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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 27, 1998 Commission file number 1-7553
KNIGHT-RIDDER, INC.
(Exact name of registrant as specified in its charter)
Florida 38-0723657
(State or other jurisdiction) (I.R.S. Employer Identification No.)
50 W. SAN FERNANDO ST., SAN JOSE, CA 95113
(Address of principal executive offices)
(408) 938-7700
(Registrant's telephone number, including area code)
ONE HERALD PLAZA, MIAMI, FLORIDA 33132
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $.02 1/12 Par Value New York Stock Exchange
Frankfurt Stock Exchange
Philadelphia Stock Exchange
Chicago Stock Exchange
Boston Stock Exchange
Pacific Exchange
Cincinnati Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
none
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value is computed by reference to the
closing price on the NYSE as of March 5, 1999: $3,966,337,367.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: March 5, 1999 - 78,541,334 one
class Common Stock, $.02 1/12 Par Value
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of definitive Proxy Statement dated March 29, 1999, in connection
with the Annual Meeting of Shareholders to be held on May 12, 1999 are
incorporated into Part III.
Table of Contents for 1998 Form 10-K
Page
----
PART I
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 9
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 55
PART III
Item 10. Directors and Executive Officers of the Registrant 55
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial
Owners and Management 58
Item 13. Certain Relationships and Related Transactions 58
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 59
SIGNATURES 62
SCHEDULES 65
EXHIBITS 65
1
PART I
Item 1. BUSINESS
THE COMPANY
Knight-Ridder, Inc., ("Knight Ridder" or the "company") was formed in 1974 by a
merger between Knight Newspapers, Inc., and Ridder Publications, Inc.
In 1903, Charles Landon Knight purchased the Akron Beacon Journal. Knight
Newspapers was founded by John S. Knight, who inherited the Beacon Journal from
his father in 1933. Ridder Publications was founded in 1892 when Herman Ridder
acquired the German-language Staats-Zeitung in New York. Both groups flourished,
each taking its stock public in 1969. The merger created a company with
operations coast to coast.
Knight Ridder is a communications company engaged in newspaper publishing, news
and information services, electronic retrieval services and graphics and photo
services. The company publishes 31 daily newspapers and 21 nondaily newspapers
in 28 U.S. markets, reaching 9.2 million readers daily and 13.1 million on
Sunday. It maintains 45 associated Web sites under the name Knight Ridder Real
Cities.
Knight-Ridder, Inc., incorporated in Florida in 1976, is headquartered in San
Jose, California, and employs about 22,000 people.
Recent Developments
In 1998, Knight Ridder moved its headquarters to San Jose, California. Also, in
1998, Knight Ridder sold its remaining Business Information Services subsidiary,
Technimetrics, Inc., its global diversified information subsidiary.
NEWSPAPERS
Knight Ridder had 31 daily newspapers and 21 nondaily newspapers at the end of
1998. See Part II, Item 8, "Financial Statements and Supplementary Data", Note A
to the consolidated financial statements for segment reporting related
information including principal markets and methods of distribution.
Newspaper operating revenue is derived primarily from the sale of newspaper
advertising. Due to seasonal factors such as heavier retail selling during the
winter and spring holiday seasons, advertising income fluctuates significantly
throughout the year. Consecutive quarterly results are not uniform or comparable
and are not indicative of the results over an entire year.
Each of Knight Ridder's newspapers is operated on a substantially autonomous
basis by local management appointed by corporate headquarters in San Jose. Each
newspaper is free to manage its own news coverage, set its own editorial
policies and establish most business practices. Basic business policies,
however, are set by the corporate staff in San Jose. Editorial services and
quality control also are provided by the corporate staff.
Each newspaper is served by the company-owned news bureau in Washington, D.C. A
supplemental news service provided by KRT Information Services, a partnership
between Knight Ridder and Tribune Co., distributes editorial material produced
by all Knight Ridder newspapers and by 16 foreign correspondents. The service
also distributes editorial computer graphics and deadline photos via the Knight
Ridder-owned PressLink Online.
2
All of the company's newspapers compete for advertising and readers' time and
attention with broadcast, satellite and cable television, the Internet and other
computer services, radio, magazines, nondaily suburban newspapers, free
shoppers, billboards and direct mail. In some cases, the newspapers also compete
with other newspapers published in nearby cities and towns - particularly in
Miami, St. Paul and Fort Worth. In Detroit and Fort Wayne, Knight Ridder has
joint operating agreements with a second newspaper. The rest of Knight Ridder's
newspapers are the only daily and Sunday papers of general circulation published
in their communities.
The newspapers rely on local sales operations for local retail and classified
advertising. The larger papers are assisted by Newspapers First and by the
Newspaper National Network, a sales force created by a group of some 50 major
newspapers, in obtaining national or general advertising.
Sources of Knight Ridder Operating Revenue
The table below presents the relative percentage contributions by individual
papers to the company's overall operating revenue in 1998, 1997 and 1996. The
percentage contributions of each paper to operating revenue are not necessarily
indicative of contributions to operating profit.
1998 1997 1996
----- ----- -----
The Philadelphia Inquirer and
Philadelphia Daily News 18.8% 19.0% 21.3%
The Miami Herald 10.6 11.4 13.3
San Jose Mercury News 9.3 10.4 12.0
The Kansas City Star(1) 8.7 6.1 N/A
Fort Worth Star-Telegram(1) 7.1 4.9 N/A
Detroit Free Press(2) 7.3 7.0 7.7
The Charlotte Observer 6.0 6.2 6.9
Saint Paul Pioneer Press 4.0 4.1 4.7
Contra Costa Newspapers 3.9 3.9 4.4
Akron Beacon Journal 3.3 3.6 4.0
All other 21.0 23.4 25.7
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
(1) The Kansas City Star and Fort Worth Star-Telegram were acquired on May 9,
1997. This table presents their part-year contribution percentage in 1997.
(2) Knight Ridder portion of Detroit Newspapers
Newsprint
Knight Ridder consumed approximately 794,000 metric tons of newsprint in 1998.
Approximately 17.3% of the company's total operating expenses during the year
was for newsprint. Knight Ridder purchases approximately 60% of its annual
consumption from 15 United States mills, with 34% purchased from 18 mills in
Canada, and 6% from other offshore sources. Foreign financial markets continue
to restrict North American newsprint exports. This, combined with the settlement
of the Fletcher Challenge labor strike and the occurrence and subsequent
settlement of an Abitibi Consolidated labor strike during 1998, leads management
to believe that sources are more than adequate to meet current demands.
Approximately 93% of the newsprint consumed by the company contained some
recycled content; the average content of these rolls was 39% recycled fiber.
This translates into an overall recycled newsprint average of 36%.
Knight Ridder is a one-third partner with Cox Enterprises and Media General,
Inc., in Southeast Paper Manufacturing Co., a newsprint mill in Dublin, Ga. The
3
mill produced 455,000 metric tons in 1998, using more than 591,000 tons of
recycled newsprint as the principal raw material and coal as the primary energy
source. Knight Ridder also owns a 13.5% equity share of Ponderay Newsprint
Company in Usk, Wash., which produced more than 242,000 metric tons in 1998.
Knight Ridder's purchases from these two mills were 14% of its annual
consumption for 1998, providing an important hedge against volatility.
Technology
Year 2000 Readiness Disclosure: For information regarding the company's
preparation of its technology infrastructure for the Year 2000, see Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations", Year 2000 Readiness Disclosure.
Other: We completed the transition of all of our companies to our Shared
Services Center to support financial systems and purchasing. Ten newspapers are
now serviced by our circulation customer service centers in Miami, Fla. and
Columbia, S.C.
The Charlotte Observer and Akron Beacon Journal completed a full conversion to
flexographic printing.
Major press replacement projects are under way at The Miami Herald and the Fort
Worth Star-Telegram. Additionally, significant renovations to the business and
editorial offices in Philadelphia were completed in 1998.
General Advertising Sales
Knight Ridder newspapers depend most heavily on three agents for the sale of
general advertising.
Newspapers First, a national advertising sales cooperative, is the primary sales
representative for the larger Knight Ridder newspapers, Detroit Newspapers and
several leading independents. It allows customers to place ads in a combination
of newspapers.
Newspaper National Network (NNN), Knight Ridder's second general sales agent,
was established in 1994 to focus national selling on behalf of the newspaper
industry. It represents all the Knight Ridder newspapers, plus more than 500
others. Like Newspapers First, it makes the purchase of newspaper advertising a
"one-stop shopping," "one-order, one-bill" prospect.
Sawyer, Ferguson and Walker, Inc., a private company, sells sales-
representative services for a number of Knight Ridder's medium to small markets
and helps with regional retail advertising sales.
The Philadelphia Inquirer and Philadelphia Daily News
1998 Revenue was $579.8 million. Philadelphia Newspapers, Inc. (PNI), is
publisher of The Philadelphia Inquirer and the Philadelphia Daily News in the
eight-county Philadelphia metropolitan market.
4
Philadelphia Online (www.philly.com), an online service, continued to show
growth, moving from 7.8 million page views per month in 1997 to more than 12.6
million per month in 1998.
The Philadelphia Primary Metropolitan Statistical Area (PMSA) population is
expected to grow 0.3% between 1998 and 2003, compared with 4.3% for the United
States.
In 1998, the PMSA had income per capita 15.1% above the U.S. average; by 2003 it
is projected to be 15.8% above.
The Miami Herald/El Nuevo Herald
1998 Revenue was $327.2 million. The Miami Herald, winner of 15 Pulitzer Prizes
and Florida's largest Sunday newspaper, is sold primarily in Miami-Dade, Broward
and Monroe counties. It is also distributed in 29 countries in Latin America and
the Caribbean, primarily through its International Satellite edition.
El Nuevo Herald, the Spanish-language newspaper, has, since May 1998, been sold
separately from The Miami Herald and is Audit Bureau of Circulation
(ABC)-audited. According to the ABC Publisher's Statement for the last six
months of 1998, circulation was 79,205 daily and 91,439 Sunday. Last year,
penetration of the two newspapers combined jumped nearly two percentage points
both daily and Sunday in Miami-Dade County.
The Herald's Broward County edition was rezoned and revamped. Twice-weekly
community sections were increased from three zones to six. The Herald is the
largest newspaper in fast-growing southern Broward County.
Online page-views doubled in both English and Spanish. With eight sites up and
running, The Herald launched miami.com, a community portal, in partnership with
other media and community organizations. Also launched: cars.com,
cometothesun.com and newhomenetwork.com.
Three Newsliner offset presses became operational. The final two presses will be
installed during 1999.
The Miami-Fort Lauderdale Designated Market Area (DMA) population is expected to
grow 6.6% between 1998 and 2003, compared with 4.3% for the United States.
In 1998, the DMA had income per capita 3.7% below the U.S. average; by 2003 it
is projected to be 9.4% below.
5
San Jose Mercury News
1998 Revenue was $287.7 million. The Mercury News serves Silicon Valley, which
encompasses San Jose - California's third-largest city - and surrounding
communities. The region is the world leader in high technology and a leader in
exports, ranking second nationally.
Significant weakness in key high-tech business sectors, exacerbated by a sharp
drop in exports to Asia, slowed and then reversed the growth of recruitment
advertising. Anticipating this decline, the Mercury News has developed new
revenue sources over the past few years. 1998 saw the publication of two books
(a guide to retirement communities and a new edition of The Guide to Silicon
Valley Careers) and the continued growth of several other print and online
products. In response to advertiser demand, delivery of advertising to
nonsubscribers was switched to direct mail.
Nuevo Mundo, serving the nation's fourth-largest Hispanic market, is 2 years old
and growing. The Spanish-language free weekly ended the year with average
circulation of 57,870 copies. A second weekly publication, Viet Mercury, was
launched in January 1999. Published entirely in Vietnamese, Viet Mercury will
serve another major segment of the local population and advertisers wanting to
reach it.
Mercury Center (www.mercurycenter.com) continued to grow in content and
viewership. Founded in 1993, the Web site averaged more than 1.2 million users
per month in 1998. Usage received a boost in May when Mercury Center became a
free site. New attractions for advertisers included a database of registered
users; major upgrades of recruitment, real estate and automotive areas; and
expanded sponsorship opportunities. A technology-focused site,
www.siliconvalley.com, was launched in February 1999.
The population of the San Jose Primary Metropolitan Statistical Area (PMSA),
which includes only Santa Clara County, is expected to grow 6.9% between 1998
and 2003; the U.S. average is 4.3%.
In 1998, the PMSA had income per capita 48.3% above the U.S. average; by 2003 it
is projected to be 51.2% above.
The Kansas City Star
1998 Revenue was $270.5 million. The Kansas City Star serves the Kansas City
metropolitan area. The Star's primary market area consists of 11 counties in
both Kansas and Missouri.
The Star launched a new circulation objective to obtain 300,000 average daily
subscribers by the year 2000. The goal is being supported by promotional
campaigns, a redesign of the newspaper, expansion of neighborhood news coverage
and development of various business ventures.
6
The Star's award-winning online community site, kansascity.com, and online
product, kcstar.com, continue to grow and improve. kcstar.com is a recent
recipient of the Newspaper Association of America's Best Online Newspaper award.
The Kansas City Metropolitan Statistical Area (MSA) population is expected to
grow 4.2% between 1998 and 2003, compared with 4.3% for the United States.
In 1998, the MSA had income per capita 7.1% above the U.S. average; by 2003 it
is projected to be 8.6% above.
Fort Worth Star-Telegram
1998 Revenue was $220.8 million. Ad revenue was up 2.8% in 1998. The
Star-Telegram is well positioned for growth in the western portion of the
Dallas/Fort Worth market, the nation's ninth-largest metropolitan area.
The Star-Telegram continues its zoned approach to local news, advertising and
customer service. In eastern Tarrant County, the Star-Telegram launched six
different editions of Hometown Star, a weekly micro-zoned tabloid. This was one
of many changes that allowed the Arlington Star-Telegram to again grow
circulation versus the prior year in the face of aggressive competition. The
Star-Telegram continues to meet reader demand for news from around the corner
and around the world, as nine out of 10 newspaper readers in Tarrant County read
the Star-Telegram each week. In the online area, the Star- Telegram continues to
operate its own Internet Service Provider business with approximately 3,500 paid
subscribers. Traffic to star-telegram.com grew by more than 40% during 1998.
The Fort Worth/Arlington Primary Metropolitan Statistical Area (PMSA) population
has grown 60% since 1980, and is expected to grow 7.1% between 1998 and 2003,
compared with 4.3% for the United States.
In 1998, the PMSA had income per capita 5.6% above the U.S. average; by 2003 it
is projected to be 6.9% above.
Detroit Free Press
1998 Revenue (Knight Ridder's share) was $224.7 million. The Detroit Free Press
is the largest newspaper in Michigan. The combined Sunday edition, The Detroit
News and Free Press, ranks seventh in circulation in the nation.
The two newspapers are published by Detroit Newspaper Agency (DNA), an agency
combining the business operations of the two newspapers. This joint operating
agency was formed in 1989. The profits (or losses) are split equally between the
two partners, Knight Ridder and Gannett Co. The Free Press is an a.m. paper, the
News is p.m. On weekends, they publish combined editions.
Detroit is the nation's sixth-largest market in terms of population and
generates approximately $450 million in revenue from its two newspapers.
A union strike, which began in July 1995, was officially ended when the unions
surrendered in February 1997. The three companies agreed to place former
striking employees on a preferential hiring list. The number of former strikers
on that list is currently about 565. The unions continue to pursue unfair labor
practice charges through the National Labor Relations Board. See Item 3, Legal
Proceedings.
7
The population of the Detroit Primary Metropolitan Statistical Area (PMSA) is
expected to grow nearly 1% between 1998 and 2003, compared with 4.3% for the
United States.
In 1998 the PMSA had income per capita 16.2% above the U.S. average; in 2003 it
is projected to be 20.7% above.
The Charlotte Observer
1998 Revenue was $187.0 million. The Charlotte Observer, the largest-circulation
daily in North and South Carolina, is sold primarily in a 15-county region
across the two states.
Population in the Charlotte Metropolitan Statistical Area (MSA) is projected to
grow 8.3% between 1998 and 2003, compared with the U.S. average of 4.3%.
In 1998, the MSA had per capita income 8.8% above the U.S. average; in 2003 it
is projected to be 13.4% above.
Item 2. PROPERTIES
The company has daily newspaper facilities in 28 markets situated in 17 states.
These facilities vary in size from 4,900 square feet at The Monterey County
Herald operation in Monterey, Calif., to 2.9 million square feet in
Philadelphia. In total, they occupy about 9.6 million square feet. Approximately
2.0 million of the total square footage is leased from others. Virtually all the
owned property is owned in fee. The company owns substantially all of its
production equipment, although certain office equipment is leased. The company
also owns land for future expansion in Columbus and Macon, Ga., and Detroit.
Knight Ridder properties are maintained in good operating condition and are
suitable for present and foreseeable operations. During the three years ended
Dec. 27, 1998, the company spent approximately $351.5 million for capital
additions and improvements to its existing properties.
Item 3. LEGAL PROCEEDINGS
On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and
the Detroit Newspaper Agency, which operates both newspapers. Subsequently, the
unions filed numerous unfair labor practice charges against the newspapers and
the Agency. In June 1997, after a lengthy trial, a National Labor Relations
Board (NLRB) administrative law judge ruled that the strike was caused by the
unfair labor practices of the Agency and The Detroit News and ordered that the
Agency and the newspapers reinstate all strikers, displacing permanent
replacements if necessary. The Agency and the newspapers appealed the decision
to the NLRB.
On August 27, 1998, the NLRB affirmed certain unfair labor practice findings
against The Detroit News and the Agency and reversed certain findings of unfair
labor practices against the Agency. The Agency and the newspapers filed a motion
to reconsider with the NLRB, that was denied on March 4, 1999. The unions filed
8
an appeal to the U.S. Court of Appeals for District of Columbia Circuit. The
Agency and the newspapers filed a motion to dismiss the appeal which is
scheduled for hearing on March 23, 1999.
Various libel 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, the ultimate liability to the
company and its subsidiaries as a result of all legal proceedings, including
Detroit, will not be material to its financial position or results of
operations, on a consolidated basis.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders of Knight-Ridder,
Inc., during the quarter ended December 27, 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
KRI Stock
Knight Ridder common stock is listed on the New York Stock Exchange and the
Frankfurt Stock Exchange under the symbol KRI.
The stock is also traded in exchanges in Philadelphia, Chicago, Boston, San
Francisco, Los Angeles and Cincinnati and through the Intermarket Trading
System. Options are traded on the Philadelphia Exchange.
