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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 28, 2003

or

For the transition period from                      to                     

Commission file number: 1-9824

The McClatchy Company

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 916-321-1846

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x Yes ¨ No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. Based on the closing price of the Company’s Class A Common Stock on the New York Stock Exchange on June 29, 2003: approximately $1,191,640,921. For purposes of the foregoing calculation only, as required by Form 10-K, the Registrant has included in the shares owned by affiliates the beneficial ownership of Common Stock of officers and directors of the Registrant and members of their families, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose.

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

Shares outstanding as of February 25, 2004:

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company’s May 19, 2004 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (incorporated in Part II and Part III to the extent provided in Items 10, 11, 12, 13 and 14 hereof).

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INDEX TO THE McCLATCHY COMPANY

2003 FORM 10-K

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PART I

Available Information

The Company maintains a website which includes an investor relations page available to all interested parties at www.mcclatchy.com. All filings with the United States Securities and Exchange Commission, along with any amendments thereto, are available free of charge on our website at www.mcclatchy.com/investor/. In addition, paper copies of any such filings are available free of charge by contacting us at the address listed on the cover page of this filing. The contents of this website are not incorporated into this filing. Further, our reference to the URL for this website is intended to be an inactive textual reference only.

Overview

The McClatchy Company (the “Company”) was formed in 1998 as a Delaware corporation serving as a holding company owning McClatchy Newspapers, Inc. and Cowles Media Company. All references to the “Company” in this Report include McClatchy Newspapers, Inc., the predecessor in interest to the Company prior to the acquisition of Cowles Media Company.

The Company dates from the California Gold Rush era of 1857. Its three original California newspapers - The Sacramento Bee, The Fresno Bee and The Modesto Bee - were the core of the Company until 1979 when the Company began to diversify geographically outside of California. At that time it purchased two newspapers in the Northwest, the Anchorage Daily News and the Tri-City Herald in Southeastern Washington. In 1986, the Company purchased The (Tacoma) News Tribune. In 1990 the Company expanded into the Carolinas when it purchased newspapers in South Carolina and The News and Observer Publishing Company in North Carolina in 1995, and into Minnesota with the 1998 acquisition of The Star Tribune Company.

During 2003, the Company owned and published 24 newspapers in four regions of the country – Minnesota, California, the Carolinas and the Northwest (Alaska and Washington). These newspapers range from large dailies serving metropolitan areas to non-daily newspapers serving small communities. For the calendar year 2003, the Company had an average paid daily circulation of 1,398,589, Sunday circulation of 1,864,685 and non-daily circulation of 61,077.

Each of the Company’s newspapers is largely autonomous in its business and editorial operations so as to meet most effectively the needs of the communities it serves. Publishers and editors of the newspapers make the day-to-day decisions and, within limits, are responsible for their own budgeting and planning. Policies on such matters as the amount and type of capital expenditures, key personnel changes, and strategic planning and operating budgets, including wage and pricing matters, are approved or established by the Company’s senior management and/or Board of Directors.

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Each of the Company’s daily newspapers has the largest circulation of any newspaper serving its particular community. The Company believes that this circulation advantage is of primary importance in attracting advertising, the principal source of revenues for the Company. Advertising revenues approximated 83% of consolidated net revenues from continuing operations in fiscal 2003 and 82% of consolidated net revenues from continuing operations in fiscal 2002. Circulation revenues approximated 15% of consolidated net revenues from continuing operations in fiscal 2003 and 16% of consolidated net revenues from continuing operations in fiscal 2002.

The Company’s newspapers supplement their newspaper publishing operations with an array of niche products and direct marketing initiatives, including direct mail. While the direct marketing programs are financially successful in their own right, they also help retain advertising in the newspapers. The newspapers also operate leading local websites in each daily newspaper market, offering users information, comprehensive news, advertising, e-commerce and other services. Online advertising, particularly classified advertising, has become one of the Company’s fastest growing revenue sources, albeit still a small part of each newspaper’s operations. Together with the mass reach of its newspaper advertising, these lines of business help each of the Company’s newspapers maintain its position as a leading media outlet in each daily newspaper market.

The Company’s newspaper business is somewhat seasonal, with peak revenues and profits generally occurring in the second and fourth quarters of each year as a result of increased advertising activity during first, the Easter holiday and spring advertising season, and then, the Thanksgiving and Christmas periods. The first quarter is historically the weakest quarter for revenues and profits.

The Company also owns Nando Media, an interactive media operation whose primary mission is to be a technology and content partner to the Company’s newspaper Internet sites. In addition, the Company is a partner (13.5% interest) in Ponderay Newsprint Company, a general partnership that owns and operates a newsprint mill in Washington State.

Recent Divestiture and Acquisition - On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company (fiscal 2002 revenues of $11.9 million). The Associated Press purchased TNN’s ad processing operations and, separately, Vertis, Inc. purchased TNN’s sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The Company has reclassified the assets and liabilities of TNN as held for sale in its Consolidated Balance Sheet as of December 29, 2002. The revenues and operating results of TNN are included in discontinued operations in the Company’s Consolidated Statements of Income.

On January 7, 2004, the Company purchased the assets of the Merced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $40.5 million in cash from Pacific-Sierra Publishing, Inc. The Merced Sun-Star had average five-day circulation of 17,400 and weekend circulation of 21,500 for fiscal year 2003, and the Merced Group had revenues in its fiscal 2003 (ending March) of $12.6 million. The results and statistical information of the Merced Group are not included in this Report.

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Forward-Looking Statements - When used in this Report, the words “believes,” “expects,” “anticipates,” “estimates,” and similar expressions are generally intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including those discussed under the heading “Risk Factors that Could Affect Operating Results” in Part II, Item 7 that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report.

