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The
McClatchy Company (the "Company") is the third largest newspaper company in
the
United States, with 31 daily newspapers and approximately 50 non-dailies. Twenty
of its daily newspapers were acquired on June 27, 2006 in the Knight Ridder
acquisition (the "Acquisition") – see Note 2. McClatchy also operates
leading local websites and direct marketing operations in each of its markets
which complement its newspapers and extend its audience reach in each
market. McClatchy-owned newspapers include The Miami
Herald, The Sacramento Bee, TheFort Worth
Star-Telegram, The Kansas City Star, The
Charlotte Observer, and The (Raleigh) News &
Observer.
McClatchy
also has a portfolio of premium digital assets. Its leading local websites
offer
users information, comprehensive news, advertising, e-commerce and other
services. The Company owns and operates McClatchy Interactive, an
interactive operation that provides websites with content, publishing tools
and
software development. McClatchy operates Real Cities, the largest
national advertising network of local news websites and owns 14.4% of
CareerBuilder, the nation’s largest online job site. McClatchy also
owns 25.6% of Classified Ventures, a newspaper industry partnership that offers
classified websites such as the nation’s number two online auto website,
cars.com, and the number one rental site, apartments.com.
The
consolidated financial statements include the Company and its
subsidiaries. Significant intercompany items and transactions are
eliminated. In preparing the financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In
the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary (consisting of normal recurring
items, except as discussed in Notes 3 and 4) to present fairly the Company's
financial position, results of operations, and cash flows for the interim
periods presented. The financial statements contained in this report
are not necessarily indicative of the results to be expected for the full
year.
Discontinued
operations - On March 5, 2007, the Company sold the (Minneapolis)
Star Tribune newspaper and other publications and websites related to
the newspaper. In the third quarter of 2006, the Company sold 12
newspapers acquired on June 27, 2006 (see Note 2). The results of all
sold newspaper operations, including interest expense directly attributable
to
them, have been recorded as discontinued operations in all periods
presented.
Revenue
recognition - The Company recognizes revenues from advertising placed
in a newspaper and/or on a website over the advertising contract period or
as
services are delivered, as appropriate, and recognizes circulation revenues
as
newspapers are delivered over the applicable subscription
term. Circulation revenues are recorded net of direct delivery
costs. Other revenue is recognized when the related product or
service has been delivered. Revenues are recorded net of estimated
incentive offerings including special pricing agreements, promotions and other
volume-based incentives. Revisions to these estimates are charged to
income in the period in which the facts that give rise to the revision become
known.
7
Cash
equivalents are highly liquid debt investments with
original maturities of three months or less.
Concentrations
of credit risk - Financial instruments, which potentially subject the
Company to concentrations of credit risk, are principally cash and cash
equivalents and trade accounts receivables. Cash and cash equivalents
are placed with major financial institutions. The Company routinely
assesses the financial strength of significant customers and this assessment,
combined with the large number and geographic diversity of its customers, limits
the Company's concentration of risk with respect to trade accounts
receivable.
Inventories
are stated at the lower of cost (based principally on the first-in, first-out
method) or current market value.
Property,
plant and equipment is stated at cost. Major improvements,
as well as interest incurred during construction, are
capitalized. Expenditures for maintenance and repairs are charged to
expense as incurred.
Depreciation
is computed generally on a straight-line basis over estimated useful
lives of:
5
to 60 years for buildings and improvements
9
to 25 years for presses
2
to 15 years for other equipment
Segment
reporting - The Company's primary business is the publication of
newspapers and related websites. The Company has four operating
segments which it aggregates into a single reportable segment because each
has
similar economic characteristics, products, customers and distribution
methods.
Goodwill
and intangible impairment - The
Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets. As required by SFAS No. 142, the Company tests for
goodwill annually (at year-end) or whenever events occur or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. The required two-step approach uses accounting
judgments and estimates of future operating results. Changes in
estimates or the application of alternative assumptions could produce
significantly different results. Impairment testing is done at a
reporting unit level. The Company performs this testing at its four newspaper
operating segments, which are also considered reporting units under SFAS 142.
An
impairment loss generally is recognized when the carrying amount of the
reporting unit’s net assets exceeds the estimated fair value of the reporting
unit. The estimates and judgments that most significantly affect the fair value
calculation are assumptions related to revenue growth, newsprint prices,
compensation levels, discount rate and private and public market trading
multiples for newspaper assets. The Company determined that it should
perform its impairment testing of goodwill as of September 30, 2007, due to
the
continuing challenging business conditions and the resulting weakness in the
Company’s stock price as of the end of its third quarter. See Note
3.
Newspaper
mastheads (newspaper titles and website domain names) are not subject to
amortization and are tested for impairment annually (at year-end), or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The impairment test consists of a comparison of the fair
value of each newspaper masthead with its carrying amount. The
Company performed impairment tests on newspaper mastheads as of September 30,2007. See Note 3.
8
Intangible
assets subject to amortization (primarily advertiser and subscriber lists)
are
tested for recoverability whenever events or change in circumstances indicate
that their carrying amounts may not be recoverable. The carrying
amount of each asset group is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use of such asset
group. The Company performed impairment tests on its long lived
assets (including intangible assets subject to amortization) as of September30,2007. No impairment loss was recognized on intangible assets subject
to amortization.
Stock-based
compensation - All share-based payments to employees, including grants
of employee stock options, stock appreciation rights, restricted stock and
purchases under the employee stock purchase plan ("ESPP"), are recognized in
the
financial statements based on their fair values. At September 30,2007, the Company had six stock-based compensation plans. Total
stock-based compensation expense from continuing operations was $1.6 million
and
$5.9 million for the three months and nine months ended September 30, 2007,
respectively and was $1.6 million and $5.2 million for the three months and
nine
months ended September 24, 2006, respectively.
The
Company has issued a total of 65,000 shares of restricted Class A Common Stock
to its Chief Executive Officer: (1) 40,000 shares on January 25, 2005, valued
at
the Company's closing stock price on that date of $70.55, which vest on January25, 2009, subject to certain performance criteria and (2) 25,000 shares on
January 24, 2006, valued at the Company's closing stock price on that date
of
$58.05, which vest over four annual installments, subject to certain performance
criteria, beginning on January 24, 2007. On January 24, 2007, 6,250
shares vested. At this time, the Company expects such performance
criteria to be met and is expensing the related stock-based compensation over
the respective four-year periods based on the grant date fair
values.
Deferred
income taxes result from temporary differences between amounts of
assets and liabilities reported for financial and income tax reporting
purposes.
Comprehensive
income (loss) - The Company records changes in its net assets from
non-owner sources in its statement of stockholders’ equity. These
changes arise primarily from minimum pension liability adjustments.
The
following table summarizes the composition of total comprehensive income (in
thousands):
Treasury
stock - The Company accounts for treasury stock under the cost
method.
Earnings
(loss) per share ("EPS") - Basic EPS excludes dilution from common
stock equivalents and reflects income (loss) divided by the weighted average
number of common shares outstanding for the period. Diluted EPS is
based upon the weighted average number of outstanding shares of common stock
and
dilutive common stock equivalents in the period. Common stock
equivalents arise from dilutive stock options and are computed using the
treasury stock method. For the three and nine months ended September30, 2007, the Company incurred a net loss and therefore the impact of the common
stock equivalents were excluded from the computation of diluted net loss per
share as their effect would have been anti-dilutive. The
anti-dilutive common stock equivalents that could potentially dilute basic
EPS
in the future, but were not included in the weighted average share calculation
for the three months and nine months ended September 30, 2007 were 3,764,161
and
3,911,733, respectively and were 2,562,949 and 2,118,374 for the three months
and nine months ended September 24, 2006, respectively.
9
Reclassifications-
Certain prior period amounts have been reclassified to conform to the 2007
presentation and relate primarily to accounting for the (Minneapolis) Star
Tribune as a discontinued operation.
Income
Taxes - On July 13, 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – An Interpretation of FASB
Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an entity’s financial statements
in accordance with FASB Statement No. 109, Accounting for Income Taxes
and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax
return. Under FIN 48, the impact of an uncertain income tax position
on the income tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if
it has less than a 50% likelihood of being sustained. Additionally,
FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006.
The
Company adopted the provisions of FIN 48 on January 1, 2007. The
total amount of unrecognized tax benefits as of the date of adoption was $66.7
million. Of the $66.7 million of unrecognized tax benefits at January1, 2007, $8.5 million are tax benefits that, if recognized, would favorably
affect the effective income tax rate in future periods. The other
$58.2 million of unrecognized tax benefits would, if recognized, result in
a
decrease to goodwill previously recorded related to
acquisitions. There were no material changes to these amounts through
September 30, 2007.
With
few
exceptions, the Company is no longer subject to examination by U.S. federal,
state, or foreign tax authorities for years before 2002.
