-----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, AGsGFq9gK5jzB41Rg8kDbEkJtIMGAVxsrDXE9VPevOe56e46dUGUF0QXtWwAHs98 pnHFKrc9NSNtHpWukcEIKg== 0000822043-96-000017.txt : 19961113 0000822043-96-000017.hdr.sgml : 19961113 ACCESSION NUMBER: 0000822043-96-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960701 FILED AS OF DATE: 19961112 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: 96659029 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 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 September 30, 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 November 1, 1996: Class A Common Stock 7,132,541 Class B Common Stock 23,073,834 1 of 22 ............................................................................ McCLATCHY NEWSPAPERS, INC. INDEX TO FORM 10-Q Part I - FINANCIAL INFORMATION Item 1 - Financial Statements: Consolidated Balance Sheet - September 30, 1996 (unaudited) and December 31, 1995 3 Consolidated Statement of Income for the Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited) 5 Consolidated Statement of Cash Flows for Nine Months Ended September 30, 1996 and 1995 (unaudited) 6 Consolidated Statement of Stockholders' Equity for the Period from December 31, 1994 to September 30, 1996 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 18 Part II - OTHER INFORMATION 22 2 ...................................................................... PART I - FINANCIAL INFORMATION Item 1 - Financial Statements McCLATCHY NEWSPAPERS, INC. CONSOLIDATED BALANCE SHEET (In thousands)
September 30, December 31, 1996 1995 (Unaudited) Current assets: Cash and cash equivalents $ 4,176 $ 3,252 Trade receivables (less allowances of $2,912 in 1996 and $2,327 in 1995) 66,452 69,451 Other receivables 2,131 2,251 Newsprint, ink and other inventories 7,779 13,703 Deferred income taxes 9,310 9,840 Other current assets 3,688 4,737 Total current assets 93,536 103,234 Property, plant and equipment: Land 31,319 30,920 Buildings and improvements 160,455 141,908 Equipment 368,663 347,651 Construction in progress 10,958 31,110 Total 571,395 551,589 Accumulated depreciation (224,935) (203,214) Net property, plant and equipment 346,460 348,375 Intangibles - net 418,014 429,390 Investment in newsprint mill partnership 9,065 5,965 Other assets 2,661 5,994 Total assets $869,736 $892,958
See notes to consolidated financial statements 3 ............................................................................. McCLATCHY NEWSPAPERS, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, 1996 1995 (Unaudited) Current liabilities: Current portion of long-term bank debt $ - $ 10,000 Accounts payable 19,096 20,152 Accrued compensation 31,070 33,222 Income taxes 2,637 - Unearned revenue 18,026 17,566 Carrier deposits 4,188 4,298 Other accrued liabilities 9,902 9,248 Total current liabilities 84,919 94,486 Long-term bank debt 209,000 243,000 Other long-term obligations 28,835 28,135 Deferred income taxes 60,114 61,643 Commitments and contingencies (note 8) Stockholders' equity: Common stock $.01 par value: Class A - authorized: 50,000,000 shares, issued: 7,066,449 in 1996 and 6,850,315 in 1995 70 69 Class B - authorized: 30,000,000 shares, issued: 23,073,834 in 1996 and 23,131,334 in 1995 231 231 Additional paid-in capital 65,224 62,521 Retained earnings 421,714 403,244 Treasury stock, 20,000 Class A shares (371) (371) Total stockholders' equity 486,868 465,694 Total liabilities and stockholders' equity $ 869,736 $ 892,958
See notes to consolidated financial statements 4 ............................................................................ McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Unaudited Unaudited Revenues - net: Advertising $ 120,856 $110,182 $354,270 $294,018 Circulation 27,102 24,756 81,196 68,175 Other 7,585 7,023 23,299 18,214 Total 155,543 141,961 458,765 380,407 Operating Expenses: Compensation 62,177 60,969 188,375 163,012 Newsprint and supplements 27,034 28,927 88,523 70,879 Depreciation and amortization 13,250 12,060 39,502 30,593 Other operating expenses 30,443 28,975 87,434 74,801 Total 132,904 130,931 403,834 339,285 Operating income 22,639 11,030 54,931 41,122 Nonoperating (expenses) income: Interest expense (3,307) (2,883) (10,259) (2,907) Investment income 24 678 76 3,833 Partnership income (losses) 850 250 3,100 (800) Other - net (17) 33 (10) 318 Total (2,450) (1,922) (7,093) 444 Income before income tax provision 20,189 9,108 47,838 41,566 Income tax provision 8,747 4,659 20,805 17,944 Net income $ 11,442 $ 4,449 $ 27,033 $ 23,622 Net income per common share $ 0.38 $ 0.15 $ 0.90 $ 0.79 Weighted average number of common shares 30,286 30,020 30,191 30,002
See notes to consolidated financial statements 5 ...................................................................... McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands)
