Knight Ridder Pension Plan. Financial Statements for the Years Ended December 31, 2007 and 2006, and Independent Auditors Report

Transcription

1 Knight Ridder Pension Plan Financial Statements for the Years Ended December 31, 2007 and 2006, and Independent Auditors Report

2 KNIGHT RIDDER PENSION PLAN TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT 1 FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006: Statements of Net Assets Available for Benefits 2 Statements of Changes in Net Assets Available for Benefits 3 Notes to Financial Statements 4 12 NOTE: All supplemental schedules required by Section of the Department of Labor s Rules and Regulations for Reporting and Disclosure under ERISA have been omitted because they are not applicable.

3 Deloitte & Touche LLP Suite Prospect Park Drive Rancho Cordova, CA USA Tel: Fax: INDEPENDENT AUDITORS REPORT To the Executive Committee of Knight Ridder Pension Plan: We were engaged to audit the accompanying financial statements and supplemental schedule of the Knight Ridder Pension Plan (the Plan ) as of December 31, 2007, and for the year then ended, as listed in the Table of Contents. These financial statements are the responsibility of the Plan s management. Other auditors were engaged to audit the financial statements of the Plan for the year ended December 31, 2006, and due to the same type of scope limitation described in the succeeding paragraph, their report, dated October 15, 2007, disclaimed an opinion on those statements. As permitted by 29 CFR of the Department of Labor s Rules and Regulations for Reporting and Disclosure under ERISA, the Plan administrator instructed us not to perform, and we did not perform, any auditing procedures with respect to the information summarized in Note 3, which was certified by The Northern Trust Company, the trustee of the Plan, except for comparing such information with the related information included in the 2007 financial statements. We have been informed by the Plan administrator that the trustee holds the Plan s investment assets and executes investment transactions. The Plan administrator has obtained a certification from the trustee as of and for the year ended December 31, 2007, that the information provided to the Plan administrator by the trustee is complete and accurate. Because of the significance of the information in the Plan s 2007 financial statements that we did not audit, we are unable to, and do not, express an opinion on the accompanying 2007 financial statements taken as a whole. The form and content of the information included in the 2007 financial statements, other than that derived from the investment information certified by the trustee, have been audited by us in accordance with auditing standards generally accepted in the United States and, in our opinion, are presented in compliance with the Department of Labor s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of See Note 1 for discussion of the merger of the Plan into the McClatchy Retirement Plan in October 14, 2008 Member of Deloitte Touche Tohmatsu

4 KNIGHT RIDDER PENSION PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS AS OF DECEMBER 31, 2007 AND 2006 ASSETS Interest in the Knight Ridder, Inc. Master Retirement Trust $ - $ 951,152,609 NET ASSETS AVAILABLE FOR BENEFITS $ - $ 951,152,609 See notes to financial statements

5 KNIGHT RIDDER PENSION PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEARS ENDED DECEMBER 31, 2007 AND ADDITIONS Net investment gain from the Knight Ridder, Inc. Master Retirement Trust $ 80,641,977 $ 113,179,555 DEDUCTIONS: Benefits paid to participants 46,648,926 44,372,414 Administrative expenses 4,175,353 3,518,406 Total deductions 50,824,279 47,890,820 TRANSFER TO THE McCLATCHY COMPANY RETIREMENT PLAN (980,970,307) - NET (DECREASE) INCREASE (951,152,609) 65,288,735 NET ASSETS AVAILABLE FOR BENEFITS: Beginning of year 951,152, ,863,874 End of year $ - $ 951,152,

