a 52-week comparable basis. Excluding newsprint, total operating expenses increased 4.3% (about 2.5% on 52-week basis) led by compensation costs and costs associated with new products.
NON-OPERATING (EXPENSES) INCOME - NET:
Interest expense declined 1.6% to $64.7 million. The Company's debt was down substantially in 2000 (see Liquidity and Capital Resources discussion below), but higher interest rates had an offsetting impact on the Company's debt service costs. The Company's share of losses from the Ponderay Newsprint Company (Ponderay) was down $790,000 from 1999 due primarily to higher newsprint prices.
INCOME TAXES:
The Company's effective tax rate was 48.0% in 2000, down from the 1999 rate of 48.5%, due to income before taxes growing relative to a set amount of non-deductible expenses.
1999 COMPARED TO 1998
Net income for 1999 was a record $82.5 million or $1.83 per share, up 35.2% from 1998 net income of $61.1 million or $1.41 per share. The 1998 results include the operations of the Star Tribune for only nine months and nine days, versus a full year in 1999. The number of weighted average shares
increased 1.7 million in fiscal 1999 due primarily to shares issued in March 1998 in connection with the Star Tribune transaction.
Strong advertising revenue growth in the Company's California and Northwest newspapers and lower newsprint prices contributed to the record earnings in 1999.
Revenues increased $119.3 million due largely to a full year of revenues from the Star Tribune. On a pro forma basis, which reflects adjusting 1998 revenues to include a full year of Star Tribune's results, excluding revenues from the operations that were sold in 1998, and restating to period reporting, total revenues increased 4.4%, with advertising revenues up 5.1%.
The pro forma revenue growth reflects advertising rate increases, and to a lesser extent, greater advertising volumes. These increases were offset somewhat by lower circulation revenues largely reflecting no circulation rate increases, increased discounting and higher payments to contract carriers at certain newspapers in 1999 (recorded as a contra revenue).
OPERATING REVENUES (in thousands):
NM Not Meaningful
Minnesota - The Star Tribune contributed 36.4% of the Company's revenues in 1999. Revenues totaled $395.9 million with $320.6 million in advertising and $70.1 million in circulation revenues. This represents an increase of 3.3% in total revenues from pro forma 1998 and an increase of 4.3% in advertising revenues. On a pro forma basis, circulation revenues declined 3.7% reflecting no rate increase in 1999 and increased payments to contract carriers.
California - The California newspapers - primarily The Sacramento Bee, The Fresno Bee, and The Modesto Bee - contributed 31.7% of the Company's revenues. Total revenues increased 5.0% from pro forma 1998 to $344.9 million with advertising revenues up 6.0% to $285.2 million at the California dailies. Circulation revenues declined 1.8% to $54.6 million reflecting no rate increases, increased discounting and higher payments to contract carriers.
Carolinas - The Company's Carolinas newspapers generated 16.3% of 1999 revenues. A majority of the newspaper operations sold in 1998 were in this region, causing the pro forma comparisons to differ considerably from reported results. On a pro forma basis, total revenues increased 3.7% to $177.6 million in 1999, with advertising revenues at the daily newspapers increasing 4.7% to $138.9 million. Circulation revenues increased nominally over pro forma 1998.
Northwest - The Northwest region - Washington state and Alaska - is the Company's smallest, contributing 14.6% of 1999 revenues. Total revenues increased 4.8% from pro forma 1998 to $159.2 million with advertising revenue of $117.3 million at its daily newspapers, up 6.5%. Circulation revenues declined 2.4% to $26.2 million reflecting factors discussed above.
Non-Newspaper Operations - Non-newspaper revenues were affected by the sale of The McClatchy Printing Company and Benson Printing Company, both commercial printing operations, in late 1998. On a pro forma basis, non-newspaper revenues increased 33.0% to $10.3 million, reflecting growth at TNN and Nando Media.
OPERATING EXPENSES:
Total operating expenses increased 9.6%, primarily reflecting the partial year of Star Tribune's expenses in 1998, but were up 1.5% from pro forma 1998. A major factor in the relatively low increase in operating expenses was the decline in average newsprint prices in 1999 compared to 1998. Newsprint and supplement expenses declined 8.1% from pro forma 1998. Lower newsprint prices were partially offset by greater newsprint usage and greater use of newspaper supplements. All other operating expenses increased 3.8% from pro forma 1998, primarily reflecting a 3.5% increase in compensation expense.
NON-OPERATING (EXPENSES) INCOME - NET:
Interest expense increased 4.7% to $65.7 million. The Company incurred most of its debt on March 19, 1998 (closing date of the Cowles merger) paying interest for roughly three-quarters of 1998 versus 12 months in 1999. However, the full year interest burden in 1999 was lessened by the repayment of $106.0 million of principal throughout the year and lower average interest rates in 1999. The Company's share of losses from its joint venture in the Ponderay was $850,000 versus income of $1.5 million in 1998.