Nine Months Ended September 30, 1996 1995 (Unaudited) Cash provided (used) by operating activities: Net income $ 27,033 $ 23,622 Reconciliation to net cash provided: Depreciation and amortization 39,618 30,701 Deferred taxes (999) 3,122 Partnership (income) losses (3,100) 800 Changes in certain assets and liabilities - net 15,251 (13,622) Other 239 1,090 Net cash provided by operating activities 78,042 45,713 Cash provided (used) by investing activities: Maturities of investments held to maturity - 29,789 Proceeds from investments available for sale - 20,539 Purchases of investments held to maturity - (5,940) Purchases of investments available for sale - (3,637) Purchases of property, plant and equipment (24,627) (22,055) Acquisition of newspaper operations (1,845) (241,250) Investment in newsprint mill partnership - (2,484) Other - net (787) 65 Net cash used by investing activities (27,259) (224,973) Cash (used) provided by financing activities: Proceeds from long-term debt - 139,000 Repayment of long-term debt (44,000) (5,000) Payment of cash dividends (8,563) (8,529) Other - principally stock issuances 2,704 924 Net cash (used) provided by financing activities (49,859) 126,395 Net change in cash and cash equivalents 924 (52,865) Cash and cash equivalents, beginning of year 3,252 68,574 Cash and cash equivalents, end of period $ 4,176 $ 15,709 Other cash flow information: Cash paid during the period for: Income taxes (net of refunds) $ 17,011 $25,099 Interest paid (net of capitalized interest) 10,678 5,903
See notes to consolidated financial statements 6 ......................................................................... 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 Capital Earnings At Cost Total Balances, December 31, 1994 $ 66 $ 233 $ 61,290 $381,002 $ (371) $ 442,220 Net income (9 months) 23,622 23,622 Dividends paid ($.285 per share) (8,529) (8,529) Conversion of 145,455 Class B shares to Class A 2 (2) Issuance of 45,988 Class A under employee stock plans 924 924 Balances, September 30, 1995 68 231 62,214 396,095 (371) 458,237 Net income (3 months) 9,996 9,996 Dividends paid ($.095 per share) (2,847) (2,847) Issuance of 20,850 Class A shares under employee stock plans 1 307 308 Balances, December 31, 1995 69 231 62,521 403,244 (371) 465,694 Net income (9 months) 27,033 27,033 Dividends paid ($.285 per share) (8,563) (8,563) Issuance of 56,708 Class A shares under employee stock plans 1 2,703 2,704 Balances, September 30, 1996 $ 70 $ 231 $ 65,224 $ 421,714 $ (371) $ 486,868
See notes to consolidated statements 7 ................................................................................ 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 last-in, 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 $4,645,000 at September 30, 1996 and $7,426,000 at December 31, 1995. Related party transactions - The Company owns a 13.5% interest in Ponderay Newsprint Company ("Ponderay") which operates a newsprint mill in the State of Washington. The Company guarantees certain bank debt used to construct the mill (see note 8) and is required to purchase 28,400 metric tons of annual production on a "take-if- tendered" basis until the debt is repaid. The Company satisfies this obligation by direct purchase (1996: $16,196,000 and 1995: $12,622,000) 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. 8 ...................................................................... Property, plant and equipment are stated at cost. Major renewals and betterments, as well as interest incurred during construction, are capitalized. For the three months ended September 30, 1996 such interest was nominal and was $394,000 for the 1995 quarter. For the nine months ended September 30, 1996 and 1995, such interest was $526,000 and $394,000, respectively. 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 4. 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 was paid subject to the resolution of certain contingencies. 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 3 for discussion of the Company's long-term debt. N & O publishes The News & Observer newspaper in Raleigh, NC, seven other non-daily publications in North Carolina and the Nando.net on- line service. The News & Observer has a daily circulation of about 154,000 and 200,000 Sunday. 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 9 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2. ACQUISITION - Continued 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 nine months of 1995 as though the acquisition had taken place on January 1, 1995 (in thousands, except per share amounts):
1995 Revenues $447,800 Net income 16,449 Earnings per common share 0.55
3. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS At September 30, 1996 and December 31, 1995 long-term bank debt consisted of (in thousands):
September 30, December 31, 1996 1995 Bank Credit Agreement $209,000 $243,000 N & O holdback payable - 10,000 Total 209,000 253,000 Less current portion - 10,000 Total long-term bank debt $209,000 $243,000
