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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 28, 2003

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

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 [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes [X]   No [  ]

As of November 3, 2003, 79,896,455 shares of Common Stock, $.02 1/12 par value, were outstanding.

Knight Ridder
Table of Contents for Form 10-Q

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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNIGHT RIDDER
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)

See "Notes to Consolidated Financial Statements."

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KNIGHT RIDDER
CONSOLIDATED STATEMENT OF INCOME
(Unaudited - in thousands, except per share data)

See "Notes to Consolidated Financial Statements."

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KNIGHT RIDDER
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - in thousands)

See "Notes to Consolidated Financial Statements."

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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 28, 2003 are not necessarily indicative of the results that may be expected for the year ending December 28, 2003. 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 29, 2002.

Amounts in 2002 and 2003 have been reclassified to conform to the current presentation of outside printing costs within newsprint, ink and supplements instead of other operating costs.

NOTE 2.  COMPREHENSIVE INCOME

For all periods presented, there are no reconciling items for comprehensive income. Net income as presented on the Consolidated Statement of Income is the same as total comprehensive income.

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NOTE 3 - DEBT

Debt consisted of the following (in thousands)

The company guarantees 13.5% of the debt of Ponderay Newsprint Company’s credit facility that matures in April 2006. The guarantee arose in April 2000 when Ponderay restated its credit agreement with a bank consortium that replaced a facility used to finance construction of its newsprint mill. The guarantee could be triggered by Ponderay’s failure to meet any of its bank covenants, at which time the company could be liable for its proportionate share of its guarantee. The company accounts for these guarantees as off-balance sheet instruments. For the quarter ended September 28, 2003, and year ended December 29, 2002, these amounts totaled $14.3 million and $16.2 million, respectively.

The company is a one-third partner of SP Newsprint Company (SP). In November 2002, SP amended and restated its credit agreement with certain of its lenders. The agreement stipulates that should SP’s consolidated liquidity fall below $5 million, it would be in default of its covenant. The company, along with the other partners, would then be required to make an equity contribution to cure the default. The company’s contribution is limited to approximately $6.7 million. The obligation ends when SP first meets certain conditions including, but not limited to, predetermined leverage and fixed-charge coverage ratios and certain liquidity requirements. The company also had a demand obligation to SP for $6.7 million as of December 29, 2002. The obligation arose in August 1985 in connection with an advance to Knight Ridder (and the other partners) by SP. In 2003, SP requested repayment of this $6.7 million demand obligation. Additionally, SP made a capital call for additional equity in the amount of $2.0 million per partner. The total payments to SP amounted to $8.7 million and have been reflected as an increase in the investment on the company’s Consolidated Balance Sheet. No interest expense is associated with the obligation.

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NOTE 4.  EARNINGS PER SHARE

Basic earnings per share are computed based on the weighted average number of common shares outstanding. Diluted earnings per share are based on the sum of the weighted average number of common shares outstanding and common stock equivalents arising out of employee stock options and non-employee stock options. Net income is the same for basic and diluted earnings per share calculations and is attributable to common shareholders.

Shares used to calculate earnings per share are as follows (in thousands):

NOTE 5.  EMPLOYEE AND NON-EMPLOYEE STOCK OPTIONS

In December 2002, the FASB issued SFAS 148 – “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS 148 amends SFAS 123 –“Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair-value for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements issued for 2003. As allowed by FAS 123, the Company follows the disclosure requirements of FAS 123, but continues to account for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which results in no charge to earnings when options are issued at fair market value. Therefore, at this time, adoption of this statement will not have a material impact on the Company’s financial position or results of operations.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. In addition, the 15% discount in market value under the Employee Stock Purchase Plan is treated as compensation expense for pro forma purposes. The company’s GAAP and pro forma information follows (in thousands, except for earnings per share data):

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NOTE 6.  BUSINESS SEGMENTS

Financial data for each of the company’s business segments are as follows (in thousands):

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NOTE 7.  GOODWILL AND OTHER INTANGIBLE ASSETS

In June 2001, the FASB issued 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.

