mniq20710q.htm
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: July 1,
2007 |
|
or
|
|
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
|
|
|
[ ]
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
|
|
|
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
|
52-2080478
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
2100
"Q" Street, Sacramento, CA
|
|
95816
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
916-321-1846
|
Registrant's
telephone number, including area
code
|
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 (check
one): [
X ] Yes [
] No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (check one): Large accelerated filer
[X]
Accelerated
filer [ ] Non-accelerated
filer [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12-b
of the Exchange Act). [ ]
Yes [X] No
As
of
August 8, 2007, the registrant had shares of common stock as listed below
outstanding:
Class
A Common Stock
|
56,985,873
|
Class
B Common Stock
|
25,112,430
|
THE
McCLATCHY COMPANY
INDEX
TO FORM 10-Q
Part
I - FINANCIAL INFORMATION
|
|
Page
|
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Item
1 - Financial Statements (unaudited):
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
Consolidated
Statement of
Income for the three and six
months ended July 1, 2007 and June 25, 2006
|
|
|
3
|
|
|
|
|
|
|
Consolidated
Statement of Cash Flows for the six months ended
July 1, 2007 and June
25, 2006
|
|
|
4
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
6
|
|
|
|
|
|
|
Item
2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
|
|
|
19
|
|
|
|
|
|
|
Item
3 - Quantitative and Qualitative Disclosures About
Market Risk
|
|
|
31
|
|
|
|
|
|
|
Item
4 - Controls and Procedures
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
Item
4 - Submission Of Matters To A Vote Of Security
Holders
|
|
|
33
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
35
|
|
PART
I - FINANCIAL
INFORMATION
Item
1 - FINANCIAL STATEMENTS
THE
MCCLATCHY COMPANY
|
|
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
July
1,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
25,271
|
|
|
$ |
19,581
|
|
Trade
receivables (less allowance of
|
|
|
|
|
|
|
|
|
$11,682
in 2007 and $12,732 in 2006)
|
|
|
271,332
|
|
|
|
311,785
|
|
Other
receivables
|
|
|
24,083
|
|
|
|
36,477
|
|
Newsprint,
ink and other inventories
|
|
|
40,813
|
|
|
|
52,097
|
|
Deferred
income taxes
|
|
|
47,055
|
|
|
|
248,753
|
|
Prepaid
income taxes
|
|
|
92,640
|
|
|
|
88,836
|
|
Land
and other assets held for sale
|
|
|
25,669
|
|
|
|
231,029
|
|
Other
current assets
|
|
|
20,128
|
|
|
|
23,192
|
|
Newspaper
assets held for sale
|
|
|
-
|
|
|
|
563,589
|
|
|
|
|
546,991
|
|
|
|
1,575,339
|
|
PROPERTY,
PLANT AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Land
|
|
|
205,042
|
|
|
|
204,692
|
|
Building
and improvements
|
|
|
391,883
|
|
|
|
382,206
|
|
Equipment
|
|
|
833,947
|
|
|
|
811,173
|
|
Construction
in progress
|
|
|
21,895
|
|
|
|
36,401
|
|
|
|
|
1,452,767
|
|
|
|
1,434,472
|
|
Less
accumulated depreciation
|
|
|
(497,530 |
) |
|
|
(458,496 |
) |
|
|
|
955,237
|
|
|
|
975,976
|
|
INTANGIBLE
ASSETS:
|
|
|
|
|
|
|
|
|
Identifiable
intangibles -net
|
|
|
1,339,135
|
|
|
|
1,369,046
|
|
Goodwill-net
|
|
|
3,586,969
|
|
|
|
3,559,828
|
|
|
|
|
4,926,104
|
|
|
|
4,928,874
|
|
INVESTMENTS
AND OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Investments
in unconsolidated companies
|
|
|
499,458
|
|
|
|
520,213
|
|
Income
tax refund
|
|
|
200,998
|
|
|
|
-
|
|
Land
held for sale
|
|
|
186,365
|
|
|
|
-
|
|
Prepaid
pension assets
|
|
|
29,332
|
|
|
|
32,457
|
|
Other
|
|
|
20,296
|
|
|
|
21,851
|
|
|
|
|
936,449
|
|
|
|
574,521
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
7,364,781
|
|
|
$ |
8,054,710
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
THE
MCCLATCHY COMPANY
|
|
CONSOLIDATED
BALANCE SHEET (UNAUDITED)
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
July
1,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
Current
portion of bank debt
|
|
$ |
-
|
|
|
$ |
530,000
|
|
Accounts
payable
|
|
|
101,766
|
|
|
|
139,501
|
|
Accrued
compensation
|
|
|
108,060
|
|
|
|
135,363
|
|
Income
taxes
|
|
|
-
|
|
|
|
47,330
|
|
Unearned
revenue
|
|
|
87,282
|
|
|
|
82,524
|
|
Accrued
interest
|
|
|
33,677
|
|
|
|
33,697
|
|
Accrued
dividends
|
|
|
14,769
|
|
|
|
14,727
|
|
Other
accrued liabilities
|
|
|
39,944
|
|
|
|
45,166
|
|
Newspaper
liabilities held for sale
|
|
|
-
|
|
|
|
83,806
|
|
|
|
|
385,498
|
|
|
|
1,112,114
|
|
NON-CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,677,338
|
|
|
|
2,746,669
|
|
Deferred
income taxes
|
|
|
708,314
|
|
|
|
706,893
|
|
Pension
and postretirement obligations
|
|
|
313,363
|
|
|
|
311,127
|
|
Other
long-term obligations
|
|
|
106,450
|
|
|
|
74,283
|
|
|
|
|
3,805,465
|
|
|
|
3,838,972
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock $.01 par value:
|
|
|
|
|
|
|
|
|
Class
A - authorized 200,000,000 shares,
|
|
|
|
|
|
|
|
|
issued
56,907,576 in 2007 and 55,795,162 in 2006
|
|
|
569
|
|
|
|
557
|
|
Class
B - authorized 60,000,000 shares,
|
|
|
|
|
|
|
|
|
issued
25,191,397 in 2007 and 26,116,397 in 2006
|
|
|
252
|
|
|
|
261
|
|
Additional
paid-in capital
|
|
|
2,193,132
|
|
|
|
2,182,544
|
|
Retained
earnings
|
|
|
1,028,546
|
|
|
|
1,016,023
|
|
Treasury
stock, 3,029 shares at cost
|
|
|
(122 |
) |
|
|
-
|
|
Accumulated
other comprehensive loss
|
|
|
(48,559 |
) |
|
|
(95,761 |
) |
|
|
|
3,173,818
|
|
|
|
3,103,624
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
7,364,781
|
|
|
$ |
8,054,710
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
|
|
|
|
|
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
|
June
25,
|
|
|
July
1,
|
|
|
June
25,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
REVENUES
- NET:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$ |
488,277
|
|
|
$ |
183,683
|
|
|
$ |
965,300
|
|
|
$ |
350,017
|
|
Circulation
|
|
|
69,707
|
|
|
|
23,504
|
|
|
|
141,587
|
|
|
|
47,268
|
|
Other
|
|
|
22,043
|
|
|
|
4,813
|
|
|
|
39,698
|
|
|
|
9,178
|
|
|
|
|
580,027
|
|
|
|
212,000
|
|
|
|
1,146,585
|
|
|
|
406,463
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
228,959
|
|
|
|
84,103
|
|
|
|
465,283
|
|
|
|
169,842
|
|
Newsprint
and supplements
|
|
|
72,186
|
|
|
|
27,267
|
|
|
|
147,603
|
|
|
|
53,531
|
|
Depreciation
and amortization
|
|
|
38,357
|
|
|
|
9,973
|
|
|
|
76,190
|
|
|
|
19,860
|
|
Other
operating expenses
|
|
|
123,144
|
|
|
|
38,396
|
|
|
|
252,740
|
|
|
|
75,690
|
|
|
|
|
462,646
|
|
|
|
159,739
|
|
|
|
941,816
|
|
|
|
318,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
117,381
|
|
|
|
52,261
|
|
|
|
204,769
|
|
|
|
87,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-OPERATING
(EXPENSES) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(49,556 |
) |
|
|
-
|
|
|
|
(103,341 |
) |
|
|
-
|
|
Interest
income
|
|
|
42
|
|
|
|
15
|
|
|
|
106
|
|
|
|
28
|
|
Equity
income (losses) in unconsolidated companies, net
|
|
|
(11,198 |
) |
|
|
496
|
|
|
|
(20,947 |
) |
|
|
892
|
|
Other
- net
|
|
|
791
|
|
|
|
(38 |
) |
|
|
743
|
|
|
|
(45 |
) |
|
|
|
(59,921 |
) |
|
|
473
|
|
|
|
(123,439 |
) |
|
|
875
|
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE
INCOME TAX PROVISION
|
|
|
57,460
|
|
|
|
52,734
|
|
|
|
81,330
|
|
|
|
88,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX PROVISION
|
|
|
22,929
|
|
|
|
20,545
|
|
|
|
32,286
|
|
|
|
34,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM CONTINUING OPERATIONS
|
|
|
34,531
|
|
|
|
32,189
|
|
|
|
49,044
|
|
|
|
53,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM DISCONTINUED OPERATIONS - NET OF INCOME TAXES
|
|
|
705
|
|
|
|
11,947
|
|
|
|
(4,778 |
) |
|
|
17,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
35,236
|
|
|
$ |
44,136
|
|
|
$ |
44,266
|
|
|
$ |
71,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.42
|
|
|
$ |
0.69
|
|
|
$ |
0.60
|
|
|
$ |
1.15
|
|
Income
(loss) from discontinued operation
|
|
|
0.01
|
|
|
|
0.25
|
|
|
|
(0.06 |
) |
|
|
0.39
|
|
Net
income per share
|
|
$ |
0.43
|
|
|
$ |
0.94
|
|
|
$ |
0.54
|
|
|
$ |
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.42
|
|
|
$ |
0.69
|
|
|
$ |
0.60
|
|
|
$ |
1.15
|
|
Income
(loss) from discontinued operation
|
|
|
0.01
|
|
|
|
0.25
|
|
|
|
(0.06 |
) |
|
|
0.38
|
|
Net
income per share
|
|
$ |
0.43
|
|
|
$ |
0.94
|
|
|
$ |
0.54
|
|
|
$ |
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
81,976
|
|
|
|
46,771
|
|
|
|
81,931
|
|
|
|
46,753
|
|
Diluted
|
|
|
82,037
|
|
|
|
46,985
|
|
|
|
82,010
|
|
|
|
47,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED)
|
|
(In
thousands)
|
|
|
|
Six
Months Ended
|
|
|
|
July
1,
|
|
|
June
25,
|
|
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
49,044
|
|
|
$ |
53,970
|
|
Reconciliation
to net cash provided by continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
76,190
|
|
|
|
19,860
|
|
Contribution
to pension plans
|
|
|
-
|
|
|
|
(31,545 |
) |
Employee
benefit expense
|
|
|
16,956
|
|
|
|
8,710
|
|
Stock
compensation expense
|
|
|
4,292
|
|
|
|
3,621
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
(2,718 |
) |
Equity
loss (income) in unconsolidated companies
|
|
|
20,947
|
|
|
|
(892 |
) |
Other
|
|
|
2,735
|
|
|
|
115
|
|
Changes
in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
40,453
|
|
|
|
2,254
|
|
Inventories
|
|
|
11,279
|
|
|
|
(158 |
) |
Other
assets
|
|
|
7,537
|
|
|
|
(8,930 |
) |
Accounts
payable
|
|
|
(31,340 |
) |
|
|
(11,711 |
) |
Accrued
compensation
|
|
|
(26,573 |
) |
|
|
(1,714 |
) |
Income
taxes
|
|
|
(44,580 |
) |
|
|
24,817
|
|
Other
liabilities
|
|
|
(8,810 |
) |
|
|
1,701
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities of continuing
operations
|
|
|
118,130
|
|
|
|
57,380
|
|
Net
cash provided by operating activities of discontinued
operations
|
|
|
3,340
|
|
|
|
28,530
|
|
Net
cash provided by operating activities
|
|
|
121,470
|
|
|
|
85,910
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(28,340 |
) |
|
|
(18,955 |
) |
Proceeds
from sale of equipment
|
|
|
19,356
|
|
|
|
-
|
|
Equity
investments and other - net
|
|
|
(806 |
) |
|
|
206
|
|
Net
cash used by investing activities of continuing operations
|
|
|
(9,790 |
) |
|
|
(18,749 |
) |
|
|
|
|
|
|
|
|
|
Proceeds
from sale of newspaper
|
|
|
522,922
|
|
|
|
-
|
|
Other
|
|
|
(4,837 |
) |
|
|
(5,103 |
) |
Net
cash provided (used) by investing activities of discontinued
operations
|
|
|
518,085
|
|
|
|
(5,103 |
) |
Net
cash provided (used) by investing activities
|
|
|
508,295
|
|
|
|
(23,852 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments
of term bank debt
|
|
|
(350,000 |
) |
|
|
-
|
|
Net
borrowings (repayments) from revolving bank debt
|
|
|
(250,508 |
) |
|
|
109,000
|
|
Net
repayments from commercial paper
|
|
|
-
|
|
|
|
(154,200 |
) |
Payment
of cash dividends
|
|
|
(29,495 |
) |
|
|
(16,842 |
) |
Other
- principally stock issuances
|
|
|
5,928
|
|
|
|
2,831
|
|
Net
cash used by financing activities
|
|
|
(624,075 |
) |
|
|
(59,211 |
) |
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
5,690
|
|
|
|
2,847
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
19,581
|
|
|
|
3,052
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
25,271
|
|
|
$ |
5,899
|
|
|
|
|
|
|
|
|
|
|
OTHER
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Income
taxes (net of refunds)
|
|
$ |
82,033
|
|
|
$ |
18,120
|
|
Interest
(net of capitalized interest)
|
|
$ |
98,319
|
|
|
$ |
2,719
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements
|
|
|
|
|
|
|
|
|
THE
McCLATCHY COMPANY
|
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
|
|
(In
thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Par
Value
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Class
A
|
|
|
Class
B
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES,
DECEMBER 31, 2006
|
|
$ |
557
|
|
|
$ |
261
|
|
|
$ |
2,182,544
|
|
|
$ |
1,016,023
|
|
|
$ |
(95,761 |
) |
|
$ |
-
|
|
|
$ |
3,103,624
|
|
Adoption
of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,218 |
) |
|
|
|
|
|
|
|
|
|
|
(2,218 |
) |
ADJUSTED
BALANCES, JANUARY 1, 2007
|
|
|
557
|
|
|
|
261
|
|
|
|
2,182,544
|
|
|
|
1,013,805
|
|
|
|
(95,761 |
) |
|
|
-
|
|
|
|
3,101,406
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,266
|
|
|
|
|
|
|
|
|
|
|
|
44,266
|
|
Pension
amortization from other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,132
|
|
|
|
|
|
|
|
2,132
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,398
|
|
Adjustment
to eliminate minimum pension
liability
related to Star Tribune
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,070
|
|
|
|
|
|
|
|
45,070
|
|
Dividends
declared ($.36 share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,525 |
) |
|
|
|
|
|
|
|
|
|
|
(29,525 |
) |
Conversion
of 925,000 Class B shares to
Class A shares
|
|
|
9
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Issuance
of 228,109 Class A shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
stock plans
|
|
|
3
|
|
|
|
|
|
|
|
5,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,750
|
|
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,541
|
|
Tax
benefit from stock plans
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122 |
) |
|
|
(122 |
) |
BALANCES,
JULY 1, 2007
|
|
$ |
569
|
|
|
$ |
252
|
|
|
$ |
2,193,132
|
|
|
$ |
1,028,546
|
|
|
$ |
(48,559 |
) |
|
$ |
(122 |
) |
|
$ |
3,173,818
|
|
THE
McCLATCHY COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1. SIGNIFICANT
ACCOUNTING POLICIES
|
|
The
McClatchy Company (the "Company") is the third largest newspaper company in
the
United States, with 31 daily newspapers and approximately 50 non-dailies. Twenty
of its daily newspapers were acquired on June 27, 2006 in the Knight Ridder
acquisition (the "Acquisition") – see Note 2. McClatchy also operates
leading local websites and direct marketing operations in each of its markets
which complement its newspapers and extend its audience reach in each
market. McClatchy-owned newspapers include The Miami
Herald, The Sacramento Bee, the (Fort Worth)
Star-Telegram, The Kansas City Star, The
Charlotte Observer, and The (Raleigh) News &
Observer.