Knight Ridder stock split two-for-one in 1996. The company's 78.4 million shares
outstanding at December 27, 1998, were held in all 50 states by 11,373
shareholders of record.
Market Price of Common Stock
The last closing price of the company's common stock prior to the preparation of
this report was $50 on Feb. 8, 1999.
The average stock trading volume per day for the years 1998, 1997 and 1996 was
242,129, 271,016 and 181,305, respectively. The following table presents the
company's common stock market data:
1998 1997 1996
---------------------- -------------------- --------------------
Quarter High Low High Low High Low
- ------- ---- --- ---- --- ---- ---
1st 57 3/8 50 7/16 42 3/8 37 3/8 36 1/16 29 7/8
2nd 59 5/8 53 1/8 49 35 3/4 38 7/16 32 11/16
3rd 57 3/4 44 55 13/16 48 3/4 38 32 7/16
4th 54 15/16 40 1/2 57 1/8 49 1/8 42 35 3/8
9
Treasury Stock Purchases
The table below is a summary of treasury stock purchases since 1988:
Shares Cost
Purchased (000s)
--------- ------
1998 4,725,000 $ 255,533
1997 13,824,300 643,375
1996 6,219,100 221,768
1995 11,508,600 319,363
1994 5,044,600 136,977
1993 1,500,000 40,693
1992
1991
1990 5,325,400 129,909
1989 5,522,200 131,885
1988 9,099,200 198,279
Dividends
Common stock dividend history and policy appears in Item 6, "11 Year Financial
Highlights"; Item 7, "Management Discussion and Analysis of Financial Condition
and Results of Operations" Quarterly Operations; and Item 8, "Financial
Statements and Supplementary Data", Note E to the consolidated financial
statements.
10
Item 6. SELECTED FINANCIAL DATA
11-YEAR FINANCIAL HIGHLIGHTS
The following data were compiled from the consolidated financial statements of
Knight Ridder and its subsidiaries. The consolidated financial statements and
related notes and discussions for the year ended Dec. 27, 1998 (Items 7 and 8),
should be read in order to obtain a better understanding of this data.
Compound
Growth Rate
(In thousands, except per ---------------- Dec. 27 Dec. 28 Dec. 29
share data and ratios) 5-Year 10-Year 1998 1997 1996
------ ------- ----------- ----------- -----------
SUMMARY OF OPERATIONS
Operating Revenue
Advertising 9.8% 4.5% $ 2,362,859 $ 2,202,251 $ 1,793,424
Circulation 4.4 4.7 587,529 567,757 501,826
Other 20.0 16.9 141,531 106,777 78,974
----------- ----------- -----------
Total Operating Revenue 9.0 4.9 3,091,919 2,876,785 2,374,224
----------- ----------- -----------
Operating Costs
Labor, newsprint and other operating costs 7.7 4.3 2,399,249 2,214,026 1,920,444
Depreciation and amortization 14.3 8.3 188,052 156,731 120,647
----------- ----------- -----------
Total Operating Costs 8.1 4.6 2,587,301 2,370,757 2,041,091
----------- ----------- -----------
Operating Income 14.1 6.6 504,618 506,028 333,133
Interest expense 19.0 5.4 (105,936) (102,662) (73,137)
Other, net(1) 105.4 15.1 109,234 290,486 50,213
Income taxes, net 19.4 8.9 (202,285) (297,348) (124,829)
----------- ----------- -----------
Income from continuing operations(1) 17.4 7.7 305,631 396,504 185,380
Discontinued BIS operations(2) 60,226 16,511 82,493
Discontinued broadcast operations(2)
Cumulative effect of changes in accounting
principles(3)
----------- ----------- -----------
Net Income(1) 19.8 8.9 $ 365,857 $ 413,015 $ 267,873
=========== =========== ===========
Operating income percentage (profit margin) 16.3% 17.6% 14.0%
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE DATA(4)
Basic weighted-average number of shares 78,882 88,475 96,021
Diluted weighted-average number of shares 98,176 101,314 97,420
Earnings per share
Basic: Continuing operations(1) 25.4 11.5 $ 3.87 $ 4.48 $ 1.93
Discontinued BIS operations(2) 0.77 0.19 0.86
Discontinued broadcast operations(2)
Cumulative effect of changes in
accounting principles(3)
Net income(1) 28.0 12.7 4.64 4.67 2.79
Diluted: Continuing operations(1) 20.2 9.3 $ 3.11 $ 3.91 $ 1.90
Discontinued BIS operations(2) 0.62 0.17 0.85
Discontinued broadcast operations(2)
Cumulative effect of changes
in accounting principles(3)
Net income(1) 22.7 10.5 3.73 4.08 2.75
Dividends declared per common share(5) 2.7 3.4 0.80 0.80 0.58 1/2
Common stock price: High 59 5/8 57 1/8 42
Low 40 1/2 35 3/4 29 7/8
Close 50 13/16 50 3/16 39 1/4
Shareholders' equity per common share 8.9 8.4 $ 17.33 $ 15.65 $ 12.12
Price/earnings ratio(6) 13.6:1 12.3:1 14.3:1
Adjusted price/earnings ratio(7) 19.3:1 21.8:1 21.6:1
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Common stock acquired $ 255,533 $ 643,375 $ 221,768
Payment of cash dividends 77,152 78,335 74,262
Ratio of earnings to fixed charges(8) 5.3:1 7.1:1 4.0:1
At year end
Total assets $ 4,257,097 $ 4,355,142 $ 2,860,907
Long-term debt (excluding current maturities) 1,329,001 1,599,133 771,335
Total debt 1,527,278 1,668,830 821,335
Shareholders' equity 1,662,731 1,551,673 1,131,508
Return on average shareholders' equity(9) 22.8% 30.8% 23.9%
Current ratio 0.8:1 1.1:1 1.0:1
Total debt/total capital ratio 47.9% 51.8% 42.1%
11
(In thousands, except per Dec. 31 Dec. 25 Dec. 26 Dec. 27
share data and ratios) 1995 1994 1993 1992
----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS
Operating Revenue
Advertising $ 1,672,970 $ 1,583,373 $ 1,481,631 $ 1,444,144
Circulation 495,315 484,581 474,420 460,014
Other 81,897 66,968 56,772 39,932
----------- ----------- ----------- -----------
Total Operating Revenue 2,250,182 2,134,922 2,012,823 1,944,090
----------- ----------- ----------- -----------
Operating Costs
Labor, newsprint and other operating costs 1,923,179 1,730,158 1,655,138 1,597,983
Depreciation and amortization 98,741 96,613 96,233 89,665
----------- ----------- ----------- -----------
Total Operating Costs 2,021,920 1,826,771 1,751,371 1,687,648
----------- ----------- ----------- -----------
Operating Income 228,262 308,151 261,452 256,442
Interest expense (59,512) (44,216) (44,403) (52,358)
Other, net(1) 14,067 1,802 2,987 13,868
Income taxes, net (72,861) (106,493) (83,281) (82,496)
----------- ----------- ----------- -----------
Income from continuing operations(1) 109,956 159,244 136,755 135,456
Discontinued BIS operations(2) 57,426 11,656 11,334 10,630
Discontinued broadcast operations(2)
Cumulative effect of changes in accounting
principles(3) (7,320) (105,200)
----------- ----------- ----------- -----------
Net Income(1) $ 160,062 $ 170,900 $ 148,089 $ 40,886
=========== =========== =========== ===========
Operating income percentage (profit margin) 10.1% 14.4% 13.0% 13.2%
- ----------------------------------------------------------------------------------------------------------------------------
SHARE DATA(4)
Basic weighted-average number of shares 99,451 107,888 109,702 108,948
Diluted weighted-average number of shares 100,196 108,551 110,663 110,356
Earnings per share
Basic: Continuing operations(1) $ 1.11 $ 1.48 $ 1.25 $ 1.24
Discontinued BIS operations(2) 0.57 0.10 0.10 0.11
Discontinued broadcast operations(2)
Cumulative effect of changes in
accounting principles(3) (0.07) (0.97)
Net income(1) 1.61 1.58 1.35 0.38
Diluted: Continuing operations(1) $ 1.10 $ 1.47 $ 1.24 $ 1.22
Discontinued BIS operations(2) 0.57 0.10 0.10 0.10
Discontinued broadcast operations(2)
Cumulative effect of changes
in accounting principles(3) (0.07) (0.95)
Net income(1) 1.60 1.57 1.34 0.37
Dividends declared per common share(5) 0.74 0.73 0.70 0.70
Common stock price: High 33 5/16 30 1/2 32 1/2 32 1/16
Low 25 1/8 23 1/4 25 5/16 25 3/8
Close 31 1/4 25 7/16 29 11/16 29 1/16
Shareholders' equity per common share $ 11.43 $ 11.58 $ 11.33 $ 10.75
Price/earnings ratio(6) 19.5:1 16.2:1 22.2:1 78.5:1
Adjusted price/earnings ratio(7) 28.4:1 17.3:1 23.9:1 23.8:1
- ------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Common stock acquired $ 319,363 $ 136,977 $ 40,693 $
Payment of cash dividends 74,377 77,942 76,787 75,992
Ratio of earnings to fixed charges(8) 3.2:1 5.2:1 4.4:1 3.8:1
At year end
Total assets $ 2,966,321 $ 2,409,239 $ 2,399,067 $ 2,431,307
Long-term debt (excluding current maturities) 1,000,721 411,504 410,388 495,941
Total debt 1,013,850 411,504 451,075 560,245
Shareholders' equity 1,110,970 1,224,654 1,243,169 1,181,812
Return on average shareholders' equity(9) 14.3% 13.9% 12.2% 12.0%
Current ratio 1.1:1 1.0:1 1.0:1 1.1:1
Total debt/total capital ratio 47.7% 25.2% 26.6% 32.2%
12
(In thousands, except per Dec. 29 Dec. 30 Dec. 31 Dec. 31
share data and ratios) 1991 1990 1989 1988
----------- ----------- ----------- -----------
SUMMARY OF OPERATIONS
Operating Revenue
Advertising $ 1,429,661 $ 1,556,932 $ 1,577,449 $ 1,523,030
Circulation 439,029 403,188 385,214 370,898
Other 35,127 31,981 32,212 29,743
----------- ----------- ----------- -----------
Total Operating Revenue 1,903,817 1,992,101 1,994,875 1,923,671
----------- ----------- ----------- -----------
Operating Costs
Labor, newsprint and other operating costs 1,593,847 1,617,138 1,593,186 1,571,525
Depreciation and amortization 86,896 91,553 91,780 84,657
----------- ----------- ----------- -----------
Total Operating Costs 1,680,743 1,708,691 1,684,966 1,656,182
----------- ----------- ----------- -----------
Operating Income 223,074 283,410 309,909 267,489
Interest expense (68,806) (71,784) (84,492) (62,456)
Other, net(1) 35,832 17,019 57,505 26,732
Income taxes, net (67,965) (88,076) (108,883) (86,484)
----------- ----------- ----------- -----------
Income from continuing operations(1) 122,135 140,569 174,039 145,281
Discontinued BIS operations(2) 9,933 8,476 5,797 1,494
Discontinued broadcast operations(2) 67,366 9,608
Cumulative effect of changes in accounting
principles(3)
----------- ----------- ----------- -----------
Net Income(1) $ 132,068 $ 149,045 $ 247,202 $ 156,383
=========== =========== =========== ===========
Operating income percentage (profit margin) 11.7% 14.2% 15.5% 13.9%
- ------------------------------------------------------------------------------------------------------------------------------------
SHARE DATA(4)
Basic weighted-average number of shares 102,586 100,098 103,110 111,842
Diluted weighted-average number of shares 103,594 101,366 104,878 113,406
Earnings per share
Basic: Continuing operations(1) $ 1.19 $ 1.40 $ 1.69 $ 1.30
Discontinued BIS operations(2) 0.10 0.09 0.06 0.01
Discontinued broadcast operations(2) 0.65 0.09
Cumulative effect of changes in
accounting principles(3)
Net income(1) 1.29 1.49 2.40 1.40
Diluted: Continuing operations(1) $ 1.18 $ 1.39 $ 1.66 $ 1.28
Discontinued BIS operations(2) 0.09 0.08 0.06 0.01
Discontinued broadcast operations(2) 0.64 0.09
Cumulative effect of changes
in accounting principles(3)
Net income(1) 1.27 1.47 2.36 1.38
Dividends declared per common share(5) 0.70 0.67 0.62 1/4 0.57 1/4
Common stock price: High 28 3/4 29 29 3/16 23 7/8
Low 21 7/8 18 1/2 21 7/16 17 7/8
Close 25 3/8 22 15/16 29 3/16 22 11/16
Shareholders' equity per common share $ 10.72 $ 9.05 $ 8.92 $ 7.74
Price/earnings ratio(6) 20.0:1 15.6:1 12.4:1 16.4:1
Adjusted price/earnings ratio(7) 21.5:1 16.5:1 21.2:1 17.7:1
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL DATA
Common stock acquired $ $ 129,909 $ 131,885 $ 198,279
Payment of cash dividends 71,087 66,422 63,260 62,990
Ratio of earnings to fixed charges(8) 2.8:1 3.3:1 3.6:1 3.8:1
At year end
Total assets $ 2,305,731 $ 2,244,919 $ 2,112,184 $ 2,340,576
Long-term debt (excluding current maturities) 556,797 803,914 660,900 727,043
Total debt 606,840 823,958 712,940 1,037,075
Shareholders' equity 1,148,620 894,913 917,145 821,625
Return on average shareholders' equity(9) 12.9% 16.5% 28.4% 18.2%
Current ratio 1.1:1 1.2:1 1.2:1 1.1:1
Total debt/total capital ratio 34.6% 47.9% 43.7% 55.8%
13
(1) Other, net, Income from continuing operations and Net Income include: the
gains from the sales of the balance of TKR Cable Company, the newspaper in
Gary, Ind., and final sales settlements in 1998; the gains from the sales of
the majority of TKR Cable Company and our newspapers in Long Beach, Calif.,
Boca Raton, Fla., Milledgeville, Ga., and Newberry, S.C., as well as the
gain on the Boulder, Colo., exchange in 1997; the gain on Netscape in 1996;
and the gain from the sale of the Pasadena Star-News in 1989. Net Income
also includes the gains on the sales of Technimetrics in 1998, KRII in 1997,
KRF in 1996, and the JoC in 1995.
(2) All years have been restated to present the Business Information Services
(BIS) Division as discontinued operations. Results of operations of the
company's BIS Division (discontinued in 1997) and Broadcast Division
(discontinued in 1989) and the gains on the sales of BIS and broadcast
assets are presented as "discontinued BIS operations" and "discontinued
broadcast operations," respectively.
(3) For 1995, the cumulative effect of change in accounting principle represents
an adjustment from the implementation of FAS 116-Accounting for
Contributions Received and Contributions Made. For 1992, the cumulative
effect of change in accounting principle represents adjustments from the
implementation of FAS 109-Accounting for Income Taxes and FAS 106-Accounting
for Postretirement Benefits Other than Pensions.
(4) All share data prior to 1996 is restated for the 1996 stock split.
(5) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997.
The quarterly dividend previously paid in January was paid in February.
(6) Price/earnings ratio is computed by dividing closing market price by diluted
earnings per share.
(7) Adjusted price/earnings ratio is computed by dividing closing market price
by diluted earnings per share from continuing operations. For comparability
purposes, diluted earnings per share from continuing operations was adjusted
to exclude gains on one-time sales as follows: the gain from the sale of the
balance of TKR Cable Company, our newspaper in Gary, Ind., and final sales
settlements in 1998; the gains from the sales of the majority of TKR Cable
Company, our four newspapers in Long Beach, Calif., Boca Raton, Fla.,
Milledgeville, Ga., and Newberry, S.C., as well as the gain on the Boulder,
Colo., exchange in 1997; the gain on Netscape in 1996; and the gain from the
sale of the Pasadena Star-News in 1989.
(8) The ratio of earnings to fixed charges is computed by dividing earnings (as
adjusted for fixed charges and undistributed equity income from
unconsolidated subsidiaries) by fixed charges for the period. Fixed charges
include the interest on debt (before capitalized interest), the interest
component of rental expense, and the proportionate share of interest expense
on guaranteed debt of certain equity-method investees and on debt of
50%-owned companies.
(9) Return on average shareholders' equity is computed by dividing net income
before the cumulative effect of changes in accounting principles in 1995 and
1992, including the results of discontinued operations in 1988 through 1998,
by average shareholders' equity. Average shareholders' equity is the average
of shareholders' equity on the first day and the last day of the fiscal
year.
14
Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Glossary of Newspaper Advertising Terms
The following definitions may be helpful when reading Management's Discussion
and Analysis of Operations.
RETAIL. Display advertising from local merchants, such as department and grocery
stores, selling goods and services to the public.
GENERAL. Display advertising by national advertisers that promotes products or
brand names on a nationwide basis.
CLASSIFIED. Small, locally placed ads listed together and organized by category,
such as real estate sales, employment opportunities or automobile sales, and
display-type advertisements in these same categories.
FULL-RUN. Advertising appearing in all editions of a newspaper.
PART-RUN. Advertising appearing in select editions or zones of a newspaper's
market. Part-run advertising is translated into full-run equivalent linage
(referred to as factored) based on the ratio of the circulation in a particular
zone to the total circulation of a newspaper.
RUN-OF-PRESS (ROP). All advertising printed on Knight Ridder presses and
appearing within a newspaper.
PREPRINT. Advertising supplements prepared by advertisers and inserted into a
newspaper.
Knight Ridder is the nation's second largest newspaper publisher in terms of
circulation and revenue, with products in print and online. The company
publishes 31 daily and 21 nondaily newspapers in 28 U.S. markets, reaching 9.2
million readers daily and 13.1 million on Sunday. It maintains 45 associated Web
sites under the name Knight Ridder Real Cities.
In 1998, the gross revenue from these businesses was about $3.1 billion. The
company is also involved in other newspaper businesses and newsprint
manufacturing through business arrangements, including joint ventures and
partnerships.
Newspaper revenue is derived principally from advertising and newspaper copy
sales. Advertising revenue currently accounts for about 76% of consolidated
revenue. This revenue comes from the three basic categories of advertising -
retail, general and classified.
Newspaper advertising volume is categorized as either run-of-press (ROP) or
preprint. Volume for ROP advertising is measured in terms of either full-run or
part-run advertising linage. By using part-run advertising, advertisers can
target their messages to selected market segments.
