Edgar Filing: MCCLATCHY CO

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended: June 24, 2012

¨	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)


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)

916-321-1836

Registrant’s telephone number, including area code

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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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). x Yes ¨ 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 x No

As of July 27, 2012, the registrant had shares of common stock as listed below outstanding:


Class A Common Stock			60,938,355
Class B Common Stock			24,800,962

THE McCLATCHY COMPANY

INDEX TO FORM 10-Q


Part I – FINANCIAL INFORMATION			Page

Item 1 – Financial Statements (unaudited):

Condensed Consolidated Balance Sheet – June 24, 2012 and December 25, 2011			2

Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months and six months ended June 24, 2012 and June 26, 2011			4

Condensed Consolidated Statement of Cash Flows for the six months ended June 24, 2012 and June 26, 2011			5

Notes to Condensed Consolidated Financial Statements			6

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			18

Item 3 – Quantitative and Qualitative Disclosures About Market Risk			31

Item 4 – Controls and Procedures			31

Part II – OTHER INFORMATION

Item 1 – Legal Proceedings			32

Item 1A – Risk Factors			32

Item 5 – Other Information			37

Item 6 – Exhibits			38

Signatures			39

Exhibit Index			40

Forward-Looking Information:

This report on Form 10-Q contains forward-looking statements regarding the future financial performance and operations of The McClatchy Company (“McClatchy” or the “Company”). These statements represent management’s expectations or beliefs concerning future events and are based upon current expectations and knowledge of factors impacting McClatchy’s business, including, without limitation, McClatchy’s customers and the markets in which McClatchy operates, the Company’s advertising revenues, the effect of the Company’s revenues on the fair value of its reporting units, its newspapers’ audience and circulation volumes, its impairment analyses and management’s evaluation of the factors pertinent thereto, the economy, the Company’s pension plans, including its assumptions regarding return on pension plan assets and assumed discount rates and future contributions to its qualified pension plan, newsprint pricing and other costs, its restructuring plans, including projected costs and savings, amortization expense, stock option expenses, prepayment of debt, capital expenditures and completion of construction of its new Miami facilities by May 2013 as required in the sales agreement for its existing Miami facilities, litigation, sufficiency of capital resources, possible acquisitions and investments, and future financial performance. 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, McClatchy claims 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, particularly in the section entitled “Risk Factors” in this quarterly report on Form 10-Q, in the documents which the Company incorporates by reference and in its other filings with the Securities and Exchange Commission, could affect the Company’s future results and could cause those future results to differ materially from those expressed in the Company’s forward-looking statements: McClatchy might not generate sufficient cash from operations, or otherwise, necessary to reduce debt or meet debt covenants as expected; McClatchy may experience decreased circulation and diminished revenues from retail, classified and national advertising; McClatchy’s operations have been, and will likely continue to be, adversely affected by competition, including competition from internet publishing and advertising platforms; increases in the cost of newsprint; bankruptcies or financial strain of its major advertising customers; litigation or any potential litigation; geo-political uncertainties, including the risk of war; changes in printing and distribution costs from anticipated levels, including changes in postal rates or agreements; changes in interest rates; changes in pension assets and liabilities; increased consolidation among major retailers in its markets or other events depressing the level of or reducing the demand for advertising; its inability to negotiate and obtain favorable terms under collective bargaining agreements with unions; competitive action by other companies; and other factors, many of which are beyond the Company’s control.

PART I – FINANCIAL INFORMATION

Item 1 – FINANCIAL STATEMENTS

THE McCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

(In thousands, except share amounts)


ASSETS CURRENT ASSETS:	June 24, 2012			December 25, 2011
Cash and cash equivalents	$	37,654		$	86,020
Trade receivables – (net of allowance of $7,656 in 2012 and $7,341 in 2011 )		140,542			179,046
Other receivables		11,264			13,990
Newsprint, ink and other inventories		30,281			28,842
Deferred income taxes		16,605			16,605
Other current assets		18,701			20,473

		255,047			344,976
PROPERTY, PLANT AND EQUIPMENT:
Land		311,688			308,489
Building and improvements		362,421			362,091
Equipment		778,604			784,592
Construction in progress		8,286			4,463

		1,460,999			1,459,635
Less accumulated depreciation		(719,202	)		(698,658	)

		741,797			760,977
INTANGIBLE ASSETS:
Identifiable intangibles – net		557,600			586,160
Goodwill		1,012,011			1,012,011

		1,569,611			1,598,171
INVESTMENTS AND OTHER ASSETS:
Investments in unconsolidated companies		320,153			304,893
Other assets		38,706			31,042

		358,859			335,935

TOTAL ASSETS	$	2,925,314		$	3,040,059

See notes to condensed consolidated financial statements.

THE McCLATCHY COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) – Continued

(In thousands, except share amounts)


LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES:	June 24, 2012			December 25, 2011
Accounts payable	$	42,457		$	44,727
Accrued pension liabilities		7,323			37,462
Accrued compensation		40,731			42,928
Income taxes payable		15,077			13,063
Unearned revenue		74,279			73,352
Accrued interest		47,872			49,686
Other accrued liabilities		16,120			15,676

		243,859			276,894
NON-CURRENT LIABILITIES:
Long-term debt		1,513,901			1,577,476
Deferred income taxes		134,656			139,296
Pension and postretirement obligations		496,837			516,668
Financing obligations		279,014			272,795
Other long-term obligations		54,642			81,743

		2,479,050			2,587,978
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY:
Common stock $.01 par value:
Class A – authorized 200,000,000 shares, issued 61,642,566 in 2012 and 60,865,566 in 2011		616			609
Class B – authorized 60,000,000 shares, issued 24,800,962 in 2012 and 2011		248			248
Additional paid-in capital		2,220,726			2,219,161
Accumulated deficit		(1,671,254	)		(1,696,032	)
Treasury stock at cost, 704,211 shares in 2012 and 260,170 shares in 2011		(2,284	)		(1,145	)
Accumulated other comprehensive loss		(345,647	)		(347,654	)

		202,405			175,187

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,925,314		$	3,040,059

See notes to condensed consolidated financial statements.

THE McCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended						Six Months Ended
	June 24, 2012			June 26, 2011			June 24, 2012			June 26, 2011
REVENUES - NET:
Advertising	$	222,565		$	236,022		$	432,329		$	461,135
Circulation		63,568			65,144			129,971			131,311
Other		13,161			13,084			25,295			25,538

		299,294			314,250			587,595			617,984
OPERATING EXPENSES:
Compensation		108,086			119,735			220,735			244,092
Newsprint, supplements and printing expenses		34,968			36,947			69,307			72,323
Depreciation and amortization		30,822			30,353			61,563			61,584
Other operating expenses		82,483			82,082			165,080			174,397

		256,359			269,117			516,685			552,396
OPERATING INCOME		42,935			45,133			70,910			65,588

NON-OPERATING (EXPENSES) INCOME:
Interest expense		(30,630	)		(44,696	)		(73,107	)		(85,643	)
Interest income		36			26			50			47
Gain (loss) on extinguishment of debt		1,653			(1,214	)		6,086			(2,479	)
Equity income in unconsolidated companies, net		9,334			9,500			15,352			12,672
Other - net		5			159			43			225

		(19,602	)		(36,225	)		(51,576	)		(75,178	)
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)		23,333			8,908			19,334			(9,590	)
INCOME TAX PROVISION (BENEFIT)		(3,532	)		3,961			(5,444	)		(12,575	)

NET INCOME		26,865			4,947			24,778			2,985
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Pension and post retirement plans:
Unamortized gain (loss)/prior service credit		1,709			(19,122	)		3,299			(18,522	)
Other comprehensive income (loss) related to investment in unconsolidated companies		(707	)		(178	)		(1,292	)		448

OTHER COMPREHENSIVE INCOME (LOSS)		1,002			(19,300	)		2,007			(18,074	)

TOTAL COMPREHENSIVE INCOME (LOSS)	$	27,867		$	(14,353	)	$	26,785		$	(15,089	)

NET INCOME PER COMMON SHARE:
Basic	$	0.31		$	0.06		$	0.29		$	0.04
Diluted	$	0.31		$	0.06		$	0.29		$	0.03
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic		85,739			85,114			85,617			85,075
Diluted		86,323			85,948			86,441			85,975

See notes to condensed consolidated financial statements.

THE McCLATCHY COMPANY

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

(In thousands)


	Six Months Ended
	June 24, 2012			June 26, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	24,778		$	2,985
Reconciliation to net cash from operations:
Depreciation and amortization		61,563			61,584
Retirement benefit expense		874			3,159
Contribution to qualified defined benefit pension plan		(40,000	)		(163,000	)
Stock-based compensation expense		1,793			2,695
Equity income in unconsolidated companies		(15,352	)		(12,672	)
(Gain) loss on extinguishment of debt		(6,086	)		2,479
Other		(251	)		3,237
Changes in certain assets and liabilities:
Trade receivables		38,504			41,967
Inventories		(1,439	)		3,391
Other assets		(3,510	)		2,690
Accounts payable		(4,084	)		(8,123	)
Accrued compensation		(2,336	)		(22,080	)
Income taxes		(33,360	)		(11,328	)
Other liabilities		2,126			(2,509	)

Net cash from operating activities		23,220			(95,525	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(12,963	)		(7,053	)
Proceeds from sale of equipment and other		813			10,770
Purchase of certificate of deposits		(2,222	)		—
Equity investments and other-net		(2,000	)		(40	)

Net cash from investing activities		(16,372	)		3,677
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of privately held 15.75% notes due 2014		—			(447	)
Repurchase of public notes and related expenses		(59,243	)		(93,847	)
Payment of financing costs		(611	)		(2,552	)
Proceeds from financing obligation related to Miami transaction		6,000			230,000
Other – principally stock transactions		(1,360	)		115

Net cash from financing activities		(55,214	)		133,269

NET CHANGE IN CASH AND CASH EQUIVALENTS		(48,366	)		41,421
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		86,020			17,508

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	37,654		$	58,929

OTHER CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes (net of refunds)	$	14,153		$	5,434
Interest (net of capitalized interest)		73,277			77,733
Other non-cash financing activities:
Financing obligation for contribution of real property to pension plan	$	—		$	49,710
Reduction of pension obligation		—			(49,710	)
Non-refundable deposit offset against carrying value of land		—			(16,500	)
Increase in PP&E for land transferred from other assets		—			116,000

See notes to condensed consolidated financial statements.

THE McCLATCHY COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

The McClatchy Company (“McClatchy” or the “Company”) 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, McClatchy’s operations include 30 daily newspapers, community newspapers, websites, mobile news and advertising, niche publications, direct marketing and direct mail services. The Company’s largest newspapers include The Miami Herald, The Sacramento Bee, Fort Worth Star-Telegram, The Kansas City Star, The Charlotte Observer and The News & Observer in Raleigh, N.C.