NOTE
2. ACQUISITION AND DIVESTITURES
Acquisition
Transaction:
On
June27, 2006 (the third day of the Company's third fiscal quarter), the Company
completed the purchase of Knight-Ridder, Inc. ("Knight Ridder") pursuant to
a
definitive merger agreement entered into on March 12, 2006, under which the
Company paid Knight Ridder shareholders a per share price consisting of $40.00
in cash and .5118 of a Class A McClatchy common share (the
"Acquisition"). The Company issued approximately 35 million Class A
common shares in connection with the Acquisition. The total purchase
price was approximately $4.6 billion. In addition, the Company
assumed $1.9 billion in Knight Ridder long-term debt at closing.
Prior
to
the Acquisition, Knight Ridder published 32 daily newspapers in 29 U.S. markets,
operated websites in all of its markets and owned a variety of internet and
other investments which consisted of: 33.3% of each of CareerBuilder LLC
("CareerBuilder") and ShopLocal LLC ("ShopLocal"), 25.0% of Topix.net ("Topix"),
21.5% of Classified Ventures LLC ("Classified Ventures"), 33.3% interest in
SP
Newsprint Company ("SP"), 13.5% interest in the Ponderay Newsprint Company
("Ponderay") and 49.5% of The Seattle Times Company which owns The Seattle
Times newspaper and weekly newspapers in the Puget Sound area, and daily
newspapers located in Walla Walla and Yakima, Washington and in Portland, Maine
and various other smaller investments. Knight Ridder was the founder
and operator of Real Cities, the largest national advertising network of local
news websites.
10
To
consummate the Acquisition, the Company borrowed $3.1 billion under a new bank
debt facility (see Note 6) and used the proceeds from the sales of four Knight
Ridder newspapers in order to pay Knight Ridder shareholders ($2.7 billion)
and
refinance its and Knight Ridder's bank debt ($498.0 million). The
after-tax proceeds from the sales of eight Knight Ridder newspapers sold after
the Acquisition closed were used to reduce debt.
Acquisition
Accounting:
Pursuant
to Emerging Issues Task Force No. 99-12, Determination of the Measurement
Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination, the McClatchy common stock issued on June 27, 2006 was valued
based upon the average closing price of McClatchy common stock from March 8,2006 through March 14, 2006 (two business days before and after the terms of
the
Acquisition were agreed to and announced), or $52.06 per
share. As a result, the fair value of the 35.0 million shares
of McClatchy common stock issued in the Acquisition was recorded at $1.8
billion, which was included in the total Acquisition purchase price of
approximately $4.6 billion. The fair value of such shares declined to
approximately $1.4 billion as of the Acquisition closing date (June 27, 2006),
however the decline of $423.0 million in valuation had no effect on the total
Acquisition purchase price recorded. The difference is included in
goodwill in the allocation of the purchase price below.
The
Acquisition was accounted for as a purchase. Pursuant to SFAS
141, Business Combinations, the purchase price was allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
as of June 27, 2006, the date of the Acquisition. The purchase price
allocation, while substantially complete, is subject to further adjustments
based upon completion of analyses of deferred income tax assets and
liabilities. See Note 5 for adjustments made in the first nine months
of fiscal 2007.
The
following table summarizes, on an unaudited pro forma basis, the combined
results of continuing operations of the Company for the nine months ended
September 24, 2006 as though the Acquisition had taken place on the first day
of
the fiscal quarter (in thousands):
Income
from continuing operations per diluted share
$
1.18
(1) Excludes
$18.1 million of income tax benefits related to the Company’s
recalculation of its deferred tax liabilities and assets.
11
Disposition
Transactions:
In
conjunction with the Acquisition, the Company divested 12 Knight Ridder
newspapers for strategic and antitrust reasons. The divested
newspapers were the Philadelphia Inquirer;Philadelphia Daily
News;San Jose Mercury News; St. Paul Pioneer Press;
Akron Beacon Journal (OH); Wilkes Barre Times Leader (PA);
Aberdeen American News (SD); Grand Forks Herald (ND); Ft.
Wayne News-Sentinel (IN); Contra Costa Times (CA);
Monterey Herald (CA); and Duluth News Tribune
(MN). The Company received cash proceeds of approximately $2.0
billion (net of transaction costs) from these divestitures. In
addition, the buyers assumed approximately $77 million of Knight Ridder
retirement obligations related to certain newspapers (see Note
7). Four of the 12 newspapers were sold concurrently with the closing
of the Acquisition. The remaining eight newspapers were owned for
periods ranging from two days to 36 days following the closing of the
Acquisition. The operating results of these eight divested newspapers
for the periods they were owned by the Company, including interest expense
and
debt issuance costs related to bank debt incurred until their respective sales,
are included in discontinued operations in the Company's consolidated statement
of income for the period from June 27, 2006 to December 31, 2006. No
accounting gain or loss was recognized on the sale of the 12
newspapers.
In
July
2006, the Company sold 18.3% of its interest in each of CareerBuilder and
ShopLocal, and 13.8% of its interest in Topix for an aggregate of $309.7 million
in cash and used the after-tax proceeds to reduce debt. No accounting
gain or loss was recognized on the sale of these investments. The
Company retained a 15.0% interest in each of CareerBuilder and ShopLocal, and
an
11.3% interest in Topix. Effective May 11, 2007, the Company's
interest in CareerBuilder declined to 14.4%.
On
March5, 2007, the Company sold the (Minneapolis) Star Tribune newspaper and
other publications and websites related to the newspaper to an entity affiliated
with Avista Capital Partners for $530.0 million. The Company expects
to receive an income tax refund of approximately $201.0 million related to
the
sale in 2008. This amount has been recorded as a current asset on the
consolidated balance sheet.
The
results of Star Tribune's operations, including interest on debt
incurred to purchase it, have been recorded as discontinued operations in all
periods presented. The Company used the proceeds from the sale of the Star
Tribune to reduce debt.
Revenues
and loss from all discontinued operations, net of income taxes, for the three
months and nine months ended September 30, 2007 and September 24, 2006 were
as
follows (in thousands):
(1) Includes
interest expense allocated to discontinued operations of $1.2 million
for
the nine months ended September 30, 2007, and $18.6 million and $22.4
million for the three months and nine months ended September 24, 2006
respectively.
NOTE
3. GOODWILL AND NEWSPAPER MASTHEAD IMPAIRMENT
Management
performed its testing of impairment of goodwill and newspaper mastheads as
of
September 30, 2007, due to the continuing challenging business conditions and
the resulting weakness in the Company's stock price as of the end of its third
quarter. The fair values of the Company's reporting units for
goodwill impairment testing and individual newspaper mastheads were estimated
using the expected present value of future cash flows, using estimates,
judgments and assumptions (see Note 1) that management believes were appropriate
in the circumstances. As a result, the Company recorded an impairment
charge related to goodwill of $1.2 billion and a newspaper masthead impairment
charge of $250.4 million in the third quarter of 2007. About a third
of the goodwill impairment charge resulted from the accounting treatment of
the
value of common stock issued in the Acquisition (see Note 2), which resulted
in
additional goodwill being recorded.
12
NOTE
4. INVESTMENTS IN UNCONSOLIDATED COMPANIES AND LAND
HELD FOR SALE
The
following is the Company's ownership interest and carrying value of investments
in unconsolidated companies and joint ventures (dollars in
thousands):
The
Company primarily uses the equity method of accounting for these
investments.
During
the second fiscal quarter of 2007, the Company expensed $7.8 million as its
share of a payment made by The Seattle Times Company ("STC") to settle certain
outstanding legal issues and amend the Joint Operating Agreement relating to
STC
and The Hearst Corporation's Seattle newspaper.
As
of
September 30, 2007, management performed a review of its investments in
unconsolidated subsidiaries and joint ventures. Due to continuing
challenging business conditions,management determined that a loss in value
of
its investments in STC and Ponderay, which are other than temporary declines,
should be recognized. As a result, the Company recorded a write down
of $69.1 million and $6.0 million to reduce its investment in STC and Ponderay,
respectively, to their fair value as of September 30, 2007. No write
downs were required for the Company's other investments in unconsolidated
subsidiaries and joint ventures.
As
part
of the Acquisition, the Company acquired 10 acres of land in
Miami. Such land was under contract to be sold for gross proceeds of
$190.0 million pursuant to a March 2005 sale agreement, the closing of which
was
subject to resolution of certain environmental and other
contingencies. On August 10, 2007, the sale agreement was
amended. As of September 30, 2007, the Company expects to consummate
the sale of the Miami land prior to December 31, 2008 for gross proceeds of
approximately $180.0 million. As a result, the Company recorded a
write-down of $9.5 million in the third quarter of 2007.
Other
intangible assets not subject to amortization:
Newspaper
mastheads
683,000
Total
1,369,046
Goodwill
3,559,828
Total
intangible assets and goodwill
$
4,928,874
14
The
following is a summary of the changes in the identifiable intangible
assets and goodwill from December 31, 2006 to September 30, 2007
(in
thousands):
(1)
Relates primarily to revised estimates of deferred income tax assets
and
liabilities and acquired income tax reserves.
Amortization
expense for continuing operations was $15.0 million and $14.2 million
in
the third fiscal quarters of 2007 and 2006, respectively and was
$45.0
million and $16.6 million for the first nine months of fiscal 2007
and
2006, respectively.