15
Circulation revenue results from the sale of newspapers. Circulation of daily
and Sunday newspapers currently accounts for 19% of consolidated revenue. It is
reported at the net wholesale price for newspapers delivered or sold by
independent contractors and at the retail price for newspapers delivered or sold
by employees and delivery agents who are paid a fee for delivery of the
newspapers.
Other revenue comes from commercial job printing, alternate delivery services,
niche and book publications, online services, event marketing, newsprint waste
sales, audiotext and other miscellaneous sources.
In 1997, the company announced its intention to sell the remaining Business
Information Services (BIS) subsidiaries. This decision resulted in the
reclassification of the former BIS segment as discontinued operations. The
company fully divested the BIS segment with the sale of Technimetrics, Inc., its
global diversified information subsidiary, on April 13, 1998.
Results of Operations
SUMMARY OF OPERATIONS. A summary of the company's operations, certain share data
and other financial data for the past 11 years is provided in Item 6. Compound
growth rates for the past five- and 10-year periods are also included, if
applicable. A review of this summary and of the information in Part I, Item 1.
"Business" will provide a better understanding of the following discussion and
analysis of operating results and of the financial statements as a whole. Item 1
contains financial data for the company's largest newspapers and information
regarding the company's properties, technology and the raw materials used in
operations.
RESULTS OF OPERATIONS: 1998 VS. 1997
Knight Ridder earned a record $2.78 per diluted share from continuing operations
in 1998, up 20.9% from the $2.30 earned in 1997, excluding one-time gains from
both years and excluding corporate relocation and newspaper severance costs
incurred in 1998. Including these items, diluted earnings per share from
continuing operations was $3.11, down $.80, or 20.5%, from the $3.91 reported in
1997.
The $3.11 earned in 1998 includes a $.48 one-time gain from the sales of the
balance of the company's jointly owned cable systems, a newspaper in Gary, Ind.,
and net settlement adjustments on the newspapers sold in 1997. The $3.11 also
includes a one-time charge of $.15 for the costs associated with the relocation
of the corporate headquarters from Miami to San Jose and other newspaper
severance costs recorded in the fourth quarter.
The $3.91 earned in 1997 includes one-time gains of $1.27 on the sale of most of
TKR Cable Company, $.24 on the exchange of the Daily Camera in Boulder, Colo.,
and $.10 on the sale of four newspapers.
16
Excluding one-time gains from both years and corporate relocation and newspaper
severance costs incurred in 1998, net income from continuing operations was
$273.3 million, up $40.0 million, or 17.1% from $233.3 million in 1997.
Including these items in both years, net income from continuing operations was
$305.6 million in 1998, down 22.9%, from $396.5 million in 1997. Net income,
including the discontinued BIS operations in both years, was $365.9 million in
1998, down 11.4% from $413.0 million last year.
Operating income in 1998 was $504.6 million, down $1.4 million, or 0.3%, from
1997. Excluding corporate relocation and newspaper severance costs from 1998,
operating income was up $22.5 million, or 4.4%, from 1997 on a 7.5% increase in
total operating revenue. On a pro forma basis for the former Disney and Scripps
newspapers (that is, including full-year results in 1997) but excluding the sold
newspapers from 1997 (comparable basis), and corporate relocation and newspaper
severance costs from 1998, operating income was about equal to the prior year.
OPERATING REVENUE. Total company revenue of $3.1 billion was up 7.5% from 1997.
On a comparable basis, total operating revenue was up 3.7%.
Advertising revenue increased by $160.6 million, or 7.3%, in 1998 to $2.4
billion. On a comparable basis, total advertising revenue improved by 3.8% from
1997 on a full-run ROP linage increase of 1.8%. The following table summarizes
the percentage change in revenue and full-run ROP linage from 1997 as reported
in our financial statements, as well as results on a comparable basis:
Pro Forma, Excluding
Divested Newspapers*
--------------------------
% Change % Change
% Change in Full-Run % Change in Full-Run
Advertising Category in Revenue ROP Linage in Revenue ROP Linage
- -------------------- ---------- ---------- ---------- ----------
Retail 8.0 .9 4.3 .4
General 6.4 2.5 3.5 3.6
Classified 6.8 1.1 3.3 3.0
Total 7.3 1.1 3.8 1.8
* Including full-year results in 1997 for the former Disney and Scripps
newspapers but excluding the sold newspapers
Retail advertising revenue improved by $80.5 million, or 8.0%, from 1997 on a
0.9% increase in full-run ROP linage. On a comparable basis, retail advertising
revenue increased 4.3% from 1997. Retail growth was relatively even throughout
the year.
General advertising revenue was up $15.7 million, or 6.4%, from 1997 on a 2.5%
increase in full-run ROP linage. On a comparable basis, general advertising
revenue was up 3.5%.
17
Classified advertising revenue was up $64.3 million, or 6.8%, from 1997 on a
1.1% increase in full-run ROP linage. On a comparable basis, classified
advertising revenue was up 3.3%. The increase was due primarily to help wanted
advertising.
Circulation revenue improved by $19.8 million, or 3.5%. On a comparable basis,
circulation revenue was essentially flat, on about flat average daily
circulation copy and an average Sunday circulation copy decline of 1.1%.
Other revenue increased $34.8 million, or 32.5%. On a comparable basis, other
revenue increased 23.9%, due to increases in event marketing, alternate
distribution, online and commercial print revenue. The purchase of two job fair
companies in 1998 in Philadelphia added to the growth in event marketing
revenue.
OPERATING COSTS. Labor and employee benefits costs were up $68.8 million, or
6.1%. On a comparable basis and excluding corporate relocation and newspaper
severance costs from 1998, labor and employee benefits costs were up $27.1
million, or 2.3%, on a 1.0% increase in the work force and an average wage rate
increase of 3.0%, offset by a decline in employee benefits costs.
Newsprint, ink and supplements costs increased by $62.8 million, or 13.5%, due
to about a 7.0% increase in the average cost per ton of newsprint, and a 5.6%
increase in newsprint consumption. On a comparable basis, newsprint consumption
increased 1.5%.
Other operating costs increased by $53.6 million, or 8.7%. On a comparable basis
and excluding corporate relocation costs in 1998, other operating costs were up
$25.1 million, or 3.9%. The increase was due primarily to promotion costs and
the changeover to circulation agents in Detroit, which was offset by additional
circulation revenue recorded at the retail price for newspapers delivered.
Previously, circulation revenue in Detroit was recorded at the net wholesale
price.
Depreciation and amortization increased $31.3 million, or 20.0%, due primarily
to amortization expense associated with the acquisition of the former Disney and
Scripps newspapers and depreciation expense associated with certain major press
projects.
NON-OPERATING ITEMS. Net interest expense increased $4.1 million, or 4.4%, from
1997, due to higher debt levels associated with the Disney acquisition and
higher interest rates in the earlier part of 1998. The average debt balance for
the year increased $153.7 million from 1997.
Equity in earnings of unconsolidated companies and joint ventures increased by
$12.5 million, more than double the earnings in 1997, due to improved results
from our newsprint mill investments and InfiNet Company, an Internet access
provider.
The "Other, net" line of the non-operating section decreased $193.7 million from
1997, due to the gains in 1997 from the sale of the majority of TKR Cable
Company, the Boulder exchange and the sale of four newspapers. Results in 1998
included the gains on the sales of the balance of the company's cable systems,
the Gary, Ind. newspaper, and final settlements on the 1997 newspaper sales.
18
INCOME TAXES. The effective income tax rate on continuing operations for 1998
was 39.8%, down from 42.9% in 1997. The effective tax rate was higher than usual
in 1997 because of the sale of cable assets, which generated income in states
with higher tax rates. Additionally, in 1998 certain tax matters were settled
for amounts that were less than those originally recorded.
OTHER. Net income in 1998 includes an after-tax gain on the sale of
Technimetrics, Inc., of $60.0 million, or $.61 per share (diluted), and income
from discontinued BIS operations, net of applicable taxes, of $184,000.
RESULTS OF OPERATIONS: 1997 VS. 1996
Diluted earnings per share from continuing operations was $3.91, up $2.01 from
the $1.90 reported in 1996. The $3.91 includes three one-time gains on sales: a
$1.27 gain on the sale of the majority of TKR Cable Company, a $.24 gain on the
exchange of the Daily Camera in Boulder, Colo., and a $.10 gain on the sale of
four newspapers. The $1.90 includes an $.08 gain on the sale of our Netscape
Communications Corporation (Netscape) investment, net of adjustments in the
carrying value of certain investments. Excluding the one-time gains from 1997
and 1996, earnings per share for 1997 was $2.30, which was up $.48, or 26.4%,
from the $1.82 earned in 1996.
Operating income in 1997 was $506.0 million, up $172.9 million, or 51.9%, from
1996. The results include operations from four newspapers acquired from The Walt
Disney Company in May 1997 and from two newspapers received in exchange from
E.W. Scripps Company for the Boulder, Colo., newspaper in August 1997. They
exclude results from the (Boulder) Daily Camera after August 1997 and from the
(Long Beach, Calif.) Press-Telegram, Boca Raton (Fla.) News, The (Milledgeville,
Ga.) Union-Recorder and suburban Newberry (S.C.) Observer after their dates of
sale in December 1997. On a pro forma basis for the former Disney and Scripps
newspapers (that is, including full-year results in 1997 and 1996) but excluding
the sold newspapers from both 1997 and 1996 (comparable basis), operating income
was up $122.9 million, or 30.2%, from 1996. The increase was due to an 8.0%
increase in total advertising revenue, offset in part by a 2.7% increase in
operating costs.
OPERATING REVENUE. Total company revenue of $2.9 billion was up 21.2% from 1996.
On a comparable basis, total operating revenue was up 6.7%.
Newspaper advertising revenue increased by $408.8 million, or 22.8%, in 1997 on
a full-run ROP linage increase of 18.0%. On a comparable basis, total
advertising revenue improved by 8.0% from 1996 on a full-run ROP linage increase
of 6.7%. The following table summarizes the percentage change in revenue and
full-run ROP from 1996 as reported in our financial statements, as well as
results on a comparable basis:
Pro Forma, Excluding
Divested Newspapers*
-------------------------
% Change % Change
% Change in Full-Run % Change in Full-Run
Advertising Category in Revenue ROP Linage in Revenue ROP Linage
- -------------------- ---------- ---------- ---------- ----------
Retail 22.8 19.0 5.7 5.6
General 23.8 16.7 11.8 8.4
Classified 22.6 17.3 9.6 7.6
Total 22.8 18.0 8.0 6.7
* Including full-year results in 1997 and 1996 for the former Disney and Scripps
newspapers but excluding the sold newspapers from both 1997 and 1996
19
Retail advertising revenue improved by $187.0 million, or 22.8%, from 1996 on a
19.0% increase in full-run ROP linage. On a comparable basis, retail advertising
revenue increased 5.7% from 1996, with increases at almost all of our
newspapers.
General advertising revenue was up $47.3 million, or 23.8%, from 1996 on a 16.7%
increase in full-run ROP linage. On a comparable basis, general advertising
revenue was up 11.8%.
Classified advertising revenue was up $174.6 million, or 22.6%, from 1996 on a
17.3% increase in full-run ROP linage. On a comparable basis, classified
advertising revenue was up 9.6%. The increase was due primarily to help wanted
advertising.
Circulation revenue improved by $65.9 million, or 13.1%. On a comparable basis,
circulation revenue increased 0.5% on an average daily circulation copy increase
of 1.3%, and an average Sunday circulation copy decrease of 0.9%.
Other revenue increased $27.8 million, or 35.2%, due to increases in commercial
print, special publications, alternate distribution and database marketing
revenue.
OPERATING COSTS. Labor and employee benefits costs were up $165.2 million, or
17.1%. On a comparable basis, labor and employee benefits costs were up $67.7
million, or 6.2%, on a 2.9% increase in the work force and an average wage rate
increase of 4.2%.
Newsprint, ink and supplements costs decreased by $5.9 million, or 1.2%, due to
a 20.7% decrease in the average cost per ton of newsprint, mostly offset by a
20.8% increase in newsprint consumption, due to acquisitions, greater ad volume
and some increased news linage. On a comparable basis, newsprint consumption was
up 6.1%.
Depreciation and amortization increased $36.1 million, or 29.9%, due to
amortization expense associated with the acquisition of the former Disney and
Scripps newspapers.
Other operating costs increased by $134.3 million, or 27.9%. On a comparable
basis, other operating costs were up $71.6 million, or 12.6%. Expenditures for
circulation promotion accounted for a large part of the increase.
NON-OPERATING ITEMS. Net interest expense increased $33.6 million, or 55.8%,
from 1996, due to higher debt levels associated with the Disney acquisition. The
average debt balance for the year increased $437.3 million from 1996, due to the
debt assumed with the former Disney newspapers acquisition.
Equity in earnings of unconsolidated companies and joint ventures decreased by
$19.1 million, or 63.8%, due to the absence of earnings from our jointly owned
cable systems (majority sold in January 1997) and lower income from our
newsprint mill investments.
The "Other, net" line of the non-operating section increased $265.7 million over
1996, due to gains on the sale of the majority of TKR Cable Company, the Boulder
exchange and the sale of four newspapers in December 1997. The 1996 results
included the gain on the sale of the Netscape investment, net of the reduction
in the carrying value of certain other investments.
20
INCOME TAXES. The effective income tax rate on continuing operations for 1997
was 42.9%, up from 40.2% in 1996. The rate increase was largely due to the sale
of cable assets, which generated income in states with high tax rates, and
additional nondeductible goodwill amortization from the Disney acquisition.
OTHER. Net income in 1997 includes an after-tax gain on the sale of Knight-
Ridder Information, Inc., of $15.3 million, or $.15 per share (diluted), and
income from discontinued BIS operations, net of applicable taxes, of $1.3
million, or $.02 per share (diluted).
A Look Ahead
Looking ahead, the company expects another year of earnings growth in 1999.
Advertising revenue will likely increase between 3% and 4%, with retail
strongest and classified advertising revenue weakest. As in 1998, the company
believes some markets will do considerably better than this, while others may
lag. The company does not expect to pay more for newsprint in 1999 than in 1998.
Year 2000 Readiness Disclosures
All Year 2000 statements in this annual report on Form 10-K are Year 2000
Readiness Disclosures under the Year 2000 Information and Readiness Disclosure
Act. The Year 2000 (Y2K) issue results from computer programs using two digits
rather than four to define the applicable year. Company computer programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure, disruption of
operations, and/or a temporary inability to conduct normal business activities.
In the spring of 1997, the company initiated a comprehensive project to address
Y2K issues. The Y2K project was divided into five phases: Scope Definition,
Impact Assessment, Conversion, Testing and Implementation.
To implement this project, the company established a Y2K Project Management
Office (PMO) to act as a central point of coordination for Y2K activity, chaired
by the vice president and chief information officer who reports directly to the
chief executive officer. The PMO team includes executive management and
employees with expertise from various disciplines. At each business unit, a Y2K
coordinator was appointed to direct all local Y2K activities. The Y2K
coordinator works closely with the PMO team and local executive management and
employees.
The Scope Definition Phase, completed in June 1997, determined that the Y2K
project would encompass both Information Technology (IT) and non-IT assets
(embedded chips), including: software, microprocessor-based hardware (including
embedded chips found in facilities and production environments) and significant
suppliers, customers and other relevant third parties.
The Impact Assessment Phase included a comprehensive inventory of both
internally developed software and vendor products, as well as
microprocessor-based hardware. These inventoried systems were evaluated to
determine Y2K issues, if any, and a preliminary assessment regarding replacement
or remediation was developed to make these systems Y2K capable, as necessary.
Additionally, a central database repository that contains each Y2K project
prioritized based on the perceived business risk was developed. This phase was
completed in November 1997.
21
A majority of the company's software is vendor-packaged. Conversion, Testing and
Implementation Phases have been ongoing since mid 1997. Business units will
complete Y2K testing prior to implementation for all critical systems. When
possible, previously created test cases are run and results are compared to the
baseline results.
For systems developed in-house, regression and other Y2K date testing is done as
appropriate after Y2K remediation is complete. Results of regression testing are
documented and compared to previous baseline results. Upon successful completion
of the Testing Phase, the systems will be implemented in the live production
environment (Implementation Phase). In all material respects, the company
expects that the Conversion, Testing and Implementation Phases will be completed
by June 30, 1999.
Formal communications were initiated with all significant suppliers, customers
and other relevant third parties to determine the extent to which related
interfaces with company systems are vulnerable if these third parties fail to
remediate their own Y2K issues. There can be no assurance that these third-party
systems will be converted on a timely basis. If any of the critical third-party
systems fail, such failure could have a material adverse impact on operations.
However, the company is monitoring vendor compliance and will consider
alternatives if vendors cannot meet the company's compliance requirements by
June 30, 1999.
At the present time, the total cost of the Y2K project is estimated to range
from $60 million to $70 million and is being funded with operating cash flows.
Approximately 65% of the total will relate to purchased hardware and software,
which will be capitalized. The remainder is expensed as incurred. Expenditures
through Dec. 27, 1998, totaled $30.3 million, of which 70.4% was capitalized. In
certain cases, an expedited system-replacement schedule will also bring enhanced
functionality and should serve to reduce future capital requirements. The
company believes that the acceleration of certain projects has not resulted in
the deferral of other IT projects that would have a material adverse impact on
the financial condition and results of operation.
As part of normal business practices, the company maintains site-specific
emergency publication plans to be followed during emergency circumstances.
Emergency publication plans are being reviewed and updated with Y2K contingency
considerations in mind. This effort, plus additional contingency planning
activities, will be completed by mid 1999.
Based on a recent assessment of its internal operations, those over which the
company has direct control, the company believes that with modifications to
existing software and conversions to new software, the Y2K issue will not pose
significant operational problems. The remediation or replacement of these
systems is well under way. Furthermore, the contingency plan will outline
alternative solutions in the event that they are required. However, if such
modifications and conversions are not made or are not completed in a timely
manner, the Y2K issue could have a material adverse impact on the operations of
the company.
22
Forward-Looking Statements
Certain statements in this annual report on Form 10-K and the company's annual
report to shareholders, 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 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 which may cause revenue declines or increased labor costs;
(f) acquisitions of new businesses or dispositions of existing businesses; (g)
increases in interest or financing costs; and (h) rapid technological changes
and frequent new product introductions prevalent in electronic publishing,
including the evolution of the Internet.