The company completed the initial evaluation of its goodwill and other intangible assets during the second quarter of 2002 and no impairment was indicated. In January 2003, the company performed its annual evaluation of goodwill and other intangibles and again no impairment was indicated. All goodwill and indefinite-lived intangible assets are reported by the newspaper segment.

The company owned 50% of CareerBuilder (formerly Career Holdings, Inc.), when it completed its evaluation of goodwill in the second quarter of 2002. The company records its investment in CareerBuilder under the equity method of accounting. The company reflected its share of CareerBuilders’ 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 CareerBuilders’ characterization of the write-down. No further impairment was identified as a result of CareerBuilder’s annual evaluation of goodwill and other intangible assets.

The company will reassess the carrying value of its goodwill and intangible assets each year, unless indicators of impairment become apparent earlier.

Goodwill and other intangible assets along with their weighted-average life, at September 28, 2003 consisted of the following (dollars in thousands):

Estimated annual aggregate amortization expense will be approximately $6.8 million for 2003 through 2006 and $4.1 million in 2007.

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During 2002, the defined benefit pension plans sponsored by the company were affected by stock market declines as well as declines in interest rates. As a result, at December 29, 2002, the accumulated benefit obligation exceeded the fair value of plan assets for many of the company’s pension plans. SFAS 87 – “Employers’ Accounting for Pension Plans,” required recognition of an additional minimum liability for those plans. In connection with the minimum liability, the company also recorded in December 2002, a $27.0 million intangible pension asset, which is in Goodwill and other intangible assets no longer being amortized as shown in the preceding table.

During the quarter ended June 29, 2003, the company amended its agreement with the Journal Gazette Company to extend their joint operating agreement in Fort Wayne, Ind., to the year 2050. Under the amended terms, the company increased its partnership interest from 55% to 75%. The transaction resulted in a $42 million increase to the company’s goodwill.

The balances of goodwill, newspaper mastheads and other intangible assets as of December 29, 2002 and September 28, 2003 and for the nine months ended September 28, 2003 were as follows (in thousands):

NOTE 8.  RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the FASB issued SFAS No. 149 – “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities.” SFAS 149 is effective for contracts with derivative instruments and hedging relationships entered into or modified after June 30, 2003. SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. This statement also amends the definition of an underlying security to conform it to language used in the FASB’s Financial Interpretation (FIN) 45 – “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The company accounts for its hedges with comparable characteristics similarly, accordingly, the adoption of SFAS 149 did not have a material impact on the company’s results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150 – “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which addresses how to classify and measure certain financial instruments with characteristics of both liabilities (or an asset in some circumstances) and equity. SFAS 150 requirements apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material impact on the company’s results of operations or financial position.

In January 2003, the FASB issued FIN 46 – “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities (VIEs) to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The company adopted the provisions of FIN 46 on its pre-February 1, 2003 VIEs and has not invested in any new VIEs after January 31, 2003. The adoption of FIN 46 did not have a material impact on the company’s results of operations or financial position.

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NOTE 9.  COMMITMENTS AND CONTINGENCIES

The company is involved in certain claims and litigation related to its operations, including ordinary routine litigation incidental to its business. There have been no material developments in these claims and litigation subsequent to those described under “Note 14. Commitments and Contingencies” in the company’s Form 10-K for the year ended December 29, 2002.

The company has future commitments for capital expenditures relating to its properties in Kansas City and Detroit. Kansas City has future commitments totaling approximately $143 million for building, plant and presses. Detroit has future commitments of approximately $30 million for presses and related equipment.

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion should be read in conjunction with “Item 1. Financial Statements” contained elsewhere in this Form 10-Q, as well as Form 10-K for the year ended December 29, 2002.

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 limitation, the following factors: (a) increased consolidation among major retailers and other events that may adversely affect business operations of major customers and depress the level of local and national advertising; (b) a further 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) increases in health and welfare costs, pension and post-employment costs and post-retirement costs; (h) increase in business insurance costs; (i) the decline in the value of other companies that the company invests in that must be recorded as a charge to earnings; (j) acquisitions of new businesses or dispositions of existing businesses; (k) increases in interest or financing costs or availability of credit; (l) rapid technological changes and frequent new product introductions prevalent in electronic publishing, including the evolution of the Internet; and (m) acts of war, terrorism, natural disaster or other events that may adversely affect the company’s operations or the operations of key suppliers to the company.