The
estimated amortization expense for the remainder of fiscal 2007
and the
five succeeding fiscal years is as follows (in
thousands):
The
publicly-traded notes are stated net of unamortized discounts and premiums
resulting from recording such assumed liabilities at fair value as of the June27, 2006 acquisition date. The notes due in 2007 were refinanced on a long-term
basis by drawing on the Company's revolving credit facility on November 1,2007
and accordingly, are included in long-term debt.
The
Company's credit facility 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. At the closing of the
Acquisition, the Company’s new Credit Agreement consisted of a $1.0 billion
five-year revolving credit facility and $2.2 billion five-year Term A loan.
Both
the Term A loan and the revolving credit facility are due on June 27,2011.
The
Company has repaid $699.0 million of bank debt in the first nine months of
fiscal 2007 from the sale of the Star Tribune newspaper, sales of other
assets and cash generated from operations. A total of $429.4 million of funds
were available under the revolving credit facility at September 30,2007.
Debt
under the Credit Agreement bears interest at the London Interbank Offered Rate
("LIBOR") plus a spread ranging from 37.5 basis points to 125.0 basis
points. Applicable rates are based upon the Company’s ratings on its
long-term debt from Moody’s Investor Services ("Moody’s") and
Standard & Poor’s. A commitment fee for the unused revolving
credit ranges from 10.0 basis points to 20.0 basis points depending on the
Company’s ratings. Standard & Poor’s has rated the facility "BB+" and
Moody’s has rated the facility “Baa3”. According to the Credit Agreement,
the Company will pay interest at LIBOR plus 75.0 basis points on outstanding
debt and its commitment fees are currently at 15.0 basis points. On
October 17, 2007 Standard & Poor’s put the Company’s corporate credit rating
on credit watch with negative implications citing faster-than-expected revenue
declines.
In
addition, the Company’s Material Subsidiaries (as defined in the Credit
Agreement) have guaranteed the Company’s obligations under the Credit
Agreement. These guarantees were effected on May 4, 2007, and continue in
effect upon the earlier of the termination of the Credit Agreement or the date
which is one year after the date both ratings agencies have rated the Company’s
bank debt as investment grade.
At
September 30, 2007, the Company had outstanding letters of credit totaling
$53.8
million securing estimated obligations stemming from workers’ compensation
claims and other contingent claims.
The
following table presents the approximate annual maturities of debt, based upon
the Company's required payments (adjusted for management’s expectations
regarding the notes due in fiscal 2007 as discussed above), for the next five
years and thereafter (in thousands):
Year
Payments
2008
$
-
2009
200,000
2010
-
2011
1,466,775
2012
-
Thereafter
1,000,000
2,666,775
Less
net discount
(87,362
)
Total
debt
$
2,579,413
NOTE
7. EMPLOYEE BENEFITS
The
Company sponsors defined benefit pension plans (“retirement plans”), which cover
a majority of its employees. Benefits are based on years of service
and compensation. Contributions to the retirement plans are made by
the Company in amounts deemed necessary to provide the required
benefits. The Company made $40.0 million in voluntary contributions
to its retirement plans in early fiscal 2006 (including $8.5 million to Star
Tribune plans). No contributions to the Company's retirement
plans are currently planned during fiscal 2007.
The
Company also has a limited number of supplemental retirement plans to provide
key employees with additional retirement benefits. The terms of the
plans are generally the same as those of the retirement plans, except that
the
supplemental retirement plans are limited to key employees and provide an
enhanced pension benefit. These plans are funded on a pay-as-you-go
basis and the accrued pension obligation is largely included in other long-term
obligations.
17
The
elements of pension costs for continuing operations are as follows (in
thousands):
No
material contributions were made to the Company's multi-employer plans for
continuing operations for the three months and nine months ended September30,2007 and September 24, 2006.
The
Company also provides for or subsidizes post-retirement healthcare and certain
life insurance benefits for employees. The elements of
post-retirement benefits for continuing operations are as follows (in
thousands):
In
the
third quarter of 2007, the Company entered into an agreement with the Pension
Benefit Guaranty Corporation (“PBGC”) to guarantee certain potential pension
plan termination liabilities associated with the plans maintained by certain
divested Knight Ridder newspapers (see Note 2). The guarantee covers any of
the
plans terminating prior to September 1, 2009 on account of financial distress.
The maximum guarantee under each plan is no greater than the termination
liability at the time of the divestiture of the plan sponsor, and the liability
amount is reduced by contributions made by the plan sponsor going forward and
by
additional amounts recovered from the plan sponsor in connection with any such
termination. PBGC may only seek payment under the guarantee if it has
exhausted all reasonable efforts to obtain payment from the current sponsors
of
the plans. The Company believes the likelihood of its being required to perform
under this guarantee is remote given the short duration of the guarantee, and
the number of pension plans and plan sponsors involved. The gross amount of
potential termination liabilities subject to the guarantee is $126.3 million
spread among a number of different plan sponsors and pension plans. The Company
recorded an expense in discontinued operations and a corresponding liability
of
$2.5 million for the fair value of the guarantee. Such liability will
be amortized into income of discontinued operations over the remaining two
years
of the guarantee.
18
NOTE
8. COMMON STOCK AND STOCK PLANS
On
June27, 2006, in connection with the Acquisition, the Company increased the
authorized number of its Class A Common shares from 100,000,000 to 200,000,000
shares and issued 34,988,009 new Class A Common shares in connection with the
Acquisition (see Note 2).
The
Company's Class A and Class B Common Stock participate equally in
dividends. Holders of Class B are entitled to one vote per share and
to elect as a class 75% of the Board of Directors, rounded down to the nearest
whole number. Holders of Class A Common Stock are entitled to
one-tenth of a vote per share and to elect as a class 25% of the Board of
Directors, rounded up to the nearest whole number. Class B Common
Stock is convertible at the option of the holder into Class A Common Stock
on a
share-for-share basis.
The
holders of shares of Class B Common Stock are parties to an agreement, the
intent of which is to preserve control of the Company by the McClatchy
family. Under the terms of the agreement, the Class B shareholders
have agreed to restrict the transfer of any shares of Class B Common Stock
to
one or more "Permitted Transferees," subject to certain exceptions. A
"Permitted Transferee" is any current holder of shares of Class B Common Stock
of the Company; any lineal descendant of Charles K. McClatchy (1858 to 1936);
or
a trust for the exclusive benefit of, or in which all of the remainder
beneficial interests are owned by, one or more lineal descendants of Charles
K.
McClatchy.
Generally,
Class B shares can be converted into shares of Class A Common Stock and then
transferred freely (unless, following conversion, the outstanding shares of
Class B Common Stock would constitute less than 25% of the total number of
all
outstanding shares of common stock of the Company). In the event that
a Class B shareholder attempts to transfer any shares of Class B Common Stock
in
violation of the agreement, or upon the happening of certain other events
enumerated in the agreement as "Option Events," each of the remaining Class
B
shareholders has an option to purchase a percentage of the total number of
shares of Class B Common Stock proposed to be transferred equal to such
remaining Class B shareholder's ownership percentage of the total number of
outstanding shares of Class B Common Stock. If all the shares
proposed to be transferred are not purchased by the remaining Class B
shareholders, the Company has the option of purchasing the remaining
shares. The agreement can be terminated by the vote of the holders of
80% of the outstanding shares of Class B Common Stock who are subject to the
agreement. The agreement will terminate on September 17, 2047, unless
terminated earlier in accordance with its terms.
At
September 30, 2007, the Company had six stock-based compensation
plans. The Company applied APB Opinion 25 and related interpretations
in accounting for its plans in fiscal 2005 and prior years. The
Company has adopted SFAS No. 123R for its stock plans effective December 26,2005, the first day of fiscal 2006.
Beginning
in fiscal 2005, the Company awarded stock-settled stock appreciation rights
("SARs") in lieu of stock options to its employees. The SARs were
granted at fair market value, have a ten-year term and vest in four equal annual
installments beginning on March 1 following the year for which the award was
made.
19
Outstanding
options and SARs are summarized as follows:
As
of September 30, 2007, there were $10.1 million of unrecognized compensation
costs related to non-vested stock-based compensation arrangements granted under
the Company's plans. The cost is expected to be recognized over a
weighted average period of 1.7 years.
