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, 1994
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 4, 1994:
Class A Common Stock 6,618,022
Class B Common Stock 23,276,789
1 of 19<PAGE>
McCLATCHY NEWSPAPERS, INC.
INDEX TO FORM 10-Q
Page
Part I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheet - September 30, 1994
(unaudited) and December 31, 1993 3
Consolidated Statement of Income for the
Three Months and Nine Months Ended
September 30, 1994 and 1993 (unaudited) 5
Consolidated Statement of Cash Flows for
the Nine Months Ended September 30, 1994
and 1993 (unaudited) 6
Consolidated Statement of Stockholders'
Equity for the Period from January 1,
1993 to September 30, 1994 (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 19<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 84,829 $ 42,326
Short-term investments 9,903
Trade receivables (less
allowances of $1,961 in
1994 and $1,757 in 1993) 47,180 47,859
Other receivables 8,535 1,456
Newsprint, ink and other
inventories 8,405 10,033
Deferred income taxes 11,427 9,672
Other current assets 2,840 1,843
Total current assets 173,119 113,189
Property, plant and
equipment:
Land 18,680 18,057
Buildings and improvements 120,053 120,753
Equipment 295,592 282,082
Construction in progress 20,895 15,893
Total 455,220 436,785
Accumulated depreciation (180,301) (166,460)
Net property, plant and
equipment 274,919 270,325
Intangibles - net 117,471 124,662
Investment in newsprint
mill partnership 3,347 3,977
Other assets 855 13,010
Total assets $ 569,711 $ 525,163
</TABLE>
See notes to consolidated financial statements<PAGE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 14,810 $ 14,043
Accrued compensation 30,816 26,324
Income taxes 3,626 1,117
Unearned revenue 11,628 10,560
Carrier deposits 3,313 3,055
Other accrued liabilities 9,228 8,281
Total current liabilities 73,421 63,380
Long-term obligations 15,082 14,213
Deferred income taxes 50,738 64,047
Commitments and
contingencies (note 8)
Stockholders' equity:
Common stock $.01 par
value:
Class A - authorized
50,000,000 shares, issued
6,624,309 in 1994 and
5,100,450 in 1993 66 51
Class B - authorized
30,000,000 shares, issued
23,276,789 in 1994 and
24,503,789 in 1993 233 238
Additional paid-in capital 61,014 39,472
Retained earnings 369,528 344,133
Treasury stock, 20,000
Class A shares in 1994
and 1993 and 750,000
Class B shares in 1993 (371) (371)
Total stockholders'
equity 430,470 383,523
Total liabilities and
stockholders' equity $ 569,711 $ 525,163
</TABLE>
See notes to consolidated financial statements<PAGE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues - net:
Advertising $ 91,326 $ 86,450 $268,133 $256,031
Circulation 21,224 20,901 63,614 62,720
Other 4,548 3,931 12,918 11,271
Total 117,098 111,282 344,665 330,022
Operating expenses:
Compensation 51,344 49,976 152,421 149,950
Newsprint and
supplements 17,087 14,970 47,661 44,568
Depreciation and
amortization 9,451 8,761 28,482 26,168
Other operating
expenses 21,916 21,179 66,654 65,432
Total 99,798 94,886 295,218 286,118
Operating income 17,300 16,396 49,447 43,904
Nonoperating
expenses
(income):
Interest expense 1 26 6 101
Investment income (971) (146) (1,935) (220)
Partnership losses 1,005 1,300 4,005 4,550
Other - net 14 (5) 45 333
Total 49 1,175 2,121 4,764
Income before
income tax
provision 17,251 15,221 47,326 39,140
Income tax
provision 1,535 7,880 14,696 18,517
Net income $ 15,716 $ 7,341 $ 32,630 $ 20,623
Net income per
common share $ 0.53 $ 0.25 $ 1.11 $ 0.72
Weighted average
number of common
shares 29,949 28,864 29,469 28,843
</TABLE>
See notes to consolidated financial statements<PAGE>
McCLATCHY NEWSPAPERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1994 1993
(Unaudited)
<S> <C> <C>
Cash provided (used) by
operating activities:
Net income $ 32,630 $ 20,623
Reconciliation to net cash
provided:
Depreciation and amortization 28,598 26,308
Deferred taxes (15,064) 4,040
Changes in certain assets and
liabilities - net 17,551 9,127
Partnership losses 4,005 4,550
Other (155) 6
Net cash provided by operating
activities 67,565 64,654
Cash provided (used) by
