-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cj290bYYDG+nJi05WJDjbcRwrImoXW4JXWolfhMapMt68sAvfhgW7Tz+L2utQXDT 2GEEsa8j8WAtfTTOGbcAUQ== 0000822043-96-000004.txt : 19960515 0000822043-96-000004.hdr.sgml : 19960515 ACCESSION NUMBER: 0000822043-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCCLATCHY NEWSPAPERS INC CENTRAL INDEX KEY: 0000822043 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 940666175 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09824 FILM NUMBER: 96562211 BUSINESS ADDRESS: STREET 1: 2100 Q ST STREET 2: PO BOX 15779 CITY: SACRAMENTO STATE: CA ZIP: 95816 BUSINESS PHONE: 9163211828 MAIL ADDRESS: STREET 1: PO BOX 15779 STREET 2: 2100 Q ST CITY: SACRAMENTO STATE: CA ZIP: 95816 10-Q 1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_______to_______ Commission File Number: 1-9824 McCLATCHY NEWSPAPERS, INC. (Exact name of registrant as specified in its charter) Delaware 94-0666175 (State of Incorporation) (IRS Employer Identification Number) 2100 "Q" Street, Sacramento, CA. 95816 (Address of principal executive offices) (916) 321-1846 (Registrant's telephone number) Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . The number of shares of each class of common stock outstanding as of May 7, 1996: Class A Common Stock 6,898,677 Class B Common Stock 23,131,334 1 of 20 2 McCLATCHY NEWSPAPERS, INC. INDEX TO FORM 10-Q Page Part I - FINANCIAL INFORMATION Item 1 - Financial Statements: Consolidated Balance Sheet - March 31, 1996 (unaudited) and December 31, 1995 3 Consolidated Statement of Income for the Three Months Ended March 31, 1996 and 1995 (unaudited) 5 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1996 and 1995 (unaudited) 6 Consolidated Statement of Stockholders' Equity for the Period from January 1, 1995 to March 31, 1996 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 17 Part II - OTHER INFORMATION 20 3 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements McCLATCHY NEWSPAPERS, INC. CONSOLIDATED BALANCE SHEET (In thousands)
March 31, December 31, 1996 1995 (Unaudited) Current assets: Cash and cash equivalents $ 214 $ 3,252 Trade receivables (less allowances of $2,780 in 1996 and $2,327 in 1995) 64,114 69,451 Other receivables 1,710 2,251 Newsprint, ink and other inventories 15,348 13,703 Deferred income taxes 9,285 9,840 Other current assets 3,757 4,737 Total current assets 94,428 103,234 Property, plant and equipment: Land 30,920 30,920 Buildings and improvements 142,710 141,908 Equipment 349,859 347,651 Construction in progress 36,110 31,110 Total 559,599 551,589 Accumulated depreciation (210,909) (203,214) Net property, plant and equipment 348,690 348,375 Intangibles - net 424,969 429,390 Investment in newsprint mill partnership 7,115 5,965 Other assets 6,039 5,994 Total assets $881,241 $892,958
See notes to consolidated financial statements 4 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31, 1996 1995 (Unaudited) Current liabilities: Current portion of bank debt $ 10,000 $ 10,000 Accounts payable 16,021 20,152 Accrued compensation 32,590 33,222 Income taxes 985 - Unearned revenue 18,744 17,566 Carrier deposits 4,353 4,298 Other accrued liabilities 9,090 9,248 Total current liabilities 91,783 94,486 Long-term bank debt 232,000 243,000 Other long-term obligations 28,629 28,135 Deferred income taxes 61,124 61,643 Commitments and contingencies (note 9) Stockholders' equity: Common stock $.01 par value: Class A - authorized 50,000,000 shares, issued 6,877,419 in 1996 and 6,850,315 in 1995 69 69 Class B - authorized 30,000,000 shares, issued 23,131,334 in 1996 and 1995 231 231 Additional paid-in capital 62,995 62,521 Retained earnings 404,781 403,244 Treasury stock, 20,000 Class A shares (371) (371) Total stockholders' equity 467,705 465,694 Total liabilities and stockholders' equity $881,241 $892,958
See notes to consolidated financial statements 5 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts)
