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 June 30, 1996
OR
- - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 1-9824
McCLATCHY NEWSPAPERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-0666175
(State of Incorporation) (IRS Employer
Identification Number)
2100 "Q" Street, Sacramento, CA. 95816
(Address of principal executive offices)
(916) 321-1846
(Registrant's telephone number)
________________
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___.
The number of shares of each class of common stock outstanding as of
August 12, 1996:
Class A Common Stock 7,024,449
Class B Common Stock 23,073,834
1 of 23
2
McCLATCHY NEWSPAPERS, INC.
INDEX TO FORM 10-Q
Page
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheet - June 30, 1996
(unaudited) and December 31, 1995 3
Consolidated Statement of Income for the
Three Months and Six Months
Ended June 30, 1996 and 1995 (unaudited) 5
Consolidated Statement of Cash Flows for
Six Months Ended June 30, 1996
and 1995 (unaudited) 6
Consolidated Statement of Stockholders'
Equity for the Period from December 31,
1994 to June 30, 1996 (unaudited) 7
Notes to Consolidated Financial Statements
(unaudited) 8
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
Part II - OTHER INFORMATION 23
3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, December 31,
1996 1995
Unaudited
Current assets:
Cash and cash equivalents $ 5,069 $ 3,252
Trade receivables (less
allowances of $2,558 in
1996 and $2,327 in 1995) 69,263 69,451
Other receivables 1,689 2,251
Newsprint, ink and
other inventories 8,153 13,703
Deferred income taxes 9,378 9,840
Other current assets 2,760 4,737
Total current assets 96,312 103,234
Property, plant and equipment:
Land 30,954 30,920
Buildings and improvements 149,588 141,908
Equipment 367,328 347,651
Construction in progress 18,846 31,110
Total 566,716 551,589
Accumulated depreciation (217,774) (203,214)
Net property, plant and equipment 348,942 348,375
Intangibles - net 422,525 429,390
Investment in newsprint mill
partnership 8,215 5,965
Other assets 6,140 5,994
Total assets $ 882,134 $ 892,958
See notes to consolidated financial statements
<PAGE 4>
McCLATCHY NEWSPAPERS, INC
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1996 1995
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 10,000 $ 10,000
Accounts payable 18,325 20,152
Accrued compensation 28,728 33,222
Income taxes 4,622 -
Unearned revenue 18,452 17,566
Carrier deposits 4,268 4,298
Other accrued liabilities 9,330 9,248
Total current liabilities 93,725 94,486
Long-term debt 217,000 243,000
Other long-term obligations 33,987 28,135
Deferred income taxes 60,498 61,643
Commitments and contingencies (note 8)
Stockholders' equity:
Common stock $.01 par value:
Class A - authorized 50,000,000 shares,
issued 6,926,877 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 63,862 62,521
Retained earnings 413,133 403,244
Treasury stock, 20,000 Class A shares (371) (371)
Total stockholders' equity 476,924 465,694
Total liabilities and
stockholders' equity $ 882,134 $ 892,958
See notes to consolidated financial statements
5
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(Unaudited)
Revenues - net:
Advertising $121,584 $96,763 $233,414 $183,836
Circulation 27,098 21,712 54,094 43,419
Other 8,237 6,173 15,714 11,191
Total 156,919 124,648 303,222 238,446
Operating Expenses:
Compensation 62,808 50,276 126,198 102,043
Newsprint and supplements 30,315 22,886 61,489 41,952
Depreciation and amortization 13,256 9,295 26,252 18,533
Other operating expenses 28,345 22,457 56,991 45,826
Total 134,724 104,914 270,930 208,354
Operating income 22,195 19,734 32,292 30,092
Nonoperating (expenses) income:
Interest expense (3,499) (14) (6,952) (24)
Investment income 29 1,574 52 3,155
Partnership income (losses) 1,100 (350) 2,250 (1,050)
Other - net (9) 278 7 285
Total (2,379) 1,488 (4,643) 2,366
Income before income
tax provision 19,816 21,222 27,649 32,458
Income tax provision 8,611 8,691 12,058 13,285
Net income $11,205 $12,531 $15,591 $19,173
Net income per common share $0.37 $0.42 $0.52 $0.64
Weighted average number
of common shares 30,183 30,004 30,139 29,995
See notes to consolidated financial statements
6
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Six Months Ended June 30,
1996 1995
(Unaudited)
Cash provided (used) by
operating activities:
Net income $ 15,591 $ 19,173
Reconciliation to net cash
provided:
Depreciation and amortization 26,329 18,606
Partnership (income) losses (2,250) 1,050