The
following tables summarize information about stock options and SARs outstanding
in the stock plans at September 30, 2007:
Range
of Exercise
Prices
Options/
SARs
Outstanding
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Options/
SARs
Exercisable
Weighted
Average
Exercise
Price
$
26.19-$42.50
1,483,625
6.54
$
40.81
588,125
$
38.43
$
45.98-$59.09
1,250,575
6.08
$
54.38
892,825
$
52.86
$
59.58-$73.36
959,500
6.58
$
68.53
638,875
$
67.92
$
26.19-$73.36
3,693,700
6.40
$
52.61
2,119,825
$
53.39
The
weighted average remaining contractual life on options exercisable at September30, 2007 was 4.8 years. The fair value of the stock options and SARs
granted was estimated on the date of grant using a Black-Scholes option
valuation model that uses the assumptions noted in the following table. The
expected life of the options represents the period of time that options granted
are expected to be outstanding using the historical exercise behavior of
employees. Expected volatility was based on historical volatility for
a period equal to the stock option's expected life for shares granted in the
third fiscal quarters of 2007 and 2006, and for a one-year look back period
for
shares granted prior to fiscal 2006. The risk-free rate for periods within
the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
Weighted
average fair value of options/SARs granted
$
8.40
$
11.01
20
The
Company also offers eligible employees the option to purchase common stock
under
its ESPP. The expense associated with the plan is computed using a
Black-Scholes option valuation model with similar assumptions to those described
for stock options, except that volatility is computed using a one-year look
back
given the short-term nature of this option. Expense associated with
the ESPP is included in the stock-related compensation discussed in Note
1.
21
ITEM
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The McClatchy Company (the "Company") is the third largest newspaper company
in
the United States, with 31 daily newspapers and approximately 50 non-dailies.
Twenty of its daily newspapers were acquired on June 27, 2006 in the Knight
Ridder acquisition (the "Acquisition") – see Note 2 to the consolidated
financial statements. McClatchy also operates leading local websites
and direct marketing operations in each of its markets which complement its
newspapers and extend its audience reach in each
market. McClatchy-owned newspapers include The Miami
Herald, The Sacramento Bee, The Fort Worth Star-Telegram,
The Kansas City Star, The Charlotte
Observer, and The (Raleigh) News &
Observer.
McClatchy
also has a portfolio of premium digital assets. Its leading local websites
offer
users information, comprehensive news, advertising, e-commerce and other
services. The Company owns and operates McClatchy Interactive, an
interactive operation that provides websites with content, publishing tools
and
software development. McClatchy operates Real Cities, the largest
national advertising network of local news websites and owns 14.4% of
CareerBuilder, the nation’s largest online job site. McClatchy also
owns 25.6% of Classified Ventures, a newspaper industry partnership that offers
classified websites such as the nation’s number two online auto website,
cars.com, and the number one rental site, apartments.com.
The Company's primary source of revenue is advertising, which accounted for
roughly 84% of the Company's revenue through September 30,2007. While percentages vary from year to year and from newspaper to
newspaper, retail advertising carried as a part of newspapers ("run-of-press"
or
"ROP" advertising) or in advertising inserts placed in newspapers (preprint
advertising) contributed roughly 44% of advertising revenues at the Company's
newspapers. Recent trends have been for certain national or regional
retailers to use greater preprint and online advertising and less ROP
advertising, although that trend shifts from time to
time. Nonetheless, ROP advertising still currently makes up the
majority of retail advertising. Classified advertising (including
online classified advertising), primarily in automotive, employment and real
estate categories, contributed about 39% of advertising revenue and national
advertising contributed about 9% of total advertising revenue. Direct
marketing and other advertising make up the remainder of the Company's
advertising revenues. Circulation revenues contributed roughly 12% of
the Company's newspaper revenues. Most newspapers are delivered by
independent contractors. Circulation revenues are recorded net of
direct delivery costs.
See
the following "Results of Operations" for a discussion of the Company's revenue
performance and contribution by category for the three months and nine months
ended September 30, 2007 and September 24, 2006.
22
Critical
Accounting Policies
Critical
accounting policies are those accounting policies that management believes
are
important to the portrayal of the Company's financial condition and results
and
require management's most difficult, subjective or complex judgments, often
as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company's 2006 Annual Report on Form 10-K
includes a description of certain critical accounting policies, including those
with respect to revenue recognition, allowance for uncollectible accounts,
acquisition accounting, goodwill and intangible impairment, discontinued
operations, pension and post-retirement benefits, income taxes, insurance and
stock-based employee compensation.
Goodwill
and Intangible Impairment:
The Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets. As required by SFAS No. 142, the Company tests for
goodwill annually (at year-end) or whenever events occur or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. The required two-step approach uses accounting
judgments and estimates of future operating results. Changes in
estimates or the application of alternative assumptions could produce
significantly different results. Impairment testing is done at a
reporting unit level. The Company performs this testing at its four
newspaper operating segments, which are also considered reporting units under
SFAS 142. An impairment loss generally is recognized when the carrying amount
of
the reporting unit’s net assets exceeds the estimated fair value of the
reporting unit. The estimates and judgments that most significantly affect
the
fair value calculation are assumptions related to revenue growth, newsprint
prices, compensation levels, discount rate and private and public market trading
multiples for newspaper assets. The Company determined that it should
perform its impairment testing of goodwill as of September 30, 2007, due to
the
continuing challenging business conditions and the resulting weakness in the
Company’s stock price as of the end of its third quarter. See Note 3 to the
consolidated financial statements.
Newspaper mastheads (newspaper titles and website domain names) are not subject
to amortization and are tested for impairment annually (at year-end), or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The impairment test consists of a comparison of the fair
value of each newspaper masthead with its carrying amount. The
Company performed impairment tests on newspaper mastheads as of September 30,2007. See Note 3 to the consolidated financial
statements.
Intangible assets subject to amortization (primarily advertiser and subscriber
lists) are tested for recoverability whenever events or change in circumstances
indicate that their carrying amounts may not be recoverable. The
carrying amount of each asset group is not recoverable if it exceeds the sum
of
the undiscounted cash flows expected to result from the use of such asset
group. The Company performed impairment tests on its long lived
assets (including intangible assets subject to amortization) as of September30,2007. No impairment loss was recognized on intangible assets subject
to amortization.
Income
Tax Contingencies:
The Company is subject to periodic audits by the Internal Revenue Service and
other state and local taxing authorities. These audits may challenge
certain aspects of the Company's tax positions such as the timing and amount
of
deductions and allocation of taxable income to the various tax
jurisdictions. Income tax contingencies are accounted for in
accordance with FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), and may require significant management judgment in
estimating final outcomes. Actual results could materially differ
from these estimates and could significantly affect the effective tax rate
and
cash flows in future periods.
23
Recent
Events and Trends
Acquisition
Transaction:
On
June 27, 2006 (the third day of the Company’s third fiscal quarter), the Company
completed the purchase of Knight-Ridder, Inc. ("Knight Ridder") pursuant to
a
definitive merger agreement entered into on March 12, 2006, under which the
Company paid Knight Ridder shareholders a per share price consisting of $40.00
in cash and .5118 of a Class A McClatchy common share (the
"Acquisition"). The Company issued approximately 35 million Class A
common shares in connection with the Acquisition. The total purchase
price was approximately $4.6 billion. In addition, the Company
assumed $1.9 billion of Knight Ridder's long-term debt at the closing of the
Acquisition.
Prior to the Acquisition, Knight Ridder published 32 daily newspapers in 29
U.S.
markets, operated websites in all of its markets and owned a variety of internet
and other investments which consisted of: 33.3% of each of
CareerBuilder LLC ("CareerBuilder") and ShopLocal LLC ("ShopLocal"), 25.0%
of
Topix.net ("Topix"), 21.5% of Classified Ventures LLC ("Classified Ventures"),
33.3% interest in SP Newsprint Company ("SP"), 13.5% interest in the Ponderay
Newsprint Company ("Ponderay") and 49.5% of The Seattle Times Company which
owns
The Seattle Times newspaper and weekly newspapers in the Puget Sound
area, and daily newspapers located in Walla Walla and Yakima, Washington and
in
Portland, Maine and various other smaller investments. Knight Ridder
was the founder and operator of Real Cities, the largest national
advertising network of local news websites.
To
consummate the Acquisition, the Company borrowed $3.1 billion under a new bank
debt facility (see Note 6 to the consolidated financial statements) and used
the
proceeds from the sales of four Knight Ridder newspapers (see Disposition
Transactions below) in order to pay Knight Ridder shareholders ($2.7 billion)
and refinance its and Knight Ridder's bank debt ($498.0 million). The
after-tax proceeds from the sales of eight Knight Ridder newspapers sold after
the Acquisition closed were used to reduce debt.
The
Acquisition was accounted for as a purchase. The purchase price was
allocated to the assets acquired and liabilities assumed based upon their
estimated fair values as of the June 27, 2006 Acquisition date. The
purchase price allocation was primarily based upon an independent
valuation. The purchase price allocation, while substantially
completed, is subject to further adjustments based upon completion of analyses
of deferred income tax assets and liabilities.
Disposition
Transactions:
In
conjunction with the Acquisition, the Company divested 12 Knight Ridder
newspapers for strategic and antitrust reasons. The divested
newspapers were the Philadelphia Inquirer;Philadelphia Daily
News;San Jose Mercury News; St. Paul Pioneer Press;
Akron Beacon Journal (OH); Wilkes Barre Times Leader (PA);
Aberdeen American News (SD); Grand Forks Herald (ND); Ft.