Three Months Ended March 31, 1996 1995 (Unaudited) Revenues - net: Advertising $111,830 $ 87,073 Circulation 26,996 21,707 Other 7,477 5,018 Total 146,303 113,798 Operating expenses: Compensation 63,390 51,767 Newsprint and supplements 31,174 19,066 Depreciation and amortization 12,996 9,238 Other operating expenses 28,646 23,369 Total 136,206 103,440 Operating income 10,097 10,358 Nonoperating (expenses) income: Interest expense (3,453) (10) Investment income 23 1,581 Partnership income (loss) 1,150 (700) Other - net 16 7 Total (2,264) 878 Income before income tax provision 7,833 11,236 Income tax provision 3,447 4,594 Net income $ 4,386 $ 6,642 Net income per common share $ 0.15 $ 0.22 Weighted average number of common shares 30,093 29,998
See notes to consolidated financial statements 6 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Three Months Ended March 31, 1996 1995 (Unaudited) Cash provided (used) by operating activities: Net income $ 4,386 $ 6,642 Reconciliation to net cash provided: Depreciation and amortization 13,034 9,275 Partnership (income) losses (1,150) 700 Changes in certain assets and liabilities - net 2,959 2,182 Other 46 (52) Net cash provided by operating activities 19,275 18,747 Cash provided (used) by investing activities: Maturities of investments held to maturity - 23,849 Proceeds from investments available for sale - 1,007 Purchases of investments held to maturity - (5,940) Purchases of investments available for sale - (3,488) Purchase of property, plant and equipment (9,048) (5,925) Advances to newsprint mill partnership - (1,445) Other - net 110 (370) Net cash (used) provided by investing activities (8,938) 7,688 Cash (used) provided by financing activities: Repayment of long-term debt (11,000) - Payment of cash dividends (2,849) (2,842) Other - principally stock issuances 474 324 Net cash used by financing activities (13,375) (2,518) Net change in cash and cash equivalents (3,038) 23,917 Cash and cash equivalents, beginning of year 3,252 68,574 Cash and cash equivalents, end of period $ 214 $92,491 Other cash flow information: Cash paid during the period for: Income taxes (net of refunds) $ 270 $ 6,235 Interest paid (net of capitalized interest) $ 3,272 $ -
See notes to consolidated financial statements 7 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS'EQUITY (UNAUDITED) (In thousands, except share and per share amounts)
Par Value Additional Treasury Class A Class B Paid-in Retained Stock Common Common Capitol Earnings at Cost Total Balances December 31, 1994 $66 $233 $61,290 $381,002 $(371) $442,220 Net income (3 months) 6,642 6,642 Dividends paid ($.095 per share) (2,842) (2,842) Conversion of 100,000 Class B to Class A 1 (1) Issuance of 17,975 shares under employee plan 1 323 324 Balance, March 31, 1995 68 232 61,613 384,802 (371) 446,344 Net income (9 months) 26,976 26,976 Dividends paid ($.285 per share) (8,534) (8,534) Conversion of 45,455 Class B to Class A 1 (1) Issuance of 48,863 Class A shares under employee stock plans 908 908 Balance December 31, 1995 69 231 62,521 403,244 (371) 465,694 Net income (3 months) 4,386 4,386 Dividends paid ($.095 per share) (2,849) (2,849) Issuance of 27,104 Class A shares under employee and director plans 474 474 Balance March 31, 1996 $69 $231 $62,995 $404,781 $(371) $467,705
See notes to consolidated statements 8 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES McClatchy Newspapers, Inc. (the Company) and its subsidiaries are engaged primarily in the publication of newspapers located in western coastal states and North and South Carolina. The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany items and transactions have been eliminated. In preparing the financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position, results of operations, and cash flows for the interim periods presented. All adjustments are normal recurring entries. Such financial statements are not necessarily indicative of the results to be expected for the full year. Revenue recognition - Advertising revenues are recorded when advertisements are placed in the newspaper and circulation revenues are recorded as newspapers are delivered over the subscription term. Unearned revenues represent prepaid circulation subscriptions. Cash equivalents are highly liquid investments with maturities of three months or less when acquired. Concentrations of credit risks - Financial instruments which potentially subject the Company to concentrations of credit risks are principally cash and cash equivalents and trade accounts receivables. The Company routinely assesses the financial strength of significant customers and this assessment, combined with