Significant Acquisitions And Divestitures
On April 13, 1998, the company closed on the sale of Technimetrics, Inc., to an
operating unit of the Thomson Corporation. Technimetrics was a subsidiary that
sold global shareholding and business contact information. This sale fully
divested the company of the discontinued Business Information Services segment.
The proceeds from the sale were $125.0 million and resulted in pretax and
after-tax gains of $103.8 million and $60.0 million, respectively.
On March 18, 1998, the company, through its wholly owned subsidiary Knight-
Ridder Cablevision, Inc., completed the sale to Tele-Communications, Inc., of
its remaining jointly owned cable television systems. On Feb. 2, 1998, the
company completed the sale of the Post-Tribune in Gary, Ind., to Hollinger
International, Inc. The proceeds from these sales were $95.8 million, consisting
of $58.1 million in cash and TCI stock with an aggregate market value of $37.7
million. The pretax and after-tax gains on the sales were $75.3 million and
$45.0 million, respectively.
In December 1997, the company closed on the sale of four newspapers, the (Long
Beach) Press-Telegram, the Boca Raton News, The (Milledgeville) Union- Recorder
and the suburban Newberry (S.C.) Observer. The sale of these four newspapers
resulted in an after-tax gain of $10.3 million. The sale also included the
transfer to the company of The Daily Sun and The Buyer's Guide, a shopper, in
Warner Robins, Ga., and The Byron (Ga.) Gazette, a weekly newspaper, all of
which are located in fast-growing suburbs in our Macon newspaper's market.
On Nov. 14, 1997, the company completed the sale of Knight-Ridder Information,
Inc., (KRII) to M.A.I.D plc for $420 million. The after-tax gain on the sale of
KRII was $15.3 million.
23
On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., the
Daily Camera, for two newspapers in California owned by the E.W. Scripps
Company.
On May 9, 1997, the company completed the acquisition of four newspapers
indirectly owned by The Walt Disney Company for $1.65 billion: The Kansas City
Star, the Fort Worth Star-Telegram, the Belleville (Ill.) News-Democrat and The
Times Leader in Wilkes-Barre, Pa.
On Jan. 10, 1997, the company and Tele-Communications, Inc., closed on the sale
of the company's interest in nearly all of their jointly owned cable systems.
The remaining systems accounted for a small portion of the original investment
and were subsequently sold in March 1998 (discussed above). The after-tax gain
on the sale of TKR Cable Company was $128.3 million. The sale yielded net
after-tax proceeds of $270 million.
On July 26, 1996, the company sold Knight-Ridder Financial (KRF) to Global
Financial Information Corporation for $275 million. The after-tax gain on the
sale of KRF was $86.3 million.
Capital Spending Program
The company's capital spending program includes normal replacements,
productivity improvements, capacity increases, building construction and
expansion, and printing press equipment. Over the past three years, capital
expenditures, excluding the discontinued BIS operations, have totaled $351.5
million for additions and improvements to properties.
Additions to property, plant and equipment increased $25.4 million from 1997 to
$132 million, due to major projects and significant Y2K expenditures in 1998.
Expenditures in 1998 included $36.3 million for the Miami and Fort Worth press
projects. Both the $108.0 million Miami press expansion and the $37.8 million
Fort Worth press expansion are expected to be completed in 2000. Additionally,
The Charlotte Observer and the Akron Beacon Journal completed a full conversion
to flexographic printing. The total project costs were $35 million and $27.2
million, respectively, with combined expenditures of $4.4 million in 1998. All
of the aforementioned press projects (except Fort Worth) were replacement
projects that significantly improved waste, reliability, speed, print quality,
page and color capacity. The Fort Worth project was primarily designed to
address page and color capacity issues for existing presses.
Significant renovations to the business and editorial offices in Philadelphia
totaling $34.5 million, of which $4.8 million was spent in 1998, were also
completed. These renovations significantly improved the working environment for
a large number of employees and addressed various infrastructure issues.
Also included in capital expenditures was $7.7 million to replace the Grand
Forks production plant and building that were destroyed by a flood and
subsequent fire in April 1997. The new facility was completed in 1998, at a
total cost of $11.5 million (before insurance recoveries).
Spending is estimated to be lower in 1999, partly due to the acceleration of
certain system replacements for Y2K capability in previous years and the
completion of several major projects.
24
Quarterly Operations
The company's largest source of revenue, retail advertising, is seasonal and
tends to fluctuate with retail sales in markets served. Historically, retail
advertising is higher in the second and fourth quarters. General advertising,
while not as seasonal as retail, is lower during the summer months.
Classified advertising revenue has in the past been a reflection of the overall
economy and has not been significantly affected by seasonal trends.
The following table summarizes the company's quarterly results of operations (in
thousands, except per share data):
QUARTER
------------------------------------------------------------------------
Description First Second Third Fourth(1)
------------ ------------- ----------- ------------
1998 Operating revenue $ 743,883 $ 779,292 $ 752,778 $ 815,966
Operating income 113,187 127,125 111,629 152,677
Income from continuing operations 101,437(a) 66,925(b) 56,983(d) 80,286(e)
Net gain on sale of BIS operations 60,042(c)
Income from BIS operations, net 184
Net income 101,621 126,967 56,983 80,286
Earnings per share(2)
Basic: Income from continuing operations 1.27(a) 0.85(b) 0.72(d) 1.03(e)
Net gain on sale of BIS operations 0.76(c)
Income from BIS operations, net
Net income 1.27 1.61 0.72 1.03
Diluted: Income from continuing operations 1.02(a) 0.68(b) 0.58(d) 0.83(e)
Net gain on sale of BIS operations 0.61(c)
Income from BIS operations, net
Net income 1.02 1.29 0.58 0.83
Dividends declared per common share 0.20 0.20 0.20 0.20
1997 Operating revenue (3) $ 600,830 $ 711,656 $ 748,704 $ 815,595
Operating income 98,169 136,977 107,936 162,946
Income from continuing operations 175,458(f) 60,950 73,467(g) 86,629(h)
Net gain on sale of BIS operations 15,261(i)
Income (loss) from BIS operations, net (726) 350 545 1,081
Net income 174,732 61,300 74,012 102,971
Earnings per share(2)
Basic: Income from continuing operations 1.88(f) 0.67 0.85(g) 1.04(h)
Net gain on sale of BIS operations 0.18(i)
Income from BIS operations, net 0.01 0.01
Net income 1.88 0.68 0.85 1.23
Diluted: Income from continuing operations 1.85(f) 0.60 0.69(g) 0.84(h)
Net gain on sale of BIS operations 0.15(i)
Income from BIS operations, net 0.01 0.01
Net income 1.85 0.61 0.69 1.00
Dividends declared per common share 0.20 0.20 0.20 0.20
1996 Operating revenue $ 570,756 $ 595,582 $ 576,887 $ 630,999
Operating income 49,639 78,647 73,948 130,899
Income from continuing operations 22,994 41,481 39,340 81,565(k)
Net gain (adjustment) on sale of BIS operations 90,901(j) (4,646)(j)
Income (loss) from BIS operations, net 523 872 (3,984) (1,173)
Net income 23,517 42,353 126,257 75,746
Earnings per share(2)
Basic: Income from continuing operations 0.23 0.42 0.41 0.87(k)
Net gain (adjustment) on sale of
BIS operations 0.96(j) (0.05)(j)
Income (loss) from BIS operations,
net 0.01 0.01 (0.04) (0.01)
Net income 0.24 0.43 1.33 0.81
Diluted: Income from continuing operations 0.23 0.42 0.41 0.86(k)
Net gain (adjustment) on sale of
BIS operations 0.94(j) (0.05)(j)
Income (loss) from BIS operations,
net 0.01 0.01 (0.04) (0.02)
Net income 0.24 0.43 1.31 0.79
Dividends declared per common share 0.18 1/2 0.20 0.20 (l)
25
(1) In the fourth quarter of 1998, the company changed the method of accounting
used to determine the market-related value of plan assets, effective Dec.
29, 1997. The effect of this change on 1998 results of operations, including
the cumulative effect of prior years, was not material. See Item 8, Note F
to the consolidated financial statements.
(2) Amounts do not total to the annual earnings per share because each quarter
and the year are calculated separately based on average outstanding shares
(basic) and average outstanding and equivalent shares (diluted) during the
periods.
(3) Certain amounts in 1997 have been reclassified to conform to the 1998
presentation.
(a) Includes the after-tax gain of $45.0 million on the sales of the balance of
our jointly owned cable systems with Tele-Communications, Inc., and our
newspaper in Gary, Ind. ($.56 per share, basic; $.45 per share, diluted).
(b) Includes after-tax corporate relocation costs, net of settlement adjustments
on 1997 newspaper sales totaling $5.1 million, or $(.07) per share, basic;
$(.05) per share, diluted. Excluding these items, EPS from continuing
operations was $.92 per share basic and $.73 per share diluted.
(c) Gain on the sale of Technimetrics, Inc.
(d) Includes after-tax corporate relocation costs of $4.4 million, or $(.06) per
share, basic; $(.05) per share, diluted. Excluding these costs, EPS from
continuing operations was $.78 per share basic and $.63 per share diluted.
(e) Includes after-tax corporate relocation costs and other severance costs of
$3.2 million, or $(.04) per share, basic; $(.03) per share, diluted.
Excluding these costs, EPS from continuing operations was $1.07 per share
basic and $.86 per share diluted.
(f) Includes the after-tax gain of $128.3 million on the sale of the majority of
TKR Cable Company ($1.38 per share, basic; $1.36 per share, diluted).
(g) Includes the after-tax gain of $24.5 million on the Boulder, Colo., exchange
($.28 per share, basic; $.23 per share, diluted).
(h) Includes the after-tax gain of $10.3 million on the sale of four newspapers
($.12 per share, basic; $.10 per share, diluted).
(i) Gain on the sale of KRII.
(j) Gain (adjustment) on the sale of KRF.
(k) Includes the after-tax gain of $8.1 million on the sale of Netscape, net of
adjustments in the carrying value of certain investments ($.09 per share,
basic and diluted).
(l) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997.
The quarterly dividend previously paid in January was paid on Feb. 24, 1997,
to shareholders of record as of the close of business on Feb. 12, 1997.
26
Financial Position And Liquidity
1998 VS. 1997. The principal change in the company's financial position during
1998 was the application of cash flow from operating activities, net sales
proceeds and excess cash towards the repurchase of 4.7 million shares for $255.5
million and the reduction of debt. The sales of Technimetrics, the company's
newspaper in Gary, Ind., and the balance of the company's cable systems in the
first half of 1998 provided after-tax sales proceeds of $111.9 million.
On June 26, 1998, the $990 million of senior secured bank debt due on Sept. 15,
1999, was paid off with the proceeds from the sale of commercial paper. At year
end, the total-debt-to-total-capital ratio was 47.9%, down from 51.8% in 1997.
Standard & Poor's, Moody's and Duff & Phelps continue to rate the company's
commercial paper A1, P2 and D1, and long-term bonds A, A3 and A, respectively.
Cash and short-term cash investments were $26.8 million at the end of 1998, a
$133.5 million decrease from 1997. The cash was used for stock repurchases and
to pay down debt. The ratio of current assets to current liabilities was 0.8:1
at year end vs. 1.1:1 at the end of 1997. Average outstanding commercial paper
during the year was $457.4 million, with an average effective interest rate of
5.5%. During 1998, the company's revolving credit and term loan agreement, which
back up the commercial paper program, increased from $642.3 million to $1.1
billion. At year-end 1998, commercial paper outstanding was $927.2 million and
aggregate unused credit lines were $172.8 million. The 364-day revolving credit
and term loan portion of the facility matures in June 1999. The company has the
option and intention to renew this facility for an additional term through June
2000.
During 1998, net cash provided by operating activities increased $55.0 million
to $297.2 million. The increase was attributed to higher net income, exclusive
of gains on sales/exchanges of investee/subsidiaries and the net gain on sale of
discontinued BIS operations from both years, offset by a reduction in working
capital.
The company's operations have historically generated strong positive cash flow,
which, along with the company's commercial paper program, revolving credit lines
and ability to issue public debt, has provided adequate liquidity to meet the
company's short-term and long-term cash requirements, including requirements for
working capital and capital expenditures.
1997 VS. 1996. The principal change in the company's financial position during
1997 was the acquisition of four newspapers formerly owned by The Walt Disney
Company for $1.65 billion. The transaction was financed through the issuance of
$660 million in convertible preferred stock and assumption of $990 million of
pre-existing debt.
During 1997, the company authorized a common stock buyback program to repurchase
in the open market up to 15 million shares. In 1997, 13.8 million shares were
repurchased.
The company utilized proceeds from the sales of the majority of its cable
systems in January 1997, its subsidiary Knight-Ridder Information, Inc., in
November 1997 and four of its newspapers in December 1997 to fund stock
repurchases and reduce debt. In November 1997, the company issued $100 million
of notes maturing in 2007 and $100 million of debentures maturing in 2027. The
27
proceeds of the new debt were used to reduce commercial paper borrowings. At
year end, the total-debt-to-total-capital ratio increased to 51.8%, up from
42.1% in 1996. Standard & Poor's and Moody's downgraded the company's commercial
paper and long-term bonds during 1997. The downgrades resulted from the
increased leverage associated with the Disney newspaper acquisition combined
with the company's common stock repurchase program. Standard & Poor's and
Moody's commercial paper ratings went from A1+ and P1 to A1 and P2,
respectively. Standard & Poor's and Moody's long-term bond ratings went from AA-
and A to A and A3, respectively.
During 1997, Duff & Phelps Credit Rating Co. began rating the company's
commercial paper and long-term bonds. The commercial paper and long-term bonds
were rated D1 and A, respectively.
Average commercial paper outstanding during the year was $286.7 million, with an
average effective interest rate of 5.6%. At year-end 1997, commercial paper
outstanding was $30.0 million and aggregate unused credit lines were $612.3
million.
During 1997, net cash provided by operating activities increased $7.3 million to
$242.2 million. The increase was attributed to higher earnings, operating
profits from the former Disney newspapers and other changes in working capital.
Cash and short-term investments were $160.3 million at the end of 1997, a $137.4
million increase from 1996. The increased cash level was to be used for stock
repurchases in the first quarter of 1998. The ratio of current assets to current
liabilities was 1.1:1 at year end vs. 1.0:1 at the end of 1996.
Online Activities
In 1998, the company incurred $22 million of net expense from online activities,
excluding investments in minority internet-related companies. These activities
are becoming more integrated with traditional advertising sales and we
anticipate continued growth in this area.
Effect Of Changing Prices
The Consumer Price Index, a widely used measure of the impact of changing
prices, has increased only moderately in recent years, up between 2% and 3% each
year since 1991. Historically, when inflation was at higher levels, the impact
on the company's operations was not significant.
The principal effect of inflation on the company's operating results is to
increase costs. Subject to normal competitive conditions, the company generally
has demonstrated the ability to raise sales prices to offset these cost
increases.
28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
BORROWINGS. By balancing the mix of variable- versus fixed-rate borrowings, the
company manages the interest rate risk of its debt portfolio. Item 8, "Financial
Statements and Supplementary Data", Note C to the consolidated financial
statements includes information relating to the contractual interest rates and
fair value of the individual borrowings within the portfolio. A hypothetical 10%
change in interest rates would increase interest expense associated with both
fixed- and variable-rate borrowings by $5.0 million. This hypothetical interest
rate change would also increase the fair value of the fixed debt by $14.2
million.
NEWSPRINT. The company consumed approximately 794,000 metric tons of newsprint
in 1998. It represents 17.3% of the company's 1998 total operating expenses. In
Part I, Item 1, "Business", under the caption "Newsprint", the company has
included information outlining its suppliers, and natural hedges the company has
in place through its investment in newsprint mills. In Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", under
the caption "A Look Ahead", the expected average price of this commodity during
1999 is discussed.
COLLECTIVE BARGAINING AGREEMENTS. Approximately 36% of the Company's 22,000
employees are represented by some 70 local unions and work under multiyear
collective bargaining agreements. These agreements are renegotiated in the years
in which they expire. During 1999, there will be negotiations to extend
collective bargaining agreements with seven unions in some of our major markets.
Individual newspapers that are unionized to a greater or lesser degree include
those in Akron, Detroit, Duluth, Fort Wayne, Grand Forks, Kansas City,
Lexington, Monterey, Philadelphia, St. Paul, State College, San Jose and
Wichita.
29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Quarterly Operations in Item 7 and Schedule II, Valuation and Qualifying
Accounts
CONSOLIDATED BALANCE SHEET
(In thousands of dollars, Dec. 27, Dec. 28, Dec. 29,
except share data) 1998 1997 1996
----------- ----------- ----------
ASSETS
CURRENT ASSETS
Cash, including short-term cash investments
of $4,159 in 1998, $140,210 in 1997 and
$50 in 1996 $ 26,836 $ 160,291 $ 22,880
Accounts receivable, net of allowances of
$15,738 in 1998, $14,963 in 1997 and
$12,685 in 1996 386,455 374,746 356,079
Inventories 59,109 50,332 42,941
Prepaid expense 14,078 15,844 90,314
Other current assets 39,213 39,902 53,513
----------- ----------- -----------
Total Current Assets 525,691 641,115 565,727
----------- ----------- -----------
INVESTMENTS AND OTHER ASSETS
Equity in unconsolidated companies
and joint ventures 201,120 197,585 330,267
Net assets of discontinued BIS operations 24,673 352,102
Other 243,586 172,859 132,425
----------- ----------- -----------
Total Investments and Other Assets 444,706 395,117 814,794
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 93,781 89,375 77,526
Buildings and improvements 484,367 444,952 387,509
Equipment 1,175,044 1,127,875 994,455
Construction and equipment installations
in progress 84,559 111,883 110,590
----------- ----------- -----------
1,837,751 1,774,085 1,570,080
Less accumulated depreciation (764,750) (727,571) (701,232)
----------- ----------- -----------
Net Property, Plant and Equipment 1,073,001 1,046,514 868,848
----------- ----------- -----------
EXCESS OF COST OVER NET ASSETS ACQUIRED AND
OTHER INTANGIBLES
Less accumulated amortization of $264,001
in 1998, $197,966 in 1997 and
$150,491 in 1996 2,213,699 2,272,396 611,538
----------- ----------- -----------
Total $ 4,257,097 $ 4,355,142 $ 2,860,907
=========== =========== ===========
See "Notes to Consolidated Financial Statements."