Wayne News-Sentinel (IN); Contra Costa Times (CA);
Monterey Herald (CA); and Duluth News Tribune
(MN). The Company received cash proceeds of approximately $2.0
billion (net of transaction costs) from these divestitures. In
addition, the buyers assumed approximately $77 million of Knight Ridder
retirement obligations related to certain newspapers (see Note 7 to consolidated
financial statements). Four of the 12 newspapers were sold
concurrently with the closing of the Acquisition. The remaining eight
newspapers were owned for periods ranging from two days to 36 days following
the
closing of the Acquisition. The operating results of these eight
divested newspapers for the periods they were owned by the Company, including
interest expense and debt issuance costs related to bank debt incurred until
their respective sales, are included in discontinued operations in the Company's
consolidated statement of income for 2006. No accounting gain or loss
was recognized on the sale of the 12 newspapers.
24
In
July
2006, the Company sold 18.3% of its interest in each of CareerBuilder and
ShopLocal, and 13.8% of its interest in Topix for an aggregate of $309.7 million
in cash and used the after-tax proceeds to reduce debt. No accounting
gain or loss was recognized on the sale of these investments. The Company
retained a 15.0% interest in each of CareerBuilder and ShopLocal and an 11.3%
interest in Topix. Effective May 11, 2007, the Company's interest in
CareerBuilder declined to 14.4%.
On
March5, 2007, the Company sold the (Minneapolis) Star Tribune and other
publications and websites related to the newspaper to an entity affiliated
with
Avista Capital Partners for $530.0 million. The Company expects to
receive an income tax refund of approximately $201.0 million related to the
sale
in 2008. This amount has been recorded as a current asset on the
consolidated balance sheet.
The
results of Star Tribune's operations, including interest on debt
incurred to purchase it, have been recorded as discontinued operations in all
periods presented. The Company used the proceeds from the sale of the Star
Tribune to reduce debt.
Impairment
of Goodwill and Newspaper Mastheads:
Management
performed its testing of impairment of goodwill and newspaper mastheads as
of
September 30, 2007, due to the continuing challenging business conditions and
the resulting weakness in the Company's stock price as of the end of its third
quarter. The fair value of the Company's reporting units for goodwill
impairment testing and individual newspaper mastheads were estimated using
the
expected present value of future cash flows, using estimates, judgments and
assumptions (see Note 1 to the consolidated financial statements), that
management believes were appropriate in the circumstances. As a
result, the Company recorded an impairment charge related to goodwill of $1.2
billion and a newspaper masthead impairment charge of $250.4 million in the
third quarter of 2007. About a third of the goodwill impairment
charge resulted from the accounting treatment of the value of common stock
issued in the Acquisition (see Notes 2 and 3 to the consolidated financial
statements), which resulted in additional goodwill being recorded.
Advertising
Revenues:
Classified
advertising revenues have continued to decline since the third fiscal quarter
of
2006 and advertising results declined across the board in the third fiscal
quarter of 2007, but particularly in real estate advertising. Real
estate advertising began to weaken in the fourth fiscal quarter of 2006 and
has
declined substantially since then. The Company has seen significant
declines in California and Florida, where real estate values and thus
advertising were strong in the third fiscal quarter of 2006 (see discussion
below). The decline in automotive classified advertising reflected an
industry-wide decline that began in 2004, while employment advertising has
been
in decline in most markets since the third fiscal quarter of
2006. National advertising also declined in the third fiscal quarter
of 2007 reflecting a slowdown in a number of segments including
telecommunications, national automotive and financial advertising.
25
A
total
of 67.9% of the Company's advertising declines in the third fiscal
quarter of 2007 came from California and Florida, two regions that benefited
strongly from the real estate boom, and are likewise being hurt in the
subsequent real estate slowdown. Advertising revenues were down 18.1% in
these regions in the third fiscal quarter of 2007. The housing sector is an
important component of these states’ economies. Hence, California and Florida
also account for a majority of the decline in auto and employment advertising,
as the real estate downturn appears to be having an impact on these categories
as well. These states have experienced real estate related advertising
downturn and recovery cycles in the past and were among the Company’s best
performing regions in 2006. Management believes a significant portion of the
current advertising downturn reflects these cyclical forces and expects declines
to continue in the fourth quarter of 2007 because of the difficult trends in
these states. See the revenue discussions in management’s review of “Results of
Operations”.
Newsprint:
Newsprint
prices continued to decline in the third fiscal quarter of 2007 after a
sustained period of increasing prices from 2002 through early
2006. Through the first nine months of fiscal 2007, newsprint expense
was 16.5% lower than pro forma newsprint expense (which includes the 20 Knight
Ridder newspapers, but excludes the (Minneapolis) Star Tribune) in the
first nine months of 2006, primarily reflecting lower newsprint usage and,
to a
lesser degree, lower newsprint prices. Newsprint pricing is dependent
on global demand and supply for newsprint. Significant changes in
newsprint prices can increase or decrease the Company's operating
expenses. However, because the Company has ownership interests in
newsprint producers (Ponderay and SP), the recent trend of falling newsprint
prices, while favorably affecting operating expenses, is contributing to equity
losses from these investments. Ponderay and SP are also currently
impacted by the higher cost of energy and fiber used in the papermaking
process. The impact of newsprint price increases on the Company's
financial results is discussed under "Results of Operations".
As
a
result of the recently announced strategic alternative review at SP, the Company
and its partners are seeking to sell SP. The ultimate outcome of
the strategic review cannot be determined and the timing of a transaction,
if any, which the Company and its partners may undertake has not been
determined.
RESULTS
OF OPERATIONS
The
Company's results from continuing operations since the close of the Acquisition
(and all pro forma amounts for prior periods discussed) include the operations
of the 20 retained former Knight Ridder newspapers and all of the Company's
previously owned newspaper operations except for the (Minneapolis) Star
Tribune newspaper.
Third
Fiscal Quarter of 2007 Compared to Third Fiscal Quarter of
2006
The
Company reported a loss from continuing operations in the third quarter of
2007
of $1.3 billion, or $16.40 per share, including a $1.4 billion pre-tax charge
for impairment of goodwill and newspaper mastheads and an $84.6 million pre-tax
charge to write down the value of the Company's investments in The Seattle
Times
Company and Ponderay Newsprint and land held for sale. Income from
continuing operations in the third quarter of 2006 was $52.6 million or 65
cents
per share, and included a gain of $9.0 million related to the sale of
land.
26
Revenues:
Revenues
in the third quarter of 2007 were $540.3 million, down 9.2% from revenues of
$595.1 million in 2006. Advertising revenues were $457.0 million,
down 9.8% from advertising in 2006, and circulation revenues were $68.0 million,
down 3.7%.
As
discussed in Recent Events and Trends above, 67.9% of the Company's
advertising declines in the third fiscal quarter of 2007 came from
California and Florida, two regions that benefited strongly from the real estate
boom, and are likewise being hurt in the subsequent real estate slowdown.
Advertising revenues were down 18.1% in these two regions in the third fiscal
quarter. The housing sector is an important component of these states’
economies. Hence, California and Florida also account for a majority of the
decline in auto and employment advertising, as the real estate downturn appears
to be having an impact on these categories as well.
The
following summarizes the Company's revenue by category, which compares third
fiscal quarter of 2007 with third fiscal quarter of 2006 (dollars in
thousands):
(1)
Certain amounts have been reclassified to conform to the 2007
presentation.
Retail
advertising decreased $6.6 million or 3.1% from the third fiscal quarter of
2006. Online retail advertising increased $1.8 million or 41.0% from
the third fiscal quarter of 2006, while print ROP advertising decreased $8.6
million or 6.8% from the third fiscal quarter of 2006. Preprint
advertising decreased $251,000 or 0.3% from the third fiscal quarter of
2006.
National
advertising decreased $5.9 million or 12.3% from the third fiscal quarter of
2006. The declines in total national advertising were primarily in the
telecommunications and to a lesser extent, in the national automotive and
financial advertising categories. Online national advertising
decreased $2.7 million from the third fiscal quarter of 2006.
27
Classified
advertising decreased $33.2 million or 16.0% from the third fiscal quarter
of
2006. Print classified advertising declined $34.7 million or 19.8%,
while online classified advertising increased $1.5 million or 4.8% from the
third fiscal quarter of 2006.
·
Real
estate advertising decreased $17.0 million or 26.1% from the third
fiscal
quarter of 2006. The Company has seen dramatic declines in
California and Florida, where real estate values, and thus advertising,
were exceptionally strong in 2006. The declines were reflected
in both print advertising, down 27.4% and online advertising, down
5.8%.
·
Automotive
advertising decreased $7.4 million or 14.9% from the third fiscal
quarter
of 2006, reflecting an industry-wide trend. Print advertising
declined 19.2%, while online advertising grew 20.0% reflecting the
strength of the Company's cars.com online
products.
·
Employment
advertising decreased $10.6 million or 15.3% from the third fiscal
quarter
of 2006 reflecting an industry-wide trend. Print employment
advertising declined 22.4%, while online employment advertising increased
1.7%.
Online
advertising, which is included in each of the advertising categories discussed
above, totaled $41.6 million in the third fiscal quarter of 2007, an increase
of
1.4% over the third fiscal quarter of 2006.