Star Tribune

The Star Tribune, a morning newspaper serving Minneapolis-St. Paul and the surrounding metropolitan area, is the Company’s largest newspaper, contributing 33.1% of fiscal 2003 revenues compared to 33.6% of fiscal 2002 revenues. In fiscal 2003 the Star Tribune’s daily average paid circulation increased 0.3% to 379,234 and Sunday average paid circulation increased 0.3% to 675,512. As of December 28, 2003, approximately 74% of the daily and 74% of Sunday circulation was home delivered. The Star Tribune competes in the eastern portion of its market with the Pioneer Press, which operates in St. Paul, Minnesota, and whose circulation, according to the Audit Bureau of Circulations’ September 28, 2003 Publisher’s Statement, is 190,392 daily and 253,058 Sunday.

The Star Tribune’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The Star Tribune’s fiscal 2003 net revenues increased 1.4% to $364,288,000 from fiscal 2002.

California Newspapers

The California newspapers include the three “Bee” newspapers along with the Clovis Independent, a weekly newspaper that circulates in Clovis, California, a community east of Fresno, and two Spanish-language, non-daily newspapers. The net revenues and circulation of these newspapers are summarized below:

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The California newspapers produced approximately 35.9% of total Company net revenues in fiscal 2003, compared to 34.7% in fiscal 2002. Fiscal 2003 net revenues at the California newspapers increased 6.3% from fiscal 2002.

The Sacramento Bee

The Sacramento Bee is a morning newspaper serving the California state capital and the surrounding region. In fiscal year 2003, The Sacramento Bee’s average paid circulation increased 0.6% daily and increased 1.3% Sunday. As of December 28, 2003, approximately 84% of the daily and 79% of Sunday circulation was home delivered.

The Sacramento Bee’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The Sacramento Bee’s fiscal 2003 net revenues increased 7.0% from fiscal 2002 revenues.

The Fresno Bee

The Fresno Bee is a morning newspaper serving the Fresno, California metropolitan area. In 2003, The Fresno Bee’s fiscal year 2003 average paid circulation increased 0.6% daily and increased 0.8% Sunday. As of December 28, 2003, approximately 85% of The Fresno Bee’s daily and 84% of Sunday circulation was home delivered.

The Fresno Bee’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The Fresno Bee’s fiscal 2003 net revenues increased 4.9% from 2002.

The Modesto Bee

The Modesto Bee is a morning newspaper that serves the Modesto, California metropolitan area, located between Sacramento and Fresno. The Modesto Bee’s fiscal year 2003 average paid circulation increased 1.0% daily and 0.9% Sunday. As of December 28, 2003, approximately 83% of the daily and 84% of Sunday circulation was home delivered.

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The Modesto Bee’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002, are set forth in the following table:

The Modesto Bee’s fiscal 2003 net revenues increased 5.3% from fiscal 2002.

Carolina Newspapers

The Carolina newspapers include The News & Observer, the second largest newspaper in North Carolina, and three daily newspapers in South Carolina. The Company also operates eight non-daily newspapers in North and South Carolina strategically located near its daily newspapers.

The net revenues and circulation of the Carolina newspapers are summarized below:

The Carolina newspapers produced 16.1% of total Company net revenues in fiscal 2003, compared to 16.6% in 2002. Net revenues of the Carolina newspapers declined 0.3% from fiscal 2002.

The News & Observer

The News & Observer, the Company’s third largest newspaper, is a morning daily serving North Carolina’s state capital, Raleigh, and the Research Triangle, which includes Raleigh, Durham and Chapel Hill, North Carolina.

The News & Observer’s average paid circulation in fiscal year 2003 increased approximately 0.4% daily and was flat on Sunday. As of December 28, 2003, approximately 81% of the daily and 76% of Sunday circulation was home delivered.

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The News & Observer’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The News & Observer’s fiscal 2003 net revenues decreased 0.9% from fiscal 2002.

The Herald

The Herald is a morning newspaper serving Rock Hill and surrounding communities in York County, South Carolina. Rock Hill is approximately 25 miles southwest of Charlotte, North Carolina. In 2003, The Herald’s fiscal year 2003 average paid circulation increased 0.5% daily and decreased 0.4% on Sunday.

The Herald’s main competitor is a zoned edition of the Charlotte Observer, whose circulation in The Herald’s primary circulation area is estimated to be approximately a third of The Herald’s circulation. As of December 28, 2003, approximately 78% of the daily and 77% of Sunday circulation of the Herald was home delivered.

Advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The Herald’s fiscal 2003 net revenues increased 0.4% from fiscal 2002.

The Island Packet and The Beaufort Gazette

The Island Packet and The Beaufort Gazette serve Beaufort County in southeastern South Carolina. The Island Packet serves Hilton Head Island and the town of Bluffton where tourism, retirement communities and services are the economic mainstays. The Beaufort Gazette serves the city of Beaufort and northern Beaufort County encompassing surrounding islands of Lady’s, St. Helena, Fripp and Parris. The management and many business functions of the two newspapers are combined to pursue regional strategies and operational synergies.

From fiscal year 2002 to fiscal year 2003, the average paid circulation increased 3.4% daily and 1.4% Sunday at The Island Packet, and decreased 1.8% daily and 2.1% Sunday at The Beaufort Gazette.

As of December 28, 2003, approximately 64% of the daily and 62% of Sunday circulation of The Island Packet was home delivered. Comparable amounts for The Beaufort Gazette were 58% daily and 63% Sunday.

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Advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The Island Packet’s fiscal year 2003 net revenues increased 2.9% over fiscal 2002, and The Beaufort Gazette’s net revenues increased 0.7%.