In addition, the Company also has an outstanding letter of credit for $4,309,000 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 borrowings and the bank issued a $10,000,000 letter of credit on behalf of the Company (see note 2). The N & O holdback was 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. 10 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS - Continued Under the Credit Agreement, interest only is payable through July 1, 2000. Principal in the amount of $39,000,000 is due on July 1, 2002 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 September 30, 1996 the interest rate applicable to the amount drawn ranged from 5.4% to 6.3%. Such debt is unsecured and the related agreement contains covenants requiring, among other things, maintenance of cash flow and limitations on debt-to-equity ratios, with which the Company was in compliance at September 30, 1996. At September 30, 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. Other long-term obligations consist of (in thousands):
September 30, December 31, 1996 1995 Pension obligations $ 16,876 $ 11,209 Post retirement benefits obligation 9,060 9,386 Deferred compensation and other 2,899 7,540 Total long-term obligations $ 28,835 $ 28,135
4. INCOME TAX PROVISIONS Income tax provisions consist of (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Current: Federal $ 7,978 $ 837 $ 19,392 $ 11,608 State 1,085 850 2,412 3,214 Deferred: Federal (1,925) 3,430 (2,731) 3,595 State 1,609 (458) 1,732 (473) Income tax provision $ 8,747 $ 4,659 $ 20,805 $ 17,944
11 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. INCOME TAX PROVISIONS - Continued The effective tax rate and the statutory federal income tax rate are reconciled as follows:
Three Months Ended Nine Months Ended September 30 September 30, 1996 1995 1996 1995 Statutory rate 35.0% 35.0% 35.0% 35.0% State taxes, net of federal benefit 5.6 2.8 5.6 4.0 Amortization of intangibles 4.4 13.1 4.4 3.8 Other (1.7) 0.3 (1.5) 0.4 Effective rate 43.3% 51.2% 43.5% 43.2%
The components of deferred taxes recorded in the Company's Consolidated Balance Sheet on September 30, 1996 and December 31, 1995 are (in thousands):
1996 1995 Depreciation and amortization $ 55,545 $ 56,468 Partnership losses 8,665 9,034 State taxes 1,271 230 Deferred compensation (16,082) (14,843) Other 1,405 914 Deferred tax liability (net of $9,310 in 1996 and $9,840 in 1995 reported as current assets) $ 50,804 $ 51,803
12 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. INTANGIBLES Intangibles consist of (in thousands):
September 30, December 31, 1996 1995 Identifiable intangible assets, primarily customer lists $ 151,339 $ 150,530 Excess purchase prices over identifiable intangible assets 366,196 364,933 Total 517,535 515,463 Less accumulated amortization 99,521 86,073 Intangibles - net $ 418,014 $ 429,390
6. EMPLOYEE BENEFIT PLANS Early Retirement Charge: The Sacramento Bee made an early retirement program available to certain employees in September 1995. A pre-tax charge of $2,318,000 was recorded for this program. Benefit Plans: The Company has two defined benefit pension plans (retirement plans) which together cover a majority of its employees (including the employees of N & O). Benefits are based on years of service and compensation. 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 three supplemental retirement plans to provide key employees with additional retirement benefits (including N & O). The terms of the plans are generally the same as those of the retirement plans, except that the supplemental retirement plans are limited to key employees and benefits under them are reduced by benefits received under the retirement plans. These plans are funded on a pay-as-you-go basis and the accrued pension obligation for the supplemental retirement plans are included in other long-term obligations. Expenses of these plans for the three months ended September 30, 1996 and 1995 were $1,776,000 and $1,573,000, respectively. Expenses for the nine months then ended were $5,442,000 and $4,596,000 in 1996 and 1995, respectively. 13 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. EMPLOYEE BENEFIT PLANS - Continued The Company also has two deferred compensation and investment plans (401(k) plans) which enable qualified employees (including N & O) voluntarily to defer compensation. Company contributions to the 401(k) plans for the three months ended September 30, 1996 and 1995 were $1,203,000 and $1,098,000, respectively. Contributions for the nine months then ended were $3,494,000 and $3,049,000 in 1996 and 1995, respectively. The Company also provides or subsidizes certain retiree health care and life insurance benefits. For the three months ended September 30, 1996 and 1995, post retirement benefit expenses were $60,000 and $150,000, respectively, and were $180,000 and $450,000 for the nine months then ended in 1996 and 1995, respectively. 7. CASH FLOW INFORMATION Cash provided or used by operations in the nine months ended September 30, 1996 and 1995 was affected by changes in certain assets and liabilities as follows (in thousands):