the large number and geographic diversity of its customers, limits the Company's concentration of risk with respect to trade accounts receivable. Inventories are stated at the lower of cost (based principally on the lastin, first-out method) or current market value. If the first-in, first-out method of inventory accounting had been used, inventories would have increased by $7,457,000 at March 31, 1996 and $7,426,000 at December 31, 1995. Property, plant and equipment are stated at cost. Major renewals and betterments, as well as interest incurred during construction, are capitalized. For three months ended March 31, 1996 and 1995 such interest was $323,000 and none, respectively. 9 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES - Continued Depreciation is computed generally on a straight-line basis over estimated useful lives of: 10 to 60 years for buildings 9 to 25 years for presses 3 to 15 years for other equipment Intangibles consist of the unamortized excess of the cost of acquiring newspaper operations over the fair market values of the newspapers' tangible assets at the date of purchase. Identifiable intangible assets, consisting primarily of lists of advertisers and subscribers and covenants not to compete, are amortized over periods ranging from three to forty years. The excess of purchase prices over identifiable assets is amortized over forty years. Management periodically evaluates the recoverability of intangible assets by reviewing the current and projected cash flows of each of its newspaper operations. Deferred income taxes result from temporary differences between amounts reported for financial and income tax reporting purposes. See note 5. Earnings per share are based on the weighted average number of outstanding shares of common stock and dilutive common stock equivalents (stock options). 2. ACQUISITION On August 1, 1995, the Company purchased The News and Observer Publishing Company (N&O) for which it paid $247,000,000 in cash for all the outstanding common stock of N&O and assumed $117,000,000 of pre-existing N&O funded debt. An additional $10,000,000 is payable subject to the resolution of certain contingencies and is collateralized by a letter of credit. The cash portion of the purchase price was financed with $138,000,000 in new long-term bank debt and $109,000,000 from existing Company cash and investments. The Company refinanced the N&O funded debt and recorded a prepayment penalty of $12,194,000 as part of N&O acquisition costs. See note 4 for discussion of the Company's long-term debt. N&O published The News & Observer newspaper in Raleigh, NC, seven other non daily publications in North Carolina and the Nando.net online service. The News & Observer has a daily circulation of about 154,000 and 200,000 Sunday. 10 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. ACQUISITION - Continued The acquisition was accounted for as a purchase and, accordingly, assets acquired and liabilities assumed have been recorded at their estimated fair values at the date of acquisition. Assets of N&O included approximately $1,500,000 of working capital, $72,600,000 of property, plant and equipment and $323,100,000 of intangible assets. Intangible assets include approximately $299,100,000 of goodwill which is to be amortized over a 40-year period. In addition to the $117,000,000 of N&O long-term debt, the Company assumed deferred income tax and other liabilities totaling $11,500,000. The N&O operations have been included in the Company's consolidated results beginning on August 1, 1995. The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company and its subsidiaries for the first quarter of 1995 as though the acquisition had taken place on January 1, 1995 (in thousands, except per share amounts):
1995 Revenues 140,064 Net income 4,257 Earnings per common shares 0.14