30
CONSOLIDATED BALANCE SHEET (Continued)
(In thousands of dollars, Dec. 27, Dec. 28, Dec. 29,
except share data) 1998 1997 1996
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 164,558 $ 172,021 $ 223,962
Accrued expenses and other liabilities 111,088 131,491 103,730
Accrued compensation and amounts withheld
from employees 112,827 119,036 96,426
Federal and state income taxes 33,920
Deferred revenue 67,006 72,491 70,452
Short-term borrowings and
current portion of long-term debt 198,277 69,697 50,000
----------- ----------- -----------
Total Current Liabilities 653,756 598,656 544,570
----------- ----------- -----------
NONCURRENT LIABILITIES
Long-term debt 1,329,001 1,599,133 771,335
Deferred federal and state income taxes 293,015 282,695 142,727
Postretirement benefits other than pensions 147,118 150,485 158,811
Employment benefits and other noncurrent
liabilities 168,974 171,225 109,909
----------- ----------- -----------
Total Noncurrent Liabilities 1,938,108 2,203,538 1,182,782
----------- ----------- -----------
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 2,502 1,275 2,047
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE I)
SHAREHOLDERS' EQUITY
Preferred stock, $1.00 par value; shares
authorized - 2,000,000; shares issued -
1,754,930 in 1998 and 1997, and 0 in 1996 1,755 1,755
Common stock, $.02 1/12 par value; shares
authorized - 250,000,000; shares
issued - 78,374,195 in 1998,
81,597,631 in 1997 and 93,340,652 in 1996 1,633 1,700 1,945
Additional capital 908,078 911,572 308,320
Retained earnings 735,132 636,646 819,572
Accumulated other comprehensive income 18,738 1,671
Treasury stock, at cost; 46,667 shares in 1998,
0 in 1997 and 1996 (2,605)
----------- ----------- -----------
Total Shareholders' Equity 1,662,731 1,551,673 1,131,508
----------- ----------- -----------
Total $ 4,257,097 $ 4,355,142 $ 2,860,907
=========== =========== ===========
31
CONSOLIDATED STATEMENT OF INCOME
Year Ended
-----------------------------------------
Dec. 27, Dec. 28, Dec. 29,
(In thousands of dollars, except share data) 1998 1997 1996
----------- ----------- -----------
OPERATING REVENUE
Advertising
Retail $ 1,089,273 $ 1,008,736 $ 821,768
General 261,831 246,096 198,797
Classified 1,011,755 947,419 772,859
----------- ----------- -----------
Total 2,362,859 2,202,251 1,793,424
Circulation 587,529 567,757 501,826
Other 141,531 106,777 78,974
----------- ----------- -----------
Total Operating Revenue 3,091,919 2,876,785 2,374,224
----------- ----------- -----------
OPERATING COSTS
Labor and employee benefits 1,200,981 1,132,227 967,069
Newsprint, ink and supplements 529,154 466,329 472,207
Other operating costs 669,114 615,470 481,168
Depreciation and amortization 188,052 156,731 120,647
----------- ----------- -----------
Total Operating Costs 2,587,301 2,370,757 2,041,091
----------- ----------- -----------
OPERATING INCOME 504,618 506,028 333,133
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (105,936) (102,662) (73,137)
Interest expense capitalized 4,516 5,376 6,397
Interest income 3,416 3,404 6,488
Equity in earnings of unconsolidated companies and joint ventures 23,309 10,800 29,868
Minority interests in earnings of consolidated subsidiaries (10,749) (11,503) (9,293)
Other, net (Note G) 88,742 282,409 16,753
----------- ----------- -----------
Total 3,298 187,824 (22,924)
----------- ----------- -----------
Income before income taxes 507,916 693,852 310,209
Income taxes 202,285 297,348 124,829
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 305,631 396,504 185,380
Net gain on sale of discontinued BIS operations,
net of applicable income taxes of $43,752 in 1998,
$8,365 in 1997 and $69,631 in 1996 (Notes B and G) 60,042 15,261 86,255
Income/(loss) from discontinued BIS operations,
net of applicable income taxes of $133 in 1998,
$1,119 in 1997 and $4,305 in 1996 (Notes B and G) 184 1,250 (3,762)
----------- ----------- -----------
Net Income $ 365,857 $ 413,015 $ 267,873
=========== =========== ===========
EARNINGS PER SHARE
Basic:
Income from continuing operations $ 3.87 $ 4.48 $ 1.93
Net gain on sale of discontinued BIS operations (Note G) .76 .17 .90
Income/(loss) from discontinued BIS operations, net (Note G) .01 .02 (.04)
----------- ----------- -----------
Net Income $ 4.64 $ 4.67 $ 2.79
=========== =========== ===========
Diluted:
Income from continuing operations $ 3.11 $ 3.91 $ 1.90
Net gain on sale of discontinued BIS operations (Note G) .61 .15 .89
Income/(loss) from discontinued BIS operations, net (Note G) .01 .02 (.04)
----------- ----------- -----------
Net Income $ 3.73 $ 4.08 $ 2.75
=========== =========== ===========
AVERAGE SHARES OUTSTANDING (000S)
Basic 78,882 88,475 96,021
Diluted 98,176 101,314 97,420
See "Notes to Consolidated Financial Statements."
32
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended
-----------------------------------------
Dec. 27, Dec. 28, Dec. 29,
(In thousands of dollars) 1998 1997 1996
----------- ----------- -----------
CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES
Net income $ 365,857 $ 413,015 $ 267,873
Noncash items deducted from (included in) income:
Gains on sales/exchanges of investee/
subsidiaries (Note G) (75,251) (283,126)
Net gain on sale of discontinued BIS operations (60,042) (15,261) (86,255)
Depreciation 101,950 94,138 86,976
Amortization of excess of cost over net assets acquired 66,035 47,475 18,500
Amortization of other assets 20,067 15,118 15,171
Provision (benefit) for deferred taxes (8,444) (14,750) 40,647
Provision for bad debts 20,854 23,332 19,315
Earnings of investees in excess of distributions (21,856) (14,658) (21,293)
Minority interests in earnings of consolidated subsidiaries 10,749 11,503 9,293
Other items, net 18,576 38,656 (9,648)
Change in certain assets and liabilities:
Accounts receivable (39,927) (57,185) (62,223)
Inventories (9,398) (326) 30,474
Other current assets 3,296 380 (159,718)
Accounts payable (20,299) (83,969) 86,251
Federal and state income taxes (52,234) 20,125 9,347
Other liabilities (22,782) 47,724 (9,826)
----------- ----------- -----------
Net Cash Provided by Operating Activities 297,151 242,191 234,884
----------- ----------- -----------
CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES
Proceeds from sales of investee/subsidiaries(Note G) 58,125 181,145
Proceeds from sale of discontinued BIS operations (Note G) 125,000 416,983 271,859
Change in net noncurrent assets of discontinued
BIS operations 520 1,996 4,249
Proceeds from sales of securities available for sale 4,319 241,894
Additions to property, plant and equipment (132,025) (106,614) (112,896)
Other items, net (35,642) (8,165) 45,142
----------- ----------- -----------
Net Cash Provided by Investing Activities 20,297 727,239 208,354
----------- ----------- -----------
CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES
Proceeds from sale of commercial paper, notes payable and
senior notes payable 914,926 833,600 601,010
Payment of total debt (1,057,186) (976,611) (793,525)
----------- ----------- -----------
Net Change in Total Debt (142,260) (143,011) (192,515)
Payment of cash dividends (77,152) (78,335) (74,262)
Sale of common stock to employees 44,411 60,029 63,815
Purchase of treasury stock (255,533) (643,375) (221,768)
Other items, net (20,369) (27,327) (21,640)
----------- ----------- -----------
Net Cash (Required for) Financing
Activities (450,903) (832,019) (446,370)
----------- ----------- -----------
Net Increase (Decrease) in Cash (133,455) 137,411 (3,132)
Cash and short-term cash investments at beginning of the year 160,291 22,880 26,012
----------- ----------- -----------
Cash and short-term cash investments at end of the year $ 26,836 $ 160,291 $ 22,880
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Noncash investing activities (Note G)
Securities received as proceeds on the sale of investee $ 37,678 $ 229,163
Noncash financing activities (Note G)
Issuance of preferred stock for the acquisition of the
Disney newspapers
Preferred stock 1,755
Additional capital 658,245
Long-term debt assumed on the acquisition of the Disney newspapers 990,000
See "Notes to Consolidated Financial Statements."
33
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Preferred Common Treasury
(In thousands of dollars, Shares Shares Shares Preferred Common
except share data) Outstanding Outstanding Outstanding Stock Stock
----------- ----------- ----------- --------- -------
BALANCE AT DEC. 31, 1995 -- 97,196,308 -- $ -- $ 2,025
Issuance of common shares under stock option plan 1,040,938 22
Issuance of common shares under stock purchase plan 126,808 3
Issuance of treasury shares under stock option plan 868,752
Issuance of treasury shares under stock purchase plan 326,946
Purchase of treasury shares (6,219,100)
Retirement of treasury shares (5,023,402) 5,023,402 (105)
Expenses related to capital transactions
Tax benefits arising from employee stock plans
Comprehensive income:
Net income
Change in unrealized gains on securities available for sale,
net of tax of $29,886
Comprehensive income
Cash dividends declared on common stock - $.58 1/2 per share(1)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 29, 1996 -- 93,340,652 -- $ -- $ 1,945
Issuance of common shares under stock option plan 89,318 2
Issuance of treasury shares under stock option plan 1,604,447
Issuance of treasury shares under stock purchase plan 387,514
Issuance of convertible preferred shares 1,754,930 1,755
Purchase of treasury shares (13,824,300)
Retirement of treasury shares (11,832,339) 11,832,339 (247)
Tax benefits arising from employee stock plans
Comprehensive income:
Net income
Change in unrealized gains on securities available for sale,
net of tax of $1,210
Comprehensive income
Cash dividends declared on common stock - $.80 per share
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 28, 1997 1,754,930 81,597,631 -- $ 1,755 $ 1,700
Issuance of common shares under stock option plan 369,372 7
Issuance of common shares under stock purchase plan 81,672 2
Issuance of treasury shares under stock option plan 638,420
Issuance of treasury shares under stock purchase plan 267,927
Issuance of treasury shares to nonemployee directors 3,333
Issuance of treasury shares 94,173
Purchase of treasury shares (4,725,000)
Retirement of treasury shares (3,674,480) 3,674,480 (76)
Tax benefits arising from employee stock plans
Comprehensive income:
Net income
Change in unrealized gains on securities available for sale,
net of tax of $12,492
Comprehensive income
Cash dividends declared on common stock - $.80 per share
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 27, 1998 1,754,930 78,374,195 (46,667) $ 1,755 $ 1,633
====================================================================================================================================
(1) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997.
The quarterly dividend previously paid in January was paid on Feb. 24, 1997,
to shareholders of record as of the close of business on Feb. 12, 1997.
(2) Accumulated other comprehensive income at Dec. 31, 1995, represents
unrealized gains on securities available for sale.
See "Notes to Consolidated Financial Statements."
34
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Continued)
Accumulated
Other
(In thousands of dollars, Additional Retained Comprehensive Treasury
except share data) Capital Earnings Income Stock Total
---------- ---------- ------------- --------- ----------
BALANCE AT DEC. 31, 1995 $ 295,360 $ 770,643 $ 42,942(2) $ -- $1,110,970
Issuance of common shares under stock option plan 26,589 (11) 26,600
Issuance of common shares under stock purchase plan 3,724 (1) 3,726
Issuance of treasury shares under stock option plan (7,661) 30,783 23,122
Issuance of treasury shares under stock purchase plan (1,278) 11,645 10,367
Purchase of treasury shares (221,768) (221,768)
Retirement of treasury shares (16,586) (162,649) 179,340 --
Expenses related to capital transactions (203) (203)
Tax benefits arising from employee stock plans 8,375 8,375
Comprehensive income:
Net income 267,873 267,873
Change in unrealized gains on securities available for sale,
net of tax of $29,886 (41,271) (41,271)
-----------
Comprehensive income 226,602
-----------
Cash dividends declared on common stock - $.58 1/2 per share(1) (56,283) (56,283)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 29, 1996 $ 308,320 $ 819,572 $ 1,671 $ -- $1,131,508
Issuance of common shares under stock option plan 2,395 2,397
Issuance of treasury shares under stock option plan (28,149) 70,785 42,636
Issuance of treasury shares under stock purchase plan (2,222) 17,218 14,996
Issuance of convertible preferred shares 658,245 660,000
Purchase of treasury shares (643,375) (643,375)
Retirement of treasury shares (37,519) (517,606) 555,372 --
Tax benefits arising from employee stock plans 10,502 10,502
Comprehensive income:
Net income 413,015 413,015
Change in unrealized gains on securities available for sale,
net of tax of $1,210 (1,671) (1,671)
-----------
Comprehensive income 411,344
-----------
Cash dividends declared on common stock - $.80 per share (78,335) (78,335)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 28, 1997 $ 911,572 $ 636,646 $ -- $ -- $1,551,673
Issuance of common shares under stock option plan 10,185 10,192
Issuance of common shares under stock purchase plan 3,966 3,968
Issuance of treasury shares under stock option plan (14,422) 32,797 18,375
Issuance of treasury shares under stock purchase plan (1,352) 13,228 11,876
Issuance of treasury shares to nonemployee directors (13) 186 173
Issuance of treasury shares 5,021 5,021
Purchase of treasury shares (255,533) (255,533)
Retirement of treasury shares (11,401) (190,219) 201,696 --
Tax benefits arising from employee stock plans 9,543 9,543
Comprehensive income:
Net income 365,857 365,857
Change in unrealized gains on securities available for sale,
net of tax of $12,492 18,738 18,738
-----------
Comprehensive income 384,595
-----------
Cash dividends declared on common stock - $.80 per share (77,152) (77,152)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 27, 1998 $908,078 $ 735,132 $ 18,738 $ (2,605) $1,662,731
====================================================================================================================================
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Knight Ridder is the nation's second largest newspaper publisher in terms of
circulation and revenue, with products in print and online. The company
publishes 31 daily newspapers in 28 U.S. markets, reaching 9.2 million readers
daily and 13.1 million on Sunday. It maintains 45 associated Web sites under the
name Knight Ridder Real Cities and has investments in two newsprint mills.
The company reports on a fiscal year, ending the last Sunday in the calendar
year. Results for 1998, 1997 and 1996 are for the 52 weeks ended Dec. 27, Dec.
28 and Dec. 29, respectively.
The BASIS OF CONSOLIDATION is to include in the consolidated financial
statements all the accounts of Knight Ridder and its more-than-50%-owned
subsidiaries. All significant intercompany transactions and account balances
have been eliminated in consolidation.
The company is a 50% partner in the DETROIT NEWSPAPER AGENCY (DNA), a joint
operating agency between Detroit Free Press, Inc., a wholly owned subsidiary of
Knight Ridder, and The Detroit News, Inc., a wholly owned subsidiary of Gannett
Co., Inc. In 1989, business operations of the Free Press and The Detroit News
were transferred to the DNA. Under the joint operating agreement that expires in
the year 2089, as of Dec. 26, 1994, profits are split equally between the
partners. The Consolidated Statement of Income includes, on a line-by-line
basis, the company's pro rata share of the revenue and expense generated by the
operation of the agency.
INVESTMENTS in companies in which Knight Ridder has an equity interest of at
least 20% but not more than 50% are accounted for under the equity method. Under
this method, the company records its share of earnings as income and increases
the investment by the equivalent amount. Dividends are recorded as a reduction
in the investment.
The investment caption "EQUITY IN UNCONSOLIDATED COMPANIES AND JOINT VENTURES"
in the Consolidated Balance Sheet represents the company's equity in the net
assets of DNA; the Seattle Times Company and subsidiaries; Newspapers First, a
company responsible for the sales and servicing of general, retail and
classified advertising accounts for a group of newspapers; Southeast Paper
Manufacturing Co. and Ponderay Newsprint Company, two newsprint mill
partnerships; InfiNet Company, a joint venture that allows newspapers to offer
Internet access to subscribers; Tesserae Information Systems, Inc., a company
that produces software used to merge various databases; TKR Cable Company and
TKR Cable Partners, cable television joint ventures (all but one of the cable
companies jointly owned with Tele-Communications, Inc. [TCI] were sold in
January 1997 and the balance was sold in March 1998); Interealty, Inc. (formerly
known as PRC Realty Systems, Inc., sold in September 1998), a software system
producer for the real estate industry; and Destination Florida, a company that
provided online travel information services (ceased operation in 1997).
The company owns 49 1/2% of the voting common stock and 65% of the nonvoting
common stock of the SEATTLE TIMES COMPANY, owns 31.1% of the voting stock of
NEWSPAPERS FIRST, is a one-third partner in the SOUTHEAST PAPER MANUFACTURING
36
CO. and owns a 13 1/2% equity share of PONDERAY NEWSPRINT COMPANY. The company
owns 33.3% of the voting stock and 50% of the nonvoting Stock of INFINET
COMPANY, and owns 33.1% of TESSERAE INFORMATION SYSTEMS, INC.
The investment in unconsolidated companies and joint ventures at Dec. 27, 1998,
includes $179.6 million representing the company's share of undistributed
earnings (excluding the DNA) accumulated since the investment dates. The
company's share of the earnings of the unconsolidated companies (except for the
DNA) of $23.3 million in 1998, $10.8 million in 1997 and $29.9 million in 1996
is included in the caption "EQUITY IN EARNINGS OF UNCONSOLIDATED COMPANIES AND
JOINT VENTURES" in the Consolidated Statement of Income. Dividends and cash
distributions received from the unconsolidated companies and joint ventures
(excluding the DNA) were $6.6 million in 1998, $3.1 million in 1997 and $18.6
million in 1996 and were offset against the investment account.
FORT WAYNE NEWSPAPERS, INC., and THE PROFESSIONAL EXCHANGE LLC (a subsidiary of
Philadelphia Newspapers, Inc.), are the only consolidated subsidiaries that have
a minority ownership interest. The minority shareholders' interest in the net
income of these subsidiaries has been reflected as an expense in the
Consolidated Statement of Income in the caption "MINORITY INTERESTS IN EARNINGS
OF CONSOLIDATED SUBSIDIARIES." Also included in this caption is a contractual
minority interest resulting from a JOA that runs through the year 2021 between
The Miami Herald Publishing Company and Cox Newspapers, Inc., covering the
publication of The Herald and The Miami News, which ceased publication in 1988.
The company's liability to the minority interest shareholders is included in the
Consolidated Balance Sheet caption, "MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES."
