Wednesday, September 10, 2003

Times' finances: Not as dire as pictured?

Special to The Seattle Times

On Jan. 20, 2000, with rain spattering the pavement outside The Seattle Times Co. headquarters, Frank Blethen called the company's first stockholder meeting of the new millennium to order.

The gray, gloomy weather did nothing to dampen Blethen's spirits. The '90s had been the best decade in The Times' 104-year history, the company's chief executive officer told the small group of shareholders, directors and senior staff members gathered in the company's second-floor board room.

The joint operating agreement (JOA) between The Seattle Times and The Hearst Corp.'s Post-Intelligencer had pumped more than $200 million into the company's coffers during those 10 years, with cash flow expected to grow by a third over the coming decade. And, Blethen assured the group, "the best is yet to come."

Just three years later, on a plane flying back to his New York headquarters, Hearst CEO Victor Ganzi scrawled a note to himself, recapping a long day of negotiations with Blethen at Seattle's Four Seasons Hotel over the future of the city's papers.

"Blethen Corp. is barely cash flow break-even," Ganzi wrote of the family holding company, whose sole asset is The Seattle Times Co. "Financial situation is very dire."

Ganzi's grim assessment was underscored in April this year when Blethen notified Hearst that, under calculations established by the joint-operating agreement, The Seattle Times had lost nearly $10 million from 2000 through 2002.

Citing the losses, Blethen invoked a JOA clause that requires Hearst to begin negotiations to shut down the weaker P-I within 18 months or terminate the JOA. Either outcome would likely end publication of the 140-year-old P-I, since Hearst has said the paper isn't financially viable outside the JOA.

In a memo to his staff at the time of the loss notification, Blethen spelled out the company's precarious financial position.

"We can't go on losing money and survive," the memo said.

It was a startling disclosure. In just three years, the financial fortunes of Seattle's major paper and its principal owners had tumbled from prosperity to uncertainty.

Or did they?

Times Co. officials insist the paper is struggling. They blame its problems on an array of ills, from Seattle's stumbling economy, to a 49-day strike, to the earthquake that shook the city three years ago. The JOA, which worked successfully for most of its first 20 years, is no longer a workable business model, they say.

Blethen reiterated the message in a memo last week, calling the newspaper's financial situation "precarious and uncertain" if the current JOA structure is maintained.

But internal Times Co. documents suggest there may be a different way of looking at the Seattle newspaper's finances and that its financial position may not be as bleak as the company has portrayed using JOA-prescribed calculations.

The documents are part of a lawsuit Hearst filed in April to block a shutdown of the P-I under the JOA. They include The Times Co.'s consolidated financial summaries used in presentations to its board members and to its lenders.

The summaries — which are entirely separate from the externally audited JOA-prescribed financial statements — involve calculations that cover broader considerations than what the JOA calls for. Those summaries also show a loss at The Seattle Times newspaper for 2000, 2001 and 2002.

But those losses are the result of unusual accounting, according to a University of Washington accounting expert. More traditional accounting, this expert said, would have probably shown a profit at The Seattle Times during the years its corporate parent says the newspaper lost millions.

An accurate portrayal?

Hearst attorneys say they are aware of the unusual accounting in The Times Co.'s summaries. But they say they don't plan to focus on them at a Friday hearing on their lawsuit before King County Superior Court Judge Greg Canova. The summaries are not at issue in the suit, which involves only JOA accounting.

While they do not dispute that The Times experienced the three years of losses under the JOA calculation, Hearst attorneys are expected to argue in the hearing that those losses resulted from unusual external conditions and should not legally trigger the effort to close the P-I.

Outside the courtroom, Hearst attorneys argue that the JOA contract-based accounting Blethen cited in his April loss notification does not accurately portray the newspaper's overall financial situation.

Except for the JOA accounting system, said Guy Michelson, a Seattle attorney who represents Hearst, "the reality is they are making money."

"They were making money hand over fist," adds Kelly Corr, another attorney who represents Hearst, "and they were crying all the way to the bank."