Changes in certain assets and
liabilities - net 13,382 (8,046)
Other (740) 130
Net cash provided by operating
activities 52,312 30,913
Cash provided (used) by
investing activities:
Maturities of investments held
to maturity - 29,845
Proceeds from investments
available for sale - 6,326
Purchases of investments held
to maturity - (5,940)
Purchases of investments
available for sale - (3,637)
Purchases of property, plant
and equipment (18,304) (12,879)
Acquisition of newspaper
operations (1,844) (2,042)
Advances to newsprint
mill partnership - (2,012)
Other - net 14 (307)
Net cash (used) provided by
investing activities (20,134) 9,354
Cash (used) provided by
financing activities:
Repayment of long-term debt (26,000) -
Payment of cash dividends (5,702) (5,685)
Other - principally stock issuances 1,341 597
Net cash used by financing
activities (30,361) (5,088)
Net change in cash and cash
equivalents 1,817 35,179
Cash and cash equivalents,
beginning of year 3,252 68,574
Cash and cash equivalents,
end of period $ 5,069 $ 103,753
Other cash flow information:
Cash paid during the period
for:
Income taxes (net of refunds) $ 5,963 $ 16,389
Interest paid (net of
capitalized interest) 6,683 -
See notes to consolidated financial statements
7
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share and per share amounts)
Par Value Additional Treasury
Class A Class B Paid-in Retained Stock
Common Common Capitol Earnings at Cost Total
Balances, December 31,
1994 $66 $233 $ 61,290 $381,002 $(371) $442,220
Net Income (6 months) 19,173 19,173
Dividends paid
($.19 per share) (5,685) (5,685)
Conversion of 100,000
Class B shares to
Class A 1 (1)
Issuance of 32,921
Class A shares
under employee
stock plans 1 596 597
Balances, June 30,
1995 68 232 61,886 394,490 (371) 456,305
Net income (6 months) 14,445 14,445
Dividends paid
($.19 per share) (5,691) (5,691)
Conversion of 45,455
Class B shares to
Class A 1 (1)
Issuance of 33,917
Class A shares
under employee
stock plans 635 635
Balances, December 31,
1995 69 231 62,521 403,244 (371) 465,694
Net income (6 months) 15,591 15,591
Dividends paid
($.19 per share) (5,702) (5,702)
Issuance of 76,562
Class A shares
under employee
stock plans 1,341 1,341
Balances, June 30,
1996 $69 $231 $ 63,862 $413,133 $(371) $476,924
See notes to consolidated statements
8
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
McClatchy Newspapers, Inc. (the Company) and its subsidiaries are engaged
primarily in the publication of newspapers located in western coastal states
and North and South Carolina.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany items and transactions have
been eliminated. In preparing the financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
Company's financial position, results of operations, and cash flows for the
interim periods presented. All adjustments are normal recurring entries.
Such financial statements are not necessarily indicative of the results to be
expected for the full year.
Revenue recognition - Advertising revenues are recorded when advertisements
are placed in the newspaper and circulation revenues are recorded as
newspapers are delivered over the subscription term. Unearned revenues
represent prepaid circulation subscriptions.
Cash equivalents are highly liquid investments with maturities of three
months or less when acquired.
Concentrations of credit risks - Financial instruments which potentially
subject the Company to concentrations of credit risks are principally cash
and cash equivalents and trade accounts receivables. The Company routinely
assesses the financial strength of significant customers and this assessment,
combined with the large number and geographic diversity of its customers,
limits the Company's concentration of risk with respect to trade accounts
receivable.
Inventories are stated at the lower of cost (based principally on the
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 $5,908,000 at June 30, 1996 and $7,426,000 at December 31, 1995.
Related party transactions - The Company owns a 13.5% interest in Ponderay
Newsprint Company ("Ponderay") which operates a newsprint mill in the State
of Washington. The Company guarantees certain bank debt used to construct
the mill (see note 8) and is required to purchase 28,400 metric tons of
annual production on a "take-if-tendered" basis until the debt is repaid.
The Company satisfies this obligation by direct purchase (1996: $11,052,000
and 1995: $7,831,000) 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.
