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 revenues is print and digital advertising, which accounted for 76.6% of the Company's revenues for the third fiscal quarter of 2009. Print and digital advertising revenues are derived from retail, national and classified advertising. Print and preprinted insert advertising are also sold in direct marketing and other advertising products. While percentages vary from year to year and from newspaper to newspaper, classified advertising revenues have 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 revenues as a percentage of total advertising revenues have declined to 28.4% in the third fiscal quarter of 2009, compared to 32.8% in the third fiscal quarter of 2008, and to 38.0% in the third fiscal quarter of 2007, primarily as a result of the economic slowdown affecting classified advertising and the secular shift in advertising demand 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 52.4% in the third quarter of fiscal 2009, compared to 49.0% in the third fiscal quarter of 2008 and to 44.7% in the third fiscal quarter of 2007. This is partially a reflection of retail advertising declining at a slower rate than classified advertising, thus increasing as a percent of total advertising.

National advertising revenues as a percentage of total advertising revenues remained relatively similar year over year and contributed about 9.0% of total advertising revenues in both the third fiscal quarter of 2009 and 2008. Direct marketing revenues and other advertising revenues made up the remainder of the Company's advertising revenues in the third fiscal quarter of 2009.

While included in the revenues described above, all categories of digital advertising are performing better than print advertising. In 2007, the Company joined a number of other newspaper companies in forming a broad-based partnership with Yahoo, Inc. (Yahoo). The Company's local sales force is able to sell Yahoo advertising inventory and share in the revenue from the sales. In addition, the

alliance allows the Company to use Yahoo's behaviorally targeted ad-serving platform (APT platform) to sell advertising on the Company's websites. While sales of Yahoo inventory and behaviorally targeted sales were conducted on a limited test basis in 2008, the Company began rolling out the APT platform to its newspaper websites in early 2009. As of the end of the third fiscal quarter of 2009, all of the Company's newspaper sites were selling Yahoo inventory and half of the newspaper sites had launched the APT platform.

In total, revenues from digital advertising increased 3.1% in the third quarter of 2009 compared to the third quarter of 2008 while print advertising revenues declined 32.4% over the same periods. However, employment advertising revenues, which have been negatively affected by the economic downturn, are down substantially in both print and digital. Excluding employment advertising, digital advertising revenues grew 28.4% in the quarter and 27.2% in the first nine months of fiscal 2009, compared to the same periods in fiscal 2008. Also, digital advertising revenues represented 17.6% of total advertising revenues in the third fiscal quarter of 2009, up from 12.2% of total advertising revenues for the third quarter of 2008 and from 9.1% of total advertising revenues for the third quarter of 2007.

Circulation revenues increased to 19.9% of the Company's revenues in the third fiscal quarter of 2009 from 14.3% in the third fiscal quarter of 2008. 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 and nine months ended September 27, 2009 and September 28, 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 third quarter and first nine months of fiscal 2009 decreased as a result of the continuing weak economy and the secular shift in advertising demand from print to digital products. Management believes a significant portion of the advertising downturn reflects the current economic cycle and expects advertising revenues to be down in the fourth fiscal quarter of 2009 compared to 2008. For further information, see the revenue discussions in management's review of "Results of Operations".

Newsprint:

Significant changes in newsprint prices can increase or decrease the Company's operating expenses, and therefore directly affect the Company's operating results. Newsprint pricing is dependent on global demand and supply for newsprint. Newsprint prices fell in each month of the first six months of 2009, and in the third quarter of 2009 newsprint prices were 25.5% lower on average than in the 2008 third quarter. However, newsprint producers have announced price increases for the near term. Global demand remains weak resulting in continued low capacity utilization irrespective of recent newsprint mill closure announcements. Hence, the Company does not yet know whether the full amount of announced newsprint price increases will be implemented or the timing of such increases. 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 Company's workforce in 2008 was reduced by approximately 2,500 positions. The 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 in savings to be realized during fiscal 2009, much of which has been realized in the first nine months of 2009.

In March 2009, the Company announced additional restructuring efforts which included reducing the Company's workforce by 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 involved 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 reduced by 10%, and no bonuses will be paid to any executive officers for 2009. The Company also 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, began to be realized in the second quarter of 2009. A total of $25.1 million in severance related costs associated with this restructuring plan were incurred through September 27, 2009 and were largely paid by the end of the third quarter of 2009.