Not true, The Times says. In his memo to the staff last week, Blethen said operating under the JOA could make the paper unprofitable through the rest of the decade. In addition, the newspaper made deep cuts in expenses in , albeit from levels many in the industry consider high.

Blethen contends Hearst's strategy is to use the JOA to keep operating the P-I while "bleeding" The Times Co. to the point it is forced to sell The Times to the deep-pocketed media conglomerate.

While the financial summaries don't directly affect the court fight over the JOA, they could raise questions with Justice Department investigators who oversee the JOA and must review any shutdown of the P-I. Since May, federal investigators have been interviewing people in Seattle to determine whether the JOA has been a financial success or failure.

A Justice Department spokeswoman declined to comment on the department's investigation of the Seattle JOA.

For its part, The Times contends the financial summaries were meant to be read only by Times Co. staff members and others familiar with the company's accounting. Times spokeswoman Kerry Coughlin said the company's board members knew enough about the internal accounting methods to decipher the summaries.

JOA losses

In examining the consolidated summaries, it's important to remember that the losses Blethen and The Times Co. generally cite refer only to the JOA accounting formula.

Under that formula, The Seattle Times and P-I pool their revenues and The Times is paid for handling the nonnews functions for both papers. The remainder is split, with 60 percent going to The Seattle Times and 40 percent to the P-I.

Each paper then figures its JOA-formula profit or loss by subtracting the cost of its news and editorial operation from its share of the split.

In 2000, The Times Co. says, The Seattle Times lost $2.1 million under this formula. The paper lost $5.1 million in 2001 and $2.7 million last year under the formula.

Different figures

The company's annual consolidated operating summaries are separate and cover revenue and expenses for the corporation and each of its four operating units in all three years. Those summaries break down the company into its four operating units: "The Seattle Times Newspaper," "Blethen Maine Newspapers" (consisting of Maine daily and weekly papers the company acquired in 1998), "Other Newspapers" and "Other Affiliates."

The summaries present a broader picture of each unit's income and expenses than the JOA accounting, breaking out separate numbers for advertising, circulation, online revenue, newsprint purchases and interest expenses.

Copies of the summaries for 2000, 2001 and 2002 show that The Times Co. took what experts say was an unusual accounting step: charging all of its $37 million in interest expenses to The Seattle Times Newspaper unit. It did that even though the expense, according to Times Co. documents, was primarily related to $233 million the company borrowed in 1998 to buy the Maine newspapers.

What the consolidated summaries show is that the Seattle Times Newspaper unit had a $3.9 million loss in 2000, including $14 million in interest expense. Without that expense, the loss would have turned into a $10.1 million profit for the year under The Times' accounting for the newspaper unit.

That figure doesn't mean the newspaper itself made that much for the year. The Seattle Times Newspaper heading in the summaries includes corporate revenues and expenses, as well as those for the paper itself. Included in revenues are corporate income from real-estate leases and online services, and Coughlin said the expense ledger includes such items as the cost of administering all of the company's tax, workers compensation, insurance and audit programs.

None of those corporate expenses is identified in the summaries, and Coughlin said they are not broken out separately from The Seattle Times Newspaper totals.

Still, without the interest expense, the accounting suggests the newspaper made a profit, though it can't be determined how much of a profit — or even whether it made a profit at all — because the impact of the corporate figures isn't clear.

The case is similar for the two other years, with $11.8 million in interest expense charged to The Seattle Times Newspaper unit in 2001, when the summaries show the unit lost $4.4 million. In 2002, The Times Co. charged $11.1 million in interest expense to the paper, resulting in a $6.4 million loss.

In each year, the summaries show the newspaper unit — again, including corporate revenues and expenses — would have been profitable without the interest expense. (The JOA accounting does not include any interest expenses because they are not considered news and editorial expenses.)

Accounting methods

Terry Shevlin, a University of Washington accounting professor who examined The Times Co.'s consolidated operating summaries for this article, said they do not follow the accounting profession's generally accepted accounting principles, known as GAAP.

Under GAAP, Shevlin said, interest paid on a loan used to buy the Blethen Maine Newspapers subsidiary would normally be charged against that unit, not against the separate Seattle Times Newspaper unit.

