UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2013

or

¨                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-9824

The McClatchy Company

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Exchange Act).

Yes o  No x

As of April 30, 2013, the registrant had shares of common stock as listed below outstanding:

THE MCCLATCHY COMPANY

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Unaudited; Amounts in thousands, except per share amounts)

See notes to the condensed consolidated financial statements.

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THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

 (Unaudited; Amounts in thousands)

See notes to the condensed consolidated financial statements.

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THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited; Amounts in thousands, except share amounts)

See notes to the condensed consolidated financial statements.

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THE MCCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited; Amounts in thousands)

See notes to condensed consolidated financial statements

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THE MCCLATCHY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Accounting

The McClatchy Company (the “Company,” “we,” “us” or “our”) is a leading news, advertising and information provider, offering a wide array of print and digital products in each of the markets it serves.  As the third largest newspaper company in the United States, based on daily circulation, our operations include 30 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services.  Our largest newspapers include the Fort Worth Star-Telegram, The Sacramento Bee, The Kansas City Star, The Miami Herald, The Charlotte Observer and The (Raleigh) News & Observer.  We are listed on the New York Stock Exchange under the symbol MNI.

We also own a portfolio of premium digital assets, including 15.0% of CareerBuilder LLC, which operates the nation’s largest online job website, CareerBuilder.com; 25.6% of Classified Ventures LLC, a company that offers classified websites such as the auto website Cars.com and the rental website Apartments.com; 33.3% of HomeFinder LLC, which operates the online real estate website HomeFinder.com; and 11.4% of Wanderful Media, owner of Find n Save®, a digital shopping portal that provides advertisers with a common platform to reach online audiences with digital circulars, coupons and display advertising.

The condensed consolidated financial statements include the Company and our subsidiaries. Intercompany items and transactions are eliminated.  Preparation of the financial statements in conformity with accounting principles generally accepted in the United States and pursuant to the rules and regulation of the Securities and Exchange Commission requires management to make estimates and assumptions that affect the reported amounts of 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 materially from those estimates.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly our 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.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 30, 2012. The fiscal periods included herein comprise 13 weeks for the first-quarter periods.

Circulation Delivery Contract Accounting

Subsequent to the issuance of our consolidated financial statements for the year ended December 30, 2012, we determined that circulation revenues associated with our “fee for service” contracts with distributors and carriers should be presented on a gross basis, as opposed to on a net basis.  The difference in presentation results in delivery costs associated with these contracts being reported as other operating expenses, rather than as a reduction in circulation revenues, in our condensed consolidated statements of operations.  We believe this error is not material to our previously issued financial statements for prior periods.  Accordingly, the classifications in the condensed consolidated statements of operations for the quarter ended March 25, 2012 have been corrected in this Form 10-Q, resulting in increases to circulation revenues and other operating expenses of $18.4 million.  There was no impact to the previously reported operating income, net loss or net loss per common share.

Fair Value of Financial Instruments

We account for certain assets and liabilities at fair value.  The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.  These levels are:

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Our policy is to recognize significant transfers between levels at the actual date of the event or circumstance that caused the transfer.  The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, certificates of deposit (in other assets) and accounts payable.  The carrying amount of these items approximates fair value.

Long-term debt.  The fair value of long-term debt is determined using quoted market prices and other inputs that were derived from available market information including the current market activity of our publicly-traded notes and bank debt, trends in investor demand and market values of comparable publicly-traded debt. These are considered to be Level 2 inputs under the fair value measurements and disclosure guidance, and may not be representative of actual value. At March 31, 2013, the estimated fair value and carrying value of long-term debt was $1.6 billion and $1.5 billion, respectively.

Intangible Assets and Goodwill

Intangible assets (primarily advertiser and subscriber lists) and goodwill consisted of the following:

The estimated amortization expense for the remainder of fiscal year 2013 and the five succeeding fiscal years is as follows:

Accumulated Other Comprehensive Loss

Our accumulated other comprehensive loss (“AOCI”) and reclassifications from AOCI, net of tax, consisted of the following:

(1) Reclassified amounts related to pension and post retirement liabilities affect the compensation line item on the condensed consolidated statements of operations.  The reclassified amounts are net of a tax benefit of $2,250.

