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, 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
November 5, 1997:
Class A Common Stock 9,421,383
Class B Common Stock 28,685,912
<PAGE> 1
McCLATCHY NEWSPAPERS, INC.
INDEX TO FORM 10-Q
Part I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements:
Consolidated Balance Sheet - September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statement of Income for the
Three Months and Nine Months Ended
September 30, 1997 and 1996 (unaudited) 5
Consolidated Statement of Cash Flows for
the Nine Months Ended September 30, 1997
and 1996 (unaudited) 6
Consolidated Statement of Stockholders'
Equity for the Period from December 31,
1995 to September 30, 1997 (unaudited) 7
Notes to Consolidated Financial Statements
(unaudited) 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 16
Part II - OTHER INFORMATION 21
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<CAPTION>
ASSETS
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,387 $ 5,877
Trade receivables (less allowances
of $2,115 in 1997 and $2,440 in 1996) 82,887 81,791
Other receivables 1,635 1,911
Newsprint, ink and other inventories 10,765 8,015
Deferred income taxes 10,930 10,223
Other current assets 4,638 3,193
Total current assets 118,242 111,010
Property, plant and equipment:
Land 33,236 32,591
Buildings and improvements 158,627 157,741
Equipment 377,490 369,346
Construction in progress 6,439 8,532
Total 575,792 568,210
Accumulated depreciation (247,282) (226,420)
Net property, plant and equipment 328,510 341,790
Intangibles - net 397,125 411,393
Newsprint mill investment 8,929 8,989
Other assets 2,444 2,484
Total assets $ 855,250 $ 875,666
See notes to consolidated financial statements
</TABLE>
<PAGE> 3
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
September 30, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 29,494 $ 22,806
Accrued compensation 39,206 33,567
Income taxes - 4,737
Unearned revenue 17,750 18,103
Carrier deposits 4,086 4,149
Other accrued liabilities 10,908 8,998
Total current liabilities 101,444 92,360
Long-term bank debt 119,000 190,000
Other long-term obligations 29,014 29,814
Deferred income taxes 58,532 60,378
Commitments and contingencies (note 7)
Stockholders' equity:
Common stock $.01 par value:
Class A - authorized
100,000,000 shares, issued
9,392,571 in 1997
and 8,946,651 in 1996 94 89
Class B - authorized
60,000,000 shares, issued
28,685,912 in 1997
and 28,842,287 in 1996 287 288
Additional paid-in capital 73,650 67,534
Retained earnings 473,229 435,574
Treasury stock, 25,000
Class A shares in 1996 - (371)
Total stockholders'equity 547,260 503,114
Total liabilities and stockholders' equity $ 855,250 $ 875,666
</TABLE>
See notes to consolidated financial statements
<PAGE> 4
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues - net:
Newspapers:
Advertising $ 125,549 $ 120,856 $ 370,509 $ 354,270
Circulation 26,882 27,102 80,455 81,196
Other 4,391 3,752 13,025 10,934
Total newspapers 156,822 151,710 463,989 446,400
Non-newspapers 2,778 3,833 8,512 12,365
Total net revenue 159,600 155,543 472,501 458,765
Operating expenses:
Compensation 63,257 62,177 189,673 188,375
Newsprint and supplements 25,061 27,034 70,118 88,523
Depreciation and amortization 13,526 13,250 40,167 39,502
Other operating expenses 30,830 30,443 90,285 87,434
Total 132,674 132,904 390,243 403,834
Operating income 26,926 22,639 82,258 54,931
Non-operating (expenses) income:
Interest expense (2,004) (3,307) (7,005) (10,259)
Partnership income (loss) 640 850 (60) 3,100
Gain on sale of newspaper
operations 54 - 6,757 -
Other - net 595 7 826 66
Income before income tax
provision 26,211 20,189 82,776 47,838
Income tax provision 10,686 8,747 34,302 20,805
Net income $ 15,525 $ 11,442 $ 48,474 $ 27,033
Net income per common share $ 0.41 $ 0.30 $ 1.27 $ 0.72
Weighted average number of
common shares 38,212 37,858 38,103 37,739
</TABLE>
See notes to consolidated financial statements