Debt Exchange Offers and Related 2009 Bank Credit Agreement Amendment:

In May 2008, the Company purchased $300 million aggregate principal amount of its outstanding debt securities for $282.4 million in cash obtained from its revolving credit facility and recorded a pre-tax gain of $19.5 million. The Company purchased $150 million, $130 million and $20 million of its outstanding principal amount of debt securities maturing in 2009, 2011 and 2014, respectively. In the third fiscal quarter of 2008, the Company purchased $5.9 million aggregate principal of its outstanding debt securities maturing in 2009 for $5.8 million in cash obtained from its revolving credit facility.

On June 26, 2009, the Company completed a private debt exchange offer for all of its outstanding debt securities for a combination of cash and newly issued 15.75% senior notes due July 15, 2014 (New Notes). The New Notes are senior unsecured obligations and will be guaranteed by McClatchy's existing and future material domestic subsidiaries. The Company exchanged $3.4 million in cash and $24.2 million of New Notes in the exchange offer. In exchange for the cash and New Notes the Company retired the following outstanding principal amount of debt securities maturing in the respective years: $3.8 million in 2011 notes, $11.1 million in 2014 notes, $53.4 million in 2017 notes, $10.8 million in 2027 debentures and $23.8 million in 2029 debentures. The Company has recorded a pre-tax gain of approximately $44.1 million on the exchange in 2009. The gain was equal to the carrying amount of the exchanged securities less the total future cash payments of the New Notes, including both payments of interest and principal amount, and related expenses of the exchange.

In connection with the debt exchange offer described above, the Company entered into an agreement on May 20, 2009 to amend the Credit Agreement which, among other things, allows it to use its revolving credit facility for up to $60 million to repurchase its 7.125% Notes due June 1, 2011 or its 4.625% Notes due November 1, 2014 (up to a $25 million limit on the 2014 notes), subject to certain conditions. A total of $3.4 million of the $60 million revolving credit facility allowable for bond repurchase was used in the exchange offer discussed above.

See additional discussion of the impact of these capital transactions on the Company's results of operations and financial position in Note 4 to the consolidated financial statements and the Liquidity and Capital Resources discussion below.

Equity Investments:

On March 31, 2008, the Company, along with the other general partners of SP Newsprint Co. (SP), completed the sale of SP, of which the Company was a one-third owner. The Company recorded a gain on the transaction of $34.4 million in 2008. The Company used the $55 million of proceeds it received from the sale to reduce debt in the second fiscal quarter of 2008 and received $5 million of proceeds on March 2, 2009 that had been recorded as a long-term receivable, which was used to reduce debt.

On June 30, 2008 (the first day of the Company's third fiscal quarter), the Company sold its 15.0% ownership interest in ShopLocal, LLC for $7.9 million and used the proceeds to reduce debt. The Company reduced its carrying value of ShopLocal to match the sales price. In addition, Classified Ventures, LLC identified potential goodwill impairment at a real estate-related reporting unit and as a result, the Company recognized an estimated charge related to this investment in the second quarter of 2008 and recorded an additional charge in the third fiscal quarter of 2008. The final charge was determined and recorded in the fourth quarter of 2008 when Classified Ventures completed its impairment analysis. The total non-cash pre-tax charges related to impairments of internet investments, including ShopLocal and Classified Ventures, in the first nine months of 2008 were $24.5 million.

RESULTS OF OPERATIONS

Third Fiscal Quarter of 2009 Compared to Third Fiscal Quarter of 2008

The Company reported income from continuing operations in the third fiscal quarter of 2009 of $23.6 million, or $0.28 per share, compared to $4.2 million, or $0.05 per share in the third fiscal quarter of 2008. The Company recorded a loss from discontinued operations in the third fiscal quarter of 2009 of $38,000 compared to income of $67,000 in the third fiscal quarter of 2008.

Revenues:

Revenues in the third quarter of 2009 were $347.4 million, down 23.1% from revenues from continuing operations of $451.6 million in the third quarter of 2008. Advertising revenues were $266.1 million, down 28.1% from 2008, and circulation revenues were $69.0 million, up 6.7%.

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

                                     Quarter Ended
                     September 27,       September 28,         %
                         2009                2008           Change
Advertising:
Retail              $       139,462     $       181,416       -23.1
National                     24,097              33,485       -28.0
Classified:
  Auto                       22,050              33,406       -34.0
  Employment                 14,105              35,024       -59.7
  Real estate                17,201              30,099       -42.9
  Other                      22,285              22,902        -2.7
Total classified             75,641             121,431       -37.7
Direct marketing
  and other                  26,920              33,785       -20.3
Total advertising           266,120             370,117       -28.1
Circulation                  69,029              64,691         6.7
Other                        12,241              16,812       -27.2
Total revenues      $       347,390     $       451,620       -23.1

Retail advertising decreased $42.0 million, or 23.1% from the third fiscal quarter of 2008, which primarily reflects the impact of the economic recession. Print retail run of press (ROP) advertising decreased $32.2 million, or 33.2%, and preprint advertising decreased $16.2 million, or 22.1%. Digital retail advertising increased $6.4 million, or 57.7%, from the first fiscal quarter of 2008 reflecting continued growth in new advertisers and the impact of the Yahoo alliance.