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Income Taxes

We account for income taxes using the liability method.  Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse.

We recognize accrued interest related to unrecognized tax benefits in interest expense.  Accrued penalties are recognized as a component of income tax expense.

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, restricted stock units and restricted stock and are computed using the treasury stock method. Anti-dilutive common stock equivalents are excluded from diluted EPS. The weighted average anti-dilutive stock options that could potentially dilute basic EPS in the future, but were not included in the weighted average share calculation, consisted of the following:

Cash Flow Information

Cash paid for interest and income taxes consisted of the following:

In the quarters ended March 31, 2013 and March 25, 2012, other significant reconciling items between net loss and net cash from operations included a (gain) loss on extinguishment of debt ($12.8 million and $(4.4) million in 2013 and 2012, respectively) as described in Note 4 and contributions to the qualified defined benefit pension plan ($7.5 million and $40.0 million in 2013 and 2012, respectively) as described in Note 5. Other non-cash financing activities as of March 31, 2013 and March 25, 2012, related to purchases of property, plant and equipment on credit, was $6.6 million and $0.6 million, respectively.

Recently Adopted Accounting Pronouncements

As of the beginning of the first quarter of 2013, we adopted the Financial Accounting Standards Board (“FASB”) accounting standards update (“ASU”) issued in February 2013. The ASU requires new disclosures about reclassifications from accumulated other comprehensive loss to net income. These disclosures may be presented on the face of the statements or in the notes to the consolidated financial statements. Accordingly, we have presented reclassifications from accumulated other comprehensive loss to the condensed consolidated statements of operations in the notes to our condensed consolidated financial statements.

As of the beginning of the first quarter of 2013, we adopted the FASB ASU issued in July 2012.  The ASU provides new guidance on annual impairment testing of indefinite-lived intangible assets. The ASU allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. If based on its qualitative assessment an entity concludes it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. The adoption of this standard did not impact our condensed consolidated financial statements.

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2.  INVESTMENTS IN UNCONSOLIDATED COMPANIES

The carrying value of investments in unconsolidated companies consisted of the following:

During the quarter ended March 31, 2013, our proportionate share of net income from certain investees listed in the table above was greater than 20% of our consolidated net loss before taxes.  Summarized condensed financial information, as provided to us by these certain investees, is as follows:

3.  MIAMI LAND AND BUILDING

On January 31, 2011, our contract to sell certain land in Miami (“Miami Contract”) terminated pursuant to its terms because the buyer (“developer”) did not consummate the transaction by the closing deadline in the contract. Under the terms of the Miami Contract, we are entitled to receive a $7.0 million termination fee and we have filed a claim against the developer to obtain the payment. As of March 31, 2013, we have not received the payment, nor have we recorded any amounts in our financial statements related to this fee pending the resolution of this claim.

On May 27, 2011, we sold 14.0 acres of land in Miami, including a building, which holds the operations of one of our subsidiaries, The Miami Herald Media Company, and adjacent parking lots, for a purchase price of $236.0 million (“Miami property”). Approximately 9.4 acres of this Miami land was previously subject to the terminated Miami Contract discussed above. We received cash proceeds of $230.0 million. The additional $6.0 million was held in an escrow account for our expenses incurred in connection with the relocation of our Miami operations. In April 2012, we received these funds, which were released for payment of costs associated with the relocation of the Miami operations.

As part of the sale transaction, The Miami Herald Media Company will continue to operate from its existing location through May 2013 rent-free. As a result of our continuing involvement in the Miami property and given the fact that we will not pay rent during this period, the sale was treated as a financing transaction. Accordingly, we will continue to depreciate the carrying value of the building until our operations are moved. In addition, we have recorded a $236.0 million liability (in financing obligations) equal to the sales proceeds received of $230.0 million plus the $6.0 million received from the escrow account for reimbursement of moving expenses. We are imputing rent based on comparable market rates, which is reflected as interest expense until the operations are moved. As of March 31, 2013, no gain or loss has been recognized on the transaction. We expect to recognize a gain of approximately $10 million at the time the operations are moved since there will no longer be a continuing involvement with the Miami property.