INCOME TAXES:
The Company's effective tax rate was 48.5% in 1999, down from a 50.0% rate in 1998. The Company's effective tax rate declined as income before taxes increased relative to a set amount of non-deductible expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $10.7 million at December 31, 2000 versus $1.2 million at the end of 1999. See notes 2 and 3 to the consolidated financial statements (and below) for a discussion of the impact of the acquisition of the Star Tribune on the Company's liquidity and capital resources.
The Company generated $182.4 million of cash from operating activities in 2000 and has generated an aggregate of $480.6 million over the last three years. During 1998, the Company received $184.3 million in proceeds from the sale of businesses and assets, and $1.25 billion in proceeds from long-term debt (discussed below). The major uses of cash over the three-year period have been to consummate the Star Tribune acquisition ($1.1 billion), to purchase property, plant and equipment (see below), and to repay debt. Cash has also been used to pay dividends. The Company repaid $119.0 million of bank debt in 2000 and has repaid $521.4 million over the last three years. The Company paid
$18.1 million in dividends in 2000, while proceeds from issuing Class A stock under employee stock plans totaled $7.3 million. See the Company's Statement of Cash Flows on page 26.
The Company expended a total of $45.7 million in 2000 for capital projects and equipment to improve productivity and keep pace with growth and new technology. Capital expenditures over the last three years have totaled $130.5 million and planned expenditures in 2001 are estimated to be approximately $47.0 million at existing operations.
See notes 1 and 8 to the consolidated financial statements for a discussion of the Company's commitments to Ponderay.
A syndicate of banks and financial institutions provided the debt financing of the Cowles merger under a Bank Credit Agreement (Credit Agreement). The Credit Agreement consists of the following: term loan consisting of Tranche A of $735 million bearing interest at the London Interbank Offered Rate ("LIBOR") plus 62.5 basis points and is payable through 2005; Tranche B of $330 million bearing interest at LIBOR plus 150 basis points and is payable through 2008; and a revolving credit line of up to $200 million bearing interest at LIBOR plus 62.5 basis points and is payable through 2005. The debt is secured by certain assets of the Company, and all of the debt is pre-payable without penalty. The Company has continued to accelerate payments on this debt as cash generation allows.
The definitive terms of the Credit Agreement include certain operating and financial restrictions, such as limits on the Company's ability to incur additional debt, create liens, sell assets, engage in mergers, make investments and pay dividends.
While the Company expects that most of its free cash flow generated from operations in 2001 and in the foreseeable future will be used to repay debt, management is of the opinion that operating cash flow and its credit facilities as described above are adequate to meet the liquidity needs of the Company, including currently planned capital expenditures and other investments.
The Company had $78.4 million of available credit under its current bank credit agreement at December 31, 2000.
RISK FACTORS
Forward Looking Information - We have made "forward-looking statements" in this document that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of McClatchy. Forward-looking statements are generally preceded by, followed by or are a part of sentences that include the words "believes," "expects," "anticipates" or similar expressions. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this document and in the documents which we incorporate by reference, could affect the future results of McClatchy, and could cause those future results to differ materially from those expressed in our forward-looking statements: general economic, market or business conditions; increases in newsprint prices and/or printing and distribution costs over anticipated levels; increases in interest rates; competition from other forms of media in our principal markets; increased consolidation among major retailers in our newspaper markets or other events depressing the level of advertising; an economic downturn in the economies of Minnesota, California's Central Valley, the Carolinas, Washington State and Alaska; changes in our ability to negotiate and obtain favorable terms under collective bargaining
arrangements with our employees; competitive actions by other companies; other occurrences leading to decreased circulation and diminished revenues from both display and classified advertising; and other factors, many of which are beyond our control. Consequently, there can be no assurance that the actual results or developments we anticipate will be realized or that these results or developments will have the expected consequences.
Substantial Leverage; Negative Net Tangible Assets; Liquidity. On March 19, 1998, we completed a reorganization (the "Reorganization") pursuant to which we implemented a holding company structure and also acquired the Star Tribune by way of a merger with Cowles Media Company (the "Cowles Merger"). To finance the Reorganization, we borrowed enough cash to fund payment of the cash due to Cowles stockholders, pay the fees and expenses incurred in connection with the Reorganization and refinance debt assumed from Cowles and pre-existing debt of McClatchy. As of December 31, 2000, we had $778.1 million of long-term debt. Furthermore, because $1.2 billion of the purchase price of the Cowles Merger was allocated to intangible assets, such as goodwill, we now have negative net tangible assets. Our net tangible assets as of December 31, 2000, were ($436.4) million.