Critical Accounting Policies and Estimates

General. Management’s discussion and analysis of its financial condition and results of operations are based upon the company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, cash flows and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to incentives, bad debts, inventories, investments, intangible assets, income taxes, financing arrangements, restructuring, long-term service contracts, pensions and other post-retirement benefits, and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue recognition. Revenue recognition varies by source. Advertising revenue is recognized when advertisements are published. Circulation revenue is recognized when the newspaper is delivered to the customer. Other revenue is recognized when the related product or service has been delivered. Revenue is recorded net of estimated incentive offerings, including special pricing agreements, promotions and other volume-based incentives. Revisions to these estimates are recognized and revenue adjusted in the period in which the facts that give rise to the revision become known.

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Bad debts. The company maintains a reserve account for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The company uses a combination of the percentage-of-sales and the aging-of-accounts-receivable methods to establish allowances for losses on accounts receivable. Payment in advance for some advertising and circulation revenue and credit background checks, have assisted the company in maintaining historical bad debt losses to less than 1% of total operating revenue.

Equity and cost method investment valuation and accounting. The company holds minority interests in companies having operations or technology in areas within its strategic focus and records these investments at cost. The company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments. In these cases, an impairment charge may be required in the future.

Goodwill and intangible impairment. The company must assess, at least annually, potential impairment of its goodwill and purchased intangible assets. This asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. This approach uses estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. Such evaluations of impairment of long-lived assets including goodwill and purchased intangible assets are an integral part of, but not limited to, the company’s strategic reviews of the business and operations performed in conjunction with restructuring actions. If the estimated fair value of the asset is less than its carrying value, an impairment loss will be recognized in an amount equal to the difference. If these estimates or their related assumptions change in the future, the company may be required to record impairment charges for these assets. The company must also record its share of impairment charges recorded by its equity method investees.

Pension and post-retirement benefits. The company has significant pension and post-retirement benefit costs and credits that are developed from actuarial valuations. These valuation assumptions include health care cost trend rates, salary growth, long term return on plan assets, discount rates and other factors. The company’s health care cost trend assumptions are developed based on historical cost data, the near-term outlook and an assessment of likely long-term trends. The salary growth assumptions reflect the company’s long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical results of the portfolio and management’s expectation of the current economic environment. The discount rate assumption is based on current investment yields on AA-rated corporate long-term bond yields. Actual results that differ from these assumptions are accumulated and amortized over the future life of the plan participants. For an explanation of these assumptions, see “Note 11. Pension and Other Post-retirement Benefit Plans” in the company’s Form 10-K for the year ended December 29, 2002. While the company believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect the company’s pension and other post-retirement benefits costs and obligations.

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Self-insurance. The company is self-insured for the majority of its group health care costs. The company relies on claims experience and the advice of consulting actuaries and administrators in determining an adequate liability for self-insurance claims.

Income taxes. The company records incomes taxes in accordance with SFAS 109 – “Accounting for Income Taxes.” The company maintains a liability to cover the cost of additional tax exposure items on the filing of federal and state income tax returns. The company files a federal consolidated income tax return and state consolidated, combined or separate returns depending upon the state requirements. Each of these filing jurisdictions may audit the tax returns filed and propose adjustments. Adjustments arise from a variety of factors, including different interpretation of statutes and regulations.

Legal. The company is involved in certain claims and litigation related to its operations, including ordinary routine litigation incidental to its business. See “Commitments and Contingencies” Note 9, in this Form 10-Q and Note 14 in the company’s Form 10-K for the year ended December 29, 2002 for further information. Management reviews and determines which liabilities, if any, arising from these claims and litigation could have a material adverse effect on the company’s consolidated financial position, liquidity, results of operations or properties. Management assesses the likelihood of any adverse judgments or outcomes as well as potential ranges of probable losses. Determination of the amount of reserves required for these contingencies is made after analysis and discussion with legal counsel.