<PAGE> 6
<TABLE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months Ended September 30,
1997 1996
(Unaudited)
<S> <C> <C>
Cash provided (used) by operating
activities:
Net income $ 48,474 $ 27,033
Reconciliation to net cash
provided:
Depreciation and amortization 40,274 39,618
Partnership losses (income) 60 (3,100)
Changes in certain assets
and liabilities - net 2,366 15,251
Gain on sale of newspaper
operations (6,757) -
Other (1,199) (760)
Net cash provided by operating
activities 83,218 78,042
Cash provided (used) by investing
activities:
Purchase of property, plant
and equipment (16,561) (24,627)
Sale of newspaper operations 11,400 -
Other - net 6 (2,632)
Net cash used by investing
activities (5,155) (27,259)
Cash (used) provided by financing
activitites:
Repayment of long-term debt (71,000) (44,000)
Payment of cash dividends (10,819) (8,563)
Other - principally stock
issuances 5,266 2,704
Net cash used by financing
activities (76,553) (49,859)
Net change in cash and cash
equivalents 1,510 924
Cash and cash equivalents,
beginning of year 5,877 3,252
Cash and cash equivalents, end of
period 7,387 4,176
Other cash flow information:
Cash paid during the period for:
Income taxes (net of refunds) $ 41,793 $ 17,011
Interest paid (net of
capitalized interest) 7,431 10,678
See notes to consolidated financial statements
</TABLE>
<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 Capital Earnings At Cost Total
<S> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1995 $ 85 $ 289 $62,477 $403,244 $ (371) $465,694
Net income (9 months) 27,033 27,033
Dividends paid
($.228 per share) (8,563) (8,563)
Conversion of 71,875
Class B shares
to Class A 1 (1)
Issuance of 198,293
shares under employee
plans 2 2,702 2,704
Balances,
September 30, 1996 88 288 65,149 421,714 (371) 486,868
Net income (3 months) 17,460 17,460
Dividends paid
($.095 per share) (3,600) (3,600)
Issuance of 109,084
Class A shares under
employee stock plans 1 1,751 1,752
Tax benefit from
stock plans 634 634
Balances,
December 31, 1996 89 288 67,534 435,574 (371) 503,114
Net income (9 months) 48,474 48,474
Dividends paid
($.285 per share) (10,819) (10,819)
Conversion of 156,375
Class B shares
to Class A 1 (1)
Issuance of 319,545
Class A shares
under employee and
director plans 4 5,262 5,266
Tax benefit from
stock plans 1,225 1,225
Retirement of
treasury shares (371) 371
Balances,
September 30, 1997 $ 94 $ 287 $ 73,650 $ 473,229 $ - $ 547,260
See notes to consolidated financial statements
</TABLE>
<PAGE>
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 California, Washington
state, Alaska 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 $3,607,000 at September 30, 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
<PAGE>
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: $13,191,000
and 1996: $16,196,000) 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
betterments, as well as interest incurred during construction, are capitalized.
For three months ended September 30, 1997 and 1996 such interest was $11,000 and
$67,000, respectively. For the nine months then ended, such interest was
$36,000 in 1997 and $526,000 in 1996.
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 September 30, 1997
and December 31, 1996 the Company had long-term bank debt of $119,000,000 and
$190,000,000, respectively. In addition, the Company also has an outstanding
letter of credit for $4,309,000 securing estimated obligations from workers'
compensation claims.
Under the Credit Agreement, interest only is payable through July 1, 2000.
Principal in the amount of $4,000,000 is due on July 1, 2003 and the remaining
principal matures in increasing annual amounts until it is paid in full by July
<PAGE>
1, 2005. The Company may select between alternative floating interest rates for
each drawdown. On September 30, 1997 the interest rate applicable to the amount
drawn ranged from 6.0% to 6.7%. 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, 1997.