3. INVESTMENT IN NEWSPRINT MILL PARTNERSHIP A wholly-owned subsidiary of the Company owns a 13.5% interest in Ponderay Newsprint Company ("Ponderay"), a general partnership formed to construct and operate a newsprint mill in the State of Washington. The Company guarantees certain bank debt used to construct the mill (see note 9) and is required to purchase 28,400 metrical production on a "take-if-tendered" basis until the debt is repaid. The Company satisfies this obligation by direct purchase (1996: $5,699,000 and 1995: $3,311,000) or reallocation to other buyers. To secure additional newsprint, the Company has arranged to purchase an additional 10,000 metric tons from Ponderay in 1996 and 8,000 in 1997. For the three months ended March 31, net revenues and net income (loss) were $46,966,000 and $9,451,000 in 1996 and $31,581,000 and $(5,405,000) in 1995. 11 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS At March 31, 1996 and December 31, 1995 long-term bank debt consisted of (in thousands):
March 31, December31, 1996 1995 Bank Credit Agreement $232,000 $243,000 N&O holdback payable 10,000 10,000 Total 242,000 253,000 Less current portion 10,000 10,000 Total long-term bank debt $232,000 $243,000
In addition, the Company also has an outstanding letter of credit for $4,581,000 securing self-insurance workers' compensation reserves. On July 28, 1995 the Company entered into a bank credit agreement (Credit Agreement) providing for borrowings up to $310,000,000. In connection with the August 1, 1995 acquisition of N&O, the Company drew down $138,000,000 of bor- rowings and the bank issued a $10,000,000 letter of credit on behalf of the Company (see note 2). The N&O holdback is expected to be paid in August 1996. Among the liabilities assumed in acquiring the stock of N&O were long-term notes payable consisting of $98,000,000 face value of unsecured senior notes bearing interest at 9.65% to 9.76% and a $19,000,000 unsecured variable rate note. The Company has refinanced N&O's debt and incurred a refinancing penalty of $12,194,000 in accordance with the terms of the note agreements which has been included in the purchase price. Under the Credit Agreement, interest only is payable through July 1, 2000. Principal in the amount of $32,000,000 is due on July 1, 2001 and the remaining principal matures in increasing annual amounts until it is paid in full by July 1, 2005. The Company may select between alternative floating interest rates for each drawdown. On March 31, 1996 the interest rate applicable to the amount drawn ranged from 5.4% to 6.1%. Such debt is unsecured and the related agreement contains covenants requiring, among other things, mainten- ance of cash flow and limitations on debt-to-equity ratios, with which the Company was in compliance at March 31, 1996. At March 31, 1996 the Company had an outstanding interest rate swap that effectively converted $50,000,000 of debt under its Credit Agreement to a fixed rate debt at a rate of 6.0%. The swap expires in November 1998. The Company makes payments to a counterparty depending on the change in variable interest rates which are recorded as additions to or reductions of interest expense. 12 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS - Continued Other long-term obligations consist of (in thousands):
March 31, December 31, 1996 1995 Postretirement benefits obligation $ 9,323 $ 9,386 Pension obligations 12,647 11,209 Deferred compensation and other 6,659 7,540 Total long-term obligations $28,629 $28,135
5. INCOME TAX PROVISIONS Income tax provisions consist of (in thousands):
March 31, March 31, 1996 1995 Current: Federal $3,048 $3,811 State 363 834 Deferred: Federal (1) (23) State 37 (28) Income tax provision $3,447 $4,594
The effective tax rate and the statutory federal income tax rate are reconciled as follows: Statutory rate 35.0% 35.0% State taxes, net of federal benefit 3.7 4.7 Amortization of intangibles 4.8 0.9 Other 0.5 0.3 Effective rate 44.0% 40.9%
13 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. INCOME TAX PROVISIONS - Continued The components of deferred taxes recorded in the Company's Balance Sheet on March 31, 1996 and December 31, 1995 are (in thousands):
1996 1995 Depreciation and amortization $54,728 $56,468 Partnership losses 8,277 9,034 State taxes 2,422 230 Deferred compensation (14,757) (14,843) Other 1,169 914 Deferred tax liability (net of $9,285 In 1996 and $9,840 in 1995 reported as current assets) $51,839 $51,803
6. INTANGIBLES Intangibles consist of (in thousands):
March 31, December 31, 1995 1996 Identifiable intangible assets, primarily customer lists $150,530 $150,530 Excess purchase prices over identifiable intangible assets 364,933 364,933 Total 515,463 515,463 Less accumulated amortization 90,494 86,073 Intangibles - net $424,969 $429,390
7. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan (retirement plan) for a majority of its employees. Benefits are based on years of service and compensa- tion. Contributions to the plan are made by the Company in amounts deemed necessary to provide benefits. Plan assets consist primarily of marketable securities including common stocks, bonds and U.S. government obligations, and other interest bearing accounts. The Company also has a supplemental retirement plan to provide key employees with additional retirement benefits. The terms of the plan are generally the same as those of the retirement plan, except that the supplemental retirement plan is limited to key employees and benefits under it are reduced by benefits received under the retirement plan. The accrued pension obligation for the supplemental retirement plan is included in other long-term obligations. 14 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. EMPLOYEE BENEFIT PLANS - Continued Expenses of these plans for the three months ended March 31, 1996 and 1995 were $1,814,000 and $1,703,000, respectively. The Company also has a Deferred Compensation and Investment Plan (401(k) plan) which enables qualified employees voluntarily to defer compensation. Company contributions to the 401(k) plan for the three months then ended March 31, 1996 and 1995 were $1,140,000 and $970,000, respectively. The Company also provides or subsidizes certain retiree health care and life insurance benefits. For the three months ended March 31, 1996 and 1995, postretirement benefit expenses were $60,000 and $150,000, respectively. 8. CASH FLOW INFORMATION Cash provided or used by operations in the three months ended March 31, 1996 and 1995 was affected by changes in certain assets and liabilities as follows (in thousands):
1996 1995 Increase (decrease) in assets: Receivables $(5,878) $(7,945) Inventories 1,645 400 Other assets (935) 1,118 Total (5,168) (6,427) Increase (decrease) in liabilities: Accounts payable (4,131) (3,119) Accrued compensation (632) 1,595 Income taxes 985 (1,607) Other liabilities 1,569 (1,114) Total (2,209) (4,245) Net cash increase from changes in assets and liabilities $ 2,959 $ 2,182
9. COMMITMENTS AND CONTINGENCIES The Company guarantees $21,052,000 of bank debt related primarily to its joint venture in the Ponderay newsprint mill. There are libel and other legal actions that have arisen in the ordinary course of business and are pending against the Company. Management believes, after reviewing such actions with counsel, that the outcome of pending actions will not have a material adverse effect on the Company's consolidated results of operations or financial position. 15 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. COMMON STOCK AND STOCK PLANS The Company's Class A and Class B common stock participate equally in dividends. Holders of Class A common stock are entitled to one-tenth of a vote per share and to elect as a class 25% of the Board of Directors, rounded up to the nearest whole number. Holders of Class B common stock are entitled to one vote per share and to elect as a class 75% of the Board of Directors, rounded down to the nearest whole number. Class B common stock is convertible at the option of the holder into Class A common stock on a share-for-share basis. The Company's Amended Employee Stock Purchase Plan (the Purchase Plan) reserved 1,500,000 shares of Class A common stock for issuance to employees. Eligible employees may purchase shares at 85% of "fair market value" (as defined) through payroll deductions. The Purchase Plan can be automatically terminated by the Company at any time. As of March 31, 1996, 525,605 shares of Class A common stock have been issued under the Purchase Plan. The Company's 1987 Stock Option Plan (1987 Employee Plan), as amended, reserved 600,000 shares of Class A common stock for issuance to key employees. Options are granted at the market price of the Class A common stock on the date of the grant. The options vest in installments over four years, and once vested are exercisable up to ten years from the date of award. Although the Employee Plan permits the Company, at its sole discretion, to settle unexercised options by making payments to the option holder