"CASH AND SHORT-TERM CASH INVESTMENTS" includes currency and checks on hand,
demand deposits at commercial banks, overnight repurchase agreements of
government securities, and investment-grade commercial paper with maturities of
90 days or less. Cash and short-term investments are recorded at cost. Due to
the short-term nature of marketable securities, cost approximates market value.
The majority of the company's "ACCOUNTS RECEIVABLE" as of Dec. 27, 1998, Dec.
28, 1997, and Dec. 29, 1996, are from advertisers, newspaper subscribers and
information users. Credit is extended based on the evaluation of the customer's
financial condition, and generally collateral is not required. Credit losses are
provided for in the financial statements and consistently have been within
management's expectations.
"INVENTORIES" are priced at the lower of cost (first-in, first-out FIFO method)
or market. Most of the inventory is newsprint, ink and other supplies used in
printing newspapers.
"OTHER ASSETS" includes investments in companies in which Knight Ridder owns
less than a 20% interest. These investments are reviewed for appropriate
classification at the time of purchase and re-evaluated as of each balance sheet
date. Investments available for sale are carried on the balance sheet at fair
market value, with the unrealized gains/losses (net of tax) reported as
"ACCUMULATED OTHER COMPREHENSIVE INCOME," a separate component of shareholders'
equity. Upon the sale of an investment, the gain/loss is calculated based on the
37
original cost, less the proceeds from the sale. Investments are classified as
"held to maturity" when the company has the positive intent and ability to hold
the investment to maturity.
"PROPERTY, PLANT AND EQUIPMENT" is recorded at cost, and the provision for
depreciation for financial statement purposes is computed principally by the
straight-line method over the estimated useful lives of the assets.
"EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLES" includes the
unamortized excess of cost over the fair market value on the purchase of at
least a 50% interest in a company's net tangible and intangible assets arising
from these acquisitions. The excess of cost over net assets acquired and
intangible assets from acquisitions accounted for as purchases and occurring
subsequent to Oct. 31, 1970, totaled, at Dec. 27, 1998, approximately $2.4
billion, including $400.5 million of identified intangible assets. The excess of
cost over net assets acquired is being amortized over a 40-year period on a
straight-line basis, unless management concludes that a shorter term is more
appropriate. Other intangibles acquired through acquisitions consist of
trademarks, subscriber and advertiser lists and mastheads that are being
amortized on a straight-line basis over periods ranging from five to 40 years,
with a weighted-average life of 25.7 years. If, in the opinion of management, an
impairment in value occurs, based on the undiscounted cash flow method, any
necessary additional write-downs will be charged to expense.
"DEFERRED REVENUE" arises as a normal part of business from advance subscription
payments for newspapers. Revenue is recognized in the period in which it is
earned.
"SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT" includes the
carrying amounts of commercial paper and other short-term borrowings with
original maturities of less than one year, and the portion of long-term debt
payable within 12 months and which management does not intend to refinance. The
carrying amounts of short-term borrowings approximate fair value. "LONG- TERM
DEBT" represents the carrying amounts of debentures, notes payable and other
indebtedness with maturities longer than one year. Fair values, disclosed in
Note C, are estimated using discounted cash flow analyses based on the company's
current incremental borrowing rates for similar types of borrowing arrangements.
In 1996, the company implemented FAS 123 - ACCOUNTING FOR STOCK-BASED
COMPENSATION. Under this statement, the company accounts for stock-based
compensation plans under the provisions of APB 25 - Accounting for Stock Issued
to Employees, and discloses the general and pro forma financial information
required by FAS 123. See Note E.
In 1997, the company adopted FAS 128 - EARNINGS PER SHARE (EPS). FAS 128
replaced the calculation of primary and fully diluted EPS with basic and diluted
EPS. Basic EPS will typically be higher than primary EPS due to the exclusion of
any dilutive effects of options, warrants and convertible securities from the
calculation. Diluted EPS is very similar to the previously reported fully
diluted EPS. All EPS amounts for all earlier periods presented have been
restated to conform to the FAS 128 requirements.
"BASIC EARNINGS PER SHARE" is computed by dividing net income by the
38
weighted-average number of common shares outstanding. "DILUTED EARNINGS PER
SHARE" is computed by dividing net income by the weighted-average number of
common and common equivalent shares outstanding. Quarterly earnings per share
may not add to the total for the year, since each quarter and the year are
calculated separately based on average outstanding shares during the period.
In 1997, the company also adopted FAS 129 - DISCLOSURE OF INFORMATION ABOUT
CAPITAL STRUCTURE. FAS 129 establishes standards for disclosing information
about an entity's capital structure. The adoption of this statement did not
result in additional required disclosures.
In 1998, the company adopted FAS 130 - REPORTING COMPREHENSIVE INCOME. FAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. FAS 130 requires that unrealized gains or losses on the
company's available-for-sale securities be included in "ACCUMULATED OTHER
COMPREHENSIVE INCOME," a separate component of shareholders' equity. Prior to
its adoption, unrealized gains or losses on available-for-sale securities were
separately identified as such in shareholders' equity. The adoption of FAS 130
expanded the disclosure provided in the statement of shareholders' equity. See
Note H.
FAS 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
was effective in 1998. The company is a newspaper company with products in print
and online. It maintains operations and local management in the markets it
serves, including the metropolitan areas of Philadelphia, Pa., Miami, Fla., San
Jose, Calif., Kansas City, Mo., Fort Worth, Texas, Detroit, Mich., and
Charlotte, N.C. Revenue is earned through the sale of advertising, circulation
and related activities. Newspapers are distributed in print through local
distribution channels, as well as online through Web sites.
The company conducts business in one operating segment and determined its
operating segment based on the individual operations that the chief operating
decision maker reviews for purposes of assessing performance and making
operating decisions. These individual operations have been aggregated into one
segment because the company believes doing so helps users understand the
company's performance and assess its prospects. The combined operations have
similar economic characteristics and each operation has similar products,
services, customers, production processes and distribution methods.
In 1998, the company also adopted FAS 132 - EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS. FAS 132 standardizes the disclosure
requirements for pensions and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values of plan assets
and eliminates certain disclosures that are no longer considered useful. See
Note F.
In 2000, the company plans to adopt FAS 133 - ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. Based on current circumstances, the company
does not believe the effect of adoption will be material.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts in 1997 and 1996 have been reclassified to conform to the 1998
presentation.
39
B. INCOME TAXES
The company's income tax expense is determined under the liability method, which
requires adjusting previously deferred taxes for changes in tax rates.
Substantially all of the company's earnings are subject to domestic taxation.
Federal, state and local income taxes consist of the following (in thousands):
1998 1997 1996
------------------- ------------------- -------------------
Current Deferred Current Deferred Current Deferred
-------- -------- -------- -------- -------- --------
Federal income taxes $213,161 $ (4,479) $286,645 $(33,176) $127,610 $ 28,075
State and local income taxes 39,953 (2,465) 64,519 (11,156) 29,913 13,167
-------- -------- -------- -------- -------- --------
Total $253,114 $ (6,944) $351,164 $(44,332) $157,523 $ 41,242
======== ======== ======== ======== ======== ========
Provision for:
Continuing operations . $210,729 $ (8,444) $312,098 $(14,750) $ 84,182 $ 40,647
Discontinued operations 42,385 1,500 39,066 (29,582) 73,341 595
-------- -------- -------- -------- -------- --------
Total $253,114 $ (6,944) $351,164 $(44,332) $157,523 $ 41,242
======== ======== ======== ======== ======== ========
Cash payments of income taxes for the years 1998, 1997 and 1996 were $262.7
million, $278.5 million and $147.2 million, respectively. Payments in 1998, 1997
and 1996 include the tax impact resulting from one-time gains. Payments in 1998
included the tax impact from the sale of the balance of our jointly owned cable
system, Technimetrics, Inc., and our newspaper in Gary, Ind. Payments in 1997
included the tax impact from the sale of the majority of our cable systems,
Knight-Ridder Information, Inc., and the sales/exchanges of our newspapers.
Payments in 1996 included the tax impact from the sale of Knight-Ridder
Financial.
40
EFFECTIVE INCOME TAX RATES
The differences between income tax expense for continuing operations shown in
the financial statements and the amounts determined by applying the federal
statutory rate of 35% in each year are as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Federal statutory income tax $ 177,771 $ 242,848 $ 108,573
State and local income taxes, net of federal benefit 17,033 34,300 13,612
Statutory rate applied to nondeductible amortization
of the excess of cost over net assets acquired 15,123 13,482 2,781
Other items, net (7,642) 6,718 (137)
--------- --------- ---------
Total $ 202,285 $ 297,348 $ 124,829
========= ========= =========
The deferred tax asset and liability at the fiscal year end consist of the
following components (in thousands):
1998 1997 1996
--------- --------- ---------
Deferred Tax Asset
Postretirement benefits other than pensions (including
amounts relating to partnerships in which the
company participates) $ 84,100 $ 88,016 $ 95,764
Accrued interest 7,175 8,165 10,576
Other nondeductible accruals 60,022 51,651 43,594
--------- --------- ---------
Gross deferred tax asset $ 151,297 $ 147,832 $ 149,934
========= ========= =========
Deferred Tax Liability
Depreciation and amortization $ 341,618 $ 341,872 $ 196,116
Compensation and benefit accruals 7,810 15,855 6,802
Equity in partnerships and investees 51,170 46,845 73,499
Unrealized appreciation in equity securities 12,492 1,210
Research and experimental expenditures 10,964
Other 3,361 4,010 11,066
--------- --------- ---------
Gross deferred tax liability $ 416,451 $ 408,582 $ 299,657
--------- --------- ---------
Net deferred tax liability $ 265,154 $ 260,750 $ 149,723
========= ========= =========
The components of deferred taxes included in the Consolidated Balance Sheet are
as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Current asset $ 27,861 $ 23,445 $ 24,296
Noncurrent liability 293,015 282,695 142,727
Discontinued BIS operations - net liability 1,500 31,292
--------- --------- ---------
Net deferred tax liability $ 265,154 $ 260,750 $ 149,723
========= ========= =========
41
C. DEBT
Debt consisted of the following (in thousands):
Dec. 27 Dec. 28 Dec. 29
1998 1997 1996
---------- ---------- ----------
Commercial paper due at various dates through June 18, 1999, at an
effective interest rate of 5.5% as of Dec. 27, 1998. Amounts are
net of unamortized discounts of $9,639 in 1998, $207 in
1997 and $1,683 in 1996 (a) $ 917,533 $ 29,793 $ 364,817
Senior secured bank debt due on Sept. 15, 1999, advanced under
a $1.2 billion credit agreement with a variable interest rate
indexed to LIBOR plus 27-1/2 basis points(b) 990,000
Debentures due on April 15, 2009, bearing interest at 9.875%,
net of unamortized discount of $1,701 in 1998, $1,867 in
1997 and $2,032 in 1996 198,299 198,133 197,968
Debentures due on Nov. 1, 2027, bearing interest at 7.15%,
net of unamortized discount of $5,614 in 1998 and $5,739 in 1997 94,386 94,261
Notes payable, bearing interest at 8.5%, subject to
mandatory pro rata amortization of 25% annually commencing
Sept. 1, 1998, through maturity on Sept. 1, 2001, net of unamortized
discount of $223 in 1998, $383 in 1997 and $555 in 1996 119,777 159,617 159,445
Notes payable due on Nov 1, 2007, bearing interest at 6.625%,
net of unamortized discount of $2,022 in 1998 and $2,179 in 1997 97,978 97,821
Senior notes payable due on Dec. 15, 2005, bearing interest at 6.3%,
net of unamortized discount of $695 in 1998, $795 in 1997 and
$895 in 1996 99,305 99,205 99,105
---------- ---------- ----------
1,527,278 1,668,830 821,335
---------- ---------- ----------
Less amounts payable in one year(c) 198,277 69,697 50,000
---------- ---------- ----------
Total long-term debt $1,329,001 $1,599,133 $ 771,335
========== ========== ==========
(a) Commercial paper is supported by $1.1 billion of revolving credit and term
loan agreements, $500 million of which matures on June 22, 2003, and $600
million of which matures on June 22, 1999. The company has the option and
intention to renew the $600 million facility before June 22, 1999, for an
additional 364-day term through June 2000.
(b) Senior secured bank debt was collateralized by all personal property assets
and four recorded first mortgages of Cypress Media, Inc., a wholly owned
subsidiary. Bank debt was paid off on June 26, 1998, with proceeds from the
sale of commercial paper.
(c) In 1998, this represents $39.9 million for the 8.5% note payable due on
Sept. 1, 1999, and $158.4 million of commercial paper due within the next 12
months and which management does not intend to refinance.
Interest payments during 1998, 1997 and 1996 were $118.4 million, $87.2 million
and $70.9 million, respectively.
42
The following table presents the approximate annual maturities of debt for the
years after 1998 (in thousands):
1999 $ 198,277
2000 299,114
2001 39,919
2002
2003 500,000
2004 and thereafter 489,968
----------
Total $1,527,278
==========
The carrying amounts and fair values of debt as of Dec. 27, 1998, are as
follows (in thousands):
Carrying Fair
Amount Value
---------- ----------
Commercial paper $ 917,533 $ 917,533
9.875% Debentures 198,299 263,309
7.15% Debentures 94,386 109,940
8.5% Notes payable 119,777 128,546
6.625% Notes payable 97,978 106,689
6.3% Senior notes payable 99,305 103,860
---------- ----------
Total $1,527,278 $1,629,877
========== ==========
D. UNCONSOLIDATED COMPANIES AND JOINT VENTURES
Summary financial information for the company's unconsolidated companies and
joint ventures that are accounted for under the equity method is as follows (in
thousands):
1998 1997 1996
---------- ---------- ----------
Current assets $ 246,940 $ 212,939 $ 258,037
Property, plant and equipment and other assets 1,260,996 1,158,224 4,076,604
Current liabilities 170,856 143,683 287,782
Long-term debt and other noncurrent liabilities 518,560 394,253 2,893,716
Net sales 782,893 806,587 1,417,668
Gross profit 90,719 62,426 225,307
Net income 56,201 24,428 55,104
Company's share of:
Net assets 201,120 197,585 330,267
Net income 23,309 10,800 29,868
43
In 1989, the Detroit Free Press and The Detroit News began operating under a
joint operating agreement as the Detroit Newspaper Agency (DNA). Balance sheet
amounts for the DNA at Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996, are
included above, and the net assets contributed to the DNA are included in
"Equity in unconsolidated companies and joint ventures" in the Consolidated
Balance Sheet.
In January 1997, the company and Tele-Communications, Inc., closed on the sale
of the company's interest in all but one of their jointly owned cable systems.
The sale of the balance of the cable system was completed in March 1998. See
Note G.
E. CAPITAL STOCK
In 1991, shareholders authorized 2 million shares of Series B preferred stock
for future issuance (which is convertible into 20 million shares of common
stock).
In 1997, the Board of Directors authorized 1,758,242 shares of Series B
preferred stock, $1.00 par value per share, and issued 1,754,930 preferred
shares in connection with the May 9, 1997, acquisition of four newspapers that
were indirectly owned by The Walt Disney Company. Each share of Series B
preferred stock is convertible into 10 shares of common stock. If and when
dividends and other distributions are declared by the Board of Directors,
holders of the Series B preferred stock are entitled to receive the dividends or
other distribution paid on the number of shares of the corporation's common
stock into which such share of this series is convertible. Each holder of this
series is entitled to vote with respect to all matters upon which holders of the
corporation's common stock are entitled to vote. The holder of Series B
preferred stock has two votes for each preferred share.
Concurrent with the 1996 stock split, the company executed a rights agreement to
replace a similar agreement that expired on July 10, 1996. The agreement grants
each holder of a common share a right, under certain conditions, to purchase
from the company a unit consisting of one one-hundredth of a share of preferred
stock, at a price of $150, subject to adjustment. The rights provide that in the
event the company is a surviving corporation in a merger, each holder of a right
will be entitled to receive, upon exercise, common shares having a value equal
to two times the exercise price of the right. In the event the company engages
in a merger or other business combination transaction in which the company is
not the surviving corporation, the rights agreement provides that proper
provision shall be made so that each holder of a right will be entitled to
receive, upon the exercise thereof at the then-current exercise price of the
right, common stock of the acquiring company having a value equal to two times
the exercise price of the right. No rights certificates will be distributed
until 10 days following a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the company's outstanding common stock,
or 10 business days following the commencement of a tender offer or exchange
offer for 20% or more of the company's outstanding stock. Until such time, the
rights are evidenced by the common share certificates of the company. The rights
are not exercisable until distributed and will expire on July 10, 2006, unless
earlier redeemed or exchanged by the company.
The company has the option to redeem the rights in whole, but not in part, at a
price of $.01 per right subject to adjustment. The company's Board of Directors
has reserved 1,500,000 preferred shares for issuance upon exercise of the
rights.
44
In 1998 and 1997, the Series B preferred stock, each share of which is
convertible into 10 shares of common stock, and shares of common stock issuable
upon exercise of stock options are included in the diluted EPS calculation, but
excluded from the basic EPS calculation. The 1998 and 1997 diluted EPS
calculations include 17,549,300 and 10,968,313 weighted-average shares of Series
B convertible preferred stock, respectively, and 1,744,887 and 1,870,340
weighted-average shares of common stock issuable upon exercise of stock options,
respectively. In 1996, the only difference between the basic and diluted EPS
calculations is the dilutive impact of options that are included in the diluted
EPS calculation.
The Employees Stock Purchase Plan provides for the sale of common stock to
employees of the company and its subsidiaries at a price equal to 85% of the
market value at the end of each purchase period. Participants under the plan
received 349,599 shares in 1998, 387,514 shares in 1997 and 453,754 shares in
1996. The purchase price of shares issued in 1998 under this plan ranged between
$41.28 and $48.58, and the market value on the purchase dates of such shares
ranged from $48.56 to $57.16.
The Employee Stock Option Plan provides for the issuance of nonqualified stock
options and incentive stock options. Options are issued at prices not less than
market value at date of grant and until March 1994 were exercisable at issue
date. Options granted thereafter vest in three equal installments over a
three-year period from the date of grant. There is no expiration date for the
granting of options, but options must expire no later than 10 years from the
date of grant. The option plan provides for the discretionary grant of stock
appreciation rights (SARs) in tandem with previously granted options, which
allow a holder to receive in cash, stock or combinations thereof the difference
between the exercise price and the fair market value of the stock at date of
exercise. Shares of common stock relating to options outstanding under this plan
are reserved at the date of grant.