"If this loan was taken to buy the Maine newspapers, the interest expense would be a direct cost of running the Maine papers," he said.

The Times Co.'s consolidated operating summaries show no interest expense charged to Blethen Maine Newspapers from 2000 to 2002.

"It looks like they loaded up the interest on The Seattle Times newspaper," Shevlin said.

He said assigning the interest expense to The Seattle Times Newspaper, which was not directly involved in the loan transaction, would be considered "unusual accounting" by the accounting profession.

Because the consolidated summaries were prepared for internal use only, they would not violate any laws, Shevlin said. But, he said, "If the summaries were given to the lenders and they were told this was in accordance with GAAP, that would not be appropriate."

An 'internal' process

The Times readily concedes the summaries were not prepared under GAAP standards. Coughlin, the company spokeswoman, said they were part of "an internal accounting process." The company, she said, maintains separate internal accounting that complies with GAAP rules but would not make that available.

Coughlin did not explain why The Times Co.'s consolidated operating summaries provided a separate accounting for the company's other units but charged all the corporate expenses to The Seattle Times.

"We do not track The Seattle Times newspaper or our affiliate newspapers as stand-alone entities," she said. "It would be inaccurate to make financial assumptions about just The Seattle Times Newspaper based on this report."

A copy of the summary was included in the company's annual report to its board of directors in 2000, and court records indicate Times officials also used it during a 2001 meeting with lenders in which the company renegotiated loan terms.

Coughlin did not explain why The Times Co. presented summaries that did not follow GAAP rules to its board and lenders.

The Times Co.'s accounting for interest expenses in its summaries might be confusing to outsiders, she said. The figures include both the interest on the loan for the Maine purchase and interest on the company's revolving credit line, which generally goes toward covering working expenses.

The summaries do not distinguish between the two types of interest, and Coughlin said The Times Co. would not disclose the size of the interest expense related to its credit line. But the UW's Shevlin said that because of the size of the Maine acquisition loan, all or most of the listed interest expense would be related to that loan.

Coughlin said that even if The Times Co. had charged its interest expense to the Blethen Maine Newspapers unit, any profit shown by its Seattle paper during the three years would have been "too close to the line to consider it an acceptable risk to the company."

Other figures?

While Coughlin said The Times Co. does not break out results for each operating unit, testimony by another Times executive raises questions about whether The Times Co. did keep separate figures for The Seattle Times newspaper.

Mae Numata, The Times Co.'s chief financial officer, said the company broke out general and administrative expenses charged to The Seattle Times Newspaper from the rest of the company in 2000.

In a deposition to Hearst attorneys in January, Numata said $79.7 million listed in a company financial statement for general and administrative expenses for the Seattle Times Newspaper in 2000 was separate from similar expenses for the rest of the company.

Asked by Hearst attorney Michelson what the $79.7 million was for, Numata said, "This is for the Seattle Times Newspaper."

"If it was for the company," Numata added, "it would be larger."

Numata also testified in the deposition that each Times Co. unit accounted for its own major expenses such as purchasing newsprint and information technology.

Coughlin said Numata meant the entire Times Co.'s operations when she referred to the "Seattle Times Newspaper" in her deposition.

Numata was not available for comment.

Bill Richards is a free-lance writer hired on a special contract by The Seattle Times to cover events involving the joint operating agreement with the Seattle Post-Intelligencer. He can be reached at brichards@seattletimes.com

Correction: The document described in this article on the newspaper's finances was not presented to lenders as the story reported. In the story, a University of Washington accounting expert said the document reflected "unusual accounting" because it charged to The Times newspaper the interest from a loan used by the parent Seattle Times Co. to purchase newspapers in Maine. The UW expert was quoted as saying that if it had also been presented to the lenders, it would be inappropriate. The document was presented to the company's board of directors in 2001 but not to lenders. With lenders, Times officials used a different financial document that did not use the accounting method in question and met accepted accounting standards. Also, the chief executive officer of Hearst Corp. is Victor Ganzi. He was misidentified in a previous version of this story as Frank Ganzi.

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