-----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, R5y0ujU6ZfwxNAN5eVZpFR1CDE50/YraDuUrEXtm9sX53XIL3G08RrZJgbgsHZZO NYluLvDEUCSzoCJAWfc4nA== 0000950144-97-010766.txt : 19971009 0000950144-97-010766.hdr.sgml : 19971009 ACCESSION NUMBER: 0000950144-97-010766 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971008 ITEM INFORMATION: FILED AS OF DATE: 19971008 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 SEC ACT: SEC FILE NUMBER: 001-07553 FILM NUMBER: 97692605 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 1 KNIGHT-RIDDER, INC. FORM 8-K DATED 10/08/97 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) October 8, 1997 KNIGHT-RIDDER, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter)
Florida 1-7553 38-0723657 - ------------------------------------------------------------------------------------------------------------------ (State or other jurisdiction of (Commission (I.R.S. Employer Identification No.) incorporation) File Number)
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 38 2 Item 5. Other Events On April 4, 1997, Knight-Ridder, Inc. (KRI) announced that it will divest Knight-Ridder Information, Inc. (KRII). This announcement resulted in its former Business Information Service (BIS) segment (excluding one business called Technimetrics, the ownership of which will continue and the operations of which are not material) being reclassified as discontinued operations in the quarter ended June 29, 1997. On October 2, 1997, KRI announced it had entered into an agreement to sell KRII to M.A.I.D. plc for $420 million. The sale is expected to close before the end of 1997 and is expected to result in a gain. This reclassification has been reflected in the accompanying consolidated balance sheets of KRI as of December 29, 1996, December 31, 1995, and December 25, 1994, and the related consolidated statements of income , cash flows and shareholders' equity for the years then ended. On May 9, 1997, KRI completed the acquisition of ABC, Media Inc. (Media) through the merger of a wholly owned subsidiary (Cypress Media, Inc.) with and into Media. Media which was indirectly owned by The Walt Disney Company, owns four newspapers in Kansas City, Missouri, Fort Worth, Texas, Wilkes-Barre, Pennsylvania, and Belleville, Illinois. The purchase price was $1.65 billion. On May 22,1997, KRI filed Form 8-K relating to the acquisition of Media excluding related financial statements and pro forma information. On July 22, 1997, KRI filed Form 8-K/A#1 including the required financial statements and pro forma financial information. The effects of discontinuing the BIS segment are also reflected in the accompanying 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 38 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereto duly authorized. Dated: October 8, 1997 KNIGHT-RIDDER, INC. (Registrant) By: /s/ Gary R. Effren --------------------------------- Gary R. Effren Vice President/Controller (Chief Accounting Officer and Duly Authorized Officer of Registrant) Page 3 of 38 4 Report of Independent Certified Public Accountants Shareholders Knight-Ridder, Inc. We have audited the accompanying consolidated balance sheet of Knight-Ridder, Inc., and subsidiaries as of December 29, 1996, December 31, 1995 and December 25, 1994, and the related consolidated statements of income, cash flows and shareholders' equity for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knight-Ridder, Inc., and subsidiaries at December 29, 1996, December 31, 1995 and December 25, 1994, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note A to the financial statements, in 1995 the Company changed its method of accounting for contributions. Miami, Florida January 29, 1997, except for Note K as to which the date is October 8, 1997 /s/ Ernst & Young LLP Page 4 of 38 5 Consolidated Balance Sheet (In thousands of dollars, except share data)
DECEMBER 29 DECEMBER 31 DECEMBER 25 1996 1995 1994 --------------- --------------- --------------- ASSETS CURRENT ASSETS Cash, including short-term cash investments of $50 in 1996, $50 in 1995 and $150 in 1994 $ 22,880 $ 26,012 9,253 Accounts receivable, net of allowances of $12,685 in 1996, $14,348 in 1995 and $13,728 in 1994 356,079 339,264 317,687 Inventories 42,941 73,349 39,555 Prepaid expense 90,314 21,543 20,354 Other current assets 53,513 42,754 35,955 ---------- ---------- ---------- Total Current Assets 565,727 502,922 422,804 ---------- ---------- ---------- INVESTMENTS AND OTHER ASSETS Equity in unconsolidated companies and joint ventures 330,267 321,658 293,205 Net assets of discontinued BIS operations 325,319 427,290 431,416 Other 135,409 225,385 143,506 ---------- ---------- ---------- Total Investments and Other Assets 790,995 974,333 868,127 ---------- ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Land and improvements 77,526 77,617 63,800 Buildings and improvements 387,509 384,314 362,209 Equipment 996,703 992,604 974,744 Construction and equipment installations in progress 110,590 56,598 15,180 ---------- ---------- ---------- 1,572,328 1,511,133 1,415,933 Less accumulated depreciation 702,141 667,735 678,962 ---------- ---------- ---------- Net Property, Plant and Equipment 870,187 843,398 736,971 ---------- ---------- ---------- EXCESS OF COST OVER NET ASSETS ACQUIRED Less accumulated amortization of $153,530 in 1996, $133,924 in 1995 and $121,453 in 1994 636,882 646,345 386,618 ---------- ---------- ---------- Total $2,863,791 $2,966,998 $2,414,520 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 223,962 $ 127,532 $ 136,817 Accrued expenses and other liabilities 103,730 105,317 98,993 Accrued compensation and amounts withheld from employees 96,426 101,357 96,917 Federal and state income taxes -- 195 1,368 Deferred revenue 70,452 72,134 66,953 Dividends payable -- 17,978 19,593 Short-term borrowings and current portion of long-term debt 50,000 13,129 -- ---------- ---------- ---------- Total Current Liabilities 544,570 437,642 420,641 ---------- ---------- ---------- NONCURRENT LIABILITIES Long-term debt 771,335 1,000,721 411,504 Deferred federal and state income taxes 142,727 134,460 108,616 Postretirement benefits other than pensions 158,820 169,059 165,833 Employment benefits and other noncurrent liabilities 112,784 113,388 82,155 ---------- ---------- ---------- Total Noncurrent Liabilities 1,185,666 1,417,628 768,108 ---------- ---------- ---------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 2,047 758 1,117 ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE I) SHAREHOLDERS' EQUITY Common stock, $.02 1/12 par value; shares authorized-- 250,000,000; share issued--93,340,652 in 1996, 97,196,308 in 1995 and 105,785,440 in 1994 1,945 2,025 2,204 Additional capital 308,320 295,360 326,392 Retained earnings 819,572 770,643 896,058 Unrealized gains on investments 1,671 42,942 -- ---------- ---------- ---------- Total Shareholders' Equity 1,131,508 1,110,970 1,224,654 ---------- ---------- ---------- Total $2,863,791 $2,966,998 $2,414,520 ========== ========== ==========
See "Notes to Consolidated Financial Statements." Page 5 of 38 6 Consolidated Statement of Income (In thousands of dollars, except per share data)
