-----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, OvPsLvud8LVJb2jckC11fAyVDC4fgeCTYBlnBECimWN9gw2EAYZ/8wVLfI2MvsTT RCgrgd/pqsPJBO7f1WAUDw== 0001019056-99-000151.txt : 19990322 0001019056-99-000151.hdr.sgml : 19990322 ACCESSION NUMBER: 0001019056-99-000151 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990319 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: 10-K SEC ACT: SEC FILE NUMBER: 001-07553 FILM NUMBER: 99568941 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 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 27, 1998 Commission file number 1-7553 KNIGHT-RIDDER, INC. (Exact name of registrant as specified in its charter) Florida 38-0723657 (State or other jurisdiction) (I.R.S. Employer Identification No.) 50 W. SAN FERNANDO ST., SAN JOSE, CA 95113 (Address of principal executive offices) (408) 938-7700 (Registrant's telephone number, including area code) ONE HERALD PLAZA, MIAMI, FLORIDA 33132 (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.02 1/12 Par Value New York Stock Exchange Frankfurt Stock Exchange Philadelphia Stock Exchange Chicago Stock Exchange Boston Stock Exchange Pacific Exchange Cincinnati Stock Exchange Securities registered pursuant to Section 12(g) of the Act: none Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value is computed by reference to the closing price on the NYSE as of March 5, 1999: $3,966,337,367. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: March 5, 1999 - 78,541,334 one class Common Stock, $.02 1/12 Par Value DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of definitive Proxy Statement dated March 29, 1999, in connection with the Annual Meeting of Shareholders to be held on May 12, 1999 are incorporated into Part III. Table of Contents for 1998 Form 10-K Page ---- PART I Item 1. Business 2 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 55 PART III Item 10. Directors and Executive Officers of the Registrant 55 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management 58 Item 13. Certain Relationships and Related Transactions 58 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 59 SIGNATURES 62 SCHEDULES 65 EXHIBITS 65 1 PART I Item 1. BUSINESS THE COMPANY Knight-Ridder, Inc., ("Knight Ridder" or the "company") was formed in 1974 by a merger between Knight Newspapers, Inc., and Ridder Publications, Inc. In 1903, Charles Landon Knight purchased the Akron Beacon Journal. Knight Newspapers was founded by John S. Knight, who inherited the Beacon Journal from his father in 1933. Ridder Publications was founded in 1892 when Herman Ridder acquired the German-language Staats-Zeitung in New York. Both groups flourished, each taking its stock public in 1969. The merger created a company with operations coast to coast. Knight Ridder is a communications company engaged in newspaper publishing, news and information services, electronic retrieval services and graphics and photo services. The company publishes 31 daily newspapers and 21 nondaily newspapers in 28 U.S. markets, reaching 9.2 million readers daily and 13.1 million on Sunday. It maintains 45 associated Web sites under the name Knight Ridder Real Cities. Knight-Ridder, Inc., incorporated in Florida in 1976, is headquartered in San Jose, California, and employs about 22,000 people. Recent Developments In 1998, Knight Ridder moved its headquarters to San Jose, California. Also, in 1998, Knight Ridder sold its remaining Business Information Services subsidiary, Technimetrics, Inc., its global diversified information subsidiary. NEWSPAPERS Knight Ridder had 31 daily newspapers and 21 nondaily newspapers at the end of 1998. See Part II, Item 8, "Financial Statements and Supplementary Data", Note A to the consolidated financial statements for segment reporting related information including principal markets and methods of distribution. Newspaper operating revenue is derived primarily from the sale of newspaper advertising. Due to seasonal factors such as heavier retail selling during the winter and spring holiday seasons, advertising income fluctuates significantly throughout the year. Consecutive quarterly results are not uniform or comparable and are not indicative of the results over an entire year. Each of Knight Ridder's newspapers is operated on a substantially autonomous basis by local management appointed by corporate headquarters in San Jose. Each newspaper is free to manage its own news coverage, set its own editorial policies and establish most business practices. Basic business policies, however, are set by the corporate staff in San Jose. Editorial services and quality control also are provided by the corporate staff. Each newspaper is served by the company-owned news bureau in Washington, D.C. A supplemental news service provided by KRT Information Services, a partnership between Knight Ridder and Tribune Co., distributes editorial material produced by all Knight Ridder newspapers and by 16 foreign correspondents. The service also distributes editorial computer graphics and deadline photos via the Knight Ridder-owned PressLink Online. 2 All of the company's newspapers compete for advertising and readers' time and attention with broadcast, satellite and cable television, the Internet and other computer services, radio, magazines, nondaily suburban newspapers, free shoppers, billboards and direct mail. In some cases, the newspapers also compete with other newspapers published in nearby cities and towns - particularly in Miami, St. Paul and Fort Worth. In Detroit and Fort Wayne, Knight Ridder has joint operating agreements with a second newspaper. The rest of Knight Ridder's newspapers are the only daily and Sunday papers of general circulation published in their communities. The newspapers rely on local sales operations for local retail and classified advertising. The larger papers are assisted by Newspapers First and by the Newspaper National Network, a sales force created by a group of some 50 major newspapers, in obtaining national or general advertising. Sources of Knight Ridder Operating Revenue The table below presents the relative percentage contributions by individual papers to the company's overall operating revenue in 1998, 1997 and 1996. The percentage contributions of each paper to operating revenue are not necessarily indicative of contributions to operating profit. 1998 1997 1996 ----- ----- ----- The Philadelphia Inquirer and Philadelphia Daily News 18.8% 19.0% 21.3% The Miami Herald 10.6 11.4 13.3 San Jose Mercury News 9.3 10.4 12.0 The Kansas City Star(1) 8.7 6.1 N/A Fort Worth Star-Telegram(1) 7.1 4.9 N/A Detroit Free Press(2) 7.3 7.0 7.7 The Charlotte Observer 6.0 6.2 6.9 Saint Paul Pioneer Press 4.0 4.1 4.7 Contra Costa Newspapers 3.9 3.9 4.4 Akron Beacon Journal 3.3 3.6 4.0 All other 21.0 23.4 25.7 ----- ----- ----- 100.0% 100.0% 100.0% ----- ----- ----- (1) The Kansas City Star and Fort Worth Star-Telegram were acquired on May 9, 1997. This table presents their part-year contribution percentage in 1997. (2) Knight Ridder portion of Detroit Newspapers Newsprint Knight Ridder consumed approximately 794,000 metric tons of newsprint in 1998. Approximately 17.3% of the company's total operating expenses during the year was for newsprint. Knight Ridder purchases approximately 60% of its annual consumption from 15 United States mills, with 34% purchased from 18 mills in Canada, and 6% from other offshore sources. Foreign financial markets continue to restrict North American newsprint exports. This, combined with the settlement of the Fletcher Challenge labor strike and the occurrence and subsequent settlement of an Abitibi Consolidated labor strike during 1998, leads management to believe that sources are more than adequate to meet current demands. Approximately 93% of the newsprint consumed by the company contained some recycled content; the average content of these rolls was 39% recycled fiber. This translates into an overall recycled newsprint average of 36%. Knight Ridder is a one-third partner with Cox Enterprises and Media General, Inc., in Southeast Paper Manufacturing Co., a newsprint mill in Dublin, Ga. The 3 mill produced 455,000 metric tons in 1998, using more than 591,000 tons of recycled newsprint as the principal raw material and coal as the primary energy source. Knight Ridder also owns a 13.5% equity share of Ponderay Newsprint Company in Usk, Wash., which produced more than 242,000 metric tons in 1998. Knight Ridder's purchases from these two mills were 14% of its annual consumption for 1998, providing an important hedge against volatility. Technology Year 2000 Readiness Disclosure: For information regarding the company's preparation of its technology infrastructure for the Year 2000, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", Year 2000 Readiness Disclosure. Other: We completed the transition of all of our companies to our Shared Services Center to support financial systems and purchasing. Ten newspapers are now serviced by our circulation customer service centers in Miami, Fla. and Columbia, S.C. The Charlotte Observer and Akron Beacon Journal completed a full conversion to flexographic printing. Major press replacement projects are under way at The Miami Herald and the Fort Worth Star-Telegram. Additionally, significant renovations to the business and editorial offices in Philadelphia were completed in 1998. General Advertising Sales Knight Ridder newspapers depend most heavily on three agents for the sale of general advertising. Newspapers First, a national advertising sales cooperative, is the primary sales representative for the larger Knight Ridder newspapers, Detroit Newspapers and several leading independents. It allows customers to place ads in a combination of newspapers. Newspaper National Network (NNN), Knight Ridder's second general sales agent, was established in 1994 to focus national selling on behalf of the newspaper industry. It represents all the Knight Ridder newspapers, plus more than 500 others. Like Newspapers First, it makes the purchase of newspaper advertising a "one-stop shopping," "one-order, one-bill" prospect. Sawyer, Ferguson and Walker, Inc., a private company, sells sales- representative services for a number of Knight Ridder's medium to small markets and helps with regional retail advertising sales. The Philadelphia Inquirer and Philadelphia Daily News 1998 Revenue was $579.8 million. Philadelphia Newspapers, Inc. (PNI), is publisher of The Philadelphia Inquirer and the Philadelphia Daily News in the eight-county Philadelphia metropolitan market. 4 Philadelphia Online (www.philly.com), an online service, continued to show growth, moving from 7.8 million page views per month in 1997 to more than 12.6 million per month in 1998. The Philadelphia Primary Metropolitan Statistical Area (PMSA) population is expected to grow 0.3% between 1998 and 2003, compared with 4.3% for the United States. In 1998, the PMSA had income per capita 15.1% above the U.S. average; by 2003 it is projected to be 15.8% above. The Miami Herald/El Nuevo Herald 1998 Revenue was $327.2 million. The Miami Herald, winner of 15 Pulitzer Prizes and Florida's largest Sunday newspaper, is sold primarily in Miami-Dade, Broward and Monroe counties. It is also distributed in 29 countries in Latin America and the Caribbean, primarily through its International Satellite edition. El Nuevo Herald, the Spanish-language newspaper, has, since May 1998, been sold separately from The Miami Herald and is Audit Bureau of Circulation (ABC)-audited. According to the ABC Publisher's Statement for the last six months of 1998, circulation was 79,205 daily and 91,439 Sunday. Last year, penetration of the two newspapers combined jumped nearly two percentage points both daily and Sunday in Miami-Dade County. The Herald's Broward County edition was rezoned and revamped. Twice-weekly community sections were increased from three zones to six. The Herald is the largest newspaper in fast-growing southern Broward County. Online page-views doubled in both English and Spanish. With eight sites up and running, The Herald launched miami.com, a community portal, in partnership with other media and community organizations. Also launched: cars.com, cometothesun.com and newhomenetwork.com. Three Newsliner offset presses became operational. The final two presses will be installed during 1999. The Miami-Fort Lauderdale Designated Market Area (DMA) population is expected to grow 6.6% between 1998 and 2003, compared with 4.3% for the United States. In 1998, the DMA had income per capita 3.7% below the U.S. average; by 2003 it is projected to be 9.4% below. 5 San Jose Mercury News 1998 Revenue was $287.7 million. The Mercury News serves Silicon Valley, which encompasses San Jose - California's third-largest city - and surrounding communities. The region is the world leader in high technology and a leader in exports, ranking second nationally. Significant weakness in key high-tech business sectors, exacerbated by a sharp drop in exports to Asia, slowed and then reversed the growth of recruitment advertising. Anticipating this decline, the Mercury News has developed new revenue sources over the past few years. 1998 saw the publication of two books (a guide to retirement communities and a new edition of The Guide to Silicon Valley Careers) and the continued growth of several other print and online products. In response to advertiser demand, delivery of advertising to nonsubscribers was switched to direct mail. Nuevo Mundo, serving the nation's fourth-largest Hispanic market, is 2 years old and growing. The Spanish-language free weekly ended the year with average circulation of 57,870 copies. A second weekly publication, Viet Mercury, was launched in January 1999. Published entirely in Vietnamese, Viet Mercury will serve another major segment of the local population and advertisers wanting to reach it. Mercury Center (www.mercurycenter.com) continued to grow in content and viewership. Founded in 1993, the Web site averaged more than 1.2 million users per month in 1998. Usage received a boost in May when Mercury Center became a free site. New attractions for advertisers included a database of registered users; major upgrades of recruitment, real estate and automotive areas; and expanded sponsorship opportunities. A technology-focused site, www.siliconvalley.com, was launched in February 1999. The population of the San Jose Primary Metropolitan Statistical Area (PMSA), which includes only Santa Clara County, is expected to grow 6.9% between 1998 and 2003; the U.S. average is 4.3%. In 1998, the PMSA had income per capita 48.3% above the U.S. average; by 2003 it is projected to be 51.2% above. The Kansas City Star 1998 Revenue was $270.5 million. The Kansas City Star serves the Kansas City metropolitan area. The Star's primary market area consists of 11 counties in both Kansas and Missouri. The Star launched a new circulation objective to obtain 300,000 average daily subscribers by the year 2000. The goal is being supported by promotional campaigns, a redesign of the newspaper, expansion of neighborhood news coverage and development of various business ventures. 6 The Star's award-winning online community site, kansascity.com, and online product, kcstar.com, continue to grow and improve. kcstar.com is a recent recipient of the Newspaper Association of America's Best Online Newspaper award. The Kansas City Metropolitan Statistical Area (MSA) population is expected to grow 4.2% between 1998 and 2003, compared with 4.3% for the United States. In 1998, the MSA had income per capita 7.1% above the U.S. average; by 2003 it is projected to be 8.6% above. Fort Worth Star-Telegram 1998 Revenue was $220.8 million. Ad revenue was up 2.8% in 1998. The Star-Telegram is well positioned for growth in the western portion of the Dallas/Fort Worth market, the nation's ninth-largest metropolitan area. The Star-Telegram continues its zoned approach to local news, advertising and customer service. In eastern Tarrant County, the Star-Telegram launched six different editions of Hometown Star, a weekly micro-zoned tabloid. This was one of many changes that allowed the Arlington Star-Telegram to again grow circulation versus the prior year in the face of aggressive competition. The Star-Telegram continues to meet reader demand for news from around the corner and around the world, as nine out of 10 newspaper readers in Tarrant County read the Star-Telegram each week. In the online area, the Star- Telegram continues to operate its own Internet Service Provider business with approximately 3,500 paid subscribers. Traffic to star-telegram.com grew by more than 40% during 1998. The Fort Worth/Arlington Primary Metropolitan Statistical Area (PMSA) population has grown 60% since 1980, and is expected to grow 7.1% between 1998 and 2003, compared with 4.3% for the United States. In 1998, the PMSA had income per capita 5.6% above the U.S. average; by 2003 it is projected to be 6.9% above. Detroit Free Press 1998 Revenue (Knight Ridder's share) was $224.7 million. The Detroit Free Press is the largest newspaper in Michigan. The combined Sunday edition, The Detroit News and Free Press, ranks seventh in circulation in the nation. The two newspapers are published by Detroit Newspaper Agency (DNA), an agency combining the business operations of the two newspapers. This joint operating agency was formed in 1989. The profits (or losses) are split equally between the two partners, Knight Ridder and Gannett Co. The Free Press is an a.m. paper, the News is p.m. On weekends, they publish combined editions. Detroit is the nation's sixth-largest market in terms of population and generates approximately $450 million in revenue from its two newspapers. A union strike, which began in July 1995, was officially ended when the unions surrendered in February 1997. The three companies agreed to place former striking employees on a preferential hiring list. The number of former strikers on that list is currently about 565. The unions continue to pursue unfair labor practice charges through the National Labor Relations Board. See Item 3, Legal Proceedings. 7 The population of the Detroit Primary Metropolitan Statistical Area (PMSA) is expected to grow nearly 1% between 1998 and 2003, compared with 4.3% for the United States. In 1998 the PMSA had income per capita 16.2% above the U.S. average; in 2003 it is projected to be 20.7% above. The Charlotte Observer 1998 Revenue was $187.0 million. The Charlotte Observer, the largest-circulation daily in North and South Carolina, is sold primarily in a 15-county region across the two states. Population in the Charlotte Metropolitan Statistical Area (MSA) is projected to grow 8.3% between 1998 and 2003, compared with the U.S. average of 4.3%. In 1998, the MSA had per capita income 8.8% above the U.S. average; in 2003 it is projected to be 13.4% above. Item 2. PROPERTIES The company has daily newspaper facilities in 28 markets situated in 17 states. These facilities vary in size from 4,900 square feet at The Monterey County Herald operation in Monterey, Calif., to 2.9 million square feet in Philadelphia. In total, they occupy about 9.6 million square feet. Approximately 2.0 million of the total square footage is leased from others. Virtually all the owned property is owned in fee. The company owns substantially all of its production equipment, although certain office equipment is leased. The company also owns land for future expansion in Columbus and Macon, Ga., and Detroit. Knight Ridder properties are maintained in good operating condition and are suitable for present and foreseeable operations. During the three years ended Dec. 27, 1998, the company spent approximately $351.5 million for capital additions and improvements to its existing properties. Item 3. LEGAL PROCEEDINGS On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and the Detroit Newspaper Agency, which operates both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and the Agency. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative law judge ruled that the strike was caused by the unfair labor practices of the Agency and The Detroit News and ordered that the Agency and the newspapers reinstate all strikers, displacing permanent replacements if necessary. The Agency and the newspapers appealed the decision to the NLRB. On August 27, 1998, the NLRB affirmed certain unfair labor practice findings against The Detroit News and the Agency and reversed certain findings of unfair labor practices against the Agency. The Agency and the newspapers filed a motion to reconsider with the NLRB, that was denied on March 4, 1999. The unions filed 8 an appeal to the U.S. Court of Appeals for District of Columbia Circuit. The Agency and the newspapers filed a motion to dismiss the appeal which is scheduled for hearing on March 23, 1999. Various libel actions and environmental and other legal proceedings that have arisen in the ordinary course of business are pending against the company and its subsidiaries. In the opinion of management, the ultimate liability to the company and its subsidiaries as a result of all legal proceedings, including Detroit, will not be material to its financial position or results of operations, on a consolidated basis. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the vote of security holders of Knight-Ridder, Inc., during the quarter ended December 27, 1998. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS KRI Stock Knight Ridder common stock is listed on the New York Stock Exchange and the Frankfurt Stock Exchange under the symbol KRI. The stock is also traded in exchanges in Philadelphia, Chicago, Boston, San Francisco, Los Angeles and Cincinnati and through the Intermarket Trading System. Options are traded on the Philadelphia Exchange. Knight Ridder stock split two-for-one in 1996. The company's 78.4 million shares outstanding at December 27, 1998, were held in all 50 states by 11,373 shareholders of record. Market Price of Common Stock The last closing price of the company's common stock prior to the preparation of this report was $50 on Feb. 8, 1999. The average stock trading volume per day for the years 1998, 1997 and 1996 was 242,129, 271,016 and 181,305, respectively. The following table presents the company's common stock market data:
1998 1997 1996 ---------------------- -------------------- -------------------- Quarter High Low High Low High Low - ------- ---- --- ---- --- ---- --- 1st 57 3/8 50 7/16 42 3/8 37 3/8 36 1/16 29 7/8 2nd 59 5/8 53 1/8 49 35 3/4 38 7/16 32 11/16 3rd 57 3/4 44 55 13/16 48 3/4 38 32 7/16 4th 54 15/16 40 1/2 57 1/8 49 1/8 42 35 3/8
9 Treasury Stock Purchases The table below is a summary of treasury stock purchases since 1988: Shares Cost Purchased (000s) --------- ------ 1998 4,725,000 $ 255,533 1997 13,824,300 643,375 1996 6,219,100 221,768 1995 11,508,600 319,363 1994 5,044,600 136,977 1993 1,500,000 40,693 1992 1991 1990 5,325,400 129,909 1989 5,522,200 131,885 1988 9,099,200 198,279 Dividends Common stock dividend history and policy appears in Item 6, "11 Year Financial Highlights"; Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations" Quarterly Operations; and Item 8, "Financial Statements and Supplementary Data", Note E to the consolidated financial statements. 10 Item 6. SELECTED FINANCIAL DATA 11-YEAR FINANCIAL HIGHLIGHTS The following data were compiled from the consolidated financial statements of Knight Ridder and its subsidiaries. The consolidated financial statements and related notes and discussions for the year ended Dec. 27, 1998 (Items 7 and 8), should be read in order to obtain a better understanding of this data.