In the first quarter of 2012, we purchased approximately 6.1 acres of land located in Doral, Florida, for approximately $3.1 million. We are building a new production facility on this site for our Miami newspaper operations. In January 2012, we also entered into an operating lease for a two-story office building adjacent to the new production facility. The operating lease on the office building has initial annual base lease payments of $1.8 million beginning in May 2013, when the building is expected to be occupied. Total costs related to relocating the Miami newspaper operations and for constructing the new production facility, including the purchase of the property, construction costs, accelerated depreciation and moving expenses, are estimated to be as follows:

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During the quarter ended March 31, 2013, we began relocating equipment to the new location in Doral, Florida.  Personnel began moving in April 2013.  Equipment and personnel moves will continue through May 2013.  We expect the relocation of the Miami newspaper operations to be completed in May 2013, and related costs and expenses for the relocation are expected to be incurred through the third quarter of fiscal year 2013.

4.  LONG-TERM DEBT

Our long-term debt consisted of the following:

Our outstanding notes are stated net of unamortized discounts, if applicable, totaling $37.2 million and $41.2 million as of March 31, 2013 and December 30, 2012, respectively.

Debt Repurchases

During the quarter ended March 31, 2013, we redeemed or repurchased a total of $145.9 million of notes through the completion of our debt refinancing described below and through privately negotiated transactions, as follows:

We redeemed and repurchased all of these notes at a price greater than par value and wrote off historical discounts related to the notes we purchased, which resulted in a loss on extinguishment of debt of $12.8 million for the quarter ended March 31, 2013. During the quarter ended March 25, 2012, we repurchased $35.5 million aggregate principal amount of outstanding notes. We repurchased most of these notes at a price lower than par value and wrote off historical discounts related to the notes we purchased, resulting in a net gain on the extinguishment of debt of $4.4 million for the quarter ended March 25, 2012.

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Credit Agreement

In connection with the issuance of the 9.00% Senior Secured Notes due in 2022 (“9.00% Notes”) discussed below, we entered into the Third Amended and Restated Credit Agreement (“Credit Agreement”), dated as of December 18, 2012. The Credit Agreement provides for $75.0 million in revolving credit commitments, with a $50.0 million letter of credit subfacility, and has a maturity date of December 18, 2017. Our obligations under the Credit Agreement are secured by a first-priority security interest in certain of our assets as described below. As of March 31, 2013, there were no outstanding draw downs and $33.6 million face amount of letters of credit were outstanding under the Credit Agreement.

Under the Credit Agreement, we may borrow at either the London Interbank Offered Rate plus a spread ranging from 275 basis points to 425 basis points, or at a base rate plus a spread ranging from 175 basis points to 325 basis points, in each case based upon our consolidated total leverage ratio. The Credit Agreement provides for a commitment fee payable on the unused revolving credit ranging from 50 basis points to 62.5 basis points, based upon our consolidated total leverage ratio.

Senior Secured Notes and Indenture

On December 18, 2012, we issued $910 million aggregate principal amount of 9.00% Notes. We received approximately $889 million net of financing costs in the offering and used the net proceeds, as well as cash on hand, to repurchase all of our outstanding $846 million in aggregate principal amount of the 11.50% Senior Secured Notes due in 2017 (“11.50% Notes”) in two separate transactions. On December 18, 2012, we repurchased $762.4 million of the 11.50% Notes pursuant to a cash tender offer done in connection with the issuance of the 9.00% Notes. In connection with the tender offer of the 11.50% Notes, we recorded a loss on the extinguishment of debt of approximately $94.5 million. In the quarter ended March 31, 2013, we redeemed the remaining $83.6 million aggregate principal amount of 11.50% Notes not tendered in the tender offer and we recorded a loss on the extinguishment of debt of approximately $9.6 million related to the refinancing.

Substantially all of our subsidiaries guarantee the obligations under the 9.00% Notes and the Credit Agreement. The guarantees provided by the guarantor subsidiaries are full and unconditional and joint and several, and the assets of any of our subsidiaries, other than the subsidiary guarantors, are minor.