investing activities:
Proceeds from short-term
investments 21,521
Purchase of short-term
investments (31,424)
Purchase of property, plant and
equipment (26,808) (24,192)
Investment in newsprint mill
partnership (3,375) (2,903)
Other - net 707 80
Net cash used by investing
activities (39,379) (27,015)
Cash provided (used) by
financing activities:
Proceeds from public offering 20,001
Repayment of long-term debt (10,072)
Payment of cash dividends (7,235) (5,685)
Other 1,551 880
Net cash provided (used) by
financing activities 14,317 (14,877)
Net change in cash and cash
equivalents 42,503 22,762
Cash and cash equivalents,
beginning of year 42,326 8,658
Cash and cash equivalents,
end of period $ 84,829 $ 31,420
Other cash flow information:
Cash paid during the period for:
Interest (net of amount
capitalized) $ 16 $ 139
Income taxes (net of refunds) 22,390 12,541
</TABLE>
See notes to consolidated financial statements<PAGE>
<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, 1992 $46 $242 $38,272 $320,110 $(371) $358,299
Net income (9 months) 20,623 20,623
Dividends paid ($.1975 per
share) (5,685) (5,685)
Conversion of 118,000 Class B
to Class A 1 (1)
Issuance of 54,645 Class A
under employee stock plans 1 899 900
Balances, September 30, 1993 48 241 39,171 (371) 374,137
335,048
Net income (3 months) 11,175 11,175
Dividends paid ($.0725 per (2,090) (2,090)
share)
Conversion of 325,000 Class B
to Class A 3 (3)
Issuance of 17,435 Class A
under employee stock plans 301 301
Balances, December 31, 1993 51 238 39,472 344,133 (371) 383,523
Net income (9 months) 32,630 32,630
Dividends paid ($.245 per
share) (7,235) (7,235)
Conversion of 477,000 Class B
to Class A 5 (5)
Issuance of 956,250 Class A to
public 9 19,992 20,001
Issuance of 90,609 Class A
under employee stock plans 1 1,550 1,551
Balances, September 30, 1994 $66 $233 $61,014 $369,528 $(371) $430,470
/TABLE
<PAGE>
See notes to consolidated financial statements<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.
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany items and
transactions have been eliminated. 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 except for the following:
- Recording of $768,000 of costs associated with the closure of the
Company's monthly Senior Spectrum tabloids in March 1994,
- Recording of a $5,134,000 credit to the tax provision in September 1994
related to the settlement of tax assessments (see note 4), and
- Recording of a $1,088,000 charge to the tax provision in July 1993
related to retroactive adjustments for 1993 tax legislation (see note
4).
Such financial statements are not necessarily indicative of the results
to be expected for the full year.
Revenue recognition - Advertising revenues are recorded when the
advertisement is 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.
Short-term investments consist of a certificate of deposit of $4,910,000
maturing on January 25, 1995 which will be held to maturity and is valued at
amortized cost, and a treasury note of $4,992,969 maturing on July 31, 1996
which is available for sale and is recorded at cost which approximates
market value.
Concentrations of credit risks - Financial instruments which potentially
subject the Company to concentrations of credit risks are principally cash
and cash equivalents, short-term investments and trade accounts receivables.
Cash and cash equivalents and short-term investments are placed with various
high-credit-quality institutions and are invested in the highest rated
commercial paper, certificates of deposit and government securities.
Accounts receivable 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 receivable. <PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES - Continued
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 $2,289,000 at September 30, 1994 and $1,460,000 at December 31,
1993.
Property, plant and equipment are stated at cost. Major renewals and
betterments, as well as interest incurred during construction, are
capitalized. For three months and six months ended September 30, 1994 and
1993 such interest was nominal.