Compound Growth Rate (In thousands, except per ---------------- Dec. 27 Dec. 28 Dec. 29 share data and ratios) 5-Year 10-Year 1998 1997 1996 ------ ------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising 9.8% 4.5% $ 2,362,859 $ 2,202,251 $ 1,793,424 Circulation 4.4 4.7 587,529 567,757 501,826 Other 20.0 16.9 141,531 106,777 78,974 ----------- ----------- ----------- Total Operating Revenue 9.0 4.9 3,091,919 2,876,785 2,374,224 ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs 7.7 4.3 2,399,249 2,214,026 1,920,444 Depreciation and amortization 14.3 8.3 188,052 156,731 120,647 ----------- ----------- ----------- Total Operating Costs 8.1 4.6 2,587,301 2,370,757 2,041,091 ----------- ----------- ----------- Operating Income 14.1 6.6 504,618 506,028 333,133 Interest expense 19.0 5.4 (105,936) (102,662) (73,137) Other, net(1) 105.4 15.1 109,234 290,486 50,213 Income taxes, net 19.4 8.9 (202,285) (297,348) (124,829) ----------- ----------- ----------- Income from continuing operations(1) 17.4 7.7 305,631 396,504 185,380 Discontinued BIS operations(2) 60,226 16,511 82,493 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ----------- ----------- ----------- Net Income(1) 19.8 8.9 $ 365,857 $ 413,015 $ 267,873 =========== =========== =========== Operating income percentage (profit margin) 16.3% 17.6% 14.0% - ------------------------------------------------------------------------------------------------------------------------------------ SHARE DATA(4) Basic weighted-average number of shares 78,882 88,475 96,021 Diluted weighted-average number of shares 98,176 101,314 97,420 Earnings per share Basic: Continuing operations(1) 25.4 11.5 $ 3.87 $ 4.48 $ 1.93 Discontinued BIS operations(2) 0.77 0.19 0.86 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) Net income(1) 28.0 12.7 4.64 4.67 2.79 Diluted: Continuing operations(1) 20.2 9.3 $ 3.11 $ 3.91 $ 1.90 Discontinued BIS operations(2) 0.62 0.17 0.85 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) Net income(1) 22.7 10.5 3.73 4.08 2.75 Dividends declared per common share(5) 2.7 3.4 0.80 0.80 0.58 1/2 Common stock price: High 59 5/8 57 1/8 42 Low 40 1/2 35 3/4 29 7/8 Close 50 13/16 50 3/16 39 1/4 Shareholders' equity per common share 8.9 8.4 $ 17.33 $ 15.65 $ 12.12 Price/earnings ratio(6) 13.6:1 12.3:1 14.3:1 Adjusted price/earnings ratio(7) 19.3:1 21.8:1 21.6:1 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL DATA Common stock acquired $ 255,533 $ 643,375 $ 221,768 Payment of cash dividends 77,152 78,335 74,262 Ratio of earnings to fixed charges(8) 5.3:1 7.1:1 4.0:1 At year end Total assets $ 4,257,097 $ 4,355,142 $ 2,860,907 Long-term debt (excluding current maturities) 1,329,001 1,599,133 771,335 Total debt 1,527,278 1,668,830 821,335 Shareholders' equity 1,662,731 1,551,673 1,131,508 Return on average shareholders' equity(9) 22.8% 30.8% 23.9% Current ratio 0.8:1 1.1:1 1.0:1 Total debt/total capital ratio 47.9% 51.8% 42.1%
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(In thousands, except per Dec. 31 Dec. 25 Dec. 26 Dec. 27 share data and ratios) 1995 1994 1993 1992 ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising $ 1,672,970 $ 1,583,373 $ 1,481,631 $ 1,444,144 Circulation 495,315 484,581 474,420 460,014 Other 81,897 66,968 56,772 39,932 ----------- ----------- ----------- ----------- Total Operating Revenue 2,250,182 2,134,922 2,012,823 1,944,090 ----------- ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs 1,923,179 1,730,158 1,655,138 1,597,983 Depreciation and amortization 98,741 96,613 96,233 89,665 ----------- ----------- ----------- ----------- Total Operating Costs 2,021,920 1,826,771 1,751,371 1,687,648 ----------- ----------- ----------- ----------- Operating Income 228,262 308,151 261,452 256,442 Interest expense (59,512) (44,216) (44,403) (52,358) Other, net(1) 14,067 1,802 2,987 13,868 Income taxes, net (72,861) (106,493) (83,281) (82,496) ----------- ----------- ----------- ----------- Income from continuing operations(1) 109,956 159,244 136,755 135,456 Discontinued BIS operations(2) 57,426 11,656 11,334 10,630 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) (7,320) (105,200) ----------- ----------- ----------- ----------- Net Income(1) $ 160,062 $ 170,900 $ 148,089 $ 40,886 =========== =========== =========== =========== Operating income percentage (profit margin) 10.1% 14.4% 13.0% 13.2% - ---------------------------------------------------------------------------------------------------------------------------- SHARE DATA(4) Basic weighted-average number of shares 99,451 107,888 109,702 108,948 Diluted weighted-average number of shares 100,196 108,551 110,663 110,356 Earnings per share Basic: Continuing operations(1) $ 1.11 $ 1.48 $ 1.25 $ 1.24 Discontinued BIS operations(2) 0.57 0.10 0.10 0.11 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) (0.07) (0.97) Net income(1) 1.61 1.58 1.35 0.38 Diluted: Continuing operations(1) $ 1.10 $ 1.47 $ 1.24 $ 1.22 Discontinued BIS operations(2) 0.57 0.10 0.10 0.10 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) (0.07) (0.95) Net income(1) 1.60 1.57 1.34 0.37 Dividends declared per common share(5) 0.74 0.73 0.70 0.70 Common stock price: High 33 5/16 30 1/2 32 1/2 32 1/16 Low 25 1/8 23 1/4 25 5/16 25 3/8 Close 31 1/4 25 7/16 29 11/16 29 1/16 Shareholders' equity per common share $ 11.43 $ 11.58 $ 11.33 $ 10.75 Price/earnings ratio(6) 19.5:1 16.2:1 22.2:1 78.5:1 Adjusted price/earnings ratio(7) 28.4:1 17.3:1 23.9:1 23.8:1 - ------------------------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL DATA Common stock acquired $ 319,363 $ 136,977 $ 40,693 $ Payment of cash dividends 74,377 77,942 76,787 75,992 Ratio of earnings to fixed charges(8) 3.2:1 5.2:1 4.4:1 3.8:1 At year end Total assets $ 2,966,321 $ 2,409,239 $ 2,399,067 $ 2,431,307 Long-term debt (excluding current maturities) 1,000,721 411,504 410,388 495,941 Total debt 1,013,850 411,504 451,075 560,245 Shareholders' equity 1,110,970 1,224,654 1,243,169 1,181,812 Return on average shareholders' equity(9) 14.3% 13.9% 12.2% 12.0% Current ratio 1.1:1 1.0:1 1.0:1 1.1:1 Total debt/total capital ratio 47.7% 25.2% 26.6% 32.2%
12
(In thousands, except per Dec. 29 Dec. 30 Dec. 31 Dec. 31 share data and ratios) 1991 1990 1989 1988 ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising $ 1,429,661 $ 1,556,932 $ 1,577,449 $ 1,523,030 Circulation 439,029 403,188 385,214 370,898 Other 35,127 31,981 32,212 29,743 ----------- ----------- ----------- ----------- Total Operating Revenue 1,903,817 1,992,101 1,994,875 1,923,671 ----------- ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs 1,593,847 1,617,138 1,593,186 1,571,525 Depreciation and amortization 86,896 91,553 91,780 84,657 ----------- ----------- ----------- ----------- Total Operating Costs 1,680,743 1,708,691 1,684,966 1,656,182 ----------- ----------- ----------- ----------- Operating Income 223,074 283,410 309,909 267,489 Interest expense (68,806) (71,784) (84,492) (62,456) Other, net(1) 35,832 17,019 57,505 26,732 Income taxes, net (67,965) (88,076) (108,883) (86,484) ----------- ----------- ----------- ----------- Income from continuing operations(1) 122,135 140,569 174,039 145,281 Discontinued BIS operations(2) 9,933 8,476 5,797 1,494 Discontinued broadcast operations(2) 67,366 9,608 Cumulative effect of changes in accounting principles(3) ----------- ----------- ----------- ----------- Net Income(1) $ 132,068 $ 149,045 $ 247,202 $ 156,383 =========== =========== =========== =========== Operating income percentage (profit margin) 11.7% 14.2% 15.5% 13.9% - ------------------------------------------------------------------------------------------------------------------------------------ SHARE DATA(4) Basic weighted-average number of shares 102,586 100,098 103,110 111,842 Diluted weighted-average number of shares 103,594 101,366 104,878 113,406 Earnings per share Basic: Continuing operations(1) $ 1.19 $ 1.40 $ 1.69 $ 1.30 Discontinued BIS operations(2) 0.10 0.09 0.06 0.01 Discontinued broadcast operations(2) 0.65 0.09 Cumulative effect of changes in accounting principles(3) Net income(1) 1.29 1.49 2.40 1.40 Diluted: Continuing operations(1) $ 1.18 $ 1.39 $ 1.66 $ 1.28 Discontinued BIS operations(2) 0.09 0.08 0.06 0.01 Discontinued broadcast operations(2) 0.64 0.09 Cumulative effect of changes in accounting principles(3) Net income(1) 1.27 1.47 2.36 1.38 Dividends declared per common share(5) 0.70 0.67 0.62 1/4 0.57 1/4 Common stock price: High 28 3/4 29 29 3/16 23 7/8 Low 21 7/8 18 1/2 21 7/16 17 7/8 Close 25 3/8 22 15/16 29 3/16 22 11/16 Shareholders' equity per common share $ 10.72 $ 9.05 $ 8.92 $ 7.74 Price/earnings ratio(6) 20.0:1 15.6:1 12.4:1 16.4:1 Adjusted price/earnings ratio(7) 21.5:1 16.5:1 21.2:1 17.7:1 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL DATA Common stock acquired $ $ 129,909 $ 131,885 $ 198,279 Payment of cash dividends 71,087 66,422 63,260 62,990 Ratio of earnings to fixed charges(8) 2.8:1 3.3:1 3.6:1 3.8:1 At year end Total assets $ 2,305,731 $ 2,244,919 $ 2,112,184 $ 2,340,576 Long-term debt (excluding current maturities) 556,797 803,914 660,900 727,043 Total debt 606,840 823,958 712,940 1,037,075 Shareholders' equity 1,148,620 894,913 917,145 821,625 Return on average shareholders' equity(9) 12.9% 16.5% 28.4% 18.2% Current ratio 1.1:1 1.2:1 1.2:1 1.1:1 Total debt/total capital ratio 34.6% 47.9% 43.7% 55.8%
13 (1) Other, net, Income from continuing operations and Net Income include: the gains from the sales of the balance of TKR Cable Company, the newspaper in Gary, Ind., and final sales settlements in 1998; the gains from the sales of the majority of TKR Cable Company and our newspapers in Long Beach, Calif., Boca Raton, Fla., Milledgeville, Ga., and Newberry, S.C., as well as the gain on the Boulder, Colo., exchange in 1997; the gain on Netscape in 1996; and the gain from the sale of the Pasadena Star-News in 1989. Net Income also includes the gains on the sales of Technimetrics in 1998, KRII in 1997, KRF in 1996, and the JoC in 1995. (2) All years have been restated to present the Business Information Services (BIS) Division as discontinued operations. Results of operations of the company's BIS Division (discontinued in 1997) and Broadcast Division (discontinued in 1989) and the gains on the sales of BIS and broadcast assets are presented as "discontinued BIS operations" and "discontinued broadcast operations," respectively. (3) For 1995, the cumulative effect of change in accounting principle represents an adjustment from the implementation of FAS 116-Accounting for Contributions Received and Contributions Made. For 1992, the cumulative effect of change in accounting principle represents adjustments from the implementation of FAS 109-Accounting for Income Taxes and FAS 106-Accounting for Postretirement Benefits Other than Pensions. (4) All share data prior to 1996 is restated for the 1996 stock split. (5) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997. The quarterly dividend previously paid in January was paid in February. (6) Price/earnings ratio is computed by dividing closing market price by diluted earnings per share. (7) Adjusted price/earnings ratio is computed by dividing closing market price by diluted earnings per share from continuing operations. For comparability purposes, diluted earnings per share from continuing operations was adjusted to exclude gains on one-time sales as follows: the gain from the sale of the balance of TKR Cable Company, our newspaper in Gary, Ind., and final sales settlements in 1998; the gains from the sales of the majority of TKR Cable Company, our four newspapers in Long Beach, Calif., Boca Raton, Fla., Milledgeville, Ga., and Newberry, S.C., as well as the gain on the Boulder, Colo., exchange in 1997; the gain on Netscape in 1996; and the gain from the sale of the Pasadena Star-News in 1989. (8) The ratio of earnings to fixed charges is computed by dividing earnings (as adjusted for fixed charges and undistributed equity income from unconsolidated subsidiaries) by fixed charges for the period. Fixed charges include the interest on debt (before capitalized interest), the interest component of rental expense, and the proportionate share of interest expense on guaranteed debt of certain equity-method investees and on debt of 50%-owned companies. (9) Return on average shareholders' equity is computed by dividing net income before the cumulative effect of changes in accounting principles in 1995 and 1992, including the results of discontinued operations in 1988 through 1998, by average shareholders' equity. Average shareholders' equity is the average of shareholders' equity on the first day and the last day of the fiscal year. 14 Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Glossary of Newspaper Advertising Terms The following definitions may be helpful when reading Management's Discussion and Analysis of Operations. RETAIL. Display advertising from local merchants, such as department and grocery stores, selling goods and services to the public. GENERAL. Display advertising by national advertisers that promotes products or brand names on a nationwide basis. CLASSIFIED. Small, locally placed ads listed together and organized by category, such as real estate sales, employment opportunities or automobile sales, and display-type advertisements in these same categories. FULL-RUN. Advertising appearing in all editions of a newspaper. PART-RUN. Advertising appearing in select editions or zones of a newspaper's market. Part-run advertising is translated into full-run equivalent linage (referred to as factored) based on the ratio of the circulation in a particular zone to the total circulation of a newspaper. RUN-OF-PRESS (ROP). All advertising printed on Knight Ridder presses and appearing within a newspaper. PREPRINT. Advertising supplements prepared by advertisers and inserted into a newspaper. Knight Ridder is the nation's second largest newspaper publisher in terms of circulation and revenue, with products in print and online. The company publishes 31 daily and 21 nondaily newspapers in 28 U.S. markets, reaching 9.2 million readers daily and 13.1 million on Sunday. It maintains 45 associated Web sites under the name Knight Ridder Real Cities. In 1998, the gross revenue from these businesses was about $3.1 billion. The company is also involved in other newspaper businesses and newsprint manufacturing through business arrangements, including joint ventures and partnerships. Newspaper revenue is derived principally from advertising and newspaper copy sales. Advertising revenue currently accounts for about 76% of consolidated revenue. This revenue comes from the three basic categories of advertising - retail, general and classified. Newspaper advertising volume is categorized as either run-of-press (ROP) or preprint. Volume for ROP advertising is measured in terms of either full-run or part-run advertising linage. By using part-run advertising, advertisers can target their messages to selected market segments. 15 Circulation revenue results from the sale of newspapers. Circulation of daily and Sunday newspapers currently accounts for 19% of consolidated revenue. It is reported at the net wholesale price for newspapers delivered or sold by independent contractors and at the retail price for newspapers delivered or sold by employees and delivery agents who are paid a fee for delivery of the newspapers. Other revenue comes from commercial job printing, alternate delivery services, niche and book publications, online services, event marketing, newsprint waste sales, audiotext and other miscellaneous sources. In 1997, the company announced its intention to sell the remaining Business Information Services (BIS) subsidiaries. This decision resulted in the reclassification of the former BIS segment as discontinued operations. The company fully divested the BIS segment with the sale of Technimetrics, Inc., its global diversified information subsidiary, on April 13, 1998. Results of Operations SUMMARY OF OPERATIONS. A summary of the company's operations, certain share data and other financial data for the past 11 years is provided in Item 6. Compound growth rates for the past five- and 10-year periods are also included, if applicable. A review of this summary and of the information in Part I, Item 1. "Business" will provide a better understanding of the following discussion and analysis of operating results and of the financial statements as a whole. Item 1 contains financial data for the company's largest newspapers and information regarding the company's properties, technology and the raw materials used in operations. RESULTS OF OPERATIONS: 1998 VS. 1997 Knight Ridder earned a record $2.78 per diluted share from continuing operations in 1998, up 20.9% from the $2.30 earned in 1997, excluding one-time gains from both years and excluding corporate relocation and newspaper severance costs incurred in 1998. Including these items, diluted earnings per share from continuing operations was $3.11, down $.80, or 20.5%, from the $3.91 reported in 1997. The $3.11 earned in 1998 includes a $.48 one-time gain from the sales of the balance of the company's jointly owned cable systems, a newspaper in Gary, Ind., and net settlement adjustments on the newspapers sold in 1997. The $3.11 also includes a one-time charge of $.15 for the costs associated with the relocation of the corporate headquarters from Miami to San Jose and other newspaper severance costs recorded in the fourth quarter. The $3.91 earned in 1997 includes one-time gains of $1.27 on the sale of most of TKR Cable Company, $.24 on the exchange of the Daily Camera in Boulder, Colo., and $.10 on the sale of four newspapers. 16 Excluding one-time gains from both years and corporate relocation and newspaper severance costs incurred in 1998, net income from continuing operations was $273.3 million, up $40.0 million, or 17.1% from $233.3 million in 1997. Including these items in both years, net income from continuing operations was $305.6 million in 1998, down 22.9%, from $396.5 million in 1997. Net income, including the discontinued BIS operations in both years, was $365.9 million in 1998, down 11.4% from $413.0 million last year. Operating income in 1998 was $504.6 million, down $1.4 million, or 0.3%, from 1997. Excluding corporate relocation and newspaper severance costs from 1998, operating income was up $22.5 million, or 4.4%, from 1997 on a 7.5% increase in total operating revenue. On a pro forma basis for the former Disney and Scripps newspapers (that is, including full-year results in 1997) but excluding the sold newspapers from 1997 (comparable basis), and corporate relocation and newspaper severance costs from 1998, operating income was about equal to the prior year. OPERATING REVENUE. Total company revenue of $3.1 billion was up 7.5% from 1997. On a comparable basis, total operating revenue was up 3.7%. Advertising revenue increased by $160.6 million, or 7.3%, in 1998 to $2.4 billion. On a comparable basis, total advertising revenue improved by 3.8% from 1997 on a full-run ROP linage increase of 1.8%. The following table summarizes the percentage change in revenue and full-run ROP linage from 1997 as reported in our financial statements, as well as results on a comparable basis: Pro Forma, Excluding Divested Newspapers* -------------------------- % Change % Change % Change in Full-Run % Change in Full-Run Advertising Category in Revenue ROP Linage in Revenue ROP Linage - -------------------- ---------- ---------- ---------- ---------- Retail 8.0 .9 4.3 .4 General 6.4 2.5 3.5 3.6 Classified 6.8 1.1 3.3 3.0 Total 7.3 1.1 3.8 1.8 * Including full-year results in 1997 for the former Disney and Scripps newspapers but excluding the sold newspapers Retail advertising revenue improved by $80.5 million, or 8.0%, from 1997 on a 0.9% increase in full-run ROP linage. On a comparable basis, retail advertising revenue increased 4.3% from 1997. Retail growth was relatively even throughout the year. General advertising revenue was up $15.7 million, or 6.4%, from 1997 on a 2.5% increase in full-run ROP linage. On a comparable basis, general advertising revenue was up 3.5%. 