of stock apprec- iation rights (SARs), the Company does not intend to avail itself of this alternative except in limited circumstances. On January 26, 1994 the Board of Directors adopted the 1994 Employee Stock Option Plan (1994 Employee Plan) which was approved by stockholders in May 1994 and reserves 650,000 Class A shares for issuance to key employees. The terms of this plan are substantially the same as the terms of the 1987 Employee Plan. The Company's stock option plan for outside (nonemployee) directors (Directors' Plan) provides for the issuance of up to 150,000 shares of Class A common stock. Under the Directors' Plan each outside director is granted an option at fair market value for 1,500 shares annually. Terms of the Directors' Plan are similar to the terms of the Employee Plans. In the 1987 Employee Plan, there are 425,725 options exercisable as of March 31, 1996. Substantially all of the shares reserved in the plan have been granted. In the 1994 Employee Plan 370,450 remain for future grants and 32,975 of the options are exercisable. A total of 781,800 options are outstanding in the employee plans at an average option prices of $18.74 and $21.96 per share for the 1987 and 1994 plans, respectively. In the Directors' Plan 60,000 options are outstanding at an average price of $21.52 per share, 43,500 shares were exercisable at March 31, 1996 and 85,500 are available for future awards. 16 McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires the determination of fair value for certain of the Company's assets, liabilities and contingent liabilities. The following methods and assumptions were used to estimate the fair value of those financial instruments included in the follow- ing categories: Cash Equivalents - The carrying amount approximates fair value based on quoted market prices. Long-Term Bank Debt - The carrying value approximates fair value based on interest rates available to the Company on debt instruments with similar terms. Interest Rate Swap Agreement - When considering interest rates at March 31, 1996, it is estimated that the Company could terminate the interest rate swap agreement with only a nominal gain or loss. 17 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Recent Events On August 1, 1995 the Company purchased The News and Observer Publishing Company (N&O)(see note 2 to the consolidated financial statements). N&O publishes The News & Observer (Raleigh, NC) newspaper, seven other non-daily publications in North Carolina and Nando.net, an online service. The N&O newspaper has a daily circulation of approximately 154,000 and 200,000 on Sunday. The results of N&O have been included in the Company's consolidated results beginning on August 1, 1995. Excess cash and investments together with bank borrowings have been used to consummate the purchase of N&O. As a result, investment income is not expected to be significant over the next several years. Three newsprint price increases have been implemented by newsprint producers since March 1995 due to a worldwide imbalance of supply and demand for newsprint. While newsprint prices have leveled off and even declined in some areas of the country, the 1995 increases continued to negatively impact the Company's operating income in the first quarter of 1996 and will continue to do so at least over the next several months. Advertising and circulation volume and rate increases, coupled with company-wide cost control programs have helped mitigate the impact of newsprint price increases. While the Company intends to continue to pursue these measures, they may not have the same effect on future results. First Quarter 1996 Compared to 1995 First quarter earnings were $4.4 million or 15 cents per share versus earnings in the 1995 quarter of $6.6 million or 22 cents per share. Significant factors affecting earnings were higher newsprint expense, financing costs associated with the acquisition of N&O and a continuing weakness in California's Central Valley economy. Earnings in 1996 were reduced by interest costs incurred on the new debt while the Company earned investment income on excess cash and investments in 1995. Earnings benefited from the Company's share of income from its Ponderay newsprint mill partnership interest compared to a loss from the venture in 1995.
