-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KVE/nNImV1r1T/gjykJ6ms6sL6+yyAPpmH2e3GUXV4cxo39PEFBHbelRrvlTSAB2 e0w20sanIUKCQT64GWeEUg== 0000950144-97-008054.txt : 19970723 0000950144-97-008054.hdr.sgml : 19970723 ACCESSION NUMBER: 0000950144-97-008054 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970509 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970722 SROS: BSE SROS: CSE SROS: CSX SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNIGHT RIDDER INC CENTRAL INDEX KEY: 0000205520 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 380723657 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-07553 FILM NUMBER: 97643806 BUSINESS ADDRESS: STREET 1: ONE HERALD PLZ CITY: MIAMI STATE: FL ZIP: 33132 BUSINESS PHONE: 3053763800 MAIL ADDRESS: STREET 1: ONE HERALD PLZ CITY: MIAMI STATE: FL ZIP: 33132 FORMER COMPANY: FORMER CONFORMED NAME: KNIGHT RIDDER NEWSPAPERS INC /FL/ DATE OF NAME CHANGE: 19860707 8-K/A 1 KNIGHT-RIDDER, INC. 8-K/A #1 5-9-97 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------------- FORM 8-K/A#1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) May 9, 1997 KNIGHT-RIDDER, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) FLORIDA 1-7553 No.38-0723657 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) ONE HERALD PLAZA, MIAMI, FLORIDA 33132 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (305) 376-3800 -------------- NOT APPLICABLE - -------------------------------------------------------------------------------- (Former Name or Former Address, if Changed Since Last Report) Page 1 of 29 Pages 2 Item 7. Financial Statements and Exhibits (a) Financial Statements of Business Acquired. The following financial statements of ABC Media, Inc., now known as Cypress Media, Inc. ("Media") are filed herewith on the pages subsequent hereto: (i) Report of Independent Certified Public Accountants; Combined Balance Sheets at December 29, 1996 and December 31, 1995; Combined Statements of Income and Retained Earnings (Deficit) for the eleven months ended December 29, 1996, the one month ended January 28, 1996 and the years ended December 31, 1995 and 1994; Combined Statements of Cash Flows for the eleven months ended December 29, 1996, the one month ended January 28, 1996 and the years ended December 31, 1995 and 1994; Notes to Combined Financial Statements at and for the three years ended December 29, 1996, December 31, 1995 and December 31, 1994. (ii) Interim Financial Statements (Unaudited); Interim Combined Balance Sheet at March 30, 1997; Interim Combined Statements of Income and Retained Earnings (Deficit) for the three months ended March 30, 1997, the two months ended March 31, 1996 and one month ended January 28, 1996; Interim Combined Statements of Cash Flows for the three months ended March 30, 1997, the two months ended March 31, 1996 and the one month ended January 28, 1996; Notes to Interim Combined Financial Statements at and for the three months ended March 30, 1997 and March 31, 1996. (b) Pro Forma Financial Information. The following pro forma financial information (unaudited) filed herewith on the pages subsequent hereto gives effect to the acquisition of Media by Knight-Ridder, Inc. on May 9, 1997: Pro Forma Condensed Consolidated Balance Sheet as of March 30, 1997 and Notes thereto; and Pro Forma Condensed Consolidated Statements of Income for the quarter ended March 30, 1997 and the year ended December 29, 1996 and Notes thereto. Page 2 of 29 Pages 3 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. KNIGHT-RIDDER, INC. (Registrant) Date: July 22, 1997 By: /s/ Ross Jones --------------------- Ross Jones Senior Vice President/Finance and Chief Financial Officer Page 3 of 29 Pages 4 Report of Independent Certified Public Accountants Stockholders ABC Media, Inc. We have audited the accompanying combined balance sheet of ABC Media, Inc. as of December 29, 1996 and the related combined statements of income and retained earnings (deficit) and cash flows for the one month period ended January 28, 1996 and the eleven month period ended December 29, 1996. We have also audited the accompanying combined balance sheet of ABC Media, Inc. as of December 31, 1995, and the related combined statements of income and retained earnings (deficit) and cash flows for the years ended December 31, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at December 29, 1996, and the combined results of its operations and its cash flows for the one month period ended January 28, 1996 and the eleven month period ended December 29, 1996, as well as the combined financial position of the Company at December 31, 1995, and the combined results of its operations and its cash flows for the years ended December 31, 1995 and 1994, in conformity with generally accepted accounting principles. Miami, Florida June 30, 1997 /S/ Ernst & Young LLP Page 4 of 29 Pages 5 ABC Media, Inc. Combined Balance Sheets (In thousands of dollars)
DECEMBER 29 DECEMBER 31 1996 1995 ------------ ---------- ASSETS Current assets: Cash $ 2,008 $ 629 Accounts receivable, net of allowances of $2,142 in 1996 and $2,026 in 1995 58,610 50,555 Inventories 5,683 4,335 Prepaid expenses 1,412 5,485 Other current assets 1,221 1,627 ---------- ---------- Total current assets 68,934 62,631 ---------- ---------- Intercompany and other assets: Due from parent company 32,499 -- Other assets 4,023 4,053 ---------- ---------- Total intercompany and other assets 36,522 4,053 ---------- ---------- Property, plant and equipment: Land and improvements 9,611 11,112 Buildings and improvements 26,062 57,278 Equipment 49,947 143,124 Construction in progress 16,253 8,683 ---------- ---------- 101,873 220,197 Less accumulated depreciation 4,436 124,564 ---------- ---------- Net property, plant and equipment 97,437 95,633 ---------- ---------- Excess of cost over net assets acquired, less accumulated amortization of $34,083 in 1996 and $52,075 in 1995 1,453,161 57,580 ========== ========== $1,656,054 $ 219,897 ========== ==========