17 Classified advertising revenue was up $64.3 million, or 6.8%, from 1997 on a 1.1% increase in full-run ROP linage. On a comparable basis, classified advertising revenue was up 3.3%. The increase was due primarily to help wanted advertising. Circulation revenue improved by $19.8 million, or 3.5%. On a comparable basis, circulation revenue was essentially flat, on about flat average daily circulation copy and an average Sunday circulation copy decline of 1.1%. Other revenue increased $34.8 million, or 32.5%. On a comparable basis, other revenue increased 23.9%, due to increases in event marketing, alternate distribution, online and commercial print revenue. The purchase of two job fair companies in 1998 in Philadelphia added to the growth in event marketing revenue. OPERATING COSTS. Labor and employee benefits costs were up $68.8 million, or 6.1%. On a comparable basis and excluding corporate relocation and newspaper severance costs from 1998, labor and employee benefits costs were up $27.1 million, or 2.3%, on a 1.0% increase in the work force and an average wage rate increase of 3.0%, offset by a decline in employee benefits costs. Newsprint, ink and supplements costs increased by $62.8 million, or 13.5%, due to about a 7.0% increase in the average cost per ton of newsprint, and a 5.6% increase in newsprint consumption. On a comparable basis, newsprint consumption increased 1.5%. Other operating costs increased by $53.6 million, or 8.7%. On a comparable basis and excluding corporate relocation costs in 1998, other operating costs were up $25.1 million, or 3.9%. The increase was due primarily to promotion costs and the changeover to circulation agents in Detroit, which was offset by additional circulation revenue recorded at the retail price for newspapers delivered. Previously, circulation revenue in Detroit was recorded at the net wholesale price. Depreciation and amortization increased $31.3 million, or 20.0%, due primarily to amortization expense associated with the acquisition of the former Disney and Scripps newspapers and depreciation expense associated with certain major press projects. NON-OPERATING ITEMS. Net interest expense increased $4.1 million, or 4.4%, from 1997, due to higher debt levels associated with the Disney acquisition and higher interest rates in the earlier part of 1998. The average debt balance for the year increased $153.7 million from 1997. Equity in earnings of unconsolidated companies and joint ventures increased by $12.5 million, more than double the earnings in 1997, due to improved results from our newsprint mill investments and InfiNet Company, an Internet access provider. The "Other, net" line of the non-operating section decreased $193.7 million from 1997, due to the gains in 1997 from the sale of the majority of TKR Cable Company, the Boulder exchange and the sale of four newspapers. Results in 1998 included the gains on the sales of the balance of the company's cable systems, the Gary, Ind. newspaper, and final settlements on the 1997 newspaper sales. 18 INCOME TAXES. The effective income tax rate on continuing operations for 1998 was 39.8%, down from 42.9% in 1997. The effective tax rate was higher than usual in 1997 because of the sale of cable assets, which generated income in states with higher tax rates. Additionally, in 1998 certain tax matters were settled for amounts that were less than those originally recorded. OTHER. Net income in 1998 includes an after-tax gain on the sale of Technimetrics, Inc., of $60.0 million, or $.61 per share (diluted), and income from discontinued BIS operations, net of applicable taxes, of $184,000. RESULTS OF OPERATIONS: 1997 VS. 1996 Diluted earnings per share from continuing operations was $3.91, up $2.01 from the $1.90 reported in 1996. The $3.91 includes three one-time gains on sales: a $1.27 gain on the sale of the majority of TKR Cable Company, a $.24 gain on the exchange of the Daily Camera in Boulder, Colo., and a $.10 gain on the sale of four newspapers. The $1.90 includes an $.08 gain on the sale of our Netscape Communications Corporation (Netscape) investment, net of adjustments in the carrying value of certain investments. Excluding the one-time gains from 1997 and 1996, earnings per share for 1997 was $2.30, which was up $.48, or 26.4%, from the $1.82 earned in 1996. Operating income in 1997 was $506.0 million, up $172.9 million, or 51.9%, from 1996. The results include operations from four newspapers acquired from The Walt Disney Company in May 1997 and from two newspapers received in exchange from E.W. Scripps Company for the Boulder, Colo., newspaper in August 1997. They exclude results from the (Boulder) Daily Camera after August 1997 and from the (Long Beach, Calif.) Press-Telegram, Boca Raton (Fla.) News, The (Milledgeville, Ga.) Union-Recorder and suburban Newberry (S.C.) Observer after their dates of sale in December 1997. On a pro forma basis for the former Disney and Scripps newspapers (that is, including full-year results in 1997 and 1996) but excluding the sold newspapers from both 1997 and 1996 (comparable basis), operating income was up $122.9 million, or 30.2%, from 1996. The increase was due to an 8.0% increase in total advertising revenue, offset in part by a 2.7% increase in operating costs. OPERATING REVENUE. Total company revenue of $2.9 billion was up 21.2% from 1996. On a comparable basis, total operating revenue was up 6.7%. Newspaper advertising revenue increased by $408.8 million, or 22.8%, in 1997 on a full-run ROP linage increase of 18.0%. On a comparable basis, total advertising revenue improved by 8.0% from 1996 on a full-run ROP linage increase of 6.7%. The following table summarizes the percentage change in revenue and full-run ROP from 1996 as reported in our financial statements, as well as results on a comparable basis: Pro Forma, Excluding Divested Newspapers* ------------------------- % Change % Change % Change in Full-Run % Change in Full-Run Advertising Category in Revenue ROP Linage in Revenue ROP Linage - -------------------- ---------- ---------- ---------- ---------- Retail 22.8 19.0 5.7 5.6 General 23.8 16.7 11.8 8.4 Classified 22.6 17.3 9.6 7.6 Total 22.8 18.0 8.0 6.7 * Including full-year results in 1997 and 1996 for the former Disney and Scripps newspapers but excluding the sold newspapers from both 1997 and 1996 19 Retail advertising revenue improved by $187.0 million, or 22.8%, from 1996 on a 19.0% increase in full-run ROP linage. On a comparable basis, retail advertising revenue increased 5.7% from 1996, with increases at almost all of our newspapers. General advertising revenue was up $47.3 million, or 23.8%, from 1996 on a 16.7% increase in full-run ROP linage. On a comparable basis, general advertising revenue was up 11.8%. Classified advertising revenue was up $174.6 million, or 22.6%, from 1996 on a 17.3% increase in full-run ROP linage. On a comparable basis, classified advertising revenue was up 9.6%. The increase was due primarily to help wanted advertising. Circulation revenue improved by $65.9 million, or 13.1%. On a comparable basis, circulation revenue increased 0.5% on an average daily circulation copy increase of 1.3%, and an average Sunday circulation copy decrease of 0.9%. Other revenue increased $27.8 million, or 35.2%, due to increases in commercial print, special publications, alternate distribution and database marketing revenue. OPERATING COSTS. Labor and employee benefits costs were up $165.2 million, or 17.1%. On a comparable basis, labor and employee benefits costs were up $67.7 million, or 6.2%, on a 2.9% increase in the work force and an average wage rate increase of 4.2%. Newsprint, ink and supplements costs decreased by $5.9 million, or 1.2%, due to a 20.7% decrease in the average cost per ton of newsprint, mostly offset by a 20.8% increase in newsprint consumption, due to acquisitions, greater ad volume and some increased news linage. On a comparable basis, newsprint consumption was up 6.1%. Depreciation and amortization increased $36.1 million, or 29.9%, due to amortization expense associated with the acquisition of the former Disney and Scripps newspapers. Other operating costs increased by $134.3 million, or 27.9%. On a comparable basis, other operating costs were up $71.6 million, or 12.6%. Expenditures for circulation promotion accounted for a large part of the increase. NON-OPERATING ITEMS. Net interest expense increased $33.6 million, or 55.8%, from 1996, due to higher debt levels associated with the Disney acquisition. The average debt balance for the year increased $437.3 million from 1996, due to the debt assumed with the former Disney newspapers acquisition. Equity in earnings of unconsolidated companies and joint ventures decreased by $19.1 million, or 63.8%, due to the absence of earnings from our jointly owned cable systems (majority sold in January 1997) and lower income from our newsprint mill investments. The "Other, net" line of the non-operating section increased $265.7 million over 1996, due to gains on the sale of the majority of TKR Cable Company, the Boulder exchange and the sale of four newspapers in December 1997. The 1996 results included the gain on the sale of the Netscape investment, net of the reduction in the carrying value of certain other investments. 20 INCOME TAXES. The effective income tax rate on continuing operations for 1997 was 42.9%, up from 40.2% in 1996. The rate increase was largely due to the sale of cable assets, which generated income in states with high tax rates, and additional nondeductible goodwill amortization from the Disney acquisition. OTHER. Net income in 1997 includes an after-tax gain on the sale of Knight- Ridder Information, Inc., of $15.3 million, or $.15 per share (diluted), and income from discontinued BIS operations, net of applicable taxes, of $1.3 million, or $.02 per share (diluted). A Look Ahead Looking ahead, the company expects another year of earnings growth in 1999. Advertising revenue will likely increase between 3% and 4%, with retail strongest and classified advertising revenue weakest. As in 1998, the company believes some markets will do considerably better than this, while others may lag. The company does not expect to pay more for newsprint in 1999 than in 1998. Year 2000 Readiness Disclosures All Year 2000 statements in this annual report on Form 10-K are Year 2000 Readiness Disclosures under the Year 2000 Information and Readiness Disclosure Act. The Year 2000 (Y2K) issue results from computer programs using two digits rather than four to define the applicable year. Company computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure, disruption of operations, and/or a temporary inability to conduct normal business activities. In the spring of 1997, the company initiated a comprehensive project to address Y2K issues. The Y2K project was divided into five phases: Scope Definition, Impact Assessment, Conversion, Testing and Implementation. To implement this project, the company established a Y2K Project Management Office (PMO) to act as a central point of coordination for Y2K activity, chaired by the vice president and chief information officer who reports directly to the chief executive officer. The PMO team includes executive management and employees with expertise from various disciplines. At each business unit, a Y2K coordinator was appointed to direct all local Y2K activities. The Y2K coordinator works closely with the PMO team and local executive management and employees. The Scope Definition Phase, completed in June 1997, determined that the Y2K project would encompass both Information Technology (IT) and non-IT assets (embedded chips), including: software, microprocessor-based hardware (including embedded chips found in facilities and production environments) and significant suppliers, customers and other relevant third parties. The Impact Assessment Phase included a comprehensive inventory of both internally developed software and vendor products, as well as microprocessor-based hardware. These inventoried systems were evaluated to determine Y2K issues, if any, and a preliminary assessment regarding replacement or remediation was developed to make these systems Y2K capable, as necessary. Additionally, a central database repository that contains each Y2K project prioritized based on the perceived business risk was developed. This phase was completed in November 1997. 21 A majority of the company's software is vendor-packaged. Conversion, Testing and Implementation Phases have been ongoing since mid 1997. Business units will complete Y2K testing prior to implementation for all critical systems. When possible, previously created test cases are run and results are compared to the baseline results. For systems developed in-house, regression and other Y2K date testing is done as appropriate after Y2K remediation is complete. Results of regression testing are documented and compared to previous baseline results. Upon successful completion of the Testing Phase, the systems will be implemented in the live production environment (Implementation Phase). In all material respects, the company expects that the Conversion, Testing and Implementation Phases will be completed by June 30, 1999. Formal communications were initiated with all significant suppliers, customers and other relevant third parties to determine the extent to which related interfaces with company systems are vulnerable if these third parties fail to remediate their own Y2K issues. There can be no assurance that these third-party systems will be converted on a timely basis. If any of the critical third-party systems fail, such failure could have a material adverse impact on operations. However, the company is monitoring vendor compliance and will consider alternatives if vendors cannot meet the company's compliance requirements by June 30, 1999. At the present time, the total cost of the Y2K project is estimated to range from $60 million to $70 million and is being funded with operating cash flows. Approximately 65% of the total will relate to purchased hardware and software, which will be capitalized. The remainder is expensed as incurred. Expenditures through Dec. 27, 1998, totaled $30.3 million, of which 70.4% was capitalized. In certain cases, an expedited system-replacement schedule will also bring enhanced functionality and should serve to reduce future capital requirements. The company believes that the acceleration of certain projects has not resulted in the deferral of other IT projects that would have a material adverse impact on the financial condition and results of operation. As part of normal business practices, the company maintains site-specific emergency publication plans to be followed during emergency circumstances. Emergency publication plans are being reviewed and updated with Y2K contingency considerations in mind. This effort, plus additional contingency planning activities, will be completed by mid 1999. Based on a recent assessment of its internal operations, those over which the company has direct control, the company believes that with modifications to existing software and conversions to new software, the Y2K issue will not pose significant operational problems. The remediation or replacement of these systems is well under way. Furthermore, the contingency plan will outline alternative solutions in the event that they are required. However, if such modifications and conversions are not made or are not completed in a timely manner, the Y2K issue could have a material adverse impact on the operations of the company. 22 Forward-Looking Statements Certain statements in this annual report on Form 10-K and the company's annual report to shareholders, are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, that could cause actual results and events to differ materially from those anticipated. Potential risks and uncertainties that could adversely affect the company's ability to obtain these results include, without limitations, the following factors: (a) increased consolidation among major retailers or other events that may adversely affect business operations of major customers and depress the level of local and national advertising; (b) an economic downturn in some or all of the company's principal newspaper markets that may lead to decreased circulation or decreased local or national advertising; (c) a decline in general newspaper readership patterns as a result of competitive alternative media or other factors; (d) an increase in newsprint costs over the levels anticipated; (e) labor disputes which may cause revenue declines or increased labor costs; (f) acquisitions of new businesses or dispositions of existing businesses; (g) increases in interest or financing costs; and (h) rapid technological changes and frequent new product introductions prevalent in electronic publishing, including the evolution of the Internet. Significant Acquisitions And Divestitures On April 13, 1998, the company closed on the sale of Technimetrics, Inc., to an operating unit of the Thomson Corporation. Technimetrics was a subsidiary that sold global shareholding and business contact information. This sale fully divested the company of the discontinued Business Information Services segment. The proceeds from the sale were $125.0 million and resulted in pretax and after-tax gains of $103.8 million and $60.0 million, respectively. On March 18, 1998, the company, through its wholly owned subsidiary Knight- Ridder Cablevision, Inc., completed the sale to Tele-Communications, Inc., of its remaining jointly owned cable television systems. On Feb. 2, 1998, the company completed the sale of the Post-Tribune in Gary, Ind., to Hollinger International, Inc. The proceeds from these sales were $95.8 million, consisting of $58.1 million in cash and TCI stock with an aggregate market value of $37.7 million. The pretax and after-tax gains on the sales were $75.3 million and $45.0 million, respectively. In December 1997, the company closed on the sale of four newspapers, the (Long Beach) Press-Telegram, the Boca Raton News, The (Milledgeville) Union- Recorder and the suburban Newberry (S.C.) Observer. The sale of these four newspapers resulted in an after-tax gain of $10.3 million. The sale also included the transfer to the company of The Daily Sun and The Buyer's Guide, a shopper, in Warner Robins, Ga., and The Byron (Ga.) Gazette, a weekly newspaper, all of which are located in fast-growing suburbs in our Macon newspaper's market. On Nov. 14, 1997, the company completed the sale of Knight-Ridder Information, Inc., (KRII) to M.A.I.D plc for $420 million. The after-tax gain on the sale of KRII was $15.3 million. 23 On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., the Daily Camera, for two newspapers in California owned by the E.W. Scripps Company. On May 9, 1997, the company completed the acquisition of four newspapers indirectly owned by The Walt Disney Company for $1.65 billion: The Kansas City Star, the Fort Worth Star-Telegram, the Belleville (Ill.) News-Democrat and The Times Leader in Wilkes-Barre, Pa. On Jan. 10, 1997, the company and Tele-Communications, Inc., closed on the sale of the company's interest in nearly all of their jointly owned cable systems. The remaining systems accounted for a small portion of the original investment and were subsequently sold in March 1998 (discussed above). The after-tax gain on the sale of TKR Cable Company was $128.3 million. The sale yielded net after-tax proceeds of $270 million. On July 26, 1996, the company sold Knight-Ridder Financial (KRF) to Global Financial Information Corporation for $275 million. The after-tax gain on the sale of KRF was $86.3 million. Capital Spending Program The company's capital spending program includes normal replacements, productivity improvements, capacity increases, building construction and expansion, and printing press equipment. Over the past three years, capital expenditures, excluding the discontinued BIS operations, have totaled $351.5 million for additions and improvements to properties. Additions to property, plant and equipment increased $25.4 million from 1997 to $132 million, due to major projects and significant Y2K expenditures in 1998. Expenditures in 1998 included $36.3 million for the Miami and Fort Worth press projects. Both the $108.0 million Miami press expansion and the $37.8 million Fort Worth press expansion are expected to be completed in 2000. Additionally, The Charlotte Observer and the Akron Beacon Journal completed a full conversion to flexographic printing. The total project costs were $35 million and $27.2 million, respectively, with combined expenditures of $4.4 million in 1998. All of the aforementioned press projects (except Fort Worth) were replacement projects that significantly improved waste, reliability, speed, print quality, page and color capacity. The Fort Worth project was primarily designed to address page and color capacity issues for existing presses. Significant renovations to the business and editorial offices in Philadelphia totaling $34.5 million, of which $4.8 million was spent in 1998, were also completed. These renovations significantly improved the working environment for a large number of employees and addressed various infrastructure issues. Also included in capital expenditures was $7.7 million to replace the Grand Forks production plant and building that were destroyed by a flood and subsequent fire in April 1997. The new facility was completed in 1998, at a total cost of $11.5 million (before insurance recoveries). Spending is estimated to be lower in 1999, partly due to the acceleration of certain system replacements for Y2K capability in previous years and the completion of several major projects. 24 Quarterly Operations The company's largest source of revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the second and fourth quarters. General advertising, while not as seasonal as retail, is lower during the summer months. Classified advertising revenue has in the past been a reflection of the overall economy and has not been significantly affected by seasonal trends. The following table summarizes the company's quarterly results of operations (in thousands, except per share data):
