<PAGE> 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
<PAGE> 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
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S>
Current assets: <C> <C>
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
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended March 31,
1996 1995
(Unaudited)
<S> <C> <C>
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
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
Three Months Ended March 31,
1996 1995
(Unaudited)
<S> <C> <C>
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 $ -
</TABLE>
See notes to consolidated financial statements
<PAGE> 7
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS'EQUITY
(UNAUDITED)
(In thousands, except share and per share amounts)
<CAPTION>
Par Value Additional Treasury
Class A Class B Paid-in Retained Stock
Common Common Capitol Earnings at Cost Total
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
See notes to consolidated statements
<PAGE> 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.
<PAGE> 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.
<PAGE> 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):
<TABLE>
<CAPTION>
1995
<S> <C>
Revenues 140,064
Net income 4,257
Earnings per common shares 0.14
</TABLE>
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.
<PAGE> 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):
<TABLE>
<CAPTION>
March 31, December31,
1996 1995
<S> <C> <C>
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
</TABLE>
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.
<PAGE> 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):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
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
</TABLE>
5. INCOME TAX PROVISIONS
Income tax provisions consist of (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
<S> <C> <C>
Current:
Federal $3,048 $3,811
State 363 834
Deferred:
Federal (1) (23)
State 37 (28)
Income tax provision $3,447 $4,594
</TABLE>
The effective tax rate and the
statutory federal income tax
rate are reconciled as follows:
<TABLE>
<S> <C> <C>
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%
</TABLE>
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
</TABLE>
6. INTANGIBLES
Intangibles consist of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1995 1996
<S> <C> <C>
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
</TABLE>
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.
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
</TABLE>
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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<TABLE>
<CAPTION>
Net Revenues (in thousands):
First Quarter
1996 1995 % Change
<S> <C> <C> <C>
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%
</TABLE>
* Not meaningful due to N&O acquisition in August 1995.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from SEC filing Form 10-Q
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 68,604
<ALLOWANCES> 2,781
<INVENTORY> 15,348
<CURRENT-ASSETS> 94,428
<PP&E> 559,599
<DEPRECIATION> 210,909
<TOTAL-ASSETS> 881,241
<CURRENT-LIABILITIES> 91,783
<BONDS> 0
<COMMON> 300
0
0
<OTHER-SE> 467,405
<TOTAL-LIABILITY-AND-EQUITY> 881,241
<SALES> 146,303
<TOTAL-REVENUES> 146,303
<CGS> 0
<TOTAL-COSTS> 136,206
<OTHER-EXPENSES> (1,189)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,453
<INCOME-PRETAX> 7,833
<INCOME-TAX> 3,447
<INCOME-CONTINUING> 4,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,386
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