1996 1995 Increase (decrease) in assets: Receivables $ (3,001) $ (7,287) Inventories (5,924) 4,903 Other assets (5,205) 836 Total (14,130) (1,548) Increase (decrease) in liabilities: Accounts payable (1,056) (5,970) Accrued compensation 2,548 (1,835) Income taxes 2,637 (5,698) Other liabilities (3,008) (1,667) Total 1,121 (15,170) Net cash changes in assets and liabilities $ 15,251 $(13,622)
14 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. COMMITMENTS AND CONTINGENCIES The Company guarantees $20,965,000 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. 9. 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 September 30, 1996, 562,984 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 appreciation rights (SARs), the Company does not intend to avail itself of this alternative except in limited circumstances. 15 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. COMMON STOCK AND STOCK PLANS - Continued The Company's 1994 Employee Stock Option Plan (1994 Employee Plan) 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 333,369 options exercisable as of September 30, 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 689,444 options are outstanding in the employee plans at an average option prices of $19.42 and $21.96 per share for the 1987 and 1994 plans, respectively. In the Directors' Plan 67,500 options are outstanding at an average price of $21.92 per share, 40,125 shares were exercisable at September 30, 1996 and 73,500 are available for future awards. 10. 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 following 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 September 30, 1996, it is estimated that the Company could terminate the interest rate swap agreement with only a nominal gain or loss. 11. SUBSEQUENT EVENT In October 1996, the Company announced that it had entered into agreements in principle to sell five of its community newspapers. Four of its California newspapers -- The Dispatch in Gilroy, the Free 16 ...................................................................... McCLATCHY NEWSPAPERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. SUBSEQUENT EVENTS (continued) Lance in Hollister, the Morgan Hill Times and the Amador Ledger Dispatch -- are being purchased by Central Valley Publishing, Inc., a newspaper company managed by USMedia Group, Inc. of Crystal City, MO. The Ellensburg Daily Record in Washington state is being purchased by Pioneer Newspapers, Inc. of Seattle, WA. While the sales are expected to be completed by year-end, they are subject to a number of conditions, including -- among others -- the parties entering into definitive agreements, the buyers completing successful due diligence, and the parties obtaining necessary approvals. The community newspapers being sold generated approximately $9.2 million in revenues in 1995 and had daily average paid circulation of about 14,800 and non-daily circulation of about 12,400. The Company has a low cost basis in the assets of these newspapers, and as a result, expects to record a nonrecurring gain on the sale of the newspapers which could be material to its 1996 annual results. 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 on-line 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 were used to consummate the purchase of N & O. As a result, investment income is not expected to be significant over the next few years. Newsprint prices have fluctuated substantially during 1995 and 1996. Declines in the second and third quarters of 1996 brought newsprint prices below 1995 levels. As a result of rising prices in 1995 and in an effort to minimize the effect of expected further increases, the Company increased its inventory levels. As prices began to decline in 1996, the Company began reducing its inventory levels in anticipation of further price decreases. Accordingly, the Company's LIFO reserve has declined $1.5 million in the 1996 third quarter and $2.8 million in the nine months ended September 30, 1996. Management expects the newsprint price reductions to continue positively impacting the Company's operating income for the balance of the year. In October, the Company announced that it had entered into agreements in principle to sell five of its community newspapers and expects to record a nonrecurring gain the fourth quarter of 1996 which could be material to its annual results. See note 11 to the consolidated financial statements. Third Quarter 1996 Compared to 1995 The Company earned $11.4 million in the third quarter of 1996, more than double the 1995 earnings of $4.4 million. The 1995 quarter included a pre-tax charge of $2.3 million for an early retirement program at The Sacramento Bee. The increase in 1996 earnings was also attributable to, among other factors, strong total revenue growth at the Company's newspapers in North and South Carolinas and advertising revenue growth at the Anchorage Daily News, lower newsprint prices and strong cost controls throughout the Company. Net revenues by region were (in thousands):