In addition, we have granted a security interest to the banks that are a party to the Credit Agreement and the trustee under the indenture governing the 9.00% Notes that include, but are not limited to, intangible assets, inventory, receivables and certain minority investments as collateral for the debt. The security interest does not include any property, plant and equipment (“PP&E”), leasehold interests and improvements with respect to such PP&E which would be reflected on our consolidated balance sheet or shares of stock and indebtedness of our subsidiaries.

Covenants under the Senior Debt Agreements

The financial covenants under the Credit Agreement require us to comply with a maximum consolidated total leverage ratio and a minimum consolidated interest coverage ratio, each measured quarterly. As of March 31, 2013 and for the remainder of the term of the Credit Agreement, we are required to maintain a consolidated total leverage ratio of not more than 6.00 to 1.00 and a consolidated interest coverage ratio of at least 1.50 to 1.00. As of March 31, 2013, we were in compliance with all financial debt covenants.

The Credit Agreement also prohibits the payment of a dividend if a payment would not be permitted under the indenture for the 9.00% Notes (discussed below). Dividends under the indenture for the 9.00% Notes are allowed if the consolidated leverage ratio (as defined in the indenture) is less than 5.25 to 1.00 and we have sufficient amounts under our restricted payments basket (as defined in the indenture).

The indenture for the 9.00% Notes includes a number of restrictive covenants that are applicable to us and our restricted subsidiaries. The covenants are subject to a number of important exceptions and qualifications set forth in the indenture for the 9.00% Notes. These covenants include, among other things, restrictions on our ability to incur additional debt; make investments and other restricted payments; pay dividends on capital stock or redeem or repurchase capital stock or certain of our outstanding notes or debentures prior to stated maturity; sell assets or enter into sale/leaseback transactions; create specified liens; create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions; engage in certain transactions with affiliates; and consolidate or merge with or into other companies or sell all or substantially all of the Company’s and our subsidiaries’ assets, taken as a whole.

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5.  EMPLOYEE BENEFITS

We maintain a frozen noncontributory qualified defined benefit pension plan (“Plan”) which covers certain eligible employees.  No new participants may enter the Plan and no further benefits will accrue.  However, years of service continue to count toward early retirement calculations and vesting of benefits previously earned.

We also have a limited number of supplemental retirement plans to provide certain key employees with additional retirement benefits.  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 retirement expense are as follows:

In addition, we provide for or subsidize post-retirement health care and certain life insurance benefits for certain eligible employees and retirees, and we have a deferred compensation plan (“401(k) plan”), which enables qualified employees to voluntarily defer compensation.  The 401(k) plan includes a matching company contribution and a supplemental contribution that is tied to our performance.  We temporarily suspended our matching contribution to the 401(k) plan in 2009 and as of March 31, 2013, we have not reinstated that benefit.

In January 2013 and January 2012, we contributed $7.5 million and $40.0 million, respectively, of cash to the Plan.  We do not intend to make any additional material contributions to the Plan during the remainder of fiscal year 2013.

6.  COMMITMENTS AND CONTINGENCIES

We are subject to a variety of legal proceedings (including libel, employment, wage and hour, independent contractor and other legal actions) and governmental proceedings (including environmental matters) that arise from time to time in the ordinary course of our business.  We are unable to estimate the amount or range of reasonably possible losses.  However, we currently believe, after reviewing such actions with counsel, that the expected outcome of pending actions will not have a material effect on our condensed consolidated financial statements.  No material amounts for any losses from litigation that may ultimately occur have been recorded in the condensed consolidated financial statements as we believe that any such losses are not probable.

We have certain indemnification obligations related to the sale of assets including but not limited to insurance claims and multi-employer pension plans of disposed newspaper operations.  We believe the remaining obligations related to disposed assets will not be material to our financial position, results of operations or cash flows.

In addition to the $33.6 million of standby letters of credit secured under the Credit Agreement (see Note 4 for further discussion), we have $1.2 million in letters of credit arising from insurance and other potential claims.  These letters of credit are collateralized with $1.2 million in certificates of deposit and are recorded as other long-term assets in our condensed consolidated balance sheet.

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7.  STOCK PLANS

Stock Plans Activity

The following table summarizes the restricted stock units (“RSUs”) activity during the quarter ended March 31, 2013:

The total fair value of the RSUs that vested during the quarter ended March 31, 2013 was $0.8 million.