Direct
marketing decreased $4.4 million or 10.7% from the third fiscal quarter of
2006
reflecting the overall slow advertising environment in 2007, and comparisons
to
a period of strong direct mail revenues in 2006.
Circulation
revenues decreased $2.6 million or 3.7% from the third fiscal quarter of 2006,
primarily reflecting lower circulation volumes. The Company continues
to reduce third-party and outlying circulation that is not highly valued by
its
newspaper advertisers, and expects circulation volumes to remain lower in fiscal
2007 compared to fiscal 2006.
Operating
Expenses:
Operating
expenses excluding the $1.4 billion charge for impairment of goodwill and
newspaper mastheads were down $38.8 million or 8.1% from the third fiscal
quarter of 2006, as the Company continued to reduce costs to mitigate the impact
of revenue declines. Compensation costs were down 3.6%, with payroll
down 5.1%, reflecting in part a 6.6% reduction in staffing. Fringe
benefits costs rose 3.1% reflecting higher retirement
expenses. Newsprint and supplement expense was down 23.5% with
newsprint expense down 24.1% and supplement expense down 20.0%. Other
operating costs were down 8.2%, reflecting lower bad debt and professional
services. Depreciation and amortization expense were about even with the 2006
third fiscal quarter.
Interest:
Interest
expense for continuing operations was $48.3 million for the third fiscal quarter
of 2007 primarily reflecting the debt incurred to finance the
Acquisition. Interest expense also included $2.2 million related to
accrued interest on the liability for unrecognized tax benefits. The
Company’s effective interest rate in the third fiscal quarter of 2007 was
approximately 6.5%.
28
Equity
Income (Loss) and Other:
Loss
from
unconsolidated companies resulted primarily from operating results of the
Company's newsprint investments reflecting the impact of lower newsprint prices
on their operations. Other-net non-operating income in the 2006 fiscal third
quarter included a pre-tax gain of $9.0 million from the sale of land in
Roseville, CA.
The
Company also recorded a charge of $84.6 million to write down the value of
its
investments in The Seattle Times Company, Ponderay Newsprint Company and land
held for sale. See Note 4 to the consolidated financial
statements.
Income
Taxes:
The
income tax rate from continuing operations in the third fiscal quarter of 2007
was impacted by two factors: Most of the goodwill impairment charges
are not tax deductible and therefore provided a tax benefit of $23.7
million. In addition, tax for the current fiscal year includes a
charge of $2.2 million related to certain tax positions taken by the Company
for
which it has established reserves. Excluding these issues, the
underlying tax rate on continuing operations would have been
39.6%. The income tax rate in the third fiscal quarter of 2006 was
31.3% and was affected by the Company's new operations added in the Acquisition
which are in states with lower tax rates than its previous markets (prior to
the
Acquisition), lowering the Company's effective state tax rate. The
Company recalculated its 2006 deferred tax liabilities and assets at this new
effective state tax rate, which resulted in a reduction to the third fiscal
quarter of 2006 income tax provision of $5.9 million.
Discontinued
Operations:
The
$1.5
million loss from discontinued operations in the third fiscal quarter of 2007
primarily related to an expense of $2.5 million to record the fair value of
the
PBGC guarantee (see Note 7 to the consolidated financial
statements).
The
loss
from discontinued operations in the third fiscal quarter of 2006 was $779,000,
reflecting income from the Star Tribune of $8.1 million, offset by a
loss of $8.9 million related to the former Knight Ridder newspapers which were
sold during the 2006 quarter. Eight of the 12 were held for periods
ranging from two to 36 days following the closing of the Acquisition, and their
results, including the interest expense of $7.7 million and debt issuance costs
of $9.2 million related to the debt incurred until their sale, were recorded
as
discontinued operations. No accounting gain or loss was recorded related to
the
disposition of the newspapers.
First
Nine Months of Fiscal 2007 Compared to First Nine Months of Fiscal
2006
The growth in revenues and expenses in the nine month period of 2007 compared
to
the same period in 2006 resulted from the Acquisition. To facilitate an analysis
of operating results, the comparative analysis between the nine months ended
September 30, 2007 and September 24, 2006 discussed below is supplemented by
a
comparison to 2006 pro forma results from continuing operations. Pro
forma amounts reflect the results of continuing operations of the
Company. The financial results for Knight Ridder and the 20
newspapers retained by the Company included in the pro forma information were
derived from the historical unaudited financial statements of Knight Ridder.
The
Company believes that the use of pro forma reporting of operating results
enhances measurement of performance by permitting comparisons with prior
historical data. Such supplemental pro forma data is not necessarily
indicative of the operating results that would have occurred if the Acquisition
had been completed as of the beginning of fiscal 2006.
29
The
Company reported a loss from continuing operations for the first nine months
of
2007 of $1.3 billion or $15.81 per share, including the write down of goodwill
and newspaper mastheads, and the investments in The Seattle Times Company and
Ponderay Newsprint and land held for sale discussed above. The loss
from discontinued operations for the first nine months of 2007 was $6.3 million,
or eight cents per share. Discontinued operations reflect the results
of the (Minneapolis) Star Tribune newspaper which was sold on March 5,2007.
Earnings
from continuing operations in the first nine months of 2006 were $106.6 million,
or $1.82 per share. Earnings from discontinued operations in the
first nine months of 2006 were $17.1 million. Total net income for the first
nine months of 2006 was $123.7 million, or $2.12 per share.
Revenues
and expenses in the nine-month period were generally affected by the trends
discussed in the quarterly comparison above, with exceptions noted
below.
Revenues:
Revenues
from continuing operations in the first nine months of fiscal 2007 were $1.7
billion, up $685.3 million or 68.4% from the first nine months of fiscal 2006
revenues from continuing operations of $1.0 billion, due to the 20 former Knight
Ridder newspapers and the sale of the (Minneapolis) Star
Tribune. Advertising revenues were $1.4 billion and circulation
revenues were $209.6 million in the first nine months of fiscal
2007. On a pro forma basis, revenues decreased $136.9 million or 7.5%
from the first nine months of fiscal 2006 with advertising revenues decreasing
$129.6 million or 8.4% and circulation revenues decreasing $8.7 million or
4.0%
from the first nine months of fiscal 2006.
A
total
of 70.5% of the Company's advertising declines in the first nine
months of fiscal 2007 came from California and Florida, two regions that
benefited strongly from the real estate boom, and are likewise being hurt in
the
subsequent real estate slowdown. Advertising revenues were down 15.6% in
these two regions in the first nine months of fiscal 2007. The housing
sector is an important component of these states’ economies. Hence, California
and Florida also account for a majority of the decline in auto and employment
advertising, as the real estate downturn appears to be having an impact on
these
categories as well.
30
The
following table summarizes the Company's revenues by category on a pro forma
basis, which compares the first nine months of fiscal 2007 with the first nine
months of fiscal 2006 (dollars in thousands):
Retail
advertising increased $273.7 million or 78.2% from the first nine months of
fiscal 2007 from the first nine months of fiscal 2006 reflecting the
Acquisition. On a pro forma basis, retail advertising decreased $18.8
million or 2.9% from the first nine months of fiscal 2006. On a pro
forma basis, online retail advertising increased $6.9 million or 59.7% from
the
first nine months of fiscal 2006, while ROP advertising decreased $26.2 million
or 6.7% from the first nine months of fiscal 2006. On a pro forma
basis, preprint advertising increased $434,000 or 0.2% from the first nine
months of fiscal 2006.
National
advertising increased $56.2 million or 73.2% from the first nine months of
fiscal 2006 reflecting the Acquisition. On a pro forma basis,
national advertising decreased $15.9 million or 10.7% from the first nine months
of fiscal 2006. Online national advertising decreased $4.1 million
from the first nine months of fiscal 2006 on a pro forma basis. The declines
reflect the same conditions discussed in the quarterly results.
Classified
advertising increased $187.1 million or 51.5% from the first nine months of
fiscal 2006 reflecting the Acquisition. On a pro forma basis,
classified advertising decreased $89.4 million or 14.0% from the first nine
months of fiscal 2006. Print classified advertising declined
16.4% on a pro forma basis, while online classified advertising was down 1.0%
on
a pro forma basis in the first nine months of fiscal 2007.
31
·
Real
estate advertising was up $37.3 million or 30.9% from the first nine
months of fiscal 2006. On a pro forma basis, real estate advertising
decreased $39.0 million or 19.8% from the first nine months of fiscal
2006
as discussed in the quarterly review
above.
·
Automotive
advertising increased $41.7 million or 48.2% from the first nine
months of
fiscal 2006. On a pro forma basis, automotive advertising
declined $23.5 million or 15.5% from the first nine months of fiscal
2006,
reflecting an industry-wide trend. As in the quarterly
discussion above, growth in online automotive advertising revenue
was
offset by declines in print
advertising.
·
Employment
advertising increased $74.1 million or 61.2% from the first nine
months of
fiscal 2006. On a pro forma basis, employment advertising
decreased $28.9 million or 12.9% from the first nine months of fiscal
2006
as discussed in the quarterly comparisons
above.