National advertising decreased $9.4 million, or 28.0%, from the third 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 $1.4 million, or 36.1% from the third fiscal quarter of 2008.

Classified advertising decreased $45.8 million, or 37.7% from the third fiscal quarter of 2008. Print classified advertising declined $39.3 million, or 43.0%, while digital classified advertising decreased $6.5 million, or 21.6%. The digital advertising decline resulted primarily from lower employment advertising. Digital automotive and real estate categories declined less than the employment category on a relative basis because the employment category has been hit harder by the economic recession. A review of the major classified categories follows:

· Automotive advertising decreased $11.4 million, or 34.0%, from the third fiscal quarter of 2008, reflecting an industry-wide trend. Print automotive advertising declined 45.0%, while digital automotive advertising declined 1.5% from the 2008 quarter.

· Employment advertising decreased $20.9 million, or 59.7%, from the third fiscal quarter of 2008, reflecting a sharp, national slowdown in hiring and therefore, employment advertising. The declines were reflected both in print employment advertising, down 67.3%, and online employment advertising, down 49.4%.

· Real estate advertising decreased $12.9 million, or 42.9%, from the third fiscal quarter of 2008, also an industry-wide trend. In total, print real estate advertising declined 49.5%, while digital advertising fell by 5.3%.

Digital advertising revenues, which are included in each of the advertising categories discussed above, totaled $46.7 million in the third fiscal quarter of 2009, an increase of 3.1% as compared to the third fiscal quarter of 2008. However, excluding employment advertising, the category most affected by the current cyclical downturn, digital advertising grew 28.4% compared to the third fiscal quarter of 2008.

Direct marketing decreased $6.9 million, or 20.7%, from the third fiscal quarter of 2008 reflecting the same trends as retail advertising discussed above.

Circulation revenues increased $4.3 million, or 6.7%, from the third fiscal quarter of 2008, primarily reflecting higher circulation prices at most newspapers, partially offset by lower circulation volumes. Average paid daily circulation declined 12.7% and Sunday circulation was down 9.6% in the third fiscal quarter of 2009. The Company expects circulation volumes to remain lower in fiscal 2009 compared to fiscal 2008 reflecting primarily price increases, the Company's focus on reducing costly circulation programs deemed to be of lesser value to its advertising customers and, to a lesser extent, changes in readership trends.

Operating Expenses:

Operating expenses in 2009 and 2008 include restructuring charges. The following
table summarizes operating expenses, as well as the amount of the restructuring
charges included in operating expenses in the 2009 and 2008 quarters (in
thousands):

                                                      Quarter Ended
                                            September 27,       September 28,          %
                                                2009                2008             Change
Operating expenses                         $       287,023     $       410,983          -30.2
Restructuring charges                                1,350             17, 043             NM

Compensation expense                       $       130,048     $       199,861          -34.9
Compensation-related restructuring
charges                                              1,350             17, 043             NM

NM= not meaningful.

Operating expenses in the third quarter of fiscal 2009 decreased by $124.0 million, or 30.2% compared to the third quarter of fiscal 2008. Compensation expenses decreased $69.8 million, or 34.9%, from the third fiscal quarter of 2008 and included the restructuring charges discussed above, which were higher in the 2008 quarter than in the 2009 quarter. Payroll was down 36.9% and fringe benefits costs declined 23.7%. Average headcount decreased 26.1% from the third quarter of 2008 and retirement and medical costs were also down.

Newsprint and supplement expense was down 46.1% with newsprint expense down 49.5%, reflecting a combination of lower newsprint usage and newsprint prices. Supplement expense was down 27.2%. Depreciation and amortization expenses decreased $2.8 million from the third fiscal quarter of 2008. Other operating costs were down $22.8 million, or 20.1%, reflecting Company-wide cost controls.

Interest:

Interest expense for continuing operations was $34.5 million for the third fiscal quarter of 2009, up slightly from the third quarter of 2008. Interest related to the Company's debt was down $2.2 million from the 2008 quarter primarily reflecting lower interest rates and debt balances. Interest expense increased $2.6 million on the Company's unrecognized tax benefits.

Income from unconsolidated investments was $4.4 million in the third fiscal quarter of 2009 compared to a loss of $850,000 in the third fiscal quarter of 2008, due primarily to improved financial results at the internet companies in which the Company has ownership interests.