6 KNIGHT RIDDER PENSION PLAN NOTES TO FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2007 AND DESCRIPTION OF PLAN The following brief description of Knight Ridder Pension Plan ( Plan ) provides general information. Participants should refer to the plan document for a more complete description of the Plan s provisions. General The Plan is a noncontributory defined benefit plan benefiting nonunion and certain union-represented employees of The McClatchy Company ( McClatchy ) and certain of its subsidiaries. The Plan provides for retirement, death, and disability benefits. The Plan is subject to the provisions of Section 401(a) of the Internal Revenue Code of 1986 (the Code ) and the Employee Retirement Income Security Act of 1974, as amended ( ERISA ). Generally, employees of participating companies begin to participate in the Plan at age 20 and after completion of one year of service with at least 1,000 hours per year. Sponsor Company Transactions On June 27, 2006, McClatchy completed the purchase of Knight Ridder, Inc. ( Knight Ridder ) pursuant to a definitive merger agreement entered into on March 12, 2006 (the Acquisition ). In conjunction with the Acquisition, McClatchy replaced Knight Ridder as the plan sponsor. McClatchy ( Sponsor ) 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 participants in the Plan who met vesting requirements and were employees of the divested companies became inactive participants in the Plan upon the divestitures. That is, such participants remain eligible for benefit payments at retirement age to the extent earned and vested at the date of divesture but will not accrue additional benefits. In connection with the Acquisition, the Knight Ridder Pension Plan was amended to provide that the Plan will be maintained by McClatchy but will continue to be known as the Knight Ridder Pension Plan. The amendment also specified that only employees of former Knight Ridder companies are eligible to participate in the Plan and reflected the divested status of certain former participating Knight Ridder companies. Plan Merger Effective December 31, 2007, the Plan merged with and into The McClatchy Company Retirement Plan. The Plan s Master Trust was dissolved in January 2008 and the assets were transferred to The McClatchy Company Master Retirement Trust. The accrual formulas, terms and conditions of the Plan that applied to legacy Knight Ridder employees benefiting under the Plan and to legacy McClatchy employees benefiting under the McClatchy Company Retirement Plan before the merger continue to be used under the merged plan, such that each plan formula, terms and conditions continue to apply to its respective group of employees. Effective January 1, 2008, the portion of the McClatchy Company Retirement Plan reflecting the terms of the Knight Ridder Retirement Plan was amended such that no participant shall accrue any further eligibility, vesting or benefit accrual service relating to a period of long-term disability after December 31, 2007 in order to conform with the provisions applicable to legacy McClatchy employees

7 Plan Assets As of December 31, 2006, the assets of the Plan were held in common with the assets of the following affiliated defined benefit plans in the Knight Ridder, Inc. Master Retirement Trust (the Master Trust ) (see Note 3): The Employees Retirement Plan of The Beacon Journal Publishing Company, San Jose Mercury News, Inc. Amended Retirement Plan Covering Employees Represented by the San Jose Newspaper Guild, and Northwest Publications, Inc. Pension Plan for Saint Paul Division (Mechanical) Employees. Funding Policy Each year, the Plan Sponsor may contribute to the Plan an amount within the range determined by the Plan s actuaries based, in part, on the funding status of the Plan at the beginning of the year. The Sponsor contributions are determined such that the contributions plus earnings on investments of the Plan fund both the current year normal cost and a portion of any unfunded past service cost plus interest thereon. The total amount of employer contributions must meet or exceed the minimum funding requirements of ERISA and can be zero under certain levels of Plan funding. For the years ended December 31, 2007 and 2006, the Plan met the ERISA minimum funding requirements. Based on actuarial computations, management determined that the Sponsor was not required to make a contribution for either of the years ended December 31, 2007 and Vesting Participants must complete five years of vesting service with participating companies before becoming 100% vested and becoming entitled to receive a retirement income benefit at retirement age. Benefits Generally, participants with five or more years of qualified service (greater than 1,000 hours or when disabled and meeting certain criteria) are entitled to annual retirement income benefits beginning at age 65. The Plan generally permits early retirement at ages 55 through 64 for vested participants who have at least 10 years of vesting service. In the event of death of a vested participant prior to receiving benefits, the participant s spouse may be eligible for a retirement benefit. The retirement benefit varies depending on qualified years service, compensation level, retirement age and certain participant elections. Generally, retirement benefits are based on a percentage of the average eligible compensation during the participants highest five years out of their last ten years of benefit accrual service multiplied by the number of qualified years of service worked for Knight Ridder companies. Benefits are subject to statutory maximums and, in some cases, benefits take into consideration any expected Social Security benefit payments and, in some instances, benefits from other retirement plans, which may reduce plan benefits. Administrative Expenses The administrative expenses represent the Plan s allocated portion of the Master Trust s administrative expenses. Other fees and expenses of the Plan for legal, accounting, and other administrative services may be paid by the Sponsor or, at the Sponsor s discretion, may be paid in whole or in part from the Plan s assets. Plan Termination Although, it has not expressed any intention to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions set forth in ERISA. In the event the Plan is terminated, the net assets of the Plan will be allocated for payment of Plan benefits to the participants in order of priority determined in accordance with ERISA, applicable regulations thereunder and the Plan document. Certain benefits under the Plan are insured by the Pension Benefit Guaranty Corporation ( PBGC ). Generally, the PBGC guarantees most vested normal age retirement benefits, early retirement benefits and certain disability and survivor s pensions. However, the PBGC does not guarantee all types of - 5 -