See notes to combined financial statements. Page 5 of 29 Pages 6 ABC Media, Inc. Combined Balance Sheets (continued) (In thousands of dollars)
DECEMBER 29 DECEMBER 31 1996 1995 ----------- ----------- LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 13,185 $ 13,870 Accrued expenses and other liabilities 16,278 13,812 Accrued compensation and related withholdings 10,700 8,810 ----------- ----------- Total current liabilities 40,163 36,492 ----------- ----------- Noncurrent liabilities: Due to affiliate 85,300 85,300 Deferred income taxes 24,907 24,186 Postretirement benefits other than pensions 7,467 7,268 Due to parent company -- 51,571 ----------- ----------- Total noncurrent liabilities 117,674 168,325 ----------- ----------- Commitments and contingencies Equity: Additional capital 1,500,000 37,864 Retained deficit (1,783) (22,784) ----------- ----------- Total equity 1,498,217 15,080 ----------- ----------- Total liabilities and equity $ 1,656,054 $ 219,897 =========== ===========
See notes to combined financial statements. Page 6 of 29 Pages 7 ABC Media, Inc. Combined Statements of Income and Retained Earnings (Deficit) (In thousands of dollars)
POST ACQUISITION PREACQUISITION ---------------- ------------------------------------------------- ELEVEN MONTHS ONE MONTH ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 29 JANUARY 28 DECEMBER 31 DECEMBER 31 1996 1996 1995 1994 ------------- ---------- ----------- ----------- Operating revenue Advertising: Retail $ 190,541 $ 12,168 $ 192,058 $ 181,526 General 30,009 2,517 28,728 30,427 Classified 133,926 9,361 127,998 114,700 --------- --------- --------- --------- Total 354,476 24,046 348,784 326,653 Circulation 92,121 8,135 101,678 93,946 Other 19,759 1,185 12,975 10,411 --------- --------- --------- --------- Total operating revenue 466,356 33,366 463,437 431,010 --------- --------- --------- --------- Operating costs Labor and employee benefits 146,795 11,997 147,119 141,115 Newsprint, ink and supplements 96,533 8,011 102,889 76,209 Other operating costs 97,293 7,199 104,768 99,677 Depreciation and amortization 43,841 1,053 13,119 13,091 --------- --------- --------- --------- Total operating costs 384,462 28,260 367,895 330,092 --------- --------- --------- --------- Operating income 81,894 5,106 95,542 100,918 --------- --------- --------- --------- Other expense Interest expense, net 8,147 739 8,880 8,909 Other, net -- 8,057 576 74 --------- --------- --------- --------- Total other expense 8,147 8,796 9,456 8,983 --------- --------- --------- --------- Income (loss) before income taxes 73,747 (3,690) 86,086 91,935 Income taxes (benefit) 43,357 (1,366) 35,750 38,089 --------- --------- --------- --------- Net income (loss) 30,390 (2,324) 50,336 53,846 --------- --------- --------- --------- Retained earnings (deficit) at beginning of year -- (22,784) (15,138) 23,063 Dividend to parent company (32,173) -- (57,982) (92,047) --------- --------- --------- --------- Retained deficit at end of year $ (1,783) $ (25,108) $ (22,784) $ (15,138) ========= ========= ========= =========
See notes to combined financial statements. Page 7 of 29 Pages 8 ABC Media, Inc. Combined Statements of Cash Flows (In thousands of dollars)
POST ACQUISITION PREACQUISITION ---------------- ------------------------------------- ELEVEN MONTHS ONE MONTH ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 29 JANUARY 28 DECEMBER 31 DECEMBER 31 1996 1996 1995 1994 ------------- ---------- ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income (loss) $ 30,390 $ (2,324) $ 50,336 $ 53,846 Noncash items deducted from (included in) income: Depreciation 9,649 826 10,352 10,324 Amortization 34,192 227 2,767 2,767 Provision for deferred taxes 646 59 (685) (2,582) Change in current assets and liabilities: Accounts receivable (10,695) 2,640 (5,992) (4,830) Inventories 3,846 (5,194) 985 2,020 Other current assets (520) 4,999 (4,875) (106) Accounts payable (2,303) 1,618 4,427 33 Other liabilities 1,669 2,687 (889) 2,716 -------- -------- -------- -------- Net cash provided by operating activities 66,874 5,538 56,426 64,188 -------- -------- -------- -------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Additions to property, plant and equipment (12,228) (136) (15,116) (6,961) Other items, net 132 (17) (119) (37) -------- -------- -------- -------- Net cash required for investing activities (12,096) (153) (15,235) (6,998) CASH REQUIRED FOR FINANCING ACTIVITIES Intercompany, net (54,828) (3,956) (45,555) (57,880) -------- -------- -------- -------- Net cash required for financing activities (54,828) (3,956) (45,555) (57,880) -------- -------- -------- -------- Net (decrease) increase in cash (50) 1,429 (4,364) (690) Cash at beginning of the period 2,058 629 4,993 5,683 -------- -------- -------- -------- Cash at end of the period $ 2,008 $ 2,058 $ 629 $ 4,993 ======== ======== ======== ========