McClatchy also owns a portfolio of premium digital assets, including 15.0% of CareerBuilder LLC, which operates the nation’s largest online job site, CareerBuilder.com, 25.6% of Classified Ventures LLC, a company that offers classified websites such as the auto website Cars.com and the rental site Apartments.com, and 33.3% of HomeFinder LLC, which operates the online real estate website HomeFinder.com. McClatchy is listed on the New York Stock Exchange under the symbol MNI.

The condensed consolidated financial statements include the Company and its subsidiaries. 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 condensed consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. 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 condensed consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 25, 2011.

Stock-based compensation – All share-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 June 24, 2012, the Company had five stock-based compensation plans .. Compensation expense for the plans is summarized below:

For the Three
Months Ended

For the Six
Months Ended

June 24,
2012

June 26,
2011

June 24,
2012

June 26,
2011

Stock-based compensation expense

0.9 million

1.1 million

1.8 million

2.7 million

Income taxes – The Company accounts for income taxes using the asset and 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.

Generally accepted accounting principles prescribe a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax returns. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense. Accrued penalties are recognized as a component of income tax expense.

Fair value of financial instruments – Generally accepted accounting principles require the disclosure of the fair value of certain financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value measurements accounting principles establishes a framework for measuring fair value of assets and liabilities. This framework provides a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). For Level 1, inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date.

The Company estimated the fair values presented below using appropriate valuation methodologies and market information available as of the end of the period covered by this report. These valuations are considered Level 1 measurements. However, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values. Additionally, the fair values were estimated at the end of the second fiscal quarter of 2012, and current estimates of fair value may differ significantly from the amounts presented.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, certificate of deposits (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 based on a number of observable inputs, including the current market activity of the Company’s publicly-traded notes and bank debt, trends in investor demand and market values of comparable publicly-traded debt. At June 24, 2012, the estimated fair value of long-term debt was $1.4 billion and the carrying value of long-term debt was $1.5 billion.

Comprehensive income (loss) –The Company records changes in its net assets from non-owner sources in its Consolidated Statement of Stockholders’ Equity. Such changes relate primarily to valuing its pension liabilities, net of tax effects. The following table summarizes the changes in other comprehensive income (loss):


	Changes to Comprehensive Income (Loss)
(in thousands)	Pre-Tax			Tax			After-Tax
Quarter Ended June 24, 2012:
Pension and post retirement plans:
Unamortized gain	$	3,106		$	(1,242	)	$	1,864
Prior service cost		(258	)		103			(155	)
Other comprehensive loss related to equity investments		(1,178	)		471			(707	)

	$	1,670		$	(668	)	$	1,002

Quarter Ended June 26, 2011:
Pension and post retirement plans:
Unamortized loss	$	(31,621	)	$	12,654		$	(18,967	)
Prior service cost		(258	)		103			(155	)
Other comprehensive loss related to equity investments		(296	)		118			(178	)

	$	(32,175	)	$	12,875		$	(19,300	)


	Changes to Comprehensive Income (Loss)
(in thousands)	Pre-Tax			Tax			After-Tax
Six Months Ended June 24, 2012:
Pension and post retirement plans:
Unamortized gain	$	6,031		$	(2,412	)	$	3,619
Prior service cost		(533	)		213			(320	)
Other comprehensive loss related to equity investments		(2,154	)		862			(1,292	)

	$	3,344		$	(1,337	)	$	2,007

Six Months Ended June 26, 2011:
Pension and post retirement plans:
Unamortized loss	$	(30,346	)	$	12,144		$	(18,202	)
Prior service cost		(533	)		213			(320	)
Other comprehensive gain related to equity investments		747			(299	)		448

	$	(30,132	)	$	12,058		$	(18,074	)

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 is summarized below:

For the Three
Months Ended

For the Six
Months Ended

June 24,
2012

June 26,
2011

June 24,
2012

June 26,
2011

Anti-dilutive stock options

6.3 million

6.7 million

6.0 million

5.7 million

New accounting pronouncements – In May 2011, the Financial Accounting Standards Board (“FASB”) issued a single authoritative guidance on a framework on how to measure fair value and on what disclosures to provide about fair value measurements. The FASB also clarified existing fair value measurement disclosures and made other amendments to current guidance. These amended standards and the adoption of this disclosure-only guidance was effective for the Company’s first fiscal quarter of 2012 and did not have a material impact on the Company’s consolidated financial results.

In June 2011, the FASB issued guidance that revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in previous guidance and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The new guidance does not change the items that must be reported in other comprehensive income. This amended guidance was effective for the Company’s first fiscal quarter of 2012 and did not have a material impact on the Company’s consolidated financial results or disclosures.

NOTE 2. INVESTMENTS IN UNCONSOLIDATED COMPANIES AND MIAMI LAND AND BUILDING

Investments

The Company’s ownership interest and investment in unconsolidated companies and joint ventures as of June 24, 2012 and December 25, 2011 consisted of the following (dollars in thousands):


Company	% Ownership Interest	June 24, 2012		December 25, 2011
CareerBuilder, LLC	15.0	$	222,501	$	218,805
Classified Ventures, LLC	25.6		76,718		66,886
HomeFinder, LLC	33.3		3,135		1,628
Seattle Times Company (C-Corporation)	49.5		—		—
Ponderay (general partnership)	27.0		12,064		11,800
Other	Various		5,735		5,774

		$	320,153	$	304,893

The Company uses the equity method of accounting for a majority of investments.

During the six months ended June 24, 2012, McClatchy’s proportionate share of net income from certain investees listed in the table above was greater than 20% of McClatchy’s consolidated net income before taxes. Summarized income statement information for these companies for the first six months of 2012 and 2011 follows (in thousands):


	Six Months Ended
	June 24, 2012		June 26, 2011
Revenues	$	527,855	$	474,915
Operating income		92,238		71,747
Net income		90,328		79,943

Miami Land and Building

On January 31, 2011, the original contract to sell certain land in Miami terminated because the buyer did not consummate the transaction by the closing deadline in the contract. Under the terms of an agreement with the developer, McClatchy is entitled to receive a $7.0 million termination fee and has filed a claim against the developer to secure payment. However, the Company has not recorded any amounts in its financial statements related to this fee pending the resolution of this claim. McClatchy previously received approximately $16.5 million in nonrefundable deposits, which it used to repay debt.

On May 27, 2011, the Company sold 14.0 acres of land in Miami, including the building holding the operations of one of its subsidiaries, The Miami Herald Media Company, and an adjacent parking lot for a purchase price of $236.0 million. Approximately 9.4 acres of this Miami land was previously subject to the original contract, which was terminated as discussed above. The Company received cash proceeds of $230.0 million, and an additional $6.0 million was held in an escrow account, payable to McClatchy once expenses are incurred related to the relocation of its Miami operations. The $6.0 million was released from escrow and received by McClatchy in April 2012 for payment of costs associated with the relocation of the Miami operations.

Under the sale agreement, The Miami Herald Media Company will continue to operate from its existing location through May 2013 rent free. Because the Company will not pay rent for this period, the Company is deemed to have continuing involvement in the property. As a result, under generally accepted accounting principles, the sale is treated as a financing transaction. Accordingly, the Company will continue to depreciate the carrying value of the building in its financial statements until its operations are moved, and no gain or loss has been recognized on the transaction.

As a result of the accounting treatment described above, the Company has recorded a liability (in financing obligations) equal to the sales proceeds received in the second quarter of 2011 ($230.0 million), plus $6.0 million for reimbursement of moving expenses. The Company is required to impute rent based on market rates. The imputed rent is reflected as interest expense as required by generally accepted accounting principles until the operations are moved. The Company expects to recognize a gain of approximately $10 million at the time the operations are moved because there will no longer be a continuing involvement with the Miami property.

In the first quarter of 2012, the Company purchased approximately 6.1 acres of land located in Doral, Fla., for approximately $3.1 million. McClatchy is building a new production facility on this site for its Miami newspaper operations. In January 2012, the Company entered into an agreement to lease a two-story office building adjacent to the future production facility. The Company’s Miami newspapers plan to relocate their operations from their current location to the new site in May 2013.

The lease on the office building is an operating lease with 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 newspapers’ 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:

•

Cash outlays for capital expenditures related to the new facilities are estimated to be $33 million. The Company began incurring these costs in the first quarter of 2012.

•

Cash expenses to relocate the Miami newspapers’ operations are expected to be $12 million.

•

Accelerated depreciation of $13 million is expected to be incurred on existing assets expected to be retired or decommissioned in connection with the relocation.

•

Cash costs of $6 million in connection with the relocation were reimbursed in April 2012 from an escrow account established for this purpose by the purchaser of the existing Miami facilities.

The relocation of the Miami operations is expected to be completed in May 2013, and accordingly, the costs and expenses are expected to be incurred through the third quarter of 2013.

NOTE 3. INTANGIBLE ASSETS AND GOODWILL

Intangible assets and goodwill consisted of the following (in thousands):


	June 24, 2012
	Gross Amount		Accumulated Amortization			Net Amount
Intangible assets subject to amortization:
Advertiser and subscriber lists	$	803,840	$	(449,935	)	$	353,905
Other		31,121		(31,013	)		108

Total	$	834,961	$	(480,948	)		354,013

Other intangible assets not subject to amortization:
Newspaper mastheads							203,587

Total							557,600
Goodwill							1,012,011

Total intangible assets and goodwill						$	1,569,611


	December 25, 2011
	Gross Amount		Accumulated Amortization			Net Amount
Intangible assets subject to amortization:
Advertiser and subscriber lists	$	803,840	$	(421,392	)	$	382,448
Other		31,121		(30,996	)		125

Total	$	834,961	$	(452,388	)		382,573

Other intangible assets not subject to amortization:
Newspaper mastheads							203,587

Total							586,160
Goodwill							1,012,011

Total intangible assets and goodwill						$	1,598,171

Changes in indefinite lived intangible assets and goodwill as of June 24, 2012, consisted of the following (in thousands):


	Original Gross Amount		Accumulated Impairment			Carrying Amount
Mastheads	$	683,000	$	(479,413	)	$	203,587
Goodwill		3,587,007		(2,574,996	)		1,012,011

Total	$	4,270,007	$	(3,054,409	)	$	1,215,598

Amortization expense with respect to intangible assets is summarized below:

For the Three
Months Ended

For the Six
Months Ended

June 24,
2012

June 26,
2011

June 24,
2012

June 26,
2011

Amortization expense

14.3 million

14.5 million

28.6 million

29.7 million

The estimated remaining amortization expense for the five succeeding fiscal years is as follows (in thousands):


Year	Amortization Expense
2012 (remainder)	$	29,599
2013		57,004
2014		52,524
2015		48,030
2016		47,721

NOTE 4. LONG-TERM DEBT

As of June 24, 2012, and December 25, 2011, the Company’s long-term debt consisted of the following (in thousands):


			Carrying Value
	Face Value at June 24, 2012		June 24, 2012		December 25, 2011
Notes:
11.50% senior secured notes due in 2017	$	846,000	$	839,404	$	843,652
4.625% notes due in 2014		66,438		63,726		77,406
5.750% notes due in 2017		286,138		272,167		318,624
7.150% debentures due in 2027		89,188		83,087		82,891
6.875% debentures due in 2029		276,230		255,517		254,903

Long-term debt	$	1,563,994	$	1,513,901	$	1,577,476

During the six months ended June 24, 2012, the Company repurchased $70.5 million of notes in privately negotiated transactions, as follows (in thousands):


	Face Value
11.50% senior secured notes due in 2017	$	5,000
4.625% notes due in 2014		15,000
5.750% notes due in 2017		50,500

Total notes repurchased	$	70,500

The Company repurchased most of these notes at a price lower than par value and wrote off historical discounts related to the notes it purchased, which resulted in a gain on extinguishment of debt. This gain was offset by the write-off of fees related to the amendment of the Credit Agreement that reduced the size of the credit facility, as discussed below. These combined events resulted in a net gain on the extinguishment of debt of $1.7 million and $6.1 million for the three and six months ended June 24, 2012, respectively.