QUARTER ------------------------------------------------------------------------ Description First Second Third Fourth(1) ------------ ------------- ----------- ------------ 1998 Operating revenue $ 743,883 $ 779,292 $ 752,778 $ 815,966 Operating income 113,187 127,125 111,629 152,677 Income from continuing operations 101,437(a) 66,925(b) 56,983(d) 80,286(e) Net gain on sale of BIS operations 60,042(c) Income from BIS operations, net 184 Net income 101,621 126,967 56,983 80,286 Earnings per share(2) Basic: Income from continuing operations 1.27(a) 0.85(b) 0.72(d) 1.03(e) Net gain on sale of BIS operations 0.76(c) Income from BIS operations, net Net income 1.27 1.61 0.72 1.03 Diluted: Income from continuing operations 1.02(a) 0.68(b) 0.58(d) 0.83(e) Net gain on sale of BIS operations 0.61(c) Income from BIS operations, net Net income 1.02 1.29 0.58 0.83 Dividends declared per common share 0.20 0.20 0.20 0.20 1997 Operating revenue (3) $ 600,830 $ 711,656 $ 748,704 $ 815,595 Operating income 98,169 136,977 107,936 162,946 Income from continuing operations 175,458(f) 60,950 73,467(g) 86,629(h) Net gain on sale of BIS operations 15,261(i) Income (loss) from BIS operations, net (726) 350 545 1,081 Net income 174,732 61,300 74,012 102,971 Earnings per share(2) Basic: Income from continuing operations 1.88(f) 0.67 0.85(g) 1.04(h) Net gain on sale of BIS operations 0.18(i) Income from BIS operations, net 0.01 0.01 Net income 1.88 0.68 0.85 1.23 Diluted: Income from continuing operations 1.85(f) 0.60 0.69(g) 0.84(h) Net gain on sale of BIS operations 0.15(i) Income from BIS operations, net 0.01 0.01 Net income 1.85 0.61 0.69 1.00 Dividends declared per common share 0.20 0.20 0.20 0.20 1996 Operating revenue $ 570,756 $ 595,582 $ 576,887 $ 630,999 Operating income 49,639 78,647 73,948 130,899 Income from continuing operations 22,994 41,481 39,340 81,565(k) Net gain (adjustment) on sale of BIS operations 90,901(j) (4,646)(j) Income (loss) from BIS operations, net 523 872 (3,984) (1,173) Net income 23,517 42,353 126,257 75,746 Earnings per share(2) Basic: Income from continuing operations 0.23 0.42 0.41 0.87(k) Net gain (adjustment) on sale of BIS operations 0.96(j) (0.05)(j) Income (loss) from BIS operations, net 0.01 0.01 (0.04) (0.01) Net income 0.24 0.43 1.33 0.81 Diluted: Income from continuing operations 0.23 0.42 0.41 0.86(k) Net gain (adjustment) on sale of BIS operations 0.94(j) (0.05)(j) Income (loss) from BIS operations, net 0.01 0.01 (0.04) (0.02) Net income 0.24 0.43 1.31 0.79 Dividends declared per common share 0.18 1/2 0.20 0.20 (l)
25 (1) In the fourth quarter of 1998, the company changed the method of accounting used to determine the market-related value of plan assets, effective Dec. 29, 1997. The effect of this change on 1998 results of operations, including the cumulative effect of prior years, was not material. See Item 8, Note F to the consolidated financial statements. (2) Amounts do not total to the annual earnings per share because each quarter and the year are calculated separately based on average outstanding shares (basic) and average outstanding and equivalent shares (diluted) during the periods. (3) Certain amounts in 1997 have been reclassified to conform to the 1998 presentation. (a) Includes the after-tax gain of $45.0 million on the sales of the balance of our jointly owned cable systems with Tele-Communications, Inc., and our newspaper in Gary, Ind. ($.56 per share, basic; $.45 per share, diluted). (b) Includes after-tax corporate relocation costs, net of settlement adjustments on 1997 newspaper sales totaling $5.1 million, or $(.07) per share, basic; $(.05) per share, diluted. Excluding these items, EPS from continuing operations was $.92 per share basic and $.73 per share diluted. (c) Gain on the sale of Technimetrics, Inc. (d) Includes after-tax corporate relocation costs of $4.4 million, or $(.06) per share, basic; $(.05) per share, diluted. Excluding these costs, EPS from continuing operations was $.78 per share basic and $.63 per share diluted. (e) Includes after-tax corporate relocation costs and other severance costs of $3.2 million, or $(.04) per share, basic; $(.03) per share, diluted. Excluding these costs, EPS from continuing operations was $1.07 per share basic and $.86 per share diluted. (f) Includes the after-tax gain of $128.3 million on the sale of the majority of TKR Cable Company ($1.38 per share, basic; $1.36 per share, diluted). (g) Includes the after-tax gain of $24.5 million on the Boulder, Colo., exchange ($.28 per share, basic; $.23 per share, diluted). (h) Includes the after-tax gain of $10.3 million on the sale of four newspapers ($.12 per share, basic; $.10 per share, diluted). (i) Gain on the sale of KRII. (j) Gain (adjustment) on the sale of KRF. (k) Includes the after-tax gain of $8.1 million on the sale of Netscape, net of adjustments in the carrying value of certain investments ($.09 per share, basic and diluted). (l) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997. The quarterly dividend previously paid in January was paid on Feb. 24, 1997, to shareholders of record as of the close of business on Feb. 12, 1997. 26 Financial Position And Liquidity 1998 VS. 1997. The principal change in the company's financial position during 1998 was the application of cash flow from operating activities, net sales proceeds and excess cash towards the repurchase of 4.7 million shares for $255.5 million and the reduction of debt. The sales of Technimetrics, the company's newspaper in Gary, Ind., and the balance of the company's cable systems in the first half of 1998 provided after-tax sales proceeds of $111.9 million. On June 26, 1998, the $990 million of senior secured bank debt due on Sept. 15, 1999, was paid off with the proceeds from the sale of commercial paper. At year end, the total-debt-to-total-capital ratio was 47.9%, down from 51.8% in 1997. Standard & Poor's, Moody's and Duff & Phelps continue to rate the company's commercial paper A1, P2 and D1, and long-term bonds A, A3 and A, respectively. Cash and short-term cash investments were $26.8 million at the end of 1998, a $133.5 million decrease from 1997. The cash was used for stock repurchases and to pay down debt. The ratio of current assets to current liabilities was 0.8:1 at year end vs. 1.1:1 at the end of 1997. Average outstanding commercial paper during the year was $457.4 million, with an average effective interest rate of 5.5%. During 1998, the company's revolving credit and term loan agreement, which back up the commercial paper program, increased from $642.3 million to $1.1 billion. At year-end 1998, commercial paper outstanding was $927.2 million and aggregate unused credit lines were $172.8 million. The 364-day revolving credit and term loan portion of the facility matures in June 1999. The company has the option and intention to renew this facility for an additional term through June 2000. During 1998, net cash provided by operating activities increased $55.0 million to $297.2 million. The increase was attributed to higher net income, exclusive of gains on sales/exchanges of investee/subsidiaries and the net gain on sale of discontinued BIS operations from both years, offset by a reduction in working capital. The company's operations have historically generated strong positive cash flow, which, along with the company's commercial paper program, revolving credit lines and ability to issue public debt, has provided adequate liquidity to meet the company's short-term and long-term cash requirements, including requirements for working capital and capital expenditures. 1997 VS. 1996. The principal change in the company's financial position during 1997 was the acquisition of four newspapers formerly owned by The Walt Disney Company for $1.65 billion. The transaction was financed through the issuance of $660 million in convertible preferred stock and assumption of $990 million of pre-existing debt. During 1997, the company authorized a common stock buyback program to repurchase in the open market up to 15 million shares. In 1997, 13.8 million shares were repurchased. The company utilized proceeds from the sales of the majority of its cable systems in January 1997, its subsidiary Knight-Ridder Information, Inc., in November 1997 and four of its newspapers in December 1997 to fund stock repurchases and reduce debt. In November 1997, the company issued $100 million of notes maturing in 2007 and $100 million of debentures maturing in 2027. The 27 proceeds of the new debt were used to reduce commercial paper borrowings. At year end, the total-debt-to-total-capital ratio increased to 51.8%, up from 42.1% in 1996. Standard & Poor's and Moody's downgraded the company's commercial paper and long-term bonds during 1997. The downgrades resulted from the increased leverage associated with the Disney newspaper acquisition combined with the company's common stock repurchase program. Standard & Poor's and Moody's commercial paper ratings went from A1+ and P1 to A1 and P2, respectively. Standard & Poor's and Moody's long-term bond ratings went from AA- and A to A and A3, respectively. During 1997, Duff & Phelps Credit Rating Co. began rating the company's commercial paper and long-term bonds. The commercial paper and long-term bonds were rated D1 and A, respectively. Average commercial paper outstanding during the year was $286.7 million, with an average effective interest rate of 5.6%. At year-end 1997, commercial paper outstanding was $30.0 million and aggregate unused credit lines were $612.3 million. During 1997, net cash provided by operating activities increased $7.3 million to $242.2 million. The increase was attributed to higher earnings, operating profits from the former Disney newspapers and other changes in working capital. Cash and short-term investments were $160.3 million at the end of 1997, a $137.4 million increase from 1996. The increased cash level was to be used for stock repurchases in the first quarter of 1998. The ratio of current assets to current liabilities was 1.1:1 at year end vs. 1.0:1 at the end of 1996. Online Activities In 1998, the company incurred $22 million of net expense from online activities, excluding investments in minority internet-related companies. These activities are becoming more integrated with traditional advertising sales and we anticipate continued growth in this area. Effect Of Changing Prices The Consumer Price Index, a widely used measure of the impact of changing prices, has increased only moderately in recent years, up between 2% and 3% each year since 1991. Historically, when inflation was at higher levels, the impact on the company's operations was not significant. The principal effect of inflation on the company's operating results is to increase costs. Subject to normal competitive conditions, the company generally has demonstrated the ability to raise sales prices to offset these cost increases. 28 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK BORROWINGS. By balancing the mix of variable- versus fixed-rate borrowings, the company manages the interest rate risk of its debt portfolio. Item 8, "Financial Statements and Supplementary Data", Note C to the consolidated financial statements includes information relating to the contractual interest rates and fair value of the individual borrowings within the portfolio. A hypothetical 10% change in interest rates would increase interest expense associated with both fixed- and variable-rate borrowings by $5.0 million. This hypothetical interest rate change would also increase the fair value of the fixed debt by $14.2 million. NEWSPRINT. The company consumed approximately 794,000 metric tons of newsprint in 1998. It represents 17.3% of the company's 1998 total operating expenses. In Part I, Item 1, "Business", under the caption "Newsprint", the company has included information outlining its suppliers, and natural hedges the company has in place through its investment in newsprint mills. In Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", under the caption "A Look Ahead", the expected average price of this commodity during 1999 is discussed. COLLECTIVE BARGAINING AGREEMENTS. Approximately 36% of the Company's 22,000 employees are represented by some 70 local unions and work under multiyear collective bargaining agreements. These agreements are renegotiated in the years in which they expire. During 1999, there will be negotiations to extend collective bargaining agreements with seven unions in some of our major markets. Individual newspapers that are unionized to a greater or lesser degree include those in Akron, Detroit, Duluth, Fort Wayne, Grand Forks, Kansas City, Lexington, Monterey, Philadelphia, St. Paul, State College, San Jose and Wichita. 29 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Quarterly Operations in Item 7 and Schedule II, Valuation and Qualifying Accounts CONSOLIDATED BALANCE SHEET
(In thousands of dollars, Dec. 27, Dec. 28, Dec. 29, except share data) 1998 1997 1996 ----------- ----------- ---------- ASSETS CURRENT ASSETS Cash, including short-term cash investments of $4,159 in 1998, $140,210 in 1997 and $50 in 1996 $ 26,836 $ 160,291 $ 22,880 Accounts receivable, net of allowances of $15,738 in 1998, $14,963 in 1997 and $12,685 in 1996 386,455 374,746 356,079 Inventories 59,109 50,332 42,941 Prepaid expense 14,078 15,844 90,314 Other current assets 39,213 39,902 53,513 ----------- ----------- ----------- Total Current Assets 525,691 641,115 565,727 ----------- ----------- ----------- INVESTMENTS AND OTHER ASSETS Equity in unconsolidated companies and joint ventures 201,120 197,585 330,267 Net assets of discontinued BIS operations 24,673 352,102 Other 243,586 172,859 132,425 ----------- ----------- ----------- Total Investments and Other Assets 444,706 395,117 814,794 ----------- ----------- ----------- PROPERTY, PLANT AND EQUIPMENT Land and improvements 93,781 89,375 77,526 Buildings and improvements 484,367 444,952 387,509 Equipment 1,175,044 1,127,875 994,455 Construction and equipment installations in progress 84,559 111,883 110,590 ----------- ----------- ----------- 1,837,751 1,774,085 1,570,080 Less accumulated depreciation (764,750) (727,571) (701,232) ----------- ----------- ----------- Net Property, Plant and Equipment 1,073,001 1,046,514 868,848 ----------- ----------- ----------- EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLES Less accumulated amortization of $264,001 in 1998, $197,966 in 1997 and $150,491 in 1996 2,213,699 2,272,396 611,538 ----------- ----------- ----------- Total $ 4,257,097 $ 4,355,142 $ 2,860,907 =========== =========== ===========
See "Notes to Consolidated Financial Statements." 30 CONSOLIDATED BALANCE SHEET (Continued)
(In thousands of dollars, Dec. 27, Dec. 28, Dec. 29, except share data) 1998 1997 1996 ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 164,558 $ 172,021 $ 223,962 Accrued expenses and other liabilities 111,088 131,491 103,730 Accrued compensation and amounts withheld from employees 112,827 119,036 96,426 Federal and state income taxes 33,920 Deferred revenue 67,006 72,491 70,452 Short-term borrowings and current portion of long-term debt 198,277 69,697 50,000 ----------- ----------- ----------- Total Current Liabilities 653,756 598,656 544,570 ----------- ----------- ----------- NONCURRENT LIABILITIES Long-term debt 1,329,001 1,599,133 771,335 Deferred federal and state income taxes 293,015 282,695 142,727 Postretirement benefits other than pensions 147,118 150,485 158,811 Employment benefits and other noncurrent liabilities 168,974 171,225 109,909 ----------- ----------- ----------- Total Noncurrent Liabilities 1,938,108 2,203,538 1,182,782 ----------- ----------- ----------- MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 2,502 1,275 2,047 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES (NOTE I) SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value; shares authorized - 2,000,000; shares issued - 1,754,930 in 1998 and 1997, and 0 in 1996 1,755 1,755 Common stock, $.02 1/12 par value; shares authorized - 250,000,000; shares issued - 78,374,195 in 1998, 81,597,631 in 1997 and 93,340,652 in 1996 1,633 1,700 1,945 Additional capital 908,078 911,572 308,320 Retained earnings 735,132 636,646 819,572 Accumulated other comprehensive income 18,738 1,671 Treasury stock, at cost; 46,667 shares in 1998, 0 in 1997 and 1996 (2,605) ----------- ----------- ----------- Total Shareholders' Equity 1,662,731 1,551,673 1,131,508 ----------- ----------- ----------- Total $ 4,257,097 $ 4,355,142 $ 2,860,907 =========== =========== ===========
31 CONSOLIDATED STATEMENT OF INCOME
Year Ended ----------------------------------------- Dec. 27, Dec. 28, Dec. 29, (In thousands of dollars, except share data) 1998 1997 1996 ----------- ----------- ----------- OPERATING REVENUE Advertising Retail $ 1,089,273 $ 1,008,736 $ 821,768 General 261,831 246,096 198,797 Classified 1,011,755 947,419 772,859 ----------- ----------- ----------- Total 2,362,859 2,202,251 1,793,424 Circulation 587,529 567,757 501,826 Other 141,531 106,777 78,974 ----------- ----------- ----------- Total Operating Revenue 3,091,919 2,876,785 2,374,224 ----------- ----------- ----------- OPERATING COSTS Labor and employee benefits 1,200,981 1,132,227 967,069 Newsprint, ink and supplements 529,154 466,329 472,207 Other operating costs 669,114 615,470 481,168 Depreciation and amortization 188,052 156,731 120,647 ----------- ----------- ----------- Total Operating Costs 2,587,301 2,370,757 2,041,091 ----------- ----------- ----------- OPERATING INCOME 504,618 506,028 333,133 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (105,936) (102,662) (73,137) Interest expense capitalized 4,516 5,376 6,397 Interest income 3,416 3,404 6,488 Equity in earnings of unconsolidated companies and joint ventures 23,309 10,800 29,868 Minority interests in earnings of consolidated subsidiaries (10,749) (11,503) (9,293) Other, net (Note G) 88,742 282,409 16,753 ----------- ----------- ----------- Total 3,298 187,824 (22,924) ----------- ----------- ----------- Income before income taxes 507,916 693,852 310,209 Income taxes 202,285 297,348 124,829 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS 305,631 396,504 185,380 Net gain on sale of discontinued BIS operations, net of applicable income taxes of $43,752 in 1998, $8,365 in 1997 and $69,631 in 1996 (Notes B and G) 60,042 15,261 86,255 Income/(loss) from discontinued BIS operations, net of applicable income taxes of $133 in 1998, $1,119 in 1997 and $4,305 in 1996 (Notes B and G) 184 1,250 (3,762) ----------- ----------- ----------- Net Income $ 365,857 $ 413,015 $ 267,873 =========== =========== =========== EARNINGS PER SHARE Basic: Income from continuing operations $ 3.87 $ 4.48 $ 1.93 Net gain on sale of discontinued BIS operations (Note G) .76 .17 .90 Income/(loss) from discontinued BIS operations, net (Note G) .01 .02 (.04) ----------- ----------- ----------- Net Income $ 4.64 $ 4.67 $ 2.79 =========== =========== =========== Diluted: Income from continuing operations $ 3.11 $ 3.91 $ 1.90 Net gain on sale of discontinued BIS operations (Note G) .61 .15 .89 Income/(loss) from discontinued BIS operations, net (Note G) .01 .02 (.04) ----------- ----------- ----------- Net Income $ 3.73 $ 4.08 $ 2.75 =========== =========== =========== AVERAGE SHARES OUTSTANDING (000S) Basic 78,882 88,475 96,021 Diluted 98,176 101,314 97,420
See "Notes to Consolidated Financial Statements." 32 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended ----------------------------------------- Dec. 27, Dec. 28, Dec. 29, (In thousands of dollars) 1998 1997 1996 ----------- ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 365,857 $ 413,015 $ 267,873 Noncash items deducted from (included in) income: Gains on sales/exchanges of investee/ subsidiaries (Note G) (75,251) (283,126) Net gain on sale of discontinued BIS operations (60,042) (15,261) (86,255) Depreciation 101,950 94,138 86,976 Amortization of excess of cost over net assets acquired 66,035 47,475 18,500 Amortization of other assets 20,067 15,118 15,171 Provision (benefit) for deferred taxes (8,444) (14,750) 40,647 Provision for bad debts 20,854 23,332 19,315 Earnings of investees in excess of distributions (21,856) (14,658) (21,293) Minority interests in earnings of consolidated subsidiaries 10,749 11,503 9,293 Other items, net 18,576 38,656 (9,648) Change in certain assets and liabilities: Accounts receivable (39,927) (57,185) (62,223) Inventories (9,398) (326) 30,474 Other current assets 3,296 380 (159,718) Accounts payable (20,299) (83,969) 86,251 Federal and state income taxes (52,234) 20,125 9,347 Other liabilities (22,782) 47,724 (9,826) ----------- ----------- ----------- Net Cash Provided by Operating Activities 297,151 242,191 234,884 ----------- ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Proceeds from sales of investee/subsidiaries(Note G) 58,125 181,145 Proceeds from sale of discontinued BIS operations (Note G) 125,000 416,983 271,859 Change in net noncurrent assets of discontinued BIS operations 520 1,996 4,249 Proceeds from sales of securities available for sale 4,319 241,894 Additions to property, plant and equipment (132,025) (106,614) (112,896) Other items, net (35,642) (8,165) 45,142 ----------- ----------- ----------- Net Cash Provided by Investing Activities 20,297 727,239 208,354 ----------- ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES Proceeds from sale of commercial paper, notes payable and senior notes payable 914,926 833,600 601,010 Payment of total debt (1,057,186) (976,611) (793,525) ----------- ----------- ----------- Net Change in Total Debt (142,260) (143,011) (192,515) Payment of cash dividends (77,152) (78,335) (74,262) Sale of common stock to employees 44,411 60,029 63,815 Purchase of treasury stock (255,533) (643,375) (221,768) Other items, net (20,369) (27,327) (21,640) ----------- ----------- ----------- Net Cash (Required for) Financing Activities (450,903) (832,019) (446,370) ----------- ----------- ----------- Net Increase (Decrease) in Cash (133,455) 137,411 (3,132) Cash and short-term cash investments at beginning of the year 160,291 22,880 26,012 ----------- ----------- ----------- Cash and short-term cash investments at end of the year $ 26,836 $ 160,291 $ 22,880 =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Noncash investing activities (Note G) Securities received as proceeds on the sale of investee $ 37,678 $ 229,163 Noncash financing activities (Note G) Issuance of preferred stock for the acquisition of the Disney newspapers Preferred stock 1,755 Additional capital 658,245 Long-term debt assumed on the acquisition of the Disney newspapers 990,000