8 benefits under the Plan, and the amount of benefit protection is subject to certain limitations. Should the Plan terminate at some future time, its net assets will generally not be available on a pro rata basis to provide participants benefits. Whether a particular participant s accumulated plan benefits will be paid depends on both the priority of those benefits and the level of benefits guaranteed by the PBGC at that time. Some benefits may be fully or partially provided for by the then existing net assets and the PBGC guarantee, while other benefits may not be provided for at all. The priority of participants claims to the Plan s net assets, as well as the benefits guaranteed by the PBGC, has been disclosed in the summary plan description and is contained in the plan document. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Following are the significant accounting policies followed by the Plan: Basis of Accounting The accompanying financial statements are prepared on the accrual basis of accounting. Valuation of Investments Held in the Master Trust The Plan s interest in the Master Trust is based on the beginning of the year value of the Plan s interest in the Master Trust plus actual contributions and allocated investment income, including net appreciation (depreciation) in fair values of investments less allocated administrative expenses, actual administrative expenses, and actual benefits paid to the participants. The underlying investments of the Master Trust are stated at fair value. The fair value of investments in mutual funds is based on the net asset value of shares held by the Master Trust on the last business day of the plan year. Securities traded on a national securities exchange are valued at the last reported sales price on the last business day of the plan year; investments traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the average of the last reported bid and ask prices. Asset-backed securities are valued in accordance with a formula based on their rating, maturity, and coupon. The fair values of participation units in limited partnerships and the commingled group real estate trust are based on the Master Trust s proportionate share of the estimated fair value of the underlying net assets on the last business day of the plan year. Short-term investments are stated at historical cost plus accrued interest, which approximates fair value. Commercial papers are stated at cost, which approximates fair value. Net appreciation (depreciation) in fair value of investments includes unrealized market appreciation and depreciation of investments and realized gains and losses on the sale of investments during the period. Actuarial Present Value of Accumulated Plan Benefits Accumulated plan benefits (see Note 5) are those estimated future periodic payments, including lump-sum distributions that are attributable under the Plan s provisions to services rendered by the employees to the valuation date. Accumulated plan benefits include benefits expected to be paid to: (a) retired or former employees and their beneficiaries, (b) beneficiaries of employees who have died, and (c) active employees and their beneficiaries. Benefits for retired or terminated employees or their beneficiaries are based on the employee s highest average annual earnings for five years of credited service out of the last ten years of credited service. The accumulated plan benefits for active employees are based on their current eligible earnings, adjusted to estimate the average compensation during the five years preceding the valuation date. Benefits payable under all circumstances retirement, death, disability, and termination of employment are included to the extent they are deemed attributable to employee service rendered to the valuation date. Payment of Benefits Benefit payments are recorded upon distribution. Use of Estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and - 6 -

9 assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Contributions to the Plan and the actuarial present value of accumulated plan benefits are reported based on certain assumptions pertaining to interest rates, inflation rates, employee compensation and demographics. Due to the changing nature of these assumptions, it is at least reasonably possible that changes in these assumptions will occur in the near term and, due to the uncertainties inherent in setting assumptions, that the effect of such changes could be material to the financial statements. Risks and Uncertainties As described in Note 3, the Plan (through the use of a Master Trust), utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the financial statements. Income Taxes The Plan has received a determination letter from the Internal Revenue Service dated April 1, 2003, stating that the Plan is qualified under Section 401(a) of the Code and, therefore, the related trust is exempt from taxation. Once qualified, the Plan is required to operate in conformity with the Code to maintain its qualification. Although certain provisions adopted in the recent plan restatement specific to compliance with the Economic Growth and Tax Relief Reconciliation Act of 2001 are not covered by the current determination letter, the plan administrator believes that the Plan is being operated in compliance with the applicable requirements of the Code and, therefore, believes that the Plan, as amended and restated, is qualified and the related trust is tax-exempt. New Accounting Pronouncements Fair Value Measurements In September 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The provisions of SFAS 157 are effective for financial statements issued for fiscal years beginning after November 15, In November 2007, the FASB agreed to defer the effective date of Statement 157 one full year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Management does not expect the adoption of SFAS 157 to have a material impact to the Plan s net assets available for benefits or changes in net assets available for benefits. Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued Statement No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No This standard permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. The entity will report unrealized gains and losses on items for which the fair - 7 -

10 value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. The provisions of SFAS 159 are effective as of the beginning of an entity s first fiscal year that begins after November 15, The adoption of SFAS 159 is not expected to have a material impact to the Plan s net assets available for benefits or changes in net assets available for benefits. 3. INVESTMENT IN THE MASTER TRUST (UNAUDITED) The Plan administrator has elected the method of compliance permitted by 29 CFR of the Department of Labor s Rules and Regulations for Reporting and Disclosure under ERISA. Accordingly, all investment information disclosed in the accompanying financial statements is unaudited and was obtained or derived from information supplied to the plan administrator and certified as complete and accurate by The Northern Trust Company, the trustee, including the interest in the Knight Ridder, Inc. Master Retirement Trust held at December 31, 2007 and 2006 shown in the Statements of Net Assets Available for Benefits, the net investment gain from the Knight Ridder, Inc. Master Retirement Trust for the years then ended shown in the Statements of Changes in Net Assets Available for Benefits and the information in Notes 3 and 4 to the financial statements. As of December 31, 2006, the amount disclosed in the statements of net assets available for benefits represent the Plan s 99.6% undivided interest in the net assets of the Master Trust. As of December 31, 2007, the Plan did not have any interest in the net assets of the Master Trust. Interest, dividends, net appreciation (depreciation) in fair value of investments, and Trust expenses are allocated to the Plan based upon its pro rata share in the net assets of the Master Trust

11 At December 31, 2006, the following table presents the net assets in the Master Trust: ASSETS Investments, at fair value determined by: Quoted market price: U.S. Government and agency securities $ 239,165,459 Municipal bonds 534,345 Corporate bonds and notes 39,809,753 Foreign bonds 11,380,520 Corporate convertible bonds 164,968 Common stocks 218,240,312 Mutual funds 458,012,448 Short-term investments 1,426,609 Commercial paper 2,292,604 Asset-backed securities and CMOs 42,763,120 Interest rate swaps 420,531 Preferred stocks 56,700 Fixed income and foreign currency options and futures (30,756) 1,014,236,613 Estimated fair value: Limited partnerships and realty funds 46,263,138 Securities lending collateral (cash collateral) 170,534,599 Receivables for security sales 9,549,949 Cash 297,747 Accrued income 3,312,871 Total assets 1,244,194,917 LIABILITIES Payable for securities lending collateral 170,534,599 Payables for security purchases 118,767,934 Total liabilities 289,302,533 Net assets in Master Trust $ 954,892,

12 At December 31, 2007 and 2006, the following table presents the investment income for the Master Trust: Net appreciation (depreciation) in fair value of investments: U.S. Government and agency securities $ 14,590,512 $ (7,797,119) Municipal bonds 6,147 17,695 Corporate bonds and notes (410,416) 1,636,361 Foreign bonds (135,941) (73,912) Corporate convertible bonds (16,874) 56,435 Common stocks 94,534,058 36,106,390 Mutual funds (46,557,095) 72,304,782 Short-term investments 100,528 29,107 Commercial paper 38,799 (3,266) Asset-backed securities (1,619,843) 157,500 Interest rate swaps (394,153) 571,656 Preferred stocks 23,777 16,566 Fixed income and foreign currency options and futures (637,170) (193,478) Other fixed income 623,175 - Limited partnerships and realty funds 3,010,125 1,805,350 Other income 1,287,776-64,443, ,634,067 Interest and dividends 16,241,431 20,203,016 Knight Ridder Pension Plan net investment income 80,684,836 $ 124,837,083 Less: Investment income attributable to non-plan participants in Master Trust (42,859) Net investment ncome in the Knight Ridder Master Trust $ 80,641,977 SECURITIES LENDING The Master Trust has entered into securities lending agreements with The Northern Trust Company as the lending agents. The agreement authorizes the lending agent to lend securities of United States and non-united States issuers held by the Master Trust to an approved list of borrowers. The lending agent has a responsibility for negotiating the terms of each loan and for collecting all required collateral. By the close of the business day on which the securities are delivered to the borrower, the lending agent shall obtain collateral in an amount equal to 102% in the case of securities of United States issuers, and 105% in the case of securities of non-united States issuers, of the market value of any securities loaned. The lending agent is authorized to invest and reinvest, on behalf of the Master Trust, all cash collateral in accordance with the provisions set forth in the agreement. Until such time as a loan of securities is terminated and such securities are returned to the lending agent, a borrower shall have all incidents of ownership of the securities loaned, including but not limited to, the right to transfer the securities to others. The securities lending transactions have been accounted for as a loan of securities, since the Master Trust may not sell or re-pledge the collateral unless the borrower defaults on the loan, at which time the

13 lending agent will use the collateral to replace the loaned security. Securities on loan valued at $175,865,184 are included in the investments of the Master Trust at December 31, Collateral valued at $180,407,389 at December 31, 2006 has been obtained to secure these loans. Since the noncash collateral may not be pledged or sold, the Master Trust is not obligated to record the collateral or the obligation to return the non-cash collateral. Cash collateral has been recorded by the Master Trust as an asset with an offsetting obligation to return the collateral. 4. ACCUMULATED PLAN BENEFITS The actuarial firm of Towers Perrin estimates the actuarial present value of accumulated plan benefits, which is the amount that results from applying actuarial assumptions to adjust the accumulated plan benefits earned by the participants to reflect the time value of money (through discounts for interest) and the probability of payment (by means of decrements such as for death, disability, withdrawal, or retirement) between the valuation date and the expected date of payment. At January 1, 2007 and 2006, the accumulated plan benefit information as of the beginning of each plan year is as follows: Actuarial Present Value of Accumulated Plan Benefits: Vested benefits: Participants currently receiving payments 359,881, ,306,864 Other participants 436,066, ,977, ,948, ,284,258 Nonvested benefits 16,384,397 23,979,318 Actuarial Present Value of Accumulated Plan Benefits 812,332, ,263,576 Transfer of actuarial present value of accumulated plan benefits to The McClatchy Company Retirement Plan 812,332,526 - Net Actuarial Present Value of Accumulated Plan Benefits $ - $ 727,263,576 Changes in Actuarial Present Value of Accumulated Plan Benefits: Actuarial present value of accumulated plan benefits as of January 1, 2006 $ 727,263,576 Additional benefits accumulated 24,541,812 Interest due to decrease in the discount period 59,972,155 Benefits paid (44,321,434) Assumption changes 44,876,417 Actuarial present value of accumulated plan benefits as of January 1, 2007 $ 812,332,526 At January 1, 2007 and 2006, significant assumptions underlying the actuarial valuations are as follows:

14 Discount rate 8.00% as of January 1, 2007 and 8.50% as of January 1, 2006 Mortality basis RP 2000 projected to 2015 with no collar adjustment Average retirement age 63 The significant changes in actuarial assumptions in the January 1, 2007 actuarial valuation are summarized as follows: Demographic and salary scale assumptions were updated as a result of an experience study conducted in These actuarial assumptions were based on the presumption that the Plan would continue. Were the Plan to terminate, different actuarial assumptions and other factors might be applicable in determining the actuarial present value of accumulated plan benefits. 5. PARTY-IN-INTEREST TRANSACTIONS Certain short-term Plan investments are held in investments managed by Northern Trust. Northern Trust Company is the trustee as defined by the Plan, and therefore, these transactions qualify as exempt partyin-interest transactions