Online
advertising, which is included in each of the advertising categories discussed
above, totaled $125.6 million in the first nine months of fiscal 2007, an
increase of $62.5 million or 99.0% over the first nine months of fiscal 2006
reflecting the Acquisition. On a pro forma basis, online advertising
increased $1.7 million or 1.4% from the first nine months of fiscal 2006. This
increase reflected growth in retail and automotive advertising, which was
partially offset by declines in employment advertising and to a lesser degree,
real estate advertising.
Direct
marketing revenues increased $48.2 million or 73.8% from the first nine months
of fiscal 2006 reflecting the Acquisition. On a pro forma basis,
direct marketing revenues decreased $5.8 million or 4.9% from the first nine
months of fiscal 2006.
Circulation
revenues increased $91.7 million or 77.8% from the first nine months of fiscal
2006 reflecting the Acquisition. On a pro forma basis, circulation
revenues decreased $8.7 million or 4.0% from the first nine months of fiscal
2006.
Operating
Expenses:
Operating
expenses excluding the $1.4 billion charge for impairment of goodwill and
newspaper mastheads increased $584.0 million or 73.0% in the nine months of
fiscal 2007 related to expenses added by the Acquisition. On a pro
forma basis, operating expenses were down $125.5 million or 8.3% from the first
nine months of fiscal 2006, as the Company continued to reduce costs and
realized synergies from the Acquisition. On a pro forma basis,
compensation costs were down 8.5%, with payroll down 8.9%, reflecting in part
a
6.3% reduction in staffing. On a pro forma basis, fringe benefits
were down 6.9% reflecting lower retirement expenses. On a pro forma
basis, newsprint and supplement expense was down 17.0% with newsprint expense
down 16.5% and supplement expense down 19.5%. On a pro forma basis,
other operating costs were down 5.2%, reflecting lower professional services.
Professional services in the first half of fiscal 2006 include $8.5 million
of
alternative strategic review services incurred and recorded by Knight
Ridder. On a pro forma basis, depreciation and amortization expense
increased by 1.6%.
Interest:
Interest
expense for continuing operations was $151.6 million for the first nine months
of fiscal 2007 primarily reflecting the debt incurred to finance the
Acquisition. While the Company used the proceeds of the (Minneapolis)
Star Tribune newspaper sale to reduce debt, it carried interest on this
debt for the first two months of the year, which equated to about $5.7 million
in interest expense included in continuing operations. Interest expense also
included $4.5 million related to accrued interest on the liability for
unrecognized tax benefits. Excluding these two items, the Company’s interest
expense was $141.4 million. The Company’s effective interest rate in the
first nine months of fiscal 2007 was approximately 6.4%. In the first
nine months of fiscal 2007, a total of $1.2 million of interest expense was
allocated to discontinued operations related to debt used to acquire the
(Minneapolis) Star Tribune newspaper, which was sold on March 5,2007.
32
Equity
Income (Loss):
Loss
from
unconsolidated companies resulted primarily from the operating results of the
Company's newsprint investments and to a loss of $7.8 million related to a
third
quarter payment by the Seattle Times Company (in which the company is a 49.5%
owner) relating to the settlement of litigation and amendment to a joint
operating agreement with The Hearst Company. Total losses recorded
from unconsolidated investments were $28.6 million compared to income from
unconsolidated investments in the first nine months of 2006 of
$81,000.
The
Company also recorded a charge of $84.6 million to write down the value of
its
investments in The Seattle Times Company, Ponderay Newsprint Company and land
held for sale. See Note 4 to the consolidated financial
statements.
Income
Taxes:
The
income tax rate from continuing operations in the first nine months of fiscal
2007 was affected by the items discussed in the quarterly review
above. The income tax rate in the third fiscal quarter of 2006 was
35.4% and was affected by the Company's new operations which are in states
with
lower tax rates than its previous markets (prior to the Acquisition), lowering
the Company's effective state tax rate. The Company recalculated its
2006 deferred tax liabilities and assets at this new effective state tax rate,
which resulted in a reduction to the third fiscal quarter of 2006 income tax
provision of $5.9 million.
Discontinued
Operations:
Loss from discontinued operations, (primarily related to the (Minneapolis)
Star Tribune newspaper, see Note 2 to the consolidated financial
statements) in the first nine months of fiscal 2007 was $6.3
million. Income from discontinued operations was $17.1 million in the
first nine months of fiscal 2006 and reflect the results of the Star Tribune
and
the former Knight Ridder newspapers sold in 2006. Additionally, $1.2
million and $5.5 million in interest incurred on the debt used to finance the
purchase of the Star Tribune was recorded in discontinued operations in
the first nine months of fiscal 2007 and fiscal 2006, respectively. Interest
expense of $7.7 million and debt issuance costs of $9.2 million related to
the
debt incurred on the former Knight Ridder newspapers until their sale, was
recorded as discontinued operations.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
and Uses of Liquidity and Capital Resources:
The Company’s cash and cash equivalents were $25.0 million as of September 30,2007. The Company generated $221.4 million of cash from operating
activities in the first nine months of fiscal 2007. The increase in
cash from operating activities in the first nine months of fiscal 2007 resulted
primarily from the Acquisition, and was not impacted by the non-cash impairment
charges recorded in the third quarter of 2007.
The Company generated $520.3 million of cash from investing activities largely
from the $522.9 million net proceeds from the sale of the (Minneapolis) Star
Tribune newspaper (see Note 2 to the consolidated financial statements) in
the first nine months of fiscal 2007 and the sale of equipment and land totaling
$48.7 million. These sources of funds were offset by $43.2 million
purchases of property, plant and equipment.
33
The
Company used $736.3 million of cash from financing sources in the first nine
months of 2007, primarily for repayment of bank debt. The Company
repaid $699.0 million of debt in the first nine months of fiscal
2007. The Company paid $44.3 million in dividends in the first nine
months of fiscal 2007 and also received $7.0 million in proceeds from issuing
Class A stock under employee stock plans in the first nine months of fiscal
2007.
As part of the Acquisition, the Company acquired 10 acres of land in
Miami. Such land was under contract to be sold for gross proceeds of
$190.0 million, pursuant to a March 2005 sale agreement, the closing of which
was subject to resolution of certain environmental and other
contingencies. On August 10, 2007, the sale agreement was
amended. As of September 30, 2007, the Company expects to consummate
the sale of its Miami land prior to December 31, 2008 for gross proceeds of
approximately $180.0 million. At September 30, 2007, the Company also had an
income tax receivable of $201.0 million which it expects to receive in fiscal
2008 related to the sale of the Star Tribune (see Note 2 to the
consolidated financial statements).
As a result of the recently announced strategic alternative review at SP,
the
Company and its partners are seeking to sell SP. The ultimate outcome of
the strategic review cannot be determined and the timing of a transaction,
if any, which the Company and its partners may undertake has not been
determined.
Debt
and Related Matters:
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. At closing, the
Company’s Credit Agreement consisted of a $1 billion five-year revolving credit
facility and $2.2 billion five-year Term A loan. Both the Term A loan and the
revolver are due on June 27, 2011.
On
June 27, 2006, McClatchy borrowed $2.2 billion under the Term A loan and
$876.0 million under the revolving credit facility. The Company has
subsequently repaid $1.7 billion of the Term A loan and $359.2 million
of the
revolving credit facility, primarily from proceeds received in the sale
of the
eight former Knight Ridder newspapers, net of income taxes paid on the
tax gain
on the sale (see Note 2 to the consolidated financial statements), proceeds
generated from asset sales and cash generated by operations in fiscal 2007
as
discussed above. On November 1, 2007the Company retired $100.0
million of public notes due in 2007 by drawing on its revolving credit
facility. A total of $312.0 million of funds was available under the
revolving credit facility at November 1, 2007.
Debt under the Credit Agreement bears interest at the London Interbank Offered
Rate ("LIBOR") plus a spread ranging from 37.5 basis points to 125.0 basis
points. Applicable rates are based upon the Company’s ratings on its
long-term debt from Moody’s Investor Services ("Moody’s") and
Standard & Poor’s. A commitment fee for the unused revolving
credit ranges from 10.0 basis points to 20.0 basis points depending on the
Company’s ratings. Standard & Poor’s has rated the facility "BB+" and
Moody’s has rated the facility “Baa3”. According to the Credit Agreement,
the Company will pay interest at LIBOR plus 75.0 basis points on outstanding
debt and its commitment fees are currently at 15.0 basis points. On
October 17, 2007 Standard & Poor’s put the Company’s corporate credit rating
on credit watch with negative implications citing faster-than-expected revenue
declines.
In
addition, the Company’s Material Subsidiaries (as defined in the Credit
Agreement) have guaranteed the Company’s obligations under the Credit
Agreement. These guarantees were effected on May 4, 2007, and continue in
effect upon the earlier of the termination of the Credit Agreement or the
date
which is one year after the date both ratings agencies have rated the Company’s
bank debt as investment grade.