The Company’s outstanding notes are stated net of unamortized discounts (totaling $50.1 million and $57.0 million as of June 24, 2012 and December 25, 2011, respectively) resulting from recording such assumed liabilities at fair value as of the June 27, 2006 acquisition of Knight Ridder, Inc. and the issuance of the 11.50% senior secured notes due in 2017 at an original issue discount.

Debt Refinancing:

On January 26, 2010, the Company entered into an amendment and restatement of its credit agreement that became effective on February 11, 2010, immediately prior to the closing of an offering of $875.0 million of senior secured notes, referred to as the 2017 Notes, as described below. The Amended and Restated Credit Agreement required a substantial reduction in bank debt and allowed for the early retirement of other bond debt using the proceeds of the secured notes offering. The Company was in compliance with all financial covenants of the credit agreement at the time of the refinancing.

In connection with the Amended and Restated Credit Agreement, the Company issued new 11.50% senior secured notes due February 15, 2017, totaling $875.0 million (the 2017 Notes). The 2017 Notes are secured by a first-priority lien on certain of McClatchy’s and the subsidiary guarantors’ assets and rank equally with liens granted under McClatchy’s Amended and Restated Credit Agreement. The assets securing the debt are unchanged from the original credit agreement and include intangible assets, inventory, receivables and certain other assets.

On December 16, 2010, the Company entered into an amendment of the Amended and Restated Credit Agreement (the Credit Agreement) to, among other things, remove certain restrictions on the ability to repurchase its publicly traded bonds, to repay the remaining bank term loans and to reduce the lenders’ revolving loan commitments under the Amended and Restated Credit Agreement.

On June 22, 2012, the Company further amended the Credit Agreement to reduce the size of the revolving loan facility from $125.0 million to $36.1 million to cover the Company’s issuances of standby letters of credit and to extend the maturity of the Credit Agreement to January 31, 2015. The new committed amount will only be available for the issuance of standby letters of credit. At June 24, 2012, the Company had outstanding letters of credit under the Credit Agreement totaling $36.1 million securing estimated obligations arising from insurance claims.

Fees for letters of credit under the Credit Agreement range from 425 basis points to 575 basis points. In each case, the applicable spread is based upon the Company’s consolidated total leverage ratio (as defined in the Credit Agreement). A commitment fee for the unused credit commitments is priced at 50 basis points to 75 basis points based upon the Company’s consolidated total leverage ratio (as defined in the Credit Agreement). As of June 24, 2012, the Company paid fees on the letters of credit under the Credit Agreement at a rate of 425 basis points and no significant unused commitments existed.

The Credit Agreement contains quarterly financial covenants including requirements that the Company maintain a minimum consolidated interest coverage ratio (as defined in the Credit Agreement) of 1.50 to 1.00. The Company is required to maintain a maximum consolidated leverage ratio (as defined in the Credit Agreement) of 6.25 to 1.00 from the quarter ending in June 2012 through the quarter ending in December 2012, decreasing to 6.00 to 1.00 thereafter. Under the Credit Agreement, the Company is required to maintain at least $10.0 million of cash equivalents (as defined in the Credit Agreement) as of the last day of each fiscal quarter beginning in the quarter ending in December 2012 and thereafter. The Credit Agreement includes limitations on additional debt.

The Credit Agreement also prohibits the payment of a dividend if a payment would not be permitted under the indenture for the 2017 Notes (discussed below). Dividends under the indenture for the 2017 Notes are allowed as a “Restricted Payment” if the consolidated leverage ratio (as defined in the Credit Agreement and the indenture) is less than 5.50 to 1.00 and the priority leverage ratio (as defined in the indenture) is less than 3.25 to 1.00.

At June 24, 2012, the Company was in compliance with all financial debt covenants. Because of the significance of the Company’s outstanding debt, remaining in compliance with debt covenants is critical to the Company’s operations. If revenue declines continue beyond those currently anticipated, the Company expects to continue to restructure operations and reduce debt to maintain compliance with its covenants.

Senior Secured Notes:

The 2017 Notes are governed by an indenture entered into on February 11, 2010, which includes a number of covenants that are applicable to the Company and its restricted subsidiaries. The covenants are subject to a number of important exceptions and qualifications set forth in the indenture for the 2017 Notes. These covenants include, among other things, restrictions on the ability of the Company and its restricted subsidiaries to incur additional debt; make investments and other restricted payments; pay dividends on capital stock or redeem or repurchase capital stock or subordinated obligations; sell assets or enter into sale/leaseback transactions; create specified liens; create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to the Company; 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 its subsidiaries’ assets, taken as a whole.

Substantially all of the Company’s subsidiaries guarantee the Company’s obligations under the Credit Agreement and the 2017 Notes (together, senior secured debt). Each of the guarantor subsidiaries is 100% owned by The McClatchy Company. Following the sale of land in Miami (see Note 2) on May 27, 2011, the Company has no significant independent assets or operations separate from the subsidiaries that guarantee its senior secured debt. The guarantees provided by the guarantor subsidiaries are full and unconditional and joint and several, and any subsidiaries of McClatchy other than the subsidiary guarantors are minor.

In addition, the Company has granted a security interest to the banks that are a party to the Credit Agreement and the trustee under the indenture governing the 2017 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 land, buildings, machinery and equipment (PP&E) and any leasehold interests and improvements with respect to such PP&E, which would be reflected on a consolidated balance sheet of the Company and its subsidiaries and shares of stock and indebtedness of the subsidiaries of the Company.

The following table presents the approximate annual maturities of debt as of June 24, 2012, based upon the Company’s required payments for the next five years and thereafter (in thousands):


Year	Payments
2012	$	—
2013		—
2014		66,438
2015		—
2016		—
Thereafter		1,497,556

Debt principal	$	1,563,994

NOTE 5. EMPLOYEE BENEFITS

Contribution of Cash and Real Property to Qualified Defined Benefit Plan: In January 2012, the Company contributed $40.0 million in cash to its qualified defined benefit pension plan. In January 2011, the Company contributed Company-owned real property from seven locations to its qualified defined benefit pension plan. The pension plan obtained independent appraisals of the property, and based on these appraisals the plan recorded the contribution (the fair value of the property) at $49.7 million.

The Company entered into leases for the seven contributed properties for 10 years and expects to continue to use the seven properties in its newspaper operations. The properties are managed on behalf of the pension plan by an independent fiduciary.

The contribution and leaseback of the properties were treated as a financing transaction and, accordingly, the Company will continue to depreciate the carrying value of the properties in its financial statements, and no gain or loss has been recognized on the contribution. The Company’s pension obligation has been reduced by $49.7 million, and a long-term and short-term financing obligation was recorded on the date of the contribution. The financing obligation is reduced by a portion of lease payments made to the pension plan each month and the balance of this obligation at June 24, 2012, was $47.1 million.

Also, in May 2011, the Company used proceeds from the sale of property in Miami (see Note 2) to contribute $163.0 million to its pension plan.

The Company does not currently intend to make any additional contributions to its qualified defined pension plan during fiscal 2012.

Retirement Plans Expenses: The Company’s defined benefit plans were frozen in March 2009. The Company sponsors a defined benefit pension plan (retirement plan), which covers a majority of its employees hired prior to March 31, 2009. Benefits are based on age, years of service and compensation.

The Company also has a limited number of supplemental retirement plans to provide key employees hired prior to March 31, 2009, 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 Company also provides for or subsidizes post-retirement health care and certain life insurance benefits for employees and has a deferred compensation plan (401(k) plan) for its employees, 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 Company performance (as defined in the plan). The Company temporarily suspended its matching contribution to the 401(k) plan in 2009, and it has not yet been reinstated.

The elements of retirement expense for continuing operations are as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 24, 2012			June 26, 2011			June 24, 2012			June 26, 2011
Service cost	$	1,395		$	1,369		$	2,770		$	2,769
Interest cost		23,049			22,688			45,949			46,238
Expected return on plan assets		(26,905	)		(24,538	)		(53,880	)		(48,563	)
Prior service cost amortization		7			7			7			7
Actuarial loss		3,268			1,425			6,343			2,825

Net pension expense		814			951			1,189			3,276
Net post-retirement benefit		(165	)		(67	)		(315	)		(117	)

Total retirement expenses-net	$	649		$	884		$	874		$	3,159

NOTE 6. COMMITMENTS AND CONTINGENCIES

Contingent claims: Libel, employment (including wage and hour) and other legal actions have arisen in the ordinary course of business and are pending against the Company. From time to time the Company is involved as a party in various governmental proceedings, including environmental matters. Management believes, after reviewing such actions with counsel, that the expected outcome of pending actions will not have a material effect on the Company’s condensed consolidated financial statements taken as a whole, although no assurances can be given. No material amounts for any losses from litigation that may ultimately occur have been recorded in the condensed consolidated financial statements as management believes that any such losses are not probable.

The Company has certain indemnification obligations related to insurance claims and multiemployer pension plans of disposed newspaper operations. Management believes the remaining obligations related to disposed newspapers will not be material to the Company’s financial position or results of operations.

In addition to the $36.1 million of letters of credit secured under the Company’s Credit Agreement (see Note 4 for further discussion), the Company has $2.2 million in letters of credit arising from insurance and other potential claims. These letters of credit are collateralized with $2.2 million in certificate of deposits and are recorded as other long-term assets in the Company’s condensed consolidated balance sheet.

NOTE 7. INCOME TAXES

During the three and six months ended June 24, 2012 the Company’s income tax provision reflects the benefit of the reversal of state tax reserves relating to the favorable settlements of state tax audits and state statute lapses. These reserve reversals are the primary driver of the effective benefit rates of 15.1% and 28.2% for each period. As a result of these reserve reversals, the Company’s unrecognized tax benefits decreased from $30.5 million at December 25, 2011 to $15.9 million at June 24, 2012. It is reasonably possible that unrecognized tax benefits may further decrease by $8.1 million in the next twelve months. The potential additional decrease in the next twelve months would be attributable to state statute lapses.