See notes to combined financial statements. Page 8 of 29 Pages 9 ABC Media, Inc. Notes to Combined Financial Statements Three Years Ended December 29, 1996, December 31, 1995 and December 31, 1994 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION NATURE OF BUSINESS In February 1997, ABC, Inc., which is indirectly owned by The Walt Disney Company (Disney), consolidated the newspaper publishing and related operations of The Kansas City Star, in Kansas City, Missouri, The Fort Worth Star-Telegram, in Ft. Worth, Texas, The Belleville News-Democrat, in Belleville, Illinois and The Times Leader in Wilkes-Barre, Pennsylvania into ABC Media, Inc. (Media). These four newspapers have combined daily and Sunday circulation of 630,000 and 898,000, respectively. BASIS OF PRESENTATION For the years ended December 29, 1996, December 31, 1995 and December 31, 1994 the accounts of the four newspapers above were included in the publishing group of ABC, Inc. and were not presented on a combined basis as those of a separate reporting entity. Accordingly, the accounts included in the accompanying financial statements were carved out of the ABC, Inc. historical accounting records. For all years presented, the financial statements of Media include the accounts of the above newspapers. The accompanying financial statements include costs allocated by ABC, Inc. for certain functions and services they performed centrally. All allocations and estimates were based on assumptions ABC, Inc.'s management believed were reasonable in the circumstances. These allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if Media had been operated as a separate entity. The financial statement captions which include allocated amounts, along with a description of the function or service and the amount allocated are summarized in Note 3. On February 9, 1996, Disney completed its acquisition of ABC, Inc. (formerly known as Capital Cities/ABC, Inc.) which indirectly owned Media. The acquisition was accounted for as a purchase and the total purchase price allocated to Media was approximately $1.5 billion based on the estimated fair value of Media's net assets. The excess of the purchase price over Media's net tangible assets, was approximately $1.5 billion. This amount is amortized on a straight line basis over forty years. Page 9 of 29 Pages 10 ABC Media, Inc. Notes to Combined Financial Statements 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED) This change in ownership occurred as of an interim date. In the accompanying statements of income and retained earnings (deficit) and cash flows the periods captioned as "Preacquisition" include those when Media was owned by ABC, Inc., while the period identified as Post Acquisition represents Media after it was acquired by Disney. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION The combined financial statements include the accounts of the four newspapers outlined in Note 1. Significant intercompany accounts and transactions have been eliminated. CONCENTRATIONS OF CREDIT RISK IN ACCOUNTS RECEIVABLE The majority of Media's accounts receivable were from advertisers and newspaper subscribers. 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 combined financial statements and consistently have been within management's expectations. INVENTORIES Inventories, consisting of newsprint, ink and other supplies, are stated at the lower of cost (last-in, first-out (LIFO) method), or market. If inventories had been stated under the lower of cost (first in first out (FIFO) method) or market, inventories would have been higher by $1.5 million and $3.7 million, at December 29, 1996 and December 31, 1995, respectively. PROPERTY, PLANT AND EQUIPMENT These assets are stated on the basis of cost and the provision for depreciation was computed principally by the straight-line method over the following estimated useful lives of the assets: building and improvements--10 to 40 years and equipment--3 to 10 years. EXCESS OF COST OVER NET ASSETS ACQUIRED This asset arises from the acquisition of the newspaper businesses for a purchase price higher than the fair market value of the net tangible assets acquired. It is amortized on a straight-line basis over forty years. If, in the opinion of management, an impairment in value occurs, based on Page 10 of 29 Pages 11 ABC Media, Inc. Notes to Combined Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the undiscounted cash flow method, any necessary additional write-downs will be charged to expense. IMPAIRMENT OF LONG LIVED ASSETS Applying FAS 121, Accounting for the Impairment of Long-Lived Assets requires impairment losses to be recorded on these assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Applying FAS 121 in 1996 did not materially impact the combined financial statements. 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 combined financial statements and accompanying notes. Actual results could differ from those estimates. 3. RELATED PARTY TRANSACTIONS The combined financial statements include significant allocations from ABC, Inc. for the cost of functions and services it performed centrally. A description of the function or service, the amount allocated and the effected combined financial statement captions are summarized below: Labor and employee benefits expenses--Included in this caption are allocated costs for workers' compensation, health, disability and life insurance costs. Media employees also participate in certain ABC, Inc. sponsored profit sharing, pension and other savings plans. Total allocated costs amounted to approximately $6.5 million, $600,000, $8.6 million, and $9.0 million for the eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and the years ended December 31, 1995 and 1994, respectively. See Notes 4 and 5 for additional information relating to pension, post retirement benefit and other savings plans. Other operating expenses--Included in this caption are allocated costs for executive management, strategic planning and marketing, treasury services, information systems management, accounting, tax and legal services, property and liability insurance. Total allocated costs amounted to approximately $6.8 million, $622,000, $10.6 million, and $9.8 million for the Page 11 of 29 Pages 12 ABC Media, Inc. Notes to Combined Financial Statements 3. RELATED PARTY TRANSACTIONS (CONTINUED) eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and the years ended December 31, 1995 and 1994, respectively. Income tax expense--See Note 6. 