YEAR ENDED ------------------------------------------------- DECEMBER 29 DECEMBER 31 DECEMBER 25 1996 1995 1994 --------------- --------------- --------------- OPERATING REVENUE Advertising Retail $ 821,768 $ 807,758 $ 792,476 General 198,797 182,516 184,469 Classified 772,859 682,696 606,428 ---------- ---------- ---------- Total 1,793,424 1,672,970 1,583,373 Circulation 501,826 495,315 484,581 Other 97,839 97,053 80,530 ---------- ---------- ---------- Total Operating Revenue 2,393,089 2,265,338 2,148,484 ---------- ---------- ---------- OPERATING COSTS Labor and employee benefits 976,142 977,121 934,420 Newsprint, ink and supplements 472,207 446,841 335,902 Other operating costs 486,491 510,767 470,069 Depreciation and amortization 123,597 100,950 98,703 ---------- ---------- ---------- Total Operating Costs 2,058,437 2,035,679 1,839,094 ---------- ---------- ---------- OPERATING INCOME 334,652 229,659 309,390 ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest expense (73,137) (59,513) (44,216) Interest expense capitalized 6,397 1,889 474 Interest income 6,490 8,577 5,732 Equity in earnings of unconsolidated companies and joint venture 29,868 20,661 7,612 Minority interests in earnings of consolidated subsidiaries (9,293) (8,809) (10,323) Other, net 16,701 (8,394) (1,865) ---------- ---------- ---------- Total (22,974) (45,589) (42,586) ---------- ---------- ---------- Income before income taxes 311,678 184,070 266,804 Income taxes 125,402 73,360 106,921 ---------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 186,276 110,710 159,883 Net gain on sale of discontinued BIS operations, net of applicable income taxes of $69,631 in 1996 and $38,933 in 1995 (Note G and K) 86,255 53,765 -- Income/(Loss) from discontinued BIS operations, net of applicable income taxes of $3,702 in 1996, $8,121 in 1995 and $12,249 in 1994, (Note K) (4,658) 2,907 11,017 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 267,873 167,382 170,900 Cumulative effect of change in accounting principle for contributions -- (7,320) -- ---------- ---------- ---------- Net income $ 267,873 $ 160,062 $ 170,900 ========== ========== ========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES Income from continuing operations $ 1.91 $ 1.10 $ 1.47 Net gain on sale of discontinued BIS operations (Note G and K) 0.89 0.54 -- Income/(Loss) from discontinued BIS operations (Note K) (0.05) 0.03 0.10 ---------- ---------- ---------- Income before cumulative effect of change in accounting principle 2.75 1.67 1.57 Cumulative effect of change in accounting principle for contributions -- (0.07) -- ---------- ---------- ---------- Net income $ 2.75 $ 1.60 $ 1.57 ========== ========== ========== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (IN 000S) 97,420 100,196 108,551 ========== ========== ==========
See "Notes to Consolidated Financial Statements." Page 6 of 38 7 Consolidated Statement of Cash Flows (In thousands of dollars)
YEAR ENDED ------------------------------------------------- DECEMBER 29 DECEMBER 31 DECEMBER 25 1996 1995 1994 --------------- --------------- --------------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 267,873 $ 160,062 $ 170,900 Noncash items deducted from (included in) income: Cumulative effect of change in accounting principle -- 7,320 -- Net gain on sale of discontinued BIS operations (86,255) (53,765) -- Depreciation 87,518 75,492 74,211 Amortization of excess of cost over net assets acquired 19,607 12,470 11,011 Amortization of other assets 16,472 12,988 13,481 Provision for noncurrent deferred taxes (30,852) 4,391 2,522 Earnings of investees in excess of distributions (21,293) (16,250) (7,737) Other items, net (355) 43,805 42,772 Change in certain assets and liabilities: Accounts receivable (42,908) (18,620) (41,135) Inventories 30,474 (32,292) 1,867 Other current assets (88,219) (9,531) 2,104 Accounts payable 86,251 (19,235) 11,099 Federal and state income taxes 972 (55,078) 1,358 Other liabilities (9,826) 3,006 33,803 ---------- ---------- ---------- Net Cash Provided by Operating Activities 229,459 114,763 316,256 ---------- ---------- ---------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Proceeds from sale of discontinued BIS operations 271,859 114,907 -- Change in net noncurrent assets of discontinued BIS operations 1,299 2,314 211 Acquisition of Contra Costa Newspapers, Inc. -- (335,755) -- Additions to property, plant and equipment (112,896) (92,086) (33,945) Other items, net 45,142 (46,081) (43,856) ---------- ---------- ---------- Net Cash Provided by (Required for) Investing Activities 205,404 (356,701) (77,590) ---------- ---------- ---------- CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES Proceeds from sale of commercial paper and senior notes payable 601,010 1,092,620 375,308 Reduction of total debt (793,525) (490,274) (414,879) ---------- ---------- ---------- Net Change in Total Debt (192,515) 602,346 (39,571) Payment of cash dividends (74,262) (74,377) (77,942) Sale of common stock to employees 72,202 75,437 25,897 Purchase of treasury stock (221,768) (319,363) (136,977) Other items, net (21,652) (25,346) (23,832) ---------- ---------- ---------- Net Cash Provided by (Required for) Financing Activities (437,995) 258,697 (252,425) ---------- ---------- ---------- Net Increase (Decrease) in Cash (3,132) 16,759 (13,759) Cash and short-term cash investments at beginning of the year 26,012 9,253 23,012 ---------- ---------- ---------- Cash and short-term cash investments at end of the year $ 22,880 $ 26,012 $ 9,253 ========== ========== ========== Working capital at end of the year $ 21,157 $ 65,280 $ 2,163 ========== ========== ==========
See "Notes to Consolidated Financial Statements." Page 7 of 38 8 Consolidated Statement of Shareholders' Equity (In thousands of dollars, except share data)
COMMON SHARES COMMON ADDITIONAL RETAINED TREASURY OUTSTANDING (1) STOCK (1) CAPITAL EARNINGS (1) STOCK ---------------- -------------- --------------- --------------- ----------- BALANCE AT DECEMBER 26, 1993 109,694,972 $ 2,285 $ 342,201 $ 898,683 $ -- Issuance of common shares under stock option plans 59,200 -- 1,104 -- -- Issuance of treasury shares under stock option plans 455,622 -- (3,562) -- (12,571) Issuance of treasury shares under stock purchase plan 620,246 -- (2,767) -- (16,835) Purchase of treasury shares (5,044,600) -- -- -- 136,977 Retirement of 3,968,732 treasury shares (1) -- (81) (12,300) (95,189) (107,571) Tax benefits arising from employee stock plans -- -- 1,716 -- -- Net income -- -- -- 170,900 -- Cash dividends declared on common stock--$.73 per share (1) -- -- -- (78,336) -- ------------ ------- --------- --------- --------- BALANCE AT DECEMBER 25, 1994 105,785,440 $ 2,204 $ 326,392 $ 896,058 $ -- Issuance of common shares under stock option plans 152,150 2 3,429 -- -- Issuance of treasury shares under stock option plans 2,167,760 -- (9,712) -- (62,712) Issuance of treasury shares under stock purchase plans 599,558 -- (2,407) -- (16,926) Purchase of treasury shares (11,508,600) -- -- -- 319,363 Retirement of 8,741,282 treasury shares (1) -- (181) (26,830) (212,715) (239,725) Tax benefits arising from employee stock plans -- -- 4,488 -- -- Unrealized gains on investments -- -- -- 42,942 -- Net income -- -- -- 160,062 -- Cash dividends declared on common stock--$.74 per share (1) -- -- -- (72,762) -- ------------ ------- --------- --------- --------- BALANCE AT DECEMBER 31, 1995 97,196,308 $ 2,025 $ 295,360 $ 813,585 $ -- Issuance of common shares under stock option plans 1,040,938 22 26,589 (11) -- Issuance of common shares under stock purchase plan 126,808 3 3,724 (1) -- Issuance of treasury shares under stock option plans 868,752 -- (7,661) -- (30,783) Issuance of treasury shares under stock purchase plan 326,946 -- (1,278) -- (11,645) Purchase of treasury shares (6,219,100) -- -- -- 221,768 Retirement of 5,023,402 treasury shares -- (105) (16,586) (162,649) (179,340) Expenses related to capital transactions -- -- (203) -- -- Tax benefits arising from employee stock plans -- -- 8,375 -- -- Reductions in unrealized gains on investments -- -- -- (41,271) -- Net income -- -- -- 267,873 -- Cash dividends declared on common stock--$.58 1/2 per share (2) -- -- -- (56,283) -- ------------ ------- --------- --------- --------- BALANCE AT DECEMBER 29, 1996 93,340,652 $ 1,945 $ 308,320 $ 821,243 $ -- ============ ======= ========= ========= =========