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

Overview

The Company’s primary source of revenue is print and digital advertising, which accounted for 74.4% of the Company’s revenue for the second quarter of 2012. All categories of advertising discussed below include both print and digital advertising. Classified advertising as a percentage of total advertising revenues were 27.4% in the second quarter of 2012. Revenues from retail advertising carried as a part of newspapers (run of press or ROP advertising), advertising inserts placed in newspapers (preprint advertising) and/or advertising sold digitally were 51.6% of total advertising revenue in the second quarter of 2012. National advertising was 6.8% of total advertising revenue in the second quarter of 2012. Direct marketing largely made up the remaining 14.2% of the Company’s advertising revenues in the second quarter of 2012 and has been growing as a percent of advertising revenues since early 2010.

Circulation revenues contributed 21.2% of the Company’s revenues in the second quarter of 2012 compared to 20.7% in the second quarter of 2011. Most of the Company’s print newspapers are delivered by independent contractors. Circulation revenues are recorded net of direct delivery costs.

See “Results of Operations” for a discussion of the Company’s revenue performance and contribution by category for the three months ended June 24, 2012 and June 27, 2011.

Recent Events and Trends

Advertising Revenues:

Advertising revenues in the second quarter of 2012 compared to the second quarter of 2011 decreased as a result of the continuing weak economy and the secular shift in advertising demand from print to digital products. The declines in the second quarter of 2012 were smaller than the period-over-period declines experienced in the second quarter of 2011 and full-year 2011, and were smaller than the period-over-period decline experienced in the first quarter of 2012 and each period compared to the corresponding periods in the prior year.

Despite declines in advertising revenue as a whole, certain advertising revenue categories grew in the first six months of 2012 compared to the same period in the prior year, including digital and direct marketing advertising. Digital advertising grew 3.8% in the first half of 2012 compared to the same period in 2011. Digital results include both digital sales bundled with print and digital advertising sold on a stand-alone basis. Digital-only advertising revenues grew 15.3% in the first six months of 2012 compared to the same period in 2011. Digital-only advertising revenues have consistently grown faster than digital advertising sold in conjunction with print products due to fewer print advertising sales. Direct marketing revenues were up 1.7% in the first six months of 2012 compared to the same period in 2011. See the revenue discussions in management’s review of the Company’s “Results of Operations.”

Sale of Real Property in Miami and Subsequent Plans for Relocation:

Sale Transaction. On May 27, 2011, the Company sold 14.0 acres of land in Miami, including the building holding the operations of one of its subsidiaries, The Miami Herald Media Company, and an adjacent parking lot for a purchase price of $236.0 million. The Company received cash proceeds of $230.0 million in 2011, and an additional $6.0 million was released from escrow and received in April 2012 as reimbursement of costs associated with its relocation (discussed below).

The Miami Herald Media Company will continue to operate from its existing location through May 2013 rent free. Because the Company will not pay rent for the two-year period, the Company is deemed to have continuing involvement in the property. As a result, under generally accepted accounting principles, the sale is treated as a financing transaction. Accordingly, the Company will continue to depreciate the carrying value of the building in its financial statements and no gain or loss will be recognized on the transaction until its operations are moved.

The Company used $163.0 million of the sale proceeds to make a contribution to its qualified defined benefit pension plan and used the remaining portion of the proceeds for general corporate purposes, including the payment of interest and taxes and for debt reduction.

Relocation Plans. In the first fiscal quarter of 2012, the Company purchased approximately 6.1 acres of land located in Doral, Fla., for approximately $3.1 million. McClatchy is building a new production facility on this site for its Miami newspapers’ operations. In January 2012, the Company entered into an agreement to lease a two-story office building adjacent to the future production facility. The newspapers plan to relocate their operations from their current location to the new site in May 2013.

•

Cash outlays for capital expenditures related to the new facilities are estimated to be $33 million.

•

Cash expenses to relocate the Miami newspapers’ operations are expected to be $12 million.

•

Accelerated depreciation of $13 million is expected to be incurred on existing assets expected to be retired or decommissioned in connection with the relocation.

•

Cash costs of $6 million in connection with the relocation were reimbursed in April 2012 from an escrow account established for this purpose by the purchaser of the existing Miami facilities.

The relocation of the Miami operations is expected to be completed in May 2013, and, accordingly, the costs and expenses are expected to be incurred at various times through the third quarter of 2013.

Bond Repurchases:

During the second fiscal quarter of 2012, the Company repurchased $15.0 million aggregate principal amount of its 4.625% notes due in 2014 and $20.0 million of aggregate principal amounts of its 5.75% notes due in 2017 in privately-negotiated transactions.

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 2011 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to goodwill and intangible impairment, pension and post-retirement benefits, income taxes, and insurance. There have been no material changes to the Company’s critical accounting policies described in the Company’s 2011 Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Second Fiscal Quarter of 2012 Compared to Second Fiscal Quarter of 2011

The Company reported net income in the second fiscal quarter of 2012 of $26.9 million, or $0.31 per share. The Company’s net income in second fiscal quarter of 2011 was $4.9 million, or $0.06 per share.

Revenues:

Revenues in the second fiscal quarter of 2012 were $299.3 million, down 4.8% from revenues of $314.3 million in the second fiscal quarter of 2011. Advertising revenues were $222.6 million in the second fiscal quarter of 2012, down 5.7% from the second fiscal quarter of 2011, and circulation revenues were $63.6 million, down 2.4% from the second fiscal quarter of 2011.

The following summarizes the Company’s revenues by category, which compares the second fiscal quarter of 2012 with the second fiscal quarter of 2011 (dollars in thousands):


	Quarter Ended
	June 24, 2012		June 26, 2011		% Change
Advertising:
Retail	$	114,919	$	120,941		(5.0	)%
National		15,190		18,541		(18.1	)%
Classified:
Auto		20,536		20,648		(0.5	)%
Employment		12,588		14,001		(10.1	)%
Real estate		9,660		11,804		(18.2	)%
Other		18,176		19,159		(5.1	)%

Total classified		60,960		65,612		(7.1	)%
Direct marketing and other		31,496		30,928		1.8	%

Total advertising		222,565		236,022		(5.7	)%
Circulation		63,568		65,144		(2.4	)%
Other		13,161		13,084		0.6	%

Total revenues	$	299,294	$	314,250		(4.8	)%

Retail advertising revenues decreased $6.0 million, or 5.0%, in the second fiscal quarter of 2012 from the second fiscal quarter of 2011 primarily reflecting lower run-of-press (ROP) revenues in health, building and home centers and furniture and home furnishing as well as lower preprint revenues, partially offset by an increase in digital retail advertising revenues. Comparing the second fiscal quarter of 2012 to the same period in 2011, retail advertising revenues changed as follows: Print ROP advertising revenues decreased $3.1 million, or 6.0%, and preprint advertising revenues decreased $4.5 million, or 9.0%. Digital retail advertising revenues increased $1.6 million for the second fiscal quarter of 2012, or 8.5% from the second fiscal quarter of 2011, reflecting strong results from the Company’s dealsaver^® group buying service.

National advertising revenues decreased $3.4 million, or 18.1%, in the second fiscal quarter of 2012, from the second fiscal quarter of 2011. The decline in total national advertising revenues was broad-based but was led by declines in the telecommunications segment. In the second fiscal quarter of 2012, print national advertising revenues declined 21.9%, and digital national advertising decreased 7.0% from the second fiscal quarter of 2011.

Classified advertising revenues decreased $4.7 million, or 7.1%, in the second fiscal quarter of 2012 from the second fiscal quarter of 2011. Print classified advertising declined $5.7 million in the second fiscal quarter of 2012, or 13.7%, while digital classified advertising increased $1.1 million, up 4.4%, from the second fiscal quarter of 2011. The increase in digital classified advertising primarily reflects stronger automotive advertising sales as discussed below. The following is a discussion of the major classified advertising categories for the second fiscal quarter of 2012:

•

Automotive advertising revenues decreased $0.1 million, or 0.5%, from the second fiscal quarter of 2011. Automotive advertising continues to migrate to digital advertising. As a result, print automotive advertising revenues declined

13.5%, while digital automotive advertising revenues were up 15.3% from the second fiscal quarter of 2011. This reflects growing sales of automobiles in the United States during the period, as well as the popularity of the Company’s Cars.com products with local auto dealerships.

•

Employment advertising revenues decreased $1.4 million, or 10.1%, from the second fiscal quarter of 2011, reflecting a continued slow recovery in employment across the Company’s markets. The declines were reflected both in print employment advertising revenues, down 14.1%, and digital employment advertising revenues, down 6.4%.

•

Real estate advertising revenues decreased $2.1 million, or 18.2%, from the second fiscal quarter of 2011 as this sector of the economy has also been slow to recover from the recession. Print real estate advertising revenues declined 24.3%, while digital advertising revenues declined 4.8%.

•

Other classified advertising revenues, which include legal, remembrance and celebration notices, and miscellaneous advertising, was down $1.0 million, or 5.1%, in the second fiscal quarter of 2012 compared to the second fiscal quarter of 2011. Other classified print advertising revenues decreased 8.2% as compared to the second fiscal quarter of 2011, and other classified digital advertising revenues grew 7.4%.

Digital advertising revenues, which are included in each of the advertising categories discussed above, totaled $50.0 million in the second fiscal quarter of 2012, an increase of 4.9% as compared to the second fiscal quarter of 2011. Digital-only advertising revenues, which totaled $26.8 million in the second fiscal quarter of 2012, grew 16.8% from the second fiscal quarter of 2011, while digital advertising revenues sold in conjunction with print products declined 6.2% from the second fiscal quarter of 2011 as a result of fewer print advertising sales.

Direct marketing and other advertising revenues increased $0.6 million, or 1.8%, in the second fiscal quarter of 2012 from the second fiscal quarter of 2011. The growth primarily reflects continued success of the Company’s print and deliver program for small advertisers and its “Sunday Select” product. Sunday Select is a package of preprints delivered to non-newspaper subscribers upon request.

Circulation revenues in the second fiscal quarter of 2012 decreased $1.6 million, or 2.4%, from the second fiscal quarter of 2011, primarily reflecting lower circulation volumes, which was partially offset by selective price increases. The Company expects circulation volumes to remain lower in fiscal 2012 compared to fiscal 2011 as a result of selective price increases and the fragmentation of audiences faced by all media as available media outlets proliferate and readership trends change. The Company continues to look for new opportunities to increase circulation revenues, including digital subscriptions.