Carolina Non-daily Newspapers

The South Carolina non-daily newspapers include the Clover Herald, the Yorkville Enquirer, the Lake Wylie Magazine and the Fort Mill Times, and serve small communities generally surrounding Rock Hill, SC. Their combined paid average fiscal year 2003 non-daily circulation is 7,988.

The North Carolina non-dailies are newspapers that serve communities generally surrounding Raleigh. They are: Chapel Hill News, Cary News, Eastern Wake News, and Smithfield Herald. Their combined paid average fiscal year 2003 non-daily circulation is 33,416.

Northwest Newspapers

The Company publishes five newspapers in Washington State and the largest daily newspaper in Alaska. The net revenues and circulation of these newspapers are summarized below:

The Company’s Northwest newspapers produced 14.8% of the Company’s total net revenues in fiscal 2003, compared to 15.1% in 2002. Net revenues in fiscal 2003 at the Northwest newspapers increased 1.2% versus fiscal 2002.

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The News Tribune

The News Tribune, a morning newspaper, primarily serves the Tacoma, Washington, metropolitan area in Pierce and South King Counties. It is the third largest newspaper in Washington State. Tacoma is approximately 30 miles south of Seattle. The News Tribune competes in the northernmost fringes of its market with the major Seattle daily newspapers. In fiscal year 2003, the average paid circulation of The News Tribune increased 0.1% daily and 0.2% Sunday. As of December 28, 2003, approximately 83% of the daily and 84% of Sunday circulation was home delivered.

The News Tribune’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The News Tribune’s fiscal 2003 net revenues increased 1.8% from fiscal 2002.

Anchorage Daily News

The Anchorage Daily News, a morning newspaper, is Alaska’s largest newspaper. The Anchorage Daily News circulates throughout the state of Alaska but its primary circulation is concentrated in the south central region of the state comprising metropolitan Anchorage, the Kenai Peninsula and the Matanuska-Susitna Valley.

The Daily News’ average paid daily and Sunday circulation each decreased 0.7% in fiscal year 2003. As of December 28, 2003, approximately 69% of the daily and 65% of Sunday circulation was home delivered.

Advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002, are set forth in the following table:

Anchorage Daily News’ fiscal 2003 net revenues decreased 1.6% from fiscal 2002.

Tri-City Herald

The Tri-City Herald is a morning newspaper serving the Tri-Cities of Richland, Kennewick and Pasco in southeastern Washington. For fiscal year 2003, the Tri-City Herald’s average paid

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circulation increased 0.9% daily and Sunday. As of December 28, 2003 approximately 88% of the daily and 87% of Sunday circulation was home delivered.

The Tri-City Herald’s advertising volumes for the fiscal years ended December 28, 2003 and December 29, 2002 are set forth in the following table:

The Tri-City Herald’s fiscal 2003 net revenues increased 5.1% from fiscal 2002.

Northwestern Non-daily Newspapers

The Company’s other non-daily newspapers include the Peninsula Gateway in South Puget Sound and The Puyallup Herald, which circulates weekly in South Pierce County, near Tacoma.

Other Operations

The Company’s rapidly expanding Internet activities have produced robust local websites in each of its daily newspaper markets. These efforts are supported by Nando Media, the Company’s interactive media operation that provides newspapers with content, publishing tools and software development. Nando Media’s primary mission is to be a technology and content partner to the Company’s newspaper Internet sites. Nando Media also provides hosting and programming services to other newspapers, and generated net revenues of $972,000 in fiscal 2003.

Raw Materials

During fiscal 2003, the Company consumed approximately 241,700 metric tons of newsprint compared to 243,900 metric tons in fiscal 2002. The Company currently obtains its supply of newsprint from a number of suppliers primarily under long-term contracts.

Newsprint expense accounted for 13.9% of operating expenses in fiscal 2003 compared to 13.6% in fiscal 2002. Consequently, the Company’s earnings are sensitive to changes in newsprint prices. All other things being equal, a hypothetical $10 per metric ton change in newsprint prices affects earnings per share by three cents annually. Management believes its newsprint sources of supply under existing arrangements are adequate for its anticipated current needs. Significant increases in the price of newsprint would adversely affect the operating results of the Company to the extent that it was not offset by advertising and circulation volume and/or rate increases.

The Company, through a wholly-owned subsidiary, Newsprint Ventures, Inc., and four other publishers and a major newsprint manufacturer are partners in Ponderay Newsprint Company, a general partnership, which owns and operates a newsprint mill located sixty miles northeast of Spokane, Washington. The mill became operational in late 1989 and has a production capacity in

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excess of 260,000 metric tons annually. The publisher partners have committed to take a total of 126,000 metric tons of this anticipated production with the balance to be sold on the open market. The Company’s annual commitment is 28,400 metric tons. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations “ and the financial statements and accompanying notes for further discussion of the impact of this investment on the Company’s business.

Competition

The Company’s newspapers, direct marketing programs and Internet sites compete for advertising revenues and readers’ time with television, radio, the Internet, direct mail companies, free shoppers, suburban neighborhood and national newspapers and other publications, and billboard companies, among others. In some of its markets (primarily Minneapolis, Minnesota; Tacoma, Washington; and Rock Hill, South Carolina), the Company’s newspapers also compete with other newspapers published in nearby cities and towns. Competition for advertising is generally based upon circulation levels, readership demographics, price and advertiser results, while competition for circulation is generally based upon the content, journalistic quality, service and the price of the newspaper. The Company’s major daily newspapers are ahead of their direct local newspaper competitors in both advertising linage and general circulation in their respective markets, and its Internet sites are leading local sites in each of the Company’s major daily newspaper markets, based upon various independent and Company research.