4. RETIREMENT PLANS Substantially all employees of Media were covered under various defined benefit plans. The funding policy for these plans is to contribute amounts as are necessary on an actuarial basis to provide for pension benefits in accordance with the requirements of ERISA. Benefits are generally based on years of service and compensation. Separate actuarial valuations were not available. ABC, Inc. pension expense allocation to Media was approximately $1.4 million, $131,000, $1.7 million and $1.3 million for the eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and the years ended December 31, 1995 and 1994, respectively. Media employees also participated in a savings and investment plan which allowed eligible employees to allocate up to 10% of their salary through payroll deduction, among a diversified portfolio of investments. ABC, Inc. matched 50% of the employee's contribution, up to 5% of salary. The cost of the plan, recorded by Media was approximately $1.3 million, $115,000, $1.5 million and $1.4 million for the eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and the years ended December 31, 1995 and 1994, respectively. 5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Media has defined postretirement benefit plans that provide medical and life insurance benefits for retirees and eligible dependents. The related expense is determined under the provisions of FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This statement requires the cost of these benefits, which are primarily for health care and life insurance, to be recognized in the financial statements throughout the employees' active working careers. Page 12 of 29 Pages 13 ABC Media, Inc. Notes to Combined Financial Statements 5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) Media valued the accumulated postretirement benefit obligation using the following assumptions:
1996 1995 1994 ---- ---- ---- Discount rate at the end of the year 8.25% 8.25% 8.25% Annual rate of increase in salaries 4.5% 4.5% 4.5% Medical trend rate: Projected 9% 10% 11% Reducing to this percentage in 2001 and thereafter 5.5% 5.5% 5.5%
The following table sets forth the plans' amounts recognized in the combined balance sheets at December 29, 1996 and December 31, 1995 (in thousands):
1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees $ 3,514 $ 3,489 Fully eligible active plan participants 4,077 3,950 ------- ------- Total accumulated postretirement benefit obligation 7,591 7,439 Unrecognized net gain (124) (171) ------- ------- Accrued postretirement benefit liability $ 7,467 $ 7,268 ======= =======
Page 13 of 29 Pages 14 ABC Media, Inc. Notes to Combined Financial Statements 5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) Related costs for the eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and the years ended December 31, 1995 and 1994, respectively, consisted of the following (in thousands):
Eleven months One month ended ended December 29 January 28 December 31 December 31 1996 1996 1995 1994 ----------- ---------- ----------- ----------- Service cost $135 $ 15 $139 $128 Interest cost 543 60 589 574 ---- ---- ---- ---- Net postretirement benefit cost $678 $ 75 $728 $702 ==== ==== ==== ====
An increase in the assumed health care cost trend rate by 1% in each year would increase the accumulated postretirement benefit obligation as of December 29, 1996 by approximately $528,000 and the aggregate of the service and interest cost components of net postretirement benefit cost for the same period by approximately $81,000. 6. INCOME TAXES The results of Media's operations are included in the consolidated federal income tax returns filed by Disney for taxable years ending after February 9, 1996 and ABC, Inc. for taxable years ending on or before February 9, 1996. The income tax amounts have been computed on a separate return basis. Media accounts for income taxes under FASB Statement No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Page 14 of 29 Pages 15 ABC Media, Inc. Notes to Combined Financial Statements 6. INCOME TAXES (CONTINUED) The components of the income tax provision (benefit) are as follows (in thousands):
Eleven months One month ended ended December 29 January 28 December 31 December 31 1996 1996 1995 1994 ------------- ---------- ----------- ----------- Current $ 42,711 $ (1,425) $ 36,435 $ 40,671 Deferred 646 59 (685) (2,582) -------- -------- -------- -------- Total $ 43,357 $ (1,366) $ 35,750 $ 38,089 ======== ======== ======== ========
The reconciliation of income tax computed at the U.S. federal statutory rate to income tax expense is as follows:
Eleven months One month ended ended December 29 January 28 December 31 December 31 1996 1996 1995 1994 ------------- ---------- ----------- ----------- Income tax (benefit) at U.S. statutory rate 35.0% (35.0)% 35.0% 35.0% State taxes, net of federal benefit 7.6 (4.6) 5.2 5.2 Goodwill amortization 16.0 2.1 1.1 1.0 Non-deductible items .2 .5 .2 .2 ---- ----- ---- ---- Total 58.8% (37.0)% 41.5% 41.4% ==== ===== ==== ====
Page 15 of 29 Pages 16 ABC Media, Inc. Notes to Combined Financial Statements 6. INCOME TAXES (CONTINUED) Significant components of Media's net deferred income taxes are as follows (in thousands):
December 29 December 31 1996 1995 ----------- ---------- Deferred tax assets: Postretirement benefits other than pension $ 2,720 $ 2,720 Compensation and benefit accruals 948 906 Allowance for bad debt 663 651 Intangibles 511 565 Other nondeductible accruals 49 33 ------- ------- Gross deferred tax assets $ 4,891 $ 4,875 ======= ======= Deferred tax liability: Depreciation and amortization 24,907 24,186 ------- ------- Gross deferred tax liability 24,907 24,186 ------- ------- Net deferred tax liability $20,016 $19,311 ======= =======