(1) Number of shares and related amounts have been restated to reflect a two-for-one stock split in the form of a 100% stock dividend, effective July 31, 1996. (2) The Board of Directors declared a $.20 per share dividend on January 28, 1997. The quarterly dividend, usually paid in January, was paid on February 24,1997, to shareholders of record as of the close of business on February 12, 1997. See "Notes to Consolidated Financial Statements." Page 8 of 38 9 Notes to Consolidated Financial Statements A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Knight-Ridder, Inc. is a communications company engaged in newspaper publishing and news and information services, and now operates exclusively as one business segment. See Note K. The company reports on a fiscal year, ending the last Sunday in the calendar year. Results for 1996 and 1994 are for the 52 weeks ended December 29 and December 25, respectively, and results for 1995 are for the 53 weeks ended December 31. The BASIS OF CONSOLIDATION is to include in the consolidated financial statements all the accounts of Knight-Ridder, Inc., 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, Inc., 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. Knight-Ridder received 45% of any profit of the agency through the first three years, with Gannett receiving 55%. In the fourth year, Knight-Ridder received 47% of the DNA profit and beginning December 27, 1993, received 49%. As of December 26, 1994, profits are split equally through the end of the 100-year Joint Operating Agreement (JOA). 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, Inc., 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 services of general, retail and classified advertising accounts for a group of newspapers; Southeast Paper Manufacturing Co. and Ponderay Newsprint Company, two newsprint mill partnerships; TKR Cable Company and TKR Cable Partners, cable television joint ventures; InfiNet, a joint venture that allows newspapers to offer Internet access to subscribers; Destination Florida, a company that provides online travel information services; and Interealty (formerly known as PRC Realty Systems, Inc., ) a software system producer for the real estate industry. Page 9 of 38 10 Notes to Consolidated Financial Statements (continued) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The company owns 49-1/2% of the voting common stock and 65% of the nonvoting common stock of the SEATTLE TIMES COMPANY, owns 48% of the voting stock of NEWSPAPERS FIRST, is a one-third partner in the SOUTHEAST PAPER MANUFACTURING CO., owns a 13-1/2% equity share of PONDERAY NEWSPRINT COMPANY, and owns 50% of the stock of TKR CABLE COMPANY and is a 50% partner in TKR CABLE PARTNERS. The company has a 15% interest in TCI/TKR Limited partnership through TKR Cable Partners. The company is a one-third partner in InfiNet and a 50% partner in DESTINATION FLORIDA and owns a 25% interest in INTEREALTY. The investment in unconsolidated companies and joint ventures at December 29, 1996, includes $300.3 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 $29.9 million in 1996, $20.7 million in 1995 and $7.6 million in 1994 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 $18.6 million in 1996, $3.2 million in 1995 and $3.1 million in 1994 and were offset against the investment account. FORT WAYNE NEWSPAPERS, INC., is the only consolidated subsidiary that has a minority ownership interest. The minority shareholders' interest in the net income of this subsidiary 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 Co. 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 December 29, 1996, December 31, 1995, and December 25, 1994, 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. Page 10 of 38 11 Notes to Consolidated Financial Statements (continued) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) "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 a less than 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 a separate component of shareholders' equity, which resulted in unrealized gains (net of tax) of $1.7 million at December 29, 1996, $42.9 million at December 31, 1995, and zero at December 25, 1994. Upon the sale of an investment, the gain/loss is calculated based on the 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" arises from the purchase of at least a 50% interest in a company for a price higher than the fair market value of the net tangible assets. Intangible assets of this type arising from acquisitions accounted for as purchases and occurring subsequent to October 31, 1970, totaled approximately $790 million at December 29, 1996. They are generally being amortized over a 40-year period on a straight-line basis, unless management has concluded a shorter term is more appropriate. 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" represent the carrying amounts of commercial paper and other short-term borrowings that approximate fair value. "LONG-TERM DEBT" represents the carrying amounts of debentures and notes payable. 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. Page 11 of 38 12 Notes to Consolidated Financial Statements (continued) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In 1994, the company adopted FAS 112 - EMPLOYERS ACCOUNTING FOR POST EMPLOYMENT BENEFITS. The adoption of FAS 112 did not materially impact the financial statements. In the first quarter of 1995, the company adopted FAS 116 - ACCOUNTING FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE. Under FAS 116, unconditional promises, including multi-year promises, are recognized in the period the promise is made. The adoption of FAS 116 resulted in a $7.3 million charge (net of tax) to operations, or $.07 per share, and was recorded as a cumulative effect adjustment. In 1996, the company adopted FAS 121 - ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. FAS 121 requires impairment losses to be recorded on long-lived 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. The adoption of FAS 121 did not materially impact the financial statements. Also 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 (Note E). "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. 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 1995 and 1994 have been reclassified to conform to the 1996 presentation. 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. No material foreign income taxes have been imposed on reported earnings. Page 12 of 38 13 Notes to Consolidated Financial Statements (continued) B. INCOME TAXES (CONTINUED) Federal, state and local income taxes consist of the following (in thousands):
1996 1995 1994 ---------------------- ------------------------ -------------------- CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED -------- -------- --------- ---------- -------- -------- Federal income taxes $127,610 $ 28,075 $ 100,568 $ (10,128) $ 97,824 $2,501 State and local income taxes 29,883 13,167 26,733 3,241 18,791 54 -------- -------- --------- --------- -------- ------ Total $157,493 $ 41,242 $ 127,301 $ (6,887) $116,615 $2,555 ======== ======== ========= ========= ======== ====== Provision for: Continuing operations $ 84,755 $ 40,647 $ 80,727 $ (7,367) $104,866 $2,055 Discontinued operations 72,738 595 46,574 480 11,749 500 -------- -------- --------- --------- -------- ------ $157,493 $ 41,242 $ 127,301 $ (6,887) $116,615 $2,555 ======== ======== ========= ========= ======== ======