Transactions under the Employee Stock Option Plan are summarized as follows:
Number of Weighted-Average
Shares Exercise Price Per Share
--------- ------------------------
Outstanding
Dec. 31, 1995 7,647,314 $ 27.26
Exercised (1,909,690) 25.95
Expired (8,650) 29.54
Forfeited (148,579) 28.70
Granted 1,324,450 39.25
Outstanding
Dec. 29, 1996 6,904,845 29.89
Exercised (1,693,765) 26.54
Expired (340,341) 29.00
Forfeited (25,873) 32.55
Granted 1,412,668 51.65
Outstanding
Dec. 28, 1997 6,257,534 35.74
Exercised (1,007,792) 28.35
Expired (25,230) 33.88
Forfeited (90,224) 55.61
Granted 1,481,750 49.72
Outstanding
Dec. 27, 1998 6,616,038 39.74
45
In 1997, the company established the Long-Term Incentive Plan. The plan rewards
participants whose leadership helps the company reach levels of total
shareholder return, as defined. The plan covers a single three-year performance
period from Jan. 1, 1997, through Dec. 31, 1999. Participants received an
aggregate initial grant of 347,218 shares of restricted Knight Ridder common
stock. Additional grants, net of forfeitures, resulted in restricted shares
outstanding of 314,925 and 322,286 at Dec. 27, 1998 and Dec. 28, 1997,
respectively. The grants of common stock are restricted, as the vesting of these
shares is triggered upon the occurrence of certain performance goals.
In 1997, the company established the Compensation Plan for Nonemployee
Directors. The purpose of the plan is to attract and retain the services of
qualified individuals who are not employees of the company to serve as members
of the Board of Directors. Part of the compensation plan includes the issuance
of stock options. Options vest in three equal installments over a three-year
period and expire no later than 10 years from the date of grant. In 1997,
200,000 shares were authorized for issuance as options under the plan.
Participants were granted 24,000 and 26,000 options in 1998 and 1997,
respectively. In addition, 3,333 shares were awarded under the plan as retainer
payments to nonemployee directors in 1998.
Proceeds from the issuance of shares under these plans are included in
shareholders' equity and do not affect income.
At Dec. 27, 1998, shares of the company's authorized but unissued common stock
were reserved and available for issuance as follows:
Shares
---------
Employee Stock Option Plan 810,465
Employees Stock Purchase Plan 1,071,507
Nonemployee Directors Plan 146,667
----------
Total 2,028,639
==========
As required by FAS 123, pro forma information regarding net income and earnings
per share has been determined as if the company had accounted for its employee
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1998, 1997 and
1996, respectively: risk-free rates of 4.7%, 5.7% and 6.1%; dividend yields of
1.6%, 1.6% and 2.0%; volatility factors of the expected market price of the
company's common stock of 0.17, 0.14 and 0.16; and a weighted-average expected
life of the option of 6.4, 6.4 and 6.5 years. The weighted-average fair values
of the stock options for 1998, 1997 and 1996 were $11.58, $12.44 and $9.65,
respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the company's stock options have characteristics significantly different from
those traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, the existing models, in
management's opinion, do not necessarily provide a reliable single measure of
the fair value of its stock options.
46
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 Employees Stock Purchase Plan is treated as
compensation expense for pro forma purposes. The company's 1998, 1997 and 1996
pro forma information follows (in thousands, except for earnings per share
information):
1998 1997 1996
----------- ----------- -----------
Net income $ 356,777 $ 407,274 $ 264,600
Basic earnings per share 4.52 4.60 2.76
Diluted earnings per share 3.63 4.02 2.72
The pro forma effect on net income is not necessarily representative of the
effect in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
The exercise price of options outstanding at Dec. 27, 1998, ranged between
$22.66 and $57.53. The weighted-average remaining contractual life of those
options for 1998, 1997 and 1996 is 7.3, 6.9 and 6.4 years, respectively. The
weighted-average exercise price of those options for 1998, 1997 and 1996 is
$39.82, $35.77 and $29.96, respectively. 3,882,661, 3,643,950 and 4,305,845
options were exercisable at the end of 1998, 1997 and 1996, respectively.
F. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
A summary of the components of net periodic benefit cost for the defined benefit
plans and postretirement benefit plans (other benefits) is presented here, along
with the total amounts charged to pension expense for multi-employer union
defined benefit plans, defined contribution plans and other agreements (in
thousands):
Pension Benefits Other Benefits
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
Defined benefit plans:
Service cost $ 41,994 $ 30,116 $ 28,562 $ 3,390 $ 3,524 $ 3,769
Interest cost 67,864 61,458 56,698 10,380 10,988 11,229
Expected return on plan assets (89,264) (75,151) (65,342) (778) (753)
Recognized net actuarial (gain) loss (1,095) 57 749 (829) (324) (324)
Amortization of prior service cost 6,418 5,990 6,268 (4,649) (4,508) (4,276)
Amortization of transition
(asset) obligation (3,999) (4,516) (4,645)
-------- -------- -------- -------- -------- --------
Net 21,918 17,954 22,290 7,514 8,927 10,398
Multi-employer union plans 11,731 11,125 9,157
Defined contribution plans 11,681 10,742 9,022
Other 1,695 1,968 1,412
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 47,025 $ 41,789 $ 41,881 $ 7,514 $ 8,927 $ 10,398
======== ======== ======== ======== ======== ========
Service cost in 1998 included approximately $7.0 million related to accelerating
the retirement of certain employees.
47
Weighted-average assumptions used each year in accounting for defined benefit
plans and postretirement benefits were:
Pension Benefits Other Benefits
------------------ ------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Discount rate as of year end 6.8% 7.0% 7.5% 6.8% 7.0% 7.5%
Return on plan assets 8.8 8.5 8.5 6.5 6.5 6.5
Rate of compensation increase 4.5 4.5 4.5 4.5 4.5 4.5
Medical trend rate:
Projected 7.0 8.0 9.0
Reducing to this percentage in 2001 and
thereafter 5.5 5.5 5.5
The assumed health care cost trend rate has a significant effect on the amounts
reported. A one-percentage-point change in the assumed health care cost trend
rate would have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service
and interest cost
components in 1998 $ 607 $ (517)
Effect on postretirement
benefit obligation as of
12/27/98 $ 4,507 $(3,957)
48
The following table sets forth the funded status and amounts recognized in the
Consolidated Balance Sheet for the company's benefit plans (excluding
liabilities of the DNA that are reported net in the Consolidated Balance Sheet
under the caption "Equity in unconsolidated companies and joint ventures") (in
thousands):
Pension Benefits Other Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
Change in Benefit Obligation
Benefit obligation at beginning of year $ 955,332 $ 796,879 $ 772,964 $ 132,618 $ 121,488 $ 142,571
Service cost 38,230 27,423 27,914 2,266 2,316 2,410
Interest cost 67,864 61,458 56,698 7,114 7,987 8,296
Plan participants' contributions 1,216 1,653 1,435
Amendments 5,666 4,483 13,299 (868) (8,599)
Actuarial (gains) losses 35,582 57,444 (51,397) (11,788) 2,695 (14,825)
Net acquisitions (divestitures) 51,384 17,225 6,931 (304)
Benefits paid (48,775) (43,739) (39,824) (9,329) (10,452) (9,496)
----------- ----------- ----------- ----------- ----------- -----------
Benefit obligation at end of year $ 1,053,899 $ 955,332 $ 796,879 $ 121,229 $ 132,618 $ 121,488
----------- ----------- ----------- ----------- ----------- -----------
Change In Plan Assets
Fair value of plan assets
at beginning of year $ 1,058,759 $ 859,911 $ 772,494 $ 12,386 $ 12,400 $ --
Actual return on plan assets 130,259 173,445 106,651 916 843
Acquisitions 59,495 12,124
Company contributions 8,930 9,647 8,466 7,512 7,942 20,461
Plan participants' contributions 1,216 1,653 1,435
Benefits paid (48,775) (43,739) (39,824) (9,329) (10,452) (9,496)
----------- ----------- ----------- ----------- ----------- -----------
Fair value of plan assets at end of year $ 1,149,173 $ 1,058,759 $ 859,911 $ 12,701 $ 12,386 $ 12,400
----------- ----------- ----------- ----------- ----------- -----------
Funded status of plan (underfunded) $ 95,274 $ 103,427 $ 63,032 $ (108,528) $ (120,232) $ (109,088)
Unrecognized net actuarial loss (120,239) (126,768) (84,860) (18,297) (6,724) (9,788)
Unrecognized prior service cost 42,159 42,911 44,418 (20,293) (23,529) (27,535)
Unrecognized net (asset) obligation at the
date FAS 87 was adopted,
net of amortization (8,480) (12,576) (16,854)
----------- ----------- ----------- ----------- ----------- -----------
Net prepaid (accrued) benefit cost $ 8,714 $ 6,994 $ 5,736 $ (147,118) $ (150,485) $ (146,411)
=========== =========== =========== =========== =========== ===========
Amounts recognized in the Consolidated Balance Sheet consist of:
Pension Benefits Other Benefits
----------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
----------- ----------- ----------- ----------- ----------- -----------
Prepaid benefit cost $ 51,636 $ 56,504 $ 47,983
Accrued benefit liability (42,922) (49,510) (42,247) $ (147,118) $ (150,485) $ (146,411)
Additional minimum liability (9,200) (5,922) (14,279)
Intangible asset 9,200 5,922 14,279
----------- ----------- ----------- ----------- ----------- -----------
Net prepaid (accrued) benefit cost $ 8,714 $ 6,994 $ 5,736 $ (147,118) $ (150,485) $ (146,411)
=========== =========== =========== =========== =========== ===========
49
Amounts applicable to the company's pension plans with accumulated benefit
obligations in excess of plan assets are as follows:
1998 1997 1996
--------- --------- ---------
Projected benefit obligation $(119,794) $ (43,497) $ (87,467)
Accumulated benefit obligation (106,092) (32,484) (77,021)
Fair value of plan assets 68,988 2,529 49,809
Unfunded accumulated benefit obligation (37,104) (29,955) (27,212)
Of the plans whose accumulated benefit obligations exceed plan assets, the
amounts applicable to qualified plans are as follows:
1998 1997 1996
--------- --------- ---------
Projected benefit obligation $ (79,800) $ (2,934) $ (55,632)
Accumulated benefit obligation (75,211) (2,934) (52,011)
Fair value of plan assets 68,988 2,529 49,809
Unfunded accumulated benefit obligation (6,223) (405) (2,202)
Net pension assets are included in "Other" noncurrent assets and net pension
liabilities are included in "Employment benefits and other noncurrent
liabilities." In 1996, net pension liabilities related to discontinued
operations were included in "Net assets of discontinued BIS operations." These
net pension liabilities were assumed by corporate in 1997. Substantially all of
the assets of the company-administered plans are invested in listed stocks and
bonds. In 1996, the $12.4 million funding of the postretirement plan assets was
included in "Prepaid expense."
In the fourth quarter of 1998, the company changed the method of accounting used
to determine the market-related value of plan assets, effective Dec. 29, 1997.
The method was changed to: (1) align the method of calculating the return
component of net periodic pension costs with the related plans' investment
strategy; and (2) to minimize significant year-to-year fluctuations in pension
cost caused by financial market volatility. The effect of this change on 1998
results of operations, including the cumulative effect of prior years, was not
material.
G. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
On May 9, 1997, the company completed the acquisition for $1.65 billion of four
newspapers indirectly owned by The Walt Disney Company. The acquisition was
accomplished through the merger of a wholly owned subsidiary with and into
Cypress Media, Inc. ("Media"), formerly known as ABC Media, Inc., the owner of
the four newspapers. Media owns newspapers in Kansas City, Mo., Fort Worth,
Texas, Belleville, Ill., and Wilkes-Barre, Pa. The company intends to continue
to manage and operate Media as a newspaper company.
The acquisition was accounted for under the purchase method. The purchase price
was allocated based on the estimated fair market value of net tangible and
intangible assets acquired. The fair market value of the net tangible and
intangible assets of Media was approximately $317.3 million at date of purchase,
50
including $351.6 million of intangible assets, which are being amortized on a
straight-line basis over periods ranging from 10 years to 40 years. The
intangible assets acquired primarily represent mastheads, which have an
indefinite life, but are being amortized over 40 years. The excess of purchase
price over these net assets, approximately $1.33 billion, has been recorded as
goodwill and is being amortized on a straight-line basis over 40 years.
Pursuant to the merger, the company issued 1,754,930 shares of its Series B
convertible preferred stock. Each share of preferred stock is convertible into
10 shares of common stock. At the effective time of the merger, Media had $990
million of bank debt, which was assumed by the company. The company's results of
operations include Media from May 9, 1997.
The pro forma unaudited results of operations, as though the former Media
newspapers acquisition had occurred at the beginning of the fiscal year in which
the acquisition took place as well as for the comparable preceding year, were as
follows (in thousands of dollars, except share data):
1997 1996
---------- ----------
Operating revenue $3,058,791 $2,873,946
Income before income taxes 695,466 313,038
Net income 413,932 255,602
Earnings per share
Basic $ 4.68 $ 2.66
Diluted 4.09 2.22
On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two
newspapers in California owned by the E.W. Scripps Company, The Monterey County
Herald and the San Luis Obispo County Telegram-Tribune.
The exchange was accounted for under the purchase method. The fair market value
of the two newspapers received in the exchange was approximately $55.8 million,
and that value was allocated to the net tangible and intangible assets of these
newspapers. The fair market value of the identified tangible and intangible
assets was approximately $50.3 million at date of exchange, including $17.7
million of intangible assets, which are being amortized on a straight-line basis
over periods ranging from 10 years to 40 years. The excess of the fair value of
these newspapers over their net assets, of approximately $5.5 million, has been
recorded as goodwill and is being amortized on a straight-line basis over 40
years. The company's results of operations include Boulder through Aug. 24,
1997, and Monterey and San Luis Obispo from that same date forward.
DISPOSITIONS
Related to Continuing Operations:
On March 18, 1998, the company closed on the sale of its remaining interest in a
jointly owned cable system with Tele-Communications, Inc. (TCI). On Feb. 2,
1998, the company sold the Post-Tribune in Gary, Ind., to Hollinger
International, Inc. The proceeds from these sales were $95.8 million, consisting
of $58.1 million in cash and TCI stock with an aggregate market value of $37.7
million. The pretax and after-tax gains on the sales were $75.3 million and
$45.0 million, respectively.
51
In December 1997, the company sold its newspapers in Boca Raton, Fla., Long
Beach, Calif., Milledgeville, Ga., and Newberry, S.C. The sale of the Boca
Raton, Newberry and Milledgeville newspapers to Community Newspaper Holdings,
Inc., also included the transfer to the company of The Daily Sun and The Buyer's
Guide, a shopper, in Warner Robins, Ga., and The Byron (Ga.) Gazette, a weekly
newspaper. The Long Beach newspaper was sold to Garden State Newspapers, Inc.,
an affiliate of Media News Group. The proceeds from the sale of the four
newspapers were $50.7 million. The pretax and after-tax gains from their sale
were $18.1 million and $10.3 million, respectively.
On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two
newspapers in California owned by the E.W. Scripps Company. The exchange
resulted in pretax and after-tax gains of $43.2 million and $24.5 million,
respectively.
In January 1997, the company and TCI closed on the sale of the company's
interest in all but one of their jointly owned cable systems. As noted above,
the balance of the cable system was sold in March 1998. The total sale price was
$377.6 million and resulted in pretax and after-tax gains of $221.8 million and
$128.3 million, respectively.
In November 1996, the company sold its investment in Netscape Communications
Corporation, resulting in an after-tax gain of $8.1 million, net of adjustments
in the carrying value of certain other investments.
Related to Discontinued Operations:
In 1997, the company announced its intention to sell the remaining Business
Information Services (BIS) subsidiaries. This decision resulted in the
reclassification of the former BIS segment as discontinued operations. The
company fully divested the BIS segment with the sale of Technimetrics, Inc., its
global diversified information subsidiary, in 1998.
On April 13, 1998, the company closed on the sale of Technimetrics to an
operating unit of The Thomson Corporation. The proceeds from the sale were
$125.0 million and resulted in pretax and after-tax gains of $103.8 million and
$60.0 million, respectively.
On Nov. 14, 1997, the company sold KRII to M.A.I.D plc for $420 million plus a
working capital purchase price adjustment of approximately $15 million. The sale
resulted in a pretax gain of $23.6 million and an after-tax gain of $15.3
million.
On July 26, 1996, the company sold Knight-Ridder Financial (KRF) to Global
Financial Information Corporation for $275 million. The pretax and after-tax
gains from the sale of KRF were $155.9 million and $86.3 million, respectively.
52
H. COMPREHENSIVE INCOME
The following table presents the components of other comprehensive income for
1998, 1997 and 1996 as shown in the statement of shareholders' equity (in
thousands):
1998 1997 1996
-------- -------- --------
Unrealized gains on securities available for sale:
Change in unrealized gains, net of taxes of $12,492 in
1998, $716 in 1997 and $17,388 in 1996 $ 18,738 $ (1,086) $(23,870)
Less: reclassification adjustment for gains
realized in net income, net of taxes of $494 in 1997
and $12,498 in 1996 (585) (17,401)
-------- -------- --------
Other comprehensive income $ 18,738 $ (1,671) $(41,271)
======== ======== ========
I. COMMITMENTS AND CONTINGENCIES
At Dec. 27, 1998, the company had lease commitments currently estimated to
aggregate approximately $79.1 million that expire from 1999 through 2051 as
follows (in thousands):
1999 $ 16,552
2000 13,733
2001 10,608
2002 8,623
2003 7,674
2004 and thereafter 21,918
----------
Total $ 79,108
==========
Payments under the lease contracts were $19.3 million in 1998, $15.6 million in
1997 and $14.2 million in 1996.
In connection with the company's insurance program, letters of credit are
required to support certain projected worker compensation obligations. At Dec.
27, 1998, the company had approximately $45 million of undrawn letters of credit
outstanding.
On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and
the Detroit Newspaper Agency, which operates both newspapers. Subsequently, the
unions filed numerous unfair labor practice charges against the newspapers and
the Agency. In June 1997, after a lengthy trial, a National Labor Relations
Board (NLRB) administrative law judge ruled that the strike was caused by the
unfair labor practices of the Agency and The Detroit News and ordered that the
Agency and the newspapers reinstate all strikers, displacing permanent
replacements if necessary. The Agency and the newspapers appealed the decision
to the NLRB.