Employees – Labor

As of December 28, 2003, the Company had 9,093 full and part-time employees, of whom approximately 25% were represented by unions including 57% at the Star Tribune and 23% at The Sacramento Bee, the Company’s two largest newspapers. Most of the Company’s union-represented employees are currently working under labor agreements expiring in various years. Six of the Company’s 11 daily papers have no unions.

While the Company’s newspapers have not had a strike since 1980 and they do not currently anticipate a strike occurring, the Company cannot preclude the possibility that a strike may occur at one or more of its newspapers when future negotiations occur. The Company believes that, in the event of a newspaper strike, it would be able to continue to publish and deliver to subscribers, a capability which is critical to retaining revenues from advertising and circulation.

The corporate headquarters of the Company are located at 2100 “Q” Street, Sacramento, California. At December 28, 2003 the Company had newspaper production facilities in 11 markets situated in six states. These facilities vary in size and in total occupy about 3.2 million square feet. Approximately 800,000 of the total square footage is leased from others. The Company owns substantially all of its production equipment, although certain office equipment is leased.

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The Company maintains its properties in good condition and believes that its current facilities are adequate to meet the present needs of its newspapers.

The Company becomes involved from time to time in claims and lawsuits incidental to the ordinary course of its business, including such matters as libel, invasion of privacy, intellectual property infringement, and wrongful termination actions, and complaints alleging discrimination. In addition, the Company is involved from time to time in governmental and administrative proceedings concerning employment, labor, environmental and other claims. Historically, such claims and proceedings have not had a material adverse effect upon the Company’s consolidated results of operations or financial condition.

Not Applicable.

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PART II

The Company’s Class A Common Stock is listed on the New York Stock Exchange (NYSE symbol - MNI). A small amount of Class A Stock is also traded on the Midwest Stock Exchange and the Pacific Stock Exchange. The Company’s Class B Stock is not publicly traded. The following table lists per share dividends paid on Common Stock and the prices of the Company’s Class A Common Stock as reported by these exchanges for fiscal 2003 and 2002:

The Company’s Board of Directors approved a 10% increase in the dividend for the first quarter of fiscal 2004 to $0.12 per share per quarter. The payment and amount of future dividends remain within the discretion of the Board of Directors and will depend upon the Company’s future earnings, financial condition and requirements, and other factors considered relevant by the Board.

The number of record holders of Class A and Class B Common Stock at February 25, 2004 was 1,482 and 24, respectively.

Equity Compensation Plan Information

Information regarding McClatchy’s equity compensation plans, including both shareholder approved plans and non-shareholder approved plans, is set forth in the section entitled “Securities Authorized for Issuance Under Equity Compensation Plans” in the definitive Proxy Statement for the Company’s 2004 Annual Meeting of Shareholders, which information is incorporated into Item 12 herein by reference.

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FIVE-YEAR FINANCIAL SUMMARY

(In thousands, except per share amounts)

On June 10, 2003, the Company sold the assets of The Newspaper Network, a national sales and marketing company. Prior year data has been reclassified for this discontinued operation. In fiscal 2002 the Company adopted SFAS No. 142 and No. 144 and in accordance with these statements, eliminated the amortization of goodwill and recorded a pre-tax charge of $1.6 million to write down the value of certain land. Amortization expense that would have been excluded had SFAS No. 142 been effective for fiscal years 2001, 2000 and 1999 was $34.7 million, $35.4 million and $34.6 million, respectively. Results in 2001 include pre-tax charges totaling $12.0 million to write down certain Internet investments and reserve for an environmental clean up. Results in fiscal 2000 include 53 weeks while all other years include 52 weeks. This summary should be read in conjunction with the consolidated financial statements and notes thereto.

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Overview

During 2003, the Company published 24 newspapers in four regions of the country - Minnesota, California, the Carolinas and the Northwest (Alaska and Washington). The Company’s newspapers range from large dailies serving metropolitan areas to non-daily newspapers serving small communities. The Company supplements its newspaper publishing with an array of niche products and direct marketing initiatives, including direct mail. The Company also operates leading local websites in each of its daily newspaper markets offering users information, comprehensive news, advertising, e-commerce and other services. The Company also owns and operates Nando Media, an interactive media operation that provides newspapers with content, publishing tools and software development.

The Company’s primary source of revenue is advertising. While percentages vary from year to year, and from newspaper to newspaper, local retail advertising carried as a part of newspapers (“run-of-press” or “ROP” advertising) or in advertising inserts placed in newspapers (preprint advertising), contributes roughly 40% of advertising revenues at the Company’s newspapers. Recent trends have been for certain national or regional retailers to use greater preprint advertising and less ROP advertising, although that trend shifts from time to time. Nonetheless, ROP advertising still makes up the majority of retail advertising. Classified advertising, primarily in automotive, employment and real estate categories, contributes about 40% and national advertising (from national telecommunications, financial, automotive manufacturers and certain other industries) contributes about 10% of such advertising. Online advertising, direct marketing and other advertising make up the remainder of the Company’s advertising revenues. Circulation revenues generally contribute from 14% to 18% of the Company’s newspaper revenues, depending upon the size and locale of the newspaper. Most newspapers are delivered by independent contractors and circulation revenues are recorded net of direct delivery costs.

See Results of Operations, which follow for a discussion of the Company’s revenue performance and contribution by categories in 2003, 2002 and 2001.

Critical Accounting Policies

The accompanying discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and

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the best estimates and judgments routinely require adjustment. The most significant areas involving estimates and assumptions are revenue recognition, allowance for uncollectible accounts, amortization and/or impairment of intangibles, pension and post-retirement expenses, insurance reserves, incentive compensation, environmental reserves, the Company’s tax provision and depreciation of fixed assets. We believe the following critical accounting policies, in particular, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition - Advertising revenues are recorded when advertisements are placed in the newspaper and circulation revenues are recorded as newspapers are delivered over the 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.