This high leverage may have important consequences for us in the future, including the following: (a) our ability to obtain additional financing for future acquisitions (if any), working capital, capital expenditures or other purposes may be impaired or, if we are able to obtain additional financing, it may not be on favorable terms; (b) a substantial portion of our cash flow available from operations, after satisfying certain liabilities arising in the ordinary course of business, will be dedicated to the payment of principal and interest on this indebtedness, thereby reducing funds that would otherwise be available to us; (c) a substantial decrease in our net operating cash flows or a substantial increase in our expenses could make it difficult for us to meet our debt service requirements, or could force us to modify our operations; and (d) our leverage may make us more vulnerable to a downturn in our business or the economy generally. In addition, the terms of the Reorganization borrowing agreements include operating and financial restrictions, such as limits on our ability to incur indebtedness, create liens, sell assets, engage in mergers or consolidations, make investments and pay dividends. The Reorganization debt is secured by certain assets of McClatchy. All of the Reorganization debt is pre-payable without penalty. Although we have no present plan in place for early repayment of this debt, we intend to accelerate payments on this debt as cash generation allows.
Our principal sources of liquidity are cash flow from operations and borrowings under a revolving credit facility. Our principal uses of liquidity will be to provide working capital, to meet debt service requirements and other liabilities arising in the ordinary course and to finance our strategic plans. A revolving credit facility is available for our working capital needs. A term loan facility has been drawn in full.
Earnings Dilution as a Result of the Cowles Merger. Our net income and earning per share for the next several years will be reduced due to increased interest expense as a result of the incurrence of additional long-term debt in the Cowles Merger, the amortization of the identifiable intangibles and goodwill associated with the Cowles Merger, and the issuance of shares of our Class A Common Stock in the Cowles Merger. Assuming that the Cowles Merger had occurred on January 1, 1998, our pro forma income from continuing operations for the year ended December 27, 1998, would have been approximately $22.2 million as compared to $61.1 million of income from continuing operations for The McClatchy Company for the same period on a historical basis. Similarly, pro forma interest expense for 1998 would have been approximately $78.6 million, as compared to approximately $62.8 million for The McClatchy Company for the same period on a historical basis. There can be no assurance that this
reduction in earnings per share and net income from continuing operations will not have a negative impact on the market price of our Class A Common Stock.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to normal business risks discussed above, the Company utilizes interest rate protection agreements to help maintain the overall interest rate parameters set by management. None of these agreements were entered into for trading purposes. (See notes 3 and 10 to the consolidated financial statements.) As a result of this interest rate mix, a hypothetical 10 percent change in interest rates would have a $0.03 to $0.05 per share increase or decrease in the Company's results of operations. It would also impact the fair values of its market risk sensitive financial instruments, but would not materially affect the Company's financial position taken as a whole.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AND FINANCIAL STATEMENT SCHEDULES
Report of Deloitte & Touche LLP 22 Consolidated Statement of Income 23 Consolidated Balance Sheet 24 Consolidated Statement of Cash Flows 26 Consolidated Statement of Stockholders' Equity 27 Notes to Consolidated Financial Statements 28 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts 47
All other schedules are omitted as not applicable under the rules of Regulation S-X.
INDEPENDENT AUDITORS' REPORT
The McClatchy Company:
We have audited the accompanying consolidated balance sheets of The McClatchy Company and its subsidiaries as of December 31, 2000 and December 26, 1999, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index to Financial Statements and Financial Statement Schedules at Item 8. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The McClatchy Company and its subsidiaries at December 31, 2000 and December 26, 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP Sacramento, California January 26, 2001
CONSOLIDATED STATEMENT OF INCOME
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEET
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
See notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The McClatchy Company (the "Company") and its subsidiaries are engaged primarily in the publication of newspapers located in Minnesota, California, the Northwest (Washington and Alaska) and the Carolinas.
The consolidated financial statements include the Company and its subsidiaries. Significant inter-company items and transactions are eliminated. In preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fiscal year-end - In 1998, the Company changed from a calendar year to a fiscal year ending on the Sunday nearest December 31. Accordingly, the Company's results are reported through December 31, 2000, December 26, 1999, and December 27, 1998.
Revenue recognition - Advertising revenues are recorded when advertisements are placed in the newspaper and circulation revenues are recorded as newspapers are delivered over the subscription term. Unearned revenues represent prepaid circulation subscriptions.
Cash equivalents are highly liquid debt investments with maturities of three months or less when acquired.
Concentrations of credit risks - Financial instruments which potentially subject the Company to concentrations of credit risks are principally cash and cash equivalents and trade accounts receivables. Cash and cash equivalents are placed with major financial institutions. Accounts receivable are with customers located primarily in the immediate area of each city of publication. The Company routinely assesses the financial strength of significant customers and this assessment, combined with the large number and geographic diversity of its customers, limits the Company's concentration of risk with respect to trade accounts receivable.