See "Notes to Consolidated Financial Statements." 33
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Preferred Common Treasury (In thousands of dollars, Shares Shares Shares Preferred Common except share data) Outstanding Outstanding Outstanding Stock Stock ----------- ----------- ----------- --------- ------- BALANCE AT DEC. 31, 1995 -- 97,196,308 -- $ -- $ 2,025 Issuance of common shares under stock option plan 1,040,938 22 Issuance of common shares under stock purchase plan 126,808 3 Issuance of treasury shares under stock option plan 868,752 Issuance of treasury shares under stock purchase plan 326,946 Purchase of treasury shares (6,219,100) Retirement of treasury shares (5,023,402) 5,023,402 (105) Expenses related to capital transactions Tax benefits arising from employee stock plans Comprehensive income: Net income Change in unrealized gains on securities available for sale, net of tax of $29,886 Comprehensive income Cash dividends declared on common stock - $.58 1/2 per share(1) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 29, 1996 -- 93,340,652 -- $ -- $ 1,945 Issuance of common shares under stock option plan 89,318 2 Issuance of treasury shares under stock option plan 1,604,447 Issuance of treasury shares under stock purchase plan 387,514 Issuance of convertible preferred shares 1,754,930 1,755 Purchase of treasury shares (13,824,300) Retirement of treasury shares (11,832,339) 11,832,339 (247) Tax benefits arising from employee stock plans Comprehensive income: Net income Change in unrealized gains on securities available for sale, net of tax of $1,210 Comprehensive income Cash dividends declared on common stock - $.80 per share - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 28, 1997 1,754,930 81,597,631 -- $ 1,755 $ 1,700 Issuance of common shares under stock option plan 369,372 7 Issuance of common shares under stock purchase plan 81,672 2 Issuance of treasury shares under stock option plan 638,420 Issuance of treasury shares under stock purchase plan 267,927 Issuance of treasury shares to nonemployee directors 3,333 Issuance of treasury shares 94,173 Purchase of treasury shares (4,725,000) Retirement of treasury shares (3,674,480) 3,674,480 (76) Tax benefits arising from employee stock plans Comprehensive income: Net income Change in unrealized gains on securities available for sale, net of tax of $12,492 Comprehensive income Cash dividends declared on common stock - $.80 per share - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 27, 1998 1,754,930 78,374,195 (46,667) $ 1,755 $ 1,633 ====================================================================================================================================
(1) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997. The quarterly dividend previously paid in January was paid on Feb. 24, 1997, to shareholders of record as of the close of business on Feb. 12, 1997. (2) Accumulated other comprehensive income at Dec. 31, 1995, represents unrealized gains on securities available for sale. See "Notes to Consolidated Financial Statements." 34 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Continued)
Accumulated Other (In thousands of dollars, Additional Retained Comprehensive Treasury except share data) Capital Earnings Income Stock Total ---------- ---------- ------------- --------- ---------- BALANCE AT DEC. 31, 1995 $ 295,360 $ 770,643 $ 42,942(2) $ -- $1,110,970 Issuance of common shares under stock option plan 26,589 (11) 26,600 Issuance of common shares under stock purchase plan 3,724 (1) 3,726 Issuance of treasury shares under stock option plan (7,661) 30,783 23,122 Issuance of treasury shares under stock purchase plan (1,278) 11,645 10,367 Purchase of treasury shares (221,768) (221,768) Retirement of treasury shares (16,586) (162,649) 179,340 -- Expenses related to capital transactions (203) (203) Tax benefits arising from employee stock plans 8,375 8,375 Comprehensive income: Net income 267,873 267,873 Change in unrealized gains on securities available for sale, net of tax of $29,886 (41,271) (41,271) ----------- Comprehensive income 226,602 ----------- Cash dividends declared on common stock - $.58 1/2 per share(1) (56,283) (56,283) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 29, 1996 $ 308,320 $ 819,572 $ 1,671 $ -- $1,131,508 Issuance of common shares under stock option plan 2,395 2,397 Issuance of treasury shares under stock option plan (28,149) 70,785 42,636 Issuance of treasury shares under stock purchase plan (2,222) 17,218 14,996 Issuance of convertible preferred shares 658,245 660,000 Purchase of treasury shares (643,375) (643,375) Retirement of treasury shares (37,519) (517,606) 555,372 -- Tax benefits arising from employee stock plans 10,502 10,502 Comprehensive income: Net income 413,015 413,015 Change in unrealized gains on securities available for sale, net of tax of $1,210 (1,671) (1,671) ----------- Comprehensive income 411,344 ----------- Cash dividends declared on common stock - $.80 per share (78,335) (78,335) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 28, 1997 $ 911,572 $ 636,646 $ -- $ -- $1,551,673 Issuance of common shares under stock option plan 10,185 10,192 Issuance of common shares under stock purchase plan 3,966 3,968 Issuance of treasury shares under stock option plan (14,422) 32,797 18,375 Issuance of treasury shares under stock purchase plan (1,352) 13,228 11,876 Issuance of treasury shares to nonemployee directors (13) 186 173 Issuance of treasury shares 5,021 5,021 Purchase of treasury shares (255,533) (255,533) Retirement of treasury shares (11,401) (190,219) 201,696 -- Tax benefits arising from employee stock plans 9,543 9,543 Comprehensive income: Net income 365,857 365,857 Change in unrealized gains on securities available for sale, net of tax of $12,492 18,738 18,738 ----------- Comprehensive income 384,595 ----------- Cash dividends declared on common stock - $.80 per share (77,152) (77,152) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DEC. 27, 1998 $908,078 $ 735,132 $ 18,738 $ (2,605) $1,662,731 ====================================================================================================================================
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Knight Ridder is the nation's second largest newspaper publisher in terms of circulation and revenue, with products in print and online. The company publishes 31 daily newspapers in 28 U.S. markets, reaching 9.2 million readers daily and 13.1 million on Sunday. It maintains 45 associated Web sites under the name Knight Ridder Real Cities and has investments in two newsprint mills. The company reports on a fiscal year, ending the last Sunday in the calendar year. Results for 1998, 1997 and 1996 are for the 52 weeks ended Dec. 27, Dec. 28 and Dec. 29, respectively. The BASIS OF CONSOLIDATION is to include in the consolidated financial statements all the accounts of Knight Ridder and its more-than-50%-owned subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The company is a 50% partner in the DETROIT NEWSPAPER AGENCY (DNA), a joint operating agency between Detroit Free Press, Inc., a wholly owned subsidiary of Knight Ridder, and The Detroit News, Inc., a wholly owned subsidiary of Gannett Co., Inc. In 1989, business operations of the Free Press and The Detroit News were transferred to the DNA. Under the joint operating agreement that expires in the year 2089, as of Dec. 26, 1994, profits are split equally between the partners. The Consolidated Statement of Income includes, on a line-by-line basis, the company's pro rata share of the revenue and expense generated by the operation of the agency. INVESTMENTS in companies in which Knight Ridder has an equity interest of at least 20% but not more than 50% are accounted for under the equity method. Under this method, the company records its share of earnings as income and increases the investment by the equivalent amount. Dividends are recorded as a reduction in the investment. The investment caption "EQUITY IN UNCONSOLIDATED COMPANIES AND JOINT VENTURES" in the Consolidated Balance Sheet represents the company's equity in the net assets of DNA; the Seattle Times Company and subsidiaries; Newspapers First, a company responsible for the sales and servicing of general, retail and classified advertising accounts for a group of newspapers; Southeast Paper Manufacturing Co. and Ponderay Newsprint Company, two newsprint mill partnerships; InfiNet Company, a joint venture that allows newspapers to offer Internet access to subscribers; Tesserae Information Systems, Inc., a company that produces software used to merge various databases; TKR Cable Company and TKR Cable Partners, cable television joint ventures (all but one of the cable companies jointly owned with Tele-Communications, Inc. [TCI] were sold in January 1997 and the balance was sold in March 1998); Interealty, Inc. (formerly known as PRC Realty Systems, Inc., sold in September 1998), a software system producer for the real estate industry; and Destination Florida, a company that provided online travel information services (ceased operation in 1997). The company owns 49 1/2% of the voting common stock and 65% of the nonvoting common stock of the SEATTLE TIMES COMPANY, owns 31.1% of the voting stock of NEWSPAPERS FIRST, is a one-third partner in the SOUTHEAST PAPER MANUFACTURING 36 CO. and owns a 13 1/2% equity share of PONDERAY NEWSPRINT COMPANY. The company owns 33.3% of the voting stock and 50% of the nonvoting Stock of INFINET COMPANY, and owns 33.1% of TESSERAE INFORMATION SYSTEMS, INC. The investment in unconsolidated companies and joint ventures at Dec. 27, 1998, includes $179.6 million representing the company's share of undistributed earnings (excluding the DNA) accumulated since the investment dates. The company's share of the earnings of the unconsolidated companies (except for the DNA) of $23.3 million in 1998, $10.8 million in 1997 and $29.9 million in 1996 is included in the caption "EQUITY IN EARNINGS OF UNCONSOLIDATED COMPANIES AND JOINT VENTURES" in the Consolidated Statement of Income. Dividends and cash distributions received from the unconsolidated companies and joint ventures (excluding the DNA) were $6.6 million in 1998, $3.1 million in 1997 and $18.6 million in 1996 and were offset against the investment account. FORT WAYNE NEWSPAPERS, INC., and THE PROFESSIONAL EXCHANGE LLC (a subsidiary of Philadelphia Newspapers, Inc.), are the only consolidated subsidiaries that have a minority ownership interest. The minority shareholders' interest in the net income of these subsidiaries has been reflected as an expense in the Consolidated Statement of Income in the caption "MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED SUBSIDIARIES." Also included in this caption is a contractual minority interest resulting from a JOA that runs through the year 2021 between The Miami Herald Publishing Company and Cox Newspapers, Inc., covering the publication of The Herald and The Miami News, which ceased publication in 1988. The company's liability to the minority interest shareholders is included in the Consolidated Balance Sheet caption, "MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES." "CASH AND SHORT-TERM CASH INVESTMENTS" includes currency and checks on hand, demand deposits at commercial banks, overnight repurchase agreements of government securities, and investment-grade commercial paper with maturities of 90 days or less. Cash and short-term investments are recorded at cost. Due to the short-term nature of marketable securities, cost approximates market value. The majority of the company's "ACCOUNTS RECEIVABLE" as of Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996, are from advertisers, newspaper subscribers and information users. Credit is extended based on the evaluation of the customer's financial condition, and generally collateral is not required. Credit losses are provided for in the financial statements and consistently have been within management's expectations. "INVENTORIES" are priced at the lower of cost (first-in, first-out FIFO method) or market. Most of the inventory is newsprint, ink and other supplies used in printing newspapers. "OTHER ASSETS" includes investments in companies in which Knight Ridder owns less than a 20% interest. These investments are reviewed for appropriate classification at the time of purchase and re-evaluated as of each balance sheet date. Investments available for sale are carried on the balance sheet at fair market value, with the unrealized gains/losses (net of tax) reported as "ACCUMULATED OTHER COMPREHENSIVE INCOME," a separate component of shareholders' equity. Upon the sale of an investment, the gain/loss is calculated based on the 37 original cost, less the proceeds from the sale. Investments are classified as "held to maturity" when the company has the positive intent and ability to hold the investment to maturity. "PROPERTY, PLANT AND EQUIPMENT" is recorded at cost, and the provision for depreciation for financial statement purposes is computed principally by the straight-line method over the estimated useful lives of the assets. "EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLES" includes the unamortized excess of cost over the fair market value on the purchase of at least a 50% interest in a company's net tangible and intangible assets arising from these acquisitions. The excess of cost over net assets acquired and intangible assets from acquisitions accounted for as purchases and occurring subsequent to Oct. 31, 1970, totaled, at Dec. 27, 1998, approximately $2.4 billion, including $400.5 million of identified intangible assets. The excess of cost over net assets acquired is being amortized over a 40-year period on a straight-line basis, unless management concludes that a shorter term is more appropriate. Other intangibles acquired through acquisitions consist of trademarks, subscriber and advertiser lists and mastheads that are being amortized on a straight-line basis over periods ranging from five to 40 years, with a weighted-average life of 25.7 years. If, in the opinion of management, an impairment in value occurs, based on the undiscounted cash flow method, any necessary additional write-downs will be charged to expense. "DEFERRED REVENUE" arises as a normal part of business from advance subscription payments for newspapers. Revenue is recognized in the period in which it is earned. "SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG-TERM DEBT" includes the carrying amounts of commercial paper and other short-term borrowings with original maturities of less than one year, and the portion of long-term debt payable within 12 months and which management does not intend to refinance. The carrying amounts of short-term borrowings approximate fair value. "LONG- TERM DEBT" represents the carrying amounts of debentures, notes payable and other indebtedness with maturities longer than one year. Fair values, disclosed in Note C, are estimated using discounted cash flow analyses based on the company's current incremental borrowing rates for similar types of borrowing arrangements. In 1996, the company implemented FAS 123 - ACCOUNTING FOR STOCK-BASED COMPENSATION. Under this statement, the company accounts for stock-based compensation plans under the provisions of APB 25 - Accounting for Stock Issued to Employees, and discloses the general and pro forma financial information required by FAS 123. See Note E. In 1997, the company adopted FAS 128 - EARNINGS PER SHARE (EPS). FAS 128 replaced the calculation of primary and fully diluted EPS with basic and diluted EPS. Basic EPS will typically be higher than primary EPS due to the exclusion of any dilutive effects of options, warrants and convertible securities from the calculation. Diluted EPS is very similar to the previously reported fully diluted EPS. All EPS amounts for all earlier periods presented have been restated to conform to the FAS 128 requirements. "BASIC EARNINGS PER SHARE" is computed by dividing net income by the 38 weighted-average number of common shares outstanding. "DILUTED EARNINGS PER SHARE" is computed by dividing net income by the weighted-average number of common and common equivalent shares outstanding. Quarterly earnings per share may not add to the total for the year, since each quarter and the year are calculated separately based on average outstanding shares during the period. In 1997, the company also adopted FAS 129 - DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. FAS 129 establishes standards for disclosing information about an entity's capital structure. The adoption of this statement did not result in additional required disclosures. In 1998, the company adopted FAS 130 - REPORTING COMPREHENSIVE INCOME. FAS 130 establishes new rules for the reporting and display of comprehensive income and its components. FAS 130 requires that unrealized gains or losses on the company's available-for-sale securities be included in "ACCUMULATED OTHER COMPREHENSIVE INCOME," a separate component of shareholders' equity. Prior to its adoption, unrealized gains or losses on available-for-sale securities were separately identified as such in shareholders' equity. The adoption of FAS 130 expanded the disclosure provided in the statement of shareholders' equity. See Note H. FAS 131 - DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION was effective in 1998. The company is a newspaper company with products in print and online. It maintains operations and local management in the markets it serves, including the metropolitan areas of Philadelphia, Pa., Miami, Fla., San Jose, Calif., Kansas City, Mo., Fort Worth, Texas, Detroit, Mich., and Charlotte, N.C. Revenue is earned through the sale of advertising, circulation and related activities. Newspapers are distributed in print through local distribution channels, as well as online through Web sites. The company conducts business in one operating segment and determined its operating segment based on the individual operations that the chief operating decision maker reviews for purposes of assessing performance and making operating decisions. These individual operations have been aggregated into one segment because the company believes doing so helps users understand the company's performance and assess its prospects. The combined operations have similar economic characteristics and each operation has similar products, services, customers, production processes and distribution methods. In 1998, the company also adopted FAS 132 - EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. FAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets and eliminates certain disclosures that are no longer considered useful. See Note F. In 2000, the company plans to adopt FAS 133 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Based on current circumstances, the company does not believe the effect of adoption will be material. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts in 1997 and 1996 have been reclassified to conform to the 1998 presentation. 39 B. INCOME TAXES The company's income tax expense is determined under the liability method, which requires adjusting previously deferred taxes for changes in tax rates. Substantially all of the company's earnings are subject to domestic taxation. Federal, state and local income taxes consist of the following (in thousands):
1998 1997 1996 ------------------- ------------------- ------------------- Current Deferred Current Deferred Current Deferred -------- -------- -------- -------- -------- -------- Federal income taxes $213,161 $ (4,479) $286,645 $(33,176) $127,610 $ 28,075 State and local income taxes 39,953 (2,465) 64,519 (11,156) 29,913 13,167 -------- -------- -------- -------- -------- -------- Total $253,114 $ (6,944) $351,164 $(44,332) $157,523 $ 41,242 ======== ======== ======== ======== ======== ======== Provision for: Continuing operations . $210,729 $ (8,444) $312,098 $(14,750) $ 84,182 $ 40,647 Discontinued operations 42,385 1,500 39,066 (29,582) 73,341 595 -------- -------- -------- -------- -------- -------- Total $253,114 $ (6,944) $351,164 $(44,332) $157,523 $ 41,242 ======== ======== ======== ======== ======== ========
Cash payments of income taxes for the years 1998, 1997 and 1996 were $262.7 million, $278.5 million and $147.2 million, respectively. Payments in 1998, 1997 and 1996 include the tax impact resulting from one-time gains. Payments in 1998 included the tax impact from the sale of the balance of our jointly owned cable system, Technimetrics, Inc., and our newspaper in Gary, Ind. Payments in 1997 included the tax impact from the sale of the majority of our cable systems, Knight-Ridder Information, Inc., and the sales/exchanges of our newspapers. Payments in 1996 included the tax impact from the sale of Knight-Ridder Financial. 40 EFFECTIVE INCOME TAX RATES The differences between income tax expense for continuing operations shown in the financial statements and the amounts determined by applying the federal statutory rate of 35% in each year are as follows (in thousands):