Net Revenues (in thousands): First Quarter 1996 1995 % Change California newspapers $ 74,428 $ 74,134 0.4% Northwest newspapers 33,331 32,189 3.5% Carolinas newspapers 34,946 5,093 NM* Other operations 3,598 2,382 51.0% Total $146,303 $113,798 28.6%
* Not meaningful due to N&O acquisition in August 1995. 18 Newspapers revenues from California increased nominally, reflecting the continued weak economy in the Central Valley, home to the Company's three Bee newspapers. Advertising revenues were up $338,000 or 0.6% and circulation revenues grew $104,000 or 0.7%. Advertising rate increases offset lower advertising linage. Full run "run-of-press" (ROP) linage, which generates a majority of advertising revenues, declined 2.3% from first quarter 1995 at the Sacramento, Fresno and Modesto Bees. Circulation revenues benefited from home delivery rate increases at the three Bee newspapers, and higher daily circulation at The Sacramento Bee. The Northwest newspapers posted a $1.1 million increase in operating revenues, led by an increase of $740,000 at the Anchorage Daily News. The Peninsula Gateway, a weekly newspaper in Gig Harbor, WA, was purchased at the end of June 1995 and contributed $611,000 in additional revenues. Overall, advertising revenues increased 3.4% at the Northwest newspapers while circulation revenues increased 4.4%. Advertising rate increases at the Anchorage Daily News and The (Tacoma) News Tribune in January 1996, and at the Tri-City Herald in November 1995, coupled with an increase in ROP advertising linage at the Daily News to produce the revenue growth. ROP advertising linage declined 8.3% at The News Tribune and Tri-City Herald due to certain retailer reorganizations. Circulation revenues grew as a result of selected homedelivery and single-copy rate increases. Revenues at the Carolinas newspapers reflect strong growth at the Company's South Carolina dailies and a $29.1 million increase from the addition of The News & Observer and its related publications. Excluding N&O newspapers, revenues increased 14.1%, with advertising revenues up 15.5% and circulation gaining 4.3%. Rate increases and advertising linage and circulation growth are reflected in the revenue increases. Other revenues increased $1.2 million, of which N&O's new media division (primarily Nando.net online Internet service) contributed $779,000. The remaining increase is largely due to greater commercial printing revenues at McClatchy Printing Company. Operating Expenses: Operating expenses increased 31.7% reflecting the costs of N&O as well as higher newsprint costs. Excluding N&O expenses, total operating costs increased 4.6%. Excluding N&O costs, newsprint and supplement expenses increased 30.5% reflecting higher newsprint prices which were partially offset by a 3.0% decline in newsprint usage. All other operating expenses, including compensation, depreciation and amortization and other expenses declined 1.3%. Lower employee headcounts, steady inflation and company-wide cost controls helped hold down these other operating expenses. 18 Net interest costs increased about $5.0 million as the Company incurred $3.4 million in interest expense on debt in 1996 while it earned $1.6 million in interest income on excess cash and investments in 1995. The Company benefited from $1.2 million of income from its joint venture in the Ponderay newsprint mill versus a loss from Ponderay in 1995 equal to $700,000. The Company's effective tax rate in 1996 is 44.0% compared to 40.9% last year. The higher rate is due primarily to greater amounts of nondeductible amortization related to the N&O acquisition. See note 5 to the consolidated financial statements. 19 LIQUIDITY & CAPITAL RESOURCES The Company's cash and cash equivalent position declined $3.0 million from year-end 1995 to a nominal balance at March 31, 1996. Operations generated $19.3 million of cash which was used to repay debt, pay for capital expendi- tures and pay dividends. Capital expenditures are projected to be approxi- mately $35.0 million in 1996. The Ponderay newsprint mill, in which the Company has a partnership interest, has incurred losses through 1995. However, the mill was profitable in the second half of 1995 and the first quarter of 1996. See notes 3 and 9 to the consolidated financial statements for a discussion of the Company's commit- ments to the joint venture. See note 3 for a discussion of the Company's long-term obligations. The Company had $68.0 million of available credit at March 31, 1996. Management is of the opinion that operating cash flow and cash and investment balances are adequate to meet the liquidity needs of the Company, including currently plan- ned capital expenditures and other investments. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Default Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. McClatchy Newspapers, Inc. Registrant Date: May 13, 1996 /s/ James P. Smith James P. Smith Vice President, Finance and Treasurer EX-27 2
5 This schedule contains financial information extracted from SEC filing Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 214 0 68,604 2,781 15,348 94,428 559,599 210,909 881,241 91,783 0 300 0 0 467,405 881,241 146,303 146,303 0 136,206 (1,189) 0 3,453 7,833 3,447 4,386 0 0 0 4,386 0.15 0.15
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