Inventories are stated at the lower of cost (based principally on the first-in, first-out method) or current market value.
Related party transactions - The Company owns a 13.5% interest in Ponderay Newsprint Company ("Ponderay") which owns and operates a newsprint mill in the State of Washington. The investment is accounted for using the equity method, under which the Company's share of earnings of Ponderay is reflected in income as earned. The Company guarantees certain bank debt used to construct the mill (see note 8) and is required to purchase 28,400 metric tons of annual production on a "take-if-tendered" basis until the debt is repaid. The Company satisfies this obligation by direct purchase (2000: $16,497,000, 1999: $14,055,000, and 1998: $16,732,000) or reallocation to other buyers.
Property, plant and equipment are stated at cost. Major improvements, as well as interest incurred during construction, are capitalized.
Depreciation is computed generally on a straight-line basis over estimated useful lives of: - 10 to 60 years for buildings - 9 to 25 years for presses - 3 to 15 years for other equipment
Intangibles consist of the unamortized excess of the cost of acquiring newspaper operations over the fair values of the newspapers' tangible assets at the date of purchase. Identifiable intangible assets, consisting primarily of lists of advertisers and subscribers, covenants not to compete and commercial printing contracts, are amortized over three to forty years. The excess of purchase prices over identifiable assets is amortized over forty years. Management periodically evaluates the recoverability of intangible assets by reviewing the current and projected cash flows of each of its newspaper operations.
Stock-based compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees.
Deferred income taxes result from temporary differences between amounts of assets and liabilities reported for financial and income tax reporting purposes. See note 4.
Comprehensive income - The Company has no changes in its net assets during any period presented from non-owner sources. Hence, comprehensive income is equal to net income.
Segment reporting - The Company's primary business is the publication of newspapers. The Company aggregates its newspapers into a single segment because each has similar economic characteristics, products, customers and distribution methods.
Earnings per share (EPS) - Basic EPS excludes dilution and reflects income divided by the weighted average number of common shares outstanding for the period. Diluted EPS is based upon the weighted average number of outstanding shares of common stock and dilutive common stock equivalents (stock options -- equivalents calculated using the treasury stock method, no adjustment to net income required) in the period. See note 9.
NOTE 2. MERGER WITH COWLES MEDIA COMPANY
On March 19, 1998 the Company acquired all of the outstanding shares of Cowles Media Company (Cowles) in a transaction valued at approximately $90.50 per Cowles share and the assumption of $77,350,000 in existing Cowles debt. Cowles publishes the Star Tribune newspaper, which serves the Twin Cities of Minneapolis and St. Paul. Cowles also owned four separate subsidiaries that publish business magazines, special-interest magazines and home improvement books. Simultaneously with the close of the merger, the Company sold the magazine and book publishing subsidiaries. The combined proceeds, plus debt and other liabilities assumed by the buyers in those transactions, were $208.1 million. These proceeds were used to repay debt associated with the Cowles merger.
In connection with the Cowles merger, the Company paid 15% of the consideration by issuing 6,330,548 shares of Class A Common Stock in exchange for Cowles shares and paid cash for the remaining shares. The Class A shares were exchanged using a ratio of 3.01667 shares of McClatchy
Class A Common for each Cowles share. The Company incurred bank debt through a syndicate of banks and financial institutions to finance the cash requirements of the merger and to refinance its existing debt (see note 3). Results of the Star Tribune have been included in the Company's results beginning March 20, 1998.
The non-newspaper businesses were valued at fair market value based upon the net after-tax proceeds received by the Company on March 19, 1998, and accordingly, no gain or loss was realized on the sale.
The merger was accounted for as a purchase, and accordingly, assets acquired and liabilities assumed have been recorded at their fair market values. Assets retained by the Company include approximately $55,319,000 of current assets, $143,978,000 of property, plant and equipment, $1,166,400,000 of intangible assets and $63,267,000 of other assets. Intangible assets include approximately $929,000,000 of goodwill which is being amortized over 40 years. In addition to assuming Cowles' long-term debt, a total of $214,197,000 of deferred taxes and other liabilities were assumed.
The following table summarizes, on an unaudited proforma basis, the combined results of operations of the Company and its subsidiaries for the year ended December 27, 1998 as though the Cowles merger had taken place on January 1, 1998 (in thousands, except per share amounts):
Revenues $1,051,340 Net income $ 22,151 Diluted earnings per share $ 0.49
NOTE 3. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS
The Company entered into a bank credit agreement (Credit Agreement) with a syndicate of banks and financial institutions providing for borrowings of up to $1,265,000,000 to finance the Cowles merger and refinance its existing debt. The Credit Agreement includes term loans consisting of Tranche A of $735,000,000 bearing interest at the London Interbank Offered Rate ("LIBOR") plus 62.5 basis points payable in increasing quarterly installments from June 30, 1998 through March 31, 2005, and Tranche B of $330,000,000 bearing interest at LIBOR plus 150 basis points, and payable in semi-annual installments from September 30, 1998 through September 30, 2008. A revolving credit line of up to $200,000,000 bears interest at LIBOR plus 62.5 basis points, and is payable by March 19, 2005. Interest rates applicable to debt drawn down at December 31, 2000, ranged from 7.1% to 8.3%. The debt is secured by certain assets of the Company, and all of the debt is pre-payable without penalty.