McClatchy
also has a portfolio of premium digital assets. Its leading local websites
offer
users information, comprehensive news, advertising, e-commerce and other
services. The Company owns and operates McClatchy Interactive, an
interactive operation that provides websites with content, publishing tools
and
software development. McClatchy operates Real Cities, the largest
national advertising network of local news websites and owns 14.4% of
CareerBuilder, the nation’s largest online job site. McClatchy also
owns 25.6% of Classified Ventures, a newspaper industry partnership that offers
classified websites such as the nation’s number two online auto website,
cars.com, and the number one rental site, apartments.com.
The
consolidated financial statements include the Company and its
subsidiaries. Significant intercompany items and transactions are
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 (consisting of normal recurring
items, except as discussed in Note 2 and an adjustment to record the settlement
of litigation by a company in which the Company is an investor as discussed
in
Note 3) to present fairly the Company's financial position, results of
operations, and cash flows for the interim periods presented. The
financial statements contained in this report are not necessarily indicative
of
the results to be expected for the full year.
Discontinued
operations - On March 5, 2007, the Company sold the (Minneapolis)
Star Tribune newspaper and other publications and websites related to
the newspaper to an entity affiliated with Avista Capital Partners for $530.0
million. In addition, the Company expects a cash income tax refund
equal to approximately $201 million related to the sale in 2008. The
results of Star Tribune's operations, including interest expense
directly attributable to the Star Tribune, have been recorded as
discontinued operations in all periods presented.
Revenue
recognition - The Company recognizes revenues from advertising placed
in a newspaper and/or on a website over the advertising contract period or
as
services are delivered, as appropriate, and recognizes circulation revenues
as
newspapers are delivered over the applicable subscription
term. Circulation revenues are recorded net of direct delivery
costs. Other revenue is recognized when the related product or
service has been delivered. Revenues are recorded net of estimated
incentive offerings including special pricing agreements, promotions and other
volume-based incentives. Revisions to these estimates are charged to
income in the period in which the facts that give rise to the revision become
known.
Cash
equivalents are highly liquid debt investments with
original maturities of three months or less.
Concentrations
of credit risk - Financial instruments, which potentially subject the
Company to concentrations of credit risk, are principally cash and cash
equivalents and trade accounts receivables. Cash and cash equivalents
are placed with major financial institutions. 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 first-in, first-out
method) or current market value.
Property,
plant and equipment is stated at cost. Major improvements,
as well as interest incurred during construction, are
capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred.
Depreciation
is computed generally on a straight-line basis over estimated useful
lives of:
5
to 60 years for buildings and improvements
|
9 to 25 years for presses
|
2
to 15 years for other equipment
|
Goodwill
and Intangible Impairment - The Company accounts for goodwill in
accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets. As required by SFAS
No. 142, the Company tests for goodwill annually or whenever events occur or
circumstances change that would more likely than not reduce the fair value
of a
reporting unit below its carrying amount. The required two-step
approach uses accounting judgments and estimates of future operating
results. Changes in estimates or the application of alternative
assumptions and definitions could produce significantly different
results. The factors that most significantly affect the fair value
calculation are private and public market trading multiples and estimates of
future cash flows. The Company periodically analyzes its intangible
assets with indefinite lives for impairment.
Stock-based
compensation - All share-based payments to employees, including grants
of employee stock options, stock appreciation rights, restricted stock and
purchases under the employee stock purchase plan ("ESPP"), are recognized in
the
financial statements based on their fair values. At July 1, 2007, the
Company had six stock-based compensation plans. Total stock-based
compensation expense from continuing operations was $2.2 million and $4.3
million for the three months and six months ended July 1, 2007, respectively
and
was $1.6 million and $3.6 million for the three months and six months ended
June
25, 2006, respectively.
The
Company has issued a total of 65,000 shares of restricted Class A Common Stock
to its Chief Executive Officer: (1) 40,000 shares on January 25, 2005, valued
at
the Company's closing stock price on that date of $70.55, which vest on January
25, 2009, subject to certain performance criteria and (2) 25,000 shares on
January 24, 2006, valued at the Company's closing stock price on that date
of
$58.05, which vest over four annual installments, subject to certain performance
criteria, beginning on January 24, 2007. On January 24, 2007, 6,250
shares vested. At this time, the Company expects such performance
criteria to be met and is expensing the related stock-based compensation over
the respective four-year periods based on the grant date fair
values.
Deferred
income taxes result from temporary differences between amounts of
assets and liabilities reported for financial and income tax reporting
purposes. Determination of deferred income taxes related to the
Acquisition is subject to further adjustments based upon completion of deferred
income tax assets and liabilities (see Note 2).
Comprehensive
income (loss) - The Company records changes in its net assets from
non-owner sources in its statement of stockholders’ equity. These
changes arise primarily from minimum pension liability adjustments.
The
following table summarizes the composition of total comprehensive income (in
thousands):
|
|
For
the three
months
ended
|
|
|
For
the six
months
ended
|
|
|
|
July
1, 2007
|
|
|
June
25, 2006
|
|
|
July
1, 2007
|
|
|
June
25, 2006
|
|
Net
income
|
|
$ |
35,236
|
|
|
$ |
44,136
|
|
|
$ |
44,266
|
|
|
$ |
71,863
|
|
Pension
amortization from other comprehensive
income, net of tax
|
|
|
2,132
|
|
|
|
-
|
|
|
|
2,132
|
|
|
|
-
|
|
Total
comprehensive income
|
|
$ |
37,368
|
|
|
$ |
44,136
|
|
|
$ |
46,398
|
|
|
$ |
71,863
|
|
Treasury
stock - The Company accounts for treasury stock under the cost
method.
Segment
reporting - The Company's primary business is the publication of
newspapers. The Company aggregates its newspapers into a single
reportable segment because each has similar economic characteristics, products,
customers and distribution methods.
Earnings
per share ("EPS") - Basic EPS excludes dilution from common stock
equivalents and reflects income divided by the weighted average number of common
shares outstanding for the period. Diluted EPS is based upon the
weighted average number of outstanding shares of common stock and dilutive
common stock equivalents in the period. Common stock equivalents
arise from dilutive stock options and are computed using the treasury stock
method. The anti-dilutive stock options that could potentially dilute
basic EPS in the future, but were not included in the weighted average share
calculation for the three months and six months ended July 1, 2007 were
3,830,396 and 3,778,007, respectively and were 2,511,418 and 2,112,561 for
the
three months and six months ended June 25, 2006, respectively.
Reclassifications-
Certain prior period amounts have been reclassified to conform to the 2007
presentation and relate primarily to accounting for the (Minneapolis) Star
Tribune as a discontinued operation.
Income
Taxes - On July 13, 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an entity’s financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes
and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain income tax position
on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant
taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained. Additionally,
FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The
total amount of unrecognized tax benefits as of the date of adoption was $66.7
million. Of the $66.7 million of unrecognized tax benefits at January
1, 2007, $8.5 million are tax benefits that, if recognized, would favorably
affect the effective income tax rate in future periods. The other
$58.2 million of unrecognized tax benefits would, if recognized, result in
a
decrease to goodwill previously recorded related to
acquisitions. There were no material changes to these amounts through
July 1, 2007.
With
few
exceptions, the Company is no longer subject to examination by U.S. federal,
state, or foreign tax authorities for years before 2002.
NOTE
2. ACQUISITION AND DIVESTITURES
Acquisition
Transaction:
On
June
27, 2006 (the second day of the Company's third fiscal quarter), the Company
completed the purchase of Knight-Ridder, Inc. ("Knight Ridder") pursuant to
a
definitive merger agreement entered into on March 12, 2006, under which the
Company paid Knight Ridder shareholders a per share price consisting of $40.00
in cash and .5118 of a Class A McClatchy common share (the
"Acquisition"). The Company issued approximately 35 million Class A
common shares in connection with the Acquisition. The total purchase
price was approximately $4.6 billion. In addition, the Company
assumed $1.9 billion in Knight Ridder long-term debt at closing.
Prior
to
the Acquisition, Knight Ridder published 32 daily newspapers in 29 U.S. markets,
operated websites in all of its markets and owned a variety of internet and
other investments which consisted of: 33.3% of each of CareerBuilder LLC
("CareerBuilder") and ShopLocal LLC ("ShopLocal"), 25.0% of Topix.net ("Topix"),
21.5% of Classified Ventures LLC ("Classified Ventures"), 33.3% interest in
SP
Newsprint Company ("SP"), 13.5% interest in the Ponderay Newsprint Company
("Ponderay") and 49.5% of The Seattle Times Company which owns The Seattle
Times newspaper and weekly newspapers in the Puget Sound area, and daily
newspapers located in Walla Walla and Yakima, Washington and in Portland, Maine
and various other smaller investments. Knight Ridder was the founder
and operator of Real Cities, the largest national advertising network of local
news websites.
To
consummate the Acquisition, the Company borrowed $3.076 billion under a new
bank
debt facility (see Note 5) and used the proceeds from the sales of four Knight
Ridder newspapers in order to pay Knight Ridder shareholders ($2.7 billion)
and
refinance its and Knight Ridder's bank debt ($498.0 million). The
after-tax proceeds from the sales of the eight Knight Ridder newspapers sold
after the Acquisition closed were used to reduce debt.