Cash payments of income taxes for the years 1996, 1995 and 1994 were $147.2 million, $130.1 million and $104.5 million, respectively. Payments in 1996 and 1995 include the tax impact resulting from gains on the sale of Knight-Ridder Financial and the Journal of Commerce, respectively. The differences between income tax expense shown in the financial statements for continuing operations and the amounts determined by applying the federal statutory rate of 35% in each year are as follows (in thousands):
1996 1995 1994 -------- ------- ------- Federal statutory income tax $109,087 $64,425 $ 93,381 State and local income taxes, net of federal benefit 13,671 11,481 11,029 Statutory rate applied to nondeductible amortization of the excess of cost over net assets acquired 2,781 2,712 3,366 Other items, net (137) (5,258) (855) -------- ------- --------- Total $125,402 $73,360 $ 106,921 ======== ======= =========
Page 13 of 38 14 Notes to Consolidated Financial Statements (continued) B. INCOME TAXES (CONTINUED) The deferred tax asset and liability at the fiscal year end is comprised of the following components (in thousands):
1996 1995 1994 --------- -------- -------- Postretirement benefits other than pensions (including amounts relating to partnerships in which the company participates) $ 95,764 $ 85,789 $ 84,833 Compensation and benefit accruals (6,802) 21,768 17,130 Accrued interest 10,576 8,073 5,135 Other nondeductible accruals 43,594 30,068 28,127 --------- -------- -------- Gross deferred tax assets $ 143,132 $145,698 $135,225 ========= ======== ======== DEFERRED TAX LIABILITY Depreciation and amortization $ 196,116 $154,242 $189,843 Equity in partnerships and investees 73,499 52,708 46,715 Unrealized appreciation in equity securities 1,210 33,478 -- Research and experimental expenditures 10,964 12,232 9,379 Other 11,066 31,924 5,412 --------- -------- -------- Gross deferred tax liability $ 292,855 $284,584 $251,349 ========= ======== ======== Net deferred tax liability $ 149,723 $138,886 $116,124 ========= ======== ========
The components of deferred taxes included in the Consolidated Balance Sheet are as follows (in thousands):
1996 1995 1994 --------- -------- -------- Current asset $ 23,536 $ 25,511 $ 21,949 Noncurrent liability 142,727 134,460 108,616 Discontinued BIS operations (net liability) 30,532 29,937 29,457 --------- -------- -------- Net deferred tax liability $ 149,723 $138,886 $116,124 ========= ======== ========
Page 14 of 38 15 Notes to Consolidated Financial Statements (continued) C. DEBT Debt consisted of the following (in thousands):
DECEMBER 29 DECEMBER 31 DECEMBER 25 1996 1995 1994 ----------- ----------- ----------- Commercial paper due at various dates through March 21, 1997, at an effective interest rate of 5.5% as of December 29, 1996. Amounts are net of amortized discounts of $1,683 in 1996, $5,502 in 1995 and $136 in 1994 (a) $ 364,817 $ 557,698 $ 54,764 Debentures due in April 15, 2009, bearing interest at 9.875%, net of unamortized discount at $2,032 in 1996, $2,211 in 1995 and $2,363 in 1994 197,968 197,789 197,637 Notes payable, bearing interest at 8.5%, subject to mandatory pro rata amortization of 25% annually commencing September 1, 1998, through maturity on September 1, 2001, net of unamortized discount of $555 in 1996, $726 in 1995 and $897 in 1994 159,445 159,274 159,103 Senior notes payable on December 15, 2005, bearing interest at 6.3%,net of unamortized discount of $895 in 1996 and $911 in 1995 99,105 99,089 -- --------- ---------- -------- 821,335 1,013,850 411,504 Less amounts payable in one year (b) 50,000 13,129 -- --------- ---------- -------- Total long-term debt $ 771,335 $1,000,721 $411,504 ========= ========== ========
(a) Commercial paper is supported by $650 million of revolving credit and term loan agreements, $400 million of which mature on October 25, 2001, and $250 million of which mature on October 24, 1997. (b) The $400 million revolving credit and term loan agreements maturing on October 25, 2001, are long-term in that no principal payments are required during the next 12 months. However, due to the company's intent to reduce its outstanding commercial paper, $50 million has been classified as current. Interest payments during 1996, 1995 and 1994 were $70.9 million, $45.4 million and $40.2 million, respectively. Page 15 of 38 16 Notes to Consolidated Financial Statements (continued) C. DEBT (CONTINUED) The following table presents the approximate annual maturities of debt for the five years after 1996 (in thousands): 1997 $ 50,000 1998 39,861 1999 39,861 2000 39,861 2001 354,679 2002 and thereafter 297,073 --------- Total $ 821,335 =========
The carrying amounts and fair values of debt as of December 29, 1996 are as follows (in thousands):
CARRYING FAIR AMOUNT VALUE ----------- ---------- Commercial paper $364,817 $364,817 9.875% Debentures 197,968 235,526 8.5% Notes payable 159,445 173,408 6.3% Senior notes payable 99,105 97,728 ----------- ---------- $821,335 $871,479 ----------- ----------
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):
1996 1995 1994 ----------- ----------- ----------- Current assets $ 258,037 $ 274,815 $ 228,864 Property, plant and equipment and other assets 4,076,604 3,671,364 3,498,335 Current liabilities 287,782 323,199 290,418 Long-term debt and other noncurrent liabilities 2,893,716 2,572,060 2,479,374 Net sales 1,417,668 1,248,694 1,021,198 Gross profit 449,383 376,545 313,221 Net income (loss) 55,104 6,517 (48,142) Company's share of: Net assets 330,267 321,658 293,205 Net income 29,868 20,661 7,612
Page 16 of 38 17 Notes to Consolidated Financial Statements (continued) D. UNCONSOLIDATED COMPANIES AND JOINT VENTURES (CONTINUED) 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 December 29, 1996, December 31, 1995, and December 25, 1994, 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. E. CAPITAL STOCK In 1991, shareholders authorized 20 million shares of preferred stock for future issuance. On June 21, 1996, the Board of Directors declared a two-for-one stock split in the form of a 100% common stock dividend that was payable on July 31, 1996, to shareholders of record on July 10, 1996. The financial statements have been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings to common stock, the par value of the additional shares arising from the split. In addition, all references in the financial statements to number of shares and per share amounts have been restated. Concurrent with the 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. Page 17 of 38 18 Notes to Consolidated Financial Statements (continued) E. CAPITAL STOCK (CONTINUED) 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 for issuance upon exercise of the rights 1,500,000 preferred shares. 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 453,754 shares in 1996, 599,558 shares in 1995 and 620,246 shares in 1994. The purchase price of shares issued in 1996 under this plan ranged between $28.59 and $35.49, and the market value on the purchase dates of such shares ranged from $33.63 to $41.75. 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 1994 were exercisable at issue date. Options granted after March 1994 are exercisable in three equal installments vesting 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. Proceeds from the issuance of shares under these plans are included in shareholders' equity and do not affect income. Page 18 of 38 19 Notes to Consolidated Financial Statements (continued) E. CAPITAL STOCK (CONTINUED) Transactions under the Employee Stock Option Plans are summarized as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE SHARES PER SHARE -------------- ------------ Outstanding December 26, 1993 7,732,846 $ 25.47 Exercised (514,822) 19.55 Expired Forfeited (12,200) 27.79 Granted 1,440,900 24.62 Outstanding December 25, 1994 8,646,724 25.68 Exercised (2,319,910) 24.21 Expired Forfeited (24,800) 26.24 Granted 1,345,300 32.16 Outstanding December 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 DECEMBER 29, 1996 6,904,845 29.89