1998 1997 1996 --------- --------- --------- Federal statutory income tax $ 177,771 $ 242,848 $ 108,573 State and local income taxes, net of federal benefit 17,033 34,300 13,612 Statutory rate applied to nondeductible amortization of the excess of cost over net assets acquired 15,123 13,482 2,781 Other items, net (7,642) 6,718 (137) --------- --------- --------- Total $ 202,285 $ 297,348 $ 124,829 ========= ========= ========= The deferred tax asset and liability at the fiscal year end consist of the following components (in thousands): 1998 1997 1996 --------- --------- --------- Deferred Tax Asset Postretirement benefits other than pensions (including amounts relating to partnerships in which the company participates) $ 84,100 $ 88,016 $ 95,764 Accrued interest 7,175 8,165 10,576 Other nondeductible accruals 60,022 51,651 43,594 --------- --------- --------- Gross deferred tax asset $ 151,297 $ 147,832 $ 149,934 ========= ========= ========= Deferred Tax Liability Depreciation and amortization $ 341,618 $ 341,872 $ 196,116 Compensation and benefit accruals 7,810 15,855 6,802 Equity in partnerships and investees 51,170 46,845 73,499 Unrealized appreciation in equity securities 12,492 1,210 Research and experimental expenditures 10,964 Other 3,361 4,010 11,066 --------- --------- --------- Gross deferred tax liability $ 416,451 $ 408,582 $ 299,657 --------- --------- --------- Net deferred tax liability $ 265,154 $ 260,750 $ 149,723 ========= ========= =========
The components of deferred taxes included in the Consolidated Balance Sheet are as follows (in thousands):
1998 1997 1996 --------- --------- --------- Current asset $ 27,861 $ 23,445 $ 24,296 Noncurrent liability 293,015 282,695 142,727 Discontinued BIS operations - net liability 1,500 31,292 --------- --------- --------- Net deferred tax liability $ 265,154 $ 260,750 $ 149,723 ========= ========= =========
41 C. DEBT Debt consisted of the following (in thousands):
Dec. 27 Dec. 28 Dec. 29 1998 1997 1996 ---------- ---------- ---------- Commercial paper due at various dates through June 18, 1999, at an effective interest rate of 5.5% as of Dec. 27, 1998. Amounts are net of unamortized discounts of $9,639 in 1998, $207 in 1997 and $1,683 in 1996 (a) $ 917,533 $ 29,793 $ 364,817 Senior secured bank debt due on Sept. 15, 1999, advanced under a $1.2 billion credit agreement with a variable interest rate indexed to LIBOR plus 27-1/2 basis points(b) 990,000 Debentures due on April 15, 2009, bearing interest at 9.875%, net of unamortized discount of $1,701 in 1998, $1,867 in 1997 and $2,032 in 1996 198,299 198,133 197,968 Debentures due on Nov. 1, 2027, bearing interest at 7.15%, net of unamortized discount of $5,614 in 1998 and $5,739 in 1997 94,386 94,261 Notes payable, bearing interest at 8.5%, subject to mandatory pro rata amortization of 25% annually commencing Sept. 1, 1998, through maturity on Sept. 1, 2001, net of unamortized discount of $223 in 1998, $383 in 1997 and $555 in 1996 119,777 159,617 159,445 Notes payable due on Nov 1, 2007, bearing interest at 6.625%, net of unamortized discount of $2,022 in 1998 and $2,179 in 1997 97,978 97,821 Senior notes payable due on Dec. 15, 2005, bearing interest at 6.3%, net of unamortized discount of $695 in 1998, $795 in 1997 and $895 in 1996 99,305 99,205 99,105 ---------- ---------- ---------- 1,527,278 1,668,830 821,335 ---------- ---------- ---------- Less amounts payable in one year(c) 198,277 69,697 50,000 ---------- ---------- ---------- Total long-term debt $1,329,001 $1,599,133 $ 771,335 ========== ========== ==========
(a) Commercial paper is supported by $1.1 billion of revolving credit and term loan agreements, $500 million of which matures on June 22, 2003, and $600 million of which matures on June 22, 1999. The company has the option and intention to renew the $600 million facility before June 22, 1999, for an additional 364-day term through June 2000. (b) Senior secured bank debt was collateralized by all personal property assets and four recorded first mortgages of Cypress Media, Inc., a wholly owned subsidiary. Bank debt was paid off on June 26, 1998, with proceeds from the sale of commercial paper. (c) In 1998, this represents $39.9 million for the 8.5% note payable due on Sept. 1, 1999, and $158.4 million of commercial paper due within the next 12 months and which management does not intend to refinance. Interest payments during 1998, 1997 and 1996 were $118.4 million, $87.2 million and $70.9 million, respectively. 42 The following table presents the approximate annual maturities of debt for the years after 1998 (in thousands): 1999 $ 198,277 2000 299,114 2001 39,919 2002 2003 500,000 2004 and thereafter 489,968 ---------- Total $1,527,278 ========== The carrying amounts and fair values of debt as of Dec. 27, 1998, are as follows (in thousands): Carrying Fair Amount Value ---------- ---------- Commercial paper $ 917,533 $ 917,533 9.875% Debentures 198,299 263,309 7.15% Debentures 94,386 109,940 8.5% Notes payable 119,777 128,546 6.625% Notes payable 97,978 106,689 6.3% Senior notes payable 99,305 103,860 ---------- ---------- Total $1,527,278 $1,629,877 ========== ========== D. UNCONSOLIDATED COMPANIES AND JOINT VENTURES Summary financial information for the company's unconsolidated companies and joint ventures that are accounted for under the equity method is as follows (in thousands):
1998 1997 1996 ---------- ---------- ---------- Current assets $ 246,940 $ 212,939 $ 258,037 Property, plant and equipment and other assets 1,260,996 1,158,224 4,076,604 Current liabilities 170,856 143,683 287,782 Long-term debt and other noncurrent liabilities 518,560 394,253 2,893,716 Net sales 782,893 806,587 1,417,668 Gross profit 90,719 62,426 225,307 Net income 56,201 24,428 55,104 Company's share of: Net assets 201,120 197,585 330,267 Net income 23,309 10,800 29,868
43 In 1989, the Detroit Free Press and The Detroit News began operating under a joint operating agreement as the Detroit Newspaper Agency (DNA). Balance sheet amounts for the DNA at Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996, are included above, and the net assets contributed to the DNA are included in "Equity in unconsolidated companies and joint ventures" in the Consolidated Balance Sheet. In January 1997, the company and Tele-Communications, Inc., closed on the sale of the company's interest in all but one of their jointly owned cable systems. The sale of the balance of the cable system was completed in March 1998. See Note G. E. CAPITAL STOCK In 1991, shareholders authorized 2 million shares of Series B preferred stock for future issuance (which is convertible into 20 million shares of common stock). In 1997, the Board of Directors authorized 1,758,242 shares of Series B preferred stock, $1.00 par value per share, and issued 1,754,930 preferred shares in connection with the May 9, 1997, acquisition of four newspapers that were indirectly owned by The Walt Disney Company. Each share of Series B preferred stock is convertible into 10 shares of common stock. If and when dividends and other distributions are declared by the Board of Directors, holders of the Series B preferred stock are entitled to receive the dividends or other distribution paid on the number of shares of the corporation's common stock into which such share of this series is convertible. Each holder of this series is entitled to vote with respect to all matters upon which holders of the corporation's common stock are entitled to vote. The holder of Series B preferred stock has two votes for each preferred share. Concurrent with the 1996 stock split, the company executed a rights agreement to replace a similar agreement that expired on July 10, 1996. The agreement grants each holder of a common share a right, under certain conditions, to purchase from the company a unit consisting of one one-hundredth of a share of preferred stock, at a price of $150, subject to adjustment. The rights provide that in the event the company is a surviving corporation in a merger, each holder of a right will be entitled to receive, upon exercise, common shares having a value equal to two times the exercise price of the right. In the event the company engages in a merger or other business combination transaction in which the company is not the surviving corporation, the rights agreement provides that proper provision shall be made so that each holder of a right will be entitled to receive, upon the exercise thereof at the then-current exercise price of the right, common stock of the acquiring company having a value equal to two times the exercise price of the right. No rights certificates will be distributed until 10 days following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the company's outstanding common stock, or 10 business days following the commencement of a tender offer or exchange offer for 20% or more of the company's outstanding stock. Until such time, the rights are evidenced by the common share certificates of the company. The rights are not exercisable until distributed and will expire on July 10, 2006, unless earlier redeemed or exchanged by the company. The company has the option to redeem the rights in whole, but not in part, at a price of $.01 per right subject to adjustment. The company's Board of Directors has reserved 1,500,000 preferred shares for issuance upon exercise of the rights. 44 In 1998 and 1997, the Series B preferred stock, each share of which is convertible into 10 shares of common stock, and shares of common stock issuable upon exercise of stock options are included in the diluted EPS calculation, but excluded from the basic EPS calculation. The 1998 and 1997 diluted EPS calculations include 17,549,300 and 10,968,313 weighted-average shares of Series B convertible preferred stock, respectively, and 1,744,887 and 1,870,340 weighted-average shares of common stock issuable upon exercise of stock options, respectively. In 1996, the only difference between the basic and diluted EPS calculations is the dilutive impact of options that are included in the diluted EPS calculation. The Employees Stock Purchase Plan provides for the sale of common stock to employees of the company and its subsidiaries at a price equal to 85% of the market value at the end of each purchase period. Participants under the plan received 349,599 shares in 1998, 387,514 shares in 1997 and 453,754 shares in 1996. The purchase price of shares issued in 1998 under this plan ranged between $41.28 and $48.58, and the market value on the purchase dates of such shares ranged from $48.56 to $57.16. The Employee Stock Option Plan provides for the issuance of nonqualified stock options and incentive stock options. Options are issued at prices not less than market value at date of grant and until March 1994 were exercisable at issue date. Options granted thereafter vest in three equal installments over a three-year period from the date of grant. There is no expiration date for the granting of options, but options must expire no later than 10 years from the date of grant. The option plan provides for the discretionary grant of stock appreciation rights (SARs) in tandem with previously granted options, which allow a holder to receive in cash, stock or combinations thereof the difference between the exercise price and the fair market value of the stock at date of exercise. Shares of common stock relating to options outstanding under this plan are reserved at the date of grant. Transactions under the Employee Stock Option Plan are summarized as follows: Number of Weighted-Average Shares Exercise Price Per Share --------- ------------------------ Outstanding Dec. 31, 1995 7,647,314 $ 27.26 Exercised (1,909,690) 25.95 Expired (8,650) 29.54 Forfeited (148,579) 28.70 Granted 1,324,450 39.25 Outstanding Dec. 29, 1996 6,904,845 29.89 Exercised (1,693,765) 26.54 Expired (340,341) 29.00 Forfeited (25,873) 32.55 Granted 1,412,668 51.65 Outstanding Dec. 28, 1997 6,257,534 35.74 Exercised (1,007,792) 28.35 Expired (25,230) 33.88 Forfeited (90,224) 55.61 Granted 1,481,750 49.72 Outstanding Dec. 27, 1998 6,616,038 39.74 45 In 1997, the company established the Long-Term Incentive Plan. The plan rewards participants whose leadership helps the company reach levels of total shareholder return, as defined. The plan covers a single three-year performance period from Jan. 1, 1997, through Dec. 31, 1999. Participants received an aggregate initial grant of 347,218 shares of restricted Knight Ridder common stock. Additional grants, net of forfeitures, resulted in restricted shares outstanding of 314,925 and 322,286 at Dec. 27, 1998 and Dec. 28, 1997, respectively. The grants of common stock are restricted, as the vesting of these shares is triggered upon the occurrence of certain performance goals. In 1997, the company established the Compensation Plan for Nonemployee Directors. The purpose of the plan is to attract and retain the services of qualified individuals who are not employees of the company to serve as members of the Board of Directors. Part of the compensation plan includes the issuance of stock options. Options vest in three equal installments over a three-year period and expire no later than 10 years from the date of grant. In 1997, 200,000 shares were authorized for issuance as options under the plan. Participants were granted 24,000 and 26,000 options in 1998 and 1997, respectively. In addition, 3,333 shares were awarded under the plan as retainer payments to nonemployee directors in 1998. Proceeds from the issuance of shares under these plans are included in shareholders' equity and do not affect income. At Dec. 27, 1998, shares of the company's authorized but unissued common stock were reserved and available for issuance as follows: Shares --------- Employee Stock Option Plan 810,465 Employees Stock Purchase Plan 1,071,507 Nonemployee Directors Plan 146,667 ---------- Total 2,028,639 ========== As required by FAS 123, pro forma information regarding net income and earnings per share has been determined as if the company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free rates of 4.7%, 5.7% and 6.1%; dividend yields of 1.6%, 1.6% and 2.0%; volatility factors of the expected market price of the company's common stock of 0.17, 0.14 and 0.16; and a weighted-average expected life of the option of 6.4, 6.4 and 6.5 years. The weighted-average fair values of the stock options for 1998, 1997 and 1996 were $11.58, $12.44 and $9.65, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the company's stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management's opinion, do not necessarily provide a reliable single measure of the fair value of its stock options. 46 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. In addition, the 15% discount in market value under the Employees Stock Purchase Plan is treated as compensation expense for pro forma purposes. The company's 1998, 1997 and 1996 pro forma information follows (in thousands, except for earnings per share information): 1998 1997 1996 ----------- ----------- ----------- Net income $ 356,777 $ 407,274 $ 264,600 Basic earnings per share 4.52 4.60 2.76 Diluted earnings per share 3.63 4.02 2.72 The pro forma effect on net income is not necessarily representative of the effect in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The exercise price of options outstanding at Dec. 27, 1998, ranged between $22.66 and $57.53. The weighted-average remaining contractual life of those options for 1998, 1997 and 1996 is 7.3, 6.9 and 6.4 years, respectively. The weighted-average exercise price of those options for 1998, 1997 and 1996 is $39.82, $35.77 and $29.96, respectively. 3,882,661, 3,643,950 and 4,305,845 options were exercisable at the end of 1998, 1997 and 1996, respectively. F. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS A summary of the components of net periodic benefit cost for the defined benefit plans and postretirement benefit plans (other benefits) is presented here, along with the total amounts charged to pension expense for multi-employer union defined benefit plans, defined contribution plans and other agreements (in thousands):
Pension Benefits Other Benefits -------------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- -------- -------- -------- -------- Defined benefit plans: Service cost $ 41,994 $ 30,116 $ 28,562 $ 3,390 $ 3,524 $ 3,769 Interest cost 67,864 61,458 56,698 10,380 10,988 11,229 Expected return on plan assets (89,264) (75,151) (65,342) (778) (753) Recognized net actuarial (gain) loss (1,095) 57 749 (829) (324) (324) Amortization of prior service cost 6,418 5,990 6,268 (4,649) (4,508) (4,276) Amortization of transition (asset) obligation (3,999) (4,516) (4,645) -------- -------- -------- -------- -------- -------- Net 21,918 17,954 22,290 7,514 8,927 10,398 Multi-employer union plans 11,731 11,125 9,157 Defined contribution plans 11,681 10,742 9,022 Other 1,695 1,968 1,412 -------- -------- -------- -------- -------- -------- Net periodic benefit cost $ 47,025 $ 41,789 $ 41,881 $ 7,514 $ 8,927 $ 10,398 ======== ======== ======== ======== ======== ========
Service cost in 1998 included approximately $7.0 million related to accelerating the retirement of certain employees. 47 Weighted-average assumptions used each year in accounting for defined benefit plans and postretirement benefits were:
Pension Benefits Other Benefits ------------------ ------------------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Discount rate as of year end 6.8% 7.0% 7.5% 6.8% 7.0% 7.5% Return on plan assets 8.8 8.5 8.5 6.5 6.5 6.5 Rate of compensation increase 4.5 4.5 4.5 4.5 4.5 4.5 Medical trend rate: Projected 7.0 8.0 9.0 Reducing to this percentage in 2001 and thereafter 5.5 5.5 5.5
The assumed health care cost trend rate has a significant effect on the amounts reported. A one-percentage-point change in the assumed health care cost trend rate would have the following effects: 1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components in 1998 $ 607 $ (517) Effect on postretirement benefit obligation as of 12/27/98 $ 4,507 $(3,957) 48 The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet for the company's benefit plans (excluding liabilities of the DNA that are reported net in the Consolidated Balance Sheet under the caption "Equity in unconsolidated companies and joint ventures") (in thousands):
Pension Benefits Other Benefits ----------------------------------------- ----------------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- Change in Benefit Obligation Benefit obligation at beginning of year $ 955,332 $ 796,879 $ 772,964 $ 132,618 $ 121,488 $ 142,571 Service cost 38,230 27,423 27,914 2,266 2,316 2,410 Interest cost 67,864 61,458 56,698 7,114 7,987 8,296 Plan participants' contributions 1,216 1,653 1,435 Amendments 5,666 4,483 13,299 (868) (8,599) Actuarial (gains) losses 35,582 57,444 (51,397) (11,788) 2,695 (14,825) Net acquisitions (divestitures) 51,384 17,225 6,931 (304) Benefits paid (48,775) (43,739) (39,824) (9,329) (10,452) (9,496) ----------- ----------- ----------- ----------- ----------- ----------- Benefit obligation at end of year $ 1,053,899 $ 955,332 $ 796,879 $ 121,229 $ 132,618 $ 121,488 ----------- ----------- ----------- ----------- ----------- ----------- Change In Plan Assets Fair value of plan assets at beginning of year $ 1,058,759 $ 859,911 $ 772,494 $ 12,386 $ 12,400 $ -- Actual return on plan assets 130,259 173,445 106,651 916 843 Acquisitions 59,495 12,124 Company contributions 8,930 9,647 8,466 7,512 7,942 20,461 Plan participants' contributions 1,216 1,653 1,435 Benefits paid (48,775) (43,739) (39,824) (9,329) (10,452) (9,496) ----------- ----------- ----------- ----------- ----------- ----------- Fair value of plan assets at end of year $ 1,149,173 $ 1,058,759 $ 859,911 $ 12,701 $ 12,386 $ 12,400 ----------- ----------- ----------- ----------- ----------- ----------- Funded status of plan (underfunded) $ 95,274 $ 103,427 $ 63,032 $ (108,528) $ (120,232) $ (109,088) Unrecognized net actuarial loss (120,239) (126,768) (84,860) (18,297) (6,724) (9,788) Unrecognized prior service cost 42,159 42,911 44,418 (20,293) (23,529) (27,535) Unrecognized net (asset) obligation at the date FAS 87 was adopted, net of amortization (8,480) (12,576) (16,854) ----------- ----------- ----------- ----------- ----------- ----------- Net prepaid (accrued) benefit cost $ 8,714 $ 6,994 $ 5,736 $ (147,118) $ (150,485) $ (146,411) =========== =========== =========== =========== =========== ===========
Amounts recognized in the Consolidated Balance Sheet consist of:
Pension Benefits Other Benefits ----------------------------------------- ----------------------------------------- 1998 1997 1996 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- ----------- Prepaid benefit cost $ 51,636 $ 56,504 $ 47,983 Accrued benefit liability (42,922) (49,510) (42,247) $ (147,118) $ (150,485) $ (146,411) Additional minimum liability (9,200) (5,922) (14,279) Intangible asset 9,200 5,922 14,279 ----------- ----------- ----------- ----------- ----------- ----------- Net prepaid (accrued) benefit cost $ 8,714 $ 6,994 $ 5,736 $ (147,118) $ (150,485) $ (146,411) =========== =========== =========== =========== =========== ===========