The terms of the Credit Agreement include certain operating and financial restrictions, such as limits on the Company's ability to incur additional debt, create liens, sell assets, engage in mergers, make investments and pay dividends.
The Company is a party to three interest rate swap agreements, expiring in 2002 to 2003, with an aggregate notional amount of $300,000,000. The effect of these agreements is to fix the LIBOR interest rate exposure at approximately 5.9% on that portion of the Company's term loans.
The fair value of these instruments as of December 31, 2000, is summarized in note 10. Payments and receipts under such agreements are recorded as adjustments to interest expense.
At December 31, 2000 the Company had outstanding letters of credit totaling $11,575,000 securing estimated obligations stemming from workers' compensation claims and other contingent claims.
At the end of 2000 and 1999, long-term debt consisted of (in thousands):
December 31, December 26, 2000 1999 -------------- -------------- Credit Agreement: Term loans $ 669,000 $ 788,000 Revolving credit line 110,000 110,000 -------------- -------------- Total indebtedness 779,000 898,000 Less current portion 898 19,834 -------------- -------------- Long-term indebtedness $ 778,102 $ 878,166 ============== ==============
Long-term debt matures, as of December of each year, as follows (in thousands):
2002 $ 83,150 2003 123,112 2004 168,467 2005 216,965 2006 45,518 Thereafter 140,890 ---------- $ 778,102 ==========
Other long-term obligations consist of (in thousands):
December 31, December 26, 2000 1999 -------------- ------------- Pension obligations $ 49,377 $ 49,261
Post retirement benefits obligation 14,474 15,926
Deferred compensation and other 9,720 14,853 -------------- ------------- Total other long-term obligations $ 73,571 $ 80,040 ============== =============
NOTE 4. INCOME TAXES
Income tax provisions consist of (in thousands):
Year Ended ----------------------------------------- December 31, December 26, December 27, 2000 1999 1998 ------------ ------------ ------------ Current: Federal $ 71,785 $ 72,306 $ 46,348 State 14,624 16,433 11,097 Deferred: Federal (3,913) (9,855) 2,977 State (406) (1,155) 630 ------------ ------------ ------------ Income tax provision $ 82,090 $ 77,729 $ 61,052 ============ ============ ============
The effective tax rate and the statutory federal income tax rate are reconciled as follows:
Year Ended --------------------------------------- December 31, December 26, December 27, 2000 1999 1998 ------------ ------------ ------------ Statutory rate 35% 35% 35% State taxes, net of federal benefit 6% 6% 6% Amortization of intangibles 7% 7% 9%
----------- ----------- ----------- Effective tax rate 48% 48% 50% ----------- ----------- -----------
The components of deferred tax liabilities (benefits) recorded in the Company's Consolidated Balance Sheet on December 31, 2000 and December 26, 1999 are (in thousands):
2000 1999 ---------- ----------- Depreciation and amortization $ 106,952 $ 114,024 Partnership losses 6,273 6,666 State taxes 9,596 10,126 Deferred compensation (10,453) (14,376) Other (384) (137) ---------- ---------- Deferred tax liability (net of $15,815 in 2000 and $16,399 in 1999 reported as current assets) $ 111,984 $ 116,303 ========== ==========
NOTE 5. INTANGIBLES
Intangibles consist of (in thousands):
December 31, December 26, 2000 1999 ------------ ------------ Identifiable intangible assets, primarily customer lists $ 384,791 $ 384,236 Excess purchase prices over identifiable intangible assets 1,290,538 1,290,383 ------------ ------------ Total 1,675,329 1,674,619 Less accumulated amortization 280,064 222,540 ------------ ------------ Intangibles - net 1,395,265 $ 1,452,079 ============ ============
NOTE 6. EMPLOYEE BENEFITS
The Company sponsors defined benefit pension plans (retirement plans) which cover a majority of its employees. Benefits are based on years of service and compensation. Contributions to the plans are made by the Company in amounts deemed necessary to provide benefits. Plan assets consist primarily of investments in marketable securities including common stocks, bonds and U.S. government obligations, and other interest bearing accounts. The Company contributed $1,855,000 in 2000 to multi-employer retirement plans.