Allowance for Uncollectible Accounts - The Company maintains an allowance account for estimated losses resulting from the risk its customers will not make required payments. Generally, the Company uses the aging of accounts receivable to establish allowances for losses on accounts receivable. However, if the financial condition of a customer deteriorates, resulting in an impairment of their ability to make payments, additional allowances are reserved.

Goodwill and Intangible Impairment - In assessing the recoverability of the Company’s goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The Company analyzes its goodwill and intangible assets with indefinite lives for impairment. No material impairment loss was recorded in fiscal 2003, 2002 or 2001.

Pension and Post-retirement Benefits - The Company has significant pension and post-retirement benefit costs and credits that are developed from actuarial valuations. Inherent in these valuations are key assumptions including salary rate increases, discount rates and expected return on plan assets. The Company is required to consider current market conditions, including changes in interest rates, in establishing these assumptions. Changes in the related pension and post-retirement benefit costs or credits may occur in the future because of changes resulting from fluctuations in the Company’s employee headcount and/or changes in the various assumptions.

The Company used a discount rate of 6.75%, assumed salary rate increases of 3.0% to 5.0% and an assumed long-term return on assets of 9.0% to calculate its retirement expenses in fiscal 2003. See note 5 to the consolidated financial statements for a more in-depth discussion of the Company’s policies in setting its key assumptions related to these obligations.

Tax Provision - The Company’s tax provision is based upon its estimated taxable income and includes assumptions and estimates it anticipates formalizing on its tax returns when subsequently prepared and are based upon existing tax laws. Deferred taxes are provided for temporary differences between assets and liabilities reported for financial accounting and income tax reporting purposes.

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Self-Insurance - The Company is self-insured for workers’ compensation in California and Alaska, and for the majority of its group health insurance costs. The Company relies on claims experience and the advice of consulting actuaries and administrators in determining an adequate provision for self-insurance claims.

Recent Events and Trends

Recent Divestiture and Acquisition:

On June 10, 2003, the Company sold the assets of The Newspaper Network (TNN), a national sales and marketing company (fiscal 2002 revenues of $11.9 million). The Associated Press purchased TNN’s ad processing operations and, separately, Vertis, Inc. purchased TNN’s sales and marketing assets. Total consideration from the sales was $14.2 million including the assumption of liabilities. The Company has reclassified the assets and liabilities of TNN as held for sale in its Consolidated Balance Sheet as of December 29, 2002. The revenues and operating results of TNN are included in discontinued operations in the Company’s Consolidated Statement of Income in 2001, 2002 and 2003, as is the gain on its sale in 2003.

On January 7, 2004, the Company purchased the assets of the Merced Sun-Star, a daily newspaper in Merced, California and five non-daily newspapers (Merced Group) for $40.5 million in cash from Pacific-Sierra Publishing, Inc. The Merced Sun-Star has five-day circulation of 17,400 and weekend circulation of 21,500, and the Merced Group had revenues in its fiscal 2003 (ending March) of $12.6 million. The results for the Merced Group are not reflected in the Company’s financial statements prior to January 7, 2004.

Operating Revenues:

While total advertising revenues grew 3.7% in fiscal 2003, classified advertising continued to decline, particularly in the employment category. Employment advertising, which reached $190.8 million in 2000, declined 41.6% to $111.4 million by the end of 2002. Employment advertising revenues declined an additional 12.0% to $98.0 million in fiscal 2003, but the rate of decline slowed from the second quarter of 2003 through the end of the year, with the fourth quarter declining 6.6% from fiscal 2002 fourth quarter. While print employment revenues have declined, the Company’s online revenues and particularly the employment category have experienced strong growth. When print and online employment advertising are combined, employment advertising declined only 7.2% for all of fiscal 2003. Also, the declines in employment advertising were offset by advertising revenue growth in other categories in 2003. Please see the revenue discussions below under Results of Operations.

Operating Costs:

Newsprint prices were higher than prior year levels beginning in the second quarter of 2003, resulting in higher newsprint expense for the year. An increase in newsprint prices was implemented in the fourth quarter of 2002 and was followed by three additional increases in 2003. All other things being equal, a hypothetical $10 per metric ton change in newsprint prices

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affects earnings per share by three cents annually. The Company’s newsprint suppliers have announced a $50 per metric ton price increase for February 2004; however, at this time it is uncertain when the price increase will be effective or whether it will be in the amount indicated by the announcement. The eventual timing and amount of any further changes in newsprint pricing is dependent on global demand and supply for newsprint. The impact of newsprint price increases on the Company’s expenses is discussed under Results of Operations below.

The Company’s fringe benefit costs increased 9.5% over fiscal 2002 due primarily to higher retirement and medical costs, and are expected to continue to increase in fiscal 2004. In addition, historically low long-term interest rates caused the Company to use a 6.75% discount rate to calculate its pension and post-retirement expenses in fiscal 2003 compared to a 7.5% rate used in fiscal 2002. This is the primary factor in driving up retirement expenses. Continued low interest rates have resulted in the Company using a discount rate of 6.25% to value its year-end pension obligations and to calculate its 2004 pension expense. In addition, with an economic recovery anticipated by many analysts over the next several years, the Company believes it is prudent to increase its assumed rate of salary increase from 3.0% to 5.0% used in 2003 to 3.5% to 5.0% in 2004 for its pension plans. These factors will increase the Company’s pension expense in fiscal 2004 compared to 2003. See Note 5 to the Consolidated Financial Statements. The Company has contributed $60.0 million to its pension plans in fiscal 2004, and earnings on this contribution will partially offset these increases. Nonetheless, the Company expects its pension and post-retirement expense to increase between $6.0 million to $8.0 million in fiscal 2004. Medical costs also rose in 2003, and are expected to increase in fiscal 2004 between $5.0 million and $6.0 million.