Depreciation is computed generally on a straight-line basis over
estimated useful lives of:
- 10 to 60 years for buildings
- 9 to 20 years for presses
- 3 to 10 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 twenty-five 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 profitability 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 common stock equivalents (stock
options). In May 1994, the number of outstanding shares increased by
956,250 shares as a result of a stock offering to the public.
See note 9.<PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. 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 own
and operate a newsprint mill in the State of Washington. The Company has
guaranteed certain debt (see note 8) and has committed to take 28,400 metric
tons of annual production on a "take-if-tendered" basis until March 1, 2001.
The Company purchased $9,167,000 and $8,925,000 of newsprint from Ponderay
in the nine months ended September 30, 1994 and 1993, respectively. For the
three months ended September 30, Ponderay net revenues and net losses were
$25,368,000 and $8,641,000 in 1994 and $23,603,000 and $10,409,000 in 1993.
For the nine months ended September 30, net revenues and net losses were
$72,348,000 and $30,794,000 in 1994 and $69,411,000 and $34,513,000 in 1993.
3. LONG-TERM OBLIGATIONS
Long-term obligations consist of (in thousands):
September 30, December 31,
1994 1993
Long-term debt:
Installment note $ 60
Less current portion 60
Total long-term debt -
Postretirement benefits
obligation $ 9,744 9,142
Other long-term
obligations 5,338 5,071
Total long-term
obligations $ 15,082 $ 14,213
Long-term obligations mature as follows (in thousands):
Year Ending September 30,
1996 $ 1,065
1997 788
1998 611
1999 479
Thereafter 12,139
Total $ 15,082
The Company has an outstanding letter of credit for $4,861,000.
Other long-term obligations consist primarily of deferred compensation
and supplemental retirement benefits.<PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME TAX PROVISIONS
Income tax provisions consist of (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Current:
Federal $ 7,960 $ 4,754 $ 22,620 $11,911
State 4,796 955 7,140 2,566
Deferred:
Federal (11,283) 2,084 (15,006) 3,801
State 62 87 (58) 239
Income tax provision $ 1,535 $ 7,880 $ 14,696 $18,517
Deferred income tax provisions result from (in thousands):
Depreciation and
amortization $ (3,759) $ 2,006 $ (6,194) $ 3,395
Partnership losses (327) 804 (595) 1,732
State taxes (509) 71 (794) 68
Deferred compensation (1,299) (827) (2,312) (1,545)
Deductible deposits (3,954) (3,954)
Other (1,373) 117 (1,215) 390
Total $(11,221) $ 2,171 $(15,064) $ 4,040
The effective tax rate and the statutory federal income tax
rate are reconciled as follows:
Statutory rate 35.0% 35.0% 35.0% 35.0%
State taxes, net
of federal benefit
4.4 4.6 4.7 4.8
Amortization of
intangibles 1.8 4.0 1.8 3.9
Impact of
retroactive tax rate
adjustments - 7.2 - 2.2
Tax settlements (29.8) (10.8)
Other (2.5) 1.0 0.4 1.4
Effective rate 8.9% 51.8% 31.1% 47.3%
/TABLE
<PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INCOME TAX PROVISIONS - Continued
During September 1994, the Company settled disputes with the
Internal Revenue Service and the California Franchise Tax Board
involving examinations of the Company's tax returns. The principal
issues related to losses of non-newspaper operations from 1982 through
1987, and to the amortization of intangible assets acquired from 1986
through 1991. The settlements resulted in a $5,134,000 increase in net
earnings (recorded as a reduction to the 1994 income tax provision). In
addition, the Company has recorded a net state tax refund receivable of
$6,952,000 in current assets, which was previously included in other
long-term assets.
On August 2, 1993 new federal tax legislation was enacted which,
among other things, increased the federal corporate tax rate to 35% from
34%, retroactive to January 1, 1993. The liability method of accounting
for taxes requires that the effect of this rate increase on current and
cumulative deferred taxes be reflected in the period in which the law
was enacted. Accordingly, the Company recorded an adjustment of
$1,088,000 in the third quarter. Of this amount, $239,000 related to
higher taxes on earnings through June 30, 1993 and $849,000 was required
to adjust the prior year cumulative deferred taxes.
The components of deferred taxes recorded in the Company's
Balance Sheet on September 30, 1994 and December 31, 1993 are (in
thousands):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Depreciation and amortization $ 39,323 $45,517
Partnership losses 10,376 10,971
Deductible deposits - 3,954
State taxes 895 1,689
Deferred compensation (13,633) (11,321)
Other 2,350 3,565
Deferred tax liability (net of $11,427 in
1994 and $9,672 in 1993 reported as current
assets) $ 39,311 $ 54,375
/TABLE
<PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INTANGIBLES
Intangibles consist of (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
<S> <C> <C>
Identifiable intangible
assets, primarily customer $ 130,011 $ 132,881
lists
Excess purchase prices over
identifiable intangible
assets 64,456 64,560
Total 194,467 197,441
Less accumulated amortization 76,996 72,779
Intangibles - net $ 117,471 $ 124,662
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (the 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 September 30, 1994 and
1993 were $1,784,000 and $1,216,000, respectively. Expenses for the nine
months then ended were $4,672,000 and $3,983,000 in 1994 and 1993,
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
September 30, 1994 and 1993 were $998,000 and $970,000, respectively.
Contributions for the nine months then ended were $2,938,000 and $2,655,000
in 1994 and 1993, respectively.
The Company also provides or subsidizes certain retiree health care and
life insurance benefits. For the three months ended September 30, 1994 and
1993, postretirement benefit expenses were $225,000, and for the nine months
then ended were $675,000.<PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. CASH FLOW INFORMATION
Cash provided or used by operations in the nine months ended September
30, 1994 and 1993 was affected by changes in certain assets and liabilities
as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
<S>
Increase (decrease) in assets: <C> <C>
Trade receivables $ (679) $ (3,745)
Inventories (1,628) 1,882
Other assets (4,079) (5)
Total (6,386) (1,868)
Increase (decrease) in liabilities:
Accounts payable 767 (550)
Accrued compensation 4,492 3,090
Income taxes 2,509 1,541
Other liabilities 3,397 3,178
Total 11,165 7,259
Net cash increase from changes in
assets and liabilities $ 17,551 $ 9,127
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company guarantees $21,875,000 of bank debt related primarily to its
joint venture in the Ponderay newsprint mill.
There are libel and other legal actions that have arisen in the ordinary
course of business and are pending against the Company. Management
believes, after reviewing such actions with counsel, that the outcome of
pending actions will not have a material adverse effect on the Company's
consolidated results of operations or financial position.
9. COMMON STOCK AND STOCK PLANS
On May 9, 1994 the Company filed a Form S-3 with the Securities and
Exchange Commission registering 1,375,000 (before over-allotments) shares of
Class A common stock which were sold by the Company and certain stockholders
in a combined primary and secondary offering to the public. Selling
stockholders converted 625,000 shares of Class B common to Class A common
stock which were sold in the offering. The Company converted 750,000 Class
B shares held in treasury to Class A shares and sold them, along with an
additional 206,250 Class A shares to cover over-allotments in the offering.
As a result of the offering, the number of outstanding common shares
increased by 956,250.<PAGE>
McCLATCHY NEWSPAPERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. COMMON STOCK AND STOCK PLANS - Continued
The Company's Class A and Class B common stock participate equally in
dividends. Holders of Class A common stock are entitled to one-tenth of a
vote per share and to elect as a class 25% of the Board of Directors,
rounded up to the nearest whole number. Holders of Class B common stock are
entitled to one vote per share and to elect as a class 75% of the Board of
Directors, rounded down to the nearest whole number. Class B common stock
is convertible at the option of the holder into Class A common stock on a
share-for-share basis.
The Company's Amended Employee Stock Purchase Plan (the Purchase Plan)
reserved 1,500,000 shares of Class A common stock for issuance to employees.
Eligible employees may purchase shares at 85% of "fair market value" (as
defined) through payroll deductions. The Purchase Plan can be automatically
terminated by the Company at any time. As of September 30, 1994, 430,977
shares of Class A common stock have been issued under the Purchase Plan.
