Overview

The McClatchy Company (the Company) is the third largest newspaper company in the United States, with 30 daily newspapers, approximately 50 non-dailies, and direct marketing and direct mail operations. McClatchy also operates leading local websites in each of its markets which extend its audience reach. The websites offer users comprehensive news and information, advertising, e-commerce and other services. Together with its newspapers and direct marketing products, these interactive operations make McClatchy a leading local media company in each of its premium high growth markets. McClatchy-owned newspapers include, among others, The Miami Herald, The Sacramento Bee, the Fort Worth Star-Telegram, The Kansas City Star, The Charlotte Observer, and The News & Observer (Raleigh).

McClatchy also owns a portfolio of premium digital assets, including 14.4% of CareerBuilder, the nation's largest online job site, 25.6% of Classified Ventures, a newspaper industry partnership that offers two of the nation's premier classified websites: 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 Company's primary source of revenue is print and digital advertising, which accounted for 77.9% of the Company's revenue for the first quarter of 2009. While percentages vary from year to year and from newspaper to newspaper, classified advertising has steadily decreased as a percentage of total advertising revenues primarily in the employment and real estate categories and to a lesser extent the automotive category. Classified advertising as a percentage of total advertising revenues has declined to 28.6% in the first quarter of 2009 compared to 34.7% in the first quarter of 2008 and 39.6% in the first quarter of 2007, primarily as a result of the economic slowdown affecting classified advertising and the secular shift in advertising demand from print to digital products.

While revenues from retail advertising carried as a part of newspapers (run-of-press or ROP advertising) or in advertising inserts placed in newspapers (preprint advertising) have decreased year over year, retail advertising has steadily increased as a percentage of total advertising up to 51.9% in the first quarter of 2009 compared to 47.2% in the first quarter of 2008 and 43.2% in the first quarter of 2007.

National advertising as a percentage of total advertising revenue remained relatively similar year over year and contributed 9.7% of total advertising revenue in the first quarter of 2009. Direct marketing and other advertising made up the remainder of the Company's advertising revenues in the first quarter of 2009.

While included in the revenues above, all categories of digital advertising are performing better than print advertising. In total, revenues from digital advertising decreased 4.7% in the first quarter of 2009 compared to the first quarter of 2008 while print advertising declined 32.7% over the same periods. However, employment advertising, which has been negatively affected by the economic downturn, is down substantially in both print and digital. Excluding employment advertising, digital advertising grew 28.7% in the first fiscal quarter of 2009 compared to the first fiscal quarter of 2008. Also, digital advertising represented 15.3% of total advertising, up from 11.3% of total advertising for the first quarter of 2008 and 8.6% in the first quarter of 2007.

Circulation revenues contributed 18.7% of the Company's newspaper revenues in the first quarter of 2009 compared to 13.9% in the 2008 quarter. Most of the Company's newspapers are delivered by independent contractors. Circulation revenues are recorded net of direct delivery costs.

See the following "Results of Operations" for a discussion of the Company's revenue performance and contribution by category for the three months ended March 29, 2009 and March 30, 2008.

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 2008 Annual Report on Form 10-K includes a description of certain critical accounting policies, including those with respect to revenue recognition, allowance for doubtful accounts, acquisition accounting, goodwill and intangible impairment, pension and postretirement benefits, income taxes, and insurance. There have been no material changes to the Company's critical accounting policies described in the Company's 2008 Annual Report on Form 10-K.

Recent Events and Trends

Advertising Revenues:

Advertising revenues in the first quarter of 2009 decreased as a result of the continuing weak economy and the secular shift in advertising demand from print to online products. Management believes a significant portion of the advertising downturn reflects the current economic cycle. See the revenue discussions in management's review of "Results of Operations".

Newsprint:

While newsprint prices in the first quarter of 2009 were higher than in the first fiscal quarter of 2008, newsprint prices fell in each month of the first quarter of 2009. Vendors have announced additional price reductions for the second quarter of 2009; however, the ultimate amount and timing of price changes are subject to negotiation.

Newsprint pricing is dependent on global demand and supply for newsprint. Significant changes in newsprint prices can increase or decrease the Company's operating expenses and therefore, directly affect the Company's operating results. The impact of newsprint prices on the Company's financial results is discussed under "Results of Operations".

Restructuring Plans:

In June 2008 and again in September 2008, the Company announced plans to reduce its workforce, as the Company streamlined its operations and staff size. The workforce in 2008 was reduced by approximately 2,500 positions. The announced workforce reductions resulted in total severance costs of approximately $45 million which was accrued and largely paid in 2008. Savings from the restructuring, including compensation savings, are expected to be approximately $200 million annually, and the Company expects about $140 million to be realized during fiscal 2009.

As a result of an increasingly poor national economic environment, in March 2009, the Company announced additional restructuring efforts which included reducing the workforce by approximately 15% or 1,600 full-time equivalent employees, the freezing of the Company's pension plans and a temporary suspension of the Company matching contribution to the 401(k) plan as of March 31, 2009. The Company's restructuring plan also involves wage reductions across the company for additional savings. The Company's chairman and chief executive officer (CEO) declined his 2008 and 2009 bonuses and other executive officers did not receive bonuses for 2008. In addition, effective March 30, 2009, the CEO's base salary was reduced by 15%, other executive officers' salaries were cut by 10%, and no bonuses will be paid to any executive officers for 2009. In addition, the Company reduced the cash compensation, including retainers and meeting fees, paid to its directors by approximately 13%, and the directors declined any stock awards for 2008 and 2009.

Much of the expected expense reductions from this plan, which are largely permanent in nature, are expected to be realized in the twelve months beginning in April 2009. The Company expects to incur an estimated $30 million of severance costs in connection with the headcount reductions. A total of $19.7 million in severance related costs associated with this restructuring plan were incurred in the first fiscal quarter of 2009 and are largely expected to be paid in the second quarter of 2009.

RESULTS OF OPERATIONS

First Fiscal Quarter of 2009 Compared to First Fiscal Quarter of 2008

The Company reported a loss from continuing operations in the first quarter of 2009 of $37.7 million, or $0.45 per share, compared to a loss from continuing operations in the first quarter of 2008 of $1.0 million, or $0.01 per share. The Company's total net loss was $37.5 million, or $0.45 per share including discontinued operations in the first fiscal quarter of 2009, compared to net loss of $0.8 million, or $0.01 per share in the first fiscal quarter of 2008.

Revenues:

Revenues in the first quarter of 2009 were $365.6 million, down 25.1% from revenues of $488.3 million in the first quarter of 2008. Advertising revenues were $284.7 million, down 29.5% from advertising in the first quarter of 2008, and circulation revenues were $68.5 million, up 0.9%.

The following summarizes the Company's revenue by category, which compares first fiscal quarter of 2009 with first fiscal quarter of 2008 (dollars in thousands):

                                 Quarter Ended
                      March 29,       March 30,         %
                        2009             2008        Change
Advertising:
Retail              $     147,815     $  190,757       -22.5
National                   27,554         38,225       -27.9
Classified:
  Auto                     23,875         35,386       -32.5
  Employment               17,194         46,441       -63.0
  Real estate              19,738         35,423       -44.3
  Other                    20,745         22,961        -9.6
Total classified           81,552        140,211       -41.8
Direct marketing
  and other                27,768         34,830       -20.3
Total advertising         284,689        404,023       -29.5
Circulation                68,480         67,864         0.9
Other                      12,456         16,396       -24.0
Total revenues      $     365,625     $  488,283       -25.1

Retail advertising decreased $42.9 million, or 22.5% from the first fiscal quarter of 2008 primarily reflecting the impact of the economic recession. Print retail run of press (ROP) advertising decreased $33.7 million, or 31.6% and preprint advertising decreased $14.6 million, or 19.7%. Digital retail advertising increased $5.4 million, or 53.8% from the first fiscal quarter of 2008.

National advertising decreased $10.7 million, or 27.9% from the first fiscal quarter of 2008. The declines in total national advertising were reflected across many segments in this category of advertising. However, digital national advertising increased $1.3 million, or 36.1% from the 2008 quarter.

Classified advertising decreased $58.7 million, or 41.8% from the first fiscal quarter of 2008. Print classified advertising declined $49.8 million, or 46.0%, while digital classified advertising decreased $8.8 million, or 27.7%. The digital advertising decline resulted primarily from lower employment advertising as discussed below in the review of the major classified categories:

· Automotive advertising decreased $11.5 million, or 32.5% from the first fiscal quarter of 2008, reflecting an industry-wide trend. Print automotive advertising declined 41.7%, while digital automotive advertising was about even with the 2008 quarter (down 0.1%).

· Real estate advertising decreased $15.7 million, or 44.3% from the first fiscal quarter of 2008. In total, print real estate advertising declined 50.7%, while digital advertising grew 6.4%.

· Employment advertising decreased $29.2 million, or 63.0% from the first fiscal quarter of 2008, reflecting a national slowdown in hiring and therefore, employment advertising. The declines were reflected both in print employment advertising, down 67.6%, and online employment advertising, down 55.8%.

Digital advertising revenue, which is included in each of the advertising categories discussed above, totaled $43.4 million in the first fiscal quarter of 2009, a decrease of 4.7% as compared to the first fiscal quarter of 2008. Those areas of digital advertising that are not as strongly tied to print up-sells (advertising sold as a combined purchase of print and online advertising), primarily retail and real estate, performed better in advertising sales in the first fiscal quarter of 2009 compared to the same period in 2008.

Direct marketing decreased $7.0 million, or 20.4% from the first fiscal quarter of 2008 reflecting the same trends as retail advertising discussed above.

Circulation revenues increased $0.6 million, or 0.9% from the first fiscal quarter of 2008, primarily reflecting higher circulation prices at certain newspapers, offset by lower circulation volumes. Average paid daily circulation declined 9.0% and Sunday circulation was down 6.5% in fiscal 2009. The Company expects circulation volumes to remain lower in fiscal 2009 compared to fiscal 2008 reflecting primarily the Company's focus on reducing circulation programs deemed to be of lesser value to its advertising customers and, to a lesser extent, changes in readership trends. However, selective price increases are expected to more than offset the impact of volume declines, resulting in circulation revenue growth.

  Operating Expenses:

  The following table summarizes operating expenses, including the impact of
restructuring charges included in the operating expenses, in the 2009 and 2008
quarters (in thousands):

                                                        Three Months Ended
                                                     March 29,      March 30,
                                                        2009           2008         change
Operating expenses as reported                       $  376,487     $  431,549     $  55,062
Less restructuring charges                               19,728          2,096       (17,632 )
Operating expenses excluding restructuring charges   $  356,759     $  429,453        72,694

Compensation expense                                 $  183,308     $  218,853        35,545
Less restructuring charges                               19,728          2,096       (17,632 )
Compensation excluding restructuring charges         $  163,580     $  216,757        53,177

Operating expenses in the first quarter of fiscal 2009 decreased by $55.1 million compared to the first quarter of fiscal 2008. Operating expenses in the first quarter of 2009 included $19.7 million in severance and benefit plan curtailment gain related to the Company's restructuring plans. Operating expenses in 2009, excluding the restructuring items, decreased $72.7 million, or 16.9% from the 2008 quarter.

Compensation expenses decreased $35.5 million, or 16.2% from the first fiscal quarter of 2008 and included the restructuring charges discussed above. Excluding the effect of the restructuring, compensation expense was down $53.2 million, or 24.5%. Excluding the restructuring charges, payroll was down 24.2% and fringe benefits costs declined 25.9% reflecting a 24.0% decrease in average headcount in the quarter and lower retirement and medical costs.

Newsprint and supplement expense was down 10.1% with newsprint expense down 7.9%, primarily reflecting lower newsprint usage as newsprint prices, while falling, remained higher than the same period in 2008. Supplement expense was down 22.5%. Depreciation and amortization expenses were down 5.5% from the first fiscal quarter of 2008. Other operating costs were down 9.9%, reflecting company-wide cost controls.

Interest:

Interest expense for continuing operations was $33.9 million for the first fiscal quarter of 2009, down 25.1% from the 2008 quarter primarily reflecting lower interest rates and debt balances. Interest expense in the 2008 fiscal quarter was $45.3 million and included a $3.4 million charge related to the write off of deferred financing costs as a result of the amendment to the Company's bank credit agreement on March 28, 2008. Excluding the write-off from 2008, interest expense declined $8.0 million, or 19.0% as compared to the first quarter of 2008.

Equity Loss:

Total losses from unconsolidated investments were $3.1 million in the first quarter of 2009 compared to $13.1 million in 2008. In 2008, equity losses in the first quarter included the results of SP Newsprint Company which was sold at the beginning of the second quarter in 2008.

Income Taxes:

The Company recorded an income tax benefit of $10.3 million on a pre-tax loss from continuing operations of $48.0 million in the first quarter of 2009. The benefit resulted in a tax benefit rate of 21.4%. This benefit rate is lower than the statutory rate expected because the Company provides for state taxes in certain states that are based on different results than its consolidated losses, including an additional provision required to increase the Company's Fin 48 tax reserves. These state tax provisions are partially offset by $1.4 million of benefit related to certain discrete tax items resulting in the 21.4% benefit tax rate in the 2009 quarter. An income tax provision of $336,000 was recorded on a pre-tax loss from continuing operations of $657,000 in the first quarter of 2008 due to $606,000 in tax expense related to certain discrete tax items.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Liquidity and Capital Resources:

The Company's cash and cash equivalents were $36.6 million as of March 29, 2009. The Company generated $28.0 million of cash from operating activities from continuing operations in the first fiscal quarter of 2009 compared to $85.5 million in 2008. The decrease in cash from operating activities in 2009 primarily relates to lower advertising revenues and receipts in 2009 and is partially offset by lower expenses and payments. The Company used $7.1 million in cash from discontinued operations primarily to pay an income tax settlement related to one of its disposed newspapers.

The Company generated $3.4 million of cash from investing activities primarily due to the receipt of $5 million due from the 2008 sale of its interest in the SP Newsprint Company, which was partially offset by purchases of property, plant and equipment totaling $2.8 million and other items.

The Company owns 10 acres of land in Miami which is currently under contract to sell. The Company expects to consummate the sale of its Miami land for a sale price of approximately $190.0 million with after-tax net proceeds of approximately $115.0 million. The contract was amended on December 30, 2008 and provides for the buyer to close the transaction by June 30, 2009; however, the buyer has the ability to extend the agreement for an additional six months to December 31, 2009, by further increasing the termination fee payable to McClatchy from $2.0 million to $6.0 million should the deal fail to close. The proceeds of the sale are required to be used to pay down bank debt.

The Company drew $14.4 million of cash from its revolving line of credit and paid $7.4 million in dividends in the first fiscal quarter of 2009.

No other dividend payments are expected to be declared or paid in 2009. The Company suspended its dividend after the payment of the first quarter dividend in 2009. In addition, the Company is restricted from paying dividends after June 2009 if its leverage ratio (as defined in its Credit Agreement) is greater than 5.0 to 1.0.

While the Company expects that most of its free cash flow generated from operations in the foreseeable future will be used to repay debt, management believes that operating cash flow and liquidity under its credit facilities as described below are adequate to meet the liquidity needs of the Company, including currently planned capital expenditures.

Debt and Related Matters:

The Company's credit agreement entered into on June 27, 2006 provided for a $3.2 billion senior unsecured credit facility (Credit Agreement) and was established in connection with the acquisition of Knight-Ridder, Inc. on June 27, 2006 (the Acquisition). At the closing of the Acquisition, the Credit Agreement consisted of a $1 billion five-year revolving credit facility and $2.2 billion five-year Term A loan.

On March 28, 2008 and September 26, 2008, respectively, the Company entered into agreements to amend the Credit Agreement giving the Company additional flexibility in its bank covenants and amending other terms as described below. Pursuant to the September 2008 amendment, the revolving credit facility was reduced to $600 million on September 26, 2008 (to a total facility of $1.150 billion); a further reduction of $125 million is required upon sale of the Miami land; and a reduction of $25 million will be made on December 31, 2009. The Company wrote off $3.7 million of deferred financing costs in connection with the amendments, which were recorded in interest expense in fiscal 2008.

A total of $144.8 million was available under the revolving credit facility at March 29, 2009, all of which could be borrowed under the Company's current leverage covenant and trailing operating cash flow (as defined in the Credit Agreement). On April 15, 2009, the Company repaid $31.0 million of bonds that matured and the amount available on its revolver was $133.5 million as of that date.

Amounts outstanding under the Credit Agreement incur interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 200 basis points to 425 basis points or Bank of America's prime rate at a spread of 100 basis points to 325 basis points based upon the Company's total leverage ratio (as defined in the Credit Agreement). A commitment fee for the unused revolving credit is priced at 50 basis points. As of March 29, 2009, the Company pays interest at LIBOR plus 350 basis points on outstanding debt.

The amended Credit Agreement contains quarterly financial covenants including a minimum interest coverage ratio (as defined in the Credit Agreement) of 2.00 to 1.00 through the term of the agreement. Quarterly covenants also include a maximum leverage ratio (as defined in the Credit Agreement) of 7.00 to 1.00 from March 29, 2009 through September 26, 2010 and 6.25 to 1.00 from and after December 26, 2010. Upon the sale by the Company of the Miami land, the applicable leverage ratio covenant will be reduced by 0.25 times. At March 29, 2009, the Company's interest coverage ratio (as defined in the Credit Agreement) was 2.80 to 1.00 and its leverage ratio (as defined in the Credit Agreement) was 5.90 to 1.00 and the Company was in compliance with all 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.

Advertising revenue results declined in fiscal year 2008 and continued to decline at an accelerated pace in the first quarter of 2009. Declining revenues that are not offset by expense savings impact the Company's interest coverage and leverage ratios. To offset the revenue declines, the Company implemented two restructuring plans in 2008 which the Company estimates will save $200 million in expenses on an annual basis. Management believes that $60 million of the savings have been realized in 2008 and approximately $140 million will be achieved during 2009.

The Company has also announced additional restructuring initiatives in early 2009. The restructuring plans have included a combination of reductions in staff of up to 1,600 positions, consolidating functions and outsourcing certain functions. In addition the Company has frozen its defined benefit pension plans, suspended its 401(k) matching contributions and implemented salary reductions, among other steps. Please see "Recent Events and Trends", section entitled "Restructuring Plans" for an expanded discussion of these restructuring initiatives. 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.

Substantially all of the Company's subsidiaries (as defined in the Credit Agreement) have guaranteed the Company's obligations under the Credit Agreement. The Company has granted a security interest to the agent under the Credit Agreement in assets that include, but are not limited to, intangible assets, inventory, receivables and certain minority investments as collateral for the facility but the security interest excludes any land, buildings, machinery and equipment (PPE) and any leasehold interests and improvements with respect to such PPE, 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. In addition, the September 2008 amendment to the Credit Agreement added various requirements for mandatory prepayments of bank debt from certain sources of cash; added limitations on cash dividends allowed to be paid at certain leverage levels; and added and amended other covenants, including limitations on additional debt and the ability to retire public bonds early, amongst other changes.

At March 29, 2009, the Company had outstanding letters of credit totaling $49.1 million securing estimated obligations stemming from workers' compensation claims and other contingent claims.

In February 2009, S&P lowered the Company's corporate credit ratings, as well as its rating on unsecured bonds and its senior bank credit facility and noted that the ratings outlook on the corporate credit rating was negative. In April 2009, Moody's took similar actions. Both agencies cited the uncertainty over the extent and duration of the current recession. The ratings downgrades had no impact on the interest rate and commitment fees the Company pays under the Credit Agreement.

The following table summarizes the ratings of the Company's debt instruments as of the date of this Report on Form 10-Q filing:

                               Debt Ratings
       Credit Facility:
          S & P                    CCC+
          Moody's                   B1

       Bonds:
          S & P                    CCC-
          Moody's                  Caa2

        Corp. Family Rating:
           S & P                   CCC+
           Moody's                 Caa1

Contractual Obligations:

As of March 29, 2009, the Company's obligations related to its pension plans have declined by $45.2 million from the end of 2008 as a result of freezing such plans in March 2009.