At September 30, 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):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
Pension obligations $ 17,156 $ 17,272
Post retirement benefits obligation 8,247 9,058
Deferred compensation and other 3,611 3,484
Total other long-term obligations $ 29,014 $ 29,814
</TABLE>
<PAGE>
<TABLE>
3. INCOME TAX PROVISIONS
Income tax provisions consist of (in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
<S> 1997 1996 1997 1996
Current: <C> <C> <C> <C>
Federal $ 9,667 $ 7,978 $ 31,706 $ 19,392
State 1,428 1,085 5,149 2,412
Deferred:
Federal (482) (1,925) (2,787) (2,731)
State 73 1,609 234 1,732
Income tax provision $ 10,686 $ 8,747 $ 34,302 $ 20,805
</TABLE>
<TABLE>
The effective tax rate and the statutory federal income tax rate are reconciled
as follows:
<CAPTION>
Three Months Nine Months Ended
Ended September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0% 35.0%
State taxes, net of
federal benefit 3.7 5.6 4.2 5.6
Amortization 3.2 4.4 3.2 4.4
Tax adjustment to basis of
newspapers sold (1.0) - (1.0) -
Other (0.1) (1.7) - (1.5)
Effective tax rate 40.8% 43.3% 41.4% 43.5%
</TABLE>
<TABLE>
The components of deferred taxes recorded in the Company's Balance Sheet on
September 30, 1997 and December 31, 1996 are (in thousands):
<CAPTION>
1997 1996
<S> <C> <C>
Depreciation and amortization $ 55,539 $ 55,649
Partnership losses 7,993 8,283
State taxes 797 1,310
Deferred compensation (18,070) (16,540)
Other 1,343 1,453
Deferred tax liability
(net of $10,930 in 1997
and $10,223 in 1996
reported as current assets) $ 47,602 $ 50,155
</TABLE>
<PAGE>
4. INTANGIBLES
Intangibles consist of (in thousands):
<TABLE>
<CAPTION>
September 30, 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 112,378 102,903
Intangibles - net $ 397,125 $ 411,393
</TABLE>
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, 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 September 30, 1997 and
1996 were $1,420,000 and $1,776,000, respectively. Expenses for the nine months
then ended were $5,113,000 and $5,442,000 in 1997 and 1996, 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 September
30, 1997 and 1996 were $1,145,000 and $1,203,000, respectively. Contributions
for the nine months then ended were $3,568,000 and $3,494,000 in 1997 and 1996,
respectively.
The Company also provides or subsidizes certain retiree health care and life
insurance benefits. For the three months ended September 30, 1997 and 1996,
postretirement benefit credit was $179,000 and was $60,000 expense in 1996. For
<PAGE>
the nine months then ended, postretirement benefit credit was $538,000 in 1997
and was a $120,000 expense in 1996.
6. CASH FLOW INFORMATION
Cash provided or used by operations in the nine months ended September 30,
1997 and 1996 was affected by changes in certain assets and liabilities as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Increase (decrease) in assets:
Receivables $ 1,145 $ (3,001)
Inventories 3,014 (5,924)
Other assets 1,673 (5,205)
Total 5,832 (14,130)
Increase (decrease) in liabilities:
Accounts payable 6,712 (1,056)
Accrued compensation 4,552 2,548
Income taxes (4,737) 2,637
Other liabilities 1,671 (3,008)
Total 8,198 1,121
Net cash increase from changes in
assets and liabilities $ 2,366 $ 15,251
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
The Company guarantees $20,783,000 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.
8. COMMON STOCK AND STOCK PLANS
On May 21, 1997 the Company increased the authorized shares of Class A
common stock to 100,000,000 and increased authorized Class B shares to
60,000,000. On March 31, 1997 the Company retired 25,000 shares of Class A
common stock that were held as treasury shares.
<PAGE>
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 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 September 30, 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 September 30, 1997, 778,536 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) 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.
In the employee plans, there are 299,473 options exercisable as of September
30, 1997. 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 718,479 options are
outstanding in the employee plans at an average option prices of $16.04 and
$20.87 per share for the 1987 and 1994 plans, respectively. In the directors'
plan, 93,750 options are outstanding at an average price of $19.09 per share,
55,792 shares were exercisable at September 30, 1997 and 75,000 are available
for future awards.
<PAGE>
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 September
30, 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 $6,757,000 gain on the sale which is included in non-
operating (expenses) income.
<PAGE>
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 $6.8 million in other non-operating
(expenses) income. See note 10 to the consolidated financial statements.
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 nine months of 1997 were made
at average newsprint prices that were below the 1996 levels. While newsprint
prices in the fourth quarter are expected to exceed those paid in 1996,
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.
In September 1997, the Financial Accounting Standards Board adopted
Statements of Financial Accounting Standards No. 130 (Reporting Comprehensive
Income), which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources; and No. 131 (Disclosures about Segments of an Enterprise and Related
Information), which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic area, and major customers. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations or cash flows. Both statements are effective in 1998, with earlier
application permitted.