7. DUE TO AFFILIATE Media has two notes payable totaling $85.3 million to an affiliate. One is for $34.0 million, bears interest at 8.0% and is due by agreement after 1997. The other is for $51.3 million, bears interest at 12.0% and is due by agreement after 1997. All interest is payable annually in November. Interest expense related to these notes amounted to approximately $8.1 million, $740,000 and $8.9 million for the eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and both years ended December 31, 1995 and 1994, respectively. Additionally accrued interest amounting to approximately $1 million is included in accrued expenses at December 29, 1996 and December 31, 1995. Both notes payable and related accrued interest were transferred to and assumed by a Disney affiliate immediately prior to completion of the acquisition dated May 9, 1997. (See Note 10). Page 16 of 29 Pages 17 ABC Media, Inc. Notes to Combined Financial Statements 8. UNAUDITED QUARTERLY RESULTS OF OPERATIONS Media'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 calendar 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 Media's quarterly results of operations (in thousands):
QUARTERS ------------------------------------------------------------- FIRST SECOND THIRD FOURTH -------- -------- -------- -------- 1996 Operating revenue $115,959 $124,864 $125,027 $133,872 Operating income 17,092 19,154 21,796 28,958 Net income 2,016 7,021 8,079 10,950 1995 Operating revenue 110,285 115,609 115,746 121,797 Operating income 23,395 23,796 23,392 24,959 Net income 12,337 12,571 12,335 13,093 1994 Operating revenue 102,340 106,375 108,863 113,432 Operating income 21,983 26,198 26,656 26,081 Net income 11,560 14,029 14,297 13,960
Page 17 of 29 Pages 18 ABC Media, Inc. Notes to Combined Financial Statements 9. COMMITMENTS AND CONTINGENCIES At December 29, 1996 Media had lease commitments currently estimated to aggregate $6.6 million that expire from 1997 through 2006 as follows (in thousands): 1997 $1,830 1998 1,293 1999 1,090 2000 820 2001 481 2002 and thereafter 1,110 ------ $6,624 ======
Payments under the lease contracts were approximately $1.9 million, $176,000, $2.1 million and $1.8 million for the eleven month period ended December 29, 1996, the one month period ended January 28, 1996, and the years ended December 31, 1995 and 1994, respectively. Various libel actions and environmental and other legal proceedings which have arisen in the ordinary course of business are pending against Media. In the opinion of ABC, Inc.'s management, the ultimate liability, if any, resulting from these proceedings will not be material to Media's financial position or results of operations. 10. SUBSEQUENT EVENTS On March 17,1997, Media entered into a credit agreement which allows borrowings up to $1.2 billion. On April 9,1997, Media borrowed $1.2 billion under that agreement. On May 9, 1997, ABC, Inc. transferred ownership of Media to Knight-Ridder, Inc. in a stock for stock transaction. Approximately $210 million of the borrowings was retained by a Disney affiliate. On May 15,1997, Knight-Ridder, Inc. agreed to unconditionally and irrevocably guarantee the payment of the $990 million debt along with related interest. Page 18 of 29 Pages 19 ABC Media, Inc. Interim Combined Balance Sheet (Unaudited) (In thousands of dollars)
MARCH 30 1997 ----------- ASSETS Current assets: Cash $ 1,848 Accounts receivable, net 52,004 Inventories 6,049 Prepaid expenses 1,278 Other current assets 1,220 ---------- Total current assets 62,399 ---------- Other assets 4,074 Net property, plant and equipment 97,655 Excess of cost over net assets acquired, net 1,443,866 ---------- Total assets $1,607,994 ========== LIABILITIES AND EQUITY Current liabilities: Accounts payable $ 11,959 Accrued expenses and other liabilities 32,695 Accrued compensation and amounts withheld from employees 9,527 ---------- Total current liabilities 54,181 ---------- Due to affiliate 85,300 Deferred income taxes 25,107 Postretirement benefits other than pensions 7,467 Due to parent company 1,207 ---------- Total noncurrent liabilities 119,081 ---------- Equity: Additional capital 1,500,000 Retained deficit (65,268) ---------- Total equity 1,434,732 ---------- Total liabilities and equity $1,607,994 ==========
See notes to interim combined financial statements. Page 19 of 29 Pages 20 ABC Media, Inc. Interim Combined Statements of Income and Retained Earnings (Deficit) (Unaudited) (In thousands of dollars)
PRE- POST ACQUISITION ACQUISITION -------------------------- ------------ THREE MONTHS TWO MONTHS ONE MONTH ENDED ENDED ENDED MARCH 30 MARCH 31 JANUARY 28 1997 1996 1996 ------------ ----------- ------------ Operating revenue Advertising: Retail $ 47,056 $ 31,275 $ 12,168 General 8,231 5,561 2,517 Classified 38,423 24,289 9,361 --------- --------- --------- Total 93,710 61,125 24,046 Circulation 25,708 18,260 8,135 Other 5,373 3,208 1,185 --------- --------- --------- Total operating revenue 124,791 82,593 33,366 --------- --------- --------- Operating costs Labor and employee benefits 40,803 26,113 11,997 Newsprint, ink and supplements 21,211 19,217 8,011 Other operating costs 28,451 17,147 7,199 Depreciation and amortization 11,875 8,130 1,053 --------- --------- --------- Total operating costs 102,340 70,607 28,260 --------- --------- --------- Operating income 22,451 11,986 5,106 --------- --------- --------- Other expense Interest expense, net 2,220 1,484 739 Other, net (210) (32) 8,057 --------- --------- --------- Total other expense 2,010 1,452 8,796 --------- --------- --------- Income (loss) before income taxes 20,441 10,534 (3,690) Income taxes (benefit) 12,135 6,194 (1,366) --------- --------- --------- Net income (loss) 8,306 4,340 (2,324) --------- --------- --------- Retained deficit at beginning of period (1,783) -- (22,784) Dividend to parent company (71,791) -- -- --------- --------- --------- Retained (deficit) earnings at end of period $ (65,268) $ 4,340 $ (25,108) ========= ========= =========