At December 29, 1996, shares of the company's authorized but unissued common stock were reserved for issuance as follows:
SHARES --------- Employee stock option plans 3,223,215 Employees stock purchase plan 1,808,620 ========= Total 5,031,835 =========
Page 19 of 38 20 Notes to Consolidated Financial Statements (continued) E. CAPITAL STOCK (CONTINUED) 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 1996 and 1995, respectively: risk-free rates of 6.1% and 5.5%; dividend yields of 2.0% and 2.5%; volatility factors of the expected market price of the company's common stock of 0.16 and 0.17; and a weighted-average expected life of the option of 6.5 years for both. The weighted-average fair value of the stock options for the years 1996 and 1995 were $9.65 and $6.94, 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 employee 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 employee stock options. 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 1996 and 1995 pro forma information follows (in thousands, except for earnings per share information):
1996 1995 -------- -------- Net earnings $264,506 $158,472 Earnings per common and common equivalent share 2.72 1.58
The 1996 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. Page 20 of 38 21 Notes to Consolidated Financial Statements (continued) E. CAPITAL STOCK (CONTINUED) The exercise price of options outstanding at December 29, 1996, ranged between $20.13 and $39.31. The weighted-average remaining contractual life of those options for 1996 and 1995, is 7.3 and 7.1 years, respectively. 4,305,845 and 5,323,930 options were exercisable at the end of 1996 and 1995, respectively. F. RETIREMENT PLANS The company and its subsidiaries have several company-administered noncontributory defined benefit plans covering most non-union employees. These plans provide benefits that are based on the employees' compensation during various times before retirement. The funding policy for these plans is to contribute annually an amount that is intended to provide the projected benefit earned during the year for the covered employees. The company also contributes to certain multi-employer union defined benefit plans, company-administered and jointly administered negotiated plans covering union employees. The funding policy for these plans is to make annual contributions in accordance with applicable agreements. The company also sponsors certain defined contribution plans established pursuant to Section 401(k) of the Internal Revenue Code. Subject to certain dollar limits, employees may contribute a percentage of their salaries to these plans, and the company will match a portion of the employees' contributions. A summary of the components of net periodic pension cost for the defined benefit plans (both company-administered non-negotiated and single-employer negotiated plans) 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):
1996 1995 1994 ---------- --------- -------- Defined benefit plans: Service cost $ 26,012 $ 18,144 $ 21,376 Interest cost 56,698 51,725 48,559 Actual return on plan assets (106,651) (137,554) 20,553 Net amortization and deferral 43,681 84,042 (78,037) ---------- --------- -------- Net 19,740 16,357 12,451 Multi-employer union plans 11,849 13,006 13,622 Defined contribution plans 8,880 8,273 7,755 Other 1,412 1,808 1,817 ---------- --------- -------- Net periodic pension cost $ 41,881 $ 39,444 $ 35,645 ========== ========= ========
Page 21 of 38 22 Notes to Consolidated Financial Statements (continued) F. RETIREMENT PLANS (CONTINUED) Assumptions used each year in accounting for defined benefit plans were:
1996 1995 1994 ------ ------- --------- Discount rate as of year end 7.5% 7.25% 8.5% Expected long-term rate of return on assets assumed in determining pension expense 8.5% 8.5% 8.0 - 8.5% Rate of increase in compensation levels as of year end 4.5% 4.5% 3.5 - 4.5%
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet for the defined benefit plans (in thousands):
December 29, 1996 December 31, 1995 December 25, 1994 ------------------------------- ---------------------------- ------------------------------ Plans Whose Plans Whose Plans Whose Plans Whose Plans Whose Plans Whose Assets Accumulated Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets Benefits Assets (16 plans) (9 plans) (17 plans) (11 plans) (19 plans) (8 plans) --------------- --------------- --------------- -------------- --------------- --------------- Actuarial present value of benefit obligations: Vested benefit obligations $ 601,284 $ 74,766 $ 564,319 $ 83,275 $ 459,237 $ 49,613 ========= ======== ========= ========= ========= ======== Accumulated benefit obligations $ 612,444 $ 77,021 $ 574,642 $ 85,581 $ 468,205 $ 51,217 ========= ======== ========= ========= ========= ======== Projected benefit obligation $ 709,412 $ 87,467 $ 672,691 $ 100,273 $ 539,832 $ 58,989 Plan assets at fair value 810,102 49,809 717,475 55,019 612,776 32,380 --------- -------- --------- --------- --------- -------- Projected benefit obligation less than (in excess of) plan assets 100,690 (37,658) 44,784 (45,254) 72,944 (26,609) Unrecognized net (gain) loss (96,564) 11,704 (15,441) 15,032 (37,278) 1,220 Prior service cost not yet recognized in net periodic pension cost 33,135 11,283 24,865 12,522 28,408 13,685 Unrecognized net (asset) obligation, at the date FAS 87 was adopted, net of amortization (18,592) 1,738 (23,689) 2,190 (29,122) 2,523 Adjustment required to recognize minimum liability (14,279) (18,071) (10,199) --------- -------- --------- --------- --------- -------- Net pension asset (liability) recognized in the Consolidated Balance Sheet $ 18,669 $(27,212) $ 30,519 $ (33,581) $ 34,952 $(19,380) ========= ======== ========= ========= ========= ========
Page 22 of 38 23 Notes to Consolidated Financial Statements (continued) F. RETIREMENT PLANS (CONTINUED) Of the nine plans whose accumulated benefits exceed assets, four are qualified pension plans. These qualified plans have vested benefits of $50.5 million and assets of $49.8 million. Net pension assets are included in "Other" noncurrent assets and net pension liabilities are included in "Employment benefits and other noncurrent liabilities." Substantially all of the assets of the company-administered plans are invested in listed stocks and bonds. G. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS On October 31, 1995, the company acquired 100% of the outstanding shares of Lesher Communications, Inc., ("Lesher") for $360 million. The difference between the purchase price of $360 million and the cash distribution of $335.8 million was due to certain assumed liabilities. Lesher, a privately held newspaper company based in Walnut Creek, Calif., publishes four daily newspapers in contiguous Contra Costa and eastern Alameda County markets in the East Bay area of Northern California. Lesher was renamed Contra Costa Newspapers, Inc., (CCN) in November 1995. The fair value of assets acquired, not including goodwill, was $99.0 million and assumed liabilities totaled $107.7 million. Included in the assumed liabilities was $68.1 million of liabilities paid at closing. Goodwill and other intangibles of $276.4 million are being amortized over periods ranging from 15 to 40 years on the straight-line basis. The pro forma results listed below are unaudited and reflect purchase price accounting adjustments assuming the acquisition occurred at the beginning of each year presented (in thousands, except per share data).