Acquisition
Accounting:
Pursuant
to Emerging Issues Task Force No. 99-12, Determination of the Measurement
Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination, the McClatchy common stock issued on June 27, 2006 was valued
based upon the average closing price of McClatchy common stock from March 8,
2006 through March 14, 2006 (two business days before and after the terms of
the
Acquisition were agreed to and announced), or $52.06 per
share. As a result, the fair value of the 35.0 million shares
of McClatchy common stock issued in the Acquisition was recorded at $1.821
billion, which was included in the total Acquisition purchase price of
approximately $4.6 billion. The fair value of such shares declined to
approximately $1.398 billion as of the Acquisition closing date (June 27, 2006),
however the decline of $423.0 million in valuation had no effect on the total
Acquisition purchase price recorded. The difference is included in
goodwill in the allocation of the purchase price below.
The
Acquisition was accounted for as a purchase. Pursuant to SFAS
141, Business Combinations, the purchase price was allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
as of June 27, 2006, the date of the Acquisition. The purchase price
allocation, while substantially complete, is subject to further adjustments
based upon completion of analyses of deferred income tax assets and
liabilities. See Note 4 for adjustments made in the first six months
of fiscal 2007.
The
following table summarizes, on an unaudited pro forma basis, the combined
results of continuing operations of the Company for the three and six months
ended June 25, 2006 as though the Acquisition had taken place on the first
day
of the fiscal quarter (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
25,
2006
|
|
|
June
25,
2006
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
632,433
|
|
|
$ |
1,228,728
|
|
Income
from continuing operations
|
|
$ |
37,047 |
(1) |
|
$ |
55,927 |
(1) |
Income
from continuing operations per diluted share
|
|
$ |
0.45
|
|
|
$ |
0.68
|
|
|
|
(1) Excludes
$18.1 million of income tax benefits related to the Company’s
recalculation of its deferred tax liabilities and assets.
|
|
Disposition
Transactions:
In
conjunction with the Acquisition, the Company divested 12 Knight Ridder
newspapers for strategic and antitrust reasons. The divested
newspapers were the Philadelphia Inquirer;Philadelphia Daily
News;San Jose Mercury News; St. Paul Pioneer Press;
Akron Beacon Journal (OH); Wilkes Barre Times Leader (PA);
Aberdeen American News (SD); Grand Forks Herald (ND); Ft.
Wayne News-Sentinel (IN); Contra Costa Times (CA);
Monterey Herald (CA); and Duluth News Tribune
(MN). The Company received cash proceeds of approximately $2.0
billion (net of transaction costs) from these divestitures. In
addition, the buyers assumed approximately $77 million of Knight Ridder
retirement obligations related to certain newspapers. Four of the 12
newspapers were sold concurrently with the closing of the
Acquisition. The remaining eight newspapers were owned for periods
ranging from two days to 36 days following the closing of the
Acquisition. The operating results of these eight divested newspapers
for the periods they were owned by the Company, including interest expense
and
debt issuance costs related to bank debt incurred until their respective sales,
are included in discontinued operations in the Company's consolidated statement
of income for the period from June 27, 2006 to December 31, 2006. No
accounting gain or loss was recognized on the sale of the 12
newspapers.
In
July
2006, the Company sold 18.3% of its interest in each of CareerBuilder and
ShopLocal, and 13.8% of its interest in Topix for an aggregate of $309.7 million
in cash and used the after-tax proceeds to reduce debt. No accounting
gain or loss was recognized on the sale of these investments. The
Company retained a 15.0% interest in each of CareerBuilder and ShopLocal, and
an
11.3% interest in Topix. Effective May 11, 2007, the Company's
interest in CareerBuilder declined to 14.4%.
On
March
5, 2007, the Company sold the (Minneapolis) Star Tribune newspaper and
other publications and websites related to the newspaper to an entity affiliated
with Avista Capital Partners for $530.0 million. The Company expects
to receive an income tax refund of approximately $201 million related to the
sale in 2008. This amount has been recorded as a long-term receivable
on the consolidated balance sheet.
The
results of Star Tribune's operations, including interest on debt
incurred to purchase it, have been recorded as discontinued operations in all
periods presented. The Company used the proceeds from the sale of the Star
Tribune to reduce debt.
Revenues
and loss from discontinued operations, net of income taxes, for the three
months
and six months ended July 1, 2007 and June 25, 2006 were as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
Revenues
|
|
$ |
91
|
|
|
$ |
92,234
|
|
|
$ |
52,994
|
|
|
$ |
179,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations before
income taxes (1)
|
|
$ |
146
|
|
|
$ |
20,373
|
|
|
$ |
(4,637 |
) |
|
$ |
30,630
|
|
Income
tax expense (benefit)
|
|
|
(559 |
) |
|
|
8,426
|
|
|
|
141
|
|
|
|
12,737
|
|
Income
(loss) from discontinued operations
|
|
$ |
705
|
|
|
$ |
11,947
|
|
|
$ |
(4,778 |
) |
|
$ |
17,893
|
|
(1)
|
Includes
interest expense allocated to discontinued operations of $0 and $1.2
million for the three months and six months ended July 1, 2007,
respectively and $1.6 million and $3.7 million for the three months
and
six months ended June 25, 2006,
respectively.
|
NOTE
3. INVESTMENTS IN UNCONSOLIDATED
COMPANIES
The
following is the Company's ownership interest and carrying value of investments
in unconsolidated companies and joint ventures (dollars in
thousands):
Company
|
|
%
Ownership
Interest
|
|
|
July
1,
2007
|
|
|
December
31,
2006
|
|
CareerBuilder
|
|
|
14.4
|
|
|
$ |
225,992
|
|
|
$ |
230,506
|
|
Seattle
Times Company
|
|
|
49.5
|
|
|
|
89,910
|
|
|
|
102,228
|
|
Classified
Ventures
|
|
|
25.6
|
|
|
|
98,476
|
|
|
|
98,259
|
|
SP
Newsprint
|
|
|
33.3
|
|
|
|
38,543
|
|
|
|
40,666
|
|
Ponderay
Newsprint
|
|
|
27.0
|
|
|
|
24,068
|
|
|
|
26,162
|
|
ShopLocal
|
|
|
15.0
|
|
|
|
11,147
|
|
|
|
10,993
|
|
Topix
|
|
|
11.3
|
|
|
|
9,442
|
|
|
|
9,956
|
|
McClatchy
Tribune Information Services
|
|
|
50.0
|
|
|
|
1,102
|
|
|
|
773
|
|
Other
|
|
Various
|
|
|
|
778
|
|
|
|
670
|
|
|
|
|
|
|
|
$ |
499,458
|
|
|
$ |
520,213
|
|
The
Company primarily uses the equity method of accounting for these
investments.
During
the second fiscal quarter of 2007, The Seattle Times Company (“STC”)
entered into an agreement to settle certain outstanding legal issues and amend
their Joint Operating Agreement relating to STC and The Hearst Corporation
("Hearst") Seattle newspaper. As a result, STC is expected to pay
approximately $24 million to Hearst in the third fiscal quarter of
2007. The Company has expensed $7.8 million as its share of this
payment as part of its equity loss in the second fiscal quarter of
2007.
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets and goodwill, along with their weighted-average amortization
periods consisted of the following (in thousands):
|
|
|
July
1, 2007
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Period
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Advertiser
and subscriber lists
|
|
$ |
817,701
|
|
|
$ |
(177,203 |
) |
|
$ |
640,498
|
|
14
years
|
Other
|
|
|
26,261
|
|
|
|
(10,624 |
) |
|
|
15,637
|
|
8
years
|
Total
|
|
$ |
843,962
|
|
|
$ |
(187,827 |
) |
|
|
656,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Newspaper
mastheads
|
|
|
|
|
|
|
|
|
|
|
683,000
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
1,339,135
|
|
|
Goodwill
- net
|
|
|
|
|
|
|
|
|
|
|
3,586,969
|
|
|
Total
intangible assets and goodwill
|
|
|
|
|
|
|
|
|
|
$ |
4,926,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Period
|
Intangible
assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertiser
and subscriber lists
|
|
$ |
817,701
|
|
|
$ |
(148,427 |
) |
|
$ |
669,274
|
|
14
years
|
Other
|
|
|
26,161
|
|
|
|
(9,389 |
) |
|
|
16,772
|
|
8
years
|
Total
|
|
$ |
843,862
|
|
|
$ |
(157,816 |
) |
|
|
686,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Newspaper
mastheads
|
|
|
|
|
|
|
|
|
|
|
683,000
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
1,369,046
|
|
|
Goodwill
- net
|
|
|
|
|
|
|
|
|
|
|
3,559,828
|
|
|
Total
intangible assets and goodwill
|
|
|
|
|
|
|
|
|
|
$ |
4,928,874
|
|
|
The
following is a summary of the changes in the identifiable intangible
assets and goodwill from December 31, 2006 to July 1, 2007 (in
thousands):
|
|
|
|
December
31,
|
|
|
|
|
Disposals/
|
|
|
Amortization
|
|
|
July
1,
|
|
|
|
2006
|
|
|
Additions
|
|
Adjustments
|
|
|
Expense
|
|
|
2007
|
|
Intangible
assets subject to amortization
|
|
$ |
843,862
|
|
|
$ |
25
|
|
$ |
75
|
|
|
$ |
-
|
|
|
$ |
843,962
|
|
Accumulated
amortization
|
|
|
(157,816 |
) |
|
|
|
|
|
(9 |
) |
|
|
(30,002 |
) |
|
|
(187,827 |
) |
|
|
|
686,046
|
|
|
|
25
|
|
|
66
|
|
|
|
(30,002 |
) |
|
|
656,135
|
|
Mastheads
and other
|
|
|
683,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683,000
|
|
Goodwill
- net
|
|
|
3,559,828
|
|
|
|
27,141
|
|
|
|
|
|
|
|
|
|
|
3,586,969
|
|
Total
|
|
$ |
4,928,874
|
|
|
$ |
27,166
|
|
$ |
66
|
|
|
$ |
(30,002 |
) |
|
$ |
4,926,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Relates primarily to revised estimates of acquired income tax
reserves.
|
|
|
|
Amortization
expense for continuing operations was $15.0 million and $1.2 million
in
the second fiscal quarters of 2007 and 2006, respectively and was
$30.0
million and $2.4 million for the first six months of fiscal 2007
and 2006,
respectively.
|
|
|
|
|
|
|
The
estimated amortization expense for the remainder of fiscal 2007 and
the
five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
Year
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
$ |
29,948
|
|
|
|
|
|
2008
|
|
|
|
59,941
|
|
|
|
|
|
2009
|
|
|
|
59,910
|
|
|
|
|
|
2010
|
|
|
|
59,232
|
|
|
|
|
|
2011
|
|
|
|
57,837
|
|
|
|
|
|
2012
|
|
|
|
57,368
|
|
|
|
NOTE
5. LONG-TERM DEBT
As
of
July 1, 2007 and December 31, 2006, long-term debt consisted of the
following (in thousands):
|
|
July
1,
2007
|
|
|
December
31,
2006
|
|
Term
A bank debt, weighted average interest of 6.11%
at July 1, 2007
and 6.12% at December 31, 2006
|
|
$ |
750,000
|
|
|
$ |
1,100,000
|
|
Revolving
bank debt, interest of 6.10%
at July 1, 2007 and 6.10% at
December 31, 2006
|
|
|
415,287
|
|
|
|
665,795
|
|
Publicly-traded
notes:
|
|
|
|
|
|
|
|
|
$100
million 6.625% debentures due in 2007
|
|
|
100,011
|
|
|
|
100,025
|
|
$200
million 9.875% debentures due in 2009
|
|
|
210,139
|
|
|
|
212,950
|
|
$300
million 7.125% debentures due in 2011
|
|
|
304,005
|
|
|
|
304,512
|
|
$200
million 4.625% debentures due in 2014
|
|
|
174,443
|
|
|
|
172,705
|
|
$400
million 5.750% debentures due in 2017
|
|
|
361,724
|
|
|
|
359,848
|
|
$100
million 7.150% debentures due in 2027
|
|
|
90,940
|
|
|
|
90,717
|
|
$300
million 6.875% debentures due in 2029
|
|
|
270,789
|
|
|
|
270,117
|
|
Total
debt
|
|
|
2,677,338
|
|
|
|
3,276,669
|
|
Less
current portion
|
|
|
-
|
|
|
|
530,000
|
|
Long
term debt
|
|
$ |
2,677,338
|
|
|
$ |
2,746,669
|
|
The
publicly-traded notes are stated net of unamortized discounts and premiums
resulting from recording such assumed liabilities at fair value as of the June
27, 2006 Acquisition date. The notes due in 2007 are expected to be refinanced
on a long-term basis by drawing on the Company's revolving credit facility
and
accordingly, are included in long-term debt.