See notes to interim combined financial statements. Page 20 of 29 Pages 21 ABC Media, Inc. Interim Combined Statements of Cash Flows (Unaudited) (In thousands of dollars)
POST ACQUISITION PREACQUISITION ------------------------- -------------- THREE MONTHS TWO MONTHS ONE MONTH ENDED ENDED ENDED MARCH 30 MARCH 31 JANUARY 28 1997 1996 1996 ------------ ---------- ---------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 8,306 $ 4,340 $ (2,324) Noncash items deducted from (included in) income: Depreciation 2,580 1,824 826 Amortization 9,295 6,306 227 Provision for deferred taxes 200 117 59 Change in current assets and liabilities: Accounts receivable 6,606 323 2,640 Inventories (366) 1,457 (5,194) Other current assets 135 (74) 4,999 Accounts payable (1,226) (2,607) 1,618 Other liabilities 15,244 11,296 2,687 -------- -------- -------- Net cash provided by operating activities 40,774 22,982 5,538 -------- -------- -------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Additions to property, plant and equipment (2,807) (4,823) (136) Other items, net (41) 20 (17) -------- -------- -------- Net cash required for investing activities (2,848) (4,803) (153) CASH REQUIRED FOR FINANCING ACTIVITIES Intercompany, net (38,086) (17,800) (3,956) -------- -------- -------- Net cash required for financing activities (38,086) (17,800) (3,956) -------- -------- -------- Net (decrease) increase in cash (160) 379 1,429 Cash at beginning of the period 2,008 2,058 629 -------- -------- -------- Cash at end of the period $ 1,848 $ 2,437 $ 2,058 ======== ======== ========
See notes to interim combined financial statements. Page 21 of 29 Pages 22 ABC Media, Inc. Notes to Interim Combined Financial Statements (Unaudited) Three Months Ended March 30, 1997 and March 31, 1996 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION NATURE OF BUSINESS In February 1997, ABC, Inc., which is indirectly owned by The Walt Disney Company (Disney), consolidated the newspaper publishing and related operations of The Kansas City Star, in Kansas City, Missouri, The Fort Worth Star-Telegram, in Ft. Worth, Texas, The Belleville News-Democrat, in Belleville, Illinois and The Times Leader in Wilkes-Barre, Pennsylvania into ABC Media, Inc. (Media). These four newspapers have combined daily and Sunday circulation of 630,000 and 898,000, respectively. BASIS OF PRESENTATION For the three months ended March 30, 1997 and March 31, 1996 the accounts of the four newspapers above were included in the publishing group of ABC, Inc. and were not presented on a combined basis as those of a separate reporting entity. Accordingly, the accounts included in the accompanying financial statements were carved out of the ABC, Inc. historical accounting records. For all periods presented, the financial statements of Media include the accounts of the above newspapers. The accompanying unaudited interim financial statements include costs allocated by ABC, Inc. for certain functions and services they performed centrally. All allocations and estimates were based on assumptions ABC, Inc.'s management believed were reasonable in the circumstances. These allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if Media had been operated as a separate entity. On February 9, 1996, Disney completed its acquisition of ABC, Inc. (formerly known as Capital Cities/ABC, Inc.) which indirectly owned Media. The acquisition was accounted for as a purchase and the total purchase price allocated to Media was approximately $1.5 billion based on the estimated fair value of Media's net assets. The excess of the purchase price over Media's net tangible assets, was approximately $1.5 billion. This amount is amortized on a straight line basis over forty years. Page 22 of 29 Pages 23 ABC Media, Inc. Notes to Interim Combined Financial Statements (Unaudited) Three Months Ended March 30, 1997 and March 31, 1996 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (CONTINUED) This change in ownership occurred as of an interim date. In the accompanying statements of income and retained earnings (deficit) and cash flows the period captioned as "Preacquisition" represents Media when it was owned by ABC, Inc., while the periods identified as Post Acquisition represent Media after it was acquired by Disney. The accompanying unaudited combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 30, 1997 are not necessarily indicative of the results that may be expected for the full year. 2. SUBSEQUENT EVENTS On March 17,1997, Media entered into a credit agreement which allows borrowings up to $1.2 billion. On April 9,1997, Media borrowed $1.2 billion under that agreement. On May 9, 1997, ABC, Inc. transferred ownership of Media to Knight-Ridder, Inc. in a stock for stock transaction. Approximately $210 million of the borrowings was retained by a Disney affiliate. On May 15, 1997, Knight-Ridder, Inc. agreed to unconditionally and irrevocably guarantee the payment of the $990 million debt along with related interest. Page 23 of 29 Pages 24 KNIGHT-RIDDER, INC. PRO FORMA FINANCIAL DATA (unaudited) The following pro forma unaudited condensed consolidated financial statements present the pro forma financial position at March 30, 1997 for Knight-Ridder, Inc. ("Knight-Ridder") and for ABC Media, Inc. ("Media"), and the pro forma results of operations for the quarter then ended, along with the results of operations for the year ended December 29, 1996. These pro forma financial statements give effect to the acquisition as if such acquisition of Media by Knight-Ridder had occurred at the beginning of each period