{\rtf1\deflang1033\deflangfe1033\margl720\margr720\margt360\margb360{\stylesheet{\fs20\lang1033\snext0 Normal;} {\s1\sb240\keepn{\*\pn \pnlvl1\pndec\pnprev1\pnstart1\pnsp144}\b\f0\fs30\lang1033 \sbasedon0\snext0 heading 1;} {\s2\sb200\keepn{\*\pn \pnlvl2\pndec\pnprev1\pnstart1\pnsp144{\pntxtb.}}\b\f0\fs26\lang1033 \sbasedon0\snext0 heading 2;} {\s3\sb180\keepn{\*\pn \pnlvl3\pndec\pnprev1\pnstart1\pnsp144{\pntxtb.}}\b\f0\fs22\lang1033 \sbasedon0\snext0 heading 3;} {\s4\sb160\keepn{\*\pn \pnlvl4\pnucltr\pnprev1\pnstart1\pnsp144{\pntxtb.}}\b\f0\fs22\lang1033 \sbasedon0\snext0 heading 4;} {\s5\sb140\keepn{\*\pn \pnlvl5\pncltr\pnprev1\pnstart1\pnsp144}\b\f0\fs20\lang1033 \sbasedon0\snext0 heading 5;} {\s6\tqc\lang1033\sbasedon0\snext6 footer;} {\*\cs16 \additive\super\sbasedon10 footnote reference;} {\*\cs18 \additive\sbasedon10 page number;}} {\fonttbl{\f0\fnil Times New Roman;}{\f1\fnil Courier New}{\f2005\fnil Courier New;}{\f2010\fnil Wingdings;}{\f2020\fnil Webdings;}{\f2\fnil Arial;}{\f3\fnil Arial;}{\f4\fnil LucidaHandwriting;}{\f5\fnil Symbol;}{\f6\fnil Symbol;}{\f7\fnil Ferdsch;}{\f30\fnil Myriad Cn Semibold;}{\f31\fnil Myriad Roman;}{\f50\fnil Courier New;}{\f51\fnil Times New Roman;}{\f52\fnil Arial;}{\f53\fnil Symbol;}{\f54\fnil Wingdings;}{\f55\fnil Wingdings 2;}{\f56\fnil Wingdings 3;}{\f57\fnil Webdings;}{\f58\fnil Arial Narrow;}{\f59\fnil Arial Unicode MS;}{\f60\fnil Cyberbit;}{\f61\fnil Morningstar 1U Light;}{\f62\fnil Calibri;}} {\colortbl;\red0\green0\blue0;\red127\green0\blue0;\red0\green0\blue255;\red127\green127\blue127;\red0\green51\blue153;\red255\green204\blue0;\red255\green255\blue255;\red246\green244\blue236;\red0\green0\blue0;} {\*\bkmkstart filing_1}{\*\bkmkend filing_1}{\*\bkmkstart doc_1_1}{\*\bkmkend doc_1_1} \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================================================================================ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql UNITED STATES \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SECURITIES AND EXCHANGE COMMISSION \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql WASHINGTON, D.C. 20549 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql FORM 10-K \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Mark One) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE SECURITIES EXCHANGE ACT OF 1934 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql For the Fiscal Year Ended December 27, 1998 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE SECURITIES EXCHANGE ACT OF 1934 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql For the transition period from _______________ to _______________. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Commission File Number 1-9824 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The McClatchy Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Exact name of registrant as specified in its charter) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Delaware 52-2080478 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (State or other jurisdiction of (I.R.S. Employer \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql incorporation or organization) Identification No.) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2100 "Q" Street, Sacramento, CA. 95816 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Address of principal executive offices) (Zip Code) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Registrant's telephone number, including area code: (916) 321-1846 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------------------------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Securities registered pursuant to Section 12(b) of the Act: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Name of each exchange \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Title of each class on which registered \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------- ------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Class A Common Stock, par value New York Stock Exchange \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $.01 per share \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Indicate by check mark whether the registrant (1) has filed all reports \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql required to be filed by Section 13 or 15(d) of the Securities Exchange Act of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1934 during the preceding 12 months (or for such shorter period that the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql registrant was required to file such reports), and (2) has been subject to such \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql filing requirements for the past 90 days. Yes /X/ No /_/. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Indicate by check mark if disclosure of delinquent filers pursuant to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and will not be contained, to the best of registrant's knowledge, in definitive \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql proxy or information statements incorporated by reference in Part III of this \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Form 10-K or any amendment to this Form 10-K /X/ . \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Aggregate market value of the Company's voting stock held by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql non-affiliates on March 22, 1999, based on the closing price for the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Class A Common Stock on the New York Stock Exchange on such date: approximately \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $651,224,010. For purposes of the foregoing calculation only, required by Form \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10-K, the Registrant has included in the shares owned by affiliates the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql beneficial ownership of Common Stock of officers and directors of the Registrant \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and members of their families, and such inclusion shall not be construed as an \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql admission that any such person is an affiliate for any purpose. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Shares outstanding at March 22, 1999: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Class A Common Stock -- 16,124,622 shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Class B Common Stock -- 28,611,912 shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Documents incorporated by reference: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Definitive Proxy Statement for the Company's May 19, 1999 Annual \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Meeting of Stockholders to be filed pursuant to Regulation 14A under the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Securities Exchange Act of 1934 (incorporated in Part III to the extent provided \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in Items 10, 11, 12 and 13 hereof). \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================================================================================ \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INDEX TO THE McCLATCHY COMPANY \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 FORM 10-K \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Item No. Page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - ------- ---- \par\pard\plain\fs16{\*\bkmkstart part_1_2_1}{\*\bkmkend part_1_2_1}\pard\plain\cf1\f50\fs16\ql PART I \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1. Business........................................................ 2 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Star Tribune Newspaper.......................................... 3 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql California Newspapers........................................... 4 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Carolinas Newspapers............................................ 6 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Northwest Newspapers............................................ 8 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other Operations................................................ 10 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Raw Materials................................................... 11 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Competition..................................................... 11 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Employees - Labor............................................... 12 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2. Properties...................................................... 13 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 3. Legal Proceedings............................................... 13 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 4. Submission of Matters to a Vote of Security \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Holders..................................................... 14 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PART II \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 5. Market for the Registrant's Common Stock \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and Related Stockholder Matters............................. 14 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 6. Selected Financial Data......................................... 15 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 7. Management's Discussion and Analysis of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Financial Condition and Results of Operations............... 16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 7A. Quantitative and Qualitative Disclosures \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql About Market Risk........................................... 29 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 8. Financial Statements and Supplementary Data..................... 29 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 9. Changes In and Disagreements With Accountants \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql on Accounting and Financial Disclosure...................... 52 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PART III \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10. Directors and Executive Officers of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Registrant.................................................. 53 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 11. Executive Compensation.......................................... 53 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 12. Security Ownership of Certain Beneficial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Owners and Management....................................... 53 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 13. Certain Relationships and Related \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Transactions................................................ 53 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PART IV \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 14. Exhibits, Financial Statement Schedules \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and Reports on Form 8-K..................................... 53 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart part_1_2_2}{\*\bkmkend part_1_2_2}\pard\plain\cf1\f50\fs16\ql PART I \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_1}{\*\bkmkend item_1_3_1}\pard\plain\cf1\f50\fs16\ql ITEM 1. BUSINESS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OVERVIEW \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The McClatchy Company, a Delaware corporation, is a successor in interest \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to McClatchy Newspapers, Inc., a Delaware corporation, and was created as a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql result of the Amended and Restated Agreement and Plan of Merger and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Reorganization (the "merger"), dated as of February 13, 1998, between (among \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql others) McClatchy Newspapers, Inc. and Cowles Media Company (nka, The Star \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tribune Company), a Delaware corporation ("Cowles"). Pursuant to the merger \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql agreement, McClatchy Newspapers, Inc. and Cowles each became wholly-owned \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql subsidiaries of The McClatchy Company. All references to the "Company" herein \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql include the predecessor in interest, McClatchy Newspapers, Inc. The Company owns \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and publishes 23 newspapers in four regions of the Country - Minnesota, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql California, the Carolinas and the Northwest (Alaska and Washington). These \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers range from large dailies serving metropolitan areas to non-daily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers serving small communities. For the year ended December 31, 1998, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company had an average paid daily circulation of 1,363,555, Sunday circulation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of 1,853,474 and non-daily circulation of 64,829. Please see the Recent Event \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql section below for a discussion of the merger with Cowles Media Company in March \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Each of the Company's newspapers is semiautonomous in its business and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql editorial operations so as to meet most effectively the needs of the communities \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql it serves. Publishers, editors and general managers of the newspapers make the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql day-to-day decisions and within limits are responsible for their own budgeting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and planning. Policies on such matters as the amount and type of capital \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expenditures, key personnel changes, and strategic planning and operating \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql budgets including wage and pricing matters, are approved or established by the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's senior management or Board of Directors. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's overall strategy is to concentrate on developing its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers and smaller related businesses. Each of its eleven daily newspapers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql has the largest circulation of any newspaper servicing its particular \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql metropolitan area. The Company believes that this circulation advantage is of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql primary importance in attracting advertising, the principal source of revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for the Company. Advertising revenues approximated 78% of consolidated revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1998 and 79% of consolidated revenues in 1997. Circulation revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximated 17% of consolidated revenues in 1998 and 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's newspaper business is somewhat seasonal, with peak revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and profits generally occurring in the second and fourth quarters of each year \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql as a result of increased advertising activity during the Easter holiday and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql spring advertising season, and Thanksgiving and Christmas periods. The first \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql quarter is historically the weakest quarter for revenues and profits. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other businesses owned by the Company include Nando Media, the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql on-line publishing operation, and The Newspaper Network (TNN), a distributor of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql preprinted advertising inserts and run-of-press advertising. In addition, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company is a partner (13.5% interest) in Ponderay Newsprint Company, a general \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql partnership that owns and operates a newsprint mill in Washington \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql State. In 1998, the Company sold two small commercial printing operations that \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were located in California and North Carolina. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company is addressing the issue that many automated information systems \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql may not operate effectively as of January 1, 2000. Please see the discussion in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part II, Item 7 under the heading "Year 2000 Compliance Disclosure." \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql When used in this Report, the words "expect" and "project" and similar \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expressions are generally intended to identify forward looking statements. Such \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql statements are subject to certain risks and uncertainties, including those \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql discussed in "Risk Factors" in Part II, Item 7, that could cause actual results \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to differ materially from those projected. Readers are cautioned not to place \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql undue reliance on these forward looking statements, which speak only as of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql date hereof. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RECENT EVENT - STAR TRIBUNE NEWSPAPER \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On March 19, 1998, the Company acquired all of the outstanding shares of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles Media Company (Cowles) in a transaction valued at approximately $90.50 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql per Cowles share and the assumption of $77,350,000 in existing Cowles debt. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles publishes the STAR TRIBUNE newspaper, which serves the Twin Cities of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Minneapolis and St. Paul, Minnesota. Cowles also owned four separate \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql subsidiaries that publish business magazines, special-interest magazines and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql home improvement books. Simultaneously with the close of the merger, the Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql sold the magazine and book publishing subsidiaries. The combined proceeds, plus \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql debt and other liabilities assumed by the buyers in those transactions, were \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $208.1 million. These proceeds were used to repay debt associated with the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles merger. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In connection with the Cowles merger, the Company paid 15% of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consideration by issuing 6,330,548 shares of Class A Common Stock in exchange \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for Cowles shares and paid cash for the remaining shares. The Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql each Cowles share. The Company incurred bank debt through a syndicate of banks \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and financial institutions to finance the cash requirements of the merger and to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql refinance its existing debt. Results of the STAR TRIBUNE have been included in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company's results beginning March 20, 1998. See Item 8, notes 2 and 4 to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consolidated financial statements for further discussion of the acquisition. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql merger was accounted for as a purchase, and accordingly, assets acquired and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql liabilities assumed have been recorded at their fair market value. The primary \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql asset retained by the Company is the STAR TRIBUNE. A morning daily, the STAR \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TRIBUNE is the largest newspaper in Minnesota and now the Company's largest \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspaper. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Daily average paid circulation in 1998 increased 1.7% to 369,738 over 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql average of 363,733, while Sunday average paid circulation was up 0.5% to 671,978 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1998 from 668,935 in 1997. As of December 31, 1998, approximately 71% of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql daily and 66% of Sunday circulation was home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 3 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The STAR TRIBUNE'S advertising lineage for the period from March 20, 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to December 27, 1998 is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 1,635 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part Run 271 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 186 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of the STAR TRIBUNE from March 20, 1998, through December 27, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998, were $305.9 million, up 5.7% from the same time period in 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CALIFORNIA NEWSPAPERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The three "Bee" newspapers have formed the core of the Company's operations \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for many years and continue to have a significant influence on the civic, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql political, economic and cultural life of California's Central Valley. These \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers are summarized below: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 Circulation (1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newspaper Daily/Weekly Sunday 1998 Revenues(2) 1997 Revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- ------------ ------ ------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Sacramento Bee 288,408 349,441 $194,160,000 $ 188,842,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Fresno Bee 157,541 192,444 84,324,000 81,439,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Modesto Bee 84,065 90,952 45,685,000 45,319,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other newspapers 4,805 n/a 1,397,000 2,627,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (1) Based on calendar year average paid daily circulation. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (2) Revenues in 1998 have four fewer days than 1997 due to the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql change to period reporting in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Bee newspapers and other California papers produced approximately 33.6% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of the total Company revenues in 1998, compared to 49.6% in 1997. In February \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997, the Company sold four of its California newspapers, leaving the CLOVIS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INDEPENDENT as California's sole non-daily paper in the region. In addition, in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql each of the Bee markets the company now operates separate Hispanic newspapers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql which have a combined circulation of about 70,000. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE SACRAMENTO BEE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE SACRAMENTO BEE is a morning newspaper serving the California state \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql capital and the surrounding metropolitan area. In 1998, THE SACRAMENTO BEE'S \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql average paid circulation increased 1.5% daily and 0.1% Sunday from 1997. As of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 31, 1998, approximately 87% of the daily, and 82% of the Sunday \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql circulation was home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE SACRAMENTO BEE'S advertising linage for the years ended December 27, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998, and December 31, 1997, is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 4 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 2,292 2,284 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part Run 309 377 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 117 132 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of THE SACRAMENTO BEE increased 2.8% from 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE FRESNO BEE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE FRESNO BEE is a morning newspaper serving the Fresno, California \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql metropolitan area. THE FRESNO BEE'S average paid circulation increased 1.5% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql daily and was up 1.3% on Sunday versus 1997. As of December 31, 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately 89% of THE FRESNO BEE'S daily 87% of the Sunday circulation was \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE FRESNO BEE'S advertising linage for the years ended December 27, 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and December 31, 1997, is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 1,266 1,247 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part Run 267 192 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 107 143 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of THE FRESNO BEE increased 3.5% from 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE MODESTO BEE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE MODESTO BEE is a morning newspaper that serves the Modesto, California, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql metropolitan area, located between Sacramento and Fresno. THE MODESTO BEE'S \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql average paid circulation increased 1.0% daily and 0.6% Sunday versus 1997. As of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 31, 1998, approximately 88% of the daily and 87% of the Sunday \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql circulation was home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE MODESTO BEE'S advertising linage for the years ended December 27, 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and December 31, 1997, is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 1,072 1,083 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part Run 60 72 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 340 471 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 5 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of THE MODESTO BEE increased 0.8% from 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CAROLINAS NEWSPAPERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In 1990, the Company purchased three daily and three non-daily newspapers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in South Carolina from The News and Observer Publishing Company (N&O). On August \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1, 1995, the Company purchased the remainder of N&O, which included THE NEWS & \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OBSERVER newspaper and six non-daily newspapers (and other businesses discussed \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql below). In mid 1997, the FORT MILL TIMES, a weekly newspaper, was purchased in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql South Carolina. Several niche products, a commercial printing operation and one \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql weekly newspaper, all located in North Carolina, were sold in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Carolinas newspapers are summarized below: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql 1998 Circulation (1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql ---------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Newspaper Daily/Weekly Sunday 1998 Revenues(3) 1997 Revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql --------- ------------ ------ -------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql The News & Observer (Raleigh) 164,277 207,929 $ 129,646,000 $ 124,182,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql The Herald (Rock Hill) 30,607 32,124 13,471,000 12,761,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql The Island Packet (Hilton Head) 15,200 17,534 10,897,000 10,041,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Beaufort Gazette 11,288 10,842 5,534,000 4,924,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Non-daily newspapers (2) 42,215 n/a 15,142,000 15,571,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql (1) Based on calendar year average paid circulation. \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql (2) Four South Carolina non-daily newspapers revenues are consolidated with \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql revenues of THE (Rock Hill) HERALD. \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql (3) Revenues in 1998 have four fewer days \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql than 1997 due to the Company's change to period reporting in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Carolinas newspapers produced 18.0% of total Company revenues in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 versus 26.1% in 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS & OBSERVER \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS & OBSERVER, the Company's third largest newspaper, is a morning \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql daily serving North Carolina's state capital, Raleigh, and the thriving Research \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Triangle which includes Raleigh, Durham and Chapel Hill, North Carolina. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS & OBSERVER'S average paid circulation in 1998 increased \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately 2.6% daily and 0.6% Sunday over calendar year 1997. As of December \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 31, 1998 approximately 80% of the daily and 75% of the Sunday circulation was \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS & OBSERVER'S advertising linage for the year ended December 27, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998, and December 31, 1997, is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 6 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 2,027 2,019 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part Run 79 87 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 8 9 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS & OBSERVER'S revenues for 1998 increased 4.4% over 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE HERALD \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE HERALD is a morning newspaper serving Rock Hill and surrounding \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql communities in York County, South Carolina. Rock Hill is a community \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately 25 miles southwest of Charlotte, North Carolina. In 1998, THE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql HERALD'S average paid circulation increased 0.5% daily and was up 1.1% Sunday \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql from 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE HERALD'S main competitor is a zoned edition of the CHARLOTTE OBSERVER, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql whose circulation in THE HERALD'S primary circulation area is estimated to be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately a third of THE HERALD'S circulation. As of December 31, 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately 79% of the daily and 77% of the Sunday circulation was home \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising linage for the years ended December 27, 1998, and December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997, were as follows: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 907 945 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 72 71 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of THE HERALD increased 5.6% over 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE ISLAND PACKET AND THE BEAUFORT GAZETTE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE ISLAND PACKET and THE BEAUFORT GAZETTE serve Beaufort County in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql southeastern South Carolina. THE ISLAND PACKET serves Hilton Head Island and the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql town of Bluffton where tourism, retirement communities and services are the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql economic mainstays. THE GAZETTE serves the city of Beaufort and northern \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Beaufort County encompassing surrounding islands of Lady's, St. Helena, Fripp \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and Paris. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The average paid circulation increased 4.8% daily and 5.6% Sunday at THE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ISLAND PACKET and was up 4.9% daily and declined 4.2% Sunday at THE GAZETTE. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As of December 31, 1998, approximately 65% of the daily and 57% of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Sunday circulation of THE PACKET was home delivered. Comparable amounts for THE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql GAZETTE were 69% daily and 72% Sunday. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 7 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising linage for the years ended December 27, 1998, and December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997, for the newspapers were: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Packet Full Run 744 754 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Packet Part Run 27 37 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Packet Total Market Coverage 7 4 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Gazette Full Run 439 547 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Gazette Total Market Coverage 54 51 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of THE PACKET increased 12.4% over 1997, while THE GAZETTE'S \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql net revenues were up 8.5%. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CAROLINAS NON-DAILY NEWSPAPERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The South Carolina non-daily newspapers include the CLOVER HERALD, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql YORKVILLE ENQUIRER, the LAKE WYLIE MAGAZINE and since mid 1997 the FORT MILL \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TIMES, and serve small communities in Chester and York counties. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The North Carolina non-dailies are newspapers that serve small communities \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql generally surrounding Raleigh. They are (circulation in parenthesis): CHAPEL \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql HILL NEWS (21,000 primarily free distribution), CARY NEWS (12,300), ZEBULON \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RECORD (3,100), GOLD LEAF FARMER (3,000) and SMITHFIELD HERALD (14,500). N&O \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql also published Business North Carolina, a monthly magazine distributed to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately 24,000 homes throughout North Carolina and the Mount Olive \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tribune, both of which were sold in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NORTHWEST NEWSPAPERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company began to diversify geographically outside of California in 1979 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql when it purchased the ANCHORAGE DAILY NEWS. Later that year, the Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql purchased the TRI-CITY HERALD in Southeastern Washington. In 1986, the Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql purchased its fifth largest newspaper, THE (Tacoma) NEWS TRIBUNE. In June 1995, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company acquired the PENINSULA GATEWAY in Gig Harbor, Washington. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company now publishes four newspapers in Washington State and the largest daily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspaper in Alaska. These newspapers are summarized below: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 Circulation (1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newspaper Daily/Weekly Sunday 1998 Revenues(2) 1997 Revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- ------------ ------ -------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The News Tribune (Tacoma) 129,557 148,166 $ 73,867,000 $ 70,561,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Anchorage Daily News 72,970 88,769 53,499,000 50,689,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tri-City Herald 39,904 43,295 19,336,000 18,939,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other newspapers 17,807 n/a 3,953,000 3,968,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (1) Based on calendar year average paid circulation. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (2) Revenues in 1998 have four fewer days than 1997 due to the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql change to period reporting in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 8 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's northwest newspapers produced approximately 15.6% of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's total revenues in 1998 versus 22.5% in 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS TRIBUNE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS TRIBUNE, a morning newspaper, primarily serves the Tacoma, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Washington metropolitan area in Pierce and South King Counties. It is the third \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql largest newspaper in the state. In 1998 the average paid circulation of THE NEWS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TRIBUNE increased 0.8% daily and increased 0.1% Sunday versus 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tacoma is approximately 30 miles south of Seattle. THE NEWS TRIBUNE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql competes in the northern most fringes of its market with the major Seattle daily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers. As of December 31, 1998 approximately 84% of the daily and 82% of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Sunday circulation was home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE NEWS TRIBUNE'S advertising linage for the years ended December 27, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998, and December 31, 1997, is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 1,084 1,080 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Part Run 38 32 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 131 75 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of THE NEWS TRIBUNE increased 4.7% from 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ANCHORAGE DAILY NEWS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The ANCHORAGE DAILY NEWS, a morning newspaper, is Alaska's largest \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspaper. The ANCHORAGE DAILY NEWS circulates throughout the state of Alaska \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql but its primary circulation is concentrated in the south central region of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql state comprised of metropolitan Anchorage, the Kenai Peninsula and the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Matanuska-Susitna Valley. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The DAILY NEWS' average paid daily circulation declined 0.4% in 1998, while \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Sunday circulation declined 1.6%. As of December 31, 1998, approximately 72% of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the daily and 67% of the Sunday circulation was home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Comparative amounts of linage for the years ended December 27, 1998, and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 31, 1997, are set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 1,101 1,100 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 22 28 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 9 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of the Anchorage Daily News increased 5.5% over 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TRI-CITY HERALD \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The TRI-CITY HERALD is a morning newspaper serving the Tri-Cities of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Richland, Kennewick and Pasco in southeastern Washington. The Tri-Cities economy \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql has benefited by the Department of Energy's (DOE) efforts to clean up nuclear \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql waste at nearby Hanford Nuclear reservation. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The TRI-CITY HERALD'S average paid circulation has increased 0.9% daily, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql but declined 0.4% Sunday from 1997. As of December 31, 1998, approximately 92% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of the daily and 86% of the Sunday circulation was home delivered. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The TRI-CITY HERALD'S advertising linage for the years ended December 27, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998, and December 31, 1997, is set forth in the following table: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---- ---- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising Linage (in thousands of six-column inches): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Full Run 804 860 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total Market Coverage 40 39 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net revenues of the TRI-CITY HERALD increased 2.1% over 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OTHER NORTHWESTERN NEWSPAPERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's other non-daily newspapers include the PENINSULA GATEWAY in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql South Puget Sound and the PIERCE COUNTY HERALD which circulates twice a week in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Puyallup, near Tacoma. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OTHER OPERATIONS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company continues to expand the distribution of preprinted advertising \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql inserts and run-of-press advertising nationally under The Newspaper Network, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Inc. The Newspaper Network has launched a business of offering advertisers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql one-order, one-bill sales of advertising in newspapers throughout the country \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and has developed into a national sales and marketing company providing services \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to both advertisers and newspapers. The Company believes that this initiative is \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql important for both McClatchy and the newspaper industry in competing with direct \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql mail on a national basis. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As a result of the Company's continued research and development of new \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql technologies for its news and data, all of its daily papers are providing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql subscriber and advertiser services through various forms of electronic \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql distribution. All eleven of the Company's largest newspapers are available \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql online through the World Wide Web. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Nando Media is the Company's new media subsidiary which has two roles. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql First, as a stand alone internet publisher it generates revenues based on \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql audience on its websites, Nando Times and \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Nando Sports Server. Secondly, Nando Media serves as a technology partner to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql McClatchy and other newspapers, providing hosting, programming and customized \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql news services. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Commercial printing operations located in Clovis, California, and Benson, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql N.C., were sold in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues for all other operations were $11.8 million, down 2.1% from 1997, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and declined mostly due to the sale of the commercial printing operations. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues from these other ventures represent 1.2% of total revenues in 1998 and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1.8% in 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RAW MATERIALS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In 1998, the Company consumed approximately 242,500 metric tons of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newsprint compared to 169,000 metric tons in 1997, with the bulk of the increase \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql due to the addition of the Star Tribune. The Company currently obtains its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql supply of newsprint from a number of suppliers under long-term contracts. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newsprint and supplement expense accounted for approximately 19.6% of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql operating expenses in 1998 compared to 18.3% in 1997. Management believes its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newsprint sources of supply under existing arrangements are adequate for its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql anticipated needs. Significant increases in the price of newsprint would \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql adversely affect the operating results of the Company to the extent that it was \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql not offset by advertising and circulation volume and/or rate increases. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company, through a wholly-owned subsidiary, Newsprint Ventures, Inc., \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and four other publishers and a major newsprint manufacturer, are partners in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Ponderay Newsprint Company, a general partnership which owns and operates a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newsprint mill located sixty miles northeast of Spokane, Washington. The mill \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql became operational in late 1989 and has a production capacity in excess of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 240,000 metric tons annually. The publisher partners have committed to take \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 126,000 metric tons of this anticipated production on a "take-if-tendered" basis \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with the balance to be sold on the open market. The Company's annual commitment \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql is 28,400 metric tons. See Part II, Items 7 and 8 for further discussion of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql impact of this investment on the Company's business. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql COMPETITION \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company faces competition for advertising revenues from television, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql radio and direct mail programs, suburban neighborhood and national newspapers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and other publications. Competition for advertising is based upon circulation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql levels, readership demographics, price and advertiser results, while competition \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for circulation is generally based upon the content, journalistic quality and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql price of the newspaper. The Company's major daily newspapers are well ahead of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql their newspaper competitors in both advertising linage and general circulation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in all of their markets. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 11 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EMPLOYEES - LABOR \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As of December 27, 1998, the Company had 10,201 full and part-time \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql employees, of whom approximately 23% were represented by unions. The addition of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Star Tribune brought 2,975 employees, 55% of which are represented by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql unions. In March 1998, the Star Tribune signed two labor agreements for five and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ten years, respectively, which cover 60% of the Star Tribune's union represented \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql employees. Most of the other union represented employees are currently working \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql under labor agreements expiring in various years. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql While the Company's newspapers have not had a strike since 1978 and they do \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql not currently anticipate a strike occurring, the Company cannot preclude the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql possibility that a strike may occur at one or more of its newspapers when future \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql negotiations occur. The Company believes that, in the event of a newspaper \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql strike, it would be able to continue to publish and deliver to subscribers, a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql capability which is critical to retaining revenues from advertising and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql circulation. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 12 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart item_1_3_2}{\*\bkmkend item_1_3_2}\pard\plain\cf1\f50\fs16\ql ITEM 2. PROPERTIES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The corporate headquarters of the Company are located at 2100 "Q" Street, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Sacramento, California. The general character, location and approximate size of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the principal physical properties used by the Company at December 27, 1998, are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql set forth below. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Approximate Area \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in Square Feet \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Owned Leased \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----- ------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Printing plants, business and editorial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql offices and warehouse space located in: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Minneapolis, Minnesota 812,484 341,692 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Sacramento, California 685,914 184,256 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Fresno, California 406,000 43,748 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tacoma, Washington 319,599 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Raleigh, North Carolina 212,700 49,580 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Modesto, California 148,816 19,574 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Garner, North Carolina 131,500 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Anchorage, Alaska 129,926 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Kennewick, Washington 98,081 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Rock Hill, South Carolina 49,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Beaufort, South Carolina 16,500 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Gig Harbor, Washington 13,200 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Chapel Hill, North Carolina 10,504 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Hilton Head, South Carolina 9,700 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Puyallup, Washington 6,500 9,481 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Durham, North Carolina 21,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other 13,949 53,453 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company believes that its current facilities are adequate to meet the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql present and immediately foreseeable needs of its newspapers. \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_3}{\*\bkmkend item_1_3_3}\pard\plain\cf1\f50\fs16\ql ITEM 3. LEGAL PROCEEDINGS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company becomes involved from time to time in claims and lawsuits \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql incidental to the ordinary course of its business, including such matters as \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql libel, invasion of privacy and wrongful termination actions, and complaints \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql alleging discrimination. In addition, the Company is involved from time to time \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in governmental and administrative proceedings concerning labor, environmental \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and other claims. Management believes that the outcome of pending claims or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql proceedings will not have a material adverse effect upon the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consolidated results of operations or financial condition. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 13 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart item_1_3_4}{\*\bkmkend item_1_3_4}\pard\plain\cf1\f50\fs16\ql ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Not Applicable. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart part_1_2_3}{\*\bkmkend part_1_2_3}\pard\plain\cf1\f50\fs16\ql PART II \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_5}{\*\bkmkend item_1_3_5}\pard\plain\cf1\f50\fs16\ql ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql STOCKHOLDER MATTERS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The McClatchy Company's Class A Common Stock is listed on the New York \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Stock Exchange (NYSE symbol - MNI). A small amount of Class A Stock is also \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql traded on the Midwest Stock Exchange and the Pacific Stock Exchange. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's Class B Stock is not publicly traded. The following table lists \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql dividends paid on Common Stock and the prices of the Company's Class A Common \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Stock as reported by the New York Stock Exchange for 1998 and 1997: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ----------------------------------------------- ---------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql High Low Dividends High Low Dividends \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ---- --- --------- ---- --- --------- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 1st Quarter $30.44 $25.13 $.095 $28.00 $23.75 $.095 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 2nd Quarter $35.88 $27.88 $.095 $30.50 $23.38 $.095 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 3rd Quarter $39.56 $28.19 $.095 $35.19 $29.25 $.095 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 4th Quarter $35.56 $24.94 $.095 $34.69 $26.50 $.095 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's Board of Directors does not anticipate reducing the present \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql level of quarterly dividend payments. However, the payment and amount of future \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql dividends remain within the discretion of the Board of Directors and will depend \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql upon the Company's future earnings, financial condition and requirements, and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql other factors considered relevant by the Board. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The number of record holders of Class A and Class B Common Stock at March \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 22, 1999 was 2,281 and 26, respectively. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 14 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart item_1_3_6}{\*\bkmkend item_1_3_6}\pard\plain\cf1\f50\fs16\ql ITEM 6. SELECTED FINANCIAL DATA \par\pard\plain\fs16 \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs14\ql FIVE-YEAR FINANCIAL SUMMARY \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql (Dollars in thousands, except per share amounts) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql December 27, Restated December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 1998 1997 1996 1995 1994 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ------------ ------------ ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CONSOLIDATED INCOME STATEMENT DATA: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql REVENUES - NET: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Advertising $ 756,052 $ 504,745 $ 484,460 $ 418,841 $ 368,068 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Circulation 162,433 107,298 108,317 95,248 85,017 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other 50,166 29,907 31,456 26,790 18,333 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ------------ ------------ ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Total 968,651 641,950 624,233 540,879 471,418 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql OPERATING EXPENSES: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Depreciation and amortization 93,786 53,269 52,954 44,000 38,140 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other costs and expenses 694,007 472,195 490,224 429,935 360,014 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ------------ ------------ ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Total 787,793 525,464 543,178 473,935 398,154 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ------------ ------------ ------------ ------------ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql OPERATING INCOME 180,858 116,486 81,055 66,944 73,264 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Partnership income (losses) 1,450 (500) 3,024 (630) (5,469) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other non-operating (expenses) income (60,205) 1,005 (10,344) (2,729) 3,166 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ------------ ------------ ------------ ------------ \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql INCOME BEFORE INCOME TAX PROVISION 112,103 116,991 73,735 63,585 70,961 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Income tax provision 61,052 47,759 31,629 27,362 23,501 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ------------ ------------ ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql NET INCOME $ 61,051 $ 69,232 $ 42,106 $ 36,223 $ 47,460 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ============ ============ ============ ============ ============ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql EARNINGS PER COMMON SHARE: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Basic $ 1.41 $ 1.82 $ 1.12 $ 0.97 1.28 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ============ ============ ============ ============ ============ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Diluted $ 1.41 $ 1.81 $ 1.11 $ 0.97 1.28 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ============ ============ ============ ============ ============ \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql DIVIDENDS PER COMMON SHARE $ 0.380 $ 0.380 $ 0.323 $ 0.304 $ 0.264 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ============ ============ ============ ============ ============ \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CONSOLIDATED BALANCE SHEET DATA: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Total assets $2,246,725 $ 857,798 $ 878,952 $ 900,424 $ 589,533 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Long-term bank debt 1,004,000 94,000 190,000 243,000 - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Stockholders' equity 807,005 567,055 505,067 470,034 443,955 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company changed its fiscal reporting to a 52/53 week year in 1998. This \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql change did not have a material impact on reported results. All earnings and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql earnings per share amounts have been adjusted for a change in the method of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql accounting for inventories. Results for 1997 include a pre-tax gain of $9.3 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million for the sale of certain business operations and real estate. Results for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1996 include a pre-tax gain of $2.8 million on the sale of a newspaper and other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql business operations. Results for 1995 include a $2.7 million pre-tax charge \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql related to early retirement programs while 1994 includes a $6.0 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql favorable adjustment (included in the income tax provision) related to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql resolution of income tax audits. The financial information also gives effect to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the acquisitions of the STAR TRIBUNE in March 1998 and The News and Observer \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Publishing Company in August 1995. This summary should be read in conjunction \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with the consolidated financial statements and notes thereto. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 15 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart item_1_3_7}{\*\bkmkend item_1_3_7}\pard\plain\cf1\f50\fs16\ql ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CONDITION AND RESULTS OF OPERATIONS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RECENT EVENTS AND TRENDS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In 1998, the Company changed from a calendar year to a fiscal year \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ending on the Sunday nearest December 31. Accordingly, the Company's 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql results are reported through December 27, versus December 31 for 1997. This \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql change did not materially affect 1998 net income. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On March 19, 1998 the Company acquired all of the outstanding shares of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles Media Company (Cowles) in a transaction valued at $90.50 per Cowles share \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and the assumption of $77.4 million in existing Cowles debt. Cowles publishes \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the STAR TRIBUNE newspaper, which serves the Twin Cities of Minneapolis and St. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Paul. Cowles also owned four separate subsidiaries that publish business \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql magazines, special-interest magazines and home improvement books. Simultaneously \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with the closing of the Cowles merger, the Company sold the magazine and book \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql publishing subsidiaries. The combined proceeds, plus debt and other liabilities \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assumed by the buyers in those transactions, were $208.1 million. The Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql used these proceeds to repay debt associated with the Cowles merger. See note 2 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to the consolidated financial statements. The Company valued the non-newspaper \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql businesses at fair market value based upon the net after-tax proceeds received \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql by the Company on March 19, 1998, and accordingly, did not realize a gain or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql loss on the sale. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In connection with the merger, the Company paid 15% of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consideration by issuing 6,330,548 shares of Class A Common Stock in exchange \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for Cowles shares and paid cash for the remaining shares. The Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql each Cowles share. The Company obtained bank debt through a syndicate of banks \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and financial institutions to finance the cash requirements of the merger and to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql refinance its existing debt (See note 4 to the consolidated financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql statements). Results of the STAR TRIBUNE have been included in the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql results beginning March 20, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The primary asset retained by the Company following the Cowles \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql transaction is the STAR TRIBUNE, the largest newspaper in Minnesota with daily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql circulation of 387,000 and Sunday circulation of 673,000 as of March 19, 1998. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql It is now the Company's largest newspaper. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On December 4, 1996 the Company declared a five-for-four stock split in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the form of a 25% stock dividend which was paid on January 2, 1997. All \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql outstanding shares and per share amounts have been restated in this discussion \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to reflect the stock dividend. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In October 1996, the Company announced that it had entered into \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql agreements in principle to sell five community newspapers. In December 1996, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company completed the sale of the Ellensburg DAILY RECORD and recorded a pre-tax \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql gain of $3.2 million in other non-operating (expenses) income. In February 1997, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the sale of the remaining four newspapers was completed. Also in the fourth \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql quarter of 1997, the Company sold Legi-Tech, its on-line legislative tracking \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql company as well as other non-strategic real estate assets. The Company recorded \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql a nonrecurring pre-tax gain of $9.3 million in non-operating (expenses) income \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for its 1997 dispositions. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 16 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In the third and fourth quarters of 1998, the Company sold two \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql commercial printing operations, a weekly newspaper, a monthly magazine and two \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql niche publications with 1998 revenues totaling $8.7 million. The net gain on \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql these sales was not material to 1998 results. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Effective January 1, 1998, the Company began accounting for newsprint \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql inventories by the first-in, first-out (FIFO) method, whereas in all prior years \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql inventories were valued using the last-in, first-out (LIFO) method. The Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql adopted FIFO accounting for newsprint inventory to provide for a better matching \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of revenues and expenses. Additionally, the change will enable the financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reporting to parallel the way management assesses the financial and operational \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql performance of its newspapers. The Company has restated financial statements of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql prior years to apply the new method retroactively and, accordingly, retained \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql earnings as of December 31, 1995 increased by $4,340,000 to reflect the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql restatement. The effect of the accounting change on 1998 results and results for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql prior years is not material. See note 3 to the consolidated financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql statements. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql During 1997, the Financial Accounting Standards Board (FASB) issued \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Statement of Financial Accounting Standards (SFAS) No. 130 (Reporting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Comprehensive Income), which requires that an enterprise report, by major \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql components and as a single total, the change in its net assets during the period \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql from non-owner sources. The Company has no items of comprehensive income, hence \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql comprehensive income and net income are equal. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SFAS No. 131 (Disclosures about Segments of an Enterprise and Related \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Information), which establishes annual and interim reporting standards for an \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql enterprise's business segments and related disclosures about its products, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql services, geographic area, and major customers; and No. 132 (Employers' \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Disclosure about Pensions and Other Post-retirement Benefits), which revises the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql disclosures about pension and other post-retirement benefits, have been adopted \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql by the Company in 1998 and did not have a material impact on the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financial position, results of operations or cash flows. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql During 1998, the FASB issued SFAS 133 (Accounting for Derivative \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Instruments and Hedging Activities) which requires that all derivatives be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql carried at fair value on the balance sheet. This statement will become effective \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in the Company's fiscal year 2000. While adoption of this statement is not \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expected to materially impact the Company's financial results, management has \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql not determined the impact on the Company's consolidated financial position. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RESULTS OF OPERATIONS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 COMPARED TO 1997 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income was $61.1 million or $1.41 per share in 1998 compared to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $69.2 million or $1.81 per share in 1997. Results in 1997 includes a gain of 14 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql cents per share on sales of operations. The 1998 results include the STAR \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TRIBUNE newspaper's results and reflect dilution from acquisition-related \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expenses including amortization of intangibles, depreciation, interest and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql higher income taxes. Also, the number of weighted average shares outstanding \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql increased in 1998, primarily as a result of Class A stock issued in connection \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with the acquisition of the STAR TRIBUNE. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 17 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues increased $326.7 million, with $305.9 million coming from the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql STAR TRIBUNE (March 20 - December 27, 1998). Total revenues excluding the Star \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tribune increased 3.2%. However, management estimates that excluding operations \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql sold in 1998 and 1997, and giving effect to the four days of December 28 through \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 31, 1998, to make the years comparable, revenue would have increased \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 4.5 to 5.0% ("underlying revenue growth"). \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Much of the underlying revenue growth at the Company's operations \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reflect advertising rate increases at most newspapers and growth in other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revenues such as online services, direct mail, commercial printing and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql non-newspaper revenues (primarily from The Newspaper Network). \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATING REVENUES (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 % Change \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------- ----------- ----------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql California newspapers $ 325,566 $ 318,227 2.3 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Minnesota newspaper 305,905 - NM \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Carolinas newspapers 174,690 167,479 4.3 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Northwest newspapers 150,655 144,157 4.5 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Non-newspaper operations 11,835 12,087 (2.1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== ============ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $ 968,651 $ 641,950 NM \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== ============ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NM - not meaningful \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CALIFORNIA - The California newspapers generated 33.6% of 1998 revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and increased $7.3 million or 2.3%, and would have increased 2.6% excluding the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql four community newspapers sold in February 1997. THE SACRAMENTO BEE, THE FRESNO \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql BEE and THE MODESTO BEE newspapers are the Company's primary operations in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql California and recorded $8.3 million in higher advertising revenues. Circulation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revenues declined $1.1 million as the newspapers did not implement circulation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql price increases in 1998, but rather discounted prices to increase subscriber \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql volume. Management estimates that revenues in the region would have increased in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the 3% range if it had not changed to fiscal year reporting. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql MINNESOTA - The STAR TRIBUNE'S revenues of $305.9 million include \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql advertising revenues of $232.0 million and circulation revenues of $57.1 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million. On a proforma basis, the STAR TRIBUNE'S revenues were up 5.7%. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql change in the Company's period reporting had little affect on revenue \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql comparisons as the STAR TRIBUNE was on a similar fiscal period in 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CAROLINAS - The Carolinas newspapers contributed 18.0% of total Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revenue and reported a $7.2 million or 4.3% increase in total revenues. THE NEWS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql & OBSERVER in Raleigh and the Company's three smaller dailies in South Carolina \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql generate the majority of revenues in this region. Advertising revenues were up \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $7.6 million or 5.7% in this region, and circulation revenues were down \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql nominally. Most of the 1998 sales of news operations affected this region. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Management estimates that excluding properties sold in 1998 and 1997, and giving \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql effect for the change in period reporting, revenues from the Carolinas \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers would have increased in the 5.0% range in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 18 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NORTHWEST - The Northwest newspapers reported the strongest revenue \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql growth percentage of all regions in 1998, although it is the Company's smallest \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql region at 15.6% of total revenues. Revenues from the Anchorage and Washington \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql State newspapers increased $6.5 million or 4.5%. Advertising revenues increased \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $4.7 million or 4.4%, circulation revenues declined $465,000 or 1.7% and other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revenues, primarily commercial printing, increased $2.2 million or nearly 25.0%. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Management estimates that revenues adjusted for the change in period reporting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql would have grown between 5.0% to 5.5%. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Non-newspaper - Non-newspaper revenues (1.2% of total revenues) were \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql primarily derived from The Newspaper Network (TNN), Nando Media, The McClatchy \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Printing Company and Benson Printing Company. Both printing companies were sold \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in late 1998. Revenues from ongoing operations were $7.5 million in 1998, up \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 39.2% from 1997 primarily due to higher revenues at TNN. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATING EXPENSES: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total operating expenses increased 49.9% and include STAR TRIBUNE's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expenses from March 20 through December 27, 1998. Excluding STAR TRIBUNE in 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and expenses from operations sold in 1998 and 1997, expenses from the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ongoing businesses increased 2.4%. Compensation increased 3.1%, newsprint and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql supplement expenses increased 10.6% (due mostly to higher newsprint prices) and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql all other operating expenses, including depreciation and amortization, increased \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql less than 1.0%. Management estimates that, had it not changed to period \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reporting, operating expenses would have risen between 2.0% to 4.0%, mostly \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reflecting general inflation. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NON-OPERATING (EXPENSE) INCOME - NET: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's net interest expense increased to $62.2 million from $8.6 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million in 1997, reflecting service on the debt incurred to complete the Star \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tribune transaction. Its share of the Ponderay Newsprint Company (Ponderay) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income (see note 1 to the consolidated financial statements) was $1.5 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql versus a loss of $500,000 in 1997 when newsprint prices were lower. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The 1998 non-operating (expense) income-net includes gains on the sales \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of certain investments and amortization of unearned covenant revenue (from the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Star Tribune) totaling $2.0 million, while the 1997 results include pre-tax \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql gains of $9.3 million on the sale of business operations and real estate \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql holdings. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INCOME TAXES: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's effective tax rate is 50.0% in 1998, up from a 40.8% rate \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1997 due primarily to the non-deductible expenses associated with the Star \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tribune transaction. See note 5 to the consolidated financial statements. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 COMPARED TO 1996 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income was $69.2 million or $1.81 per diluted share in 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compared to $42.1 million or $1.11 per diluted share in 1996 (both restated for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the change in inventory accounting). Net \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 19 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income from ongoing operations -- excluding the gains on the sales of community \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers, other businesses and non-strategic assets in 1997 and 1996 -- was \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $63.8 million or $1.67 per share in 1997 versus $40.5 million or $1.08 per share \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1996. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Much of the increase in earnings reflect higher revenues at the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's newspapers in the Carolinas, The Sacramento Bee and The Modesto Bee, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and lower average newsprint prices in 1997 than 1996. Net income also benefited \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql from lower interest expense as the Company repaid debt. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues increased $17.7 million to $641.9 million, up 2.8% in 1997, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql but were up $26.1 million excluding the sold community newspapers from the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql comparisons. At ongoing operations, advertising revenues increased 5.6% -- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql mostly reflecting rate increases. Circulation revenues were up nominally as only \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql one of the Company's newspapers implemented a home delivery rate increase in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATING REVENUES (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 1996 % Change \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------- ----------- ----------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql California newspapers $ 318,227 $ 310,719 2.4 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Carolinas newspapers 167,479 153,674 9.0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Northwest newspapers 144,157 143,569 0.4 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Non-newspaper operations 12,087 16,271 (25.7) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== =========== \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $ 641,950 $ 624,233 2.8 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== =========== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CALIFORNIA - The California newspapers generated 49.6% of total \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revenues in 1997 and increased $7.5 million over 1996. Revenues were up $14.1 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million or 4.7% excluding the four community newspapers sold in February 1997. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The three Bee newspapers, located in Sacramento, Fresno and Modesto, California \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql are the Company's primary businesses in this region and recorded $12.0 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in higher advertising revenues. Circulation revenues declined nominally in 1997, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql while revenues from non-traditional sources, i.e. niche products, on-line \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql services, etc., increased $2.0 million (primarily at THE SACRAMENTO BEE). \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CAROLINAS - The Carolina newspapers generated 26.1% of total revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1997 and increased $13.8 million, with $12.2 million from the North Carolina \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspapers -- primarily THE NEWS & OBSERVER in Raleigh, and the remainder from \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company's three South Carolina dailies. Advertising revenues increased $12.2 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million in 1997 while circulation revenues were up $918,000. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NORTHWEST - The Northwest newspapers generated 22.5% of total revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and reported a $588,000 increase in revenues. Revenues were up $2.2 million or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1.6% excluding the Ellensburg DAILY RECORD which was sold in December 1996. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Retailer consolidation in the two Washington markets, Tacoma and Tri-Cities, and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql lower commercial printing revenues at the ANCHORAGE DAILY NEWS slowed the growth \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in revenues in this region. Advertising revenues increased $2.1 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (excluding Ellensburg) while circulation revenues declined $446,000 at the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ongoing operations. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 20 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NON-NEWSPAPER - Revenues at the Company's non-newspaper operations \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql declined $4.2 million. These operations which account for 1.8% of total company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revenues included The Newspaper Network, N&O's New Media Division (primarily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Nando Media, the Company's on-line publishing company), McClatchy Printing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company, Benson Printing Company, and Legi-Tech. Revenues declined due mostly to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the sale of Nando Media's internet access business and a reorganization at \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql McClatchy Printing Company. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATING EXPENSES: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Operating expenses were down 3.3% in 1997. However, excluding the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql operating expenses of the sold community newspapers, expenses were down 1.6%. At \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company's ongoing operations, newsprint and supplement cost declined 17.2% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql due primarily to lower average newsprint prices. Excluding newsprint and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql supplement cost and expenses of the sold newspapers, total other operating \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expenses were up 2.7% reflecting increased costs associated with new product \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql development and promotions in 1997. Other expense increases were tempered by the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql low rate of inflation in 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NON-OPERATING (EXPENSES) INCOME - NET: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest expense declined $4.6 million as the Company paid down debt. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Ponderay reported a loss in 1997 due to lower newsprint prices. Hence, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company recorded a loss of $500,000 in 1997 versus income of $3.0 million in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1996 as its share of Ponderay's results. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql A pre-tax gain of $6.7 million was realized on the sale of four \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql community newspapers in 1997 versus a pre-tax gain of $2.8 million on the sale \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of the Ellensburg DAILY RECORD in 1996. Also, a pre-tax gain of $2.5 million was \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql recorded on the sale of Legi-Tech and other non-strategic real estate assets. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INCOME TAXES: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's effective tax rate was 40.8% in 1997 versus 42.9% in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1996. The tax rate was lower primarily because of a difference in the book and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql tax basis of intangibles at some of the sold operations -- see note 5 to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consolidated financial statements. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql LIQUIDITY AND CAPITAL RESOURCES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's cash and cash equivalents were $9.7 million at December \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 27, 1998, versus $8.7 million at the end of 1997. See notes 2 and 4 to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consolidated financial statements (and below) for a discussion of the impact of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the acquisition of the STAR TRIBUNE on the Company's liquidity and capital \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql resources. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company generated $134.5 million of cash from operating activities \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1998 and has generated an aggregate of $352.1 million over the last three \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql years. During 1998, the Company received $184.3 million in proceeds from the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql sale of businesses and assets, and $1.25 billion in proceeds from long-term debt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (discussed below). The major uses of cash over the three year period \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 21 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql have been to consummate the STAR TRIBUNE acquisition ($1.1 billion), to purchase \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql property, plant and equipment (see below), and to repay debt. Cash has also been \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql used to pay dividends. In 1998, the Company repaid $296.4 million of bank debt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and paid $16.3 million in dividends. Proceeds from issuing Class A stock under \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql employee stock plans totaled $4.5 million in 1998. See the Company's Statement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of Cash Flows on page 34. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company expended a total of $35.1 million in 1998 for capital \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql projects and equipment to improve productivity and keep pace with growth and new \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql technology. Capital expenditures over the last three years have totaled $90.1 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million and planned expenditures in 1999 are estimated to be approximately $42 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million at existing operations. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql See notes 1 and 9 to the consolidated financial statements for a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql discussion of the Company's commitments to Ponderay. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql A syndicate of banks and financial institutions have provided the debt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financing of the Cowles merger under a new Bank Credit Agreement (Credit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Agreement). The Credit Agreement consists of the following: A term loan \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consisting of Tranche A of $735 million bore interest at the London Interbank \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Offered Rate ("LIBOR") plus 125 basis points, and is payable in seven years, and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tranche B of $330 million bore interest at LIBOR plus 175 basis points and is \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql payable in nine and one-half years. A revolving credit line of up to $200 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million bore interest at LIBOR plus 125 basis points and is payable in seven \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql years. As the Company reduces the outstanding debt relative to cash flow (as \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql defined in the Credit Agreement), the interest rate spread over LIBOR will \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql decline (see below). The debt is secured by certain assets of the Company, and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql all of the debt is pre-payable without penalty. The Company intends to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql accelerate payments on this debt as cash generation allows. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Beginning in 1999, the interest rate spread over LIBOR declined to 62.5 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql basis points for Tranche A and the revolving credit line, and declined to 150 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql basis points for Tranche B. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The definitive terms of the Credit Agreement include certain operating \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and financial restrictions, such as limits on the Company's ability to incur \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql additional debt, create liens, sell assets, engage in mergers, make investments \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and pay dividends. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql While the Company expects that most of its free cash flow generated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql from operations in 1999 and in the foreseeable future will be used to repay \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql debt, management is of the opinion that operating cash flow and its credit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql facilities as described above are adequate to meet the liquidity needs of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company, including currently planned capital expenditures and other investments. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company had $70.2 million of available credit under its current \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql bank credit agreement at December 27, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 22 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql YEAR 2000 COMPLIANCE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's Year 2000 Compliance Plan includes a definition of Year \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2000 conformity, compliance certification standards, reporting and risk \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql management structures. The Company's target date for completion of all \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql remediation projects is July 1, 1999. At the time of this filing, the Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql remains on schedule and fully expects to meet this date of completion. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql A corporate task force and task forces at each of our newspapers are in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql place to assess Year 2000 issues and the necessary changes to the Company's many \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql different systems. A Year 2000 Compliance Coordinator has been named to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql facilitate our progress in meeting our internal deadlines for compliance. This \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql coordinator reports to the Corporate Director of Information Systems and the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's Vice President, Finance. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql For purposes of achieving remediation, a combination of internal \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql effort, upgrades from vendors, external programmers and consultants, replacement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql systems or, in a few cases, retirement of systems are being used. To date, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company has completed an inventory and analysis of systems and equipment with \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql date-related logic and is currently in the remediation and testing phases. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Historical costs incurred in bringing systems to Year 2000 compliance through \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, 1998, are estimated to be $500,000. At present, we estimate the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql incremental cost of making required changes will be approximately $800,000 in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql additional costs through 1999. Capital projects, previously budgeted for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql business reasons, which, incidentally, include Year 2000 compliance, total \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately $13 million throughout the Company. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's 11 daily newspapers generate over 95% of our revenues and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql profits. The following describes these newspapers' state of readiness for Year \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2000, the associated risks and the state of our contingency plans: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NEWSPAPER PRODUCTION FACILITIES AND PROCESSES: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Production Systems: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company has reviewed its computer and mechanical systems at all \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql production facilities and many such systems have been made Year 2000 compliant \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql or will be remediated by the Company's target date. The STAR TRIBUNE will \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql upgrade their press control systems in February 1999. Also, an upgrade on the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql press control system for one of the four presses at THE SACRAMENTO BEE has been \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ordered and is expected to be installed during February 1999. These upgrades are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql considered minor and their absence would not prohibit printing of the daily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspaper. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql If the Company's presses succumb to Year 2000 problems, it would be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql difficult in our larger markets to print on a timely basis. Although all of our \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql papers have reciprocal printing agreements with other papers in each area, our \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql largest papers, which contribute the greatest revenues, are too large to be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql printed in their entirety at another location. Hence, these newspapers could be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql printed late, with smaller editions and with less circulation. This risk would \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql have significant negative revenue implications for the Company. Also, there are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql no assurances that the other newspapers with which the Company has reciprocal \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql printing arrangements will be Year 2000 compliant. Year 2000 contingency plans \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql at each property outline procedures for off-site printing and special year-end \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql press \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 23 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql schedules. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Third Party Suppliers: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql One of the most significant risks associated with the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql production systems in the Year 2000 may be the Company's ability to receive \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql electrical power from the various utility companies that serve the communities \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in which it produces newspapers. None of the Company's newspapers currently have \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql electrical generators sufficiently large enough to run printing presses. Hence, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql if electrical service is unavailable, the Company may have to rely on reciprocal \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql printing agreements (discussed above) or may not be able to produce a daily \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspaper. The Company is continuing to monitor the status of its utility \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql providers as to their Year 2000 readiness, but must rely on representations from \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql such vendors. If the Company's utility providers are unable to supply electrical \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql power, it could have significant negative revenue implications for the Company. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Current reports from power utility companies have been promising and have led to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql an increased level of confidence that significant power failures are unlikely. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Nonetheless, Company contingency plans and procedures are in place for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql short-term outages. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company has contacted its newsprint vendors, and we have received \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql written statements that the Company's major newsprint suppliers generally expect \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to be Year 2000 compliant before January 1, 2000. In addition, we plan to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql determine in the first half of 1999 whether we will increase our stock of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newsprint during the last months of 1999, as additional insurance against \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql potential Year 2000 problems that might be experienced by vendors or delivery \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql systems. The same inquiry process and determinations are being made for all \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql other major material sources, such as ink and plate suppliers. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EDITORIAL SYSTEMS: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company uses editorial systems from various vendors. We maintain \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql software and hardware maintenance contracts with vendors of critical components, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and many systems at our newspapers have been made Year 2000 compliant. Our \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql largest newspaper, the STAR TRIBUNE completed upgrades to their editorial system \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in September 1998. Minor upgrades at a few other newspapers are expected to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql bring all editorial systems into compliance by July 1, 1999. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company has budgeted to replace existing editorial systems at our \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql California dailies (THE SACRAMENTO BEE, THE MODESTO Bee and THE FRESNO BEE) in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1999 with newer systems which offer increased functionality, including the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ability to paginate pages (electronically assemble all elements on a page). \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql These systems are expected to be Year 2000 compliant. THE SACRAMENTO BEE has \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql performed, and THE FRESNO BEE and THE MODESTO BEE will perform, interim software \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and/or hardware upgrades on the existing editorial systems to meet our Year 2000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compliance standards. Although the hardware vendor has declined to certify \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql certain pieces of hardware as Y2K compliant, extensive testing by the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql application vendor and THE SACRAMENTO BEE indicates that the existing systems \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql can operate into 2000 without problems should installation of the new systems \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql extend beyond December 31,1999. Replacement of the editorial systems was already \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql planned and budgeted; therefore, they are not directly a Year 2000 compliance \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expense. Costs to upgrade existing software will be expensed as incurred. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 24 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql For the reasons noted above, we believe at this time that the risks of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql editorial system failure are minimal. For backup purposes, our newspapers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql possess enough Apple Macintosh workstations (generally immune to Year 2000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql issues) with input, processing and output capabilities that, in an emergency, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql could be used to complete an edition, or even produce new editions for several \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql days, while problems were being resolved. In the case of several newspapers, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql primary editorial system functions are currently produced on Macintosh \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql workstations, further reducing risk. In all cases, complications could result in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql smaller newspapers with less editorial content. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CIRCULATION SYSTEMS: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql It is expected that all circulation systems will be upgraded and be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Year 2000 compliant by mid-1999. The majority of these systems are supported by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql vendor maintenance agreements and in some cases, we rely on the vendor to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql provide timely releases of compliant versions. Two newspapers, the STAR TRIBUNE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and THE MODESTO BEE, utilize custom, in-house circulation systems that require \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql internal re-coding. Several components of the circulation system requiring \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql re-coding at the STAR TRIBUNE were completed and moved into production in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql November 1998. The remaining portion of the remediated code will be put into \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql production by the end of March 1999. THE MODESTO BEE remains on target to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql achieve compliance on their circulation system by July 1, 1999. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In the event that a circulation system should fail, Company contingency \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plans provide for backup delivery lists to be created immediately prior to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql end of 1999. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Post-press (packaging and distribution) systems and mechanical \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql equipment are believed to be either already in compliance or are in the process \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of being replaced as part of regular cyclical system replacements. We expect all \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to be Year 2000 compliant by mid-1999. We currently believe our newspapers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql delivery transportation fleets to be immune from Year 2000 issues. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The inability to deliver our print products would have negative impact \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql on both circulation and advertising revenues, the primary sources of revenue for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ADVERTISING SYSTEMS/CUSTOMERS: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Display Systems: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's newspapers use various systems to produce graphics for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql run-of-press (display) advertising. While we believe most newspapers' \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql advertising systems are compliant, three of our newspapers, the STAR TRIBUNE, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ANCHORAGE DAILY NEWS and THE NEWS & OBSERVER, rely on graphic processing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql subsystems from a vendor which has not yet provided Year 2000 readiness \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql solutions. Progress on these highly customized systems was made during the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql fourth quarter of 1998, although full compliance has not been achieved. These \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql three newspapers may be required to replace the systems if they do not achieve \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Year 2000 compliance, and detailed contingency plans are being developed. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Classified Systems: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The classified advertising systems at the Company's newspapers are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql under software and \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 25 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql hardware maintenance contracts with vendors, and in most cases, have received or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expect to receive upgrades that the Company believes will provide Year 2000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compatibility. Two newspapers, however, will be replacing their classified \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql systems with newer, more functional models. THE NEWS & OBSERVER installed a new, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Year 2000 compliant, classified system during the fourth quarter of 1998. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ANCHORAGE DAILY NEWS applied a Year 2000 upgrade to its existing classified \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql system, and we currently believe the system is Year 2000 compliant; nonetheless, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql a replacement system is in the process of being installed and is expected to be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql completed by March 1999. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql General: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql If advertising systems at our newspapers are not brought into \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compliance, our newspapers may have to retrieve hard-copy proofs of advertising \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql contents of the respective databases in advance and manually input graphics, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql which could delay the production of the newspaper. Moreover, many advertisers \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql currently send advertising materials to the Company's newspapers electronically. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql If advertisers are unable to create advertising material due to their own Year \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2000 issues, or external communication systems are affected, it is possible that \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the newspapers would have additional advertising makeup costs. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company is currently reviewing a plan to address the issue of Year \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2000 readiness with our major advertisers, as they represent a critical source \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of revenue. Lack of Year 2000 compliance among major advertisers could result in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql lost advertising revenues. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ACCOUNTING, ADMINISTRATION AND GENERAL: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In 1997, the Company, in the course of reviewing the effectiveness of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql its financial and human resource systems, determined to replace the systems at \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql all newspapers with a centralized system that we believe to be Year 2000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compliant. All but two of our newspapers have now switched to the new financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql system, and half of our newspapers have moved to the new payroll and human \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql resources system. By February 1999, the financial systems and by July 1999 the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql human resource systems at all newspapers within the Company are expected to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql operate on this centralized platform. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql We believe financial reporting and accounting responsibilities can be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql met without the use of automated financial systems. A failure in the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financial systems would result in delays in processing payables, receivables, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql payroll and reporting Company performance while manual (contingency) processes \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were activated. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql If the automated advertising or circulation management and billing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql systems fail (see previous discussions of advertising and circulation systems), \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql contingency plans will be implemented that would revert to a manual accounting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql system. Billing would also be manual, labor intensive and would experience \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql significant delays. Advertising orders would be created using hard copy \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql advertising tickets. A local database or spreadsheet would be used to create run \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql lists for pagination. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The McClatchy Year 2000 Compliance Plan addressed the need to verify \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Year 2000 readiness of any third party that could cause a material impact on \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company. Each McClatchy property identified and requested Year 2000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compliance statements from material vendors and \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 26 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql suppliers, content providers, utility companies, financial organizations and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql other business partners. Where written representations of Year 2000 compliance \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql have not been forthcoming, we assume that the service or product will not be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Year 2000 compliant. In the event that any of the Company's material vendors, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql suppliers or financial institutions are unable to provide the Company with \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql services, materials or financing required to operate the Company's business, it \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql could have a material impact on our operations. To date, no such impact has been \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql identified. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CONTINGENCY PLANS: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In addition to contingency plans noted in the various systems above, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql each of our newspapers has developed contingency plans to cope with the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql possibility that major systems could develop problems. These plans are being \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reviewed and modified locally and at our corporate office throughout the first \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql half of 1999 as testing of major systems indicate need for further refinement. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As an added measure, the Company will conduct, at all locations, start-to-finish \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql functional tests of its production systems in mid-1999 and other significant \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql systems in the fall of 1999. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RISK FACTORS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql We have made "forward-looking statements" in this document that are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql subject to risks and uncertainties. Forward-looking statements include the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql information concerning possible or assumed future results of operations of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql McClatchy. Forward-looking statements are generally preceded by, followed by or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql are a part of sentences that include the words "believes," "expects," \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql "anticipates" or similar expressions. For those statements, we claim the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql protection of the safe harbor for forward-looking statements contained in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Private Securities Litigation Reform Act of 1995. You should understand that the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql following important factors, in addition to those discussed elsewhere in this \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql document and in the documents which we incorporate by reference, could affect \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the future results of McClatchy, and could cause those future results to differ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql materially from those expressed in our forward-looking statements: general \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql economic, market or business conditions; financial, reliance on customer and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql vendor assurances as to their Year 2000 compliance, the completeness of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's internal efforts to identify systems that are not Year 2000 compliant \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and its remediation efforts associated with such systems; increases in newsprint \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql prices and/or printing and distribution costs over anticipated levels; increases \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in interest rates; competition from other forms of media in our principal \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql markets; increased consolidation among major retailers in our newspaper markets \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql or other events depressing the level of advertising; an economic downturn in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql economies of Minnesota, California's Central Valley, the Carolinas, Washington \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql State and Alaska; changes in our ability to negotiate and obtain favorable terms \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql under collective bargaining arrangements with our employees; competitive actions \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql by other companies; other occurrences leading to decreased circulation and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql diminished revenues from both display and classified advertising; and other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql factors, many of which are beyond our control. Consequently, there can be no \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assurance that the actual results or developments we anticipate will be realized \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql or that these results or developments will have the expected consequences. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SUBSTANTIAL LEVERAGE; NEGATIVE NET TANGIBLE ASSETS; LIQUIDITY. On March \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 19, 1998, we completed a reorganization (the "Reorganization") pursuant to which \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql we implemented a holding company structure and also acquired the STAR TRIBUNE by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql way of a merger with Cowles Media \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 27 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company (the "Cowles Merger"). To finance the Reorganization, we borrowed enough \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql cash to fund payment of the cash due to Cowles stockholders, pay the fees and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expenses incurred in connection with the Reorganization and refinance debt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assumed from Cowles and pre-existing debt of McClatchy. As of December 27, 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql we had $1.0 billion of long-term debt. In contrast, our pre-Reorganization \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consolidated indebtedness was $94.0 million. Furthermore, because $1.2 billion \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of the purchase price of the Cowles Merger was allocated to intangible assets, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql such as goodwill, we now have negative net tangible assets. Our net tangible \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assets as of December 27, 1998, were $(704.0) million. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql This high leverage may have important consequences for us in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql future, including the following: (a) our ability to obtain additional financing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for future acquisitions (if any), working capital, capital expenditures or other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql purposes may be impaired or, if we are able to obtain additional financing, it \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql may not be on favorable terms; (b) a substantial portion of our cash flow \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql available from operations, after satisfying certain liabilities arising in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ordinary course of business, will be dedicated to the payment of principal and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql interest on this indebtedness, thereby reducing funds that would otherwise be \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql available to us; (c) a substantial decrease in our net operating cash flows or a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql substantial increase in our expenses could make it difficult for us to meet our \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql debt service requirements, or could force us to modify our operations; and (d) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql our leverage may make us more vulnerable to a downturn in our business or the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql economy generally. In addition, the terms of the Reorganization borrowing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql agreements include operating and financial restrictions, such as limits on our \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ability to incur indebtedness, create liens, sell assets, engage in mergers or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consolidations, make investments and pay dividends. The Reorganization debt is \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql secured by certain assets of McClatchy. All of the Reorganization debt is \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql pre-payable without penalty. Although we have no present plan in place for early \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql repayment of this debt, we intend to accelerate payments on this debt as cash \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql generation allows. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Our principal sources of liquidity are cash flow from operations and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql borrowings under a revolving credit facility. Our principal uses of liquidity \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql will be to provide working capital, to meet debt service requirements and other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql liabilities arising in the ordinary course and to finance our strategic plans. A \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql revolving credit facility is available for our working capital needs. A term \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql loan facility has been drawn in full. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EARNINGS DILUTION AS A RESULT OF THE COWLES MERGER. Our net income and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql earning per share for the next several years will be reduced due to increased \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql interest expense as a result of the incurrence of additional long-term debt in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Cowles Merger, the amortization of the identifiable intangibles and goodwill \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql associated with the Cowles Merger, and the issuance of shares of our Class A \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Common Stock in the Cowles Merger. Assuming that the Cowles Merger had occurred \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql on January 1, 1997, our pro forma income from continuing operations for the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql fiscal year ended December 31, 1997 would have been approximately $32.5 million, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql as compared to $69.2 million of income from continuing operations for McClatchy \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newspapers, Inc. for the same period on a historical basis (restated for a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql change in inventory accounting - see note 3 to the consolidated financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql statements). Similarly, our pro forma interest expense for fiscal 1997 would \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql have been approximately $83.8 million, as compared to approximately $8.7 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for McClatchy Newspapers, Inc. for the same period on a historical basis. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Assuming that the Cowles Merger had occurred on January 1, 1998, our pro forma \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income from continuing operations for the year ended \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 28 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, 1998, would have been approximately $22.2 million as compared to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $61.1 million of income from continuing operations for The McClatchy Company for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the same period on a historical basis. Similarly, pro forma interest expense for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 would have been approximately $78.6 million, as compared to approximately \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $62.8 million for The McClatchy Company for the same period on a historical \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql basis. There can be no assurance that this reduction in earnings per share and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql net income from continuing operations will not have a negative impact on the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql market price of our Class A Common Stock. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql I{\*\bkmkstart item_1_3_8}{\*\bkmkend item_1_3_8}\plain\cf1\f50\fs16\ql TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql MARKET RISK \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In addition to normal business risks discussed above, the Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql utilizes interest rate protection agreements to help maintain the overall \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql interest rate parameters set by management. None of these agreements were \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql entered into for trading purposes. (See notes 4 and 11 to the consolidated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financial statements.) As a result of this interest rate mix, a hypothetical 10 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql percent change in interest rates would have a $0.04 to $0.07 per share increase \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql or decrease in the Company's results of operations. It would also impact the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql fair values of its market risk sensitive financial instruments, but would not \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql materially affect the Company's financial position taken as a whole. \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_9}{\*\bkmkend item_1_3_9}\pard\plain\cf1\f50\fs16\ql ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INDEX TO FINANCIAL STATEMENTS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql AND FINANCIAL STATEMENT SCHEDULES \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Report of Deloitte & Touche LLP 30 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Consolidated Statement of Income 31 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Consolidated Balance Sheet 32 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Consolidated Statement of Cash Flows 34 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Consolidated Statement of Stockholders' Equity 35 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Notes to Consolidated Financial Statements 36 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Financial Statement Schedule: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Schedule II - Valuation and Qualifying Accounts 57 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql All other schedules are omitted as not applicable under the rules of Regulation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql S-X. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 29 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INDEPENDENT AUDITORS' REPORT \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The McClatchy Company: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql We have audited the accompanying consolidated balance sheets of The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql McClatchy Company and its subsidiaries as of December 27, 1998, and December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997, and the related consolidated statements of income, cash flows and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql stockholders' equity for each of the three years in the period ended December \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 27, 1998. Our audits also included the financial statement schedule listed in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Index to Financial Statements and Financial Statement Schedules at Item 8. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql These financial statements and financial statement schedule are the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql responsibility of the Company's management. Our responsibility is to express an \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql opinion on these financial statements and financial statement schedule based on \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql our audits. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql We conducted our audits in accordance with generally accepted auditing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql standards. Those standards require that we plan and perform the audit to obtain \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reasonable assurance about whether the financial statements are free of material \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql misstatement. An audit includes examining, on a test basis, evidence supporting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the amounts and disclosures in the financial statements. An audit also includes \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assessing the accounting principles used and significant estimates made by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql management, as well as evaluating the overall financial statement presentation. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql We believe that our audits provide a reasonable basis for our opinion. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In our opinion, such consolidated financial statements present fairly, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in all material respects, the financial position of The McClatchy Company and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql its subsidiaries at December 27, 1998 and December 31, 1997, and the results of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql their operations and their cash flows for each of the three years in the period \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ended December 27, 1998, in conformity with generally accepted accounting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql principles. Also, in our opinion, such financial statement schedule, when \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql considered in relation to the basic consolidated financial statements taken as a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql whole, presents fairly in all material respects the information set forth \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql therein. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As discussed in Note 3 to the consolidated financial statements, in 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company changed its method of accounting for newsprint inventory. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Deloitte & Touche LLP \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Sacramento, California \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql February 2, 1999 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 30 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs16\ql CONSOLIDATED STATEMENT OF INCOME \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (In thousands, except per share amounts) Year Ended \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ --------- --------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Restated Restated \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql REVENUES - NET Newspapers: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Advertising $ 756,052 $ 504,745 $ 484,460 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Circulation 162,433 107,298 108,317 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other 38,331 17,820 15,185 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 956,816 629,863 607,962 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Non-newspapers 11,835 12,087 16,271 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 968,651 641,950 624,233 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATING EXPENSES \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Compensation 365,760 254,048 253,327 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newsprint and supplements 154,778 96,138 116,896 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Depreciation and amortization 93,786 53,269 52,954 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other operating expenses 173,469 122,009 120,001 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 787,793 525,464 543,178 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATING INCOME 180,858 116,486 81,055 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NON-OPERATING (EXPENSES) INCOME \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest expense (62,820) (8,698) (13,321) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Investment income 651 83 102 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Partnership income (loss) 1,450 (500) 3,024 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Gain (loss) on sale of newspaper operations and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql other business operations/assets (111) 9,254 2,840 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other - net 2,075 366 35 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (58,755) 505 (7,320) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INCOME BEFORE INCOME TAX PROVISION 122,103 116,991 73,735 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INCOME TAX PROVISION 61,052 47,759 31,629 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- --------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NET INCOME $ 61,051 $ 69,232 $ 42,106 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ========= ========= ========= \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NET INCOME PER COMMON SHARE: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Basic $ 1.41 $ 1.82 $ 1.12 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Diluted $ 1.41 $ 1.81 $ 1.11 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql WEIGHTED AVERAGE NUMBER OF COMMON SHARES: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Basic 43,199 37,971 37,593 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Diluted 43,349 38,155 37,812 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql See notes to consolidated financial statements \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 31 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs16\ql CONSOLIDATED BALANCE SHEET \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (In thousands, except share amounts) December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ASSETS Restated \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CURRENT ASSETS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cash $ 9,650 $ 8,671 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Trade receivables (less allowances of $4,835 in 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and $2,162 in 1997) 149,685 93,069 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other receivables 2,762 2,143 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newsprint, ink and other inventories 16,587 11,735 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Deferred income taxes 17,441 8,477 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other current assets 4,414 2,717 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 200,539 126,812 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PROPERTY, PLANT AND EQUIPMENT \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Buildings and improvements 203,842 160,443 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Equipment 446,236 371,312 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 650,078 531,755 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Less accumulated depreciation (275,230) (246,236) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 374,848 285,519 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Land 56,593 34,199 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Construction in progress 21,961 5,468 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 453,402 325,186 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INTANGIBLES - NET 1,510,954 393,215 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OTHER ASSETS 81,830 12,585 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TOTAL ASSETS $ 2,246,725 $ 857,798 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ============== ============= \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql See notes to consolidated financial statements \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 32 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Restated \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CURRENT LIABILITIES \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Accounts payable $ 68,358 $ 35,613 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Accrued compensation 62,038 27,956 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Income taxes 29,222 1,877 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Unearned revenue 33,602 19,308 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Carrier deposits 4,071 3,980 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other accrued liabilities 23,099 9,709 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 220,390 98,443 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql LONG-TERM BANK DEBT 1,004,000 94,000 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OTHER LONG-TERM OBLIGATIONS 75,274 40,406 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DEFERRED INCOME TAXES 140,056 57,894 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql COMMITMENTS AND CONTINGENCIES (NOTE 9) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql STOCKHOLDERS' EQUITY Common stock $.01 par value: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Class A - authorized \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 100,000,000 shares, issued \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 16,033,763 in 1998 and 9,421,383 in 1997 160 94 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Class B - authorized \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 60,000,000 shares, issued \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 28,655,912 in 1998 and 28,685,912 in 1997 287 287 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Additional paid-in capital 269,523 74,354 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Retained earnings 537,035 492,320 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 807,005 567,055 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------- ------------ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,246,725 $ 857,798 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ============= ============ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 33 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs14\ql CONSOLIDATED STATEMENT OF CASH FLOWS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql (In thousands) Year Ended \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql -------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ----------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Restated Restated \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CASH FLOWS FROM OPERATING ACTIVITIES: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Net income $ 61,051 $ 69,232 $ 42,106 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Reconciliation to net cash provided: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Depreciation and amortization 96,556 53,411 53,110 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Deferred income taxes 3,607 (2,031) (3,441) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Partnership (income) losses (1,450) 500 (3,024) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Loss (gain) on sale of newspaper operations \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql and other business operations/assets 111 (9,254) (2,840) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Changes in certain assets and liabilities - net (25,646) 5,806 13,694 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other 249 (221) 585 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ----------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Net cash provided by operating activities 134,478 117,443 100,190 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CASH FLOWS FROM INVESTING ACTIVITIES: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Merger of Cowles Media Company (1,099,518) - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Purchases of property, plant and equipment (35,111) (23,243) (31,737) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other acquisitions - (1,813) (1,844) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Sale of newspaper and other business operations 184,290 14,340 6,808 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other - net - 732 (85) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ----------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Net cash used by investing activities (950,339) (9,984) (26,858) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CASH FLOWS FROM FINANCING ACTIVITIES \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Proceeds from long-term debt 1,125,000 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Repayment of long-term debt (296,370) (96,000) (63,000) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Payment of cash dividends (16,336) (14,439) (12,163) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Other - principally stock issuances 4,546 5,774 4,456 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ----------- ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Net cash provided (used) by financing activities 816,840 (104,665) (70,707) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql NET CHANGE IN CASH AND CASH EQUIVALENTS 979 2,794 2,625 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,671 5,877 3,252 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------------ ----------- ------------ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,650 $ 8,671 $ 5,877 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ============ =========== ============ \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql See notes to consolidated financial statements. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 34 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs12\ql CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql (In thousands, except share and per share amounts) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Par Value Additional Restated Treasury \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql ------------------- Paid-In Retained Stock Restated \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Class A Class B Capital Earnings At Cost Total \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql ---------- -------- ------------ ------------- ---------- -------------- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql BALANCES, DECEMBER 31, 1995 $ 85 $ 289 $ 62,447 $ 407,584 $ (371) $ 470,034 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Net income 42,106 42,106 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Dividends paid ($.323 per share) (12,163) (12,163) \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Conversion of 71,875 Class B \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql shares to Class A 1 (1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Issuance of 307,376 Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql under employee stock plans 3 4,453 4,456 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Tax benefit from stock plans 634 634 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql ---------- -------- ------------ ------------- ---------- -------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql BALANCES, DECEMBER 31, 1996 89 288 67,534 437,527 (371) 505,067 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Net income 69,232 69,232 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Dividends paid ($.38 per share) (14,439) (14,439) \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Conversion of 156,375 Class B \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql shares to Class A 1 (1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Issuance of 348,357 Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql under employee stock plans 4 5,805 5,809 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Tax benefit from stock plans 1,386 1,386 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Retirement of treasury stock (371) 371 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql ---------- -------- ------------ ------------- ---------- -------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql BALANCES, DECEMBER 31, 1997 94 287 74,354 492,320 - 567,055 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Net income 61,051 61,051 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Dividends paid ($.38 per share) (16,336) (16,336) \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Conversion of 30,000 Class B - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql shares to Class A \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Issuance of 251,832 Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql under employee stock plans 3 4,543 4,546 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Issuance of 6,330,548 Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql for Cowles merger 63 189,741 189,804 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql Tax benefit from stock plans 885 885 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql ---------- -------- ------------ ------------- ---------- -------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql BALANCES, DECEMBER 27, 1998 $ 160 $ 287 $269,523 $ 537,035 $ - $ 807,005 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql ========== ======== ============ ============= ========== ============== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs12\ql See notes to consolidated financial statements \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 35 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTES TO CONSOLIDATED FINANCIAL STATEMENTS \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 1. SIGNIFICANT ACCOUNTING POLICIES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The McClatchy Company (the "Company") and its subsidiaries are engaged \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql primarily in the publication of newspapers located in Minnesota, California, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Northwest (Washington and Alaska) and the Carolinas. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The consolidated financial statements include the Company and its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql subsidiaries. Significant inter-company items and transactions are eliminated. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In preparing the financial statements, management makes estimates and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assumptions that affect the reported amounts of assets and liabilities and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql disclosure of contingent assets and liabilities at the date of the financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql statements and the reported amounts of revenues and expenses during the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reporting period. Actual results could differ from those estimates. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql FISCAL YEAR-END - In 1998, the Company changed from a calendar year to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql a fiscal year ending on the Sunday nearest December 31. Accordingly, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's results are reported through December 27, 1998 versus December 31, in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql prior years. This change did not materially affect 1998 net income. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql REVENUE RECOGNITION - Advertising revenues are recorded when \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql advertisements are placed in the newspaper and circulation revenues are recorded \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql as newspapers are delivered over the subscription term. Unearned revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql represent prepaid circulation subscriptions. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CASH EQUIVALENTS are highly liquid debt investments with maturities of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql three months or less when acquired. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql CONCENTRATIONS OF CREDIT RISKS - Financial instruments which \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql potentially subject the Company to concentrations of credit risks are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql principally cash and cash equivalents and trade accounts receivables. Cash and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql cash equivalents are placed with major financial institutions. Accounts \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql receivable are with customers located primarily in the immediate area of each \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql city of publication. The Company routinely assesses the financial strength of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql significant customers and this assessment, combined with the large number and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql geographic diversity of its customers, limits the Company's concentration of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql risk with respect to trade accounts receivable. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INVENTORIES are stated at the lower of cost (based principally on the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql first-in, first-out method) or current market value. See note 3 for a discussion \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of a change in the method of accounting for newsprint inventory. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RELATED PARTY TRANSACTIONS - The Company owns a 13.5% interest in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Ponderay Newsprint Company ("Ponderay") which owns and operates a newsprint mill \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in the State of Washington. The investment is accounted for using the equity \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql method, under which the Company's share of earnings of Ponderay is reflected in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income as earned. The Company guarantees certain bank debt used to \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 36 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql construct the mill (see note 9) and is required to purchase 28,400 metric tons \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of annual production on a "take-if-tendered" basis until the debt is repaid. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company satisfies this obligation by direct purchase (1998: $16,732,000, 1997: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $18,221,000 and 1996: $20,714,000) or reallocation to other buyers. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PROPERTY, PLANT AND EQUIPMENT are stated at cost. Major renewals and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql betterments, as well as interest incurred during construction, are capitalized. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql No interest was capitalized in 1998. Capitalized interest aggregated $36,000 in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 and $536,000 in 1996. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DEPRECIATION is computed generally on a straight-line basis over \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql estimated useful lives of: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - 10 to 60 years for buildings \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - 9 to 25 years for presses \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - 3 to 15 years for other equipment \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INTANGIBLES consist of the unamortized excess of the cost of acquiring \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql newspaper operations over the fair values of the newspapers' tangible assets at \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the date of purchase. Identifiable intangible assets, consisting primarily of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql lists of advertisers and subscribers, covenants not to compete and commercial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql printing contracts, are amortized over three to forty years. The excess of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql purchase prices over identifiable assets is amortized over forty years. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Management periodically evaluates the recoverability of intangible assets by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reviewing the current and projected cash flows of each of its newspaper \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql operations. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql STOCK-BASED COMPENSATION - The Company accounts for stock-based awards \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to employees using the intrinsic value method in accordance with APB No. 25, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Accounting for Stock Issued to Employees. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DEFERRED INCOME TAXES result from temporary differences between amounts \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of assets and liabilities reported for financial and income tax reporting \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql purposes. See note 5. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql COMPREHENSIVE INCOME - The Company has no changes in its net assets \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql during any period presented from non-owner sources. Hence, comprehensive income \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql is equal to net income. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SEGMENT REPORTING - The Company's primary business is the publication \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of newspapers. The Company aggregates its newspapers into a single segment \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql because each has similar economic characteristics, products, customers and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql distribution methods. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EARNINGS PER SHARE (EPS) - Basic EPS excludes dilution and reflects \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income divided by the weighted average number of common shares outstanding for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the period. Diluted EPS is based upon the weighted average number of outstanding \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql shares of common stock and dilutive common stock equivalents (stock options -- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql equivalents calculated using the treasury stock method, no adjustment to net \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income required) in the period. See note 10. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 2. MERGER WITH COWLES MEDIA COMPANY \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On March 19, 1998 the Company acquired all of the outstanding shares of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles Media \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 37 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company (Cowles) in a transaction valued at approximately $90.50 per Cowles \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql share and the assumption of $77,350,000 in existing Cowles debt. Cowles \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql publishes the STAR TRIBUNE newspaper, which serves the Twin Cities of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Minneapolis and St. Paul. Cowles also owned four separate subsidiaries that \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql publish business magazines, special-interest magazines and home improvement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql books. Simultaneously with the close of the merger, the Company sold the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql magazine and book publishing subsidiaries. The combined proceeds, plus debt and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql other liabilities assumed by the buyers in those transactions, were $208.1 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million. These proceeds were used to repay debt associated with the Cowles \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql merger. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In connection with the Cowles merger, the Company paid 15% of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql consideration by issuing 6,330,548 shares of Class A Common Stock in exchange \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for Cowles shares and paid cash for the remaining shares. The Class A shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were exchanged using a ratio of 3.01667 shares of McClatchy Class A Common for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql each Cowles share. The Company incurred bank debt through a syndicate of banks \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and financial institutions to finance the cash requirements of the merger and to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql refinance its existing debt (see note 4). Results of the STAR TRIBUNE have been \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql included in the Company's results beginning March 20, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The non-newspaper businesses were valued at fair market value based \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql upon the net after-tax proceeds received by the Company on March 19, 1998, and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql accordingly, no gain or loss was realized on the sale. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The primary asset retained by the Company is the STAR TRIBUNE, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql largest newspaper in Minnesota with daily circulation of 387,000 and Sunday \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql circulation of 673,000 as of March 19, 1998. The STAR TRIBUNE is now the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's largest newspaper. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The merger was accounted for as a purchase, and accordingly, assets \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql acquired and liabilities assumed have been recorded at their fair market values. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Assets retained by the Company include approximately $55,319,000 of current \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assets, $143,978,000 of property, plant and equipment, $1,166,400,000 of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql intangible assets and $165,788,000 of other assets. Intangible assets include \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql approximately $929,000,000 of goodwill which is being amortized over 40 years. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In addition to assuming Cowles' long-term debt, a total of $214,197,000 of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql deferred taxes and other liabilities were assumed. The Company is continuing to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assess the value of certain assets and liabilities, including identifiable \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql intangible assets, severance and other liabilities and will adjust its carrying \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql values as final determinations are made. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The following table summarizes, on an unaudited proforma basis, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql combined results of operations of the Company and its subsidiaries for the years \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ended December 27, 1998 and December 31, 1997, as though the Cowles merger had \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql taken place on January 1, 1997 (in thousands, except per share amounts): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues $ 1,051,340 $ 1,011,784 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income 22,151 32,536 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Diluted earnings per share $ 0.49 $ 0.73 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 38 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles Media Company donated $10,000,000 to the Cowles Media Foundation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and incurred significant investment banking, legal and other costs associated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with the transaction in the first quarter of 1998, contributing to the dilution \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in the pro forma results for the year ended December 27, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 3. CHANGE IN METHOD OF ACCOUNTING FOR NEWSPRINT \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INVENTORY \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company has accounted for newsprint inventories by the first-in, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql first-out (FIFO) method beginning January 1, 1998, whereas in all prior years \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql inventories were valued using the last-in, first-out (LIFO) method. The new \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql method of accounting for newsprint inventory was adopted to provide for a better \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql matching of revenues and expenses. Additionally, the change will enable the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financial reporting to parallel the way management assesses the financial and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql operational performance of its newspapers. The financial statements of prior \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql years have been restated to apply the new method retroactively, and accordingly, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql retained earnings as of December 31, 1995 have been increased by $4,340,000 to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reflect the restatement. The effect of the accounting change on net income as \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql previously reported for the years ended December 31, 1997 and 1996, is as \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql follows (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------- ----------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income as previously reported $ 68,799 $ 44,493 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Adjustment for effect of change in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql accounting for newsprint \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql inventories applied retroactively 433 (2,387) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== =========== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income as adjusted $ 69,232 $ 42,106 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== =========== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The adjustment resulted in an increase of $0.01 to basic and diluted \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql net income per share in 1997 and a reduction of $0.06 to basic and diluted net \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql income per share in 1996. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 4. LONG-TERM BANK DEBT AND OTHER LONG-TERM \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OBLIGATIONS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On July 28, 1995 the Company entered into a bank credit agreement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql providing for borrowings up to $310,000,000. At December 31, 1997, the Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql had long-term bank debt of $94,000,000 and the remaining balance of this debt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql was refinanced with the new credit agreement obtained in connection with the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cowles merger. See note 2 and the discussion below. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql At December 31, 1997, the Company had an outstanding interest rate swap \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql that effectively converted $50,000,000 of debt under its Credit Agreement to a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql fixed rate debt at a rate of 6.0%. The swap was terminated upon the closing of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Cowles merger, with no significant loss to the Company. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 39 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company entered into a bank credit agreement (Credit Agreement) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with a syndicate of banks and financial institutions providing for borrowings of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql up to $1,265,000,000 to finance the Cowles merger and refinance its existing \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql debt. The Credit Agreement includes term loans consisting of Tranche A of $735 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million bearing interest at the London Interbank Offered Rate ("LIBOR") plus 125 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql basis points, payable in increasing quarterly installments from June 30, 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql through March 31, 2005, and Tranche B of $330 million bearing interest at LIBOR \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plus 175 basis points and payable in semi-annual installments from September 30, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 through September 30, 2008. A revolving credit line of up to $200 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql bears interest at LIBOR plus 125 basis points and is payable by March 19, 2005. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As the Company reduces the outstanding debt relative to cash flow (as defined in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Credit Agreement), the interest rate spread over LIBOR will decline. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest rates applicable to debt drawn down at December 27, 1998, ranged from \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 6.19% to 7.28%. The debt is secured by certain assets of the Company, and all of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the debt is pre-payable without penalty. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The terms of the Credit Agreement include certain operating and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financial restrictions, such as limits on the Company's ability to incur \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql additional debt, create liens, sell assets, engage in mergers, make investments \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and pay dividends. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's Credit Agreement requires a minimum of $300,000,000 of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql debt be subject to interest rate protection agreements. During the second \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql quarter, the Company entered into interest rate protection agreements to reduce \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the impact of changes in interest rates on its floating rate debt. The Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql is a party to three interest rate swap agreements, expiring in 2002 to 2003, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql with an aggregate notional amount of $300,000,000. The effect of these \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql agreements is to fix the LIBOR interest rate exposure at 5.9% on that portion of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company's term loans. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Also during the second quarter, the Company entered into an interest \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql rate collar with a $200,000,000 notional amount, and a LIBOR ceiling rate of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 6.5% and a floor of 5.3%. The fair value of these instruments as of December 27, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998, is summarized in note 11. Payments and receipts under such agreements are \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql recorded as adjustments to interest expense. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql At December 27 1998, the Company had outstanding letters of credit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql totaling $29,822,000 securing estimated obligations stemming from workers' \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compensation claims, pension liabilities and other contingent claims. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 40 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql At the end of 1998 and 1997, long-term debt consisted of (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Credit Agreement: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Term loans $ 904,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revolving credit line 100,000 $ 94,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total indebtedness 1,004,000 94,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Less current portion - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================ ============= \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Long-term indebtedness $ 1,004,000 $ 94,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================ ============= \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Long-term debt matures, as of December of each year, as follows (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2000 $ 56,625 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2001 76,653 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2002 95,028 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2003 154,747 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2004 200,684 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Thereafter 420,263 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $1,004,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ========== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other long-term obligations consist of (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Pension obligations $ 41,976 $ 28,639 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Post retirement benefits obligation 17,736 7,895 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Deferred compensation and other 15,562 3,872 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total other long-term obligations $ 75,274 $ 40,406 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================ ============= \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 41 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 5. INCOME TAXES \par\pard\plain\fs16 \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs16\ql Income tax provisions consist of (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Year Ended \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ --------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Restated Restated \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Current: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Federal $ 46,348 $ 42,994 $ 31,449 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql State 11,097 6,796 3,621 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Deferred: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Federal 2,977 (2,084) (6,212) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql State 630 53 2,771 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- --------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Income tax provision $ 61,052 $ 47,759 $ 31,629 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ========= ========= ======== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The effective tax rate and the statutory federal income tax rate are reconciled \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql as follows: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Year Ended \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ---- ---- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Statutory rate 35% 35% 35% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql State taxes, net of federal benefit 6 4 5 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Amortization of intangibles 9 3 4 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Tax basis adjustment of intangibles sold - (1) - \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other - - (1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Effective tax rate 50% 41% 43% \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs16\ql 42 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The components of deferred tax liabilities (benefits) recorded in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's Consolidated Balance Sheet on December 27, 1998, and December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997, are (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql --------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Restated \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Depreciation and amortization $ 115,030 $ 55,571 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Partnership losses 7,275 7,897 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql State taxes 8,871 762 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Deferred compensation (13,492) (18,630) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Other 4,931 3,817 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql --------- --------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql Deferred tax liability (net of $17,441 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql in 1998 and $8,477 in 1997 reported \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql as current assets) $ 122,615 $ 49,417 \par\pard\plain\fs16\pard\plain\cf1\f50\fs18\ql ========= ======== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 6. INTANGIBLES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Intangibles consist of (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ------------ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Identifiable intangible assets, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql primarily customer lists $ 385,073 $ 147,196 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Excess purchase prices over \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql identifiable intangible assets 1,290,291 362,098 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ------------ \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total 1,675,364 509,294 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Less accumulated amortization 164,410 116,079 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ------------ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Intangibles - net $ 1,510,954 $ 393,215 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ============ ============ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 7. EMPLOYEE BENEFITS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql RETIREMENT PLANS: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company sponsors defined benefit pension plans (retirement plans) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql which cover a majority of its employees. Benefits are based on years of service \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and compensation. Contributions to the plans are made by the Company in amounts \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql deemed necessary to provide benefits. Plan assets consist primarily of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql investments in marketable securities including common stocks, bonds and U.S. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql government obligations, and other interest bearing accounts. The Company \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql contributed $1.2 million to multi-employer retirement plans in 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 43 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company also has a number of supplemental retirement plans to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql provide key employees with additional retirement benefits. The terms of the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plans are generally the same as those of the retirement plans, except that the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql supplemental retirement plans are limited to key employees and benefits under \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql them are reduced by benefits received under the retirement plans. These plans \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql are funded on a pay-as-you-go basis and the accrued pension obligation is \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql included in other long-term obligations. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The elements of pension costs are as follows (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------ --------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------ ------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cost of benefits earned during the year $ 12,603 $ 7,409 $ 7,451 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest on projected benefit obligation 21,793 10,456 9,367 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Expected return on plan assets (30,818) (10,836) (9,715) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Prior service cost amortization 741 558 566 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Actuarial (gain) loss (532) 11 (27) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Transition amount amortization (547) (547) (547) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------------ ------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net pension cost $ 3,240 $ 7,051 $ 7,095 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================== ============= ============= \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company also provides or subsidizes certain retiree health care and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql life insurance benefits. In 1997, the Company terminated certain life insurance \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql benefits for employees retiring on or after January 1, 1998, and accordingly, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql recorded a curtailment gain of $417,000. The elements of post-retirement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql expenses are as follows (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------ ---------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------- ------- ------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Service $ 445 $ 3 $ 22 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest 890 351 401 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Actuarial gain (665) (654) (184) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Curtailment gain - (417) - \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------- ------- ------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net post-retirement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql benefit expense (income) $ 670 $ (717) $ 239 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ======= ======= ======= \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 44 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql A reconciliation of the plans' benefit obligations, fair value of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assets, funded status and amounts recognized in the Company's Consolidated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Balance Sheet at December 27, 1998, and December 31, 1997, are as follows (in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Retirement Plans Post-retirement Plans \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ---------------- --------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql 1998 1997 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ---- ---- ---- ---- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Change in benefit obligations: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Beginning of year $ 158,823 $ 136,492 $ 4,895 $ 5,535 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Service cost 12,579 7,414 445 3 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Interest costs 21,817 10,465 890 351 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Acquisition 173,499 - 9,008 - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Plan amendments 2,506 - 142 (417) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Actuarial loss (gain) 15,397 10,361 668 (112) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Benefits paid (16,671) (5,909) (1,299) (465) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------- --------- -------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql End of year 367,950 158,823 14,749 4,895 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------- --------- -------- -------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Change in fair market value of assets: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Beginning of year 150,582 131,371 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Acquisition 225,250 - - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Return on assets 49,171 23,916 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Contributions 562 1,204 1,299 465 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Benefit payments (16,671) (5,909) (1,299) (465) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------- --------- -------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql End of year 408,894 150,582 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------- --------- -------- -------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Funded status 40,944 (8,241) (14,749) (4,895) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Unrecongnized net gain (23,191) (20,767) (3,222) (3,215) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Transition asset (1,642) (2,189) - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Prior service costs 4,727 2,962 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------- --------- -------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Prepaid (accrued ) cost $ 20,838 $ (28,235) $(17,971) $ (8,110) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ========= ========= ======== ======== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Amounts recognized: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Prepaid benefit cost $ 61,630 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Accrued benefit liability (40,792) $ (28,235) $(17,971) $ (8,110) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Additional liability (1,184) - - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Intangible asset 1,184 - - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql --------- --------- -------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Net amount recognized $ 20,838 $ (28,235) $(17,971) $ (8,110) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ========= ========= ======== ======== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 45 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Weighted average assumptions used for valuing benefit obligations were: \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------- ---------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Retirement and Post-retirement Plans: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Discount rate in determining benefit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql obligation 6.75% 7.25% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Retirement Plans: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Expected long-term rate of return \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql on assets 9.00% 9.00% \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Rates of compensation increase 3.5% - 5.0% 3.5% - 5.0% \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql For pension plans with accumulated benefit obligations in excess of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plan assets, the projected benefit obligation, the accumulated benefit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql obligation and the fair value of plan assets were $20.3 million, $18.4 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and $0, respectively, as of December 27, 1998, and $11.0 million, $9.0 million \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and $0, respectively, as of December 31, 1997. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql For the McClatchy Newspaper, Inc., post-retirement plan (benefit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql obligation of $4.9 million, income of $292,000), the medical care cost trend \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql rates are estimated to decline from 8.75% in 1998 to 5.8% by the year 2002. A \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1.0% change in the assumed health care cost trend rate would have increased the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql APBO and the annual service cost by 1.4 %. For the STAR TRIBUNE post-retirement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plan, the medical cost trend rates are expected to decline form 8.8% in 1998 to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 5.5% by the year 2004. For the Star Tribune's plan (benefit obligation of $9.8 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql million and expense of $962,000), a 1.0% change in the assumed health care cost \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql trend rate would have increased the benefit obligation and expense by 9.2% and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 12.5%, respectively, and decreased each by 8.1% and 10.8%, respectively. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company has deferred compensation plans (401(k) plans and other \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql savings plans) which enable qualified employees to voluntarily defer \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compensation. The Company's mandatory matching contributions to the 401(k) plans \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were $6,010,000 in 1998, $5,123,000 in 1997 and $4,704,000 in 1996. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 8. CASH FLOW INFORMATION \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net cash paid in connection with the Cowles merger in 1998 consists of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Fair value of assets acquired $ 1,542,690 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Fair value of liabilities assumed (282,893) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Issuance of Class A common stock (189,804) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Fees and expenses 31,654 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Less cash acquired (2,129) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =============== \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $ 1,099,518 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =============== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql No significant acquisitions were made in 1997 and 1996. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 46 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cash paid during the years ended December 27, 1998, and December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 and 1996, for interest and income taxes were (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------- -------- -------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest paid \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (net of amount capitalized) $ 53,626 $ 9,255 $ 13,699 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Income taxes paid \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (net of refunds) 47,508 51,262 27,543 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cash provided or used by operations was affected by changes in certain \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql assets and liabilities, net of the effects of acquired newspaper operations, as \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql follows (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, December 31, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------------- --------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------------- ------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Restated Restated \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Increase (decrease) in assets: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Trade receivables $ 27,837 $ 11,875 $ 12,419 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Inventories 2,066 738 (9,838) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other assets 2,005 391 (5,895) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------------- ------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total 31,908 13,004 (3,314) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------------- ------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Increase (decrease) in liabilities: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Accounts payable 11,985 12,831 2,656 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Accrued compensation (19,637) 5,408 6,024 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Income taxes 9,987 (1,474) 5,371 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Other liabilities 3,927 2,045 (3,671) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------------- ------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total 6,262 18,810 10,380 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------------- ------------- ------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net cash (decrease) increase from changes in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql certain assets and liabilities $ (25,646) $ 5,806 $ 13,694 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ================= ============= ============= \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 9. COMMITMENTS AND CONTINGENCIES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company guarantees $20,539,000 of bank debt related primarily to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql its joint venture in the Ponderay newsprint mill. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company and its subsidiaries rent certain facilities and equipment \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql under operating leases expiring at various dates through January 2009. Total \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql rental expense amounted to $5,355,000 in 1998, $2,838,000 in 1997 and $2,584,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1996. Minimum rental commitments under operating leases with non-cancelable \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql terms in excess of one year are (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 47 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1999 $ 6,112 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2000 4,183 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2001 2,865 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2002 1,927 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2003 1,201 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Thereafter 1,546 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ----------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Total $ 17,834 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql =========== \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql There are libel and other legal actions that have arisen in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ordinary course of business and are pending against the Company. From time to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql time, the Company is involved as a party in various governmental proceedings, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql including environmental matters. Management believes, after reviewing such \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql actions with counsel, that the outcome of pending actions will not have a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql material adverse effect on the Company's consolidated results of operations or \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql financial position. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 10. COMMON STOCK AND STOCK PLANS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On December 4, 1996, the Board of Directors of the Company declared a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql five-for-four split on its Class A and Class B common stock in the form of a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql special 25% stock dividend, which was paid on January 2, 1997 to the holders of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql record of the common stock as of the close of business on December 16, 1996. All \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql share and per share amounts have been adjusted in the financial statements to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reflect the stock split. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's Class A and Class B common stock participate equally in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql dividends. Holders of Class B common stock are entitled to one vote per share \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and to elect as a class 75% of the Board of Directors, rounded down to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql nearest whole number. Holders of Class A common stock are entitled to one-tenth \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of a vote per share and to elect as a class 25% of the Board of Directors, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql rounded up to the nearest whole number. Class B common stock is convertible at \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the option of the holder into Class A common stock on a share-for-share basis. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql At December 27, 1998 the Company has five stock-based compensation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plans, which are described below. The Company applies APB Opinion 25 and related \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql interpretations in accounting for its plans. No significant amounts of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql compensation costs have been recognized for its fixed stock option plans and its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql stock purchase plan. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's Amended Employee Stock Purchase Plan (the Purchase Plan) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reserved 1,875,000 shares of Class A common stock for issuance to employees. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Eligible employees may purchase shares at 85% of "fair market value" (as \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql defined) through payroll deductions. The Purchase Plan can be automatically \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql terminated by the Company at any time. As of December 27, 1998, 867,150 shares \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql of Class A common stock have been issued under the Purchase Plan. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company has three stock option plans which reserve 3,312,500 Class \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql A common shares for issuance to key employees -- the 1987, 1994 and 1997 plans \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ("Employee Plans"). Terms of each of the Employee Plans are substantially the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql same. Options are granted at the market price of the Class A common stock on the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql date of grant. The options vest in installments over four years, and \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 48 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql once vested are exercisable up to 10 years from the date of grant. Although the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plans permit the Company, at its sole discretion, to settle unexercised options \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql by granting stock appreciation rights, the Company does not intend to avail \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql itself of this alternative except in limited circumstances. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's amended and restated stock option plan for outside \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql directors (the Directors' Plan) provides for the issuance of up to 187,500 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql shares of Class A stock. Under the plan each outside director was granted an \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql option at fair market value at the conclusion of each regular annual meeting of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql stockholders for 2,500 shares. Terms of the Directors' Plan are similar to the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql terms of the Employee Plans. Outstanding options are summarized as follows: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Employee Plans Directors' Plan \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ---------------------------------- -------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Weighted Weighted \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Average Average \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Exercise Exercise \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Options Price Options Price \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ----------------- ---------------- -------------- ----------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql December 31, 1995 989,000 $ 15.88 75,000 $ 17.22 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Granted 203,000 25.10 15,000 18.90 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Exercised (215,382) 13.77 (5,625) 16.83 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Forfeited (2,032) 16.94 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ----------------- -------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Outstanding, \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql December 31, 1996 974,586 18.29 84,375 17.54 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Granted 204,000 28.19 16,875 25.75 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Exercised (270,307) 15.83 (7,500) 16.58 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ----------------- -------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Outstanding, \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql December 31, 1997 908,279 21.24 93,750 19.09 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Granted 558,362 29.10 27,500 30.00 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Exercised (175,955) 15.41 (1,875) 16.60 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Forfeited (48,528) 23.82 (2,500) 30.00 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ----------------- -------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Outstanding, \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql December 27, 1998 1,242,158 25.48 116,875 21.47 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ================= ============== \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Employee Directors' \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Plans Plan \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ---------------- ----------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Options exercisable: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 31, 1996 367,737 50,166 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 31, 1997 298,834 55,792 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql December 27, 1998 337,494 71,260 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 49 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The following tables summarize information about fixed stock options \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql outstanding in the stock plans at December 27, 1998: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql EMPLOYEE PLANS \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql - ---------------------------------------------------------------------------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Average Weighted Weighted \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Remaining Average Average \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Range of Exercise Options Contractual Exercise Options Exercise \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Prices Outstanding Life Price Exercisable Price \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------ ----------- ---- ----- ----------- ----- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 6.35 - $ 18.10 368,190 5.38 $ 16.90 281,457 $ 15.74 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 19.20 - $ 28.19 451,468 8.31 $ 26.52 56,037 $ 24.26 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 29.75 - $ 30.63 60,000 9.32 $ 29.96 - - \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 32.88 362,500 9.93 $ 32.88 - - \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql DIRECTORS' PLAN \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql - ---------------------------------------------------------------------------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Average Weighted Weighted \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Remaining Average Average \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Range of Exercise Options Contractual Exercise Options Exercise \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Prices Outstanding Life Price Exercisable Price \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ------ ----------- ---- ----- ----------- ----- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 14.60 - $ 18.20 46,875 3.66 $ 17.05 46,875 $ 17.05 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 18.40 - $ 25.75 45,000 7.47 $ 21.32 24,385 $ 20.27 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql $ 30.00 25,000 9.40 $ 30.00 - $ - \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Had compensation costs for the Company's five stock-based compensation \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql plans been determined based upon the fair value at the grant dates for awards \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql under those plans consistent with the method of FASB Statement No. 123, the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's net income and earnings per share would have been reduced to the pro \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql forma amounts indicated below (in thousands, except per share amounts): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 1997 1996 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------- -------- -------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income: Restated Restated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As reported $ 61,051 $ 69,232 $ 42,106 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Pro forma $ 59,402 $ 68,406 $ 41,855 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Earnings per common share: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql As reported \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Basic $ 1.41 $ 1.82 $ 1.12 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Diluted $ 1.41 $ 1.81 $ 1.11 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Pro forma \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Basic $ 1.38 $ 1.80 $ 1.11 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Diluted $ 1.37 $ 1.79 $ 1.10 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 50 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The impact of outstanding non-vested stock options granted prior to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1995 has been excluded from the pro forma calculation; accordingly, the 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 and 1996 pro forma adjustments are not indicative of future period pro \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql forma adjustments, when the calculation will apply to all applicable stock \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql options. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Compensation costs are calculated for the fair value of the employees' \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql purchase rights, which was estimated using the Black-Scholes model with the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql following assumptions for 1998, 1997, and 1996 respectively: dividend yield of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1.2% to 1.4% for all years; an expected life of one to seven years for all \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql years; expected volatility of .2868, .2838 and .2791; and risk-free interest \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql rates of 4.5% to 5.8% in 1998, 5.72 % to 6.62 % in 1997 and 5.4% to 6.4% in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1996. The weighted-average fair value of those purchase rights granted in 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997, and 1996 was $9.58, $8.99 and $8.31, respectively for Employee Plans and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $9.33, $8.28 and $5.61, respectively for the Directors' Plan. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SFAS 107, "Disclosures about Fair Value of Financial Instruments", \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql requires the determination of fair value for certain of the Company's assets, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql liabilities and contingent liabilities. In 1997, the fair market value and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql carrying value of the Company's financial instruments were approximately equal. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The following estimates were developed using available market data for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql instruments held as of December 27, 1998, (in thousands): \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Carrying Estimated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Amount Fair Value \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql -------------- -------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Cash and cash equivalents $ 9,650 $ 9,650 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Long-term debt 1,004,000 1,004,000 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Interest rate protection \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql agreements - (8,009) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 12. SALE OF NEWSPAPER AND OTHER BUSINESS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql OPERATIONS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In 1998, the Company sold The McClatchy Printing Company, Benson \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Printing Company, the MOUNT OLIVE TRIBUNE (a twice-weekly newspaper in North \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Carolina) and several niche publications. Total revenues for the sold businesses \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql were $8.6 million in 1998, and the Company reported a net pre-tax loss of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $111,000 in non-operating income - (expense) - net. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql On February 28, 1997, the Company completed the sale of the GILROY \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DISPATCH, THE HOLLISTER FREE LANCE, the MORGAN HILL TIMES and the AMADOR LEDGER \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DISPATCH. These newspapers had combined daily circulation of approximately \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10,150 and weekly circulation of 12,800, and generated $7.6 million in revenues \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in 1996. The Company reported a $6,748,000 pre-tax gain on the sale which is \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql included in non-operating (expenses) income. The Company sold Legi-Tech, its \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql on-line legislative tracking company and certain real estate and recorded a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $2,506,000 pre-tax gain in this area. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 51 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Ellensburg DAILY RECORD in Washington state was sold in December \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1996 and a pre-tax gain of $3,218,000 was recorded in non-operating income. The \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company also sold Nando's internet access operations and Legi-Tech's Florida \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql operations in 1996 and recorded a pre-tax loss of $378,000 on the sales. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql NOTE 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The Company's business is somewhat seasonal, with peak revenues and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql profits generally occurring in the second and fourth quarters of each year as a \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql result of increased advertising activity during the spring holiday and Christmas \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql periods. The first quarter is historically the weakest quarter for revenues and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql profits. The Company's quarterly results are summarized as follows (in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql thousands, except per share amounts): \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1st 2nd 3rd 4th \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Quarter Quarter Quarter Quarter \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------------- -------------- ------------- ------------- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues-net $ 163,963 $ 267,007 $ 263,129 $ 274,552 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Operating income 22,665 52,525 48,863 56,805 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income 9,245 16,682 14,026 21,098 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income per common share 0.24 0.37 0.31 0.47 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 RESTATED: \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Revenues-net $ 150,621 $ 162,280 $ 159,600 $ 169,449 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Operating income 22,915 32,670 27,034 33,867 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income (1) 15,431 17,668 15,589 20,544 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Net income per common share (1) 0.41 0.46 0.41 0.54 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (1) Net income and net income per share have been adjusted to reflect \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql FIFO inventory accounting (see note 3) and reflect basic and diluted EPS, except \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the second quarter when basic EPS is $0.47 and diluted EPS is $0.46. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql In February 1997, the Company recorded an after-tax gain of 10 cents \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql per share on the sale of four community newspapers, while in the third and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql fourth quarters of 1997 the Company recorded an after-tax gain of one cent per \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql share and three cents per share, respectively, on the sale of a non-newspaper \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql business and certain real estate assets. In 1998, the Company sold operations \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql and recorded a one cent per share loss in the third quarter and a one cent per \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql share gain in the fourth quarter. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql I{\*\bkmkstart item_1_3_10}{\*\bkmkend item_1_3_10}\plain\cf1\f50\fs16\ql TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ACCOUNTING AND FINANCIAL DISCLOSURE \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Not applicable. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 52 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart part_1_2_4}{\*\bkmkend part_1_2_4}\pard\plain\cf1\f50\fs16\ql PART III \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_11}{\*\bkmkend item_1_3_11}\pard\plain\cf1\f50\fs16\ql ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Biographical information for Class A Directors, Class B Directors and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql executive officers contained under the captions "Nominees for Class A \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Directors", "Nominees for Class B Directors" and "Other Executive Officers" \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql under the heading "Election of Directors" in the definitive Proxy Statement for \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company's 1999 Annual Meeting of Stockholders is incorporated herein by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reference. \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_12}{\*\bkmkend item_1_3_12}\pard\plain\cf1\f50\fs16\ql ITEM 11. EXECUTIVE COMPENSATION \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The information contained under the headings "Compensation", "Executive \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Compensation", "Stock Option Awards", "Option Exercises and Holdings", "Pension \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Plans" and "Employment Agreement" in the definitive Proxy Statement for the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's 1999 Annual Meeting of Stockholders is incorporated herein by \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql reference. \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_13}{\*\bkmkend item_1_3_13}\pard\plain\cf1\f50\fs16\ql ITEM 12. SECURITY OWNERSHIP OF CERTAIN \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql BENEFICIAL OWNERS AND MANAGEMENT \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The information contained under the heading "Stock Ownership" in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql is incorporated herein by reference. \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_14}{\*\bkmkend item_1_3_14}\pard\plain\cf1\f50\fs16\ql ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql The information contained under the headings "Certain Relationships and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Related Transactions" in the definitive Proxy Statement for the Company's 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Annual Meeting of Stockholders is incorporated herein by reference. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart part_1_2_5}{\*\bkmkend part_1_2_5}\pard\plain\cf1\f50\fs16\ql PART IV \par\pard\plain\fs16 \par\pard\plain\fs16{\*\bkmkstart item_1_3_15}{\*\bkmkend item_1_3_15}\pard\plain\cf1\f50\fs16\ql ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql FORM 8-K \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql a) (1)&(2) Financial Statements and Financial Statement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Schedules filed as a part of this Report as listed in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Index to Financial Statements and Financial Statement \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Schedules on page 29 hereof. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (3) Exhibits filed as part of this Report as listed in the Exhibit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Index beginning on page 58 hereof. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql b) Reports on Form 8-K - The Company filed a Form 8-K dated October 8, 1998, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to report the change in the Company's fiscal year under Item 8 of Form 8-K. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 53 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16{\*\bkmkstart part_1_2_6}{\*\bkmkend part_1_2_6}\pard\plain\cf1\f50\fs16\ql SIGNATURES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON MARCH 29, 1999. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THE McCLATCHY COMPANY \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql By /S/ GARY B. PRUITT \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Gary B. Pruitt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql President and Chief Executive Officer \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SIGNATURE TITLE DATE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- ----- ---- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PRINCIPAL EXECUTIVE OFFICERS: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ GARY B. PRUITT President, Chief Executive March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- Officer and Director \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Gary B. Pruitt) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PRINCIPAL FINANCIAL OFFICER: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ JAMES P. SMITH Vice President, March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- Finance, Treasurer \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (James P. Smith) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql PRINCIPAL ACCOUNTING OFFICER: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ ROBERT W. BERGER Controller March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Robert W. Berger) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 54 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SIGNATURES-(CONTINUED) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SIGNATURE TITLE DATE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- ----- ---- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DIRECTORS: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ ELIZABETH BALLANTINE Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Elizabeth Ballantine) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ WILLIAM K. COBLENTZ Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (William K. Coblentz) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ MOLLY MALONEY EVANGELISTI Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - ----------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Molly Maloney Evangelisti) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ JOAN F. LANE Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Joan F. Lane) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ R. LARRY JINKS Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (R. Larry Jinks) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ JAMES B. MCCLATCHY Publisher and March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- Director \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (James B. McClatchy) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ KEVIN MCCLATCHY Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Kevin McClatchy) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ WILLIAM ELLERY MCCLATCHY Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (William Ellery McClatchy) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 55 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SIGNATURES-(CONTINUED) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SIGNATURE TITLE DATE \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql --------- ----- ---- \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DIRECTORS: \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ ERWIN POTTS Chairman of the Board and March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- Director \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Erwin Potts) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ S. DONLEY RITCHEY, JR. Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (S. Donley Ritchey, Jr.) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ WILLIAM M. ROTH Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (William M. Roth) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /S/ FREDERICK R. RUIZ Director March 29, 1999 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------------------------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (Frederick R. Ruiz) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 56 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql SCHEDULE II \par\pard\plain\fs16 \par\pard\plain\fs16\par\pard\plain\cf1\f50\fs14\ql MCCLATCHY NEWSPAPERS, INC. AND SUBSIDIARIES \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql VALUATION AND QUALIFYING ACCOUNTS \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql FOR THE THREE YEARS ENDED DECEMBER 27, 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql (in thousands) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql COLUMN A Column B Column C Column D Column E \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql -------- ----------- ---------------------------- --------------- ---------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Additions Deductions(1) \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ---------------------------- for Purposes \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Balance Charged to Charged to for Which Balance at End \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Beginning Costs and Other Accounts of Period \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql of Period Expenses Accounts Were Set Up \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql ----------- ------------ ------------ --------------- ---------------- \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql YEAR ENDED DECEMBER 31, 1996: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Deduct from assets to which \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql they apply: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Uncollectible accounts $ (2,327) $ (5,567) $ - $ 5,454 $ (2,440) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql YEAR ENDED DECEMBER 31, 1997: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Deduct from assets to which \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql they apply: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Uncollectible accounts $ (2,440) $ (4,793) $ - $ 5,071 $ (2,162) \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql YEAR ENDED DECEMBER 27, 1998: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Deduct from assets to which \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql they apply: \par\pard\plain\fs16\pard\plain\cf1\f50\fs14\ql Uncollectible accounts $ (2,162) $ (4,958) $ (2,011) $ 4,296 $ (4,835) \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (1) Amounts written off net of bad debt recoveries. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 57 \par\pard\plain\fs16 \par\pard\plain\fs16 \page \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INDEX OF EXHIBITS \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EXHIBIT \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ------ \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 3.1* The Company's Restated Certificate of Incorporation dated \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql March 18, 1998, included as Exhibit 3.1 in the Company's 1997 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 3.2* The Company's By-laws included as Exhibit 3.2 in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's Registration Statement No. 333-46501 on Form S-4. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10.1* Amended and Restated Agreement and Plan of Merger and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Reorganization between The McClatchy Company and Cowles Media \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company dated February 13, 1998 included as Exhibit 2.1 in \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql the Company's Registration Statement No. 333-46501 on Form \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql S-4. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10.2* Credit Agreement dated March 10, 1998 between The McClatchy \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company (formerly MNI Newco, Inc.), the lenders party \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql thereto, Salomon Brothers, Inc., as Arranger and Syndication \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Agent and Bank of America National Trust and Savings \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Association as Swingline Lender, Administrative Agent and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Collateral Agent, included as Exhibit 10.2 in the Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1997 Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10.3* Ponderay Newsprint Company Partnership Agreement dated as of \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql September 12, 1985 between Lake Superior Forest Products, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Inc., Central Newsprint Company, Inc., Bradley Paper Company, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Copley Northwest, Inc., Puller Paper Company, Newsprint \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Ventures, Inc., Wingate Paper Company, Tribune Newsprint \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company and Nimitz Paper Company included in Exhibit 10.10 to \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql McClatchy Newspapers, Inc. Registration Statement No. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 33-17270 on Form S-1. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.4* McClatchy Newspapers, Inc. Management by Objective Plan \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Description included in Exhibit 10.1 to McClatchy Newspapers, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Inc. Registration Statement No. 33-17270 on Form S-1. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.5* Supplemental Executive Retirement Plan included in Exhibit \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10.7 to McClatchy Newspapers, Inc. 1988 Report on Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.6*+ Amended and Restated 1987 Stock Option Plan dated August 15, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1996 included as Exhibit 10.7 to the McClatchy Newspapers, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Inc. 1996 Report on Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.7*+ Amended and Restated 1994 Stock Option Plan dated February 1, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 included as Exhibit 10.8 to the Company's Report on Form \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10-Q filed for the Quarter Ending on June 30, 1998. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10.8*+ 1997 Stock Option Plan dated December 10, 1997 included as \par\pard\plain\fs16{\*\bkmkstart part_1_2_7}{\*\bkmkend part_1_2_7}\pard\plain\cf1\f50\fs16\ql Exhibit 10.8 in the Company's 1997 Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.9* Group Executive Life Insurance Plan included in Exhibit 10.9 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql to McClatchy Newspapers, Inc. Registration Statement No. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 33-17270 on Form S-1. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.10* Group Executive Long Term Disability Insurance Plan included \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in Exhibit 10.8 to McClatchy Newspapers, Inc. Registration \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Statement No. 33-17270 on Form S-1. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.11* Executive Performance Plan adopted on January 1, 1990 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql included in Exhibit 10.13 to McClatchy Newspapers, Inc. 1989 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Report on Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.12*+ The Company's Amended and Restated 1990 Directors' Stock \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Option Plan dated February 1, 1998 included as Exhibit 10.12 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql in the Company's 1997 Form 10-K. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.13+ Employment Agreement between the Company and Gary B. Pruitt \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql dated June 1, 1996 included as Exhibit 10.13 to the McClatchy \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Newspapers, Inc. 1996 Report on Form 10-K. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.14* The Company's Long-Term Incentive Plan, dated January 1, 1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql included as Exhibit 10.2 to the Company's Report on Form 10-Q \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql for the Quarter Ending on June 30, 1998. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql **10.15* The Company's Chief Executive Bonus Plan, dated January 1, \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1998 included as Exhibit 10.3 to the Company's Report on Form \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 10-Q for the Quarter Ending on June 30, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 21* Subsidiaries of the Company included as Exhibit 21 in the \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Company's 1997 Form 10-K. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 23 Consent of Deloitte & Touche LLP. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 27 Financial Data Schedule for the Year Ended December 27, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql - -------------------- \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql * Incorporated by reference \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql ** Compensation plans or arrangements for the Company's executive officers and \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql directors. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql + Assumed by the Company from McClatchy Newspapers, Inc. on March 19, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 59 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \page{\*\bkmkstart doc_1_2}{\*\bkmkend doc_1_2} \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql INDEPENDENT AUDITOR'S CONSENT \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql We consent to the incorporation by reference in The McClatchy Company's \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (formerly McClatchy Newspapers, Inc.) Registration Statements No. 33-21704, No. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 33-24096, No. 33-37300, No. 33-65104, No. 33-56717, No. 333-42903, and No. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 333-59811 on Form S-8 and No. 333-47909 on Form S-3 of our report dated February \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2, 1999 (which expresses an unqualified opinion and includes an explanatory \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql paragraph relating to an accounting change), appearing in this Annual Report on \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Form 10-K of The McClatchy Company for the year ended December 27, 1998. \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql /s/ Deloitte & Touche LLP \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql Sacramento, California \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql March 25, 1999 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \page{\*\bkmkstart doc_1_3}{\*\bkmkend doc_1_3} \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql
5 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql EXHIBIT 27-- This schedule contains financial information extracted from SEC \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql filing Form 10-K and is qualified in its entirety by reference to such financial \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql statements. \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1,000 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 12-MOS \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DEC-27-1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql JAN-01-1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql DEC-27-1998 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $9,620 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 154,520 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 4,835 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 16,587 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 200,537 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 275,230 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2,246,725 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 220,390 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 447 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 806,558 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 2,246,725 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 968,651 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 968,651 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 787,793 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql (4,065) \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 62,820 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 122,103 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 61,051 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 0 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql $61,051 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1.41 \par\pard\plain\fs16\pard\plain\cf1\f50\fs16\ql 1.41 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16 \par\pard\plain\fs16}