The Company also has a number of supplemental retirement plans to provide key employees with additional retirement benefits. The terms of the plans are generally the same as those of the retirement plans, except that the supplemental retirement plans are limited to key employees and benefits under them are reduced by benefits received under the retirement plans. These plans are funded on a pay-as-you-go basis and the accrued pension obligation is included in other long-term obligations.
The elements of pension costs are as follows (in thousands):
The Company also provides or subsidizes certain retiree health care and life insurance benefits, under two plans - one for employees of McClatchy Newspapers, Inc. and one for the Star Tribune Company's employees. The elements of post-retirement expenses are as follows (in thousands):
A reconciliation of the plans' benefit obligations, fair value of assets, funded status and amounts recognized in the Company's Consolidated Balance Sheet at December 31, 2000 and December 26, 1999, are as follows (in thousands):
Weighted average assumptions used for valuing benefit obligations were:
For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, the accumulated benefit obligation and the fair value of plan assets were $16,060,000, $15,806,000 and $0 respectively, as of December 31, 2000 and $20,100,000, $18,400,000 and $0, respectively, as of December 26, 1999.
For the McClatchy Newspapers, Inc. post-retirement plan (benefit obligation of $4.5 million, income of $285,000), the medical care cost trend rates are estimated to decline from 8.75% in 1999 to 5.8% by the year 2002. A 1.0% change in the assumed health care cost trend rate would have decreased or increased the APBO by $1,700 and the annual service cost nominally. For the Star Tribune post-retirement plan, the medical cost trend rates are expected to decline from 7.6% in 1999 to 5.5% by the year 2004. For the Star Tribune's plan (benefit obligation of $7.1 million and expense of $797,000), a 1.0% change in the assumed health care cost trend rate would have increased the benefit obligation and expense by $753,000 and $119,000 respectively, and decreased each by $663,000 and $104,000, respectively.
The Company has deferred compensation plans (401(k) plans and other savings plans) which enable qualified employees to voluntarily defer compensation. The Company's manadatory matching contributions to the 401(k) plans were $6,198,000 in 2000, $6,232,000 in 1999, and $6,010,000 in 1998.
NOTE 7. CASH FLOW INFORMATION
Net cash paid in connection with the Cowles merger in 1998 consists of (in thousands):
No significant acquisitions were made in 2000 or 1999.
Cash paid during the years ended December 31, 2000, December 26, 1999 and December 27, 1998, for interest and income taxes were (in thousands):
Cash provided or used by operations was affected by changes in certain assets and liabilities, net of the effects of acquired newspaper operations, as follows (in thousands):
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company guarantees $20,444,000 of bank debt related primarily to its joint venture in the Ponderay newsprint mill.
The Company and its subsidiaries rent certain facilities and equipment under operating leases expiring at various dates through March 2010. Total rental expense amounted to $5,714,000 in 2000, $5,862,000 in 1999 and $5,407,000 in 1998. Minimum rental commitments under operating leases with non-cancelable terms in excess of one year are (in thousands):
2001 $ 6,402 2002 5,424 2003 4,046 2004 2,383 2005 1,711 Thereafter 1,843 -----------
Total $21,809 ===========
There are libel and other legal actions that have arisen in the ordinary course of business and are pending against the Company. From time to time, the Company is involved as a party in various governmental proceedings, including environmental matters. Management believes, after reviewing such actions with counsel, that the outcome of pending actions will not have a material adverse effect on the Company's consolidated results of operations or financial position.
NOTE 9. COMMON STOCK AND STOCK PLANS
The Company's Class A and Class B common stock participate equally in dividends. Holders of Class B common stock are entitled to one vote per share and to elect as a class 75% of the Board of Directors, rounded down to the nearest whole number. Holders of Class A common stock are entitled to one-tenth of a vote per share and to elect as a class 25% of the Board of Directors, rounded up to the nearest whole number. Class B common stock is convertible at the option of the holder into Class A common stock on a share-for-share basis.
At December 31, 2000 the Company has five stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. No significant amounts of compensation costs have been recognized for its fixed stock option plans and its stock purchase plan.
The Company's Amended Employee Stock Purchase Plan (the Purchase Plan) reserved 1,875,000 shares of Class A common stock for issuance to employees. Eligible employees may purchase shares at 85% of "fair market value" (as defined) through payroll deductions. The Purchase Plan can be automatically terminated by the Company at any time. As of December 31, 2000 1,064,321 shares of Class A common stock have been issued under the Purchase Plan.
The Company has three stock option plans which reserve 3,312,500 Class A common shares for issuance to key employees -- the 1987, 1994 and 1997 plans ("Employee Plans"). Terms of each of the Employee Plans are substantially the same. Options are granted at the market price of the Class A common stock on the date of grant. The options vest in installments over four years, and once vested are
exercisable up to 10 years from the date of grant. Although the plans permit the Company, at its sole discretion, to settle unexercised options by granting stock appreciation rights, the Company does not intend to avail itself of this alternative except in limited circumstances.