49 Amounts applicable to the company's pension plans with accumulated benefit obligations in excess of plan assets are as follows: 1998 1997 1996 --------- --------- --------- Projected benefit obligation $(119,794) $ (43,497) $ (87,467) Accumulated benefit obligation (106,092) (32,484) (77,021) Fair value of plan assets 68,988 2,529 49,809 Unfunded accumulated benefit obligation (37,104) (29,955) (27,212) Of the plans whose accumulated benefit obligations exceed plan assets, the amounts applicable to qualified plans are as follows: 1998 1997 1996 --------- --------- --------- Projected benefit obligation $ (79,800) $ (2,934) $ (55,632) Accumulated benefit obligation (75,211) (2,934) (52,011) Fair value of plan assets 68,988 2,529 49,809 Unfunded accumulated benefit obligation (6,223) (405) (2,202) Net pension assets are included in "Other" noncurrent assets and net pension liabilities are included in "Employment benefits and other noncurrent liabilities." In 1996, net pension liabilities related to discontinued operations were included in "Net assets of discontinued BIS operations." These net pension liabilities were assumed by corporate in 1997. Substantially all of the assets of the company-administered plans are invested in listed stocks and bonds. In 1996, the $12.4 million funding of the postretirement plan assets was included in "Prepaid expense." In the fourth quarter of 1998, the company changed the method of accounting used to determine the market-related value of plan assets, effective Dec. 29, 1997. The method was changed to: (1) align the method of calculating the return component of net periodic pension costs with the related plans' investment strategy; and (2) to minimize significant year-to-year fluctuations in pension cost caused by financial market volatility. The effect of this change on 1998 results of operations, including the cumulative effect of prior years, was not material. G. ACQUISITIONS AND DISPOSITIONS ACQUISITIONS On May 9, 1997, the company completed the acquisition for $1.65 billion of four newspapers indirectly owned by The Walt Disney Company. The acquisition was accomplished through the merger of a wholly owned subsidiary with and into Cypress Media, Inc. ("Media"), formerly known as ABC Media, Inc., the owner of the four newspapers. Media owns newspapers in Kansas City, Mo., Fort Worth, Texas, Belleville, Ill., and Wilkes-Barre, Pa. The company intends to continue to manage and operate Media as a newspaper company. The acquisition was accounted for under the purchase method. The purchase price was allocated based on the estimated fair market value of net tangible and intangible assets acquired. The fair market value of the net tangible and intangible assets of Media was approximately $317.3 million at date of purchase, 50 including $351.6 million of intangible assets, which are being amortized on a straight-line basis over periods ranging from 10 years to 40 years. The intangible assets acquired primarily represent mastheads, which have an indefinite life, but are being amortized over 40 years. The excess of purchase price over these net assets, approximately $1.33 billion, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. Pursuant to the merger, the company issued 1,754,930 shares of its Series B convertible preferred stock. Each share of preferred stock is convertible into 10 shares of common stock. At the effective time of the merger, Media had $990 million of bank debt, which was assumed by the company. The company's results of operations include Media from May 9, 1997. The pro forma unaudited results of operations, as though the former Media newspapers acquisition had occurred at the beginning of the fiscal year in which the acquisition took place as well as for the comparable preceding year, were as follows (in thousands of dollars, except share data): 1997 1996 ---------- ---------- Operating revenue $3,058,791 $2,873,946 Income before income taxes 695,466 313,038 Net income 413,932 255,602 Earnings per share Basic $ 4.68 $ 2.66 Diluted 4.09 2.22 On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two newspapers in California owned by the E.W. Scripps Company, The Monterey County Herald and the San Luis Obispo County Telegram-Tribune. The exchange was accounted for under the purchase method. The fair market value of the two newspapers received in the exchange was approximately $55.8 million, and that value was allocated to the net tangible and intangible assets of these newspapers. The fair market value of the identified tangible and intangible assets was approximately $50.3 million at date of exchange, including $17.7 million of intangible assets, which are being amortized on a straight-line basis over periods ranging from 10 years to 40 years. The excess of the fair value of these newspapers over their net assets, of approximately $5.5 million, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. The company's results of operations include Boulder through Aug. 24, 1997, and Monterey and San Luis Obispo from that same date forward. DISPOSITIONS Related to Continuing Operations: On March 18, 1998, the company closed on the sale of its remaining interest in a jointly owned cable system with Tele-Communications, Inc. (TCI). On Feb. 2, 1998, the company sold the Post-Tribune in Gary, Ind., to Hollinger International, Inc. The proceeds from these sales were $95.8 million, consisting of $58.1 million in cash and TCI stock with an aggregate market value of $37.7 million. The pretax and after-tax gains on the sales were $75.3 million and $45.0 million, respectively. 51 In December 1997, the company sold its newspapers in Boca Raton, Fla., Long Beach, Calif., Milledgeville, Ga., and Newberry, S.C. The sale of the Boca Raton, Newberry and Milledgeville newspapers to Community Newspaper Holdings, Inc., also included the transfer to the company of The Daily Sun and The Buyer's Guide, a shopper, in Warner Robins, Ga., and The Byron (Ga.) Gazette, a weekly newspaper. The Long Beach newspaper was sold to Garden State Newspapers, Inc., an affiliate of Media News Group. The proceeds from the sale of the four newspapers were $50.7 million. The pretax and after-tax gains from their sale were $18.1 million and $10.3 million, respectively. On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two newspapers in California owned by the E.W. Scripps Company. The exchange resulted in pretax and after-tax gains of $43.2 million and $24.5 million, respectively. In January 1997, the company and TCI closed on the sale of the company's interest in all but one of their jointly owned cable systems. As noted above, the balance of the cable system was sold in March 1998. The total sale price was $377.6 million and resulted in pretax and after-tax gains of $221.8 million and $128.3 million, respectively. In November 1996, the company sold its investment in Netscape Communications Corporation, resulting in an after-tax gain of $8.1 million, net of adjustments in the carrying value of certain other investments. Related to Discontinued Operations: In 1997, the company announced its intention to sell the remaining Business Information Services (BIS) subsidiaries. This decision resulted in the reclassification of the former BIS segment as discontinued operations. The company fully divested the BIS segment with the sale of Technimetrics, Inc., its global diversified information subsidiary, in 1998. On April 13, 1998, the company closed on the sale of Technimetrics to an operating unit of The Thomson Corporation. The proceeds from the sale were $125.0 million and resulted in pretax and after-tax gains of $103.8 million and $60.0 million, respectively. On Nov. 14, 1997, the company sold KRII to M.A.I.D plc for $420 million plus a working capital purchase price adjustment of approximately $15 million. The sale resulted in a pretax gain of $23.6 million and an after-tax gain of $15.3 million. On July 26, 1996, the company sold Knight-Ridder Financial (KRF) to Global Financial Information Corporation for $275 million. The pretax and after-tax gains from the sale of KRF were $155.9 million and $86.3 million, respectively. 52 H. COMPREHENSIVE INCOME The following table presents the components of other comprehensive income for 1998, 1997 and 1996 as shown in the statement of shareholders' equity (in thousands):
1998 1997 1996 -------- -------- -------- Unrealized gains on securities available for sale: Change in unrealized gains, net of taxes of $12,492 in 1998, $716 in 1997 and $17,388 in 1996 $ 18,738 $ (1,086) $(23,870) Less: reclassification adjustment for gains realized in net income, net of taxes of $494 in 1997 and $12,498 in 1996 (585) (17,401) -------- -------- -------- Other comprehensive income $ 18,738 $ (1,671) $(41,271) ======== ======== ========
I. COMMITMENTS AND CONTINGENCIES At Dec. 27, 1998, the company had lease commitments currently estimated to aggregate approximately $79.1 million that expire from 1999 through 2051 as follows (in thousands): 1999 $ 16,552 2000 13,733 2001 10,608 2002 8,623 2003 7,674 2004 and thereafter 21,918 ---------- Total $ 79,108 ========== Payments under the lease contracts were $19.3 million in 1998, $15.6 million in 1997 and $14.2 million in 1996. In connection with the company's insurance program, letters of credit are required to support certain projected worker compensation obligations. At Dec. 27, 1998, the company had approximately $45 million of undrawn letters of credit outstanding. On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and the Detroit Newspaper Agency, which operates both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and the Agency. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative law judge ruled that the strike was caused by the unfair labor practices of the Agency and The Detroit News and ordered that the Agency and the newspapers reinstate all strikers, displacing permanent replacements if necessary. The Agency and the newspapers appealed the decision to the NLRB. On August 27, 1998, the NLRB affirmed certain unfair labor practice findings against The Detroit News and the Agency and reversed certain findings of unfair labor practices against the Agency. The Agency and the newspapers filed a motion to reconsider with the NLRB, that was denied on March 4, 1999. The unions filed an appeal to the U.S. Court of Appeals for District of Columbia Circuit. The Agency and the newspapers filed a motion to dismiss the appeal which is scheduled for hearing on March 23, 1999. Various libel actions and environmental and other legal proceedings that have arisen in the ordinary course of business are pending against the company and its subsidiaries. In the opinion of management, the ultimate liability to the company and its subsidiaries as a result of all legal proceedings, including Detroit, will not be material to its financial position or results of operations, on a consolidated basis. 53 REPORT OF INDEPENDENT AUDITORS Shareholders Knight-Ridder, Inc. We have audited the accompanying consolidated balance sheet of Knight- Ridder, Inc., and subsidiaries as of Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996, and the related consolidated statements of income, cash flows and shareholders' equity for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knight- Ridder, Inc., and subsidiaries at Dec. 27, 1998, Dec. 28, 1997, and Dec. 29, 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note F to the consolidated financial statements, in 1998 the company changed its method of accounting for certain postretirement benefits. /s/ ERNST & YOUNG LLP --------------------- San Jose, California January 22, 1999 54 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 1999 Proxy Statement pages 5 and 6, "Election of Directors" and "Nominees for Election for Three-Year Terms Ending 2002; pages 7 and 8, "Directors Continuing in Office"; page 9, "Section 16 (a) Beneficial Ownership Reporting Compliance"; pages 10 and 11, "Board Committees and Attendance" and "How the Company Compensates Directors"; and page 11, "Certain Relationships and Related Transactions". KNIGHT RIDDER EXECUTIVE COMMITTEE Alvah H. Chapman Jr., 77 Served as chairman of the Executive Committee 1984 to 1995; chairman of the board 1982 to 1989; chief executive officer 1976 to 1988; president 1973 to 1982; executive vice president 1967 to 1973; vice president 1966 to 1967; The Miami Herald general manager 1962 to 1969. B.S., business administration, The Citadel, 1942. Mary Jean Connors, 46 Senior vice president/human resources since 1996; vice president/human resources 1989 to 1996. Served as Philadelphia Newspapers, Inc., vice president/human resources 1988 to 1989; assistant to the senior vice president/news for Knight Ridder 1988; The Miami Herald assistant managing editor/personnel 1985 to 1988; held various editing positions at The Miami Herald 1980 to 1985. B.A., English, Miami University in Oxford, Ohio, 1973. John C. Fontaine, 67 Retired president and a partner in the law firm of Hughes Hubbard & Reed. Served as president 1995 to 1997; executive vice president 1994 to 1995; senior vice president 1987 to 1993; general counsel 1980 to 1993. Prior to that, a partner with Hughes Hubbard & Reed. LL.B., Harvard Law School, 1956; B.A., political science, University of Michigan, 1953. Ross Jones, 56 Senior vice president and chief financial officer since 1993. Served as vice president/finance in 1993; vice president and treasurer of Reader's Digest Association, Inc., 1985 to 1993 and in other positions there 1977 to 1985. Served as manager at Brown Brothers Harriman & Co. 1970 to 1977. Advanced Management Program, Harvard Business School, 1988; M.B.A., finance, Columbia University Business School, 1970; B.A., classics, Brown University, 1965. Frank McComas, 53 Senior vice president/operations since 1996; vice president/operations 1995 to 1996. Served as publisher, The (Columbia) State, 1988 to 1995; publisher, Bradenton Herald, 1980 to 1988; held various positions at The Miami Herald and The Charlotte Observer, 1970 to 1980. Advanced Management Program, Harvard Business School, 1994; B.B.A. in business administration, Kent State University, 1968. 55 P. Anthony Ridder, 58 Chairman of the Executive Committee since 1995; Knight Ridder chairman and CEO since 1995. Served as president 1989 to 1995; president of the Newspaper Division 1986 to 1995; chairman of the Operating Committee since 1985. Served as publisher of the San Jose Mercury News 1977 to 1986; general manager 1975 to 1977; business manager 1969 to 1975. B.A., economics, University of Michigan, 1962. Steven B. Rossi, 49 Senior vice president/operations since December 1998. Served as executive vice president and general manager, Philadelphia Newspapers, Inc., 1992 to 1998; executive vice president 1991 to 1992; senior vice president 1988 to 1991; vice president/finance and CFO 1987 to 1988. Served as vice president and divisional general manager of Amerigas, Inc., 1981 to 1987. M.B.A., The Wharton School of the University of Pennsylvania, 1974; B.A., economics, Ursinus College, 1971. Karen Stevenson, 48 Vice president and general counsel since August 1998. Served as executive vice president, general counsel and secretary of TELE-TV in New York, 1995 to 1997; member of the San Francisco law firm of Howard, Rice, Nemerovski, Canady, Falk & Rabkin, 1990 to 1995; vice president/law and secretary, Transamerica Corporation, 1988 to 1990. J.D., Boalt Hall School of Law, University of California, 1980; B.A., sociology, University of California, Los Angeles, 1971. KNIGHT RIDDER OFFICERS Marshall Anstandig, 50 Vice president/senior labor and employment counsel since August 1998. Served as partner in the law firm of Brown & Bain, P.A., 1996 to 1998; managing partner in law firm of Bryan Cave in Phoenix 1990 to 1996. J.D., Detroit College of Law, Michigan State University, 1974; B.A., political science, Hope College, 1971. Marty Claus, 50 Vice president/news since 1993. Served as Detroit Free Press managing editor/ business and features 1987 to 1992; held various editing positions at the Free Press 1977 to 1987. Held various writing and editing positions at the San Bernardino (Calif.) Sun-Telegram 1970 to 1977. B.A., journalism, Michigan State University Honors College, 1970. Gary R. Effren, 42 Vice president/controller since 1995. Served as assistant vice president/ assistant treasurer 1993 to 1995; assistant to the vice president/finance and treasurer 1989 to 1993; director of corporate accounting 1986 to 1989; business manager of Viewdata Corporation of America 1984 to 1986; manager of financial reporting 1983 to 1984. M.B.A., University of Miami, 1989; B.S., accounting, Rider College, 1978; CPA. Virginia Dodge Fielder, 50 Vice president/research since 1989. Served as vice president/news and circulation research 1986 to 1989; director/news and circulation research 1981 to 1985; editorial research manager, Chicago Sun-Times, 1979 to 1981; held various positions at Lexington Herald-Leader 1976 to 1979. Ph.D., mass communications, Indiana University, 1976; M.A., journalism, Indiana University, 1974; B.A., psychology, Transylvania University, 1970. Clark Hoyt, 56 Vice president/news since 1993. Served as chief of the Knight Ridder Washington Bureau 1987 to 1993; news editor 1985 to 1987; managing editor, The Wichita Eagle, 1981 to 1985; various editing positions, Detroit Free Press, 1977 to 1981; various reporting positions, Detroit Free Press and Washington Bureau, 1968 to 1976. B.A., English literature, Columbia College, 1964. 56 Mindi Keirnan, 43 Vice president/operations since 1996; assistant vice president/assistant to the chairman and CEO 1995 to 1996. Served as assistant to the president 1994 to 1995; managing editor/news, Saint Paul Pioneer Press, 1991 to 1994; various editing positions at Gannett News Service, Crain's Chicago Business, the Detroit Free Press and the Tallahassee Democrat 1977 to 1991. B.S., political science, Florida State University, 1984. Polk Laffoon IV, 53 Vice president/corporate relations since 1994 and corporate secretary since January 1999. Served as assistant to the president 1992 to 1994; assistant circulation director/distribution, The Miami Herald, 1991 to 1992; executive assistant to the vice president/marketing 1989 to 1991; Living Today editor 1987 to 1989. Served as director and vice president/investor relations, Taft Broadcasting Co., 1982 to 1987. M.B.A., marketing, The Wharton School of the University of Pennsylvania, 1970; B.A., English, Yale, 1967. Tally C. Liu, 48 Vice president/finance and advanced technology since 1998. Served as vice president/finance and administration 1994 to 1998; vice president/finance and controller 1993 to 1994; vice president and controller 1990 to 1993. Served as San Jose Mercury News vice president and chief financial officer 1987 to 1990 and in various roles 1983 to 1987; held various finance positions, Boca Raton News, 1978 to 1983. M.B.A., Florida Atlantic University, 1977; B.S., business administration, National Chen-Chi University, 1973; CPA. Larry D. Marbert, 45 Vice president/production and facilities since 1998. Served as Knight Ridder vice president/technology 1994 to 1998; Philadelphia Newspapers, Inc., senior vice president/operations 1991 to 1994; vice president/operations research and planning 1988 to 1991; vice president/production 1986 to 1988; various production positions, Knight Ridder and The Miami Herald, 1977 to 1986. M.S., management science, Auburn University, 1977; B.S., University of North Carolina, business administration, 1976. Alan G. Silverglat, 52 Vice president/treasurer since 1995. Served as senior vice president/finance and planning for Business Information Services Division 1983 to 1995; other BIS positions 1980 to 1983. Formerly with Ernst & Young. B.S., business administration, University of Missouri, 1968; CPA. David Starr, 48 Vice president and chief information officer since June 1998. Served as chief information officer at The Reader's Digest Association, Inc., 1997 to 1998; chief information officer for ITT Corporation, 1994 to 1997; senior vice president, information technology, Citicorp Payment Products, 1986 to 1993; senior manager, Price Waterhouse, 1980 to 1986. B.A., physics, Florida State University, 1972. 57 ITEM 11. EXECUTIVE COMPENSATION 1999 Proxy Statement, page 10, "Board Committees and Attendance"; pages 10 and 11, "How the Company Compensates Directors" and "Certain Relationships and Related Transactions"; page 19 through page 23, "How the Company Compensates Executive Officers"; page 23, "Summary Compensation Table"; page 24, "Stock Option Grants in Last Fiscal Year"; page 25, "Aggregate Stock Option Exercises in Last Fiscal Year and Fiscal Year-End Stock Option Values"; page 26, "Long-Term Incentive Plan Awards in Last Fiscal Year" and "Other Benefits"; and page 27, "Performance of Knight Ridder Common Stock". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 1999 Proxy Statement, page 5, "Information About Knight Ridder Stock Ownership" and page 9, "Stock Ownership of Directors and Officers". See Part II, Item 8, "Financial Statements and Supplementary Data", Note E to the consolidated financial statements. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 1999 Proxy Statement, page 11, "Certain Relationships and Related Transactions". 58 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The following consolidated financial statements of Knight-Ridder, Inc. and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 27, 1998, are included in Item 8: Consolidated Balance Sheet - December 27, 1998, December 28, 1997, and December 29, 1996 Consolidated Statement of Income - Years ended December 27, 1998, December 28, 1997, and December 29, 1996 Consolidated Statement of Cash Flows - Years ended December 27, 1998, December 28, 1997, and December 29, 1996 Consolidated Statement of Shareholders' Equity - Years ended December 27, 1998, December 28, 1997, and December 29, 1996 Notes to consolidated financial statements - December 27, 1998 2. The following consolidated financial statement schedule of Knight-Ridder, Inc. and subsidiaries is included in Item 14(d): Schedule II - Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or have been shown in the consolidated financial statements or notes thereto, and therefore have been omitted from this section. 