9
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES - Continued
Property, plant and equipment are stated at cost. Major renewals and
betterments, as well as interest incurred during construction, are
capitalized. For the three months ended June 30, 1996 and 1995 such interest
was $323,000 and none, respectively. For the six months ended June 30, 1996
and 1995 such interest was $459,000 and none, respectively.
Depreciation is computed generally on a straight-line basis over estimated
useful lives of:
10 to 60 years for buildings
9 to 25 years for presses
3 to 15 years for other equipment
Intangibles consist of the unamortized excess of the cost of acquiring
newspaper operations over the fair market values of the newspapers' tangible
assets at the date of purchase. Identifiable intangible assets, consisting
primarily of lists of advertisers and subscribers and covenants not to
compete, are amortized over periods ranging from three to forty years.
The excess of purchase prices over identifiable assets is amortized over
forty years. Management periodically evaluates the recoverability of
intangible assets by reviewing the current and projected cash flows of each
of its newspaper operations.
Deferred income taxes result from temporary differences between amounts
reported for financial and income tax reporting purposes. See note 4.
Earnings per share are based on the weighted average number of outstanding
shares of common stock and dilutive common stock equivalents (stock options).
2. ACQUISITION
On August 1, 1995, the Company purchased The News and Observer Publishing
Company (N&O) for which it paid $247,000,000 in cash for all the outstanding
common stock of N&O and assumed $117,000,000 of pre-existing N&O funded debt.
An additional $10,000,000 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 recoreded 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.
10
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. ACQUISITION - Continued
N&O publishes 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.
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 approx-
imately $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 half of 1995 as though the acquisition had taken
place on January 1, 1995 (in thousands, except per share amounts):
1995
Revenues $293,754
Net income 15,729
Earnings per common share 0.52
3. LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS
At June 30, 1996 and December 31, 1995 long-term debt consisted of
(in thousands):
June 30, December 31,
1996 1995
Bank Credit Agreement $217,000 $243,000
N&O holdback payable 10,000 10,000
Total 227,000 253,000
Less current portion 10,000 10,000
Total long-term debt $217,000 $243,000
In addition, the Company also has an outstanding letter of credit for
$4,309,000 securing self-insurance workers' compensation reserves.
11
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. LONG-TERM DEBT AND OTHER LONG-TERM OBLIGATIONS - Continued
On July 28, 1995 the Company entered into a bank credit agreement (Credit
Agreement) providing for borrowings up to $310,000,000. In connection with
the August 1, 1995 acquisition of N&O, the Company drew down $138,000,000 of
borrowings and the bank issued a $10,000,000 letter of credit on behalf of
the Company (see note 2). The N&O holdback 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 $7,000,000 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 June 30, 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, maintenance of cash flow and limitations on debt-to-equity ratios,
with which the Company was in compliance at June 30, 1996.
At June 30, 1996 the Company had an outstanding interest rate swap that
effectively converted $50,000,000 of debt under its Credit Agreement to a
fixed rate debt at a rate of 6.0%. The swap expires in November 1998.
The Company makes payments to a counterparty depending on the change in
variable interest rates which are recorded as additions to or reductions of
interest expense.
Other long-term obligations consist of (in thousands):
June 30, December 31,
1996 1995
Postretirement benefits obligation $ 9,250 $ 9,386
Pension obligations 17,975 11,209
Deferred compensation and other 6,762 7,540
Total long-term obligations $33,987 $28,135
12
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME TAXES
Income tax provisions consist of (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Current:
Federal $ 8,366 $ 6,960 $11,414 $10,771
State 964 1,530 1,328 2,364
Deferred:
Federal (805) 188 (806) 165
State 86 13 122 (15)
Income tax provisions $ 8,611 $ 8,691 $12,058 $13,285
The effective tax rate and the statutory federal income tax rate are
reconciled as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
Statutory rate 35.0% 35.0% 35.0% 35.0%
State taxes, net of
federal benefit 3.4 4.7 3.4 4.7
Amortization of intangibles 4.6 0.9 4.7 0.9
Other 0.5 0.3 0.5 0.3
Effective rate 43.5% 40.9% 43.6% 40.9%
13
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME TAXES - Continued
The components of deferred taxes recorded in the Company's Consolidated
Balance Sheet on June 30, 1996 and December 31, 1995 are (in thousands):
1996 1995
Depreciation and amortization $ 56,227 $ 56,468
Partnership losses 7,973 9,034
State taxes 3,049 230
Deferred compensation (17,790) (14,843)
Other 1,661 914
Deferred tax liability (net of $9,378
in 1996 and $9,840 in 1995 reported
as current assets) $ 51,120 $ 51,803
5. INTANGIBLES
Intangibles consist of (in thousands):
June 30, December 31,
1996 1995
Identifiable intangible assets,
primarily customer lists $151,339 $150,530
Excess purchase prices over
identifiable intangible assets 366,196 364,933
Total 517,535 515,463
Less accumulated amortization 95,010 86,073
Intangibles - net $422,525 $429,390
14
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. 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
compensation. Contributions to the plan are made by the Company in amounts
deemed necessary to provide benefits. Plan assets consist primarily of
marketable securities including common stocks, bonds and U.S. government
obligations, and other interest bearing accounts.