The Company sold SP at the beginning of the second fiscal quarter of 2008 and recorded a gain on the sale of $34.5 million. In the third quarter of 2009, the Company recorded final closing adjustments resulting in an additional gain of $1.0 million.

In addition, the Company recorded charges totaling $3.0 million in the third fiscal quarter of 2008 related to estimated impairments of certain internet investments.

For an expanded discussion of transactions and events related to the Company's less than 50% owned companies, see Note 3 to the consolidated financial statements.

Gain on Extinguishment of Debt:

In the second fiscal quarter of 2009, the Company closed a debt exchange offer and in the third quarter of 2009 the Company recorded additional expenses of $0.7 million associated with this exchange. In the third fiscal quarter of 2008, the Company recorded a pre-tax gain on the extinguishment of debt of $180,000 relating to a bond tender offer for cash. For further information, see Note 4 to the consolidated financial statements.

Income Taxes:

The income tax rate from continuing operations in the third fiscal quarter of 2009 was 22.7% compared to 33.0% in 2008. The Company refined its estimate of its 2009 projected effective annual tax rate and applied the revised rate to its results from continuing operations resulting in an adjustment in the third quarter of 2009. The projected annual effective tax rate on earnings excluding discrete tax items (primarily gains on debt extinguishments or sales of investments) is estimated to be 61.8% for full year 2009. The Company had previously applied a lower tax rate to operating losses excluding discrete items through the first half of 2009. As a result, the Company recorded a tax benefit of $11.4 million in the third fiscal quarter of 2009 to adjust the year-to-date tax provision.

First Nine Months of 2009 Compared to First Nine Months of 2008

The Company reported income from continuing operations in the first nine months of 2009 of $27.9 million, or $0.33 per share, compared to $23.2 million, or $0.28 per share in 2008. The Company's net income was $28.3 million, or $0.33 per share, including discontinued operations in the first nine months of 2009, compared to $23.1 million, or $0.28 per share, in the first nine months of 2008. Net income in both years was impacted by the events discussed in the comparison of quarterly results above.

Revenues:

Revenues from continuing operations in the first nine months of 2009 were down 24.6% to $1.1 billion compared to $1.4 billion in 2008. Advertising revenues in 2009 totaled $834.5 million, down 29.3%, and circulation revenues were $206.9 million, up 4.2%.

The following summarizes the Company's revenues by category, which compares the first nine months of 2009 with the first nine months of 2008 (dollars in thousands):

                                   Nine Months Ended
                     September 27,       September 28,         %
                         2009                2008           Change
Advertising:
Retail              $       436,719     $       568,670       -23.2
National                     75,791             108,391       -30.1
Classified:
  Auto                       69,551             104,790       -33.6
  Employment                 46,447             121,888       -61.9
  Real estate                55,631              99,934       -44.3
  Other                      65,721              70,174        -6.3
Total classified            237,350             396,786       -40.2
Direct marketing
  and other                  84,610             106,621       -20.6
Total advertising           834,470           1,180,468       -29.3
Circulation                 206,860             198,610         4.2
Other                        37,020              50,508       -26.7
Total revenues      $     1,078,350     $     1,429,586       -24.6

Retail advertising decreased $132.0 million, or 23.2%, from the first nine months of 2008 and largely reflected the factors discussed in the comparison of quarterly results above. Print ROP advertising decreased $103.2 million, or 33.1%, from the first nine months of 2008 and preprint advertising decreased $46.3 million, or 20.6%, from 2008. Online retail advertising increased $17.5 million, or 53.1%, from the first nine months of 2008 driven by increased banner and display advertisements and, to a lesser degree, the impact of rolling out the Yahoo advertising platform at the Company's newspapers as discussed in the comparison of quarterly results above.

National advertising revenues decreased $32.6 million, or 30.1%, from the first nine months of 2008. The declines in total national advertising were across a broad number of segments in this category. Online national advertising increased $3.9 million, or 32.8%, from the first nine months of 2008.

Classified advertising revenues decreased $159.4 million, or 40.2%, from the first nine months of 2008 and was impacted by generally the same factors discussed in the quarterly results above. Print classified advertising declined $135.9 million, or 44.9%, while digital classified advertising decreased $23.6 million, or 25.1%, from the first nine months of 2008 due almost entirely to a decline in digital employment advertising. More specifically:
· Automotive advertising decreased $35.2 million, or 33.6%, from the first nine months of 2008, reflecting lower automotive sales and the consolidation of automotive dealers. Print automotive advertising declined 43.5%, while online advertising was down 1.6%.

. . .