The Company's 1987 Stock Option Plan (the Employee Plan), as amended,
reserved 600,000 shares of Class A common stock for issuance to key
employees. Options are granted at the market price of the Class A common
stock on the date of the grant. The options vest in installments over four
years, and once vested are exercisable up to ten years from the date of
award. Although the Employee Plan permits the Company, at its sole
discretion, to settle unexercised options by making payments to the option
holder of stock appreciation rights (SARs), the Company does not intend to
avail itself of this alternative except in limited circumstances. At
September 30, 1994 there were 520,650 options outstanding to purchase Class
A common stock at an average price of $18.94 per share. There are 261,725
options exercisable and 650 shares are available for future awards.
On January 26, 1994 the Board of Directors adopted the 1994 Employee
Stock Option Plan reserving 650,000 Class A shares for issuance to key
employees. The terms of this plan are substantially the same as the terms
of the Employee Plan and no shares have been granted under the new plan.
In July 1990, the Company adopted a stock option plan for outside
(nonemployee) directors (the Directors' Plan) providing 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 Plan and as of September 30, 1994 options for 55,500 shares at
an average of $21.15 per share had been granted. There are 26,250 options
exercisable as of September 30, 1994.<PAGE>
Item 2 - Management's Discussion And Analysis Of Results Of Operations And
Financial Condition
Recent Events
On May 9, 1994 the Company filed a Form S-3 with the Securities and
Exchange Commission registering 1,375,000 (before over-allotments) shares of
Class A common stock which were sold by the Company and certain stockholders
in a combined primary and secondary offering to the public. Selling
stockholders converted 625,000 shares of Class B common to Class A common
stock which were sold in the offering. The Company converted 750,000 Class
B shares held in treasury to Class A shares and sold them, along with an
additional 206,250 Class A shares to cover over-allotments in the offering.
As a result of the offering, the number of outstanding common shares
increased by 956,250.
During September 1994, the Company settled disputes with the Internal
Revenue Service and the California Franchise Tax Board involving
examinations of the Company's tax returns. The principal issues related to
losses of non-newspaper operations from 1982 through 1987, and to the
amortization of intangible assets acquired from 1986 through 1991. The
settlements resulted in a $5,134,000 increase in net earnings (recorded as a
reduction to the 1994 income tax provision).
Third Quarter Comparisons
Excluding the $5.1 million favorable tax settlement discussed above, net
income in the third quarter of 1994 increased to $10.6 million compared to
1993 income of $7.3 million. Net income including the tax adjustment was
$15.7 million or 53 cents per share. Much of this increase was fueled by an
improving economy in Northern California where three of the Company's
largest newspapers are located.
About ninety percent of the Company's advertising revenues are generated
by seven of the Company's nineteen newspapers. Advertising revenues
improved 5.6% over the 1993 quarter to $91.3 million largely due to rate and
volume increases at six of these newspapers. Rate increases were generally
implemented in the first quarter of 1994. Full run "run-of-press" (ROP)
advertising linage, which is found in the body of a newspaper and generates
a majority of advertising revenues, increased 3.5% over the 1993 quarter. In
particular, classified and national advertising activity were up in the
quarter.
Advertising in editions of the newspapers zoned for particular
neighborhoods, known as part run ROP, increased 6.5% while advertising in
products delivered to nonsubscribers of the newspapers, known as total-
market-coverage (TMC) products, declined 3.4% at the seven largest
newspapers. Linage in the Company's twelve other newspapers increased 3.6%.
Circulation revenues mirrored the increase in the number of subscribers
to the Company's newspapers as most of the newspapers have chosen not to
increase subscription prices in 1994. Revenues increased 1.5% to $21.2
million. The average number of paid daily subscribers was up 0.9% over the
1993 quarter and Sunday subscribers increased 1.6%.
Other revenues continue to rise primarily due to increased activity in
commercial printing.<PAGE>
The increase in operating expenses was largely driven by two newsprint
price increases. Newsprint and supplement costs were up 14.5% reflecting
price hikes in May and August 1994 and, to a lesser degree, greater usage of
newsprint. Compensation expenses rose 2.7%, mostly due to rising costs of
fringe benefits. The 7.9% increase in depreciation and amortization related
mostly to new production equipment at The Sacramento Bee, while increases in
other operating expenses generally reflected the impact of inflation.
The Company benefitted from a $825,000 increase in investment income
earned on cash equivalents and short-term investments. In addition, the
Company recorded lower losses from its joint venture in the Ponderay
newsprint mill due to rising newsprint prices.
Excluding the $5.1 million tax settlement, the effective tax rate in the
third quarter of 1994 was 38.7% compared to 51.8% in 1993. In the 1994
third quarter, the Company adjusted its annual effective tax rate from 43.8%
to 41.9%, primarily due to higher deductibility of amortization. In August
1993 federal tax laws were passed which increased the corporate tax rate to
35% retroactive to January 1993. The Company recorded tax adjustments of
$1,088,000 representing additional taxes on income in the first half of 1993
and the revaluing of cumulative deferred taxes. See note 4 to the financial
statements.
Nine Month Comparisons
Net income for the nine month period was up 58.2% to $32.6 million
($27.5 million, up 26.7% excluding tax adjustments in each year). In
general, the nine month results were affected by the same factors discussed
in the quarterly comparisons.
Revenues increased 4.4% to $344.7 million. Advertising revenues gained
4.7% to $268.1 millon and circulation revenues were $63.6 million, up 1.4%.
Increased commercial printing helped push other revenues up 14.6% to $12.9
million.
Advertising volumes at the seven largest daily newspapers increased as
follows: full run ROP linage increased 1.6% as classified and national
gains offset a 3.0% decline in retail linage, part run ROP was up 3.0%, TMC
linage up 4.2% and the number of preprinted inserts distributed through the
newspapers rose 12.3% over 1993. Advertising at the Company's twelve other
newspapers increased 6.5%.
The number of subscribers to the Company's daily newspapers increased
1.3% on average and Sunday subscribers were up 1.6%.
Operating expenses were held to 3.2% increase reflecting five months
(January through May) without newsprint price increases. Newsprint costs
increased 6.9% due mostly to the May and August price hikes. Remaining
operating expenses increased 2.5% and were generally affected by those
factors discussed in the third quarter comparisons.
Investment income on cash equivalents and short-term investments
increased $1.7 million, while the Company's share of losses from the
Ponderay mill declined $545,000.
The effective tax rate was 31.1% in 1994 versus 47.3% in 1993 and were
impacted in each year by the adjustments discussed in the quarterly
comparisons. See note 4 to the financial statements.<PAGE>
Liquidity & Capital Resources
The Company generated $67.6 million in cash from operations in the nine
months ended September 30, 1994, received net proceeds of $20.0 million from
the May offering and received $21.5 million in proceeds from maturing debt
securities. These funds were used to purchase $26.8 million in equipment,
building improvements and other capital expenditures, to purchase $31.4
million in short-term investments and to fund advances to Ponderay and
dividend payments to stockholders. Cash and cash equivalents increased
$42.5 million to $84.8 million at September 30 and short-term investments
totalled $9.9 million. Capital expenditures are expected to total $38.0
million in 1994.
The Company has a partnership interest in a newsprint mill (Ponderay)
which is expected to incur losses over the next several years. These losses
are expected to diminish as newsprint prices increase. The Company
presently intends, when necessary, to contribute funds to help finance its
share of these losses. See note 2 and 8 to the consolidated financial
statements for a discussion of the Company's commitments to the joint
venture.
See note 3 for a discussion of the Company's long-term obligations.
Management is of the opinion that operating cash flow, cash and cash
equivalent balances and short-term investments are adequate to meet the
liquidity needs of the Company, including currently planned capital
expenditures and other investments.<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 - Booth Gardner was appointed by President
Clinton to serve as United States Ambassador to the General
Agreement on Tariffs and Trade (GATT) meeting in Geneva,
Switzerland. As such, he is no longer able to serve on
Boards of Directors of for-profit organizations and,
accordingly, resigned as a director of the Company effective
September 30, 1994.
Item 6. Exhibits and Reports on Form 8-K - Exhibit 27, Financial
Data Schedule, contains financial information extracted from
SEC filing Form 10-Q for the period ending September 30,
1994 and is qualified in its entirety by reference to such
financial statements.
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 4, 1994 /s/ James P. Smith
James P. Smith
Vice President,
Finance and Treasurer<PAGE>
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This schedule contains financial information extracted from SEC filing Form 10-Q
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