At September 30, 2007, the Company had outstanding letters of credit totaling
$53.8 million securing estimated obligations stemming from workers’ compensation
claims and other contingent claims.
Contractual
Obligations:
As of September 30, 2007, the Company has purchase obligations primarily related
to capital expenditures for property, plant and equipment expiring at various
dates through 2008, totaling approximately $12.5 million.
Significant changes in the Company's contractual obligations since year-end
2006
include the reduction of current-portion of long-term debt of $530.0 million
(see Note 2 to the consolidated financial statements) and an increase of $27.3
million in income tax reserves through September 30, 2007, of which $25.2
million related to the adoption of FIN 48 (see Note 1 to the consolidated
financial statements).
See Note 7 to the consolidated financial statements for a discussion of a
guarantee entered into in the third quarter of 2007.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Debt under the Credit Agreement bears interest at the LIBOR plus a spread
ranging from 37.5 basis points to 125.0 basis points. Applicable
rates are based upon the Company's ratings on bank debt from Moody's and
Standard & Poor's. A hypothetical 25 basis point change in LIBOR
for a fiscal year would increase or decrease in the annual net income by $2.0
million to $2.5 million based on the current amounts outstanding under the
Credit Agreement.
See
the
discussion at “Recent Events and Trends - Operating Expenses” in Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the
impact of market changes on the Company's newsprint and pension
costs.
35
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures. Our management evaluated,
with the participation of our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), the effectiveness of the design and operation of
the
Company's disclosure controls and procedures (as defined in Rules 13a - 15(e)
or
15d - 15(e) under the Securities Exchange Act of 1934, as amended) as of the
end
of the period covered by this Quarterly Report on Form 10-Q. Based on this
evaluation, the Company's management, including the CEO and CFO, concluded
that
the Company's disclosure controls and procedures were effective at that time
to
ensure that information we are required to disclose in reports that we file
or
submit under the Securities Exchange Act of 1934 is accumulated and communicated
to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure
and that such information is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission Rules
and
Forms.
Changes in internal control over financial reporting. There was
no change in our internal control over financial reporting that occurred during
the third quarter of fiscal 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
36
PART
II - OTHER INFORMATION
ITEM
1A. RISK FACTORS
Forward-Looking
Information:
This
quarterly report on Form 10-Q contains forward-looking statements regarding
the
Company's actual and expected financial performance and
operations. These statements are based upon our current expectations
and knowledge of factors impacting our business, including, without limitation,
statements about litigation, the ability to consummate contemplated sales
transactions for its assets or investments which may enable debt reduction
on anticipated terms or at all, tax and other benefits from the sale of the
(Minneapolis) Star Tribune newspaper, advertising revenues,
return on pension plan assets and assumed salary increases, newsprint costs,
amortization expense, stock option expenses, prepayment of debt, capital
expenditures, sufficiency of capital resources and possible acquisitions and
investments. Such statements are subject to risks, trends and
uncertainties. Forward-looking statements are generally preceded by,
followed by or are a part of sentences that include the words "believes,""expects,""anticipates,""estimates," or similar expressions. For
all of those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. You should understand that the following important
factors, in addition to those discussed elsewhere in this document and in the
documents which we incorporate by reference, could affect the future results
of
McClatchy and could cause those future results to differ materially from those
expressed in our forward-looking statements: general economic, market or
business conditions, especially in any of the markets where we operate
newspapers; impact of any litigation or any potential litigation; geo-political
uncertainties including the risk of war; changes in newsprint prices and/or
printing and distribution costs from anticipated levels; changes in interest
rates; changes in pension assets and liabilities; increased competition from
newspapers, internet sites or other forms of media reaching the markets we
serve; increased consolidation among major retailers in our markets or other
events depressing the level of advertising; changes in our ability to negotiate
and obtain favorable terms under collective bargaining agreements with unions;
competitive action by other companies; difficulties in servicing our debt
obligations; other occurrences leading to decreased circulation and diminished
revenues from retail, classified and national advertising; and other factors,
many of which are beyond our control.
See McClatchy’s 2007 Form 10-K filed with the Securities and Exchange Commission
on March 1, 2007 for further discussion of risk factors that could affect
operating results.
ITEM
6. EXHIBITS
Exhibits
filed as part of this Report as listed in the Index of Exhibits, on page 39
hereof.
37
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.
Form
of Physical Note for Commercial Paper Program included as Exhibit
4.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
June 27,2004.
10.1*
Credit
Agreement dated June 27, 2006 by and among the Company, lenders party
thereto, Bank of America, N.A., as Administrative Agent, Swing Line
Lender
and Letter of Credit Issuer, JPMorgan Chase Bank as Syndication Agent
and
Banc of America Securities LLC and JPMorgan Securities Inc. as Joint
Lead
Arrangers and Joint Book Managers, included as Exhibit 10.2 in the
Company's Current Report on Form 10-Q filed for the quarter ending
on June25, 2006.
10.2*
Amendment
1 to Credit Agreement dated March 28, 2007 by and between The McClatchy
Company and Bank of America, N.A., as Administrative Agent, included
as
Exhibit 99.1 in the Company's Current Report on Form 8-K filed April2,2007.
10.3*
Amendment
2 to Credit Agreement dated July 30, 2007 by and between The McClatchy
Company and Bank of America, N.A., as Administrative Agent, included
as
Exhibit 10.1 in the Company's Current Report on Form 8-K filed July31,2007.
10.4*
General
Continuing Guaranty dated May 4, 2007 by each Material
Subsidiary in favor of the Lenders party to the Credit Agreement
dated June 27, 2006 by and between The McClatchy Company, the
Lenders and Bank of America, N.A., as Administrative Agent, included
as
Exhibit 10.3 in the Company’s Current Report on Form 10-Q for the quarter
ending on April 1, 2007.
The
McClatchy Company Management by Objective Plan Description included
as
Exhibit 10.4 in the Company's Report filed on Form 10-K for the Year
ending December 31, 2000.
**10.8*
The
Company's Amended and Restated Long-Term Incentive Plan included
as
Exhibit 99.1 to the Company's Report on Form 8-K filed May 23,2005.
**10.9*
Amended
and Restated Supplemental Executive Retirement Plan included as Exhibit
10.4 to the Company's 2001 Form 10-K.
**10.10*
The
Company's Amended and Restated 1990 Directors' Stock Option Plan
dated
February 1, 1998 included as Exhibit 10.12 to the Company's 1997
Form
10-K.
**10.11*
Amended
and Restated 1994 Stock Option Plan included as Exhibit 10.15 to
the
Company's Report on Form 10-Q filed for the Quarter Ending on July1,2001.
39
**10.12*
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
December16, 2004.
**10.13*
Amendment
1 to The McClatchy Company 2004 Stock Incentive Plan dated January23,2007, included as Exhibit 10.10 to the Company's 2006 Report on Form
10-K.
**10.14*
Form
of Restricted Stock Agreement related to the Company's 2004 Stock
Incentive Plan, included as Exhibit 99.1 to the Company's Current
Report
on Form 8-K dated January 28, 2005.
**10.15*
The
Company's Amended and Restated Chief Executive Bonus Plan, included
as
Exhibit 10.12 to the Company's Report on Form 10-Q for the Quarter
Ending
June 29, 2003.
**10.16*
Amended
and Restated Employment Agreement between the Company and Gary B.
Pruitt
dated October 22, 2003, included as Exhibit 10.10 to the Company's
2003
Form 10-K.
10.17*
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.
**10.18*
Amended
and Restated 1997 Stock Option Plan included as Exhibit 10.7 to the
Company's 2002 Report on Form 10-K.
**10.19*
Amendment
1 to The McClatchy Company 1997 Stock Option Plan dated January 23,2007,
included as Exhibit 10.16 to the Company's 2006 Report on Form
10-K.
**10.20*
The
Company's Amended and Restated 2001 Director Stock Option Plan, included
as Exhibit 10.13 to the Company's 2004 Report on Form
10-K.
**10.21*
Amendment
1 to The McClatchy Company 2001 Director Option Plan dated January23,2007, included as Exhibit 10.18 to the Company's 2006 Report on Form
10-K.
10.22*
Stock
Purchase Agreement by and between The McClatchy Company and Snowboard
Acquisition Corporation, dated December 26, 2006, included as Exhibit
2.1
to the Company's Report on Form 8-K filed December 26,2006.
10.23*
Contract
for Purchase and Sale of Real Property by and between The Miami Herald
Publishing Company and Richmond, Inc. and Knight Ridder, Inc. and
Citisquare Group, LLC, dated March 3, 2005, included as Exhibit 10.23
in
the company's Current Report on Form 10Q filed for the quarter ending
July1, 2007.
10.24*
Amendment
to Contract for Purchase and Sale of Real Property by and between
The
Miami Herald Publishing Company and Richmond, Inc. and Knight Ridder,
Inc.
and Citisquare Group, LLC, dated March 3, 2005, included as Exhibit
10.24
in the company's Current Report on Form 10Q filed for the quarter
ending
July 1, 2007.