Third Quarter 1996 1995 % change California newspapers $ 76,953 $ 78,190 (1.6) Northwest newspapers 35,832 35,534 0.8 Carolinas newspapers 39,317 25,715 52.9 Non-newspaper operations 3,441 2,522 36.4 Total $ 155,543 $ 141,961 9.6
18 ...................................................................... Revenues at the Company's California newspapers, which account for nearly fifty percent of total revenues in the third quarter, declined $1.2 million. The decline was due primarily to a lackluster retail advertising climate at the Company's three Bee newspapers located in Sacramento, Fresno and Modesto. These newspapers were also affected by the consolidation in late 1995 of Macy's and Weinstock's department stores, previously their two largest advertisers. Advertising revenues declined $1.3 million at the Bee newspapers and full run run- of-press (ROP) advertising linage, which provides a majority of advertising revenues, fell 7.0%. Circulation revenues increased $391,000 at the three Bee newspapers due primarily to increased home delivery rates in the first quarter of 1996. The Northwest newspapers contributed 23.0% of total revenues and posted a gain of $298,000 over the 1995 quarter. Most of the Northwest newspapers revenues are generated by The News Tribune (Tacoma, WA), the Anchorage Daily News and the Tri-City Herald (WA). Advertising revenues were up $511,000 at these newspapers, due almost entirely to gains at the Daily News. Advertising revenues were generally flat at the Washington newspapers and full run ROP linage was down 4.3% at all three newspapers combined. Circulation revenues were even with the 1995 quarter and other revenues, mostly commercial printing at the Daily News, declined $207,000. The Carolinas newspapers contributed 25.3% of total revenues and increased by $13.6 million. Revenues at the North Carolina newspapers were $32.9 million in the 1996 quarter versus $20.0 million in 1995, which included August and September only. Revenues at the Company's three South Carolina newspapers increased $714,000 or 12.6% due to strong advertising and circulation improvements. Full run ROP linage was up 9.2% at the South Carolina dailies. Revenues at the Company's non-newspaper operations increased $919,000 in the quarter, and include revenues from McClatchy Printing Company, Legi-Tech, The Newspaper Network (TNN) and Nando, N & O's on- line publishing division. Operating Expenses: Operating expenses increased 1.5%. The 1995 expenses include a pre- tax charge of $2.3 million for the early retirement program at The Sacramento Bee. If this charge is excluded, total operating expenses increased 3.3% over the 1995 quarter and reflect three months of N & O expenses in 1996 versus two months of expenses in 1995. Compensation costs increased 2.0%, but after excluding the early retirement charge in 1995, and removing N & O expenses from the 1996 and 1995 quarters, costs declined 1.9%. Newsprint and supplement costs declined 6.5% due to falling newsprint prices and, to a lessor extent, lower newsprint usage. Excluding N & O from the quarter in both years, newsprint and supplement costs declined 21.7%. All other operating expenses, including depreciation and amortization, increased 6.5% including N & O, and declined 2.8% excluding N & O from each period. The declines reflect cost controls implemented throughout the Company, as well as a 1995 pre-tax charge of $1.1 million in other operating expenses for the write-off of obsolete distribution equipment at The Sacramento Bee. 19 ...................................................................... Non-operating Expenses -- Net: Investment income declined $654,000 from third quarter 1995 as the Company's excess cash was used to complete the N & O purchase on August 1, 1995. Interest expense increased $424,000 on debt incurred for the acquisition. The Company expects the interest expense comparison to improve in the fourth quarter as it continues to use cash generated from operations to repay the debt (see Liquidity and Capital Resources below). The Company's share of earnings from Ponderay increased $600,000 over the 1995 quarter. Earnings from Ponderay are expected to decline if newsprint prices continue to fall. The Company's effective tax rate was 43.3% in the third quarter of 1996 verse 51.2% in 1995. The higher rate in 1995 reflects adjustments to increase the 1995 full-year effective rate to 43.0%, primarily reflecting the non-deductibility of amortization related to the N & O purchase. Nine Month Comparisons Earnings in the nine months ending on September 30,1996 were $27.0 million versus $23.6 million in 1995 and reflect many of the trends discussed above in the third quarter comparison. Revenues by region were (in thousands):
Nine Months 1996 1995 % change California newspapers $ 228,227 $ 232,211 (1.7) Northwest newspapers 105,960 103,665 2.2 Carolinas newspapers 113,337 36,674 NM Non-newspaper operations 11,241 7,857 43.1 Total $ 458,765 $380,407 20.6