1995 1994 ---------- ---------- Net sales $2,368,427 $2,244,146 Operating earnings 233,129 314,599 Earnings before income taxes 163,952 251,741 Net earnings 161,700 161,765 Earnings per common and common equivalent share 1.61 1.49
Page 23 of 38 24 Notes to Consolidated Financial Statements (continued) G ACQUISITIONS AND DISPOSITIONS (CONTINUED) Discontinued Operations (See Note K): During October 1995, the company acquired 100% interest in The CARL Corporation, a leading provider of library automation services. The company also acquired a 100% interest in The UnCover Company, a joint partnership of The CARL Corporation and Blackwell Limited. All acquisitions were accounted for as purchases and, accordingly, the accompanying financial statements include the results of their operations from the acquisition dates. The acquisition cost of CCN in 1995 is included in the caption "Acquisition of Contra Costa Newspapers, Inc." DISPOSITIONS Discontinued operations (See Note K): 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. On April 3, 1995, the company sold the Journal of Commerce (JoC) to the Economist Group of London for $115 million. The after-tax gain from the sale of the JoC was $53.8 million. Other: In November 1996, the company sold its investment in Netscape Communications Corporation, resulting in an after tax gain of $7.3 million, net of adjustments in the carrying value of certain other investments. In January 1997, the company and Tele-Communications, Inc., closed on the previously announced sale of the company's interest in all but one of their jointly owned cable investments. The remaining systems, including Kentucky, account for a small portion of the original investment. That sale is expected to close later. The company expects to report an after-tax gain on the transaction of between $130 million and $150 million. The company expects the total sale to yield net after-tax proceeds of between $270 million and $280 million. Page 24 of 38 25 Notes to Consolidated Financial Statements (continued) H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The company and its subsidiaries have defined postretirement benefit plans that provide medical and life insurance for retirees and eligible dependents. The company's postretirement benefit expense is determined under the provisions of FAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This statement requires that the cost of these benefits, which are primarily for health care and life insurance, be recognized in the financial statements throughout the employees' active working careers. The company valued the accumulated postretirement benefit obligation using the following assumptions:
1996 1995 1994 ---- ---- ---- Discount rate at the end of the year 7.5% 7.25% 8.5% Annual rate of increase in salaries 4.5 4.5 4.5 Medical trend rate: Projected 9.0 10.0 11.0 Reduced to this percentage in 2001 and thereafter 5.5 5.5 5.5
Page 25 of 38 26 Notes to Consolidated Financial Statements (continued) H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) The following tables present the funded status of the company's benefit plan (excluding liabilities of the DNA that are reported in the Consolidated Balance Sheet under the investment caption "Equity in unconsolidated companies and joint ventures") and the components of 1996, 1995 and 1994 periodic expense (in thousands):
1996 1995 1994 --------------------------- ------------------------ ----------------------- LIFE LIFE LIFE INSURANCE INSURANCE INSURANCE MEDICAL AND OTHER MEDICAL AND OTHER MEDICAL AND OTHER PLANS PLANS PLANS PLANS PLANS PLANS ---------- ---------- --------- ----------- -------- ------------ Accumulated postretirement benefit obligation: Retirees $ 58,225 $ 13,519 $ 69,180 $ 13,313 $ 64,244 $ 11,194 Fully eligible active plan participants 12,369 5,157 16,778 5,440 11,435 4,390 Other active plan participants 17,650 14,568 21,617 16,243 13,277 15,188 -------- -------- --------- -------- -------- -------- Accumulated benefit obligation in excess of plan assets 88,244 33,244 107,575 34,996 88,956 30,772 Unrecognized net reduction (increase) in prior service costs 27,693 (158) 31,723 (180) 35,752 (222) Unrecognized net gain (loss) 1,494 8,303 (10,632) 5,577 1,629 8,946 -------- -------- --------- -------- -------- -------- Accrued liability recognized in the balance sheet $117,431 $ 41,389 $ 128,666 $ 40,393 $126,337 $ 39,496 ======== ======== ========= ======== ======== ======== Net periodic postretirement benefit cost includes the following components: Service cost $ 3,769 $ 4,414 $ 2,996 Interest cost 11,229 11,742 10,893 Amortization (4,600) (5,095) (4,628) -------- --------- -------- Net periodic postretirement benefit cost $ 10,398 $ 11,061 $ 9,261 ======== ========= ======== Impact of 1% increase in medical trend rate: Aggregate impact on 1996 service cost and interest cost $ 1,058 ======== Increase in December 29, 1996, accumulated postretirement benefit obligation $ 6,160 ========
A pretax gain resulting from curtailments, settlements and special termination benefits under these plans was $8.6 million in 1996, which related to restructuring of plans. Page 26 of 38 27 Notes to Consolidated Financial Statements (continued) I. COMMITMENTS AND CONTINGENCIES At December 29, 1996, the company had lease commitments currently estimated to aggregate approximately $47.6 million that expire from 1997 through 2051 as follows (in thousands): 1997 $12,841 1998 9,357 1999 7,240 2000 5,936 2001 3,955 2002 and thereafter 8,289 ------- Total $47,618 =======
Payments under the lease contracts were $15.2 million in 1996, $13.3 million in 1995, and $12.2 million in 1994. In connection with the company's insurance program, letters of credit are required to support certain projected worker compensation obligations. At December 29, 1996, the company had approximately $40.3 million of undrawn letters of credit outstanding. In 1990, a verdict was rendered against the company's subsidiary, Philadelphia Newspapers, Inc. (PNI), publisher of The Philadelphia Inquirer and Philadelphia Daily News, in a libel action entitled Sprague v. Philadelphia Newspapers, Inc., for $2.5 million in compensatory damages and $31.5 million in punitive damages. On April 1, 1996, the libel action was settled. The settlement had no material impact on earnings. 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 these legal proceedings will not be material to the financial position or results of operations. Page 27 of 38 28 Notes to Consolidated Financial Statements (continued) J. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) 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 ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH --------------- --------------- -------------- ----------------- 1996 Reclassified for discontinued operations: Operating revenue $ 574,815 $ 600,046 $ 581,864 $ 636,364 Operating income 49,506 79,105 74,524 131,517 Income from continuing operations 22,872 41,732 39,711 81,961 Net gain/(adjustment) on sale of discontinued BIS operations 90,901 (4,646) Income/(Loss) from discontinued BIS operations 645 621 (4,355) (1,569) Net income 23,517 42,353 126,257 75,746 (b) Net Income/(Loss) per common and common Equivalent share (1),(2): Continuing operations 0.23 0.42 0.41 0.86 (b) Net gain (adjustment) on sale of discontinued BIS operations - - 0.94 (.05) Discontinued BIS operations 0.01 0.01 (.04) (.02) Net income 0.24 0.43 1.31 0.79 (b) Dividends declared per common share (2) 0.18 1/2 0.20 0.20 (c)