The following table summarizes the stock appreciation rights (“SARs”) activity during the quarter ended March 31, 2013:

For the quarter ended March 31, 2013, the following weighted average assumptions were used to estimate the fair value of the SARs granted:

Stock-Based Compensation

All stock-based payments, including grants of stock appreciation rights, restricted stock units and common stock under equity incentive plans, are recognized in the financial statements based on their fair values.  At March 31, 2013, we had five stock-based compensation plans.  Stock-based compensation expenses are reported in the compensation line item in the condensed consolidated statements of operations. Total stock-based compensation expense for the periods presented in this report is summarized below:

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Information

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended, including statements relating to future financial performance and operations. These statements are based upon our current expectations and knowledge of factors impacting our business and are generally preceded by, followed by or are a part of sentences that include the words “believes,” “expects,” “anticipates,” “estimates” or similar expressions. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements. 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. Such statements are subject to risks, trends and uncertainties. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Part I, Item 1A of our 2012 Annual Report on Form 10-K. We undertake no obligation to revise or update any forward-looking statements except as required under applicable law.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of The McClatchy Company (the “Company,” “we,” “us” or “our”). MD&A should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes to the financial statements (“Notes”) as of and for the quarter ended March 31, 2013, included in Item 1 of this Quarterly Report on Form 10-Q, as well as with our audited consolidated financial statements and accompanying notes to the financial statements and MD&A contained in our 2012 Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 6, 2013.

Overview

We are a leading news, advertising and information provider, offering a wide array of print and digital products in each of the markets we serve. We are the third largest newspaper company in the United States, based on daily circulation. Our operations include 30 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services. Our largest newspapers include the Fort Worth Star-Telegram, The Sacramento Bee, The Kansas City Star, The Miami Herald, The Charlotte Observer and The (Raleigh) News & Observer.

We also own a portfolio of premium digital assets, including 15.0% of CareerBuilder, LLC, which operates the nation’s largest online job website, CareerBuilder.com, 25.6% of Classified Ventures, LLC, a company that offers classified websites such as the auto website Cars.com and the rental website Apartments.com, 33.3% of HomeFinder, LLC, which operates the online real estate website HomeFinder.com; and 11.4% of Wanderful Media, owner of Find n Save®, a digital shopping portal that provides advertisers with a common platform to reach online audiences with digital circulars, coupons and display advertising.

Our primary sources of revenues are print and digital advertising, which accounted for 66.8% of our total revenues for quarter ended March 31, 2013 compared to 68.4% in quarter ended March 25, 2012. All categories of advertising (retail, national and classified) discussed below include both print and digital advertising. Retail advertising revenues include advertising carried as a part of newspapers (run of press (“ROP”) advertising), advertising inserts placed in newspapers (“preprint advertising”) and/or advertising delivered digitally.

Circulation revenues accounted for 29.1% of our total revenues for the quarter ended March 31, 2013, compared to 27.6% in the quarter ended March 25, 2012. Our print newspapers are delivered by independent contractors and large distributors. Revenues from other sources, including among other, commercial printing and distribution revenues, constituted 4.1% of our total revenues in the quarter ended March 31, 2013 compared to 4.0% in the quarter ended March 25, 2012.

See “Results of Operations” section below for a discussion of our revenue performance and contribution by category for the quarters ended March 31, 2013 and March 25, 2012.

Recent Developments

Circulation Delivery Contract Accounting

Subsequent to the issuance of our consolidated financial statements for the year ended December 30, 2012, we determined that circulation revenues associated with our “fee for service” contracts with distributors and carriers should be presented on a gross basis, as opposed to on a net basis.  The difference in presentation results in delivery costs associated with these contracts being reported as other operating expenses, rather than as a reduction in circulation revenues, in our condensed consolidated statements of operations.  We believe this error is not material to our previously issued financial statements for prior periods.  Accordingly, the classifications in the condensed consolidated statements of operations for the quarter ended March 25, 2012 have been corrected in this Form 10-Q, resulting in increases to circulation revenues and other operating expenses of $18.4 million.  There was no impact to the previously reported operating income, operating cash flow, net loss or net loss per common share amounts.