The Company also has 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.
Expenses of these plans for the three months ended June 30, 1996 and 1995
were $1,852,000 and $1,320,000, respectively. Expenses for the six months
then ended were $3,666,000 and $3,023,000 in 1996 and 1995, 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
June 30, 1996 and 1995 were $1,151,000 and $981,000, respectively. Contri-
butions for the six months then ended were $2,291,000 and $1,951,000 in 1996
and 1995, respectively.
The Company also provides or subsidizes certain retiree health care and
life insurance benefits. For the three months ended June 30, 1996 and 1995,
postretirement benefit expenses were $60,000 and $150,000, respectively, and
were $120,000 and $300,000 for the six months then ended in 1996 and 1995,
respectively.
15
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. CASH FLOW INFORMATION
Cash provided or used by operations in the six months ended June 30, 1996
and 1995 was affected by changes in certain assets and liabilities as follows
(in thousands):
1996 1995
Increase (decrease) in assets:
Receivables $ (752) $ (7,987)
Inventories (5,550) 2,831
Other assets (2,001) 312
Total (8,303) (4,844)
Increase (decrease) in liabilities:
Accounts payable (1,827) (6,078)
Accrued compensation 1,358 (4,161)
Income taxes 4,622 (3,254)
Other liabilities 926 603
Total 5,079 (12,890)
Net cash changes from changes in
assets and liabilities $ 13,382 $ (8,046)
8. COMMITMENTS AND CONTINGENCIES
The Company guarantees $21,053,000 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.
16
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. COMMON STOCK AND STOCK PLANS
The Company's Class A and Class B common stock participate equally in
dividends. Holders of Class A common stock are entitled to one-tenth of a
vote per share and to elect as a class 25% of the Board of Directors, rounded
up to the nearest whole number. Holders of Class B common stock are entitled
to one vote per share and to elect as a class 75% of the Board of Directors,
rounded down to the nearest whole number. Class B common stock is convert-
ible 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 June 30, 1996, 544,193 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 discre-
tion, 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 1994 Employee Stock Option Plan (1994 Employee Plan) reserves
650,000 Class A shares for issuance to key employees. The terms of this plan
are substantially the same as the terms of the 1987 Employee Plan.
The Company's stock option plan for outside (nonemployee) directors
(Directors' Plan) provides for the issuance of up to 150,000 shares of
Class A common stock. Under the Directors' Plan each outside director is
granted an option at fair market value for 1,500 shares annually. Terms of
the Directors' Plan are similar to the terms of the Employee Plans.
In the 1987 Employee Plan, there are 396,650 options exercisable as of
June 30, 1996. Substantially all of the shares reserved in the plan have
been granted. In the 1994 Employee Plan 370,450 remain for future grants
and 32,975 of the options are exercisable. A total of 752,725 options are
outstanding in the employee plans at average option prices of $18.90 and
$21.96 per share for the 1987 and 1994 plans, respectively. In the
Directors' Plan 67,500 options are outstanding at an average price of $21.92
per share, 40,125 shares were exercisable at June 30, 1996 and 73,500 are
available for future awards.
17
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires
the determination of fair value for certain of the Company's assets, liabili-
ties 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 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 June 30,
1996, it is estimated that the Company could terminate the interest rate swap
agreement with only a nominal gain or loss.
18
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 were used to consummate the purchase of N&O. As a
result, investment income is not expected to be significant over the next
several years.
Newsprint prices have fluctuated substantially during 1995 and 1996.
Declines in the second quarter of 1996 have brought newsprint prices down to
1995 levels and management expects further reductions in the year to
positively impact the Company's operating income. Advertising and
circulation rate increases, coupled with company-wide cost control programs,
have helped mitigate the impact of earlier newsprint price increases. While
the Company intends to continue to pursue these measures where appropriate,
they may not have the same effect on future results.