Page 28 of 38 29 Notes to Consolidated Financial Statements (continued) J. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ------------------------------------------------------------------ FIRST SECOND THIRD FOURTH --------------- --------------- --------------- ------------------ 1996 As previously reported: Operating revenue $ 697,661 $ 716,982 $ 653,796 $ 706,404 Operating income 50,612 80,450 71,614 132,242 Net income 23,518 42,352 126,257 (a) 75,746 (b) Net income per common and common equivalent share (1), (2) 0.24 0.43 1.31 (a) 0.79 (b) Dividends declared per common share (2) 0.18 1/2 0.20 0.20 - (c) 1995 Reclassified for discontinued operations: Operating revenue $ 540,653 $ 569,521 $ 519,839 $ 635,325 Operating income 64,497 82,063 15,757 67,342 Income from continuing operations 29,456 42,484 3,966 34,804 Net gain on sale of discontinued BIS operations 53,765 Income/(Loss) from discontinued BIS operations 6,217 (2,129) 2,624 (3,805) Income before cumulative effect of change in accounting principle 35,673 94,120 6,590 30,999 Cumulative effect of change in accounting principle for contributions (7,320) Net income 28,353 94,120 6,590 30,999 Net income/(loss) per common and common equivalent share (1), (2): Continuing operations 0.28 0.42 0.04 0.35 Net gain on sale of discontinued BIS operations - 0.54 - - Discontinued operations 0.06 (.02) 0.03 (.03) Income before cumulative effect of change in accounting principle 0.34 0.94 0.07 0.32 Cumulative effect of change in accounting principle for contributions (0.07) - - - Net income 0.27 0.94 0.07 0.32 Dividends declared per common share (2) 0.18 1/2 0.18 1/2 0.18 1/2 0.18 1/2
Page 29 of 38 30 Notes to Consolidated Financial Statements (continued) J. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER --------------------------------------------------------------- FIRST SECOND THIRD FOURTH --------------- --------------- ------------- ------------- 1995 As previously reported: Operating revenue $ 674,599 $ 687,455 $ 637,994 $ 751,786 Operating income 71,007 84,714 19,081 65,482 Income before cumulative effect of change in accounting principle 35,673 94,120 (d) 6,590 30,999 Cumulative effect of change in accounting principle for contributions (7,320) Net income 28,353 94,120 (d) 6,590 30,999 Net income per common and common equivalent share (2): Income before cumulative effect of change in accounting principle 0.34 0.94 (d) 0.07 0.32 Cumulative effect of change in accounting principle for contributions (0.07) - - - Net income 0.27 0.94 (d) 0.07 0.32 Dividends declared per common share (2) 0.18 1/2 0.18 1/2 0.18 1/2 0.18 1/2 1994 Reclassified for discontinued operations: Operating revenue $ 505,204 $ 537,324 $ 517,905 $ 588,051 Operating income 57,905 90,204 69,162 92,119 Income from continuing operations 25,034 48,385 33,301 53,163 Income/(Loss) from discontinued BIS operations 5,338 1,736 3,942 1 Net income 30,372 50,121 37,243 53,164 Net income per common and common Equivalent share (1), (2): Continuing operations 0.23 0.44 0.31 0.50 Discontinued BIS operations 0.04 0.02 0.04 - Net income 0.27 0.46 0.35 0.50 Dividends declared per common share (2) 0.17 1/2 0.18 1/2(e) 0.18 1/2 0.18 1/2
Page 30 of 38 31 Notes to Consolidated Financial Statements (continued) J. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER FIRST SECOND THIRD FOURTH --------------- --------------- ------------- ----------- 1994 As previously reported: Operating revenue $ 630,863 $ 661,550 $ 642,613 $ 713,935 Operating income 64,810 95,286 75,277 95,888 Net income 30,372 50,121 37,243 53,164 Net income per common and common equivalent share (1), (2) 0.27 0.46 0.35 0.50 Dividends declared per common share (2) 0.17 1/2 0.18 1/2(e) 0.18 1/2 0.18 1/2
(1) Amounts do not total to the annual earnings per share because each quarter and the year are calculated separately based on average outstanding shares during that period. (2) Amounts have been restated to reflect a two-for-one stock split in the form of a 100% stock dividend, effective July 31, 1996. (a) Includes the gain on the sale of KRF. (b) Includes the after-tax gain on the sale of Netscape, net of adjustments to the carrying value of certain investments ($.07 per share). (c) The Board of Directors declared a $.20 per share dividend on January 28, 1997. The quarterly dividend usually paid in January was paid on February 24, 1997, to shareholders of record as of the close of business on February 12, 1997. (d) Includes the after-tax $53.8 million ($.54 per share) gain on the sale of JoC. (e) The second quarter ended June 26, 1994. These dividends were declared June 28, 1994, and recorded in the third quarter. K. SUBSEQUENT EVENTS On April 4, 1997, the company announced that it will divest Knight-Ridder Information, Inc. (KRII). This announcement resulted in its former Business Information Service (BIS) segment (excluding one business called Technimetrics, the ownership of which will continue and the operations of which are not material) being reclassified as discontinued operations in the quarter ended June 29, 1997. On October 2, 1997, KRI also announced it has entered into an agreement to sell KRII to M.A.I.D. plc for $420 million. The sale is expected to close before the end of 1997 and is expected to result in a gain. Page 31 of 38 32 Notes to Consolidated Financial Statements (continued) K. SUBSEQUENT EVENTS (CONTINUED) The accompanying consolidated financial statements and notes thereto, have been reclassified to reflect the effects of the discontinued segment. In the accompanying consolidated balance sheets as of December 29, 1996, December 31, 1995, and December 25, 1994 the non current assets and liabilities of the discontinued segment have been reclassified and included in the balance sheet caption, "Net assets of discontinued BIS operations." In the accompanying consolidated statements of income and cash flows for the three years then ended, results of operations and related cash flows of the discontinued segment have been reclassified. Page 32 of 38 33 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 sheet. 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 33 of 38 34 Pro Forma Condensed Consolidated Balance Sheet (Unaudited) (In Thousands of Dollars)