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Debt Reductions

In the quarter ended March 31, 2013, we redeemed the remaining outstanding $83.6 million aggregate principal amount of 11.50% Senior Secured Notes (“11.50% Notes”) not tendered in the tender offer in December 2012 (See Debt and Related Matters section in the “Liquidity and Capital Resources” section below) and recorded a loss on the extinguishment of debt of approximately $9.6 million.  In addition, during the quarter ended March 31, 2013, we purchased $62.3 million aggregate principal amount of our outstanding debt in privately negotiated repurchases, which consisted of $37.5 million aggregate principal amount of our 4.625% notes due in 2014 and $24.8 million aggregate principal amount of our 5.750% notes due in 2017.  As a result, we recorded an additional loss on extinguishment of debt of approximately $3.2 million.

Other Developments

Sale of Real Property in Miami and Subsequent Plans for Relocation

On May 27, 2011, we sold 14.0 acres of land in Miami, including the building holding the operations of one of our subsidiaries, The Miami Herald Media Company, and adjacent parking lots, for a purchase price of $236.0 million (“Miami property”). We received cash proceeds of $230.0 million. The additional $6.0 million was held in an escrow account for our expenses incurred in connection with the relocation of our Miami operations. In April 2012, we received these funds, which were released for payment of costs associated with the relocation of the Miami operations.

In connection with the sale, The Miami Herald Media Company entered into a lease agreement with the buyer pursuant to which we have continued to operate our Miami newspaper operations rent free from the existing location through May 2013, while our new facilities are being constructed. We must vacate the facilities by the end of May 2013. As a result of our continuing involvement in the Miami property and given the fact that we will not pay rent during this period, the sale was treated as a financing transaction. Accordingly, we will continue to depreciate the carrying value of the building until our operations are moved. In addition, we have recorded a $236.0 million liability (in financing obligations) equal to the sales proceeds received of $230.0 million plus the $6.0 million received from the escrow account for reimbursement of moving expenses. We are imputing rent based on comparable market rates, which is reflected as interest expense until the operations are moved. As of March 31, 2013, no gain or loss has been recognized on the transaction. We expect to recognize a gain of approximately $10 million at the time the operations are moved since there will no longer be a continuing involvement with the Miami property.

In the first quarter of 2012, we purchased approximately 6.1 acres of land located in Doral, Florida, for approximately $3.1 million. We are building a new production facility on this site for our Miami newspaper operations. In January 2012, we also entered into an operating lease for a two-story office building adjacent to the new production facility. The operating lease on the office building has initial annual base lease payments of $1.8 million beginning in May 2013 when the building is expected to be occupied. Total costs related to relocating the Miami newspaper operations and for constructing the new production facility, including the purchase of the property, construction costs, accelerated depreciation and moving expenses, are estimated to be as follows:

During the quarter ended March 31, 2013, we began relocating equipment to the new location in Doral, Florida.  Personnel began moving in April 2013.  Equipment and personnel moves will continue through May 2013.  We expect the relocation of the Miami newspaper operations to be completed in May 2013, and related costs and expenses from the relocation are expected to be incurred through the third quarter of fiscal year 2013.

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Results of Operations

We had net loss in the quarter ended March 31, 2013 of $12.7 million, or $0.15 per share, compared to a net loss of $2.1 million, or $0.02 per share, in the quarter ended March 25, 2012.

Revenues

The following table summarizes our revenues by category:

During the quarter ended March 31, 2013, total revenues decreased 3.8% compared to the same period in 2012 as we continue to be impacted by the industry-wide declines in advertising revenues.  The continued weak economy and a secular shift in advertising demand from print to digital products are the principal causes of the change.  However, in the quarter ended March 31, 2013, decreases in total advertising revenues were partially offset by increases in circulation revenues and other revenues.

Advertising Revenues

During the quarter ended March 31, 2013, total advertising revenues decreased 6.0% to $197.1 million compared to the same period in 2012.  While declines during the period were widespread among categories, the primary decrease in advertising revenues related to retail advertising and employment classified advertising.  These decreases are partially offset by increases in our digital revenues and direct marketing revenues.