The Company's amended and restated stock option plan for outside directors (the Directors' Plan) provides for the issuance of up to 187,500 shares of Class A stock. Under the plan each outside director was granted an option at fair market value at the conclusion of each regular annual meeting of stockholders for 2,500 shares. Terms of the Directors' Plan are similar to the terms of the Employee Plans. Outstanding options are summarized as follows:
The following tables summarize information about fixed stock options outstanding in the stock plans at December 31, 2000:
Had compensation costs for the Company's five stock-based compensation plans been determined based upon the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share amounts):
The impact of outstanding non-vested stock options granted prior to 1995 has been excluded from the pro forma calculation; accordingly, the 2000, 1999 and 1998 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock options.
Compensation costs are calculated for the fair value of the employees' purchase rights, which was estimated using the Black- Scholes model with the following assumptions for 2000, 1999 and 1998 respectively: dividend yield of 1.0% to 1.4% for all years; an expected life of one to seven years for all years; expected volatility of .2732, .2862 and .2868; and risk-free interest rates of 5.3% to 6.8% in 2000, 5.4% to 6.3% in 1999, and 4.5% to 5.8% in 1998. The weighted-average fair value of those purchase rights granted in 2000, 1999, and 1998 was $12.18, $13.43 and $9.20.
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS AND DERIVATIVE DISCLOSURES
The following estimates were developed using available market data for instruments held as of December 31, 2000 and December 26, 1999, (in thousands):
The Company does not have, nor does it intend to enter into derivative contracts for trading purposes. The Company does not attempt to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Hence, there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink and other inventories, leases of equipment and facilities, or its business insurance contracts.
The Company's three interest rate swap agreements (see note 3) are designated as cash flow hedges and are specifically designed to hedge the variability in the expected cash flows that is attributable to interest rate fluctuations on $300,000,000 of its variable rate bank debt. The three swap instruments, as well as the related debt, are reset to three-month LIBOR rates quarterly. The swaps were entered into to match the significant terms of the debt to provide highly effective hedges.
The Company does not expect any significant net gain or loss to be recognized in earnings as a result of ineffectiveness of its cash flow hedges, nor any significant impact to its consolidated statement of financial position to result from recording the fair value of its cash flow hedges in its consolidated financial statements.
NOTE 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's business is somewhat seasonal, with peak revenues and profits generally occurring in the second and fourth quarters of each year as a result of increased advertising activity during the spring holiday and Christmas periods.
The first quarter is historically the weakest quarter for revenues and profits. The Company's quarterly results are summarized as follows (in thousands, except per share amounts):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Biographical information for Class A Directors, Class B Directors and executive officers contained under the captions "Nominees for Class A Directors", "Nominees for Class B Directors" and "Other Executive Officers" under the heading "Election of Directors" in the definitive Proxy Statement for the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the headings "Compensation", "Executive Compensation", "Stock Option Awards", "Option Exercises and Holdings", "Pension Plans" and "Employment Agreement" in the definitive Proxy Statement for the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Stock Ownership" in the definitive Proxy Statement for the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the headings "Certain Relationships and Related Transactions" in the definitive Proxy Statement for the Company's 2001 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) (1)&(2) Financial Statements and Financial Statement Schedules filed as a part of this Report as listed in the Index to Financial Statements and Financial Statement Schedules on page 21 hereof.
(3) Exhibits filed as part of this Report as listed in the Exhibit Index beginning on page 48 hereof.
b) Reports on Form 8-K - None.
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 on March 30, 2001.
THE McCLATCHY COMPANY
By /s/ GARY B. PRUITT ------------------------------------- Gary B. Pruitt President and Chief Executive Officer
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 and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
Principal Executive Officer:
/s/ GARY B. PRUITT President, Chief Executive March 30, 2001 - -------------------------------- (Gary B. Pruitt) Officer and Director
Principal Financial Officer:
/s/ ROBERT W. BERGER Controller, March 30, 2001 - -------------------------------- (Robert W. Berger) Assistant Treasurer
Principal Accounting Officer:
/s/ ROBERT W. BERGER Controller, March 30, 2001 - -------------------------------- (Robert W. Berger) Assistant Treasurer
SIGNATURES-(Continued)
Signature Title Date --------- ----- ----
Directors:
/s/ ELIZABETH BALLANTINE Director March 30, 2001 - -------------------------------- (Elizabeth Ballantine)
/s/ LEROY T. BARNES Director March 30, 2001 - -------------------------------- (Leroy T. Barnes)
/s/ WILLIAM K. COBLENTZ Director March 30, 2001 - -------------------------------- (William K. Coblentz)
/s/ MOLLY MALONEY EVANGELISTI Director March 30, 2001 - -------------------------------- (Molly Maloney Evangelisti)
/s/ R. LARRY JINKS Director March 30, 2001 - -------------------------------- (R. Larry Jinks)
/s/ JOAN F. LANE Director March 30, 2001 - -------------------------------- (Joan F. Lane)
/s/ JAMES B. McCLATCHY Publisher and March 30, 2001 - -------------------------------- (James B. McClatchy) Director
/s/ KEVIN McCLATCHY Director March 30, 2001 - -------------------------------- (Kevin McClatchy)
SIGNATURES-(Continued)
Signature Title Date --------- ----- ----
Directors:
/s/ WILLIAM ELLERY McCLATCHY Director March 30, 2001 - -------------------------------- (William Ellery McClatchy)
/s/ ERWIN POTTS Chairman of the Board and March 30, 2001 - -------------------------------- (Erwin Potts) Director
/s/ S. DONLEY RITCHEY, JR. Director March 30, 2001 - -------------------------------- (S. Donley Ritchey, Jr.)