Knight-Ridder ABC 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 expense 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 ---------- ----------- ---------- ----------- Net assets of discontinued BIS operations 317,909 317,909 Investments and Other Assets 557,259 4,074 561,333 Property, Plant and Equipment, Net 881,444 97,655 33,257 A 1,012,356 Goodwill and other intangibles, net 632,370 1,443,866 350,000 A 2,337,873 1,355,503 C (1,443,866)D ---------- ----------- ---------- ----------- Total $2,879,882 $ 1,607,994 $ 296,428 $ 4,784,304 ========== =========== ========== =========== 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 130,759 25,107 152,767 E 308,633 Postretirement benefits other than pensions 147,431 7,467 154,898 Employment benefits and other noncurrent liabilities 115,619 115,619 Due to parent Company 1,207 (1,207)D ---------- ----------- ---------- ----------- Total Noncurrent Liabilities 1,100,439 119,081 1,056,260 2,275,780 ---------- ----------- ---------- ----------- Minority interest in consolidated subsidiaries 1,047 1,047 ---------- ----------- 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 losses on investments (15,793) (15,793) ---------- ------------ ----------- ----------- Total Shareholders' Equity 1,264,042 1,434,732 (774,732) 1,924,042 ---------- ------------ ----------- ----------- Total $2,879,882 $ 1,607,994 $296,428 $ 4,784,304 ========== ============ =========== ===========
Page 34 of 38 35 Pro Forma Condensed Consolidated Statements of Income (Unaudited) (In Thousands of Dollars, except Per Share Data)
Knight-Ridder ABC 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 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 26,163 5,373 31,536 ------------ ------------ ---------- Total Operating Revenue 606,399 124,791 731,190 ------------ ------------ ---------- OPERATING COSTS Labor and employee benefits 252,491 40,803 293,294 Newsprint, ink and supplements 93,464 21,211 $15 A 114,690 Other operating costs 131,314 28,451 159,765 Depreciation and amortization 30,946 11,875 529 B 45,371 2,021 C ------------ ------------ ----------- ---------- Total Operating Costs 508,215 102,340 2,565 613,120 ------------ ------------ ----------- ---------- OPERATING INCOME 98,184 22,451 (2,565) 118,070 ------------ ------------ ----------- ---------- OTHER INCOME (EXPENSE) Interest expense (14,906) (2,220) (13,125)D (30,251) Interest expense capitalized 1,792 1,792 Interest income 437 437 Equity in earnings of unconsolidated companies and joint ventures 868 868 Minority interests in earnings of consolidated subsidiaries (2,659) (2,659) Other, net 219,127 210 219,337 ------------ ------------ ----------- ---------- Total 204,659 (2,010) (13,125) 189,524 ------------ ------------ ----------- ---------- Income before income taxes 302,843 20,441 (15,690) 307,594 Income taxes 127,374 12,135 (6,276)E 133,233 ------------ ------------ ----------- ---------- INCOME FROM CONTINUING OPERATIONS 175,469 8,306 (9,414) 174,361 Income/(Loss) from discontinued operations (738) (738) ------------ ------------ ----------- ---------- Net Income $ 174,731 $ 8,306 $ (9,414) $ 173,623 ============ ============ =========== ========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Income from continuing operations $ 1.85 $ 1.55 Income/(Loss) from discontinued BIS operations, net - - ------------ ---------- Net income $ 1.85 $ 1.55 ============ ========== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (IN 000s) 94,683 17,550 112,233 ============ =========== ==========
Page 35 of 38 36 Pro Forma Condensed Consolidated Statements of Income For the year ended December 29, 1996 (In Thousands of Dollars, except per share data)
Knight-Ridder, ABC Media, Pro Forma Adjusted Inc. Inc. Adjustments Pro Forma -------------- ------------- ----------- ------------- OPERATING REVENUE 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 97,839 20,944 118,783 -------------- ------------- -------------- Total Operating Revenue 2,393,089 499,722 2,892,811 OPERATING COSTS Labor and employee benefits 976,142 158,792 1,134,934 Newsprint, ink and supplements 472,207 104,544 $2,153 A 578,904 Other operating costs 486,491 104,492 590,983 Depreciation and amortization 123,597 44,894 2,118 B 181,072 10,463 C -------------- ------------- ------------ -------------- Total Operating Costs 2,058,437 412,722 14,734 2,485,893 -------------- ------------- ------------ -------------- OPERATING INCOME 334,652 87,000 (14,734) 406,918 -------------- ------------- ------------ -------------- OTHER INCOME (EXPENSE) Interest expense (73,137) (8,886) (52,494)D (134,517) Interest expense capitalized 6,397 6,397 Interest income 6,490 6,490 Equity in earnings of unconsolidated companies and joint ventures 29,868 29,868 Minority interests in earnings of consolidated subsidiaries (9,293) (9,293) Other, net 16,701 (8,057) 8,644 -------------- ------------- ------------ -------------- Total (22,974) (16,943) (52,494) (92,411) -------------- ------------- ------------ -------------- Income before income taxes 311,678 70,057 (67,228) 314,507 Income taxes 125,402 41,991 (26,891)E 140,502 -------------- ------------- ------------ -------------- INCOME FROM CONTINUING OPERATIONS 186,276 28,066 (40,337) 174,005 Net gain on sale of discontinued BIS operations 86,255 86,255 Income/(Loss) from discontinued BIS operations (4,658) (4,658) -------------- ------------- ------------ -------------- Net Income $267,873 $28,066 ($40,337) $255,602 ============== ============= ============ ============== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE Income from continuing operations $ 1.91 $ 1.51 Net gain on sale of discontinued BIS operations 0.89 0.75 Income/(Loss) from discontinued BIS operations, net (0.05) (0.04) -------------- -------------- Net income $ 2.75 $ 2.22 ============== ============== AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (IN 000s) 97,420 17,550 114,970 ============== ============ ==============
Page 36 of 38 37 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 $1.3 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 Knight-Ridder 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 sheet 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. Page 37 of 38 38 Notes to Pro Forma Financial Statements (Unaudited) (continued) (In Thousands of Dollars) 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. 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 tax rates. Page 38 of 38 -----END PRIVACY-ENHANCED MESSAGE-----