The following table reflects the category of advertising revenue as a percentage of total advertising revenue for the periods presented:

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Retail:

During the quarter March 31, 2013, retail advertising revenues decreased 8.7% to $97.9 million compared to the same period in 2012.  In the quarter ended March 31, 2013, compared to the same period in 2012, the decrease was primarily due to a decrease in ROP advertising revenues of 10.2% and a decrease in preprint advertising revenues of 6.4%.  The decreases in the period were widespread among the ROP and preprint categories.

National:

National advertising revenues decreased 0.9% to $15.0 million during the quarter ended March 31, 2013 compared to the same period in 2012.  During the quarter ended March 31, 2013 compared to the same period in 2012, we experienced a 5.7% decrease in print national advertising, which was almost entirely offset by an increase in digital national advertising of 13.5%.  Decreases in total national advertising revenues were broad-based but led by a decrease from the entertainment category and were nearly offset by increases in our banking and telecommunications categories.

Classified:

During the quarter ended March 31, 2013, classified advertising revenues decreased 6.7% to $55.5 million compared to the same periods in 2012. The automotive and employment categories represent our largest declines in classified advertising, partially offset by an increase in the digital automotive category.  While the decreases in classified advertising revenues are partially a result of the weak economy, we believe that advertisers are increasingly using digital advertising, which is widely available from many of our competitors. During the quarter ended March 31, 2013, compared to the same period in 2012, we experienced a 13.2% decrease in print classified advertising, which was partially offset by an increase in digital classified advertising of 3.0%.  The following is a discussion of the major classified advertising categories for the quarter ended March 31, 2013 as compared to the same period in 2012:

Digital:

Digital advertising revenues, which are included in each of the advertising categories discussed above, constituted 24.0% of total advertising revenues in the quarter ended March 31, 2013.  Total digital advertising includes digital advertising both bundled with print and sold on a stand-alone basis.  Digital advertising revenues totaled $47.3 million in the quarter ended March 31, 2013 representing an increase of 1.5% compared to the same period in 2012.  Digital-only advertising revenues totaled $26.7 million, an increase of 8.9% in the quarter ended March 31, 2013 compared to the same period in 2012.  Digital advertising revenues sold in conjunction with print products declined 6.7% in the quarter ended March 31, 2013 compared to the same period in 2012, as a result of fewer print advertising sales.

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Direct Marketing and Other:

Direct marketing and other advertising revenues increased 2.6% to $28.8 million during the quarter ended March 31, 2013 compared to the same period in 2012.  This increase reflects, in part, growth in revenues from our “Sunday Select” product, a package of preprinted advertisements delivered to nonsubscribers upon request, which grew 14.3% in the quarter ended March 31, 2013 compared to the same period in 2012.

Circulation Revenues

Circulation revenues increased 1.2% to $85.8 million during the quarter ended March 31, 2013 compared to the same period in 2012.  This increase primarily reflects the implementation of our new digital subscription packages (“Plus Program”) in the fourth quarter of 2012 and was partially offset by lower circulation volumes.  The Plus Program provided $5.8 million in incremental revenues contributing to the 1.2% growth in total circulation revenues for the quarter ended March 31, 2013 compared to the same period in 2012. As expected, circulation volumes continue to remain lower as a result of fragmentation of audiences faced by all media as available media outlets proliferate and readership trends change.  We expect the Plus Program to continue to increase our circulation revenues in future results and we will continue to look for new opportunities to increase circulation revenues.

Operating Expenses

Total operating expenses decreased 1.5% during the quarter ended March 31, 2013 compared to the same period in 2012.  Operating expenses in the periods presented include restructuring-related severance as we continue to restructure our operations, accelerated depreciation on equipment and moving expenses primarily related to the relocation of our Miami newspaper operations. The following table summarizes operating expenses:

Compensation expenses, which include the restructuring charges discussed above, were flat in the quarter ended March 31, 2013 compared to the same period in 2012.  Payroll expenses in the quarter ended March 31, 2013 decreased 3.3% compared to the same period in 2012, reflecting a 4.0% decline in average full-time equivalent headcount.  Fringe benefits costs in the quarter ended March 31, 2013 increased 15.6%, compared to the same period in 2012, primarily as a result of higher medical and retirement costs.

