-----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, KrZWGAZhCN8vYliAWrU66ARXqQi9NFQIS4pbEpKQNe7edXtzkI70VP5j/EqlIoqJ /wTtn60qytqUQTPhFowvPw== 0000822043-97-000003.txt : 19970514 0000822043-97-000003.hdr.sgml : 19970514 ACCESSION NUMBER: 0000822043-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97602125 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 March 31, 1997 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 9, 1997: Class A Common Stock 9,077,316 Class B Common Stock 28,842,287 1 McCLATCHY NEWSPAPERS, INC. INDEX TO FORM 10-Q Page Part I - FINANCIAL INFORMATION Item 1 - Financial Statements: Consolidated Balance Sheet - March 31, 1997 (unaudited) and December 31, 1996 3 Consolidated Statement of Income for the Three Months Ended March 31, 1997 and 1996 (unaudited) 5 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (unaudited) 6 Consolidated Statement of Stockholders' Equity for the Period from December 31, 1995 to March 31, 1997 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 15 Part II - OTHER INFORMATION 19 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements McCLATCHY NEWSPAPERS, INC. CONSOLIDATED BALANCE SHEET (In thousands) March 31, December 31, 1997 1996 (Unaudited) [S] [C] [C] Current assets: Cash and cash equivalents $ 7,323 $ 5,877 Trade receivables (less allowances of $2,264 in 1997 and $2,440 in 1996) 72,214 81,791 Other receivables 1,964 1,911 Newsprint, ink and other inventories 7,670 8,015 Deferred income taxes 10,471 10,223 Other current assets 4,118 3,193 Total current assets 103,760 111,010 Property, plant and equipment: Land 33,060 32,591 Buildings and improvements 156,131 157,741 Equipment 369,739 369,346 Construction in progress 9,530 8,532 Total 568,460 568,210 Accumulated depreciation (231,031) (226,420) Net property, plant and equipment 337,429 341,790 Intangibles - net 405,701 411,393 Newsprint mill investment 8,589 8,989 Other assets 2,509 2,484 Total assets $ 857,988 $ 875,666 See notes to consolidated financial statements 3 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED BALANCE SHEET (In thousands, except share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31, 1997 1996 (Unaudited) Current liabilities: [S] [C] [C] Accounts payable $ 20,349 $ 22,806 Accrued compensation 34,661 33,567 Income taxes 10,902 4,737 Unearned revenue 18,414 18,103 Carrier deposits 4,150 4,149 Other accrued liabilities 8,995 8,998 Total current liabilities 97,471 92,360 Long-term bank debt 155,000 190,000 Other long-term obligations 29,139 29,814 Deferred income taxes 59,577 60,378 Commitments and contingencies (note 7) Stockholders' equity: Common stock $.01 par value: Class A - authorized 50,000,000 shares, issued 9,018,108 in 1997 and 8,946,651 in 1996 Class B - authorized 90 89 30,000,000 shares, issued 28,842,287 in 1997 and 1996 288 288 Additional paid-in capital 69,089 67,534 Retained earnings 447,334 435,574 Treasury stock, 25,003 Class A shares in 1996 - (371) Total stockholders' equity 516,801 503,114 Total liabilities and stockholders' equity $ 857,988 $ 875,666 See notes to consolidated financial statements 4 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share amounts) Three Months Ended March 31, 1997 1996 (Unaudited) [S] [C] [C] Revenues - net: Newspapers: Advertising $116,643 $111,830 Circulation 26,958 26,996 Other 4,233 3,542 Total newspapers 147,834 142,368 Non-newspapers 2,787 3,935 Total net revenue 150,621 146,303 Operating expenses: Compensation 63,408 63,390 Newsprint and supplements 21,471 31,174 Depreciation and amortization 13,250 12,996 Other operating expenses 29,702 28,646 Total 127,831 136,206 Operating income 22,790 10,097 Non-operating (expenses) income: Interest expense (2,668) (3,453) Partnership (loss) income (400) 1,150 Gain on sale of newspaper operations 6,594 - Other - net 103 39 Income before income tax provision 26,419 7,833 Income tax provision 11,062 3,447 Net income $ 15,357 $ 4,386 Net income per common share $ 0.40 $ 0.12 Weighted average number of common shares 37,984 37,616 See notes to consolidated financial statements 5 McCLATCHY NEWSPAPERS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) Three Months Ended March 31, 1997 1996 (Unaudited) [S] [C] [C] Cash provided (used) by operating activities: Net income $ 15,357 $ 4,386 Reconciliation to net cash provided: Depreciation and amortization 13,287 13,034 Partnership losses (income) 400 (1,150) Changes in certain assets and liabilities - net 12,249 2,959 Gain on sale of newspaper operations (6,594) - Other (1,046) 46 Net cash provided by operating activities 33,653 19,275 Cash provided (used) by investing activities: Purchase of property, plant and equipment (6,938) (9,048) Sale of newspaper operations 11,400 - Other - net 1 110 Net cash provided (used) by investing activities 4,463 (8,938) Cash (used) provided by financing activitites: Repayment of long-term debt (35,000) (11,000) Payment of cash dividends (3,597) (2,849) Other - principally stock issuances 1,927 474 Net cash used by financing activities (36,670) (13,375) Net change in cash and cash equivalents 1,446 (3,038) Cash and cash equivalents, beginning of year 5,877 3,252 Cash and cash equivalents, end of period $ 7,323 $ 214 Other cash flow information: Cash paid during the period for: Income taxes (net of refunds) $ 5,624 $ 270 Interest paid (net of capitalized interest) 2,702 3,272 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- Retaied Stock In Common Common Capital Earnings At Cost Total Balances, December 31, 1995 $ 85 $ 289 $62,447 $403,244 (371) $465,694 Net income (3 months) 4,386 4,386 Dividends paid ($.076 per share) (2,849) (2,849) Issuance of 33,880 shares under employee plans 474 474 Balances, March 31, 1996 85 289 62,921 404,781 (371) 467,705 Net income (9 months) 40,107 40,107 Dividends paid ($.247 per share) (9,314) (9,314) Conversion of 71,875 Class B shares to Class A 1 (1) Issuance of 273,496 Class A shares under employee stock plans 3 3,979 3,982 Tax benefit from stock plans 634 634 Balances, December 31, 1996 89 288 67,534 435,574 (371) 503,114 Net income (3 months) 15,357 15,357 Dividends paid ($.095 per share) (3,597) (3,597) Issuance of 101,457 Class A shares under employee and director plans 1 1,606 1,607 Tax benefit from stock plans 320 320 Retirement of treasury shares (371) 371 Balances, March 31, 1997 $ 90 $ 288 $69,089 $447,334 $ - $ 516,801
See notes to consolidated financial 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. All share and per share amounts have been adjusted to reflect a five-for-four stock split. See note 8. 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. Cash and cash equivalents are placed with major financial institutions. Accounts receivables are with customers located primarily in the immediate area of each city of publication. The Company routinely assesses the financial strength of significant customers and this assessment, combined with the large number and geographic diversity of its customers, limits the Company's concentration of risk with respect to trade accounts receivables. 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 $3,371,000 at March 31, 1997 and $3,246,000 at December 31, 1996. Related party transactions - The Company owns a 13.5% interest in Ponderay Newsprint Company ("Ponderay") which owns and operates a newsprint mill in the State of Washington. The investment is accounted for using the equity method, under which the Company's share of earnings of Ponderay is 8 reflected in income as earned. The Company guarantees certain bank debt used to construct the mill (see note 7) 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 (1997: $3,779,000 and 1996: $5,699,000) or reallocation to other buyers. To secure additional newsprint, the Company has arranged to purchase an additional 8,000 metric tons from Ponderay in 1997. Property, plant and equipment are stated at cost. Major renewals and betterment's, as well as interest incurred during construction, are capitalized. For three months ended March 31, 1997 and 1996 such interest was $15,000 and $323,000, 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. Stock-based compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees. Deferred income taxes result from temporary differences between amounts reported for financial and income tax reporting purposes. See note 3. Earnings per share are based on the weighted average number of outstanding shares of common stock and dilutive common stock equivalents (stock options). All share and per share amounts have been adjusted to reflect a five-for-four stock split. See note 8. 2. LONG-TERM BANK DEBT AND OTHER LONG-TERM OBLIGATIONS On July 28, 1995 the Company entered into a bank credit agreement (Credit Agreement) providing for borrowings up to $310,000,000. At March 31, 1997 and December 31, 1996 the Company had long-term bank debt of $155,000,000 and $190,000,000, respectfully. In addition, the Company also has an outstanding letter of credit for $4,309,000 securing estimated obligations from workers' compensation claims. 9 Under the Credit Agreement, interest only is payable through July 1, 2000. Principal in the amount of $40,000,000 is due on July 1, 2003 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, 1997 the interest rate applicable to the amount drawn ranged from 5.8% to 8.0%. 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 March 31, 1997. At March 31, 1997 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): March 31, December 31, 1996 1996 [S] [C] [C] Pension obligations $ 17,153 $ 17,272 Post retirement benefits obligation 8,965 9,058 Deferred compensation and other 3,021 3,484 Total long-term obligations $ 29,139 $ 29,814 3. INCOME TAX PROVISIONS Income tax provisions consist of (in thousands): March 31, March 31, 1997 1996 [S] [C] [C] Current: Federal $ 10,359 $ 3,048 State 1,768 363 Deferred: Federal (1,124) (1) State 59 37 Income tax provision $ 11,062 $ 3,447 10 The effective tax rate and the statutory federal income tax rate are reconciled as follows: 1997 1996 [S] [C] [C] Statutory rate 35.0% 35.0% State taxes, net of federal benefit 4.5 3.7 Amortization of intangibles 3.2 4.8 Tax adjustments to basis of newspapers sold (1.0) - Other 0.1 0.5 41.8% 44.0% The components of deferred taxes recorded in the Company's Balance Sheet on March 31, 1997 and December 31, 1996 are (in thousands): 1997 1996 [S] [C] [C] Depreciation and amortization $ 55,559 $ 55,649 Partnership losses 8,141 8,283 State taxes 1,139 1,310 Deferred compensation (17,110) (16,540) Other 1,377 1,453 Deferred tax liability (net of $10,471 in 1997 and $10,223 in 1996 reported as current assets) $ 49,106 $ 50,155 4. INTANGIBLES Intangibles consist of (in thousands): March 31, December 31, 1997 1996 [S] [C] [C] Identifiable intangible assets, primarily customer lists $ 147,443 $ 148,692 Excess purchase prices over identifiable intangible assets 362,060 365,604 Total 509,503 514,296 Less accumulated amortization 103,802 102,903 Intangibles - net $ 405,701 $ 411,393 5. EMPLOYEE BENEFIT PLANS The Company has two defined benefit pension plans (retirement plans) which together cover a majority of its employees. Benefits are based on years of service and compensation. Contributions to the plans are made by the Company in amounts deemed necessary to provide benefits. The plans 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. The terms of the plans are generally the same as those of the retirement plans, 11 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 is included in other long-term obligations. Expenses of these plans for the three months ended March 31, 1997 and 1996 were $1,798,000 and $1,814,000, respectively. The Company also has two Deferred Compensation and Investment Plans (401(k) plans) which enables qualified employees to voluntarily defer compensation. Company contributions to the 401(k) plans for the three months ended March 31, 1997 and 1996 were $1,166,000 and $1,140,000, respectively. The Company also provides or subsidizes certain retiree health care and life insurance benefits. For the three months ended March 31, 1997 and 1996, postretirement benefit expenses were $60,000. 6. CASH FLOW INFORMATION Cash provided or used by operations in the three months ended March 31, 1997 and 1996 was affected by changes in certain assets and liabilities as follows (in thousands): 1997 1996 [S] [C] [C] Increase (decrease) in assets: Receivables $ (8,947) $ (5,878) Inventories (81) 1,645 Other assets 966 (935) Total 8,062 (5,168) Increase (decrease) in liabilities: Accounts payable (2,433) (4,131) Accrued compensation (31) (632) Income taxes 6,165 985 Other liabilities 486 1,569 Total 4,187 (2,209) Net cash increase from changes in assets and liabilities $ 12,249 $ 2,959 7. COMMITMENTS AND CONTINGENCIES The Company guarantees $20,875,000 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. From time to time, the Company is involved as a party in various governmental proceedings, including environmental matters. Management believes, after reviewing such actions with counsel, that the outcome of pending actions will not have a material adverse effect on the Company's consolidated results of operations or financial position. 12 8. COMMON STOCK AND STOCK PLANS On March 31, 1997 the Company retired 25,003 shares of Class A common that were held as treasury shares. On December 4, 1996, the Board of Directors of the Company declared a five- for-four split on its Class A and Class B common stock in the form of a special 25% stock dividend, which was paid on January 2, 1997 to the holders of the record of the common stock as of the close of business on December 16, 1996. All share and per share amounts have been adjusted in the financial statements to reflect the stock split. 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. At March 31, 1997 the Company has four stock-based compensation plans, which are described below. The Company applies APB No. 25 and related interpretations in accounting for its plans. No significant amounts of compensation cost have been recognized for its fixed stock option plans and its stock purchase plan. The Company's Amended Employee Stock Purchase Plan (the Purchase Plan) reserved 1,875,000 shares of Class A common stock for issuance to employees. Eligible employees may purchase shares at 85% of "fair market value" (as defined) through payroll deductions. The Purchase Plan can be automatically terminated by the Company at any time. As of March 31, 1997, 741,658 shares of Class A common stock have been issued under the Purchase Plan. The Company's Amended and Restated 1987 Stock Option Plan (1987 employee plan), as amended, reserved 750,000 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. The Company's Amended and Restated 1994 Employee Stock Option Plan (1994 employee plan) reserved 812,500 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 amended and restated stock option plan for outside (nonemployee) directors (directors' plan) provides for the issuance of up to 187,500 shares of Class A common stock. Under the Directors' Plan each outside director is granted an option at fair market value for 1,875 shares annually. Terms of the Directors' Plan are similar to the terms of the employee plans. 13 In the employee plans, there are 423,470 options exercisable as of March 31, 1997. Substantially all of the shares reserved in the 1987 plan have been granted. In the 1994 plan, 260,063 remain for future grants. A total of 892,192 options are outstanding in the employee plans at an average option price of $15.73 and $20.40 per share for the 1987 and 1994 plans, respectively. In the directors' plan, 84,375 options are outstanding at an average prices of $17.54 per share, 63,292 shares were exercisable at March 31, 1997 and 91,875 are available for future awards. 9. 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 March 31, 1997, it is estimated that the Company could terminate the interest rate swap agreement with only a nominal gain or loss. 10. SALE OF NEWSPAPER OPERATIONS On February 28, 1997 the Company completed the sale of the Gilroy Dispatch, The Hollister Free Lance, the Morgan Hill Times and the Amador Ledger Dispatch. These newspapers had combined daily circulation of approximately 10,150 and weekly circulation of 12,800, and generated $7,574,000 in revenues in 1996. The Company reported a $6,594,000 gain on the sale which is included in nonoperating (expenses) income. 14 Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Recent Events and Trends On December 4, 1996 the Company declared a five-for-four stock split in the form of a 25% stock dividend which was paid on January 2, 1997. All outstanding shares and per share amounts have been restated in this discussion to reflect the stock dividend. In October 1996, the Company announced that it had entered into agreements in principle to sell five community newspapers. In December, the Company sold the Ellensburg Daily Record and recorded a pre-tax gain of $3.2 million. On February 28, 1997 it completed the sale of the remaining four community newspapers and recorded a pre-tax gain of $6.6 million in other non-operating (expenses) income. See note 10. The after tax gain on the 1997 sale is 10 cents per share. Newsprint prices fluctuated substantially during 1996, reaching an all-time high in early 1996. Prices began declining during the second quarter of 1996 and the Company's newsprint purchases in the first quarter of 1997 continued to be priced at roughly year-end 1996 price levels. While newsprint prices have risen in April 1997, management expects average newsprint prices in 1997 to be below 1996 average prices which would positively impact operating income for the year. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128) which requires changes in current earnings per share (EPS) reporting requirements. The Company is required to adopt SFAS 128 in the fourth quarter of 1997. Because of the limited number of stock options granted by the Company, management expects there to be no significant difference in the calculation and reporting of EPS under the new statement, hence, SFAS 128 is not expected to significantly affect historical or future EPS. First Quarter 1997 Compared to 1996 Net income in the first quarter of 1997 was $15.4 million or 40 cents per share and includes a gain of 10 cents per share on the February 1997 sale of the four community newspapers. Excluding the gain and operating results of the four newspapers from the comparisons, income in the 1997 quarter was $11.4 million or 30 cents per share compared to income of $4.5 million or 12 cents per share in 1996. The increase in income is largely attributable to higher advertising revenues, particularly at the Company's North and South Carolina newspapers (Carolina newspapers), and lower newsprint costs. 15 Revenues: Revenues increased 3.0% to $150.6 million over the 1996 quarter with advertising revenues up 4.3% to $116.6 million, and circulation revenues roughly even at $27.0 million. Excluding the newspapers that were sold, total revenues were up 3.7% with advertising revenues rising 5.1% and circulation revenues up 0.7%. Operating Revenues By Region (in thousands): 1997 1996 % Change [S] [C] [C] [C] California newspapers $ 75,555 $ 74,428 1.5 Carolina newspapers 39,069 34,609 12.9 Northwest newspapers 33,210 33,331 (0.4) Non-newspaper operations 2,787 3,935 (29.2) Total $ 150,621 $146,303 3.0 The California newspapers contributed just over 50% of the Company's total revenues and excluding revenues from the four community newspapers which were sold, California newspapers operating revenue increased $1.8 million or 2.5%. Results for the sold newspapers were included in two months in 1997 versus the full quarter in 1996. At the three Bee newspapers, advertising revenues rose $1.2 million or 2.0% and were primarily driven by advertising rate increases implemented in January and February at The Fresno and Sacramento Bees, respectively, and in May 1996 at The Modesto Bee. Full run "run-of-press" (ROP) advertising linage, which is found in the body of the newspaper and is the largest contributor to advertising revenues, declined 3.4% at the three Bees. The newspapers were affected by the consolidation of Macy's and Weinstock's department stores, previously their two largest advertisers. This consolidation was completed in March 1996 and, therefore, will not have an impact on advertising volume comparisons in future quarters. Circulation revenues at the three Bee dailies were up $129,000 or 0.9% and other revenues were up $337,000, more than double the 1996 quarter. The increase in circulation revenue is due to a partial Sunday single-copy price increase and less promotional discounting at The Sacramento Bee, and modest increases in circulation volumes at The Fresno and Modesto Bees. Average paid circulation for the three Bees combined was down 0.3% daily and flat on Sundays. The increase in other revenues is primarily from new revenue sources being developed at the newspapers such as niche publications, on-line Internet services on the World Wide Web in Sacramento and Modesto, and direct mail programs at The Sacramento and Fresno Bees. The Carolina newspapers contributed 25.9% of the Company's total revenues and reported a $4.5 million increase in operating revenues. Most of the Carolinas' revenues are generated by The News & Observer newspaper in Raleigh, NC and three daily newspapers in South Carolina. Advertising revenues for the region were up $4.0 million or 14.3%. The combined advertising revenues for the daily newspapers rose $3.3 million due to rate increases implemented during the quarter and increases in full run ROP 16 linage of 11.9%. The remaining increase of approximately $450,000 was largely contributed by a shopper that was purchased in June 1996. Circulation revenues at the Carolina newspapers were up $274,000 or 4.7%, largely due to volume increases. Average paid circulation was up 2.5% daily and 2.1% Sunday at the Carolina dailies. The Company's Northwest newspapers contributed 22.0% of total revenues. Their revenues declined $121,000 or 0.4%, however, excluding revenues from the Ellensburg Daily Record which was sold in December 1996, revenues increased $262,000. Excluding Ellensburg, advertising revenues increased $351,000 or 1.5%, circulation revenues declined $229,000 or 3.3% and other revenues increased $140,000 or 7.1%. Advertising revenues in the region were up primarily due to rate increases implemented in late 1996 and early 1997 but were partially offset by reduced linage at The News Tribune (Tacoma, WA) because of the consolidation of some retail advertisers in 1996. Full run ROP advertising volumes for the region declined 1.2%. Circulation revenues declined primarily due to lower average paid circulation. Average paid circulation declined 0.7% daily and Sunday was off 0.9% at the three Northwest daily newspapers. The $1.1 million decline in non-newspaper revenues is largely attributable to the sale of the Company's Internet access business in the fourth quarter of 1996 and to a reorganization at one of its commercial printing operations. Operating Expenses: Operating expenses declined 6.1% and were down 5.5% excluding the sold newspapers. In particular, newsprint and supplement cost declined 31.1% due to lower newsprint prices and flat newsprint usage. Excluding newsprint and supplement costs and expenses related to the sold newspapers, all other operating expenses increased $2.3 million or 2.3%. Compensation, the Company's largest component of expenses, was held to a 0.9% increase mostly due to lower full-time-equivalent employees. The other operating expense component was up 4.9% due to increased spending on product development and promotion. Nonoperating (Expenses) Income: Interest expense declined $785,000 as the Company continued to repay long- term bank debt. The Company's share of operating loss from its Ponderay newsprint mill joint venture was $400,000 in the first quarter versus income of $1.2 million in 1996. Lower newsprint prices held Ponderay's results below last year. Also included in non-operating income is the $6.6 million gain on the sale of the four California community newspapers. The Company's effective tax rate was 41.8% in 1997 versus 44.0% in 1996. The decline in the effective tax rate is primarily due to an adjustment to the tax basis of certain intangibles related to the sale of the four community newspapers and lower non-deductible amortization. See note 3. 17 Liquidity & Capital Resources Operations generated $33.7 million of cash, a 74.6% increase over the 1996 first quarter. Cash was used to repay debt, pay for capital expenditures and pay dividends. Capital expenditures are projected to be between $25.0 million and $30.0 million in 1997. See notes 1 and 7 to the consolidated financial statements for a discussion of the Company's commitments to its newsprint mill joint venture (Ponderay). See note 2 for a discussion of the Company's long-term obligations. The Company had $155.0 million of available credit at March 31, 1997. Management is of the opinion that operating cash flow and available credit facilities are adequate to meet the liquidity needs of the Company, including currently planned capital expenditures and other investments. Forward Looking Information 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 statements going beyond historical facts that McClatchy management has discussed, are subject to risks and uncertainties that could cause actual results to differ. These include increases in newsprint prices and/or printing and distribution costs over anticipated levels, competition from other forms of media in the Company's principal markets, increased consolidation among major retailers in the Company's newspaper markets or other events depressing the level of advertising, an economic downturn in the local economies of California's Central Valley, Washington State, Alaska or the Carolinas, or other occurrences leading to decreased circulation and diminished revenues from both display and classified advertising. 18 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 /s/ James P. Smith Date: May 13, 1997 James P. Smith Vice President, Finance and Treasurer 19 EX-27 2
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. 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 7,323 0 74,478 (2,264) 7,670 103,760 568,460 (231,031) 857,988 97,471 0 378 0 0 516,423 857,988 150,621 150,621 0 127,831 (6,297) 0 2,668 26,419 11,062 15,357 0 0 0 15,357 0.40 0.40
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