Third Quarter 1997 Compared to 1996
The Company reported third quarter earnings of $15.5 million, up 35.7% from
1996 third quarter earnings of $11.4 million. The increase in earnings resulted
largely from higher advertising revenues, lower newsprint prices and lower net
non-operating expenses.
<PAGE>
Revenues:
Revenues increased 2.6% to $159.6 million, but were up 4.3% excluding the
five community newspapers that were sold. Advertising revenues were $125.5
million, up 5.5% from ongoing operations in 1996 while circulation revenues from
ongoing operations rose nominally to $26.9 million. The Company has not raised
circulation rates at most of its newspapers in 1997.
Operating Revenues By Region (in thousands):
<TABLE>
<CAPTION>
1997 1996 % Change
<S> <C> <C> <C>
California newspapers $ 78,810 $ 76,953 2.4
Carolina newspapers 42,190 38,925 8.5
Northwest newspapers 35,822 35,832 -
Non-newspaper operations 2,778 3,833 (27.5)
Total operating revenue $ 159,600 $ 155,543 2.6
</TABLE>
The California newspapers' operating revenues increased 2.4%, but were up
5.0% excluding four community newspapers sold in February 1997. The sold
newspapers contributed $2.4 million in revenues in 1996. Advertising revenues
at the three daily Bee newspapers, located in Sacramento, Modesto and Fresno,
increased $3.2 million or 5.4% due primarily to rate increases. Full-run "run-
of-press" (ROP) advertising linage, which is found in the body of the newspaper
and generates a majority of advertising revenues, increased 2.1% in the quarter.
Circulation revenues at the Bee newspapers declined $38,000 while other
revenues, generated from niche products, online operations, etc., increased
$579,000, more than double the 1996 revenues. This increase was mostly related
to new products at The Sacramento Bee.
The Carolina newspapers revenues were up $3.3 million, led by The News and
Observer (Raleigh, N.C.) newspaper, where revenues increased $2.4 million.
Advertising revenues increased $2.9 million or 9.1% while full-run ROP
advertising linage increased 4.5% for the daily Carolina newspapers.
Circulation revenues rose $257,000 due to increases in daily and Sunday average
paid circulation, mostly at The News and Observer.
Revenues at the Northwest newspapers were flat, but were up $480,000 or
1.4%, excluding the Ellensburg Daily Record, which was sold in December 1996.
Advertising revenues increased $408,000 or 1.6% at the three daily Northwest
newspapers, while full-run ROP declined 2.6%. Gains in advertising revenues at
The News Tribune (Tacoma, WA) and the Anchorage Daily News were partially offset
by declines at the Tri-City Herald (WA). Circulation revenues declined
nominally and other revenues increased $51,000 at the three dailies.
Non-newspaper revenues declined $1.1 million due mostly to the sale of the
Company's internet access business late in the third quarter of 1996, and a
reorganization at its commercial printing operation in Clovis, California in
the fourth quarter of 1996.
Operating Expenses:
Operating expenses declined 0.2%, but excluding the sold newspapers,
increased 1.9%. At the Company's ongoing newspaper operations, newsprint and
supplements declined $1.7 million or 6.4% due to lower average newsprint prices
<PAGE>
in the quarter. Excluding newsprint and supplement expenses, and costs
associated with the sold newspapers, total other operating costs increased 4.0%
due primarily to lower workers' compensation and other fringe benefits in the
1996 quarter, coupled with higher spending on product development and promotions
in 1997.
Non-operating (Expenses) Income - Net:
Interest expense declined $1.3 million as the Company continues to direct
excess cash towards the repayment of debt. Non-operating (expenses) income -
net includes a gain of $504,000 on the sale of a building in September 1997 that
was not being used in the Company's operations.
The Company's effective tax rate was 40.8% versus 43.3% in 1996 due to lower
non-deductible amortization and a tax basis adjustment on certain intangibles
associated with the sold newspapers. See note 3 to the consolidated financial
statements.
Nine Month Comparisons
Net income for the nine months ended September 30, 1997 was $48.5 million
and included an after-tax gain of $4.0 million on the sale of four community
newspapers in California in February 1997. Excluding the gain, earnings were
$44.5 million, up 64.7% from 1996. Revenues, expenses and earnings from ongoing
operations were generally affected by the same factors discussed in the third
quarter comparisons.
Revenues:
Total revenues increased 3.0% to $472.5 million, but were up 4.4% to $471.4
million after excluding the results from the sold newspapers in 1997 and 1996.
The four community newspapers contributed $1.1 million in January and February
1997 versus $7.2 million contributed by the five community newspapers in the
nine-month period in 1996. Advertising revenues from ongoing operations were
$369.7 million, up 5.9% and circulation revenues were up slightly at $80.3
million.
<TABLE>
Operating Revenues By Region (in thousands):
<CAPTION>
1997 1996 % Change
<S> <C> <C> <C>
California newspapers $ 234,704 $ 228,227 2.8
Carolina newspapers 123,483 112,213 10.0
Northwest newspapers 105,802 105,960 (0.1)
Non-newspaper operations 8,512 12,365 (31.2)
Total operating revenue $ 472,501 $ 458,765 3.0
</TABLE>
Total revenues at the Company's California newspapers increased $6.5 million
over the nine months, but were up $11.0 million or 5.0% excluding the sold
newspapers. Advertising revenues at the three Bee newspapers were up $9.3
million or 5.2%, with full-run ROP linage up 0.8%. Circulation revenues
increased nominally while other revenues were up $1.5 million, primarily at The
Sacramento Bee. Average paid circulation increased 0.6% daily and 0.3% Sunday
at the three Bees.
<PAGE>
Total revenues at the Carolina newspapers increased $11.3 million with $8.2
million coming from The News and Observer. Advertising revenues rose $10.1
million or 11.1% with full-run ROP linage up 8.6%. Circulation revenues
increased $684,000 or 3.9% as average paid daily circulation increased 2.1% and
Sunday improved 1.1%.
Total revenues at the Northwest newspapers declined $158,000, but were up
$1.2 million excluding the Ellensburg Daily Record (sold December 1996), with
most of the gains in advertising revenues at the Anchorage Daily News. Full-run
ROP advertising linage declined 1.4% while average paid circulation was down
0.6% daily and 0.5% Sunday.
Non-newspaper revenues declined $3.9 million for reasons discussed in the
third quarter comparisons.
Operating Expenses:
Operating expenses declined 3.4%, and were down 1.8% after excluding
expenses of the sold newspapers from the comparisons, due primarily to lower
newsprint expense. Newsprint and supplement costs (exclusive of sold
newspapers) were down 20.3% as average newsprint prices were significantly below
the 1996 levels. Total other operating expenses were up 3.5% excluding
newsprint and supplement costs and the expenses of the sold newspapers, due to
the reasons discussed in the third quarter comparisons.
Non-Operating (Expenses) Income - Net:
Interest expense declined $3.3 million as debt has been repaid. The Company
recorded $60,000 as its share of losses from the Ponderay newsprint mill joint
venture versus $3.1 million in income in 1996 when average newsprint prices were
higher. In addition to the pre-tax gain of $6.8 million on the sale of the
community newspapers, the Company recorded a $504,000 pre-tax gain on the sale
of a building.
The Company's effective tax rate was 41.4% in 1997 compared to 43.5% in
1996. See note 3 to the consolidated financial statements.
Liquidity & Capital Resources
Operations generated $83.2 million in cash, a 6.6% increase over 1996. In
addition, the Company received $11.4 million in proceeds from the sale of the
four community newspapers in February 1997. 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 to the consolidated financial statements for a discussion of
the Company's long-term obligations. The Company had $191.0 million of
available credit at September 30, 1997.
<PAGE>
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.
<PAGE>
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: November 6, 1997 /s/ James P. Smith
James P. Smith
Vice President, Finance and Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from SEC filing Form 10-K
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,387
<SECURITIES> 0
<RECEIVABLES> 86,637
<ALLOWANCES> 2,115
<INVENTORY> 10,765
<CURRENT-ASSETS> 118,242
<PP&E> 575,792
<DEPRECIATION> 247,282
<TOTAL-ASSETS> 855,250
<CURRENT-LIABILITIES> 101,444
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<COMMON> 381
0
0
<OTHER-SE> 546,879
<TOTAL-LIABILITY-AND-EQUITY> 855,250
<SALES> 472,501
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