NM -- Not meaningful due to the August 1, 1995 acquisition of N & O. California revenues declined $4.0 million with advertising revenues down $4.3 million at the Company's three Bee newspapers, while circulation revenues increased $748,000. Other revenues declined $544,000 due mostly to lower prices received for recycled newsprint. Northwest newspaper revenues increased $2.3 million, with advertising revenue gaining $1.5 million, circulation up $403,000 and other revenues declining $838,000 at the three largest dailies. The Anchorage Daily News reported $2.1 million or an 8.9% gain in advertising revenues which was partially offset by lower advertising revenues at the Washington state dailies. The Carolinas newspaper revenue increased $76.7 million due to a $74.5 million increase in North Carolina newspapers purchased in August 1995 and a 13.1% increase in the South Carolina newspapers. 20 ...................................................................... Revenues at non-newspaper operations increased $3.4 million and include nine months of Nando revenues versus five months in 1995. Other increases include a 33.2 % increase in commercial printing at McClatchy Printing Company, a 25.8% increase in TNN revenues offset by a $448,000 decline in revenues at Legi-Tech. Operating Expense: Operating expenses increased 19.0% including N & O expenses and the early retirement charge discussed above. Excluding N & O and the charge, operating expenses declined 1.4%, with compensation down 0.6% and newsprint and supplement costs up 1.3%. Newsprint prices began to decline in the second quarter of 1996, hence the average price in the nine months is greater than prices incurred in the third quarter comparisons. All other operating expenses, including depreciation and amortization, but excluding N & O costs, declined $2.2 million or 2.2%. Again, 1995 other operating expenses included the $1.1 million asset write-off at The Sacramento Bee. Nonoperating Expenses: Investment income declined $3.8 million from 1995, while interest expense on debt incurred in the acquisition increased $7.4 million. The Company's share of Ponderay income was $3.1 million versus a loss of $800,000 in 1995. The Company's effective tax rate was 43.5% in 1996, slightly higher than the 43.2% rate in 1995. See note 4 to the consolidated financial statements. Liquidity & Capital Resources The Company's cash and cash equivalent position improved by $924,000 from year-end 1995 to $4.2 million at September 30, 1996. The Company's cash position is not expected to change substantially as it continues to use free cash flow to repay debt. Operations generated $78.0 million of cash and $44.0 million was used to repay debt. Cash was also used to pay for capital expenditures and pay dividends. Capital expenditures are projected to be approximately $30.0 million in 1996. See notes 1 and 8 to the consolidated financial statements for a discussion of the Company's commitments to the Ponderay newsprint mill. See note 3 for a discussion of the Company's long-term obligations. The Company had $101.0 million of available credit at September 30, 1996. Management is of the opinion that available credit, cash flow from operations and cash balances are adequate to meet the liquidity needs of the Company, including currently planned capital expenditures and other investments. Outlook The preceding management discussion contains estimates and other forward-looking statements covering subjects related to financial operating results. These forward-looking statements, and any other 21 ...................................................................... statements going beyond historical fact that the McClatchy management has discussed, are subject to risks and uncertainties that could cause actual results to differ. These include increases in newsprint, printing and distribution costs over anticipated levels, increased consolidation among major retailers in the Company's newspaper markets or other events depressing the level of advertising, an economic downturn in the Company's principal markets or other occurrences leading to decreasing circulation and diminished revenues from both display and classified advertising. 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. 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: November 12, 1996 James P. Smith Vice President, Finance and Treasurer 22 ...................................................................... EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This schedule contains financial information extracted from SEC filing Form 10-K and is qualified in its entirety by reference to such financial statements. 9-MOS 12/31/95 09/30/96 4,176 0 71,495 2,912 7,779 93,536 571,395 224,935 869,736 84,919 0 000 000 301 486,567 869,736 458,765 458,765 0 403,834 (3,166) 0 10,259 47,838 20,805 27,033 0 0 0 27,033 .90 .90
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