Second Quarter 1996 Compared to 1995
The Company earned $11.2 million in the second quarter of 1996, down 10.6%
from $12.5 million earned in the same quarter of 1995. Earnings were
affected by several factors, including a lackluster retail advertising
climate in the Company's California and Washington state newspapers and
financing costs associated with the acquisition of N&O.
Net revenues by region were (in thousands):
Second Quarter
1996 1995 % Change
California newspapers $ 76,846 $ 79,887 (3.8)
Northwest newspapers 36,797 35,942 2.4
Carolinas newspapers 39,074 5,866 NM*
Other operations 4,202 2,953 42.3
Total $156,919 $124,648 25.9
* Not meaningful due to N&O acquisition in August 1995.
Net revenues declined $3.0 million at the Company's California newspapers
reflecting the retail advertising climate discussed above. The Company's
three Bee newspapers were also affected by the consolidation in late 1995 of
Macy's and Weinstocks department stores, previously their two largest
advertisers. Advertising revenues declined $3.2 million at the Bee
newspapers and full run run-of-press
19
(ROP) advertising linage, which provides a majority of advertising revenues,
fell 9.5%. Circulation revenues increased $250,000 at the three Bees
primarily due to home-delivery rate increases implemented in the first
quarter.
Revenues at the Company's northwest newspapers increased $855,000. Much of
the increase was attributable to the addition of The Peninsula Gateway in
July 1995 -- contributing $669,000 in revenues in the second quarter of 1996
- -- and greater advertising revenues at the Anchorage Daily News, up $847,000.
These gains were partially offset by lower advertising revenues at The News
Tribune in Tacoma, Washington and lower commercial printing revenues at the
Anchorage Daily News and The News Tribune. Full run ROP linage declined 2.4%
at the major northwest newspapers.
The $33.2 million increase in revenues at the Company's Carolinas news-
papers is largely due to the addition of N&O, whose revenues were $32.5
million. Revenues at the Company's South Carolina newspapers increased 12.6%
over second quarter 1995. Robust growth was recorded in advertising and
circulation revenues, particularly at The (Hilton Head) Island Packet and
Beaufort Gazette. Full run ROP linage increased 12.3% at the South Carolina
dailies.
Revenues from other operations increased $1.2 million, and were up $510,000
or 17.3% excluding Nando.net, the internet publishing company purchased in
the N&O acquisition. Revenue growth was primarily provided by increased
sales by The Newspaper Network and higher commercial printing revenues at
McClatchy Printing Company.
Operating Expenses:
Operating expenses increased 28.4% due to the addition of N&O, and were
held to a 0.3% increase excluding N&O. Declining newsprint prices, beginning
in May, and lower usage held newsprint and supplement costs to a 2.2% or
$493,000 increase excluding N&O. Management expects more favorable newsprint
and supplement cost comparisons in the next two quarters should prices
continue to decline. Other operating costs, which include compensation,
depreciation and amortization and "other operating expenses", declined
$185,000, excluding N&O's expenses, due to company-wide cost controls.
Non-Operating Expenses - Net:
Interest costs in the second quarter were $3.5 million versus interest
income of $1.6 million in 1995. The Company used its cash and investments and
incurred debt to complete the August 1, 1995 purchase of N&O. The Company's
share of earnings from its Ponderay newsprint mill venture was $1.1 million
versus a $350,000 loss in 1995 owing to the earlier newsprint price
increases. As a result of declining newsprint prices, this trend of higher
Ponderay earnings may dissipate in the second half of the year.
The Company's effective tax rate increased to 43.5% versus 40.9% in 1995
primarily due to the nondeductible amortization of intangibles related to the
N&O acquisition. See note 4 to the consolidated financial statements.
20
Six Month Comparisons
The Company earned $15.6 million versus $19.2 million in 1995, down 18.7%.
In addition to factors discussed in the second quarter comparisons above, the
Company incurred higher newsprint costs in the first quarter of 1996.
Net revenues by region were (in thousands):
1996 1995 % Change
California newspapers $151,274 $154,021 (1.8)
Northwest newspapers 70,128 68,131 2.9
Carolinas newspapers 74,020 10,959 NM*
Other operations 7,800 5,335 46.2
Total $303,222 $238,446 27.2
* Not meaningful due to N&O acquisition in August 1995.
Net revenues at the Company's California newspapers declined $2.7 million,
reflecting the conditions discussed above. Advertising revenues at the three
Bee newspapers declined $3.0 million and were partially offset by gains in
circulation revenues.
The $2.0 million increase in revenues at the Company's northwest newspapers
included $1.2 million from The Peninsula Gateway. Revenues at the Anchorage
Daily News increased $1.2 million as advertising revenue growth of $1.6
million, up 5.4%, was offset by a $546,000 decline in commercial printing
revenue. Revenues at the Washington dailies, excluding The Peninsula
Gateway, declined $531,000 or 1.2%, reflecting a soft retail climate.
N&O contributed $61.6 million of the $63.1 million increase in the
Company's Carolinas newspaper revenues. The South Carolina newspapers
posted a $1.5 million or 13.3% gain in revenues over 1995.
Operating Expenses:
Operating expenses were up 30.0%, but increased only 2.4% excluding N&O.
Newsprint and supplement expenses increased 15.0% excluding N&O due largely
to higher prices paid in the first three months of the year. All other
operating expenses declined 0.8% reflecting company-wide cost controls.
Nonoperating Expenses - Net:
The Company incurred $7.0 million in interest expense on debt in 1996 and
earned $3.2 million in interest income on excess cash and investments in
1995. The unfavorable comparison in net interest costs will begin to
dissipate in the third quarter as the Company cycles against the August 1,
1995 acquisition of N&O and continues to repay debt related to the
acquisition.
21
The Company's share of Ponderay earnings was $2.2 million versus a $1.0
million loss in 1995, reflecting higher newsprint prices.
The Company's effective tax rates were 43.6% in 1996 compared to 40.9% in
1995 due mostly to nondeductible amortization related to the N&O acquisition.
See note 4 to the consolidated financial statements.
Liquidity & Capital Resources
The Company's cash and cash equivalent position was $5.1 million versus
$3.3 million at year-end 1995. The Company's cash position is not expected
to change substantially as it continues to use free cash flow to repay debt.
Operations generated $52.3 million of cash and the Company used $26 million
to repay debt. Cash was also used to pay for capital expenditures and pay
dividends. Capital expenditures are projected to be approximately $35.0
million in 1996. See the Company's statement of cash flows at page 6 of this
report.
See notes 1 and 8 to the consolidated financial statements for a discussion
of the Company's commitments to its Ponderay newsprint mill.
See note 3 for a discussion of the Company's long-term obligations. The
Company had $83.0 million of available credit June 30, 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
planned capital expenditures and other investments.
Outlook
The preceding management discussion contains estimates and other forward-
looking statements covering subjects related to financial operating results.
These forward-looking statements, and any other statements going beyond
historical facts that the McClatchy management has discussed, are subject to
risks and uncertainties that could cause actual results to differ. These
include increases in newsprint, printing and distribution costs over
anticipated levels, increased consolidation among major retailers in the
Company's newspaper markets or other events depressing the level of advertis-
ing, an economic downturn in the Company's principal markets or other
occurrences leading to decreased circulation and diminished revenues from
both display and classified advertising.
22
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 :
The Annual Meeting of Stockholders of McClatchy Newspapers, Inc. was held
on May 15, 1996 and stockholders of record on March 18, 1996 approved all
matters submitted for voting as follows:
Votes
For Withheld
Election of Directors of the Board:
Nominees for Class A Directors voted
by Class A stockholders:
Larry Jinks 5,207,538 12,825
Joan F. Lane 5,199,737 20,626
S. Donley Ritchey, Jr. 5,209,580 10,783
Frederick R. Ruiz 5,207,238 13,125
Nominees for Class B Directors voted
by Class B stockholders:
William K. Coblentz 21,890,468
Molly Maloney Evangelisti 21,890,468
William L. Honeysett 21,890,468
Betty Lou Maloney 21,890,468
James B. McClatchy 21,890,468
William E. McClatchy 21,890,468
Gary B. Pruitt 21,890,468
William M. Roth 21,890,468
James P. Smith 21,890,468
H. Roger Tatarian 21,890,468
23
Votes
Broker
Non-
For Against Abstentions Votes
Ratification of appointment of
Deloitte & Touche LLP as the
Company's independent auditors
for 1995 22,410,849 469 1,189 0
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: August 12, 1996 /s/ James P. Smith
James P. Smith
Vice President,
Finance and Treasurer