On August 27, 1998, the NLRB affirmed certain unfair labor practice findings
against The Detroit News and the Agency and reversed certain findings of unfair
labor practices against the Agency. The Agency and the newspapers filed a motion
to reconsider with the NLRB, that was denied on March 4, 1999. The unions filed
an appeal to the U.S. Court of Appeals for District of Columbia Circuit. The
Agency and the newspapers filed a motion to dismiss the appeal which is
scheduled for hearing on March 23, 1999.
Various libel 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, the ultimate liability to the
company and its subsidiaries as a result of all legal proceedings, including
Detroit, will not be material to its financial position or results of
operations, on a consolidated basis.
53
REPORT OF INDEPENDENT AUDITORS
Shareholders
Knight-Ridder, Inc.
We have audited the accompanying consolidated balance sheet of Knight- Ridder,
Inc., and subsidiaries as of Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996,
and the related consolidated statements of income, cash flows and shareholders'
equity for the years then ended. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Knight- Ridder,
Inc., and subsidiaries at Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
As discussed in Note F to the consolidated financial statements, in 1998 the
company changed its method of accounting for certain postretirement benefits.
/s/ ERNST & YOUNG LLP
---------------------
San Jose, California
January 22, 1999
54
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
1999 Proxy Statement pages 5 and 6, "Election of Directors" and "Nominees for
Election for Three-Year Terms Ending 2002; pages 7 and 8, "Directors Continuing
in Office"; page 9, "Section 16 (a) Beneficial Ownership Reporting Compliance";
pages 10 and 11, "Board Committees and Attendance" and "How the Company
Compensates Directors"; and page 11, "Certain Relationships and Related
Transactions".
KNIGHT RIDDER EXECUTIVE COMMITTEE
Alvah H. Chapman Jr., 77
Served as chairman of the Executive Committee 1984 to 1995; chairman of the
board 1982 to 1989; chief executive officer 1976 to 1988; president 1973 to
1982; executive vice president 1967 to 1973; vice president 1966 to 1967; The
Miami Herald general manager 1962 to 1969. B.S., business administration, The
Citadel, 1942.
Mary Jean Connors, 46
Senior vice president/human resources since 1996; vice president/human resources
1989 to 1996. Served as Philadelphia Newspapers, Inc., vice president/human
resources 1988 to 1989; assistant to the senior vice president/news for Knight
Ridder 1988; The Miami Herald assistant managing editor/personnel 1985 to 1988;
held various editing positions at The Miami Herald 1980 to 1985. B.A., English,
Miami University in Oxford, Ohio, 1973.
John C. Fontaine, 67
Retired president and a partner in the law firm of Hughes Hubbard & Reed. Served
as president 1995 to 1997; executive vice president 1994 to 1995; senior vice
president 1987 to 1993; general counsel 1980 to 1993. Prior to that, a partner
with Hughes Hubbard & Reed. LL.B., Harvard Law School, 1956; B.A., political
science, University of Michigan, 1953.
Ross Jones, 56
Senior vice president and chief financial officer since 1993. Served as vice
president/finance in 1993; vice president and treasurer of Reader's Digest
Association, Inc., 1985 to 1993 and in other positions there 1977 to 1985.
Served as manager at Brown Brothers Harriman & Co. 1970 to 1977. Advanced
Management Program, Harvard Business School, 1988; M.B.A., finance, Columbia
University Business School, 1970; B.A., classics, Brown University, 1965.
Frank McComas, 53
Senior vice president/operations since 1996; vice president/operations 1995 to
1996. Served as publisher, The (Columbia) State, 1988 to 1995; publisher,
Bradenton Herald, 1980 to 1988; held various positions at The Miami Herald and
The Charlotte Observer, 1970 to 1980. Advanced Management Program, Harvard
Business School, 1994; B.B.A. in business administration, Kent State University,
1968.
55
P. Anthony Ridder, 58
Chairman of the Executive Committee since 1995; Knight Ridder chairman and CEO
since 1995. Served as president 1989 to 1995; president of the Newspaper
Division 1986 to 1995; chairman of the Operating Committee since 1985. Served as
publisher of the San Jose Mercury News 1977 to 1986; general manager 1975 to
1977; business manager 1969 to 1975. B.A., economics, University of Michigan,
1962.
Steven B. Rossi, 49
Senior vice president/operations since December 1998. Served as executive vice
president and general manager, Philadelphia Newspapers, Inc., 1992 to 1998;
executive vice president 1991 to 1992; senior vice president 1988 to 1991; vice
president/finance and CFO 1987 to 1988. Served as vice president and divisional
general manager of Amerigas, Inc., 1981 to 1987. M.B.A., The Wharton School of
the University of Pennsylvania, 1974; B.A., economics, Ursinus College, 1971.
Karen Stevenson, 48
Vice president and general counsel since August 1998. Served as executive vice
president, general counsel and secretary of TELE-TV in New York, 1995 to 1997;
member of the San Francisco law firm of Howard, Rice, Nemerovski, Canady, Falk &
Rabkin, 1990 to 1995; vice president/law and secretary, Transamerica
Corporation, 1988 to 1990. J.D., Boalt Hall School of Law, University of
California, 1980; B.A., sociology, University of California, Los Angeles, 1971.
KNIGHT RIDDER OFFICERS
Marshall Anstandig, 50
Vice president/senior labor and employment counsel since August 1998. Served as
partner in the law firm of Brown & Bain, P.A., 1996 to 1998; managing partner in
law firm of Bryan Cave in Phoenix 1990 to 1996. J.D., Detroit College of Law,
Michigan State University, 1974; B.A., political science, Hope College, 1971.
Marty Claus, 50
Vice president/news since 1993. Served as Detroit Free Press managing editor/
business and features 1987 to 1992; held various editing positions at the Free
Press 1977 to 1987. Held various writing and editing positions at the San
Bernardino (Calif.) Sun-Telegram 1970 to 1977. B.A., journalism, Michigan State
University Honors College, 1970.
Gary R. Effren, 42
Vice president/controller since 1995. Served as assistant vice president/
assistant treasurer 1993 to 1995; assistant to the vice president/finance and
treasurer 1989 to 1993; director of corporate accounting 1986 to 1989; business
manager of Viewdata Corporation of America 1984 to 1986; manager of financial
reporting 1983 to 1984. M.B.A., University of Miami, 1989; B.S., accounting,
Rider College, 1978; CPA.
Virginia Dodge Fielder, 50
Vice president/research since 1989. Served as vice president/news and
circulation research 1986 to 1989; director/news and circulation research 1981
to 1985; editorial research manager, Chicago Sun-Times, 1979 to 1981; held
various positions at Lexington Herald-Leader 1976 to 1979. Ph.D., mass
communications, Indiana University, 1976; M.A., journalism, Indiana University,
1974; B.A., psychology, Transylvania University, 1970.
Clark Hoyt, 56
Vice president/news since 1993. Served as chief of the Knight Ridder Washington
Bureau 1987 to 1993; news editor 1985 to 1987; managing editor, The Wichita
Eagle, 1981 to 1985; various editing positions, Detroit Free Press, 1977 to
1981; various reporting positions, Detroit Free Press and Washington Bureau,
1968 to 1976. B.A., English literature, Columbia College, 1964.
56
Mindi Keirnan, 43
Vice president/operations since 1996; assistant vice president/assistant to the
chairman and CEO 1995 to 1996. Served as assistant to the president 1994 to
1995; managing editor/news, Saint Paul Pioneer Press, 1991 to 1994; various
editing positions at Gannett News Service, Crain's Chicago Business, the Detroit
Free Press and the Tallahassee Democrat 1977 to 1991. B.S., political science,
Florida State University, 1984.
Polk Laffoon IV, 53
Vice president/corporate relations since 1994 and corporate secretary since
January 1999. Served as assistant to the president 1992 to 1994; assistant
circulation director/distribution, The Miami Herald, 1991 to 1992; executive
assistant to the vice president/marketing 1989 to 1991; Living Today editor 1987
to 1989. Served as director and vice president/investor relations, Taft
Broadcasting Co., 1982 to 1987. M.B.A., marketing, The Wharton School of the
University of Pennsylvania, 1970; B.A., English, Yale, 1967.
Tally C. Liu, 48
Vice president/finance and advanced technology since 1998. Served as vice
president/finance and administration 1994 to 1998; vice president/finance and
controller 1993 to 1994; vice president and controller 1990 to 1993. Served as
San Jose Mercury News vice president and chief financial officer 1987 to 1990
and in various roles 1983 to 1987; held various finance positions, Boca Raton
News, 1978 to 1983. M.B.A., Florida Atlantic University, 1977; B.S., business
administration, National Chen-Chi University, 1973; CPA.
Larry D. Marbert, 45
Vice president/production and facilities since 1998. Served as Knight Ridder
vice president/technology 1994 to 1998; Philadelphia Newspapers, Inc., senior
vice president/operations 1991 to 1994; vice president/operations research and
planning 1988 to 1991; vice president/production 1986 to 1988; various
production positions, Knight Ridder and The Miami Herald, 1977 to 1986. M.S.,
management science, Auburn University, 1977; B.S., University of North Carolina,
business administration, 1976.
Alan G. Silverglat, 52
Vice president/treasurer since 1995. Served as senior vice president/finance and
planning for Business Information Services Division 1983 to 1995; other BIS
positions 1980 to 1983. Formerly with Ernst & Young. B.S., business
administration, University of Missouri, 1968; CPA.
David Starr, 48
Vice president and chief information officer since June 1998. Served as chief
information officer at The Reader's Digest Association, Inc., 1997 to 1998;
chief information officer for ITT Corporation, 1994 to 1997; senior vice
president, information technology, Citicorp Payment Products, 1986 to 1993;
senior manager, Price Waterhouse, 1980 to 1986. B.A., physics, Florida State
University, 1972.
57
ITEM 11. EXECUTIVE COMPENSATION
1999 Proxy Statement, page 10, "Board Committees and Attendance"; pages 10 and
11, "How the Company Compensates Directors" and "Certain Relationships and
Related Transactions"; page 19 through page 23, "How the Company Compensates
Executive Officers"; page 23, "Summary Compensation Table"; page 24, "Stock
Option Grants in Last Fiscal Year"; page 25, "Aggregate Stock Option Exercises
in Last Fiscal Year and Fiscal Year-End Stock Option Values"; page 26,
"Long-Term Incentive Plan Awards in Last Fiscal Year" and "Other Benefits"; and
page 27, "Performance of Knight Ridder Common Stock".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
1999 Proxy Statement, page 5, "Information About Knight Ridder Stock Ownership"
and page 9, "Stock Ownership of Directors and Officers".
See Part II, Item 8, "Financial Statements and Supplementary Data", Note E to
the consolidated financial statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
1999 Proxy Statement, page 11, "Certain Relationships and Related Transactions".
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
1. The following consolidated financial statements of
Knight-Ridder, Inc. and subsidiaries, included in the annual
report of the registrant to its shareholders for the year
ended December 27, 1998, are included in Item 8:
Consolidated Balance Sheet - December 27, 1998, December 28,
1997, and December 29, 1996
Consolidated Statement of Income - Years ended December 27,
1998, December 28, 1997, and December 29, 1996
Consolidated Statement of Cash Flows - Years ended December
27, 1998, December 28, 1997, and December 29, 1996
Consolidated Statement of Shareholders' Equity - Years ended
December 27, 1998, December 28, 1997, and December 29, 1996
Notes to consolidated financial statements - December 27, 1998
2. The following consolidated financial statement schedule of
Knight-Ridder, Inc. and subsidiaries is included in Item
14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions, or are inapplicable, or have been shown in the
consolidated financial statements or notes thereto, and
therefore have been omitted from this section.
3. Exhibits
No. 2 - Disposition of Assets is incorporated by
reference to the Company's Form 8-K dated as
of March 18, 1998, filed March 31, 1998.
No. 3(i) - Amended and Restated Articles of
Incorporation of Knight-Ridder, Inc.
(totally amended and restated as of
February, 1998) are incorporated by
reference to the Company's Form 10-K filed
March 13, 1998.
(ii) - Bylaws of Knight-Ridder, Inc. (As Amended
Through January 28, 1997), are incorporated
by reference to the Company's Form 10-Q
filed May 9, 1997.
No. 4 - Indenture, dated as of April 6, 1989, is
incorporated by reference to the Company's
Registration Statement on Form S-3,
effective April 7, 1989. (No. 33-28010)
Rights Agreement, dated as of June 21, 1996,
is incorporated by reference to the
Company's Form 8-K filed July 9, 1996.
59
Indenture, dated as of October 9, 1997, is
Incorporated by reference to the Company's
Registration Statement on Form S-3,
effective October 10, 1997 (No. 333-37603).
No. 10 (a) - Knight-Ridder, Inc. Employee Stock Option
Plan (As amended through January 26, 1999)
is filed herein.
(b) - Knight-Ridder, Inc. Compensation Plan for
Nonemployee Directors effective July 1, 1997
(As amended through January 26, 1999) is
filed herein.
(c) - Knight Ridder Annual Incentive Plan is filed
herein.
(d) - Consulting Agreement is filed herein.
- Stock Purchase Agreement between
Knight-Ridder Business Information Services,
Inc. and M.A.I.D. plc, dated as of October
1, 1997 is incorporated by reference to the
Company's Form 10-Q filed November 12, 1997.
- Knight-Ridder, Inc. Long-Term Incentive Plan
is incorporated by reference to the
Company's Form 10-Q filed on May 9, 1997.
- Knight-Ridder Local Incentive Plan is
incorporated by reference to the Company's
Form 10-K filed on March 20, 1996.
- Executive Officer's Retirement Agreement
dated December 19, 1991, is incorporated by
reference to the Company's Form 10-K filed
on March 23, 1994.
No. 11 - Statement re Computation of Per Share
Earnings is filed herein.
No. 12 - Statement re Computation of Earnings to
Fixed Charges Ratio From Continuing
Operations is filed herein.
No. 18 - Change in accounting principle is filed
herein.
No. 21 - Subsidiaries of the Registrant is filed
herein.
60
No. 23 - "Consent of Independent Auditors" is filed
herein.
No. 24 - "Powers of Attorney" for Thomas P. Gerrity
and Kathleen Foley Feldstein are filed
herein. "Power of Attorney" for M. Kenneth
Oshman is incorporated by reference to the
Company's Form 10-K filed on March 10, 1997.
"Power of Attorney" for James I. Cash, Jr.
is incorporated by reference to the
Company's Form 10-K filed on March 20, 1996.
"Powers of Attorney" for all other members
of the Board of Directors are incorporated
by reference to the Company's Form 10-K
filed on March 24, 1995.
No. 27 - "Financial Data Schedule" is filed herein.
(b) Reports on Form 8-K filed during the fourth quarter of 1998:
There were no reports on Form 8-K filed during the quarter ended December
27, 1998.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated March 19, 1999
- ----------------------------- ------------------------------------
By P. Anthony Ridder
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated March 19, 1999
- ----------------------------- ------------------------------------
P. Anthony Ridder
Chairman and
Chief Executive Officer
Dated March 19, 1999
- ----------------------------- ------------------------------------
Ross Jones
Chief Financial Officer and
Senior Vice President/Finance
Dated March 19, 1999
- ----------------------------- ------------------------------------
Gary R. Effren
Vice President/Controller
(Chief Accounting Officer)
62
/s/ James I. Cash, Jr.*
------------------------------------
James I. Cash, Jr.
Director
/s/ Alvah H. Chapman, Jr.*
------------------------------------
Alvah H. Chapman, Jr.
Director
/s/ Joan Ridder Challinor *
------------------------------------
Joan Ridder Challinor
Director
/s/ Kathleen Foley Feldstein*
------------------------------------
Kathleen Foley Feldstein
Director
/s/ Thomas P. Gerrity*
------------------------------------
Thomas P. Gerrity
Director
/s/ Barbara Barnes Hauptfuhrer*
------------------------------------
Barbara Barnes Hauptfuhrer
Director
/s/ Jesse Hill, Jr.*
------------------------------------
Jesse Hill, Jr.
Director
/s/ M. Kenneth Oshman*
------------------------------------
M. Kenneth Oshman
Director
/s/ Thomas L. Phillips*
------------------------------------
Thomas L. Phillips
Director
/s/ P. Anthony Ridder*
------------------------------------
P. Anthony Ridder
Director
/s/ Randall L. Tobias*
------------------------------------
Randall L. Tobias
Director
63
/s/ Gonzalo F. Valdes-Fauli*
------------------------------------
Gonzalo F. Valdes-Fauli
Director
/s/John L. Weinberg*
------------------------------------
John L. Weinberg
Director
Dated March 19, 1999 * By Ross Jones
- ------------------------------ ------------------------------------
Ross Jones
Attorney-in-fact
64
ANNUAL REPORT ON FORM 10-K
ITEM 14 (a) (2), (c) and (d)
SUPPLEMENTARY DATA
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 27, 1998
KNIGHT-RIDDER, INC. AND SUBSIDIARIES
SAN JOSE, CALIFORNIA
65
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
KNIGHT-RIDDER, INC. AND SUBSIDIARIES
(IN THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------- -------- -------- -------- --------
ADDITIONS
------------------------------
BALANCE AT CHARGED CHARGED
BEGINNING TO COSTS TO BALANCE
OF AND OTHER AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- --------------- -------------- ------------- ----------------- --------------
YEAR ENDED DECEMBER 27, 1998:
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNT:
ACCOUNTS RECEIVABLE ALLOWANCES $ 14,963 $ 20,854 $20,079 (2) $ 15,738
VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357
-------- -------- -------- -------- --------
$ 16,320 $ 20,854 $ 20,079 $ 17,095
YEAR ENDED DECEMBER 28, 1997:
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNT:
ACCOUNTS RECEIVABLE ALLOWANCES $ 12,685 $ 23,332 $ 752(1) $ 21,806 (2) $ 14,963
VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357
-------- -------- -------- -------- --------
$ 14,042 $ 23,332 $ 752 $ 21,806 $ 16,320
YEAR ENDED DECEMBER 29, 1996:
RESERVES AND ALLOWANCES
DEDUCTED FROM ASSET ACCOUNT:
ACCOUNTS RECEIVABLE ALLOWANCES $ 14,348 $ 19,315 $ 2,097(1) $ 23,075 (2) $ 12,685
VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357
-------- -------- -------- -------- --------
$ 15,705 $ 19,315 $ 2,097 $ 23,075 $ 14,042
(1) Represents amounts from the former BIS division included under "Income
(loss) from discontinued BIS operations" in the Consolidated Statement of
Income.
(2) Represents uncollectible accounts written-off, net of recoveries, and
dispositions of subsidiaries' balances.
66