RESULTS OF OPERATIONS

FISCAL 2003 COMPARED TO FISCAL 2002

The Company reported net income from continuing operations of $144.2 million, or $3.10 per share, compared to the fiscal year 2002 earnings from continuing operations of $130.5 million, or $2.83 per share. Total fiscal 2003 earnings from continuing operations included a pre-tax charge of $1.0 million to write down a certain Internet investment. Net income including the discontinued operation was $150.2 million in fiscal 2003, or $3.23 per share, compared to $131.2 million, or $2.84 per share, in fiscal 2002.

Revenues:

Revenues from continuing operations in fiscal year 2003 increased 2.8% to $1.1 billion with advertising revenues up 3.7% to $910.6 million and circulation revenues down 0.3% to $165.6 million.

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The following table summarizes the Company’s revenue by category in 2003 (in thousands):

While the Company reviews and evaluates the operations of each individual newspaper, for purposes of organization and ease of understanding, the following table summarizes fiscal 2003 revenues at its newspaper operations by region with year over year changes:

Retail advertising grew $14.9 million over fiscal 2002 due primarily to growth in preprinted advertising inserts placed into the newspapers, which was up $13.5 million or 9.3%. Much of this growth was from the Company’s three daily Bee newspapers in California ($8.2 million) and from the Star Tribune in Minneapolis ($5.4 million).

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National advertising increased $9.5 million reflecting strong advertising from telecommunication companies at most newspapers, and banking and automotive advertising at The Sacramento Bee. In fact, $3.7 million of the increase in national advertising was at The Sacramento Bee, and the California newspapers as a group contributed $6.7 million of the increase.

Classified advertising declined $4.9 million, due primarily to a $13.3 million decline in employment advertising, offset somewhat by strong advertising growth of $11.7 million in classified real estate advertising. Automotive and other classified advertising declined $3.2 million with only the California newspapers showing growth in these areas. The decline in automotive is partially due to difficult comparisons to strong growth in this category in 2002.

Employment advertising was down at all newspapers as this industry-wide trend of lower employment advertising continued, especially at larger metropolitan newspapers. The Star Tribune in Minnesota and The Sacramento Bee recorded most of these declines by virtue of being the Company’s two largest newspapers. The News & Observer in Raleigh, NC, had significant losses of employment advertising over the last few years; however, it was one of the Company’s first newspapers to show an improving trend in the second half of fiscal 2003. Employment revenue declined $5.3 million at the Star Tribune, $3.6 million at The Sacramento Bee, and $464,000 at The News & Observer.

Real estate advertising was strong at all newspapers except for those in the Carolina region, where they declined nominally due to local market conditions. The increase in real estate advertising at the Company’s other newspapers reflects the national trend in this category.

Other advertising revenues increased $13.2 million and primarily consisted of direct marketing and Internet advertising revenues, two of the fastest growing revenue sources at the Company’s newspapers. Direct marketing revenues increased $4.4 million with much of the growth coming from the Company’s California newspapers ($3.2 million) where the three Bee newspapers have combined to offer direct mail programs to advertisers. Online advertising grew $8.7 million or 47.5% with strong growth at all newspapers, but with particularly strong growth at The Sacramento Bee (up $2.9 million) and the Star Tribune (up $2.2 million).

Circulation revenues declined nominally as increases at some newspapers were offset by declines at others. Each newspaper pursues its own mix of rate changes and promotional programs. The most significant declines in circulation revenues were at the Star Tribune, which reflected changes in the sales mix between single copy and home delivery and promotional programs, and at The Island Packet and The Beaufort Gazette, where reclassifications of certain delivery costs to a contra-revenue account decreased net circulation revenues.

Other revenues declined $2.9 million with much of the decline in the Northwest newspapers ($1.2 million) due to lower commercial printing revenues and at Nando Media ($437,000) due to the Company’s decision to discontinue the sale of news and information content to third parties.

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Operating Expense:

Total operating expenses from continuing operations increased by 2.9% in fiscal 2003 due primarily to higher newsprint, retirement and medical costs. Compensation costs were up 3.1% reflecting salary increases and higher fringe benefit costs. Salaries increased 1.7% reflecting merit increases which were offset somewhat by a 1.2% decline in head count. However, fringe benefit costs rose by 9.5%, largely due to $7.0 million in additional retirement and medical costs. Newsprint and supplement expense was up 5.0% for fiscal 2003, with newsprint prices up 5.3% and consumption down 0.9%. Other operating expenses increased 3.9% due primarily to higher postage costs associated with the Company’s direct mail programs and to the write-off of certain software fixed assets. Depreciation and amortization costs declined $3.1 million, or 4.2%, primarily reflecting lower capital expenditures over the last several years and the expiration of useful lives of certain assets.

Non-Operating (Expenses) Income – Net:

Interest expense was $18.1 million for the fiscal year 2003. This is a 31.6% decline from the fiscal year 2002 as the Company benefited from lower interest rates, the expiration of two interest rate swaps and debt repayment from free cash flow. The Company also recorded $368,000 as its share of Ponderay’s income for the fiscal year 2003 compared to $1.3 million of loss in the fiscal year 2002. The additional income from Ponderay primarily reflects the favorable impact of higher newsprint prices. The Company recorded losses on the writedown of an Internet investment of $1 million in fiscal 2003 as it determined that the carrying value of the investment was permanently impaired. Also, in fiscal 2002 the Company purchased a significant portion of the assets of an Internet company in which it had previously invested, and as a result of the asset purchase, the Company was required to write down its investment, recording a loss of $1 million.