for purposes of the condensed consolidated statements of income and as if such acquisition had occurred at the end of the period for purposes of the condensed consolidated balance sheets. The pro forma unaudited condensed consolidated financial statements do not purport to represent what Knight-Ridder's actual results of operations would have been had the acquisition occurred at the beginning of the periods and may not be indicative of Knight-Ridder's financial position or operating results for any future periods. The pro forma adjustments are based upon currently available information. The assumptions underlying the calculation of the pro forma adjustments are considered appropriate under the circumstances. These pro forma unaudited condensed consolidated financial statements should be read in conjunction with Knight-Ridder's Consolidated Financial Statements and the Notes thereto for the year ended December 29, 1996 along with Management's Discussion and Analysis of Operations, which are included in Knight-Ridder's Form 10-K covering such year and for the quarter ended March 30, 1997 along with Management's Discussion and Analysis of Operations, which are included in Knight-Ridder's Form 10-Q covering such period. Page 24 of 29 Pages 25 KNIGHT-RIDDER, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS OF DOLLARS)
ABC Knight-Ridder Media, Inc. Inc. March 30, March 30, Pro Forma Adjusted 1997 1997 Adjustments Pro Forma ------------- --------- ----------- --------- ASSETS Cash & equivalents including short-term cash investments $ 24,552 $ 1,848 $ 26,400 Accounts receivable, net 338,760 52,004 390,764 Inventories 48,313 6,049 $ 1,534 A 55,896 Prepaid expenses 33,930 1,278 35,208 Other current assets 45,345 1,220 46,565 ---------- ----------- ----------- ---------- Total Current Assets 490,900 62,399 1,534 554,833 ---------- ----------- ----------- ---------- Investments and Other Assets 606,730 4,074 610,804 Property, Plant and Equipment, Net 914,183 97,655 33,257 A 1,045,095 Goodwill and other intangibles, net 910,538 1,443,866 350,000 A 2,616,041 1,355,503 C (1,443,866)D ---------- ----------- ----------- ---------- Total $2,922,351 $ 1,607,994 $ 296,428 $4,826,773 ========== =========== =========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 136,407 $ 11,959 $ 148,366 Accrued expenses and other liabilities 102,516 32,695 $ 14,900 A 150,111 Accrued compensation and amounts withheld from employees 87,150 9,527 96,677 Federal and state income taxes 113,649 113,649 Deferred revenue 74,632 74,632 ---------- ----------- ----------- ---------- Total Current Liabilities 514,354 54,181 14,900 583,435 ---------- ----------- ----------- ---------- Long-term debt 706,630 85,300 990,000 B 1,696,630 (85,300)D Deferred federal and state income taxes 161,790 25,107 152,767 E 339,664 Postretirement benefits other than pensions 147,906 7,467 155,373 Employment benefits and other noncurrent liabilities 125,770 125,770 Due to parent company 1,207 (1,207)D ---------- ----------- ----------- ---------- Total Noncurrent Liabilities 1,142,096 119,081 1,056,260 2,317,437 ---------- ----------- ----------- ---------- Minority interest in consolidated subsidiaries 1,859 1,859 ---------- ---------- Commitments and Contingencies Shareholders' equity Common Stock 1,944 1,944 Preferred Stock 1,755 B 1,755 Additional capital 303,753 1,500,000 (1,500,000)F 961,998 658,245 B Retained earnings (deficit) 974,138 (65,268) 65,268 F 974,138 Unrealized gains on investments (15,793) (15,793) ---------- ----------- ----------- ---------- Total Shareholders' Equity 1,264,042 1,434,732 (774,732) 1,924,042 ---------- ----------- ----------- ---------- Total $2,922,351 $ 1,607,994 $ 296,428 $4,826,773 ========== =========== =========== ==========
Page 25 of 29 Pages 26 KNIGHT-RIDDER, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
ABC Knight-Ridder Media, Inc. Inc. For The Quarter For The Quarter Ended Ended March 30 March 30 Pro Forma Adjusted 1997 1997 Adjustments Pro Forma --------------- --------------- ----------- --------- OPERATING REVENUE Newspapers Advertising Retail $193,367 $ 47,056 $240,423 General 51,498 8,231 59,729 Classified 208,516 38,423 246,939 -------- -------- --------- Total 453,381 93,710 547,091 Circulation 126,855 25,708 152,563 Other 20,594 5,373 25,967 -------- -------- --------- Total Newspapers 600,830 124,791 725,621 Business Information Services 78,492 78,492 -------- -------- --------- Total Operating Revenue 679,322 124,791 804,113 -------- -------- --------- OPERATING COSTS Labor and employee benefits 272,050 40,803 312,853 Newsprint, ink and supplements 93,464 21,211 $ 15 A 114,690 Other operating costs 178,400 28,451 206,851 Depreciation and amortization 37,908 11,875 529 B 52,333 2,021 C -------- -------- -------- -------- Total Operating Costs 581,822 102,340 2,565 686,727 -------- -------- -------- -------- OPERATING INCOME 97,500 22,451 (2,565) 117,386 -------- -------- -------- -------- OTHER INCOME (EXPENSE) Interest expense (14,935) (2,220) (13,125)D (30,280) Interest expense capitalized 1,792 1,792 Interest income 675 675 Equity in earnings of unconsolidated companies and joint ventures 868 868 Minority interests in earnings of consolidated subsidiaries (2,744) (2,744) Other, net 218,413 210 218,623 -------- -------- -------- -------- Total 204,069 (2,010) (13,125) 188,934 -------- -------- -------- -------- Income before income taxes 301,569 20,441 (15,690) 306,320 Income taxes 126,838 12,135 (6,276)E 132,697 -------- -------- -------- -------- Net income $174,731 $ 8,306 $ (9,414) $173,623 ======== ======== ======== ======== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 1.85 $ 1.55 ======== ======== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 94,683 17,550 112,233 ======== ======== ========