Through
June 27, 2006, the Company used its senior unsecured revolving credit facility,
which provided borrowings of up to $500 million. This credit facility was
refinanced with a new $3.2 billion senior unsecured credit facility ("Credit
Agreement") entered into in connection with the Acquisition. At the
closing of the Acquisition, the Company’s new Credit Agreement consisted of a $1
billion five-year revolving credit facility and $2.2 billion five-year Term
A
loan. Both the Term A loan and the revolving credit facility are due on
June 27, 2011.
The
Company has repaid $600.5 million of bank debt in the first six months of fiscal
2007 from the sale of the Star Tribune newspaper, sales of other assets
and cash generated from operations. A total of $529.1 million of funds were
available under the revolving credit facility at July 1, 2007.
Debt
under the Credit Agreement bears interest at the London Interbank Offered Rate
("LIBOR") plus a spread ranging from 37.5 basis points to 125.0 basis
points. Applicable rates are based upon the Company’s ratings on its
long-term debt from Moody’s Investor Services ("Moody’s") and
Standard & Poor’s. A commitment fee for the unused revolving
credit ranges from 10.0 basis points to 20.0 basis points depending on the
Company’s ratings. Standard & Poor’s has rated the facility "BB+" and
Moody’s has rated the facility “Baa3”. According to the Credit Agreement,
the Company will pay interest at LIBOR plus 75.0 basis points on outstanding
debt and its commitment fees are currently at 15.0 basis points.
The
Credit Agreement contains financial covenants including a minimum interest
coverage ratio (as defined in the Credit Agreement) of 3.00 to 1.00 through
July
1, 2007; 2.75 to 1.00 from September 30, 2007 through September 28, 2008 and
3.00 to 1.00 from December 28, 2008 and thereafter; and a maximum leverage
ratio
(as defined in the Credit Agreement) of 4.75 to 1.00 through July 1, 2007;
5.00
to 1.00 from September 30, 2007 through March 30, 2008; 4.75 to 1.00 from June
29, 2008 through September 28, 2008; 4.25 to 1.00 from December 28, 2008 to
September 27, 2009; and declining to 4.00 to 1.00 on December 27, 2009 and
thereafter. At July 1, 2007, the Company was in compliance with all
debt covenants.
In
addition, the Company’s Material Subsidiaries (as defined in the Credit
Agreement) have guaranteed the Company’s obligations under the Credit
Agreement. These guarantees were effected on May 4, 2007, and continue in
effect upon the earlier of the termination of the Credit Agreement or the date
which is one year after the date both ratings agencies have rated the Company’s
bank debt as investment grade.
At
July
1, 2007, the Company had outstanding letters of credit totaling $55.6 million
securing estimated obligations stemming from workers’ compensation claims and
other contingent claims.
The
following table presents the approximate annual maturities of debt, based upon
the Company's required payments (adjusted for management’s expectations
regarding the notes due in fiscal 2007 as discussed above), for the next five
years and thereafter (in thousands):
|
Year
|
|
Payments
|
|
|
2008
|
|
$ |
-
|
|
|
2009
|
|
|
200,000
|
|
|
2010
|
|
|
-
|
|
|
2011
|
|
|
1,565,287
|
|
|
2012
|
|
|
-
|
|
|
Thereafter |
|
|
1,000,000
|
|
|
|
|
|
2,765,287
|
|
|
Less
net discount |
|
|
(87,949 |
) |
|
Total
debt |
|
$ |
2,677,338
|
|
NOTE
6. EMPLOYEE BENEFITS
The
Company sponsors defined benefit pension plans (“retirement plans”), which cover
a majority of its employees. Benefits are based on years of service
and compensation. Contributions to the retirement plans are made by
the Company in amounts deemed necessary to provide the required
benefits. The Company made $40.0 million in voluntary contributions
to its retirement plans in early fiscal 2006 (including $8.5 million to Star
Tribune plans). No contributions to the Company's retirement
plans are currently planned for fiscal 2007.
The
Company also has a limited number of 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 provide an
enhanced pension benefit. These plans are funded on a pay-as-you-go
basis and the accrued pension obligation is largely included in other long-term
obligations.
The
elements of pension costs for continuing operations are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
10,872
|
|
|
$ |
4,235
|
|
|
$ |
18,810
|
|
|
$ |
8,028
|
|
Interest cost
|
|
|
22,772
|
|
|
|
6,462
|
|
|
|
46,988
|
|
|
|
12,258
|
|
Expected
return on plan
assets
|
|
|
(26,024 |
) |
|
|
(8,517 |
) |
|
|
(54,250 |
) |
|
|
(16,268 |
) |
Prior
service cost
amortization
|
|
|
24
|
|
|
|
50
|
|
|
|
105
|
|
|
|
94
|
|
(Gain)/loss
amortization
|
|
|
(556 |
) |
|
|
2,372
|
|
|
|
3,453
|
|
|
|
4,491
|
|
Net
pension
expense
|
|
$ |
7,088
|
|
|
$ |
4,602
|
|
|
$ |
15,106
|
|
|
$ |
8,603
|
|
No
material contributions were made to the Company's multi-employer plans for
continuing operations for the three months and six months ended July 1, 2007
and
June 25, 2006.
The
Company also provides for or subsidizes post-retirement healthcare and certain
life insurance benefits for employees. The elements of
post-retirement benefits for continuing operations are as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
Service
cost
|
|
$ |
200
|
|
|
$ |
1
|
|
|
$ |
422
|
|
|
$ |
1
|
|
Interest
cost
|
|
|
426
|
|
|
|
97
|
|
|
|
1,434
|
|
|
|
106
|
|
(Gain)/loss
amortization
|
|
|
(6 |
) |
|
|
-
|
|
|
|
(6 |
) |
|
|
-
|
|
Net
post-retirement
expense
|
|
$ |
620
|
|
|
$ |
98
|
|
|
$ |
1,850
|
|
|
$ |
107
|
|
NOTE
7. COMMON STOCK AND STOCK PLANS
On
June
27, 2006, in connection with the Acquisition, the Company increased the
authorized number of its Class A Common shares from 100,000,000 to 200,000,000
shares and issued 34,988,009 new Class A Common shares in connection with the
Acquisition (see Note 2).
The
Company's Class A and Class B Common Stock participate equally in
dividends. Holders of Class B 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. 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. Class B Common
Stock is convertible at the option of the holder into Class A Common Stock
on a
share-for-share basis.
The
holders of shares of Class B Common Stock are parties to an agreement, the
intent of which is to preserve control of the Company by the McClatchy
family. Under the terms of the agreement, the Class B shareholders
have agreed to restrict the transfer of any shares of Class B Common Stock
to
one or more "Permitted Transferees," subject to certain exceptions. A
"Permitted Transferee" is any current holder of shares of Class B Common Stock
of the Company; any lineal descendant of Charles K. McClatchy (1858 to 1936);
or
a trust for the exclusive benefit of, or in which all of the remainder
beneficial interests are owned by, one or more lineal descendants of Charles
K.
McClatchy.
Generally,
Class B shares can be converted into shares of Class A Common Stock and then
transferred freely (unless, following conversion, the outstanding shares of
Class B Common Stock would constitute less than 25% of the total number of
all
outstanding shares of common stock of the Company). In the event that
a Class B shareholder attempts to transfer any shares of Class B Common Stock
in
violation of the agreement, or upon the happening of certain other events
enumerated in the agreement as "Option Events," each of the remaining Class
B
shareholders has an option to purchase a percentage of the total number of
shares of Class B Common Stock proposed to be transferred equal to such
remaining Class B shareholder's ownership percentage of the total number of
outstanding shares of Class B Common Stock. If all the shares
proposed to be transferred are not purchased by the remaining Class B
shareholders, the Company has the option of purchasing the remaining
shares. The agreement can be terminated by the vote of the holders of
80% of the outstanding shares of Class B Common Stock who are subject to the
agreement. The agreement will terminate on September 17, 2047, unless
terminated earlier in accordance with its terms.
At
July
1, 2007, the Company had six stock-based compensation plans. The
Company applied APB Opinion 25 and related interpretations in accounting for
its
plans in fiscal 2005 and prior years. The Company has adopted SFAS
No. 123R for its stock plans effective December 26, 2005, the first day of
fiscal 2006.
Beginning
in fiscal 2005, the Company awarded stock-settled stock appreciation rights
("SARs") in lieu of stock options to its employees. The SARs were
granted at fair market value, have a ten-year term and vest in four equal annual
installments beginning on March 1 following the year for which the award was
made.
Outstanding options and SARs are summarized as follows:
|
|
Options/
SARs
|
|
|
Weighted
Average Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
(in
thousands)
|
|
Outstanding
December 31, 2006
|
|
|
4,064,075
|
|
|
$ |
52.78
|
|
|
$ |
4,857
|
|
Granted
|
|
|
37,250
|
|
|
|
39.45
|
|
|
|
|
|
Exercised
|
|
|
(69,625 |
) |
|
|
26.55
|
|
|
|
|
|
Forfeited
|
|
|
(94,250 |
) |
|
|
63.74
|
|
|
|
|
|
Expired
|
|
|
(227,000 |
) |
|
|
56.57
|
|
|
|
|
|
Outstanding
July 1, 2007
|
|
|
3,710,450
|
|
|
|
52.63
|
|
|
nil
|
|
Options
and SARs exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1, 2007
|
|
|
2,130,825
|
|
|
$ |
53.42
|
|
|
|
|
|
As
of
July 1, 2007, there were $11.4 million of unrecognized compensation costs
related to non-vested stock-based compensation arrangements granted under the
Company's plans. The cost is expected to be recognized over a
weighted average period of 1.9 years.
The
following tables summarize information about stock options and SARs
outstanding in the stock plans at July 1, 2007:
|
|
Range
of Exercise
Prices
|
|
|
Options/
SARs
Outstanding
|
|
|
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options/
SARs
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$ |
26.19
- $42.50
|
|
|
|
1,486,625
|
|
|
|
6.79
|
|
|
$ |
40.81
|
|
|
|
590,625
|
|
|
$ |
38.44
|
|
$ |
45.98
- $59.09
|
|
|
|
1,253,200
|
|
|
|
6.34
|
|
|
$ |
54.37
|
|
|
|
892,825
|
|
|
$ |
52.86
|
|
$ |
59.58
- $73.36
|
|
|
|
970,625
|
|
|
|
6.82
|
|
|
$ |
68.49
|
|
|
|
647,375
|
|
|
$ |
67.86
|
|
$ |
26.19
- $73.36
|
|
|
|
3,710,450
|
|
|
|
6.65
|
|
|
$ |
52.63
|
|
|
|
2,130,825
|
|
|
$ |
53.42
|
|
The
weighted average remaining contractual life on options exercisable at July
1,
2007 was 5.1 years. The fair value of the stock options and SARs
granted was estimated on the date of grant using a Black-Scholes option
valuation model that uses the assumptions noted in the following table. The
expected life of the options represents the period of time that options granted
are expected to be outstanding using the historical exercise behavior of
employees. Expected volatility was based on historical volatility for
a period equal to the stock option's expected life for shares granted in the
second fiscal quarters of 2007 and 2006, and for a one-year look back period
for
shares granted prior to fiscal 2006. The risk-free rate for periods within
the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
|
|
Six
Months Ended
|
|
|
|
July
1, 2007
|
|
|
June
25, 2006
|
|
Dividend
yield
|
|
|
1.96
|
|
|
|
1.57
|
|
Expected
life in years
|
|
|
5.41
|
|
|
|
5.27
|
|
Volatility
|
|
|
.19
|
|
|
|
.19
|
|
Risk-free
interest rate
|
|
|
4.74 |
% |
|
|
5.00 |
% |
Weighted
average fair value of options/SARs granted
|
|
$ |
8.40
|
|
|
$ |
11.01
|
|
The
Company also offers eligible employees the option to purchase common stock
under
its ESPP. The expense associated with the plan is computed using a
Black-Scholes option valuation model with similar assumptions to those described
for stock options, except that volatility is computed using a one-year look
back
given the short-term nature of this option. Expense associated with
the ESPP is included in the stock-related compensation discussed in Note
1.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
Overview
The
McClatchy Company (the "Company") is the third largest newspaper company in
the
United States, with 31 daily newspapers and approximately 50 non-dailies. Twenty
of its daily newspapers were acquired on June 27, 2006 in the Knight Ridder
acquisition (the "Acquisition") – see Note 2 to the consolidated financial
statements. McClatchy also operates leading local websites and direct
marketing operations in each of its markets which complement its newspapers
and
extend its audience reach in each market. McClatchy-owned newspapers
include The Miami Herald, The Sacramento Bee, the
(Fort Worth) Star-Telegram, The Kansas City Star,
The Charlotte Observer, and The (Raleigh) News
& Observer.