Income Taxes:

The Company’s effective income tax rate was 37.5% for the fiscal year 2003 compared to 39.5% for fiscal year 2002. The lower effective tax rate in 2003 primarily relates to successful resolution of certain state tax positions the Company took in connection with past acquisitions.

FISCAL 2002 COMPARED TO FISCAL 2001

Net income in the fiscal year 2002 was $130.5 million, up 129.0%, or $2.83 per share compared to the fiscal year 2001 earnings from continuing operations of $56.9 million, or $1.25 per share. This increase largely reflects the adoption in fiscal 2002 of Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets,” which eliminated goodwill amortization. Fiscal 2002 earnings included a pre-tax charge of $1.6 million to write down the value of certain real property (as discussed below). The fiscal year 2001 earnings from continuing operations would have been $2.01 per share if SFAS No. 142 had been in place during that year. See the discussion under operating expenses and income tax provision

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below, and Note 2 to the Consolidated Financial Statements for an explanation of the impact of SFAS No. 142 on the Company’s year-to-date expenses and financial position.

Operating Revenues – Net:

Net revenues in the fiscal year 2002 remained virtually flat at $1.07 billion, with advertising revenues up 0.7% to $877.8 million, and circulation revenues down 1.4% to $166.1 million.

The following table summarizes the Company’s revenues by category in 2002 (in thousands):

While the Company reviews and evaluates the operations of each individual newspaper, for purposes of organization and ease of understanding, the following table summarizes fiscal 2002 revenues at its newspaper operations by region with year over year changes:

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Retail advertising revenues increased $5.9 million from fiscal 2001 as growth in preprint advertising increased $12.3 million, but was partially offset by declines in ROP advertising of $6.3 million. This change reflects an industry-wide trend toward advertising in preprinted inserts in lieu of ROP advertising. Much of the retail growth came from The Sacramento Bee, up $2.9 million, and The News & Observer in Raleigh, NC, up $1.7 million. Both newspapers had new mall openings in their markets during 2002 with the attendant grand-opening advertising. Retail was generally weak at other newspapers as effects from the economic recession impacted advertisers.

National advertising was down $5.7 million in fiscal 2002 compared to 2001 and declined at virtually all of the Company’s newspapers as national advertisers had not yet seen recovery in their businesses from the economic recession that began in 2001, and therefore, kept advertising at lower levels.

Classified advertising increased $4.9 million; however, employment advertising was down $25.6 million, or 18.7%, from 2001 levels. The decline in employment advertising was primarily offset by strong advertising in automotive, up $17.6 million, and real estate, up $10.0 million.

Employment advertising was down significantly at the Company’s three largest newspapers: the Star Tribune, ($12.9 million), The Sacramento Bee ($4.5 million), and The News & Observer in Raleigh, NC ($4.1 million); but was generally down at all newspapers reflecting the industry-wide trend of recent years.

The gains in automotive were largely the result of “zero-percent financing” programs in 2002 at automotive dealers, while low interest rates fueled growth in real estate activity which was reflected in greater advertising in the Company’s newspapers.

Other advertising revenues increased $1.4 million, largely reflecting a $l.1 million decline in direct marketing revenues, offset by a $2.2 million increase in online advertising. The Star Tribune reorganized its direct marketing program to focus on more profitable projects, which improved profitability, but resulted in a $3.9 million revenue decline, while The Sacramento Bee expanded its direct mail programs, generating a revenue increase of $1.1 million. The increase in online advertising was generally spread throughout the Company’s newspapers, except at The News & Observer, where lower online employment advertising pulled down total online advertising revenues slightly.

Circulation revenues declined $2.4 million and were down at most newspapers (only the Carolinas newspapers showed increases in circulation revenues) due primarily to the reclassification of certain circulation bad debts to a contra-revenue account. This reclassification reflected uncollected revenues for newspapers distributed free to home-delivery subscribers in an effort to regain subscriptions after their initial expiration date (known as “grace” period deliveries). This reclassification had no effect on earnings as it reduced both revenues and expenses.

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Other revenues declined $2.2 million, with most of the decline coming from The News Tribune in Tacoma, WA where management declined to continue commercial printing for a large customer. By declining to renew the printing contract, The News Tribune was able to forego significant capital expenditures for press equipment that would have been required but, in management’s view, offered no long-term strategic benefit to the newspaper.

Operating Expenses:

Total operating expenses from continuing operations decreased 7.8% to $826.2 million in fiscal 2002. Depreciation and amortization decreased $35.8 million in large part due to the adoption of SFAS No. 142, which eliminated the amortization of goodwill. Expenses excluding depreciation and amortization declined 4.3% despite an increase in compensation, which was up 2.4%, reflecting merit increases, incentive compensation increases and higher fringe benefit costs. Much of the decline in the expenses excluding depreciation and amortization was due to lower newsprint costs. Newsprint and supplements declined by 20.8% with newsprint prices down 18.9% and newsprint consumption down 3.0%. Other operating expenses were down 4.9%. Excluding a $1.6 million charge to write down certain real property, other operating expenses were down 5.7%, reflecting company-wide cost controls. The $1.6 million charge reflected the Company’s decision to retain certain real property it had previously held for sale, and accordingly, wrote down the property value to its historical carrying value in accordance with SFAS No. 144, “Accounting for The Impairment or Disposal of Long-Lived Assets.”

Non-Operating (Expenses) Income – Net:

Interest expense was $26.4 million for fiscal year 2002. This is a 40.0% decrease from fiscal year 2001 as the Company continued to benefit from lower interest rates and debt repayment from the Company’s cash flow. The Company also recorded $1.3 million as its share of Ponderay’s loss in the fiscal year 2002 compared to $527,000 of income in the fiscal year 2001. The Company recorded a loss on the writedown of an Internet investment of $1 million in fiscal 2002 after it purchased a significant portion of the assets of an Internet company in which it had previously invested, and applied purchase accounting to the fair market value of the assets at the time of purchase. In 2001, the Company recorded a loss of $10.6 million related to four Internet investments whose values were determined to be permanently impaired.