CONSOLIDATED RESULTS OF OPERATIONS: THIRD QUARTER ENDED SEPTEMBER 28, 2003 COMPARED TO THIRD QUARTER ENDED SEPTEMBER 29, 2002:

The following table sets forth the consolidated results of operations for the quarters ended September 28, 2003 and September 29, 2002 (in thousands, except per share amounts):

Earnings per share were $.85 per diluted share, up $.18 per share, or 26.9%, from the prior year. The 2002 results include an $18 million pre-tax expense ($.14 per diluted share) associated with the conversion of CareerBuilder from a C corporation into a limited liability company (LLC). The increase in diluted earnings per share was primarily due to a 3.3% decrease in the weighted-average number of shares outstanding and the absence of the CareerBuilder charge in the current year. A $3.6 million decrease in operating revenue and a $10.2 million increase in operating costs was nearly offset by a $2.1 million decrease in net interest expense and a $10.0 million decrease in losses from equity investments. A lower effective tax rate for the quarter versus the prior year also positively affected earnings per share.

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NEWSPAPER DIVISION

Operating Revenue

The table below presents operating revenue and related statistics for newspaper operations for the quarter ended September 28, 2003 compared to the quarter ended September 29, 2002 (in thousands):

Advertising revenue for the quarter ended September 28, 2003 was down $6.6 million, or 1.2%, compared to the same quarter of the prior year. The most significant decreases were in Kansas City ($2.2 million or 4.2%), Miami ($2.0 million or 2.9%) and San Jose ($2.0 million or 4.1%). The largest increases were in Columbia ($709,000 or 5.1%) and San Luis Obispo ($540,000 or 11.6%).

Retail advertising decreased $3.8 million, or 1.5%, during the quarter ended September 28, 2003 compared to the same period last year, on an 8.6% decrease in full run linage, partially offset by a 7.6% increase in preprint advertising revenue. The largest decreases were in Philadelphia ($1.1 million or 2.8%), Miami ($930,000 or 3.0%) and San Jose ($872,000 or 4.6%).

General advertising revenue for the quarter ended September 28, 2003 increased $8.2 million, or 12.2%, compared to the same quarter in 2002, on a 9.2% increase in full run linage, and a 41.5% increase in preprint advertising revenue. The largest increases were in Philadelphia ($4.2 million or 24.6%), San Jose ($1.7 million or 20.7%), Contra Costa ($1.0 million or 42.5%) and Fort Worth ($857,000 or 19.9%). Telecommunications drove the increase in most major markets, with additional increases from automotive and travel. San Jose and Contra Costa also exhibited increases in the technology and pharmaceutical categories during the quarter ended September 28, 2003 as compared with the prior year.

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Classified revenue was down $11.0 million, or 5.3%, in the third quarter of 2003 compared to the third quarter of 2002, due to classified recruitment advertising, down $11.5 million, or 18.4%. Increases in real estate advertising of $2.4 million, or 5.2%, partially offset this decline. The largest decreases in classified revenue were in Philadelphia ($3.2 million or 9.7%), San Jose ($2.8 million or 13.2%), Kansas City ($1.9 million or 10.3%), Charlotte ($1.1 million or 7.4%) and Fort Worth ($915,000 or 4.8%) primarily due to shortfalls in employment and automotive. San Jose also had decreases in real estate ($874,000 or 11.5%).

Circulation revenue declined $3.3 million, or 2.8%, in the quarter ended September 28, 2003 compared to the same period last year, due to decreases in average daily copies of 36,000, or 1.0%, and Sunday copies of 20,000, or 0.4%. The decrease in circulation revenue was also due to increased discounting.

Other revenue decreased $1.1 million, or 4.6%, against the prior year due to a decrease in earnings from Detroit, down $3.0 million, or 44.0%. This was partially offset by an increase in commercial printing revenue, up $868,000, or 8.5%, and alternate distribution revenue, up $710,000, or 92.8%.

Operating Costs

The table below presents operating costs for newspaper operations for the quarter ended September 28, 2003 compared to the quarter ended September 29, 2002 (in thousands):