McClatchy
also has a portfolio of premium digital assets. Its leading local websites
offer
users information, comprehensive news, advertising, e-commerce and other
services. The Company owns and operates McClatchy Interactive, an
interactive operation that provides websites with content, publishing tools
and
software development. McClatchy operates Real Cities, the largest
national advertising network of local news websites and owns 14.4% of
CareerBuilder, the nation’s largest online job site. McClatchy also
owns 25.6% of Classified Ventures, a newspaper industry partnership that offers
classified websites such as the nation’s number two online auto website,
cars.com, and the number one rental site, apartments.com.
The
Company's primary source of revenue is advertising, which accounts for roughly
84% of the Company's revenue. While percentages vary from year to
year and from newspaper to newspaper, retail advertising carried as a part
of
newspapers ("run-of-press" or "ROP" advertising) or in advertising inserts
placed in newspapers (preprint advertising) generally contributes roughly 37%
of
advertising revenues at the Company's newspapers. Recent trends have
been for certain national or regional retailers to use greater preprint and
online advertising and less ROP advertising, although that trend shifts from
time to time. Nonetheless, ROP advertising still makes up the
majority of retail advertising. Classified advertising (including
online classified advertising), primarily in automotive, employment and real
estate categories, generally contributes about 33% of advertising revenue and
national advertising generally contributes about 8% of total advertising
revenue. Direct marketing and other advertising make up the remainder
of the Company's advertising revenues. Circulation revenues
contribute roughly 12% of the Company's newspaper revenues. Most
newspapers are delivered by independent contractors. Circulation
revenues are recorded net of direct delivery costs.
See
the
following "Results of Operations" for a discussion of the Company's revenue
performance and contribution by category for the three months and six months
ended July 1, 2007 and June 25, 2006.
Critical
Accounting Policies
Critical
accounting policies are those accounting policies that management believes
are
important to the portrayal of the Company's financial condition and results
and
require management's most difficult, subjective or complex judgments, often
as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company's 2006 Annual Report on Form 10-K
includes a description of certain critical accounting policies, including those
with respect to revenue recognition, allowance for uncollectible accounts,
acquisition accounting, goodwill and intangible impairment, discontinued
operations, pension and post-retirement benefits, income taxes, insurance and
stock-based employee compensation.
Income
Tax Contingencies:
The
Company is subject to periodic audits by the Internal Revenue Service and
other
state and local taxing authorities. These audits may challenge
certain aspects of the Company's tax positions such as the timing and amount
of
deductions and allocation of taxable income to the various tax
jurisdictions. Income tax contingencies are accounted for in
accordance with FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), and may require significant management judgment in
estimating final outcomes. Actual results could materially differ
from these estimates and could significantly affect the effective tax rate
and
cash flows in future periods.
Recent
Events and Trends
Acquisition
Transaction:
On
June
27, 2006 (the second day of the Company’s third fiscal quarter), the Company
completed the purchase of Knight-Ridder, Inc. ("Knight Ridder") pursuant to
a
definitive merger agreement entered into on March 12, 2006, under which the
Company paid Knight Ridder shareholders a per share price consisting of $40.00
in cash and .5118 of a Class A McClatchy common share (the
"Acquisition"). The Company issued approximately 35 million Class A
common shares in connection with the Acquisition. The total purchase
price was approximately $4.6 billion. In addition, the Company
assumed $1.9 billion of Knight Ridder's long-term debt at the closing of the
Acquisition.
Prior
to
the Acquisition, Knight Ridder published 32 daily newspapers in 29 U.S. markets,
operated websites in all of its markets and owned a variety of internet and
other investments which consisted of: 33.3% of each of CareerBuilder
LLC ("CareerBuilder") and ShopLocal LLC ("ShopLocal"), 25.0% of Topix.net
("Topix"), 21.5% of Classified Ventures LLC ("Classified Ventures"), 33.3%
interest in SP Newsprint Company ("SP"), 13.5% interest in the Ponderay
Newsprint Company ("Ponderay") and 49.5% of The Seattle Times Company which
owns
The Seattle Times newspaper and weekly newspapers in the Puget Sound
area, and daily newspapers located in Walla Walla and Yakima, Washington and
in
Portland, Maine and various other smaller investments. Knight Ridder
was the founder and operator of Real Cities, the largest
national advertising network of local news websites.
To
consummate the Acquisition, the Company borrowed $3.076 billion under a new
bank
debt facility (see Note 5 to the consolidated financial statements) and used
the
proceeds from the sales of four Knight Ridder newspapers (see Disposition
Transactions below) in order to pay Knight Ridder shareholders ($2.7 billion)
and refinance its and Knight Ridder's bank debt ($498.0 million). The
after-tax proceeds from the sales of the eight Knight Ridder newspapers sold
after the Acquisition closed were used to reduce debt.
The
Acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values as of the June 27, 2006 Acquisition date. The
purchase price allocation was primarily based upon an independent
valuation. The purchase price allocation, while substantially
completed, is subject to further adjustments based upon completion of analyses
of deferred income tax assets and liabilities.
Disposition
Transactions:
In
conjunction with the Acquisition, the Company divested 12 Knight Ridder
newspapers for strategic and antitrust reasons. The divested
newspapers were the Philadelphia Inquirer;Philadelphia Daily
News;San Jose Mercury News; St. Paul Pioneer Press;
Akron Beacon Journal (OH); Wilkes Barre Times Leader (PA);
Aberdeen American News (SD); Grand Forks Herald (ND); Ft.
Wayne News-Sentinel (IN); Contra Costa Times (CA);
Monterey Herald (CA); and Duluth News Tribune
(MN). The Company received cash proceeds of approximately $2.0
billion (net of transaction costs) from these divestitures. In
addition, the buyers assumed approximately $77 million of Knight Ridder
retirement obligations related to certain newspapers. Four of the 12
newspapers were sold concurrently with the closing of the
Acquisition. The remaining eight newspapers were owned for periods
ranging from two days to 36 days following the closing of the
Acquisition. The operating results of these eight divested newspapers
for the periods they were owned by the Company, including interest expense
and
debt issuance costs related to bank debt incurred until their respective sales,
are included in discontinued operations in the Company's consolidated statement
of income for 2006. No accounting gain or loss was recognized on the
sale of the 12 newspapers.
In
July
2006, the Company sold 18.3% of its interest in each of CareerBuilder and
ShopLocal, and 13.8% of its interest in Topix for an aggregate of $309.7 million
in cash and used the after-tax proceeds to reduce debt. No accounting
gain or loss was recognized on the sale of these investments. The Company
retained a 15.0% interest in each of CareerBuilder and ShopLocal and an 11.3%
interest in Topix. Effective May 11, 2007, the Company's interest in
CareerBuilder declined to 14.4%.
On
March
5, 2007, the Company sold the (Minneapolis) Star Tribune and other
publications and websites related to the newspaper to an entity affiliated
with
Avista Capital Partners for $530.0 million. The Company expects to
receive an income tax refund of approximately $201 million related to the sale
in 2008. This amount has been recorded as a long-term receivable on
the consolidated balance sheet.
The
results of Star Tribune's operations, including interest on debt
incurred to purchase it, have been recorded as discontinued operations in all
periods presented. The Company used the proceeds from the sale of the Star
Tribune to reduce debt.
Advertising
Revenues:
Classified
advertising revenues have continued to decline since the third fiscal quarter
of
2006 and advertising results declined across the board in the second fiscal
quarter of 2007, but particularly in real estate advertising. Real
estate advertising began to weaken in the fourth fiscal quarter of 2006 and
has
declined substantially since then. The Company has seen significant
declines in California and Florida, where real estate values and thus
advertising were strong in the second fiscal quarter of 2006 (see discussion
below). The decline in automotive classified advertising reflected an
industry-wide decline that began in 2004, while employment advertising has
been
in decline in most markets since the third fiscal quarter of
2006. National advertising also declined in the second fiscal quarter
of 2007 reflecting a slowdown in a number of segments including
telecommunications, national automotive and financial advertising, an
industry-wide trend.
A
total
of 68.5% of the Company's advertising declines in the second fiscal
quarter of 2007 came from California and Florida, two regions that benefited
strongly from the real estate boom, and are likewise being hurt in the
subsequent real estate slowdown. Advertising revenues were down 17.8% in
the second fiscal quarter of 2007. The housing sector is an important component
of these states’ economies. Hence, California and Florida also account for a
majority of the decline in auto and employment advertising, as the real estate
downturn is having an impact on these categories as well. These states have
experienced similar advertising downturn and recovery cycles in the past, and
were recently the Company’s best performing regions. Management believes a
significant portion of the current advertising downturn reflects these cyclical
forces and expects declines to continue in 2007 because of the difficult trends
in these states. See the revenue discussions in management’s review of “Results
of Operations”.
Newsprint:
Newsprint
prices continued to decline in the second fiscal quarter of 2007 after a
sustained period of increasing prices from 2002 through early
2006. Through the first six months of fiscal 2007, newsprint expense
was 13.8% lower than pro forma newsprint expense (which includes the 20 Knight
Ridder Newspapers) in the first six months of 2006, primarily reflecting lower
newsprint usage and, to a lesser degree, lower newsprint
prices. Newsprint pricing is dependent on global demand and supply
for newsprint. Significant changes in newsprint prices can increase
or decrease the Company's operating expenses. However, because the
Company has ownership interests in newsprint producers (Ponderay and SP), the
recent trend of falling newsprint prices, while favorably affecting operating
expenses, is contributing to equity losses from these
investments. Ponderay and SP are also currently impacted by the
higher cost of energy and fiber used in the papermaking process. The
impact of newsprint price increases on the Company's financial results is
discussed under "Results of Operations".
As
a
result of the recently announced strategic alternative review at SP, the Company
and its partners are seeking to sell SP. The ultimate outcome of
the strategic review cannot be determined and the timing of a transaction,
if any, which the Company and its partners may undertake has not been
determined.
RESULTS
OF OPERATIONS
The
Company noted the following items related to the Acquisition and other matters
that impacted second fiscal quarter of 2007 and year-to-date fiscal 2007
results:
·
|
On
June 26, 2006, the Company issued approximately 35 million Class
A shares
in connection with the Acquisition. As a result, the weighted average
diluted shares used to calculate earnings per share in the second
fiscal
quarter of 2007 increased to approximately 82 million shares compared
to
approximately 47 million shares in second fiscal quarter of
2006.
|
·
|
The
purchase price for the Acquisition has been allocated to the assets
acquired and liabilities assumed based upon their estimated fair
values as
of June 27, 2006, the date of the Acquisition. The purchase price
allocation, while substantially complete, is subject to further
adjustments based upon completion of analyses of deferred income
tax
assets and liabilities.
|
·
|
On
March 5, 2007, the Company sold the (Minneapolis) Star Tribune
newspaper for $530.0 million in proceeds and is expected to receive
a tax
refund of approximately $201 million related to the sale in
2008. The results of Star Tribune's operations have
been recorded as discontinued operations in all periods
presented.
|
·
|
During
the second fiscal quarter of 2007, STC and Hearst entered into an
agreement to settle certain outstanding legal issues and amend their
Joint
Operating Agreement relating to STC and Hearst's Seattle
newspaper. As a result, STC is expected to pay approximately $24
million to Hearst in the third fiscal quarter of 2007. The
Company has expensed $7.8 million as its share of this payment
as part of its equity loss in the second fiscal quarter of
2007.
|
The
Company's results from continuing operations since the close of the Acquisition
(and all pro forma amounts for prior periods discussed) include the operations
of the 20 retained former Knight Ridder newspapers and all of the Company's
previously owned newspaper operations except for the (Minneapolis) Star
Tribune newspaper.
The
growth in revenues and expenses in the second fiscal quarter of 2007 compared
to
the same period in 2006 resulted from the Acquisition. To facilitate an analysis
of operating results, the comparative analysis between the three months and
six
months ended July 1, 2007 and June 25, 2006 discussed below is supplemented
by a
comparison to 2006 pro forma results from continuing operations. Pro
forma amounts reflect the results of continuing operations of the Company as
defined in the preceding paragraph. The financial results for Knight
Ridder and the 20 newspapers retained by the Company included in the pro forma
information were derived from the historical unaudited financial statements
of
Knight Ridder. The Company believes that the use of pro forma reporting of
operating results enhances measurement of performance by permitting comparisons
with prior historical data. Such supplemental pro forma data is not
necessarily indicative of the operating results that would have occurred if
the
Acquisition had been completed as of the beginning of fiscal 2006.
Second
Fiscal Quarter of 2007 Compared to Second Fiscal Quarter of
2006
The
Company reported income from continuing operations of $34.5 million or $0.42
per
share in the second fiscal quarter of 2007, compared to $32.2 million or $0.69
per share in the second fiscal quarter of 2006. The Company recorded
income from discontinued operations of $0.7 million or $0.01 per share relating
to the results of the (Minneapolis) Star Tribune. The
Company’s total net income was $35.2 million or $0.43 per share including
discontinued operations in the second fiscal quarter of 2007, compared to net
income of $44.1 million or $0.94 per share in the second fiscal quarter of
2006.
Revenues
in the second fiscal quarter of 2007 were $580.0 million, up $368.0 million
or
173.6% from the second fiscal quarter of 2006 revenues of $212.0 million, due
to
the addition of the 20 former Knight Ridder newspapers and the sale of the
(Minneapolis) Star Tribune. Advertising revenues totaled
$488.3 million and circulation revenues were $69.7 million. On a pro
forma basis, revenues decreased $52.4 million or 8.3% from the second fiscal
quarter of 2006 with advertising revenues decreasing $53.1 million or 9.8%
and
circulation revenues decreasing $3.4 million or 4.6% from the second fiscal
quarter of 2006.
As
discussed in Recent Events and Trends above, 68.5% of the Company's
advertising declines in the second fiscal quarter of 2007 came from
California and Florida, two regions that benefited strongly from the real estate
boom, and are likewise being hurt in the subsequent real estate slowdown.
Advertising revenues were down 17.8% in these two regions in the second fiscal
quarter. The housing sector is an important component of these states’
economies. Hence, California and Florida also account for a majority of the
decline in auto and employment advertising, as the real estate downturn is
having an impact on these categories as well.
The
following summarizes the Company's revenue by category on a pro forma basis,
which compares second fiscal quarter of 2007 with second fiscal quarter of
2006
(dollars in thousands):
|
|
As
Reported
|
|
|
Pro
Forma
|
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
|
%
Change
|
|
|
June
25,
2006
|
|
|
%
Change
|
|
Advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
213,203
|
|
|
$ |
74,971
|
|
|
|
184.4
|
|
|
$ |
227,220
|
|
|
|
(6.2 |
) |
National
|
|
|
46,064
|
|
|
|
15,394
|
|
|
|
199.2
|
|
|
|
50,821
|
|
|
|
(9.4 |
) |
Classified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
43,760
|
|
|
|
18,085
|
|
|
|
142.0
|
|
|
|
51,729
|
|
|
|
(15.4 |
) |
Employment
|
|
|
66,236
|
|
|
|
25,954
|
|
|
|
155.2
|
|
|
|
78,363
|
|
|
|
(15.5 |
) |
Real
estate
|
|
|
54,687
|
|
|
|
28,916
|
|
|
|
89.1
|
|
|
|
67,492
|
|
|
|
(19.0 |
) |
Other
|
|
|
23,120
|
|
|
|
6,480
|
|
|
|
256.8
|
|
|
|
23,085
|
|
|
|
0.2
|
|
Total
classified
|
|
|
187,803
|
|
|
|
79,435
|
|
|
|
136.4
|
|
|
|
220,669
|
|
|
|
(14.9 |
) |
Direct
marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other
|
|
|
41,207
|
|
|
|
13,883
|
|
|
|
196.8
|
|
|
|
42,658
|
|
|
|
(3.4 |
) |
Total
advertising
|
|
|
488,277
|
|
|
|
183,683
|
|
|
|
165.8
|
|
|
|
541,368
|
|
|
|
(9.8 |
) |
Circulation
|
|
|
69,707
|
|
|
|
23,504
|
|
|
|
196.6
|
|
|
|
73,087
|
|
|
|
(4.6 |
) |
Other
|
|
|
22,043
|
|
|
|
4,813
|
|
|
|
358.0
|
|
|
|
17,978
|
|
|
|
22.6 |
|
Total
revenues
|
|
$ |
580,027
|
|
|
$ |
212,000
|
|
|
|
173.6
|
|
|
$ |
632,433
|
|
|
|
(8.3 |
) |
Retail
advertising increased $138.2 million or 184.4% from the second fiscal quarter
of
2006 reflecting the Acquisition. On a pro forma basis, retail
advertising decreased $14.0 million or 6.2% from the second fiscal quarter
of
2006. On a pro forma basis, online retail advertising increased $2.4
million or 59.8% from the second fiscal quarter of 2006, while print ROP
advertising decreased $14.5 million or 10.3% from the second fiscal quarter
of
2006. On a pro forma basis, preprint advertising decreased $1.9
million or 2.3% from the second fiscal quarter of 2006.
National
advertising increased $30.7 million or 199.2% from the second fiscal quarter
of
2006 reflecting the Acquisition. On a pro forma basis, national
advertising decreased $4.8 million or 9.4% from the second fiscal quarter of
2006. The declines in total national advertising were primarily in
the telecommunications, national automotive and financial advertising
categories, reflecting an industry-wide trend. Online national
advertising increased $1.7 million from the second fiscal quarter of 2006 and
decreased $0.6 million on a pro forma basis.
Classified
advertising increased $108.4 million or 136.4% from the second fiscal quarter
of
2006 reflecting the Acquisition. On a pro forma basis, classified
advertising decreased $32.9 million or 14.9% from the second fiscal quarter
of
2006. Online classified advertising increased $25.1 million or 267.0%
from the second fiscal quarter of 2006. On a pro forma basis, online
classified advertising decreased $2.8 million or 7.6% from the second fiscal
quarter of 2006.
·
|
Real
estate advertising was up $25.8 million or 89.1% from the second
fiscal
quarter of 2006. On a pro forma basis, real estate advertising decreased
$12.8 million or 19.0% from the second fiscal quarter of
2006. The Company has seen dramatic declines in California and
Florida, where real estate values, and thus advertising, were
exceptionally strong in 2006. The Company expects declines in
this revenue category to continue because of the difficult trends
in these
states.
|
·
|
Automotive
advertising increased $25.7 million or 142.0% from the second fiscal
quarter of 2006. On a pro forma basis, automotive advertising
declined $8.0 million or 15.4% from the second fiscal quarter of
2006,
reflecting an industry-wide trend. Print advertising declined
18.7%, while online advertising grew 12.9% reflecting the strength
of the
Company's cars.com online products.
|
·
|
Employment
advertising increased $40.3 million or 155.2% from the second fiscal
quarter of 2006. On a pro forma basis, employment advertising
decreased $12.1 million or 15.5% from the second fiscal quarter of
2006. Print employment advertising declined 17.0% while online
employment advertising declined 12.4%. Online employment advertising
was
affected by the current affiliate agreement with CareerBuilder, the
Company’s online employment advertising partner. This agreement
is helping to grow online employment revenues at the legacy McClatchy
newspapers. However, under the current affiliate agreement
selected products are no longer available to be sold by the 20 acquired
Knight Ridder newspapers, which are reducing their internet
revenues.
|
Online
advertising, which is included in each of the advertising categories discussed
above, totaled $42.8 million in the second fiscal quarter of 2007, an increase
of $31.2 million or 269.4% over the second fiscal quarter of 2006. On
a pro forma basis, online advertising decreased $1.0 million or 2.2% from the
second fiscal quarter of 2006 and was held down by the current CareerBuilder
affiliate agreement's impact on employment advertising as discussed
above.
Direct
marketing revenues increased $27.1 million or 202.0% from the second fiscal
quarter of 2006 reflecting the Acquisition. On a pro forma basis,
direct marketing revenues decreased $1.7 million or 3.9% from the second fiscal
quarter of 2006 reflecting the overall slow advertising environment. The Company
extends its newspaper franchises by supplementing the mass reach of the
newspaper with direct marketing and direct mail products so that advertisers
can
both achieve broad appeal and capture targeted audiences with one-stop
shopping.
Circulation
revenues increased $46.2 million or 196.6% from the second fiscal quarter of
2006 reflecting the Acquisition. On a pro forma basis, consolidated
circulation revenues decreased $3.4 million or 4.6% from the second fiscal
quarter of 2006, primarily reflecting lower circulation volumes. The
Company continues to reduce third-party and outlying circulation that is not
highly valued by its newspaper advertisers, and expects circulation volumes
to
remain lower in fiscal 2007 compared to fiscal 2006.
Operating
Expenses:
Operating
expenses increased $302.9 million or 189.6% in the second fiscal quarter of
2007
related to expenses added by the Acquisition. On a pro forma basis,
operating expenses were down $57.5 million or 11.1% from the second fiscal
quarter of 2006, as the Company continued to reduce costs and realized synergies
from the Acquisition. On a pro forma basis, compensation costs were
down 12.5%, with payroll down 12.4%, and a 6.9% reduction in
staffing. On a pro forma basis, fringe benefits were down
13.2%. On a pro forma basis, newsprint and supplement expense was
down 17.0% with newsprint expense down 17.4% and supplement expense down
14.3%. On a pro forma basis, other operating costs were down 8.5%,
reflecting lower bad debt and professional services. Professional
services in the second fiscal quarter of 2006 included $4.7 million of strategic
alternative review services incurred and recorded by Knight
Ridder. On a pro forma basis, depreciation and amortization expense
increased by 4.3% due primarily to the purchase price accounting related to
the
Acquisition.
Interest:
Interest
expense for continuing operations was $49.6 million for the second fiscal
quarter of 2007 primarily reflecting the service costs on debt incurred to
finance the Acquisition. Interest expense also included $1.7 million
related to accrued interest on the liability for unrecognized tax
benefits. The Company’s effective interest rate in the second fiscal
quarter of 2007 was approximately 6.4%.
Equity
Income (Loss):
Loss
from
unconsolidated companies resulted primarily from operating results of the
Company's newsprint investments and STC (see Note 3 to the consolidated
financial statements).
Income
Taxes:
The
income tax rate from continuing operations in the second fiscal quarter of
2007
was 39.9%, compared to 39.0% in the second fiscal quarter of
2006. The effective tax rate for the current fiscal year is expected
to be in the 39.5% to 40.0% range, but the tax rate is preliminary and may
change when the purchase price allocation and related deferred taxes are
finalized.
Discontinued
Operations:
Income
from discontinued operations, (related to the (Minneapolis) Star
Tribune newspaper --
see
Note 2 to the consolidated financial statements) in the second fiscal quarter
of
2007 was $0.7 million or $0.01 per share. Income from discontinued operations
was $11.9 million or $0.25 per share in the second fiscal quarter of
2006. Additionally, $2.1 million in interest incurred on the debt
used to finance the purchase of the Star Tribune was recorded in
discontinued operations in the second fiscal quarter of 2006.
First
Six Months of Fiscal 2007 Compared to First Six Months of Fiscal
2006
The
Company reported income from continuing operations of $49.0 million or $0.60
per
share in the first six months of fiscal 2006, compared to $54.0 million or
$1.15
per share in the first six months of fiscal 2006. The Company
recorded a loss from discontinued operations in the first six months of fiscal
2007 of $4.8 million or $0.06 per share relating to the results of the
(Minneapolis) Star Tribune newspaper. The Company's net
income was $44.3 million or $0.54 per share including discontinued operations
in
the first six months of fiscal 2007 compared to $71.9 million or $1.53 per
share
in the first six months of fiscal 2006. Revenues and expenses in the
six-month period were generally affected by the trends discussed in the
quarterly comparison above, with exceptions noted below.
Revenues:
Revenues
from continuing operations in the first six months of fiscal 2007 were $1.147
billion, up $740.1 million or 182.1% from the first six months of fiscal 2006
revenues from continuing operations of $406.5 million, due to the 20 former
Knight Ridder newspapers and the sale of the (Minneapolis) Star
Tribune. Advertising revenues were $965.3 million and
circulation revenues were $141.6 million in the first six months of fiscal
2007. On a pro forma basis, revenues decreased $82.1 million or 6.7%
from the first six months of fiscal 2006 with advertising revenues decreasing
$79.8 million or 7.6% and circulation revenues decreasing $6.1 million or 4.1%
from the first six months of fiscal 2006.
A
total
of 72.1% of the Company's advertising declines in the first six months
of fiscal 2007 came from California and Florida, two regions that benefited
strongly from the real estate boom, and are likewise being hurt in the
subsequent real estate slowdown. Advertising revenues were down 14.4% in
these two regions in the first six months of fiscal 2007. The housing
sector is an important component of these states’ economies. Hence, California
and Florida also account for a majority of the decline in auto and employment
advertising, as the real estate downturn is having an impact on these categories
as well.
The
following table summarizes the Company's revenues by category on a pro forma
basis, which compares the first six months of fiscal 2007 with the first six
months of fiscal 2006 (dollars in thousands):
|
|
As
Reported
|
|
|
Pro
Forma
|
|
|
|
Year
to Date
|
|
|
Year
to Date
|
|
|
|
|
|
July
1,
2007
|
|
|
June
25,
2006
|
|
|
%
Change
|
|
|
June
25,
2006
|
|
|
%
Change
|
|
Advertising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
$ |
419,231
|
|
|
$ |
139,659
|
|
|
|
200.2
|
|
|
$ |
431,565
|
|
|
|
(2.9 |
) |
National
|
|
|
91,214
|
|
|
|
29,152
|
|
|
|
212.9
|
|
|
|
101,220
|
|
|
|
(9.9 |
) |
Classified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto
|
|
|
85,895
|
|
|
|
36,585
|
|
|
|
134.8
|
|
|
|
101,950
|
|
|
|
(15.7 |
) |
Employment
|
|
|
135,882
|
|
|
|
51,082
|
|
|
|
166.0
|
|
|
|
154,076
|
|
|
|
(11.8 |
) |
Real
estate
|
|
|
109,837
|
|
|
|
55,379
|
|
|
|
98.3
|
|
|
|
131,706
|
|
|
|
(16.6 |
) |
Other
|
|
|
44,725
|
|
|
|
12,672
|
|
|
|
252.9
|
|
|
|
44,613
|
|
|
|
0.3
|
|
Total
classified
|
|
|
376,339
|
|
|
|
155,718
|
|
|
|
141.7
|
|
|
|
432,345
|
|
|
|
(13.0 |
) |
Direct
marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other
|
|
|
78,516
|
|
|
|
25,488
|
|
|
|
208.1
|
|
|
|
80,011
|
|
|
|
(1.9 |
) |
Total
advertising
|
|
|
965,300
|
|
|
|
350,017
|
|
|
|
175.8
|
|
|
|
1,045,141
|
|
|
|
(7.6 |
) |
Circulation
|
|
|
141,587
|
|
|
|
47,268
|
|
|
|
199.5
|
|
|
|
147,672
|
|
|
|
(4.1 |
) |
Other
|
|
|
39,698
|
|
|
|
9,178
|
|
|
|
332.5
|
|
|
|
35,915
|
|
|
|
10.5
|
|
Total
revenues
|
|
$ |
1,146,585
|
|
|
$ |
406,463
|
|
|
|
182.1
|
|
|
$ |
1,228,728
|
|
|
|
(6.7 |
) |
Retail
advertising increased $279.6 million or 200.2% from the first six months of
fiscal 2007 from the first six months of fiscal 2006 reflecting the
Acquisition. On a pro forma basis, retail advertising decreased $12.3
million or 2.9% from the first six months of fiscal 2006. On a pro
forma basis, online retail advertising increased $5.2 million or 70.9% from
the
first six months of fiscal 2006, while ROP advertising decreased $17.6 million
or 6.7% from the first six months of fiscal 2006. On a pro forma
basis, preprint advertising increased $0.1 million or 0.1% from the first six
months of fiscal 2006.
National
advertising increased $62.1 million or 212.9% from the first six months of
fiscal 2006 reflecting the Acquisition. On a pro forma basis,
national advertising decreased $10.0 million or 9.9% from the first six months
of fiscal 2006. The declines reflect the same conditions discussed in
the quarterly results. Online national advertising increased $3.1
million from the first six months of fiscal 2006 and decreased $1.4 million
on a
pro forma basis.
Classified
advertising increased $220.6 million or 141.7% from the first six months of
fiscal 2006 reflecting the Acquisition. On a pro forma basis,
classified advertising decreased $56.0 million or 13.0% from the first six
months of fiscal 2006. Print classified advertising declined
14.8% on a pro forma basis, while online classified advertising was down 3.6%
on
a pro forma basis in the first six months of fiscal 2007.
·
|
Real
estate advertising was up $54.5 million or 98.3% from the first six
months
of fiscal 2006. On a pro forma basis, real estate advertising decreased
$21.9 million or 16.6% from the first six months of fiscal 2006 as
discussed in the quarterly review
above.
|
·
|
Automotive
advertising increased $49.3 million or 134.8% from the first six
months of
fiscal 2006. On a pro forma basis, automotive advertising
declined $16.1 million or 15.7% from the first six months of fiscal
2006,
reflecting an industry-wide trend. As in the quarterly
discussion above, growth in online automotive advertising revenue
was
offset by declines in print
advertising.
|
·
|
Employment
advertising increased $84.8 million or 166.0% from the first six
months of
fiscal 2006. On a pro forma basis, employment advertising
decreased $18.2 million or 11.8% from the first six months of fiscal
2006,
partially reflecting the effect of the current CareerBuilder affiliate
agreement discussed above.
|
Online
advertising, which is included in each of the advertising categories discussed
above, totaled $84.0 million in the first six months of fiscal 2007, an increase
of $61.9 million or 280.3% over the first six months of fiscal 2006 reflecting
the Acquisition. On a pro forma basis, online advertising increased
$1.1 million or 1.4% from the first six months of fiscal 2006, reflecting growth
in retail and automotive advertising, which was partially offset by employment
advertising and to a lesser degree, real estate declines.
Direct
marketing revenues increased $53.0 million or 216.1% from the first six months
of fiscal 2006 reflecting the Acquisition. On a pro forma basis,
direct marketing revenues decreased $1.6 million or 2.0% from the first six
months of fiscal 2006. The Company extends its newspaper franchises by
supplementing the mass reach of the newspaper with direct marketing and direct
mail products so that advertisers can both achieve broad appeal and capture
targeted audiences with one-stop shopping.
Circulation
revenues increased $94.3 million or 199.5% from the first six months of fiscal
2006 reflecting the Acquisition. On a pro forma basis, circulation
revenues decreased $6.1 million or 4.1% from the first six months of fiscal
2006.
Operating
Expenses:
Operating
expenses increased $622.9 million or 195.3% in the six months of fiscal 2007
related to expenses added by the Acquisition. On a pro forma basis,
operating expenses were down $86.6 million or 8.4% from the first six months
of
fiscal 2006, as the Company continued to reduce costs and realized synergies
from the Acquisition. On a pro forma basis, compensation costs were
down 10.6%, with payroll down 10.6%, and a 6.2% reduction in
staffing. On a pro forma basis, fringe benefits were down
10.8%. On a pro forma basis, newsprint and supplement expense was
down 13.8% with newsprint expense down 12.8% and supplement expense down
19.2%. On a pro forma basis, other operating costs were down 3.7%,
reflecting lower professional services. Professional services in the first
half
of fiscal 2006 include $8.5 million of alternative strategic review services
incurred and recorded by Knight Ridder. On a pro forma basis,
depreciation and amortization expense increased by 3.0% due primarily to the
purchase price accounting related to the Acquisition.
Interest:
Interest
expense for continuing operations was $103.3 million for the first six months
of
fiscal 2007 primarily reflecting the service costs on debt incurred to finance
the Acquisition. While the Company used the proceeds of the
(Minneapolis) Star Tribune newspaper sale to reduce debt, it carried
interest on this debt for the first two months of the year, which equated to
about $5.7 million in interest expense included in continuing operations.
Interest expense also included $3.0 million related to accrued interest on
the
liability for unrecognized tax benefits. Excluding these two items, the
Company’s interest expense was $94.6 million. The Company’s effective
interest rate in the first six months of fiscal 2007 was approximately
6.4%. In the first six months of fiscal 2007, a total of $1.2 million
of interest expense was allocated to discontinued operations related to debt
used to acquire the (Minneapolis) Star Tribune newspaper, which was
sold on March 5, 2007.
Equity
Income (Loss):
Loss
from
unconsolidated companies resulted primarily from the operating results of the
Company's newsprint investments and to a lesser extent from the Company's
investment in internet-related companies and STC (see Note 3 to the consolidated
financial statements).
Income
Taxes:
The
income tax rate from continuing operations in the first six months of fiscal
2007 was 39.7%, compared to 39.0% in the first six months of fiscal
2006. The effective tax rate for the current fiscal year is expected
to be in the 39.5% to 40.0% range, but the tax rate is preliminary and may
change when the purchase price allocation and related deferred taxes are
finalized.
Loss
from
discontinued operations, (related to the (Minneapolis) Star Tribune
newspaper, see Note 2 to the consolidated financial statements) in the first
six
months of fiscal 2007 was $4.8 million or $0.06 per share. Income from
discontinued operations was $17.9 million or $0.38 per share in the first six
months of fiscal 2006. Additionally, $1.2 million and $3.7 million in
interest incurred on the debt used to finance the purchase of the Star
Tribune was recorded in discontinued operations in the first six months of
fiscal 2007 and fiscal 2006, respectively.
LIQUIDITY
AND CAPITAL RESOURCES
Sources and Uses of Liquidity and Capital Resources:
The
Company’s cash and cash equivalents were $25.3 million as of July 1,
2007. The Company generated $121.5 million of cash from operating
activities in the first six months of fiscal 2007. The increase in
cash from operating activities in the first six months of fiscal 2007 resulted
primarily from the Acquisition.
The
Company generated $508.3 million of cash from investing activities largely
from
the $522.9 million proceeds (net of expenses) from the sale of the (Minneapolis)
Star Tribune newspaper (see Note 2 to the consolidated financial
statements) in the first six months of fiscal 2007 and the sale of equipment
totaling $19.4 million. These sources of funds were offset by $28.3
million purchases of property, plant and equipment.
The
Company used $624.1 million of cash from financing sources in the first six
months of 2007, primarily for repayment of bank debt. Of the $624.1
million, the Company repaid $600.5 million of debt in the first six months
of
fiscal 2007. The Company paid $29.5 million in dividends in the first
six months of fiscal 2007 and also received $5.7 million in proceeds from
issuing Class A stock under employee stock plans in the first six months of
fiscal 2007.
At
July
1, 2007, the Company had $212.0 million of land and other assets held for sale.
The Company expects to sell its Miami land in 2008 (included in long-term
assets) and its San Jose land in the third fiscal quarter of 2007 (included
in
current assets). Gross proceeds (before transaction costs) from those sales
are
expected to be $190.0 million and $25.0 million, respectively. At
July 1, 2007, the Company also had an income tax receivable of $201.0 million
which it expects to receive in fiscal 2008 related to the sale of the Star
Tribune (see Note 2 to the consolidated financial statements).
As
a
result of the recently announced strategic alternative review at SP, the Company
and its partners are seeking to sell SP. The ultimate outcome of the
strategic review cannot be determined and the timing of a transaction, if
any, which the Company and its partners may undertake has not been
determined.
Debt
and Related Matters:
Through
June 27, 2006, the Company used its senior unsecured revolving credit facility,
which provided borrowings of up to $500 million. This credit agreement was
refinanced with a new $3.2 billion senior unsecured credit facility ("Credit
Agreement") entered into in connection with the Acquisition. At
closing, the Company’s new Credit Agreement consisted of a $1 billion five-year
revolving credit facility and $2.2 billion five-year Term A loan. Both the
Term
A loan and the revolver are due on June 27, 2011.
On
June 27, 2006, McClatchy borrowed $2.2 billion under the Term A loan and
$876.0 million under the revolving credit facility. The Company has
subsequently repaid $1.45 billion of the Term A loan and $460.7 million of
the
revolving credit facility, primarily from proceeds received in the sale of
the
eight former Knight Ridder newspapers, net of income taxes paid on the tax
gain
on the sale (see Note 2 to the consolidated financial statements), proceeds
generated from asset sales and cash generated by operations in fiscal 2007
as
discussed above. A total of $529.1 million of funds were available
under the revolving credit facility at July 1, 2007.
Debt
under the Credit Agreement bears interest at the London Interbank Offered Rate
("LIBOR") plus a spread ranging from 37.5 basis points to 125.0 basis
points. Applicable rates are based upon the Company’s ratings on its
long-term debt from Moody’s Investor Services ("Moody’s") and
Standard & Poor’s. A commitment fee for the unused revolving
credit ranges from 10.0 basis points to 20.0 basis points depending on the
Company’s ratings. Standard & Poor’s has rated the facility "BB+" and
Moody’s has rated the facility “Baa3”. According to the Credit Agreement,
the Company will pay interest at LIBOR plus 75.0 basis points on outstanding
debt and its commitment fees are currently at 15.0 basis points.
The
Credit Agreement contains financial covenants including a minimum interest
coverage ratio (as defined in the Credit Agreement) of 3.00 to 1.00 through
July
1, 2007; 2.75 to 1.00 from September 30, 2007 through September 28, 2008 and
3.00 to 1.00 from December 28, 2008 and thereafter; and a maximum leverage
ratio
(as defined in the Credit Agreement) of 4.75 to 1.00 through July 1, 2007;
5.00
to 1.00 from September 30, 2007 through March 30, 2008; 4.75 to 1.00 from June
29, 2008 through September 28, 2008; 4.25 to 1.00 from December 28, 2008 to
September 27, 2009; and declining to 4.00 to 1.00 on December 27, 2009 and
thereafter. At July 1, 2007, the Company was in compliance with all
debt covenants.
In
addition, the Company’s Material Subsidiaries (as defined in the Credit
Agreement) have guaranteed the Company’s obligations under the Credit
Agreement. These guarantees were effected on May 4, 2007, and continue in
effect upon the earlier of the termination of the Credit Agreement or the date
which is one year after the date both ratings agencies have rated the Company’s
bank debt as investment grade.
At
July
1, 2007, the Company had outstanding letters of credit totaling $55.6 million
securing estimated obligations stemming from workers’ compensation claims and
other contingent claims.
Contractual
Obligations:
As
of
July 1, 2007, the Company has purchase obligations primarily related to capital
expenditures for property, plant and equipment expiring at various dates through
2008, totaling approximately $16.4 million.
Significant
changes in the Company's contractual obligations since year-end 2006 include
the
reduction of current-portion of long-term debt of $530.0 million (see Note
2 to
the consolidated financial statements) and an increase of $25.7 million in
income tax reserves through July 1, 2007, of which $25.2 million related to
the
adoption of FIN 48 (see Note 1 to the consolidated financial
statements).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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Debt
under the Credit Agreement bears interest at the LIBOR plus a spread ranging
from 37.5 basis points to 125.0 basis points. Applicable rates are
based upon the Company's ratings on its long-term debt from Moody's and Standard
& Poor's. A hypothetical 25 basis point change in LIBOR for a
fiscal year would increase or decrease in the annual net income by $2.0 million
to $2.5 million based on the current amounts outstanding under the Credit
Agreement.
See
the
discussion at “Recent Events and Trends - Operating Expenses” in Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the
impact of market changes on the Company's newsprint and pension
costs.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures. Our management evaluated,
with the participation of our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), the effectiveness of the design and operation of
the
Company's disclosure controls and procedures (as defined in Rules 13a - 15(e)
or
15d - 15(e) under the Securities Exchange Act of 1934, as amended) as of the
end
of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, the Company's management, including the CEO and CFO, concluded
that
the Company's disclosure controls and procedures were effective at that time
to
ensure that information we are required to disclose in reports that we file
or
submit under the Securities Exchange Act of 1934 is accumulated and communicated
to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure
and that such information is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission Rules
and
Forms.
Changes
in internal control over financial reporting. There was no
change in our internal control over financial reporting that occurred during
the
second quarter of fiscal 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
Item
1A.
Risk Factors
Forward-Looking
Information:
This
quarterly report on Form 10-Q contains forward-looking statements regarding
the
Company's actual and expected financial performance and
operations. These statements are based upon our current expectations
and knowledge of factors impacting our business, including, without limitation,
statements about litigation, the ability to consummate contemplated sales
transactions for its assets or investments which may enable debt reduction
on anticipated terms or at all, tax and other benefits from the sale of the
(Minneapolis) Star Tribune newspaper, advertising revenues,
return on pension plan assets and assumed salary increases, newsprint costs,
amortization expense, stock option expenses, prepayment of debt, capital
expenditures, sufficiency of capital resources and possible acquisitions and
investments. Such statements are subject to risks, trends and
uncertainties. Forward-looking statements are generally preceded by,
followed by or are a part of sentences that include the words "believes,"
"expects," "anticipates," "estimates," or similar expressions. For
all of those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. You should understand that the following important
factors, in addition to those discussed elsewhere in this document and in the
documents which we incorporate by reference, could affect the future results
of
McClatchy and could cause those future results to differ materially from those
expressed in our forward-looking statements: general economic, market or
business conditions, especially in any of the markets where we operate
newspapers; impact of any litigation or any potential litigation; geo-political
uncertainties including the risk of war; changes in newsprint prices and/or
printing and distribution costs from anticipated levels; changes in interest
rates; changes in pension assets and liabilities; increased competition from
newspapers, internet sites or other forms of media reaching the markets we
serve; increased consolidation among major retailers in our markets or other
events depressing the level of advertising; changes in our ability to negotiate
and obtain favorable terms under collective bargaining agreements with unions;
competitive action by other companies; difficulties in servicing our debt
obligations; other occurrences leading to decreased circulation and diminished
revenues from retail, classified and national advertising; and other factors,
many of which are beyond our control.
See
McClatchy’s 2007 Form 10-K filed with the Securities and Exchange Commission on
March
1,
2007 for further discussion of risk factors that could affect operating
results.
The
Company held its annual shareholders’ meeting on May 16, 2007 to vote on
two proposals. Shareholders approved all of the proposals by voting as
follows:
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1.
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Election
of Directors of the Board
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VOTES
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FOR
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WITHHELD
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Class
A Common Stock
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Elizabeth
Ballantine
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46,813,690
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2,495,780
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Kathleen
Foley Feldstein
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46,750,814
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2,558,656
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P.
Anthony Ridder
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46,546,767
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2,762,703
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Maggie
Wilderotter
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46,743,074
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2,566,396
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Class
B Common Stock
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Leroy
Barnes, Jr.
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23,786,457
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-0-
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William
K. Coblentz
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23,786,457
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-0-
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Molly
Maloney Evangelisti
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23,786,457
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-0-
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Larry
Jinks
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23,786,457
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-0-
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Joan
F. Lane
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23,786,457
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-0-
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Brown
McClatchy Maloney
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23,786,457
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-0-
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William
B. McClatchy
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23,786,457
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-0-
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Kevin
S. McClatchy
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23,786,457
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-0-
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Theodore
Mitchell
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23,786,457
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-0-
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S.
Donley Ritchey
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23,786,457
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-0-
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Gary
B. Pruitt
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23,786,457
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-0-
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Frederick
R. Ruiz
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23,786,457
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-0-
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2.
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Ratification
of Deloitte & Touche LLP
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FOR
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AGAINST
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ABSTAIN
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BROKER
NON-VOTES
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as independent auditors for 2007
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28,686,832
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22,282
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8,290
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-0-
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Exhibits
filed as part of this Report as listed in the Index of Exhibits, on page 35
hereof.
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 thereunto
duly authorized.
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The
McClatchy Company
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Registrant
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August
10, 2007
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By:
/s/ Gary B. Pruitt
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Date
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Gary
B. Pruitt
Chief
Executive Officer
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August
10, 2007
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By:
/s/ Patrick J. Talamantes
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Date
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Patrick
J. Talamantes
Chief
Financial Officer
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INDEX
OF EXHIBITS
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Exhibit
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Description
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2.1*
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Agreement
and Plan of Merger, dated March 12, 2006, between the Company and
Knight-Ridder, Inc., included as Exhibit 2.1 in the Company’s Current
Report on Form 8-K filed March 12, 2007.
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3.1*
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The
Company's Restated Certificate of Incorporation dated June 26, 2006,
included as Exhibit 3.1 in the Company's Quarterly Report on Form
10-Q for
the quarter ended June 25, 2006.
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3.2*
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The
Company's By-laws as amended as of June 22, 2006, included as Exhibit
3.2
in the Company's Current Report on Form 8-K filed June 28,
2006.
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4.1*
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Form
of Physical Note for Commercial Paper Program included as Exhibit
4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 27,
2004.
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10.1*
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Credit
Agreement dated June 27, 2006 by and among the Company, lenders party
thereto, Bank of America, N.A., as Administrative Agent, Swing Line
Lender
and Letter of Credit Issuer, JPMorgan Chase Bank as Syndication Agent
and
Banc of America Securities LLC and JPMorgan Securities Inc. as Joint
Lead
Arrangers and Joint Book Managers, included as Exhibit 10.2 in the
Company's Current Report on Form 10-Q filed for the quarter ending
on June
25, 2006.
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10.2*
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Amendment
1 to Credit Agreement dated March 28, 2007 by and between The McClatchy
Company and Bank of America, N.A., as Administrative Agent, included
as
Exhibit 99.1 in the Company's Current Report on Form 8-K filed April
2,
2007.
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10.3*
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Amendment
2 to Credit Agreement dated July 30, 2007 by and between The McClatchy
Company and Bank of America, N.A., as Administrative Agent, included
as
Exhibit 10.1 in the Company's Current Report on Form 8-K filed July
31,
2007.
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10.4*
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General
Continuing Guaranty dated May 4, 2007 by each Material
Subsidiary in favor of the Lenders party to the Credit Agreement
dated June 27, 2006 by and between The McClatchy Company, the
Lenders and Bank of America, N.A., as Administrative Agent, included
as
Exhibit 10.3 in the Company’s Current Report on Form 10-Q for the quarter
ending on April 1, 2007.
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10.5*
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Second
Supplemental Indenture dated June 27, 2006, between the Company and
Knight-Ridder, Inc. included as Exhibit 10.3 in the Company's Current
Report on Form 10-Q filed for the quarter ending on June 25,
2006.
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10.6*
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Fourth
Supplemental Indenture dated June 27, 2006, between the Company and
Knight-Ridder, Inc. included as Exhibit 10.4 in the Company's Current
Report on Form 10-Q filed for the quarter ending on June 25,
2006.
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**10.7*
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The
McClatchy Company Management by Objective Plan Description included
as
Exhibit 10.4 in the Company's Report filed on Form 10-K for the Year
ending December 31, 2000.
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**10.8*
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The
Company's Amended and Restated Long-Term Incentive Plan included
as
Exhibit 99.1 to the Company's Report on Form 8-K filed May 23,
2005.
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**10.9*
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Amended
and Restated Supplemental Executive Retirement Plan included as Exhibit
10.4 to the Company's 2001 Form 10-K.
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**10.10*
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The
Company's Amended and Restated 1990 Directors' Stock Option Plan
dated
February 1, 1998 included as Exhibit 10.12 to the Company's 1997
Form
10-K.
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**10.11*
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Amended
and Restated 1994 Stock Option Plan included as Exhibit 10.15 to
the
Company's Report on Form 10-Q filed for the Quarter Ending on July
1,
2001.
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**10.12*
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Form
of 2004 Stock Incentive Plan Nonqualified Stock Option Agreement
included
as Exhibit 99.1 to the Company's Current Report on Form 8-K filed
December
16, 2004.
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**10.13*
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Amendment
1 to The McClatchy Company 2004 Stock Incentive Plan dated January
23,
2007, included as Exhibit 10.10 to the Company's 2006 Report on Form
10-K.
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**10.14*
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Form
of Restricted Stock Agreement related to the Company's 2004 Stock
Incentive Plan, included as Exhibit 99.1 to the Company's Current
Report
on Form 8-K dated January 28, 2005.
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**10.15*
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The
Company's Amended and Restated Chief Executive Bonus Plan, included
as
Exhibit 10.12 to the Company's Report on Form 10-Q for the Quarter
Ending
June 29, 2003.
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**10.16*
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Amended
and Restated Employment Agreement between the Company and Gary B.
Pruitt
dated October 22, 2003, included as Exhibit 10.10 to the Company's
2003
Form 10-K.
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10.17*
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Form
of Indemnification Agreement between the Company and each of its
officers
and directors, included as Exhibit 99.1 to the Company's Current Report on
Form 8-K filed on May 23, 2005.
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**10.18*
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Amended
and Restated 1997 Stock Option Plan included as Exhibit 10.7 to the
Company's 2002 Report on Form 10-K.
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**10.19*
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Amendment
1 to The McClatchy Company 1997 Stock Option Plan dated January 23,
2007,
included as Exhibit 10.16 to the Company's 2006 Report on Form
10-K.
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**10.20*
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The
Company's Amended and Restated 2001 Director Stock Option Plan, included
as Exhibit 10.13 to the Company's 2004 Report on Form
10-K.
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**10.21*
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Amendment
1 to The McClatchy Company 2001 Director Option Plan dated January
23,
2007, included as Exhibit 10.18 to the Company's 2006 Report on Form
10-K.
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10.22*
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Stock
Purchase Agreement by and between The McClatchy Company and Snowboard
Acquisition Corporation, dated December 26, 2006, included as Exhibit
2.1
to the Company's Report on Form 8-K filed December 26,
2006.
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10.23
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Contract
for Purchase and Sale of Real Property by and between The Miami Herald
Publishing Company and Richmond, Inc. and Knight Ridder, Inc. and
Citisquare Group, LLC, dated March 3, 2005.
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10.24
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First
amendment to Contract for Purchase and Sale of Real Property by and
between The Miami Herald Publishing Company and Richmond, Inc. and
Knight
Ridder, Inc. and Citisquare Group, LLC, dated March 3,
2005.
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21*
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Subsidiaries
of the Company.
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31.1
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Certification
of the Chief Executive Officer of The McClatchy Company pursuant
to Rule
13a-14(a) under the Exchange Act.
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31.2
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Certification
of the Chief Financial Officer of The McClatchy Company pursuant
to Rule
13a-14(a) under the Exchange Act.
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32.1
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Certification
of the Chief Executive Officer of The McClatchy Company pursuant
to 18
U.S.C. Section 1350.
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32.2
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Certification
of the Chief Financial Officer of The McClatchy Company pursuant
to 18
U.S.C. Section 1350.
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* |
Incorporated
by reference |
** |
Compensation
plans or arrangements for the Company's executive officers and
directors |
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