/s/ FREDERICK R. RUIZ Director March 30, 2001 - -------------------------------- (Frederick R. Ruiz)
/s/ MAGGIE WILDEROTTER Director March 30, 2001 - -------------------------------- (Maggie Wilderotter)
SCHEDULE II
THE McCLATCHY COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended December 31, 2000 (in thousands)
(1) Amounts written off net of bad debt recoveries.
INDEX OF EXHIBITS
Exhibit -------
3.1* The Company's Restated Certificate of Incorporation dated March 18, 1998, included as Exhibit 3.1 in the Company's 1997 Form 10-K. 3.2* The Company's By-laws included as Exhibit 3.2 in the Company's Registration Statement No. 333-46501 on Form S-4. 10.1* Amended and Restated Agreement and Plan of Merger and Reorganization between The McClatchy Company and Cowles Media Company dated February 13, 1998 included as Exhibit 2.1 in the Company's Registration Statement No. 333-46501 on Form S-4. 10.2* Credit Agreement dated March 10, 1998 between The McClatchy Company (formerly MNI Newco, Inc.), the lenders party thereto, Salomon Brothers, Inc., as Arranger and Syndication Agent and Bank of America National Trust and Savings Association as Swingline Lender, Administrative Agent and Collateral Agent, included as Exhibit 10.2 in the Company's 1997 Form 10-K. 10.3* Ponderay Newsprint Company Partnership Agreement dated as of September 12, 1985 between Lake Superior Forest Products, Inc., Central Newsprint Company, Inc., Bradley Paper Company, Copley Northwest, Inc., Puller Paper Company, Newsprint Ventures, Inc., Wingate Paper Company, Tribune Newsprint Company and Nimitz Paper Company included in Exhibit 10.10 to McClatchy Newspapers, Inc. Registration Statement No. 33- 17270 on Form S-1. **10.4 The McClatchy Company Management by Objective Plan Description. **10.5* Supplemental Executive Retirement Plan included in Exhibit 10.7 to McClatchy Newspapers, Inc. 1988 Report on Form 10-K. **10.6* Amended and Restated 1987 Stock Option Plan dated August 15, 1996 included as Exhibit 10.7 to the McClatchy Newspapers, Inc. 1996 Report on Form 10-K. **10.7* Amended and Restated 1994 Stock Option Plan dated February 1, 1998 included as Exhibit 10.8 to the Company's Report on Form 10-Q filed for the Quarter Ending on June 30, 1998. 10.8* 1997 Stock Option Plan dated December 10, 1997 included as Exhibit 10.8 in the Company's 1997 Form 10-K. **10.9* Executive Performance Plan adopted on January 1, 1990 included in Exhibit 10.13 to McClatchy Newspapers, Inc. 1989 Report on Form 10-K. **10.10* The Company's Amended and Restated 1990 Directors' Stock Option Plan dated February 1, 1998 included as Exhibit 10.12 in the Company's 1997 Form 10-K. **10.11* Employment Agreement between the Company and Gary B. Pruitt dated June 1, 1996 included as Exhibit 10.13 to the McClatchy Newspapers, Inc. 1996 Report on Form 10-K. **10.12* The Company's Long-Term Incentive Plan, dated January 1, 1998 included as Exhibit 10.2 to the Company's Report on Form 10-Q for the Quarter Ending on June 30, 1998. **10.13* The Company's Chief Executive Bonus Plan, dated January 1, 1998 included as Exhibit 10.3 to the Company's Report on Form 10-Q for the Quarter Ending on June 30, 1998. 21* Subsidiaries of the Company included as Exhibit 21 in the Company's 1997 Form 10-K. 23 Consent of Deloitte & Touche LLP.
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* Incorporated by reference
** Compensation plans or arrangements for the Company's executive officers and director