Newsprint, supplements and printing expenses decreased 10.6% to $30.7 million in the quarter ended March 31, 2013 compared to the same period in 2012.  The newsprint expense decline of 14.8% reflects a 12.8% decrease in newsprint usage and a 2.2% decrease in newsprint prices.  Supplement and printing expense increased 3.2% in the quarter ended March 31, 2013 compared to the same period in 2012, primarily as a result of outsourcing some of our printing operations.

Depreciation and amortization expenses decreased slightly to $30.4 million in the quarter ended March 31, 2013 compared to the same period in 2012.  Other operating costs were flat in the quarter ended March 31, 2013 compared to the same period in 2012.

Non-Operating Expenses

Interest Expense

Total interest expense decreased 16.4% in the quarter ended March 31, 2013 compared to the same period in 2012, primarily due to lower outstanding principal amounts of debt and lower overall rates with the refinancing of notes (see Debt and Related Matters discussion below).

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Equity Income

Total income from unconsolidated investments increased 52.2% during the quarter ended March 31, 2013 compared to the same period in 2012 due to the continued growth in our internet-related investments.

Loss on Extinguishment of Debt

During the quarter ended March 31, 2013, we repurchased $145.9 million aggregate principal amount of outstanding notes.  We repurchased these notes at a price higher than par value and wrote off historical discounts related to the notes we purchased, which resulted in a loss on extinguishment of debt of $12.8 million in the quarter ended March 31, 2013.  During the quarter ended March 25, 2012, we repurchased $35.5 million aggregate principal amount of outstanding notes.  We repurchased most of these notes at a price lower than par value and wrote off historical discounts related to the notes we purchased, resulting in a net gain on the extinguishment of debt of $4.4 million for the quarter ended March 25, 2012.

Income Taxes

We recorded an income tax benefit of $5.7 million for the quarter ended March 31, 2013.  The benefit was affected by the inclusion in pre-tax loss of discrete tax items, such as (i) loss on the refinancing of our 11.50% Notes, (ii) certain asset disposals, and (iii) severance for the quarter ended March 31, 2013.  Excluding these items the effective tax rate was 40.8% for the quarter ended March 31, 2013 and is higher than the federal statutory rate of 35% due primarily to state taxes, including certain state taxes that do not vary with net income.

In the quarter ended March 25, 2012, we recorded an income tax benefit of $1.9 million.  The benefit includes taxes on discrete items similar to those discussed above.  Excluding the taxes on discrete items the effective benefit rate was 42.4% and reflects a combination of federal taxes at the federal statutory rate of 35% plus state taxes net of federal provision of 7.4%.

Liquidity and Capital Resources

Sources and Uses of Liquidity and Capital Resources

Our cash and cash equivalents were $17.6 million as of March 31, 2013, compared to $24.4 million of cash at March 25, 2012, and $113.1 million as of December 30, 2012.  The cash balance at December 30, 2012 reflects the receipt of distributions from our equity investments and proceeds from the issuance of the 9.00% Senior Secured Notes due in 2022 (“9.00% Notes”), both of which were subsequently used to complete the debt refinancing as discussed below.

We expect that most of our cash generated from operations in the foreseeable future will be used to repay debt, fund our capital expenditures and make required contributions to our qualified defined benefit pension plan (“Plan”).  As of March 31, 2013, we had approximately $1.6 billion in total debt outstanding, consisting of $910 million aggregate principal amount of publicly-traded senior secured notes due 2022 and $655.7 million aggregate principal amount of unsecured publicly-traded notes maturing in 2014, 2017, 2027, and 2029.  We expect that we will need to refinance a significant portion of this debt prior to the scheduled maturity of such debt.  In addition, we expect to use our cash from operations from time to time to opportunistically repurchase our outstanding debt prior to the scheduled maturity of such debt and/or reduce our debt through debt exchanges, privately negotiated transactions or similar transactions.  We believe that our cash from operations is sufficient to satisfy our liquidity needs over the next 12 months, while maintaining adequate cash and cash equivalents.

The following table summarizes our cash flows: