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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-7553
KNIGHT-RIDDER, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 38-0723657
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
50 W. SAN FERNANDO ST., SUITE 1500, SAN JOSE, CA 95113
------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(408) 938-7700
----------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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. Yes [X] No [ ]
As of October 30, 2002, 82,349,967 shares of Common Stock, $.02 1/12 par value,
were outstanding.
Table of Contents for Form 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet .................................... 3
Consolidated Statement of Income .............................. 4
Consolidated Statement of Cash Flows .......................... 5
Notes to Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Operations ............... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....... 27
Item 4. Controls and Procedures .......................................... 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 28
Item 2. Changes in Securities and Use of Proceeds ........................ 28
Item 3. Defaults Upon Senior Securities .................................. 28
Item 4. Submission of Matters to a Vote of Security Holders .............. 28
Item 5. Other Information ................................................ 28
Item 6. Exhibits and Reports on Form 8-K ................................. 28
SIGNATURE .................................................................. 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In thousands, except per share data)
September 29,
2002 December 30,
(unaudited) 2001
------------ ------------
ASSETS
Current Assets
Cash $ 42,885 $ 37,287
Accounts receivable, net of allowances of $21,912 in 2002 and $23,811 in 2001 356,562 391,788
Inventories 45,256 43,240
Prepaid expense 43,194 35,464
Other current assets 27,565 27,792
------------ ------------
Total Current Assets 515,462 535,571
------------ ------------
Investments and Other Assets
Equity in unconsolidated companies and joint ventures 339,553 393,777
Other 240,666 193,685
------------ ------------
Total Investments and Other Assets 580,219 587,462
------------ ------------
Property, Plant and Equipment
Land and improvements 99,475 99,605
Buildings and improvements 497,472 492,576
Equipment 1,316,948 1,301,826
Construction and equipment installations in progress 22,565 43,772
------------ ------------
1,936,460 1,937,779
Less accumulated depreciation (971,441) (922,453)
------------ ------------
Net Property, Plant and Equipment 965,019 1,015,326
------------ ------------
Goodwill and Other Identified Intangible Assets
Goodwill 1,748,229 1,748,229
Newspaper mastheads 284,284 284,284
Other, less accumulated amortization of $41,445 in 2002 and $36,329 in 2001 37,553 42,504
------------ ------------
Total Goodwill and Other Identified Intangible Assets, net 2,070,066 2,075,017
------------ ------------
Total $ 4,130,766 $ 4,213,376
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 110,800 $ 110,333
Accrued expenses and other liabilities 150,915 112,946
Accrued compensation and amounts withheld from employees 110,756 107,842
Federal and state income taxes 6,160 30,844
Deferred revenue 78,433 77,368
Short-term borrowings and current portion of long-term debt 40,099 40,699
------------ ------------
Total Current Liabilities 497,163 480,032
------------ ------------
Noncurrent Liabilities
Long-term debt 1,500,223 1,582,888
Deferred Federal and state income taxes 285,951 255,266
Postretirement benefits other than pensions 138,919 136,134
Employment benefits and other noncurrent liabilities 173,595 197,448
------------ ------------
Total Noncurrent Liabilities 2,098,688 2,171,736
------------ ------------
Minority Interests in Consolidated Subsidiaries 2,971 1,320
Commitments and Contingencies
Shareholders' Equity
Common stock, $.02 1/12 par value; shares authorized - 250,000,000;
shares issued - 82,327,850 in 2002 and 84,012,749 in 2001 1,715 1,750
Additional capital 1,023,721 984,830
Retained earnings 508,260 575,649
Treasury stock, at cost, 31,356 shares in 2002 and 34,757 shares in 2001 (1,752) (1,941)
------------ ------------
Total Shareholders' Equity 1,531,944 1,560,288
------------ ------------
Total $ 4,130,766 $ 4,213,376
============ ============
See "Notes to Consolidated Financial Statements."
3
CONSOLIDATED STATEMENT OF INCOME
(Unaudited in thousands, except per share data)
Quarter Ended Three Quarters Ended
-------------------------- --------------------------
Sept 29, Sept 30, Sept 29, Sept 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
OPERATING REVENUE
Advertising
Retail $ 257,652 $ 247,363 $ 773,062 $ 764,033
General 67,616 64,295 214,669 221,720
Classified 207,202 221,491 621,222 697,187
----------- ----------- ----------- -----------
Total 532,470 533,149 1,608,953 1,682,940
Circulation 119,079 127,731 367,774 384,610
Other 37,441 32,242 105,579 99,407
----------- ----------- ----------- -----------
Total Operating Revenue 688,990 693,122 2,082,306 2,166,957
----------- ----------- ----------- -----------
OPERATING COSTS
Labor and employee benefits 276,542 266,392 835,257 922,123
Newsprint, ink and supplements 82,469 106,500 260,441 337,051
Other operating costs 156,934 150,240 471,028 474,418
Depreciation and amortization 30,219 46,094 94,460 140,328
----------- ----------- ----------- -----------
Total Operating Costs 546,164 569,226 1,661,186 1,873,920
----------- ----------- ----------- -----------
OPERATING INCOME 142,826 123,896 421,120 293,037
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (18,363) (24,229) (57,069) (79,155)
Interest expense capitalized 60 482 536 1,520
Interest income 130 159 294 701
Equity in losses of unconsolidated
companies and joint ventures (31,054) (1,693) (53,226) (5,535)
Minority interests (2,884) (2,263) (7,797) (6,358)
Other, net (658) (3,543) (9,082) (21,120)
----------- ----------- ----------- -----------
Total (52,769) (31,087) (126,344) (109,947)
----------- ----------- ----------- -----------
Income before income taxes and cumulative effect of change
in accounting principle of unconsolidated company 90,057 92,809 294,776 183,090
Income taxes 33,521 37,124 109,677 73,242
----------- ----------- ----------- -----------
Net Income before cumulative effect of change in
accounting principle of unconsolidated company $ 56,536 $ 55,685 $ 185,099 $ 109,848
----------- ----------- ----------- -----------
Cumulative effect of change in accounting principle
of unconsolidated company $ -- $ -- $ (24,279) $ --
----------- ----------- ----------- -----------
Net Income $ 56,536 $ 55,685 $ 160,820 $ 109,848
=========== =========== =========== ===========
NET INCOME PER SHARE - BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE OF
UNCONSOLIDATED COMPANY
Basic $ 0.68 $ 0.71 $ 2.22 $ 1.39
----------- ----------- ----------- -----------
Diluted $ 0.67 $ 0.65 $ 2.17 $ 1.28
----------- ----------- ----------- -----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
OF UNCONSOLIDATED COMPANY - PER SHARE
Basic $ -- $ -- $ (0.29) $ --
----------- ----------- ----------- -----------
Diluted $ -- $ -- $ (0.28) $ --
----------- ----------- ----------- -----------
NET INCOME PER SHARE
Basic $ 0.68 $ 0.71 $ 1.93 $ 1.39
----------- ----------- ----------- -----------
Diluted $ 0.67 $ 0.65 $ 1.89 $ 1.28
----------- ----------- ----------- -----------
DIVIDENDS DECLARED PER COMMON SHARE $ 0.25 $ 0.25 $ 0.75 $ 0.75
----------- ----------- ----------- -----------
AVERAGE SHARES OUTSTANDING (000's)
Basic 82,796 74,799 83,407 73,879
----------- ----------- ----------- -----------
Diluted 84,090 85,837 85,181 85,715
----------- ----------- ----------- -----------
See "Notes to Consolidated Financial Statements."
4
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited, in thousands)
Three Quarters Ended
----------------------------
September 29, September 30,
2002 2001
------------ ------------
CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES
Net income $ 160,820 $ 109,848
Noncash items deducted from (included in) income:
Depreciation 87,511 85,470
Amortization of other identifed intangible assets (and, in 2001, goodwill) 5,116 50,858
Amortization of other assets 1,832 4,000
Cumulative effect of change in accounting principle 24,279
Losses on sales and write-down of investments 7,435 11,538
Benefit (provision) for deferred taxes 30,685 (4,324)
Provision for bad debts 14,599 20,075
Distributions in excess of earnings in investees 64,559 3,511
Minority interests in earnings of consolidated subsidiaries 7,797 6,358
Other items, net 9,500 7,491
Change in certain assets and liabilities:
Accounts receivable 20,627 38,695
Inventories (2,016) 5,511
Other assets (32,001) (50,148)
Accounts payable 13,571 (30,947)
Federal and state income taxes (15,414) 16,446
Other liabilities 8,325 60,860
------------ ------------
Net Cash Provided by Operating Activities 407,225 335,242
------------ ------------
CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES
Additions to property, plant and equipment (40,885) (75,347)
Proceeds from sales of investments 2,079 15,326
Other investments, net (13,866) (8,293)
------------ ------------
Net Cash Required for Investing Activities (52,672) (68,314)
------------ ------------
CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES
Net decrease in commercial paper, net of unamortized discount (131,021) (367,558)
Proceeds from issuance of term debt 297,107
Repayment of term debt (40,000)
Payment of cash dividends (62,650) (63,224)
Issuance of common stock to employees and directors 70,259 57,078
Purchase of treasury stock (204,588) (145,356)
Other items, net (20,955) (12,443)
------------ ------------
Net Cash Required for Financing Activities (348,955) (274,396)
------------ ------------
Net Increase (Decrease) in Cash 5,598 (7,468)
Cash and short-term cash
investments at beginning of the period 37,287 41,661
------------ ------------
Cash and short-term cash
investments at end of the period $ 42,885 $ 34,193
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Noncash investing activities:
Unrealized gains/ (losses) (net of tax) on investments available for sale $ -- $ 1,558
Noncash financing activities:
Conversion of preferred stock to common stock
Preferred Stock (156)
Additional Capital (58,400)
Issuance of common stock upon conversion to preferred stock
Common Stock 32
Additional Capital 58,524
See "Notes to Consolidated Financial Statements."
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Knight-Ridder,
Inc. (Knight Ridder or the company) have been prepared in accordance with
generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter and three quarters ended September
29, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 29, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto, as well as the critical
accounting policies in Management's Discussion and Analysis, included in the
company's annual report on Form 10-K for the year ended December 30, 2001.
Certain amounts in 2001 have been reclassified to conform to the 2002
presentation primarily relating to the presentation of the interest rate swaps,
certain items on the consolidated statement of cash flows and full-run
advertising linage.
NOTE 2 - COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income (in
thousands of dollars):
Quarter Ended Three Quarters Ended
--------------------------- ---------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income $ 56,536 $ 55,685 $ 160,820 $ 109,848
Total unrealized losses on securities available for sale -- 257 -- (5,541)
Less: reclassification adjustment for realized
losses, net of taxes -- -- -- 7,099
------------ ------------ ------------ ------------
Change in accumulated other comprehensive income -- 257 -- 1,558
------------ ------------ ------------ ------------
Total comprehensive income $ 56,536 $ 55,942 $ 160,820 $ 111,406
============ ============ ============ ============
6
NOTE 3 - DEBT
Debt consisted of the following (in thousands)
Balance At
Effective Interest ----------------------------
Rate as of September 29, December 30,
September 29, 2002 2002 2001
------------------ ------------ ------------
Commercial paper, net of discount (a) 1.8% $ 396,127 $ 527,148
Debentures, net of discount (b) 7.0% 198,919 198,795
Debentures, net of discount (c) 7.8% 95,075 94,927
Debentures, net of discount (d) 7.1% 296,777 296,686
Notes payable, net of discount (e) 2.9% 98,838 98,667
Notes payable, net of discount (f) 5.9% 297,489 297,277
Senior notes, net of discount (g) 2.7% 99,680 99,605
Notes payable, other 5.5% 250 850
Fair market value of interest swaps 57,167 9,632
------------ ------------
Total Debt (h) 5.0% 1,540,322 1,623,587
Less amounts classified as current 40,099 40,699
------------ ------------
Total long-term debt 5.0% $ 1,500,223 $ 1,582,888
============ ============
(a) Commercial paper is supported by $895 million revolving credit facility
which matures in 2006.
(b) Represents $200 million of 9.875% debentures due in 2009.
(c) Represents $100 million of 7.15% debentures due in 2027.
(d) Represents $300 million of 6.875% debentures due in 2029.
(e) Represents $100 million of 6.625% notes due in 2007.
(f) Represents $300 million of 7.125% notes due in 2011.
(g) Represents $100 million of 6.3% senior notes due in 2005.
(h) Interest payments for the three quarters ended September 29, 2002 and
September 30, 2001 were $55.6 million and $74.3 million, respectively.
NOTE 4 - INCOME TAX PAYMENTS
Income tax payments for the three quarters ended September 29, 2002 and
September 30, 2001 were $95.0 million and $60.5 million, respectively.
7
NOTE 5 - EQUITY
Earnings per Share:
- -------------------
The following table sets forth the computation of basic and diluted earnings per
share in accordance with GAAP (in thousands, except per share data):
Quarter Ended Three Quarters Ended
--------------------------- ---------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income before cumulative effect of
change in accounting principle $ 56,536 $ 55,685 $ 185,099 $ 109,848
Cumulative effect of change in accounting
principle -- -- (24,279) --
------------ ------------ ------------ ------------
Net income $ 56,536 $ 55,685 $ 160,820 $ 109,848
Less dividends on preferred stock -- 2,387 -- 7,550
------------ ------------ ------------ ------------
Net income attributable to common stock $ 56,536 $ 53,298 $ 160,820 $ 102,298
============ ============ ============ ============
Average shares outstanding (basic) 82,796 74,799 83,407 73,879
Effect of dilutive securities:
Weighted average preferred stock, as converted -- 9,548 -- 10,413
Stock options 1,294 1,490 1,774 1,423
------------ ------------ ------------ ------------
Average shares outstanding (diluted) 84,090 85,837 85,181 85,715
------------ ------------ ------------ ------------
Net income per share - before cumulative
effect of change in accounting principle
Basic $ 0.68 $ 0.71 $ 2.22 $ 1.39
------------ ------------ ------------ ------------
Diluted $ 0.67 $ 0.65 $ 2.17 $ 1.28
------------ ------------ ------------ ------------
Cumulative effect of change in accounting
principle
Basic $ -- $ -- $ (0.29) $ --
------------ ------------ ------------ ------------
Diluted $ -- $ -- $ (0.28) $ --
------------ ------------ ------------ ------------
Net income per share
Basic $ 0.68 $ 0.71 $ 1.93 $ 1.39
------------ ------------ ------------ ------------
Diluted $ 0.67 $ 0.65 $ 1.89 $ 1.28
------------ ------------ ------------ ------------
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The company's wholly-owned subsidiary, MediaStream, Inc. ("MediaStream"), was
named as one of a number of defendants in two separate class action lawsuits
that have been consolidated with one other similar lawsuit by the Judicial Panel
on Multi-District Litigation under the caption "In re Literary Works in
Electronic Databases Copyright Litigation," M.D.L. Docket No. 1379 (the
"Multi-District Litigation"). The two lawsuits originally filed against
MediaStream in September 2000 were: The Authors Guild, Inc. et al. v. The Dialog
Corporation et al., and Posner et al. v. Gale Group Inc. et al. These lawsuits
were brought by or on behalf of freelance authors who allege that the defendants
have infringed plaintiffs' copyrights by making plaintiffs' works available on
databases operated by the defendants. The plaintiffs are seeking to be certified
as class representatives of all similarly-situated freelance authors.
8
The two lawsuits were initially stayed pending disposition by the U.S. Supreme
Court of New York Times Company et al. v. Tasini et al., No. 00-21. On June 25,
2001, the Supreme Court ruled that the defendants in Tasini did not have a
privilege under Section 201 of the Copyright Act to republish articles
previously appearing in print publications absent the author's separate
permission for electronic republication. The judge has ordered the parties in
the Multi-District Litigation to try to resolve the claims through mediation,
which commenced November 2001, and the parties have agreed to a limited stay to
respond to the complaint during such mediation, which may be terminated by the
plaintiffs upon 30 days prior written notice. In September 2001, the plaintiffs
submitted an amended complaint, which named the company as an additional
defendant and makes reference to Knight Ridder Digital, a wholly owned
subsidiary of the company.
Plaintiffs in the Multi-District Litigation seek actual damages, statutory
damages and injunctive relief, among other remedies. The company and MediaStream
intend to contest liability and vigorously defend their positions in the
litigation, including opposing class certification. In addition, MediaStream has
indemnity agreements from various content providers supplying articles to
MediaStream's databases that could mitigate its potential exposure. Management
is currently unable to predict whether an unfavorable outcome is likely or the
magnitude of any potential loss.
Various libel and copyright infringement actions and environmental and other
legal proceedings that have arisen in the ordinary course of business are
pending against the company and its subsidiaries. In the opinion of management,
while the liability in any of the foregoing actions or legal proceedings may be
significant individually or by itself, the ultimate liability to the company and
its subsidiaries as a result of all such actions and other legal proceedings
will not be material to its financial position or results of operations on a
consolidated basis.
9
NOTE 7 - BUSINESS SEGMENT INFORMATION
Although not required to do so, the company reports its online operations as a
separate reportable business segment from its newspaper operations pursuant to
FASB 131, Disclosures about Segments of an Enterprise and Related Information.
FASB 131 requires disclosure of certain information about reportable operating
segments management believes are important and allows users to assess the
performance of individual operating segments in the same way that management
reviews performance and makes decisions.
Financial data for the company's segments is as follows (in thousands):
Knight Ridder
Business Segment Information
(in thousands of dollars)
Quarter Ended Three Quarters Ended
--------------------------- ---------------------------
September 29, September 30, September 29, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Operating revenue
Newspapers $ 674,751 $ 682,612 $ 2,040,957 $ 2,135,382
Online 14,239 10,510 41,349 31,575
------------ ------------ ------------ ------------
$ 688,990 $ 693,122 $ 2,082,306 $ 2,166,957
============ ============ ============ ============
Operating income (loss)
Newspapers $ 152,714 $ 133,711 $ 454,419 $ 335,232
Online (2,820) (6,627) (9,329) (25,610)
Corporate (7,068) (3,188) (23,970) (16,585)
------------ ------------ ------------ ------------
$ 142,826 $ 123,896 $ 421,120 $ 293,037
============ ============ ============ ============
Depreciation and amortization
Newspapers $ 27,582 $ 43,893 $ 86,591 $ 133,710
Online 1,318 805 3,650 2,309
Corporate 1,319 1,396 4,219 4,309
------------ ------------ ------------ ------------
$ 30,219 $ 46,094 $ 94,460 $ 140,328
============ ============ ============ ============
Capital Expenditures
Newspapers $ 16,670 $ 20,198 $ 38,005 $ 66,874
Online 106 4,041 1,072 7,135
Corporate 1,052 218 1,808 1,338
------------ ------------ ------------ ------------
$ 17,828 $ 24,457 $ 40,885 $ 75,347
============ ============ ============ ============
As of
---------------------------
September 29, September 30,
2002 2001
------------ ------------
Total Assets
Newspapers $ 3,618,576 $ 3,740,435
Online 205,780 135,970
Corporate 317,206 257,320
------------ ------------
$ 4,141,562 $ 4,133,725
============ ============
10
NOTE 8 - WORKFORCE REDUCTION PLAN
Due to the slowing economy and the resulting decline in advertising revenue, the
company announced in the second quarter of 2001 a workforce reduction program
affecting the majority of its newspapers. The workforce reduction plan
eliminated approximately 1,600 positions through early retirement programs as
well as voluntary and involuntary buyouts and attrition. As a result of this
plan, the company incurred charges of $78.5 million, or $47.1 million net of
tax, related to employee severance costs and benefits during the second quarter
of 2001 in accordance with EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity." As of
September 29, 2002, the plan is complete and substantially all payments have
been made.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS
146). SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3. The
principal difference between SFAS 146 and EITF 94-3 relates to SFAS 146's timing
for recognition of a liability for a cost associated with an exit or disposal
activity. SFAS 146 requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred. Under EITF
94-3 a liability for an exit cost as generally defined in EITF 94-3 was
recognized at the date of an entity's commitment to an exit plan. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. SFAS 146 is applied prospectively upon adoption and, as a result, is not
expected to have a material impact on the Company's current financial position
or results of operations.
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accountants Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible
Assets. Under SFAS 142, goodwill and indefinite-lived intangible assets are no
longer amortized but are reviewed at least annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life continue to be
amortized over their useful lives. The amortization provisions of SFAS 142 apply
to goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001 the company has
applied the new accounting rules beginning December 31, 2001.
Pursuant to the provisions of SFAS 142, the company completed the evaluation of
its goodwill and other intangible assets during the second quarter of 2002 and
no impairment was indicated. However, the company owns 50% of Career Holdings,
Inc., parent company of CareerBuilder, which completed its evaluation of
goodwill in the second quarter of 2002. The company records its investments in
Career Holdings under the equity method of accounting. The company has reflected
its share of Career Holdings' impairment of goodwill, $24.3 million, or $.28 per
diluted share, arising from its adoption of SFAS 142 in the second quarter ended
June 30, 2002, as a year-to-date cumulative effect of a change in accounting
principle consistent with Career Holdings' characterization of the write-down.
11
The following table shows a 2002 versus 2001 net income comparison had SFAS 142
been applied at the beginning of fiscal 2001 (in thousands, except per share
amounts):
Quarter Ended Three Quarters Ended
--------------------- ---------------------
Sept 29, Sept 30, Sept 29, Sept 30,
2002 2001 % Change 2002 2001 % Change
--------- --------- --------- --------- --------- ---------
Net Income before cumulative effect of change in
accounting principle of unconsolidated company $ 56,536 $ 55,685 1.5% $ 185,099 $ 109,848 68.5%
Cumulative effect of change in accounting principle of
unconsolidated company -- -- (24,279) --
Goodwill and other intangibles amortization -- $ 13,825 -- $ 41,475
--------- --------- --------- ---------
Adjusted Net Income $ 56,536 $ 69,510 -18.7% $ 160,820 $ 151,323 6.3%
========= ========= ========= =========
Basic Earnings per Share before cumulative effect of change
in accounting principle of unconsolidated company $ 0.68 $ 0.71 -4.2% $ 2.22 $ 1.39 59.7%
Cumulative effect of change in accounting principle of
unconsolidated company -- -- (0.29) --
Goodwill and other intangibles amortization -- $ 0.19 -- $ 0.56
--------- --------- --------- ---------
Adjusted Basic Earnings per Share $ 0.68 $ 0.90 -24.4% $ 1.93 $ 1.95 -1.0%
========= ========= ========= =========
Diluted Earnings per Share before cumulative effect of
change in accounting principle of unconsolidated company $ 0.67 $ 0.65 3.1% $ 2.17 $ 1.28 69.5%
Cumulative effect of change in accounting principle of
unconsolidated company -- -- (0.28) --
Goodwill and other intangibles amortization -- $ 0.16 -- $ 0.49
--------- --------- --------- ---------
Adjusted Diluted Earnings per Share $ 0.67 $ 0.81 -17.3% $ 1.89 $ 1.77 6.8%
========= ========= ========= =========
12
Goodwill and other intangible assets at September 29, 2002 consisted of the
following (in thousands):
Gross Accumulated Net
Intangible assets continuing to be amortized: Amount Amortization Amount
------------ ------------ ------------
Advertisers $ 43,558 $ 21,346 $ 22,212
Subscribers 33,651 19,586 14,065
Other 960 513 447
------------ ------------ ------------
Total $ 78,169 $ 41,445 $ 36,724
Goodwill and other intangible assets no longer being amortized:
Goodwill $ 1,748,229
Newspaper mastheads 284,284
Other 829
------------
Total $ 2,033,342
Total goodwill and other intangible assets $ 2,070,066
============
Estimated annual aggregate amortization expense will be approximately $6.8
million for 2002 through 2006 and $4.1 million in 2007.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-Q are forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties
that could cause actual results and events to differ materially from those
anticipated.
Potential risks and uncertainties that could adversely affect the company's
ability to obtain these results include, without limitations, the following
factors: (a) increased consolidation among major retailers or other events that
may adversely affect business operations of major customers and depress the
level of local and national advertising; (b) an accelerated economic downturn in
some or all of the company's principal newspaper markets that may lead to
decreased circulation or decreased local or national advertising; (c) a decline
in general newspaper readership patterns as a result of competitive alternative
media or other factors; (d) an increase in newsprint costs over the levels
anticipated; (e) labor disputes or shortages that may cause revenue declines or
increased labor costs; (f) disruptions in electricity and natural gas supplies
and increases in energy costs; (g) acquisitions of new businesses or
dispositions of existing businesses; (h) increases in interest or financing
costs or availability of credit; (i) rapid technological changes and frequent
new product introductions prevalent in electronic publishing, including the
evolution of the Internet; and (j) acts of war, terrorism or other events that
may adversely affect the company's operations or the operations of key suppliers
to the company.
14
RESULTS OF OPERATIONS: THIRD QUARTER ENDED SEPTEMBER 29, 2002 COMPARED TO THIRD
QUARTER ENDED SEPTEMBER 30, 2001
The following table sets forth the results of operations for the quarters ended
September 29, 2002 and September 30, 2001 (in thousands, except per share
amounts):
September 29, September 30,
2002 2001 % Change
------------ ------------ ------------
Operating Revenue $ 688,990 $ 693,122 -0.6%
Operating Income 142,826 123,896 15.3%
Net Income 56,536 55,685 1.5%
Net Income includes the following expenses:
Career Holdings legal entity restructure 11,304 --
Goodwill and other intangibles amortization -- 13,825
Diluted Earnings per Share $ 0.67 $ 0.65 3.1%
Diluted Earnings per Share includes the following expenses:
Career Holdings legal entity restructure 0.14 --
Goodwill and other intangibles amortization -- 0.16
15
NEWSPAPER DIVISION
Operating Revenue
The table below presents operating revenue and related statistics for newspaper
operations for the quarter ended September 29, 2002 compared to the quarter
ended September 30, 2001 (in thousands):
Quarter Ended
---------------------------
September 29, September 30,
2002 2001 Variance % Change
------------ ------------ ------------ ------------
Operating revenues
Advertising
Retail $ 257,652 $ 247,363 $ 10,289 4.2%
General 67,616 64,295 3,321 5.2%
Classified 207,202 221,491 (14,289) -6.5%
------------ ------------ ------------
Total 532,470 533,149 (679) -0.1%
------------ ------------ ------------
Circulation 119,079 127,731 (8,652) -6.8%
Other 23,202 21,732 1,470 6.8%
------------ ------------ ------------
Total operating revenue $ 674,751 $ 682,612 $ (7,861) -1.2%
============ ============ ============
Average daily circulation
Daily 3,746 3,740 6 0.2%
Sunday 5,130 5,106 24 0.5%
Advertising linage
Full run
Retail 3,771.6 3,662.4 109.2 3.0%
General 578.0 564.4 13.6 2.4%
Classified 4,713.9 4,636.0 77.9 1.7%
------------ ------------ ------------
Total full run 9,063.5 8,862.8 200.7 2.3%
============ ============ ============
Factored part-run 552.1 545.9 6.2 1.1%
------------ ------------ ------------
Total preprints inserted 1,714.5 1,647.7 66.7 4.0%
------------ ------------ ------------
Advertising revenue for the quarter ended September 29, 2002 declined only 0.1%
compared to the same quarter of the prior year, with the best year-over-year
comparison since the final quarter of 2000. The most significant declines were
in San Jose ($4.6 million or 8.8%), Philadelphia ($3.8 million or 4.1%) and
Charlotte ($787,000 or 2.2%). Miami had the largest increase ($4.5 million or
6.7%), followed by Kansas City ($1.4 million or 2.9%) and Akron ($606,000 or
3.3%).
Retail advertising increased $10.3 million, or 4.2%, during the quarter ended
September 29, 2002 compared to the same period last year, on a 3.0% increase in
full run linage, an 11.9% increase in preprint advertising revenue and a 28.8%
increase in total market coverage/alternate distribution advertising revenue.
The largest increases were in Miami ($2.5 million or 8.8%), San Jose ($1.1
million or 6.5%), Kansas City ($842,000 or 3.3%), Contra Costa ($825,000 or
6.8%), Fort Worth ($672,000 or 2.8%) and Wichita ($553,000 or 8.8%).
16
General advertising revenue for the quarter ended September 29, 2002 increased
$3.3 million, or 5.2%, compared to the same quarter in 2001, with a 2.4%
increase in full run linage. The largest increases were in Miami ($1.8 million
or 12.4%), San Jose ($1.6 million or 25.5%) and Kansas City ($1.2 million or
22.6%). Telecommunications was responsible for most of the growth. Miami also
benefited from an increase in financial and travel, including airlines and the
cruise industry. San Jose had increases in auto and financial while Kansas City
had increases in sporting goods and healthcare. Philadelphia had the largest
shortfall ($1.3 million or 7.0%) due to automotive, travel and healthcare.
Classified revenue was down $14.3 million, or 6.5%, in the third quarter of
2002, compared to the third quarter of 2001, due to classified recruitment, down
$19.7 million, or 24.0%, and real estate, down $1.6 million, or 3.8%. Partially
offsetting these declines were increases in other classified revenue of $4.7
million, or 11.5% and in automotive of $2.3 million, or 4.1%. While there were
declines in recruitment revenue in most major markets during the third quarter
of 2002 compared to the same period in 2001, the following properties were
responsible for the majority of the decrease: San Jose ($4.9 million or 46.2%),
Philadelphia ($4.7 million or 25.5%), Kansas City ($2.2 million or 24.6%) and
Fort Worth ($1.9 million or 30.9%).
Circulation revenue declined $8.7 million, or 6.8%, in the quarter ended
September 29, 2002 compared to the same period last year, while average daily
copies increased from the prior year's third quarter by 5,857, or 0.2%, and
Sunday copies increased by 23,888, or 0.5%. The decrease in revenue was due to
(a) increased discounting of subscription rates, (b) reduced rates for Newspaper
in Education (NIE) and (c) price rollbacks, primarily confined to Sunday single
copy in five markets.
Other revenue increased $1.5 million, or 6.8%, for the quarter ended September
29, 2002 compared to the quarter ended September 30, 2001 with increases in
earnings from Detroit ($2.8 million or 69.5%), partially offset by decreases in
commercial printing revenue ($1.6 million or 13.3%).
Operating Costs
The table below presents operating costs for newspaper operations for the
quarter ended September 29, 2002 compared to the quarter ended September 30,
2001 (in thousands):
Quarter Ended
---------------------------
September 29, September 30,
2002 2001 Variance % Change
------------ ------------ ------------ ------------
Operating costs
Labor and employee benefits $ 268,052 $ 258,679 $ 9,373 3.6%
Newsprint, ink and supplements 84,938 109,231 (24,293) -22.2%
Other operating costs 141,465 137,098 4,367 3.2%
Depreciation and amortization 27,582 43,893 (16,311) -37.2%
------------ ------------ ------------
Total operating costs $ 522,037 $ 548,901 $ (26,864) -4.9%
============ ============ ============
17
Total operating costs were down $26.9 million, or 4.9%, in the third quarter of
2002 compared to the third quarter of 2001. Excluding the effect of the change
in goodwill and other intangible amortization in 2001, total operating costs
declined $11.6 million, or 2.2%.
Labor and employee benefits increased $9.4 million, or 3.6%, in the third
quarter of 2002 from the third quarter of 2001 as a result of the sustained
accrual of bonuses this year versus their elimination in the same period last
year ($2.8 million), a 3.4% increase in the average wage rate in the third
quarter of 2002 compared to the third quarter of 2001 and an increase in health
care costs, partially offset by a 751, or 4.2%, decrease in the number of
full-time equivalent employees (FTEs).
Newsprint, ink and supplements decreased in the third quarter of 2002 from the
third quarter of 2001 by $24.3 million, or 22.2%, due to a 25.9% decrease in the
price per ton of newsprint. Consumption of newsprint for the third quarter of
2002 was virtually flat compared to the third quarter of 2001.
Other operating costs increased in the third quarter of 2002 from the third
quarter of 2001 by $4.4 million, or 3.2%, primarily due to increases in
circulation costs and property and casualty insurance expenses.
Depreciation and amortization declined $16.3 million, or 37.2%, in the third
quarter of 2002 compared to the third quarter of 2001. The company adopted SFAS
142 in the first quarter of fiscal year 2002. Not amortizing goodwill caused an
increase in operating income of $15.2 million, and an increase in net income of
$13.8 million, or $.16 per share, in the third quarter of 2002. Excluding the
effect from the adoption of SFAS 142, depreciation and amortization expense
decreased $1.1 million, or 3.8%.
ONLINE DIVISION
The table below presents the operating results and related statistics for online
operations for the quarter ended September 29, 2002 compared to the quarter
ended September 30, 2001 (in thousands):
Quarter Ended
---------------------------
September 29, September 30,
2002 2001 Variance % Change
------------ ------------ ------------ ------------
Operating revenue $ 14,239 $ 10,510 $ 3,729 35.5%
Operating costs
Labor and employee benefits 6,700 7,710 $ (1,010) -13.1%
Other operating costs 9,041 8,622 419 4.9%
Depreciation and amortization 1,318 805 513 63.7%
------------ ------------ ------------
Total operating costs $ 17,059 $ 17,137 $ (78) -0.5%
------------ ------------ ------------
Operating Loss $ (2,820) $ (6,627) $ 3,807 57.4%
============ ============ ============
Average monthly unique visitors 6,865 6,315 550 8.7%
============ ============ ============
18
Operating revenue for the third quarter of 2002 increased from the same period
in 2001 primarily due to increases in recruitment packages and recruitment
upsell. Reach for Knight Ridder Digital properties, defined as the percentage of
all online users in the nation who used any of Knight Ridder Digital's websites,
increased from 5.6% in the third quarter of 2001 to 5.7% in the third quarter of
2002. Average monthly unique visitors increased from 6.3 million in the third
quarter of 2001 to 6.9 million in the third quarter of 2002.
The decrease in labor and employee benefits for the third quarter of 2002
compared to the same quarter last year was primarily due to an FTE reduction of
85, or 27.4%. Other operating costs for the third quarter of 2002 increased from
the same quarter last year due to increases in advertising and promotion costs,
and software costs. Offsetting these increases in other operating costs was a
decrease in other contract services, and content and wire service fees.
Depreciation and amortization expense in the third quarter of 2002 increased due
to new Knight Ridder Digital offices and the implementation of a single digital
platform (a shared content management and web serving database for all of the
Knight Ridder Digital websites).
CORPORATE AND OTHER NON-OPERATING ITEMS
Interest expense, net of interest income and capitalized interest, decreased
$5.4 million, or 23%, in the quarter ended September 29, 2002 from the third
quarter ended September 30, 2001 due to a lower average debt balance and a lower
weighted-average interest rate. Weighted-average interest rates were lower due
to a general decline in short-term interest rates.
Equity in losses of unconsolidated companies and joint ventures for the quarter
ended September 29, 2002 increased by $29.4 million from the comparable period
in 2001. Included in the $29.4 million is an $18.0 million tax expense charge
arising from Career Holdings, Inc. ("Career Holdings"), the parent of
CareerBuilder. During the third quarter Career Holdings was converted from a
regular "C" corporation to a limited liability company ("LLC"). The conversion
resulted in taxable gain to Career Holdings to the extent the fair value of its
assets was greater than the tax basis on the date of the conversion.
Accordingly, Career Holdings recorded a tax expense and owes taxes of
approximately $36.0 million. Knight Ridder recorded its 50% share of this
expense as part of the loss from equity investments.
Career Holdings' conversion to an LLC also triggered the recognition of a tax
loss for Knight Ridder. Since the acquisition of its interest in Career
Holdings, Knight Ridder has recorded tax benefits in the form of deferred taxes
for its share of the losses arising from Career Holdings' operating results. The
conversion allows Knight Ridder to recognize these losses for income tax
purposes because the conversion is treated as a sale of the stock of Career
Holdings for its fair market value. This generated a capital loss for Knight
Ridder, which can be carried back and applied against taxes paid by Knight
Ridder in prior years, resulting in an approximately $36.0 million tax refund
claim when Knight Ridder files its income tax returns in 2003. Because the
Company had previously recorded the impact of these losses for financial
statement reporting, the recognition of the tax loss will not impact Knight
Ridder's effective tax rate reflected in the financial statements.
19
Following the conversion to an LLC, Knight Ridder's share of Career Holdings
operating results will be included in Knight Ridder's consolidated tax returns.
Unlike "C" corporations, where Career Holdings was a separate taxable entity
subject to income tax, LLCs generally are not taxable entities, and their
operating results are included in those of its members.
In addition to the $18.0 million charge related to Career Holdings, equity in
losses of unconsolidated companies and joint ventures increased $11.4 million
related to losses from newsprint mill investments due to declining newsprint
prices and losses from the Seattle Times.
On October 2, 2002, subsequent to the quarter ended September 29, 2002, the
company sold a one-third share interest of CareerBuilder, jointly owned with the
Tribune Company, to Gannett Company Inc. for $98.3 million. The company's share
of the proceeds was approximately $49 million.
The effective tax rate was 37.2% for the third quarter ended September 29, 2002
compared to 40.0% for the comparable period in 2001. The decrease in the
effective tax rate from 2001 to 2002 was primarily due to the amortization of
non-deductible goodwill and certain other intangible assets in 2001.
20
RESULTS OF OPERATIONS: THREE QUARTERS ENDED SEPTEMBER 29, 2002 COMPARED TO THREE
QUARTERS ENDED SEPTEMBER 30, 2001
The following table sets forth the results of operations for the three quarters
ended September 29, 2002 and September 30, 2001 (in thousands, except per share
amounts):
September 29, September 30,
2002 2001 % Change
------------ ------------ ------------
Operating Revenue $ 2,082,306 $ 2,166,957 -3.9%
Operating Income 421,120 293,037 43.7%
Net Income 160,820 109,848 46.4%
Net Income includes the following expenses:
Cumulative effect of change in accounting principle (FAS 142) 24,279 --
Career Holdings legal entity restructure 11,304 --
Losses on sales/ write-downs of investments -- 7,099
Goodwill and other intangibles amortization -- 41,475
Workforce Reduction -- 47,100
------------ ------------
Total $ 35,583 $ 95,674
------------ ------------
Diluted Earnings per Share $ 1.89 $ 1.28 47.7%
Diluted Earnings per Share includes the following expenses:
Cumulative effect of change in accounting principle (FAS 142) 0.28 --
Career Holdings legal entity restructure 0.14 --
Losses on sales/ write-downs of investments -- 0.08
Goodwill and other intangibles amortization -- 0.49
Workforce Reduction -- 0.55
------------ ------------
Total $ 0.42 $ 1.12
------------ ------------
21
NEWSPAPER DIVISION
Operating Revenue
The table below presents operating revenue and related statistics for newspaper
operations for the three quarters ended September 29, 2002 compared to the three
quarters ended September 30, 2001 (in thousands):
Three Quarters Ended
---------------------------
September 29, September 30,
2002 2001 Variance % Change
------------ ------------ ------------ ------------
Operating revenues
Advertising
Retail $ 773,062 $ 764,033 $ 9,029 1.2%
General 214,669 221,720 (7,051) -3.2%
Classified 621,222 697,187 (75,965) -10.9%
------------ ------------ ------------
Total 1,608,953 1,682,940 (73,987) -4.4%
------------ ------------ ------------
Circulation 367,774 384,610 (16,836) -4.4%
Other 64,230 67,833 (3,603) -5.3%
------------ ------------ ------------
Total operating revenue $ 2,040,957 $ 2,135,382 (94,425) -4.4%
============ ============ ============
Average daily circulation
Daily 3,818 3,803 15 0.4%
Sunday 5,155 5,159 (4) -0.1%
Advertising linage
Full run
Retail 11,387.3 11,283.9 103.5 0.9%
General 1,808.8 1,892.0 (83.2) -4.4%
Classified 13,639.2 13,695.1 (55.9) -0.4%
------------ ------------ ------------
Total full run 26,835.3 26,871.0 (35.7) -0.1%
============ ============ ============
Factored part-run 1,658.5 1,687.2 (28.7) -1.7%
------------ ------------ ------------
Total preprints inserted 5,023.1 5,013.2 9.9 0.2%
------------ ------------ ------------
Advertising revenue and linage for the three quarters ended September 29, 2002
declined compared to the same period of the prior year due primarily driven by
decreases in classified recruitment, down $90.8 million, or 32.0%.
Retail advertising increased $9.0 million, or 1.2%, during the three quarters
ended September 29, 2002 compared to the same period last year on a 0.9%
increase in full run linage. The largest increases were in Miami ($4.5 million
or 3.6%), Contra Costa ($2.4 million or 6.5%) and San Jose ($2.0 million or
3.6%).
General advertising revenue for the three quarters ended September 29, 2002 was
below the comparable period in 2001 by $7.1 million, or 3.2%, on a 4.4% decrease
in full run linage. The largest decreases were in San Jose ($3.6 million or
13.0%), Philadelphia ($2.9 million or 4.6%) and Saint Paul ($1.8 million or
17.7%). The decrease in general advertising revenue was primarily due to
reductions in the technology and travel categories.
22
Classified revenue was down $76.0 million, or 10.9%, in the first three quarters
of 2002 compared to the first three quarters of 2001. Classified recruitment
drove the decline, down $90.8 million, or 32.0%. While there were declines in
recruitment revenue in most major markets during the first three quarters of
2002 compared to the same period in 2001, the following properties were
responsible for the majority of the decrease: San Jose ($26.6 million or 57.2%),
Philadelphia ($19.8 million or 31.7%), Kansas City ($8.2 million or 28.1%) and
Fort Worth ($7.4 million or 35.4%). Partially offsetting these declines,
classified automotive revenue increased 5.3%, with growth in Kansas City
(15.1%), Philadelphia (15.2%), Fort Worth (7.6%) and Charlotte (15.9%). Other
classified revenue was also up 4.7%, due to increases in Miami and Fort Worth.
Classified real estate was flat against the prior year.
Circulation revenue declined $16.8 million, or 4.4%, for the first three
quarters of 2002 compared to the first three quarters of 2002, while average
daily copies increased from the prior year's first three quarters by 0.4% and
Sunday copies decreased only by 0.1%. The decrease in revenue was due to (a)
increased discounting of subscription rates, (b) reduced rates for Newspaper in
Education (NIE) and (c) price rollbacks, primarily confined to Sunday single
copy in five markets.
Other revenue declined $3.6 million, or 5.3%, for the three quarters ended
September 29, 2002 compared to the three quarters ended September 30, 2001 with
decreases in commercial printing, partially offset by an increase in earnings
from Detroit.
Operating Costs
The table below presents operating costs for newspaper operations for the three
quarters ended September 29, 2002 compared to the three quarters ended September
30, 2001 (in thousands):
Three Quarters Ended
---------------------------
September 29, September 30,
2002 2001 Variance % Change
------------ ------------ ------------ ------------
Operating costs
Labor and employee benefits $ 801,496 $ 890,409 $ (88,913) -10.0%
Newsprint, ink and supplements 268,187 345,701 (77,514) -22.4%
Other operating costs 430,264 430,330 (66) 0.0%
Depreciation and amortization 86,591 133,710 (47,119) -35.2%
------------ ------------ ------------
Total operating costs $ 1,586,538 $ 1,800,150 $ (213,612) -11.9%
============ ============ ============
Total operating costs were down $213.6 million, or 11.9%, in the first three
quarters of 2002 compared to the first three quarters of 2001. Excluding the
workforce reduction charge and the effect of the change in goodwill and other
intangible amortization in 2001, total operating costs declined $89.5 million,
or 5.3%.
23
Labor and employee benefits decreased $88.9 million, or 10.0%, in the first
three quarters of 2002 compared to the first three quarters of 2001 as a result
of a workforce reduction charge in 2001 of $78.5 million and a 1,542, or 8.2%
decline in the number of FTEs. This was partially offset by a 3.2% average wage
rate increase, the sustained accrual of bonuses this year versus their
elimination in the prior year and increased health care costs.
Newsprint, ink and supplements decreased in the first three quarters of 2002
from the same period in 2001 by $77.5 million, or 22.4%, due to a 22.0% decrease
in the price per ton of newsprint and a 3.9% decline in consumption.
Other operating costs were flat in the first three quarters of 2002 compared to
the same period last year.
Depreciation and amortization were down $47.1 million, or 35.2%, in the first
three quarters of 2002 compared to the first three quarters of 2001. Not
amortizing goodwill as a result of the adoption of SFAS 142 at the beginning of
fiscal year 2002 caused an increase in operating income of $45.6 million, and an
increase in net income of $41.5 million, or $.49 per share, in the first three
quarters of 2002. Excluding the effect from the adoption of SFAS 142,
depreciation and amortization expense decreased $1.5 million, or 1.7%.
ONLINE DIVISION
The table below presents operating results and related statistics for online
operations for the three quarters ended September 29, 2002 compared to the three
quarters ended September 30, 2001 (in thousands):
Three Quarters Ended
---------------------------
September 29, September 30,
2002 2001 Variance % Change
------------ ------------ ------------ ------------
Operating revenue $ 41,349 $ 31,575 $ 9,774 31.0%
Operating costs
Labor and employee benefits 21,190 25,202 (4,012) -15.9%
Other operating costs 25,837 29,674 (3,837) -12.9%
Depreciation and amortization 3,650 2,309 1,341 58.1%
------------ ------------ ------------
Total operating costs $ 50,677 $ 57,185 $ (6,508) -11.4%
------------ ------------ ------------
Operating Loss $ (9,328) $ (25,610) $ 16,282 63.6%
============ ============ ============
Average monthly unique visitors 6,586 5,853 733 12.5%
============ ============ ============
Operating revenue for the first three quarters of 2002 increased from the same
period in 2001 primarily due to increases in recruitment packages and
recruitment upsell. Reach for Knight Ridder Digital properties increased from
5.2% in the three quarters ended September 30, 2001 to 5.5% in the three
24
quarters ended September 29, 2002. Average monthly unique visitors increased
from 5.9 million in the first nine months of 2001 to 6.6 million in the first
nine months of 2002.
The decrease in labor and employee benefits for the first three quarters of 2002
compared to the same period in 2001 was primarily due to an FTE reduction of
105, or 29.1%. Other operating costs for the first three quarters of 2002
declined from the same period in 2001 due to decreases in content and wire
service fees, other contract services, advertising and promotion costs, and bad
debt expense. Offsetting these decreases in other operating costs was an
increase in software costs and legal fees. Depreciation and amortization expense
in the first three quarters of 2002 increased due to new Knight Ridder Digital
offices and the implementation of a single digital platform (a shared content
management and web serving database for all of the Knight Ridder Digital
websites).
CORPORATE AND OTHER NON-OPERATING ITEMS
Interest expense, net of interest income and capitalized interest, decreased
$20.7 million, or 26.9%, from the three quarters ended September 29, 2002 due to
a lower average debt balance and a lower weighted-average interest rate.
Equity in losses of unconsolidated companies and joint ventures for the quarter
ended September 29, 2002 increased by $47.7 million from the comparable period
in 2001. Primarily contributing to the year-over-year increases were $30.9
million from newsprint mill investments (due to declining newsprint prices) and
an $18.0 million tax expense charge arising from Career Holdings. During the
third quarter Career Holdings was converted from a regular "C" corporation to a
limited liability company ("LLC"). The conversion resulted in taxable gain to
Career Holdings to the extent the fair value of its assets was greater than the
tax basis on the date of the conversion. Accordingly, Career Holdings recorded a
tax expense and owes taxes of approximately $36.0 million. Knight Ridder
recorded its 50% share of this expense as part of the loss from equity
investments.
Career Holdings' conversion to an LLC also triggered the recognition of a tax
loss for Knight Ridder. Since the acquisition of its interest in Career
Holdings, Knight Ridder has recorded tax benefits in the form of deferred taxes
for its share of the losses arising from Career Holdings' operating results. The
conversion allows Knight Ridder to recognize these losses for income tax
purposes because the conversion is treated as a sale of the stock of Career
Holdings for its fair market value. This generated a capital loss for Knight
Ridder, which can be carried back and applied against taxes paid by Knight
Ridder in prior years, resulting in an approximately $36.0 million tax refund
claim when Knight Ridder files its income tax returns in 2003. Because the
Company had previously recorded the impact of these losses for financial
statement reporting, the recognition of the tax loss will not impact Knight
Ridder's effective tax rate reflected in the financial statements.
Following the conversion to an LLC, Knight Ridder's share of Career Holdings
operating results will be included in Knight Ridder's consolidated tax returns.
Unlike "C" corporations, where Career Holdings was a separate taxable entity
subject to income tax, LLCs generally are not taxable entities, and their
operating results are included in those of its members.
25
On October 2, 2002, the company sold a one-third share interest of
CareerBuilder, jointly owned with the Tribune Company, to Gannett Company Inc.
for $98.3 million. The company's share of the proceeds was approximately $49
million.
Losses from "Other, net" items for the three quarters ended September 29, 2002
decreased $12.0 million from the same period in 2001 due to the pre-tax loss of
$11.5 million on the sale and write-down of Internet-related investments during
the first quarter of 2001.
The effective tax rate was 37.2% for the three quarters ended September 29, 2002
compared to 40.0% for the comparable period in 2001. The decrease in the
effective tax rate from 2001 to 2002 was primarily due to amortization of
non-deductible goodwill and certain other intangible assets in 2001.
LIQUIDITY & CAPITAL RESOURCES
Cash flow from operations is the company's primary source of liquidity.
Management is focused on growing cash flow and on managing cash effectively. In
addition, the company uses financial leverage to minimize the overall cost of
capital and maintain adequate operating and financial flexibility.
The company invests excess cash in short-term investments to meet projected cash
needs from operations, capital expenditures and other business purposes. The
company supplements internally generated cash with a combination of short-term
and long-term borrowings. Commercial paper outstanding at September 29, 2002 was
$396.1 million, with an average effective interest rate of 1.8%. As of September
29, 2002, the company's $895 million revolving credit agreement, which backs up
the commercial paper outstanding, had remaining availability of $498.9 million.
During the second quarter of 2001 and the first quarter of 2002, the company
entered into certain interest rate swap agreements. The principal objective of
such agreements is to maintain a roughly equal balance between fixed and
floating interest rates in the company's debt structure. The swap agreements
expire at various dates in 2005, 2007, 2009 and 2011 and convert an aggregate
principal amount of $500 million of fixed rate, long-term debt into variable
rate borrowings. The variable interest rates are based on 3- or 6-month LIBOR
plus a rate spread. As of September 29, 2002 the weighted average variable
interest rates under these agreements were 4.1% versus the fixed rates of 8.1%.
The market value of the swap agreements as of September 29, 2002 and December
30, 2001 totaled $57.2 million and $9.6 million, respectively. The swaps are
shown within long-term debt on the balance sheet.
Cash provided by operating activities was $407.2 million for the three quarters
ended September 29, 2002 compared to $335.2 million for the three quarters ended
September 30, 2001. The increase in cash provided by operating activities was
due to higher net income (due to prior year workforce reduction charge of $78.5
million), the cumulative effect of a change in accounting principle (a non-cash
charge to earnings), higher distribution in excess of earnings in investees (due
to an increase in non-cash losses of equity investees), and the timing of
payments in certain current assets and liabilities. These increases were offset
by a $40 million cash contribution to certain defined benefit pension plans made
during the second quarter of 2002.
26
Cash required for investing activities in the three quarters ended September 29,
2002 was $52.7 million compared to $68.3 million in the first three quarters of
2001. The decrease in cash required was due to lower capital expenditures
partially offset by lower proceeds from the sale of investments.
Cash required for financing activities for the three quarters ended September
29, 2002 was $349.0 million compared to $274.4 million for the three quarters
ended September 30, 2001. The increase in cash required for financing activities
was due to the increased purchase of treasury stock and the increased reduction
of debt. During the three quarters ended September 29, 2002 the company
repurchased a total of 3.2 million common shares at a total cost of $204.6
million and an average cost of $64.37 per share. At September 29, 2002 the
company has remaining authorization to repurchase 2.3 million shares of its
common stock. The company received $70.3 million from the issuance of shares to
employees under the company's stock option and stock purchase plans.
The company's operations have historically generated strong positive cash flow,
which, along with the company's commercial paper program, revolving credit line
and ability to issue public debt, have provided adequate liquidity to meet the
company's short-term and long-term cash requirements, including requirements for
working capital and capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has no material changes to the disclosure made on this matter in the
company's annual report on Form 10-K for the year ended December 30, 2001.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this report, the company carried out an
evaluation, under the supervision and with the participation of the company's
management, including the company's chief executive officer and chief financial
officer, of the effectiveness of the design and operation of the company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the chief executive officer and chief financial officer
concluded that the company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the company (including
its consolidated subsidiaries) required to be included in the company's periodic
SEC filings.
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Part 1, Item 1, Note 6, incorporated herein by reference.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended September 30, 2002, the company filed (i) a
Report on Form 8-K on August 5, 2002 under Item 9 reporting the
submission of the sworn statements of the company's Principal
Executive Officer, P. Anthony Ridder, and Principal Financial
Officer, Gary Effren, to the Securities and Exchange Commission
("SEC") pursuant to the SEC's Order No. 4-460; and (ii) a Report on
Form 8-K on August 9, 2002 under Item 9 reporting the submission of
the written statements of the company's Principal Executive Officer,
P. Anthony Ridder, and Principal Financial Officer, Gary Effren,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
28
SIGNATURE
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.
KNIGHT-RIDDER, INC.
(Registrant)
Date: November 5, 2002 /s/ GARY R. EFFREN
-----------------------------------------
Gary R. Effren
Senior Vice President/Finance and Chief
Financial Officer
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
29
Statement Under Oath of Principal Executive Officer and Principal Financial
Officer Regarding Facts and Circumstances Relating To Exchange Act Filings
I, P. Anthony Ridder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Knight-Ridder, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
30
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002.
/s/ P. ANTHONY RIDDER
-----------------------
P. Anthony Ridder,
Chief Executive Officer
31
Statement Under Oath of Principal Executive Officer and Principal Financial
Officer Regarding Facts and Circumstances Relating To Exchange Act Filings
I, Gary R. Effren, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Knight-Ridder, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
32
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 5, 2002.
/s/ GARY R. EFFREN
-----------------------
Gary R. Effren,
Chief Financial Officer
33