Page 26 of 29 Pages 27 KNIGHT-RIDDER, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 29, 1996 (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
ABC Knight-Ridder, Media, Pro Forma Adjusted Inc. Inc. Adjustments Pro Forma ------------- ------ ----------- --------- OPERATING REVENUE Newspapers Advertising Retail $ 821,768 $202,709 $1,024,477 General 198,797 32,526 231,323 Classified 772,859 143,287 916,146 ---------- -------- ---------- Total 1,793,424 378,522 2,171,946 Circulation 501,826 100,256 602,082 Other 78,974 20,944 99,918 ---------- -------- ---------- Total Newspapers 2,374,224 499,722 2,873,946 Business Information Services 400,619 - 400,619 ---------- -------- ---------- Total Operating Revenue 2,774,843 499,722 3,274,565 ---------- -------- ---------- OPERATING COSTS Labor and employee benefits 1,083,026 158,792 1,241,818 Newsprint, ink and supplements 472,207 104,544 $ 2,153 A 578,904 Other operating costs 718,641 104,492 823,133 Depreciation and amortization 166,051 44,894 2,118 B 10,463 C 223,526 ---------- -------- ------- ---------- Total Operating Costs 2,439,925 412,722 14,734 2,867,381 ---------- -------- ------- ---------- OPERATING INCOME 334,918 87,000 (14,734) 407,184 ---------- -------- ------- ---------- OTHER INCOME (EXPENSE) Interest expense (73,296) (8,886) (52,494)D (134,676) Interest expense capitalized 6,397 6,397 Interest income 7,459 7,459 Equity in earnings of unconsolidated companies and joint ventures 29,868 29,868 Minority interests in earnings of consolidated subsidiaries (9,419) (9,419) Other, net 170,681 (8,057) 162,624 ---------- -------- -------- ---------- Total 131,690 (16,943) (52,494) 62,253 ---------- -------- -------- ---------- Income before income taxes 466,608 70,057 (67,228) 469,437 Income taxes 198,735 41,991 (26,891)E 213,835 ---------- -------- -------- ---------- NET INCOME $ 267,873 $ 28,066 $(40,337) $ 255,602 ========== ======== ======== ========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE $ 2.75 $ 2.22 ========== ========== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 97,420 17,550 114,970 ========== ========= ==========
Page 27 of 29 Pages 28 Knight-Ridder, Inc. Notes to Pro Forma Financial Statements (unaudited) (In Thousands of Dollars) NOTE A - PRO FORMA ADJUSTMENTS On May 9, 1997, Knight-Ridder completed the acquisition of Media through the merger of a wholly owned subsidiary of Knight-Ridder with and into Media. Media owns four newspapers located in Belleville, Illinois, Kansas City, Missouri, Wilkes-Barre, Pennsylvania and Fort-Worth, Texas. Knight-Ridder intends to continue to manage and operate Media as a newspaper company. The four newspapers have combined daily and Sunday circulation of 630,000 and 898,000, respectively. The acquisition was accounted for under the purchase method. The purchase price of $1.65 billion was allocated, based on preliminary allocations, to the estimated fair market value of tangible and intangible net assets of Media. The excess of purchase price over these net assets of Media of approximately $1.36 billion, has been recorded as goodwill and will be amortized on a straight-line basis over 40 years. Pursuant to the merger, Knight-Ridder issued 1,754,930 shares of its Series B convertible preferred stock. At the effective time of the merger, Media had $990 million of bank debt, the payment of which was subsequently guaranteed by Knight-Ridder. The pro forma condensed consolidated balance sheets at March 30, 1997 and the related pro forma condensed consolidated statements of income for the quarter then ended, as well as the pro forma condensed consolidated statements of income for the year ended December 29, 1996 reflect the acquisition as if it had occurred at the beginning of the period for purposes of the condensed consolidated statements of income and as if such acquisition had occurred at the end of the period for purposes of the condensed consolidated balance sheets. The pro forma adjustments are described below: CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 30, 1997 A. To adjust the net assets of Media to their estimated fair value based on a preliminary allocation of the purchase price and to record estimated acquisition costs of $14.9 million. B. To reflect the issuance of 1,754,930 shares of Knight-Ridder Series B convertible preferred stock valued at $660 million and the $990 million of bank debt owed by Media. C. To record a preliminary allocation of the excess purchase price over the fair value of the net assets acquired. D. To eliminate assets and liabilities retained by the seller. E. To record the tax effects of pro forma adjustments related to the increase in fair value of net assets acquired. F. To eliminate Media's equity accounts. Page 28 of 29 Pages 29 Knight-Ridder, Inc. Notes to Pro Forma Financial Statements (unaudited) (In Thousands of Dollars) CONDENSED CONSOLIDATED STATEMENTS OF INCOME - QUARTER ENDED MARCH 30, 1997 AND THE YEAR ENDED DECEMBER 29, 1996 A. To eliminate the effects of cost calculated under the LIFO inventory method ($15,000 for the quarter ended March 30, 1997 and $2.2 million for the year ended December 29, 1996). B. To record depreciation ($529,000 for the quarter ended March 30, 1997 and $2.1 million for the year ended December 29, 1996) from preliminary recording of property at its estimated fair value. C. To recognize incremental amortization of intangibles from a preliminary allocation of purchase price. D. To record interest expense ($13.1 million for the quarter ended March 30, 1997 and $52.5 million for the year ended December 29, 1996) on the bank debt to fund the acquisition. E. To record the tax effects of the pro forma adjustments at the statutory rates. Page 29 of 29 Pages -----END PRIVACY-ENHANCED MESSAGE-----