Income Taxes:

The Company’s effective income tax rate was 39.5% versus 52.1% in fiscal year 2001. This decrease results primarily from the Company’s adoption of SFAS No. 142 which eliminated the non-tax-deductible amortization of goodwill. See Note 2 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s cash and cash equivalents were $3.4 million at December 28, 2003, versus $5.4 million at the end of fiscal 2002. The Company generated $183.9 million of cash from operating activities in fiscal 2003 and has generated an aggregate of $553.7 million over the

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last three years. The major non-operating uses of cash over the three-year period have been to repay debt, to purchase property, plant and equipment, make pension contributions and to pay dividends. In fiscal 2003, the Company repaid $149.0 million of bank debt and has repaid $432.0 million over the last three years. The Company paid $20.3 million in dividends in fiscal 2003, while proceeds from issuing Class A stock under employee stock plans totaled $10.2 million. See the Company’s Statement of Cash Flows on page 34.

In fiscal 2003, the Company made a voluntary contribution of $50.0 million to its defined benefit pension plans. In early fiscal 2004 it made additional voluntary contributions totaling $60.0 million in order to reduce the unfunded liability of its qualified pension plans, which totaled $14.0 million at December 28, 2003, and to help reduce pension expense with the earnings on the contributions. Given the anticipated increase in its pension obligations in 2004 resulting from pension expense, and depending on the return on pension assets and the interest rate environment, management considered the $60.0 million contribution to be prudent. The Company may be required to, or may voluntarily opt to, make additional contributions to its pension plans in future years, but does not currently anticipate any additional contributions in fiscal 2004.

The Company expended a total of $34.1 million in fiscal 2003 for capital projects and equipment from continuing operations to improve productivity, keep pace with new technology and maintain existing operations. Capital expenditures over the last three years from continuing operations have totaled $101.7 million and planned expenditures in fiscal 2004 are estimated to be $48.0 million at existing facilities. The Company has purchase obligations through 2011 totaling $33.2 million primarily for capital expenditures – see the table of contractual obligations below.

See Notes 1 and 7 to the Consolidated Financial Statements and the table of contractual obligations and commitments below for a discussion of the Company’s commitments to Ponderay.

A syndicate of banks and financial institutions provided the bank debt financing for the 1998 acquisition of The Star Tribune Company under a Bank Credit Agreement (Credit Agreement). At December 28, 2003, the Company’s bank debt totaled $347.0 million and includes term loans consisting of Tranche A of $227.0 million bearing interest at the London Interbank Offered Rate (LIBOR) plus 62.5 basis points, payable in increasing quarterly installments through March 21, 2005, and Tranche B of $102.0 million bearing interest at LIBOR plus 150 basis points and payable in semi-annual installments through September 19, 2007. A revolving credit line of up to $200.0 million, of which $18.0 million was outstanding at December 28, 2003, bears interest at LIBOR plus 62.5 basis points and is payable by March 19, 2005. Interest rates applicable to debt drawn down at December 28, 2003, ranged from 1.8% to 2.7%.

The terms of the Credit Agreement include certain operating and financial restrictions, such as limits on the Company’s ability to incur additional debt, create liens, sell assets, engage in mergers, make investments and pay dividends. The debt is unsecured and is pre-payable without penalty.

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With the addition of a $1.0 million letter of credit on January 2, 2004, the Company currently has outstanding letters of credit totaling $7.0 million securing estimated obligations stemming from workers’ compensation claims and other contingent claims. The Company had $176.0 million of available credit under its current Credit Agreement at December 28, 2003. However, the Company drew down $122.0 million on its revolving credit line recently to make pension contributions, complete the Merced acquisition and to repay Tranche A debt, and has subsequently repaid a portion of this drawdown. Hence, its available credit at February 24, 2004 was $82.0 million.

The Company’s revolving line of credit and Tranche A debt both mature before the end of its first quarter of fiscal 2005. The Company expects that most of its cash generated from operations in the foreseeable future will be used to repay debt. Management believes that the Company’s operating cash flow and its access to credit facilities are adequate to meet its liquidity needs, including currently planned capital expenditures, pension contributions and future investments. In 2004 the Company expects to re-finance its existing debt facilities subject to market conditions being favorable. The Company has approximately $4.6 million of unamortized loan origination fees related to its current credit facilities (currently expensing $917,000 quarterly). The balance of these fees will be written off when the re-financing occurs.

The Company does not have, nor does it intend to enter into, derivative contracts for trading purposes. The Company has not attempted to hedge fluctuations in the normal purchases of goods and services used to conduct its business operations. Currently there is no intent to hedge or enter into contracts with embedded derivatives for the purchase of newsprint, ink, and other inventories, leases of equipment and facilities, or business insurance contracts.

The Company utilizes interest rate protection agreements (swaps) to help maintain the overall interest rate risk parameters set by management. None of these agreements were entered into for trading purposes. The swap instruments were entered into to match the significant terms of the underlying debt in an effort to provide highly effective hedges. The Company currently has one interest rate swap agreement designated as a cash flow hedge specifically designed to hedge interest rate fluctuations on $100.0 million of its variable rate bank debt through June 2004. The effect of this agreement is to fix the LIBOR interest rate exposure at approximately 3.8% on that portion of the Company’s term loans. Notwithstanding the debt refinancing discussed above, the Company expects to hold this swap through its maturity.

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The following table summarizes the Company’s contractual obligations and commercial commitments as of December 28, 2003 (in thousands):