Operating Expenses:

Operating expenses in the second fiscal quarter of 2012 declined $12.8 million, or 4.7%, from the second fiscal quarter of 2011. Operating expenses in both fiscal quarters included restructuring-related severance as the Company continues to restructure its operations. The second fiscal quarter of 2012 also included $2.2 million of accelerated depreciation on equipment and moving expenses primarily related to the relocation of the Company’s Miami newspaper operations. The following table summarizes operating expenses, including the impact of restructuring charges and other items included in the operating expenses in the first fiscal quarters of 2012 and 2011 (in thousands):


	Quarter Ended
	June 24, 2012		June 26, 2011		Dollar Change
Operating expenses as reported	$	256,359	$	269,117	$	(12,758	)
Restructuring charges and other items		3,518		7,876		(4,358	)

Compensation expense as reported	$	108,086	$	119,735	$	(11,649	)
Compensation-related restructuring charges		275		7,614		(7,339	)

Compensation expenses decreased $11.7 million in the second fiscal quarter of 2012, or 9.7% from the second fiscal quarter of 2011 and included the restructuring charges discussed above. Payroll expenses in the second fiscal quarter were down 11.7% reflecting, in part, a 6.6% decline in average headcount. Fringe benefits costs in the second quarter of 2012 increased 1.6% mainly due to increased medical costs compared to the second fiscal quarter of 2011.

Newsprint, supplement and printing expense decreased 5.4% in the second fiscal quarter of 2012 as compared to the same period in 2011. Newsprint expense was down 8.7% in the second fiscal quarter of 2012 primarily reflecting lower newsprint usage and, to a lesser extent, lower newsprint prices. Supplement and printing expense increased 5.1% compared to the second fiscal quarter of 2011 reflecting lower supplement expenses offset by higher costs of outsourced printing compared to the second fiscal quarter of 2011. Depreciation and amortization expenses were up 1.5% from the second fiscal quarter of 2011 due to $2.0 million of accelerated depreciation in the 2012 quarter on certain assets at the Company’s Miami operations. Other operating costs increased 0.1% in the second fiscal quarter of 2012 as compared to the same quarter in 2011. Other operating costs in second fiscal quarter 2012 included $1.0 million of Miami-related moving costs.

Interest:

Interest expense was $30.6 million for the second fiscal quarter of 2012, down $14.1 million, or 31.5% compared to same period in 2011. This decrease was due to lower outstanding principal amounts of debt in the second quarter of 2012 and the reversal of $10.8 million in interest on taxes, due to certain state tax settlements and statute expiration benefits.

Equity Income:

Total income from unconsolidated investments was $9.3 million in the second fiscal quarter of 2012 compared to $9.5 million in the same period in 2011. Income from the Company’s internet-related investments continued to grow, but were offset by lower income from its joint venture in the Ponderay Newsprint Company (Ponderay) reflecting the impact of lower newsprint prices on Ponderay’s results.

Gain/Loss on Extinguishment of Debt:

The Company repurchased $35.0 million aggregate principal of notes at a price lower than par value and wrote off historical discounts related to the notes it purchased, which resulted in a gain on extinguishment of debt. This gain was offset by the write-off of fees related to the amendment of the Credit Agreement to reduce the size of the credit facility, as discussed below in Liquidity and Capital Resources. These combined events resulted in a net gain on the extinguishment of debt of $1.7 million in the second fiscal quarter of 2012. In the second fiscal quarter of 2011, the Company purchased $49.5 million aggregate principal amount of its outstanding debt securities at less than par value, but given the amount of related discounts written off on the bonds, the Company recorded a loss of $1.2 million in the second quarter of 2011.

Income Taxes:

The Company recorded an income tax benefit of $3.5 million with an effective benefit rate of 15.1%, for the second fiscal quarter of 2012. The benefit largely reflects the reversal of state tax reserves for favorable settlements of state tax issues, statute closures and to a lesser degree, lower taxes on discrete tax items. Excluding these items the effective tax rate was 42.6% 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 second fiscal quarter of 2011, the Company recorded an income tax provision of $4.0 million on a pre-tax income of $8.9 million, representing an effective rate of 44.5%. The rate is higher than the federal statutory rate of 35.0% due primarily to state taxes, including certain state taxes that do not vary with net income.

First Six Months of 2012 Compared to First Six Months of 2011

The Company reported net income in the first six months of 2012 of $24.8 million or $0.29 per share. In the first six months of 2011 the Company reported net income of $3.0 million, or $0.04 per share. Net income in the first six months of both years was impacted by the events discussed in the quarterly results above.

Revenues:

Revenues in the first six months of 2012 were $587.6 million, down 4.9% from revenues of $618.0 million in the same period of 2011. Advertising revenues were $432.3 million, down 6.2% from advertising in the first six months of 2011, and circulation revenues were $130.0 million, down 1.0% from the first six months of 2011.

Advertising revenues represented 73.6% of total revenues in the first six months of 2012 compared to 74.6% in the same period of 2011. Retail advertising revenues were 51.4% of advertising in the first six months of 2012 compared to 51.0% in the 2011 first six months, while classified advertising comprised 27.8% of total advertising versus 28.3% of total advertising in the first six months of 2012 and 2011, respectively. National advertising revenues were 7.0% and 7.9% of total advertising in the first six months of 2012 and 2011, respectively. Direct marketing and other revenues were 13.7% and 12.7% of advertising in the first six months of 2012 and 2011, respectively.

Circulation revenues represented 22.1% of total revenues in the first six months of 2012 and were 21.2% of total revenues in the first six months of 2011.

The following summarizes the Company’s revenues by category, which compares the first six months of 2012 with the first six months of 2011 (dollars in thousands):


	Six Months Ended
	June 24, 2012		June 26, 2011		% Change
Advertising:
Retail	$	222,049	$	235,378		(5.7	)%
National		30,320		36,637		(17.2	)%
Classified:
Auto		41,034		41,256		(0.5	)%
Employment		24,932		27,481		(9.3	)%
Real estate		19,073		23,447		(18.7	)%
Other		35,358		38,263		(7.6	)%

Total classified		120,397		130,447		(7.7	)%
Direct marketing and other		59,563		58,673		1.5	%

Total advertising		432,329		461,135		(6.2	)%
Circulation		129,971		131,311		(1.0	)%
Other		25,295		25,538		(1.0	)%

Total revenues	$	587,595	$	617,984		(4.9	)%

Retail advertising revenues decreased $13.3 million, or 5.7%, from the first six months of 2012, largely reflecting the factors discussed in the quarterly results above. Print ROP advertising revenues decreased $7.8 million, or 7.8%, from the first six months of 2011 and preprint advertising revenues decreased $9.0 million, or 9.0%, from the first six months of 2011. Digital retail advertising revenues grew $3.4 million, or 9.6%, from the first six months of 2011 driven by increased banner and display advertisements and strong results from the Company’s dealsaver^® group buying service.

National advertising revenues decreased $6.3 million, or 17.2%, from the first six months of 2011. The declines in total national advertising were primarily in the telecommunications segment. Print national advertising decreased $4.8 million, or 17.9%, while digital national advertising revenues decreased $1.5 million, or 15.5%, from the first six months of 2011.

Classified advertising revenues decreased $10.1 million, or 7.7%, from the first six months of 2011 and were impacted generally by the same factors discussed in the quarterly results above. Print classified advertising revenues declined $11.7 million, or 14.1%, while digital classified advertising revenues grew $1.6 million, or 3.4%, from the first six months of 2011. The following is a discussion of the major classified advertising categories for the first six months of 2012 compared to the same period in 2011:

•

Automotive advertising revenues decreased $0.2 million, or 0.5%, from the first six months of 2011 reflecting issues discussed in the quarterly results above. Print automotive advertising declined 12.1%, while digital advertising revenues grew 13.6%.

•

Employment advertising revenues decreased $2.5 million, or 9.3%, from the first six months of 2011 reflecting a national slowdown in hiring. The six-month declines were reflected both in print employment advertising revenues, down 12.5%, and digital employment advertising revenues, down 6.3%.

•

Real estate advertising revenues decreased $4.4 million, or 18.7%, from the first six months of 2011 reflecting the nationwide slowdown in home sales. In total, print real estate advertising revenues declined 24.1% while digital real estate advertising revenues increased 6.7%.

•

Other classified advertising revenues were down $2.9 million, or 7.6%, in the first six months of 2012 compared to the first six months of 2011. Print other classified advertising revenues decreased 11.0% while digital other classified advertising revenues increased 6.7%.

Digital advertising revenues, which are included in each of the advertising categories discussed above, totaled $96.6 million in the first six months of 2012 and increased 3.8% as compared to the first six months of 2011. Digital-only advertising revenues, which totaled $51.3 million in the first six months of 2012, grew 15.3% from the first six months of 2011, while digital advertising revenues sold in conjunction with print products declined 6.8% from the first six months of 2011 reflecting fewer print advertising sales.

Direct marketing and other advertising revenues increased $0.9 million, or 1.5%, from the first six months of 2011 reflecting new products as discussed in the quarterly results above.

Circulation revenues decreased $1.3 million, or 1.0%, from the first six months of 2011 primarily reflecting the impact of lower circulation volumes. The Company expects circulation volumes to remain lower in fiscal 2012 compared to fiscal 2011 reflecting primarily the fragmentation of audiences faced by all media as available outlets proliferate and readership trends change.

Operating Expenses:

Operating expenses in the first six months of 2012 included expenses associated with restructuring-related severance as well as accelerated depreciation on equipment and moving expenses in connection with the relocation of the Company’s Miami newspaper operations. Operating expenses in the first six months of 2011 included restructuring-related severance as well as charges related to real property in California and Texas that were sold for less than the carrying value as the Company continued to restructure its operations. The following table summarizes operating expenses, including the impact of these charges on operating expenses in 2012 and 2011 (in thousands):


	Six Months Ended
	June 24, 2012		June 26, 2011		Dollar Change
Operating expenses as reported	$	516,685	$	552,396	$	(35,711	)
Total restructuring charges and other items		7,582		22,727		(15,145	)

Compensation expense as reported	$	220,735	$	244,092	$	(23,357	)
Compensation-related restructuring charges		1,446		12,163		(10,717	)

Compensation expenses decreased $23.4 million, or 9.6%, from the first six months of 2011 Payroll was down 10.2% as compared to the first six months of 2011 reflecting an 8.3% decrease in average headcount in the first six months of 2012 as compared to the first six months of 2011. Fringe benefits costs decreased 6.5% from the 2011 period as the Company recorded lower retirement costs and medical costs in the first six months of 2012. (See Note 5 for an expanded discussion of retirement costs in 2012 compared to 2011.)

Newsprint, printing and supplement expenses were down 4.2% in the first six months of 2012 as compared to the same period in 2011 primarily reflecting lower newsprint usage. Depreciation and amortization expenses were flat in comparison to the first six months of 2011 reflecting the following: (i) the 2012 period included $4.2 million in accelerated depreciation on equipment primarily related to the relocation of the Miami operations and (ii) the Company curtailed capital expenditures in both periods due to adequate production capacity at its facilities. Other operating costs were down 5.3% in the first six months of 2012 as compared to the same period in 2011 reflecting company-wide efforts to reduce costs, including property taxes, insurance, marketing and professional services. These were offset by charges of $10.6 million primarily resulting from real property in California and Texas that was sold in the first six months of 2011. Other operating expenses excluding the impact of the charges on the excess property were down 5.7%.

Interest:

Interest expense was $73.1 million for the first six months of 2012, down 14.6% from the same period in 2011. Interest on debt was lower in the first six months of 2012 compared to the same period in 2011, as a result of lower outstanding principal amounts and the reversal of $10.8 million in interest on taxes due to certain state tax settlements and statue closure benefits.

Equity Income:

The Company reported income from unconsolidated investments of $15.4 million in the first six months of 2012 compared to $12.7 million in the same period in 2011 primarily due to growth at the Company’s internet-related investments.

Gain/Loss on Extinguishment of Debt:

During the first six months of 2012, the Company repurchased $70.5 million aggregate principal notes at a price lower than par value and wrote off historical discounts related to the notes it purchased. The Company also amended the Credit Agreement as discussed below in “Liquidity and Capital Resources” and together these events resulted in a net gain on the extinguishment of debt of $6.1 million for the six months ended June 24, 2012. In 2011, the Company purchased $77.9 million aggregate principal amount of its outstanding debt securities and recorded a loss of $2.5 million in the first six months of 2011.

Income Taxes:

The Company recorded an income tax benefit of $5.4 million or an effective benefit rate of 28.2% for the first six months of 2012. The benefit rate largely reflects the reversal of state tax reserves for favorable settlements of state tax issues, statute closures and to a lesser degree, lower taxes on discrete tax items. Excluding these items, the effective tax rate was 42.8% 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.

The Company recorded an income tax benefit of $12.6 million for an effective benefit rate of 131.3% for the first six months of 2011. The benefit included a favorable settlement of certain state tax issues in the first fiscal quarter of 2011. Excluding the impact of this settlement and other immaterial items, the effective benefit rate was 42.8% and is higher than the federal statutory rate of 35% primarily due to state taxes, including certain state taxes that do not vary with net income.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Liquidity and Capital Resources:

The Company’s cash and cash equivalents were $37.7 million as of June 24, 2012, compared to $58.9 million of cash at June 26, 2011, and $86.0 million at the end of fiscal 2011.

Operating Activities:

The Company generated $23.2 million of cash from operating activities in the first six months of 2012 compared to using $95.5 million of cash from operations in the first six months of 2011. The increase in cash generated from operations is primarily due to the difference in contributions to its pension plan as discussed below.

The Company made a $40.0 million cash contribution to its defined benefit pension plan in January 2012 to meet its required contribution for 2012, while in the first six months of 2011 the Company made a voluntary cash contribution of $163.0 million. Earlier in 2011, the Company contributed certain of its real property to meet its required funding (a non-cash transaction). The property contributed in 2011 was appraised at $49.7 million and is discussed further in Note 5 to the condensed consolidated financial statements.

As of December 25, 2011, the projected benefit obligations of the Company’s qualified pension plan exceeded plan assets by $422.5 million. Legislation enacted in the second quarter of 2012, has mandated a change in the discount rates used to calculate the projected benefit obligations for purposes of funding pension plans. The new legislation and calculation will use historical averages of long-term highly-rated corporate bonds (within ranges as defined in the legislation), which will result in the application of a higher discount rate to determine the projected benefit obligations for funding than generally accepted accounting principles requires based on current accounting pronouncements and current long-term interest rates.

The Pension Relief Act of 2010 (PRA) provided relief with respect to the funding requirements of the qualified defined benefit pension plan, and under the PRA, the Company elected an option that allows the required contributions related to its 2009 and 2011 plan years to be paid over 15 years. Even with the relief provided by the two legislative rules discussed above, based on the current funding position of the pension plan, management expects future contributions will be required. Management believes that contributions in future years will be manageable using the Company’s expected cash from operations.

While amounts of future contributions are subject to numerous assumptions, including, among others, changes in interest rates, returns on assets in the pension plan and future government regulations, the Company estimates that a total of approximately $35 million will be required to be contributed to the qualified defined benefit plan over 2013 and 2014. The timing and amount of these payments reflects actuarial estimates the Company believes to be reasonable but are subject to changes in estimates. Management believes cash from operations will be sufficient to satisfy its contribution requirements.

Investing Activities:

The Company used $16.4 million of cash from investing activities in the first six months of 2012, of which the Company used $13.0 million for the purchase of property plant and equipment. The Company expects capital expenditures to be approximately $40.0 million in 2012, including the capital expenditures related to the new Miami facilities. (See Note 2 to the condensed consolidated financial statements for a greater discussion of the Miami facilities being built.)

Financing Activities:

The Company used $55.2 million from financing activities in the first six months of 2012. The Company repurchased $70.5 million of aggregate principal amount of bonds for $59.2 million in cash in privately negotiated transactions in the first six months of 2012. In the second fiscal quarter of 2012, the Company received the final payment of $6.0 million from the sale of the Miami land and building.

The Company expects that most of its free cash flow generated from operations in the foreseeable future will be used to repay debt, fund its capital expenditures and make required contributions to its defined benefit pension plan. Management believes that free cash flow is adequate to meet the liquidity needs of the Company over the next 12 months.

Debt and Related Matters:

Credit Agreement: On January 26, 2010, the Company entered into an amendment and restatement of its credit agreement that became effective on February 11, 2010, immediately prior to the closing of an offering of $875.0 million of senior secured notes, referred to as the 2017 Notes, as described below. The Amended and Restated Credit Agreement required a substantial reduction in bank debt and allowed for the early retirement of other bond debt using the proceeds of the secured notes offering. The Company was in compliance with all financial covenants of the credit agreement at the time of the refinancing.

The Credit Agreement contains quarterly financial covenants including requirements that the Company maintain a minimum consolidated interest coverage ratio (as defined in the Credit Agreement) of 1.50 to 1.00. The Company is required to maintain a maximum consolidated leverage ratio (as defined in the Credit Agreement) of 6.25 to 1.00 from the quarter ending in June 2012 through the quarter ending in December 2012, decreasing to 6.00 to 1.00 thereafter. Under the Credit Agreement, the Company is required to maintain at least $10.0 million of cash equivalents (as defined in the Credit Agreement) as of the last day of each fiscal quarter beginning in the quarter ending in December 2012. The Credit Agreement includes limitations on additional debt.

The Credit Agreement also prohibits the payment of a dividend if a payment would be not be permitted under the indenture for the 2017 Notes (discussed below). Dividends under the indenture for the 2017 Notes are allowed as a “Restricted Payment” if the consolidated leverage ratio (as defined in the Credit Agreement and the indenture) is less than 5.50 to 1.00 or the priority leverage ratio (as defined in the indenture) is less than 3.25 to 1.00.

At June 24, 2012, the Company’s consolidated interest coverage ratio (as defined in the Credit Agreement) was 2.24 to 1.00, its consolidated leverage ratio (as defined in the Credit Agreement) was 4.57 to 1.00 and the Company was in compliance with all of its financial covenants. Because of the significance of the Company’s outstanding debt, remaining in compliance with debt covenants is critical to the Company’s operations. If revenue declines continue beyond those currently anticipated, the Company expects to continue to restructure operations and reduce debt to maintain compliance with its covenants.

Senior Secured Notes: The 2017 Notes are governed by an indenture entered into on February 11, 2010, which includes a number of covenants that are applicable to the Company and its restricted subsidiaries. The covenants are subject to a number of important exceptions and qualifications set forth in the indenture for the 2017 Notes. These covenants include, among other things, restrictions on the ability of the Company and its restricted subsidiaries to incur additional debt; make investments and other restricted payments; pay dividends on capital stock or redeem or repurchase capital stock or subordinated obligations; sell assets or enter into sale/leaseback transactions; create specified liens; create or permit restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other distributions to the Company; 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 its subsidiaries’ assets, taken as a whole.

Substantially all of the Company’s subsidiaries have guaranteed the Company’s obligations under the Credit Agreement and the 2017 Notes. In addition, the Company has granted a security interest to the banks that are a party to the Credit Agreement and the trustee under the indenture governing the 2017 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 land, buildings, machinery and equipment (PP&E) and any leasehold interests and improvements with respect to such PP&E, which would be reflected on a consolidated balance sheet of the Company and its subsidiaries, and shares of stock and indebtedness of the subsidiaries of the Company.

Off-Balance-Sheet Arrangements:

As of June 24, 2012, the Company did not have any off-balance-sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.

Contractual Obligations:

As of June 24, 2012, the Company’s contractual obligations were reduced from the end of fiscal 2011 by the following:

•

repayment of $70.5 million in debt principal in the first six months of 2012, and

•

reduction in the underfunded pension liability for the qualified defined benefit pension plan by $40.0 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Substantially all of the Company’s outstanding debt is composed of fixed-rate bonds and, therefore, such debt is not subject to interest rate fluctuations.

The discount rate used to measure the Company’s obligations under its qualified defined benefit pension plan is generally based upon long-term interest rates on highly-rated corporate bonds. As a result, changes in long-term interest rates may have a significant impact on the funding position of the Company’s qualified defined pension plan. Management estimates that a 1.0% increase in its discount rate could decrease its pension obligations by approximately $200 million.

See the discussion at “Recent Events and Trends - Operating Expenses” 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:

The Company’s management evaluated, with the participation of its 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 as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to its management, including its 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 the Company’s internal control over financial reporting that occurred during the second fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 6 to the condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

The Company has significant competition in the market for news and advertising, which may reduce its advertising and circulation revenues in the future.

The Company’s primary source of revenues is advertising, followed by circulation. In recent years, the advertising industry generally has experienced a secular shift toward internet advertising and away from other traditional media. In addition, the Company’s circulation has declined, reflecting general trends in the newspaper industry, including consumer migration toward the internet and other media for news and information. The Company faces increasing competition from other digital sources for both advertising and circulation revenues. This competition has intensified as a result of the continued developments of digital media technologies. Distribution of news, entertainment and other information over the internet, as well as through mobile phones, tablets and other devices, continues to increase in popularity. These technological developments are increasing the number of media choices available to advertisers and audiences. As media audiences fragment, the Company expects advertisers to continue to allocate larger portions of their advertising budgets to digital media. This increased competition has had and is expected to continue to have an adverse effect on the Company’s business and financial results, including negatively impacting revenues and operating income.

Weak general economic and business conditions subject the Company to risks of declines in advertising revenues.

The U. S. economy continues to be in a period of economic uncertainty. Certain aspects of the economy, including real estate, employment and consumer confidence, remain challenging. These economic conditions have had and are expected to continue to have an adverse effect on the Company’s advertising revenues. To the extent these economic conditions continue or worsen, the Company’s business and advertising revenues will be adversely affected, which could negatively impact the Company’s operations and cash flows and the Company’s ability to meet the covenants in its senior secured credit agreement. In addition, seasonal variations in consumer spending cause the Company’s quarterly advertising revenues to fluctuate. Second- and fourth-quarter advertising revenues are typically higher than first- and third-quarter advertising revenues, reflecting the slower economic activity in the winter and summer and the stronger fourth-quarter holiday season. If general economic conditions and other factors cause a decline in revenues, particularly during the second or fourth quarters, the Company may not be able to grow or maintain its revenues for the year, which would have an adverse effect on the Company’s business and financial results.

The Company’s quarterly financial results have fluctuated in the past and will fluctuate in the future. As a result, you should not rely upon past quarterly financial results as indicators of future performance.

The Company’s financial results in any given quarter can be influenced by numerous factors, many of which the Company are unable to predict or are outside of the Company’s control, including:

•

the timing of investments, restructuring plans and capital expenditures;

•

expenses associated with long-term plans, including the Company’s construction of and relocation to a new production facility and offices in Miami;

•

the Company’s ability to implement cost controls; and

•

the effect of the overall economy on revenues, particularly advertising revenues related to employment, real estate and consumer goods.

The Company has a contract to sell its existing Miami facilities and related land that requires it to vacate the existing facilities and release the land to the buyers by the end of May 2013. If the construction of the Company’s new facilities for its Miami newspaper operations is not completed by the end of May 2013, the Company may incur substantial unscheduled additional costs associated with the relocation of the Miami operations.

On May 27, 2011, the Company sold 14.0 acres of land in Miami, including the building holding the operations of one of its subsidiaries, The Miami Herald Media Company. The Miami Herald Media Company will continue to operate from its existing location through May 2013 while its new facilities are being constructed. Under the sales contract, the Company will remain in its current facilities rent free through May 2013, but the Company must vacate the facilities by the end May 2013 and release the land to the purchaser.

If the Company is unable to complete the construction of new facilities and move its Miami newspaper operations to the new facilities by May 2013, or if the relocation is otherwise delayed, the Company may incur substantial costs to produce its newspapers using third-party vendors, or it may not be able to conduct a portion or all of its business until the relocation occurs. In addition, there could be substantial penalties required as a result of breaching the sales agreement to vacate existing facilities by the May 2013 deadline. Any additional costs would adversely affect the Company’s results of operations.

If management is unable to execute cost-control measures successfully, total operating costs may be greater than expected, which may adversely affect the Company’s profitability.

As a result of recent adverse general economic and business conditions and the Company’s operating results, the Company has taken steps to lower operating costs by reducing workforce and implementing general cost-control measures. If the Company does not achieve its expected savings from these initiatives, or if operating costs increase as a result of these initiatives, total operating costs may be greater than anticipated. Although management believes that appropriate steps have been taken and are being taken to implement cost-control efforts, such efforts may affect the Company’s business and its ability to generate future revenue. Portions of the Company’s expenses are fixed costs that neither increase nor decrease proportionately with revenues. As a result, management is limited in its ability to reduce costs in the short term. If these cost-control efforts do not reduce costs sufficiently, income from continuing operations may decline.

An economic downturn and its impact on the Company’s business may result in goodwill and masthead impairment charges.

The Company recorded masthead impairment charges of $2.8 million in fiscal 2011, $59.6 million in fiscal 2008 and $3.0 billion of goodwill and masthead impairment charges in fiscal 2007 reflecting the economic downturn and the decline in the price of the Company’s publicly traded common stock. The Company currently has goodwill of $1.0 billion. Further erosion of general economic, market or business conditions could have a negative impact on the Company’s business and stock price, which may require the Company to record additional impairment charges in the future.

The Company has $1.6 billion in total consolidated debt, which subjects the Company to significant financial risk.

As of June 24, 2012, the Company had approximately $1.6 billion in total principal indebtedness outstanding. This level of debt increases the Company’s vulnerability to general adverse economic and industry conditions. Higher leverage ratios could affect the Company’s future ability to refinance maturing debt or the ultimate structure of such refinancing. In addition, the Company’s credit ratings could affect its ability to refinance its debt.

Covenants in the indenture governing the Company’s 11.50% senior secured notes due 2017 (the 2017 Notes) and its senior secured credit facility restrict the Company’s operations in many ways.

The indenture governing the 2017 Notes and the senior secured credit facility contain various covenants that limit, subject to certain exceptions, the Company’s ability and/or its restricted subsidiaries’ ability to, among other things:

•

incur liens or additional debt or provide guarantees;

•

issue redeemable stock and preferred stock;

•

pay dividends or make distributions on capital stock or repurchase capital stock or repurchase outstanding notes or debentures prior to their stated maturity;

•

make loans, investments or acquisitions;

•

enter into agreements that restrict distributions from its subsidiaries;

•

create or permit restrictions on the ability of its subsidiaries to pay dividends or distributions or guarantee debt or create liens;

•

sell assets and capital stock of its subsidiaries;

•

enter into certain transactions with its affiliates; and

•

dissolve, liquidate, consolidate or merge with or into, or sell substantially all its assets to another person.

The restrictions contained in the indenture for the 2017 Notes and the senior secured credit facility could adversely affect the Company’s ability to:

•

finance its operations;

•

make needed capital expenditures;

•

make strategic acquisitions or investments or enter into alliances;

•

withstand a future downturn in its business or the economy in general;

•

engage in business activities, including future opportunities, that may be in its interest; and

•

plan for or react to market conditions or otherwise execute its business strategies.

The Company’s ability to comply with covenants contained in the indenture for the 2017 Notes and the senior secured credit facility may be affected by events beyond its control, including prevailing economic, financial and industry conditions. Even if the Company is able to comply with all of the applicable covenants, the restrictions on its ability to manage its business could adversely affect its business by, among other things, limiting its ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that the Company believes would be beneficial to it.

Potential disruptions in the credit markets could adversely affect the availability and cost of short-term funds for liquidity requirements and could adversely affect the Company’s access to capital or to obtain financing at reasonable rates and its ability to refinance existing debt at reasonable rates or at all.

If internal funds are insufficient to fund the Company’s operations, the Company may be required to rely on the banking and credit markets to meet its financial commitments and short-term liquidity needs. Future disruptions in the capital and credit markets, such as were experienced during 2008 and 2009, could adversely affect the Company’s ability to access additional funds in the capital markets or draw on its senior secured credit facility. There can be no assurance that continued or increased volatility and disruption in the capital and credit markets will not impair the Company’s liquidity in future periods. If this should happen, any alternative credit arrangements may not be put in place without a potentially significant increase in the Company’s cost of borrowing.

As of June 24, 2012, the Company had approximately $1.6 billion in total principal indebtedness, consisting of $846 million of publicly-traded senior secured notes and $718 million of unsecured publicly-traded notes maturing in 2014, 2017, 2027 and 2029. While cash flow should permit the Company to lower the amount of this debt before it matures, a significant portion of this debt will probably need to be refinanced in the future. Access to the capital markets for longer-term financing may be restricted if disruptions in the capital and credit markets occur again as were experienced during 2008 and 2009.

The Company requires newsprint for operations and, therefore, its operating results may be adversely affected if the price of newsprint increases.

Newsprint is the major component of the Company’s cost of raw materials. Newsprint accounted for 13.6% of McClatchy’s operating expenses in the second fiscal quarter of 2012. Accordingly, earnings are sensitive to changes in newsprint prices. The price of newsprint has historically been volatile and may increase as a result of various factors, including:

•

declining newsprint supply from mill closures;

•

reduction in newsprint suppliers because of consolidation in the newsprint industry;

•

paper mills reducing their newsprint supply because of switching their production to other paper grades; and

•

a decline in the financial situation of newsprint suppliers.

The Company has not attempted to hedge fluctuations in the normal purchases of newsprint or enter into contracts with embedded derivatives for the purchase of newsprint. If the price of newsprint increases materially, operating results could be adversely affected. If newsprint suppliers experience labor unrest, transportation difficulties or other supply disruptions, the Company’s ability to produce and deliver newspapers could be impaired and/or the cost of the newsprint could increase, both of which would negatively affect its operating results.

A portion of the Company’s employees are members of unions and if the Company experiences labor unrest, its ability to produce and deliver newspapers could be impaired.

If McClatchy experiences labor unrest, its ability to produce and deliver newspapers could be impaired in some locations. The results of future labor negotiations could harm the Company’s operating results. The Company’s newspapers have not endured a labor strike for decades. However, management cannot ensure that a strike will not occur at one or more of the Company’s newspapers in the future. As of June 24, 2012, approximately 6.2% of full-time and part-time employees were represented by unions. Most of the Company’s union-represented employees are currently working under labor agreements, with

expiration dates through 2014. McClatchy faces collective bargaining upon the expirations of these labor agreements. Even if its newspapers do not suffer a labor strike, the Company’s operating results could be harmed if the results of labor negotiations restrict its ability to maximize the efficiency of its newspaper operations.

The Company may be required to make greater contributions to its defined benefit pension plans in the next several years than previously required, placing greater liquidity needs upon its operations.

The adverse conditions in the capital markets in 2008 had a significantly negative impact on the investment funds in the Company’s pension plan, which was partially offset by strong returns in the capital markets since the end of 2008. The projected benefit obligations of the qualified pension plan exceeded plan assets by $422.5 million as of December 25, 2011. In early 2012, the Company contributed $40.0 million to its qualified defined benefit pension plan, reducing the underfunded obligation.

The excess of benefit obligations over pension assets is expected to give rise to required pension contributions over the next several years. Legislation enacted, in the second quarter of 2012, has mandated a change in the discount rates used to calculate the projected benefit obligations for purposes of funding pension plans. The new legislation and calculation will use historical averages of long-term highly-rated corporate bonds (within ranges as defined in the legislation) which will have an impact of applying a higher discount rate to determine the projected benefit obligations for funding than for generally accepted accounting principles based on current accounting pronouncements and current long-term interest rates. Also, the Pension Relief Act of 2010 (PRA) provided relief in the funding requirements of the qualified defined benefit pension plan, and the Company has elected an option that allows the funding related to its 2009 and 2011 plan years required contributions to be paid over 15 years. However, even with the relief provided by these legislative rules, management expects future contributions to be required. In addition, poor capital market performance and/or lower long-term interest rates may result in greater annual contribution requirements.

The Company has invested in certain internet ventures, but such ventures may not be as successful as expected, which could adversely affect the results of operations of the Company.

The Company continues to evaluate its business and make strategic investments in digital ventures, either alone or with partners, to further its growth in its digital businesses. In 2011, McClatchy invested in ShopCo, LLC, a partnership with several other leading media and publishing companies, which provides its Find n Save shopping portal with significant scale. The Company also has investments in CareerBuilder.com, Classified Ventures, LLC, which operates Cars.com, Apartments.com and other classified websites, and HomeFinder.com. There can be no assurances that the Company will receive a return on these investments or that they will result in advertising growth or will produce equity income or capital gains in future years.

If the Company is not successful in growing its digital businesses, its business, financial condition and prospects will be adversely affected.

The Company’s future growth depends to a significant degree upon the development of its digital businesses. The growth and success of its digital businesses over the long term depend on various factors, including, among other things, the ability to:

•

continue to increase digital audiences;

•

attract advertisers to its websites;

•

maintain or increase the advertising rates on its websites;

•

exploit new and existing technologies to distinguish its products and services from those of competitors and develop new content, products and services; and

•

invest funds and resources in digital opportunities.

If the Company is not successful in growing its digital businesses, its business, financial condition and prospects will be adversely affected.

Circulation declines could adversely affect the Company’s circulation and advertising revenues.

Advertising and circulation revenues are affected by circulation and readership levels of the Company’s newspapers. In recent years, newspapers have experienced difficulty maintaining or increasing print circulation levels because of a number of factors, including:

•

increased competition from other publications and other forms of media technologies available in various markets, including the internet and other new media formats that are often free for users;

•

continued fragmentation of media audiences;

•

a growing preference among some consumers to receive all or a portion of their news other than from a newspaper;

•

increases in subscription and newsstand rates; and

•

declining discretionary spending by consumers affected by negative economic conditions.

These factors could also affect the Company’s newspapers’ ability to institute circulation price increases for print products. A prolonged reduction in circulation would have a material adverse effect on advertising revenues. To maintain the Company’s circulation base, it may be required to incur additional costs that it may not be able to recover through circulation and advertising revenues.

Adverse results from litigation or governmental investigations can impact the Company’s business practices and operating results.

From time to time, the Company and its subsidiaries are parties to litigation and regulatory, environmental and other proceedings with governmental authorities and administrative agencies. Adverse outcomes in lawsuits or investigations could result in significant monetary damages or injunctive relief that could adversely affect the Company’s operating results or financial condition as well as its ability to conduct businesses as they are presently being conducted.

ITEM 5. OTHER INFORMATION

In June 2011, the Financial Accounting Standards Board issued guidance that revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in previous guidance and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The new guidance does not change the items that must be reported in other comprehensive income. This amended guidance was effective for the Company’s first fiscal quarter of 2012.

The following presents the retrospective application of the new guidance for the three years ended December 25, 2011 (in thousands):


	Year Ended
	December 25, 2011			December 26, 2010			December 27, 2009
NET INCOME (LOSS)	$	54,389		$	36,183		$	50,587
OTHER COMPREHENSIVE INCOME (LOSS)
NET OF TAXES:
Pension and post retirement plans:
Unamortized gain (loss)		(99,447	)		8,050			67,539
Prior service credit		(640	)		(640	)		368
Other comprehensive income (loss) related to investment in unconsolidated companies		(506	)		53			(119	)

OTHER COMPREHENSIVE INCOME (LOSS)		(100,593	)		7,463			67,788

TOTAL COMPREHENSIVE INCOME (LOSS)	$	(46,204	)	$	43,646		$	118,375

ITEM 6. EXHIBITS

Exhibits filed as part of this Report as listed in the Index of Exhibits.

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.


		The McClatchy Company
		Registrant

August 3, 2012		/s/Patrick J. Talamantes

Date		Patrick J. Talamantes Chief Executive Officer

August 3, 2012		/s/R. Elaine Lintecum

Date		R. Elaine Lintecum Chief Financial Officer

EXHIBIT INDEX


Exhibit		Description

	2.1*	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, 2006.

	3.1*	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.

	3.2*	The Company’s Bylaws as amended and restated effective March 20, 2012, included as Exhibit 3.1 in the Company’s Current Report on Form 8-K filed March 22, 2012.

	10.1*	Amended and Restated Credit Agreement, dated as of February 11, 2010, among the Company, the lenders from time to time party thereto, Bank of America, N.A., Administrative Agent, Swing Line Lender and L/C Issuer included as Exhibit 10.1 in the Company’s Form 8-K filed on February 17, 2010.

	10.2*	Amendment No 1 to the Amended and Restated Credit Agreement, dated as of February 11, 2010, among the Company, the lenders from time to time party thereto, Bank of America, N.A., Administrative Agent, Swing Line Lender and L/C Issuer included as Exhibit 10.1 in the Company’s Form 8-K filed on December 20, 2010.

	10.3*	Amended and Restated Guaranty dated as of September 26, 2008, executed by certain subsidiaries of The McClatchy Company in favor of the lenders under the Credit Agreement, included as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on September 30, 2008.

	10.4*	Commitment Reduction and Amendment and Restatement Agreement, dated as of June 22, 2012, among the Company and Bank of America, N.S., as Administrative Agent included as Exhibit 10.1 in the Company’s Form 8-K filed June 25, 2012.

	10.5*	Second Amended and Restated Credit Agreement, dated as of June 22, 2012, among the Company, the lenders from time to time party thereto, and Bank of America, N.A., Administrative Agent and L/C Issuer included as Exhibit 10.2 in the Company’s Form 8-K filed June 25, 2012.

	10.6*	Security Agreement dated as of September 26, 2008, executed by The McClatchy Company and certain of its subsidiaries in favor of Bank of America, N.A., as Administrative Agent, included as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on September 30, 2008.

	10.7*	Second Supplemental Indenture dated June 27, 2006, between the Company and Knight-Ridder, Inc. included as Exhibit 10.3 in the Company’s Quarterly Report on Form 10-Q filed for the quarter ending on June 25, 2006.

	10.8*	Fourth Supplemental Indenture dated June 27, 2006, between the Company and Knight-Ridder, Inc. included as Exhibit 10.4 in the Company’s Quarterly Report on Form 10-Q filed for the quarter ending on June 25, 2006.

	10.9*	Purchase Agreement, dated February 4, 2010, by and among the Company, certain of the Company’s subsidiaries and J.P. Morgan Securities Inc. as Representative of the several Initial Purchasers included as Exhibit 10.1 in the Company’s Current Report on Form 8-K filed on February 9, 2010.


Exhibit		Description

	10.10*	Indenture, dated February 11, 2010, among The McClatchy Company, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A. relating to the 11.50% Senior Secured Notes due 2017 included as Exhibit 4.1 in the Company’s Current Report on Form 8-K filed on February 17, 2010.

	10.11*	Registration Rights Agreement, dated February 11, 2010, between The McClatchy Company and J.P. Morgan Securities Inc., relating to the 11.50% Senior Secured Notes due 2017 included as Exhibit 4.2 in the Company’s Current Report on Form 8-K filed on February 17, 2010.

	10.12*	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 30, 2000.

	*10.13	The Company’s Amended and Restated Long-Term Incentive Plan included as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed May 23, 2005.

	*10.14	Amendment No. 1 to the Company’s Amended and Restated Long-Term Incentive Plan, included as Exhibit 10.26 in the Company’s Quarterly Report on Form 10-Q for the quarter ending June 29, 2008.

	*10.15	Amended and Restated Supplemental Executive Retirement Plan included as Exhibit 10.4 to the Company’s Report on Form 10-K for the year ending December 29, 2002.

	*10.16	Amendment Number 1 to The McClatchy Company Supplemental Executive Retirement Plan included as Exhibit 10.1 on the Company’s Current Report on Form 8-K filed on February 10, 2009.

	*10.17	Amended and Restated McClatchy Company Benefit Restoration Plan included as Exhibit 10.1 on the Company’s Current Report on Form 8-K filed on July 29, 2011.

	*10.18	Amended and Restated McClatchy Company Bonus Recognition Plan included as Exhibit 10.2 on the Company’s Current Report on Form 8-K filed on July 29, 2011.

	*10.19	Amended and Restated 1994 Stock Option Plan included as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q filed for the Quarter Ending on July 1, 2001.

	*10.20	The Company’s 2004 Stock Incentive Plan, as amended and restated included as Exhibit 10.25 in the Company’s Quarterly Report on Form 10-Q filed for the quarter ending June 29, 2008.

	*10.21	Form of Chief Executive Stock Appreciation Rights Agreement related to the Company’s 2004 Stock Incentive Plan included as Exhibit 10.25 in the Company’s Report on Form 10-K for the year ending December 30, 2007.

	*10.22	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.

	*10.23	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 filed January 28, 2005.


Exhibit		Description

	*10.24	Form of Restricted Stock Unit Agreement related to the Company’s 2004 Stock Incentive Plan, included as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 18, 2009.

	*10.25	Form of Restricted Stock Unit Agreement under The McClatchy Company 2012 Omnibus Incentive Plan included as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated May 18, 2012.

	*10.26	Form of Stock Appreciation Right Agreement under The McClatchy Company 2012 Omnibus Incentive Plan included as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated May 18, 2012.

	*10.27	Employment Agreement between the Company and Patrick Talamantes dated May 16, 2012, included as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 18, 2012.

	*10.28	2012 Senior Executive Retention Bonus Plan included as Exhibit 10.4 on the Company’s Current Report on Form 8-K filed on May 18, 2012.

	*10.29	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.

	*10.30	Amended and Restated 1997 Stock Option Plan included as Exhibit 10.7 to the Company’s Report on Form 10-K for the year ending December 29, 2002.

	*10.31	Amendment 1 to The McClatchy Company 1997 Stock Option Plan dated January 23, 2007, included as Exhibit 10.16 to the Company’s Report on Form 10-K for the year ending December 31, 2006.

	*10.32	The Company’s Amended and Restated 1990 Directors’ Stock Option Plan dated February 1, 1998, included as Exhibit 10.12 to the Company’s Report on Form 10-K for the year ending December 31, 1997.

	*10.33	The Company’s Amended and Restated 2001 Director Stock Option Plan, included as Exhibit 10.13 to the Company’s Report on Form 10-K for the year ending December 25, 2005.

	*10.34	Amendment 1 to The McClatchy Company 2001 Director Option Plan dated January 23, 2007, included as Exhibit 10.18 to the Company’s Report on Form 10-K for the year ending December 31, 2006.

	*10.35	The Company’s Amended and Restated Employee Stock Purchase Plan, included as Exhibit 10.28 in the Company’s Quarterly Report on Form 10-Q for the quarter ending June 29, 2008.

	10.36*	Purchase and Sale Agreement Between the Company, a Delaware corporation, and Richwood, Inc., a Florida corporation and Bayfront 2011 Property, LLC dated May 26, 2011, included as Exhibit 10.42 in the Company’s Quarterly Report on Form 10-Q for the quarter ending June 26, 2011.


Exhibit		Description

	31.1	Certification of the Chief Executive Officer of The McClatchy Company pursuant to Rule 13a-14(a) under the Exchange Act.

	31.2	Certification of the Chief Financial Officer of The McClatchy Company pursuant to Rule 13a-14(a) under the Exchange Act.

	32.1***	Certification of the Chief Executive Officer of The McClatchy Company pursuant to 18 U.S.C. Section 1350.

	32.2***	Certification of the Chief Financial Officer of The McClatchy Company pursuant to 18 U.S.C. Section 1350.

	101.INS***	XBRL Instance Document

	101.SCH***	XBRL Taxonomy Extension Schema

	101.CAL***	XBRL Taxonomy Extension Calculation Linkbase

	101.DEF***	XBRL Extension Definition Linkbase

	101.LAB***	XBRL Taxonomy Extension Label Linkbase

	101.PRE***	XBRL Taxonomy Extension Presentation Linkbase

	*	Incorporated by reference

	**	Compensation plans or arrangements for the Company’s executive officers and directors

	***	Furnished, not filed.