3. Exhibits No. 2 - Disposition of Assets is incorporated by reference to the Company's Form 8-K dated as of March 18, 1998, filed March 31, 1998. No. 3(i) - Amended and Restated Articles of Incorporation of Knight-Ridder, Inc. (totally amended and restated as of February, 1998) are incorporated by reference to the Company's Form 10-K filed March 13, 1998. (ii) - Bylaws of Knight-Ridder, Inc. (As Amended Through January 28, 1997), are incorporated by reference to the Company's Form 10-Q filed May 9, 1997. No. 4 - Indenture, dated as of April 6, 1989, is incorporated by reference to the Company's Registration Statement on Form S-3, effective April 7, 1989. (No. 33-28010) Rights Agreement, dated as of June 21, 1996, is incorporated by reference to the Company's Form 8-K filed July 9, 1996. 59 Indenture, dated as of October 9, 1997, is Incorporated by reference to the Company's Registration Statement on Form S-3, effective October 10, 1997 (No. 333-37603). No. 10 (a) - Knight-Ridder, Inc. Employee Stock Option Plan (As amended through January 26, 1999) is filed herein. (b) - Knight-Ridder, Inc. Compensation Plan for Nonemployee Directors effective July 1, 1997 (As amended through January 26, 1999) is filed herein. (c) - Knight Ridder Annual Incentive Plan is filed herein. (d) - Consulting Agreement is filed herein. - Stock Purchase Agreement between Knight-Ridder Business Information Services, Inc. and M.A.I.D. plc, dated as of October 1, 1997 is incorporated by reference to the Company's Form 10-Q filed November 12, 1997. - Knight-Ridder, Inc. Long-Term Incentive Plan is incorporated by reference to the Company's Form 10-Q filed on May 9, 1997. - Knight-Ridder Local Incentive Plan is incorporated by reference to the Company's Form 10-K filed on March 20, 1996. - Executive Officer's Retirement Agreement dated December 19, 1991, is incorporated by reference to the Company's Form 10-K filed on March 23, 1994. No. 11 - Statement re Computation of Per Share Earnings is filed herein. No. 12 - Statement re Computation of Earnings to Fixed Charges Ratio From Continuing Operations is filed herein. No. 18 - Change in accounting principle is filed herein. No. 21 - Subsidiaries of the Registrant is filed herein. 60 No. 23 - "Consent of Independent Auditors" is filed herein. No. 24 - "Powers of Attorney" for Thomas P. Gerrity and Kathleen Foley Feldstein are filed herein. "Power of Attorney" for M. Kenneth Oshman is incorporated by reference to the Company's Form 10-K filed on March 10, 1997. "Power of Attorney" for James I. Cash, Jr. is incorporated by reference to the Company's Form 10-K filed on March 20, 1996. "Powers of Attorney" for all other members of the Board of Directors are incorporated by reference to the Company's Form 10-K filed on March 24, 1995. No. 27 - "Financial Data Schedule" is filed herein. (b) Reports on Form 8-K filed during the fourth quarter of 1998: There were no reports on Form 8-K filed during the quarter ended December 27, 1998. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KNIGHT-RIDDER, INC. Dated March 19, 1999 - ----------------------------- ------------------------------------ By P. Anthony Ridder Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated March 19, 1999 - ----------------------------- ------------------------------------ P. Anthony Ridder Chairman and Chief Executive Officer Dated March 19, 1999 - ----------------------------- ------------------------------------ Ross Jones Chief Financial Officer and Senior Vice President/Finance Dated March 19, 1999 - ----------------------------- ------------------------------------ Gary R. Effren Vice President/Controller (Chief Accounting Officer) 62 /s/ James I. Cash, Jr.* ------------------------------------ James I. Cash, Jr. Director /s/ Alvah H. Chapman, Jr.* ------------------------------------ Alvah H. Chapman, Jr. Director /s/ Joan Ridder Challinor * ------------------------------------ Joan Ridder Challinor Director /s/ Kathleen Foley Feldstein* ------------------------------------ Kathleen Foley Feldstein Director /s/ Thomas P. Gerrity* ------------------------------------ Thomas P. Gerrity Director /s/ Barbara Barnes Hauptfuhrer* ------------------------------------ Barbara Barnes Hauptfuhrer Director /s/ Jesse Hill, Jr.* ------------------------------------ Jesse Hill, Jr. Director /s/ M. Kenneth Oshman* ------------------------------------ M. Kenneth Oshman Director /s/ Thomas L. Phillips* ------------------------------------ Thomas L. Phillips Director /s/ P. Anthony Ridder* ------------------------------------ P. Anthony Ridder Director /s/ Randall L. Tobias* ------------------------------------ Randall L. Tobias Director 63 /s/ Gonzalo F. Valdes-Fauli* ------------------------------------ Gonzalo F. Valdes-Fauli Director /s/John L. Weinberg* ------------------------------------ John L. Weinberg Director Dated March 19, 1999 * By Ross Jones - ------------------------------ ------------------------------------ Ross Jones Attorney-in-fact 64 ANNUAL REPORT ON FORM 10-K ITEM 14 (a) (2), (c) and (d) SUPPLEMENTARY DATA CERTAIN EXHIBITS YEAR ENDED DECEMBER 27, 1998 KNIGHT-RIDDER, INC. AND SUBSIDIARIES SAN JOSE, CALIFORNIA 65
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS KNIGHT-RIDDER, INC. AND SUBSIDIARIES (IN THOUSANDS OF DOLLARS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------- -------- -------- -------- -------- ADDITIONS ------------------------------ BALANCE AT CHARGED CHARGED BEGINNING TO COSTS TO BALANCE OF AND OTHER AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------- --------------- -------------- ------------- ----------------- -------------- YEAR ENDED DECEMBER 27, 1998: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES $ 14,963 $ 20,854 $20,079 (2) $ 15,738 VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357 -------- -------- -------- -------- -------- $ 16,320 $ 20,854 $ 20,079 $ 17,095 YEAR ENDED DECEMBER 28, 1997: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES $ 12,685 $ 23,332 $ 752(1) $ 21,806 (2) $ 14,963 VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357 -------- -------- -------- -------- -------- $ 14,042 $ 23,332 $ 752 $ 21,806 $ 16,320 YEAR ENDED DECEMBER 29, 1996: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES $ 14,348 $ 19,315 $ 2,097(1) $ 23,075 (2) $ 12,685 VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357 -------- -------- -------- -------- -------- $ 15,705 $ 19,315 $ 2,097 $ 23,075 $ 14,042
(1) Represents amounts from the former BIS division included under "Income (loss) from discontinued BIS operations" in the Consolidated Statement of Income. (2) Represents uncollectible accounts written-off, net of recoveries, and dispositions of subsidiaries' balances. 66 EX-10.A 2 EXHIBIT 10(A) EXHIBIT 10 (a) KNIGHT-RIDDER, INC. EMPLOYEE STOCK OPTION PLAN (As amended through January 26, 1999) 1. PURPOSE The purpose of this Stock Option Plan (hereinafter referred to as the "Plan") is to attract and retain key employees of Knight-Ridder, Inc. (hereinafter referred to as the "Company") and its subsidiaries, by the grant of options and stock appreciation rights. "Subsidiaries" as used herein shall mean corporations (other than Knight-Ridder, Inc.) or partnerships in an unbroken chain of corporations and/or partnerships beginning with Knight-Ridder, Inc. if, at the time of the granting of the option or stock appreciation right, each of the corporations and partnerships other than the last corporation or partnership in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in a corporation in such chain or at least a 50% partnership interest in such chain. The term "fair market value" of a share of common stock as of any date shall be the mean between the highest and lowest sales price of a share of common stock on the date in question as reported on the composite tape for issues listed on the New York Stock Exchange. If no transaction was reported on the composite tape in the common stock on such date, the prices used shall be the prices reported on the nearest day preceding the date in question. If the common stock is not then quoted on the composite tape, "fair market value" shall be the closing sales price or the mean between the closing bid and asked prices on the date in question, as applicable, as furnished by any member firm of the New York Stock Exchange selected from time to time for that purpose by the Compensation Committee. 2 The term "incentive stock option" shall mean an option described in Section 422(b) of the Internal Revenue Code of 1986, as amended. 2. ADMINISTRATION OF THE PLAN The Plan shall be administered by a committee as appointed from time to time by the Board of Directors of the Company, which committee shall consist of not less than three (3) members of such Board of Directors, all of whom shall be "nonemployee directors" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934. Said committee shall be called the "Compensation Committee." In administering the Plan, the Compensation Committee may adopt rules and regulations for carrying out the Plan. The interpretation and decision with regard to any question arising under the Plan made by the Committee shall, unless overruled or modified by the Board of Directors of the Company, be final and conclusive on all employees of the Company and its subsidiaries participating or eligible to participate in the Plan. 3. STOCK The stock which may be issued and sold pursuant to the exercise of options or stock appreciation rights granted under the Plan may be authorized and unissued common stock or shares of common stock reacquired by the Company and held in treasury of a total number not exceeding 39,200,000* shares. The shares deliverable under the Plan shall be fully paid and nonassessable shares. Any shares, in respect of which an option is granted under the Plan which shall have for any reason expired or terminated, may be again allotted under the Plan. Any shares covered by - -------- * Assumes addition of 7,000,000 shares is approved by Company shareholders at the 1999 Annual Meeting on May 12, 1999. 3 options which have been canceled by reason of the exercise of related stock appreciation rights as provided in the immediately following paragraph or which are used to exercise other options or to satisfy tax withholding obligations shall not be available for other options under the Plan. The exercise of options with respect to which stock appreciation rights shall have been granted shall cause a corresponding cancellation of such stock appreciation rights, and the exercise of stock appreciation rights issued in respect of options shall cause a corresponding cancellation of such options. Each option and stock appreciation right granted under the Plan shall be subject to the requirement and condition that if the Board of Directors shall determine that the listing, registration or qualification upon any securities exchange or under any state or federal law, or the approval or consent of any governmental body is necessary or desirable as a condition of granting such option or stock appreciation right, or the issue or purchase of any shares thereunder, then no such option or stock appreciation right may be exercised in whole or in part unless or until such listing, registration, qualification, approval or consent has been obtained, free of any conditions which are not acceptable to the Board of Directors of the Company. 4. ELIGIBILITY Options and stock appreciation rights will be granted only to persons who are employees of the Company and its subsidiaries (including officers and directors except for persons acting as directors only). The Compensation Committee of the Board of Directors of the Company shall determine in its sole discretion the employees to be granted options, the number of shares subject to each option, the employees to be granted stock appreciation rights and the options with respect to which such stock appreciation rights shall be granted. Subject to the provisions of Section 12 of the Plan, the maximum number of shares with respect to which 4 options or stock appreciation rights, or a combination thereof, may be granted under the Plan to any person in any calendar year is 100,000. 5. PRICE The purchase price under each option shall be determined by the Compensation Committee subject to approval by the Board of Directors of the Company, but such price shall not be less than one hundred percent (100%) of the fair market value of the common stock at the time such option is granted. 6. THE PERIOD OF THE OPTION AND THE EXERCISE OF THE SAME Each option granted under the Plan shall expire no later than ten (10) years from the date such option is granted, but the Compensation Committee may prescribe a shorter period for any individual option or options. The shares subject to the option may be purchased from time to time during the option period, subject to any waiting period or vesting schedule the Compensation Committee may specify for any individual option or options. In order to exercise the option or any part thereof, the employee shall give notice in writing to the Company of his intention to purchase all or part of the shares subject to the option, and in said notice he shall set forth the number of shares as to which he desires to exercise such option, and shall pay for such shares at the time of exercise of such option. Such payment may be made in such manner as the Compensation Committee may specify, which may include cash, delivery to the Company of shares of common stock of the Company, delivery of proceeds of the sale of the option shares by ChaseMellon Shareholder Services on behalf of the employee, and any other manner permitted by law specified by the Committee. At the time of granting an option, the Committee may impose conditions on the right to exercise an option. 5 Except as specified in Sections 9 and 10 below, no option may be exercised except by the Optionee personally while he is in the employ of the Company or its subsidiaries. No Optionee or his legal representative, legatees or distributees, as the case may be, shall be or have any of the rights and privileges of a shareholder of the Company by reason of such option unless and until the shares are issued to him under the terms of the Plan. 7. PROVISIONS REGARDING STOCK APPRECIATION RIGHTS A stock appreciation right granted under the Plan shall entitle the holder thereof to receive from the Company, upon surrender of the related option, payment of an amount, in cash, shares of common stock or a combination thereof, as determined by the Compensation Committee, equal in value to (A) the excess of the fair market value of a share of common stock on the date the stock appreciation right is exercised over the option price provided for in the related option, multiplied by (B) the number of shares with respect to which the stock appreciation right was exercised. A stock appreciation right shall be exercisable during the period commencing on a date specified by the Compensation Committee and ending on the date on which the related option expires or is earlier canceled or terminated. Notwithstanding the preceding sentence, the Compensation Committee may provide for the grant of a stock appreciation right which may be exercised only within a sixty-day period following certain events specified by the Compensation Committee in the grant of such stock appreciation right. Moreover, the Compensation Committee may provide that such stock appreciation right shall be payable only in cash and that, in addition to payment of the amount otherwise due upon exercise of such stock appreciation right, the holder thereof shall receive (unless such stock appreciation right is in tandem with an incentive stock option), an amount equal to the excess of the highest price paid for a share of common stock in the open market or otherwise over the sixty-day period 6 prior to exercise over the fair market value of a share of common stock on the date the stock appreciation right is exercised. In order to exercise the stock appreciation right or any part thereof, the employee shall give notice in writing to the Company of his intention to exercise such right, and in said notice the employee shall set forth the number of shares as to which such employee desires to exercise the stock appreciation right, provided that such right may not be exercised with respect to a number of shares in excess of the number for which the related option could then be exercised. Any limitations on the right to exercise the related option shall also apply to the stock appreciation right. No holder of a stock appreciation right or such holder's legal representatives, legatees or distributees, as the case may be, shall be or have any of the rights and privileges of a shareholder of the Company by reason of such stock appreciation right unless and until the shares are issued to such holder under the terms of the Plan. 8. NON-TRANSFERABILITY OF OPTION AND STOCK APPRECIATION RIGHT No option or stock appreciation right granted under the Plan to an employee shall be transferred by him otherwise than by Will or by the laws of Descent and Distribution, and such option or stock appreciation right shall be exercisable during his lifetime only by him. 9. TERMINATION OF EMPLOYMENT All options granted less than one year before an Optionee's termination of employment shall terminate immediately upon such Optionee's termination of employment. The remaining provisions of this Section 9 shall apply to options granted one year or more before an Optionee's termination of employment. 7 Except as provided below, if an Optionee shall cease to be employed by the Company or one of its subsidiaries, as the case may be, for any reason other than death, disability or retirement pursuant to a retirement plan of the Company or one of its subsidiaries, any option theretofore granted to him which has not been exercised shall forthwith cease and terminate. The Compensation Committee may provide in the grant of any option or in an amendment of such grant that in the event of any such termination of employment (except termination for "cause" as defined below), such option shall be exercisable (solely to the extent it was exercisable on the date of the Optionee's termination of employment) within the ninety days after his termination, but in no event after the expiration of the term of said option prescribed pursuant to Section 6. The Company or any of its subsidiaries shall have "cause" to terminate the Optionee's employment only on the basis of the Optionee's having been guilty of fraud, misappropriation, embezzlement or any other act or acts of dishonesty constituting a felony and resulting or intended to result directly or indirectly in a substantial gain or personal enrichment to the Optionee at the expense of the Company or any of its subsidiaries. Notwithstanding the foregoing, the Optionee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Optionee a copy of a resolution (i) duly adopted by three-quarters (3/4) of the entire membership of the Compensation Committee, or of the Board of Directors of the Company, at a meeting called and held for such purpose after reasonable notice to the Optionee and an opportunity for the Optionee, together with the Optionee's counsel, to be heard before such Committee or Board, as the case may be, and (ii) finding that in the good faith opinion of such Committee or Board, as the case may be, the Optionee was guilty of conduct described in the preceding sentence of this paragraph and specifying the particulars of such conduct in detail. However, an Optionee's right to exercise his outstanding options shall 8 automatically be suspended from the moment the Optionee is notified that the Company has commenced an investigation into whether there are grounds for terminating the Optionee's employment for "cause" until a determination has been made that no such grounds exist. In the case of an Optionee employed by any of the subsidiaries of the Company that were sold during 1997 or 1998 and whose employment with the group consisting of the Company and its subsidiaries ceased as a result of such sale, any option (other than an incentive stock option) theretofore granted to the Optionee which has not been exercised as of the Optionee's termination of employment shall become 100% vested and shall be exercisable within one (1) year after the date of the subsidiary's sale by the Company, but in no event after the expiration of the term of said option prescribed pursuant to Section 6. In the case of any Optionee employed at the Miami, Florida headquarters of the Company at the time of the May 1998 announcement of the reorganization of the Company who terminates employment with the Company because (i) the Optionee's position is eliminated as a result of the reorganization or (ii) the Optionee declines employment at the Company's new headquarters in San Jose, California, any option (other than an incentive stock option) theretofore granted to the Optionee which has not been exercised as of the Optionee's termination of employment shall become 100% vested and shall be exercisable within three (3) years following termination of employment, but in no event after the expiration of the term of said option prescribed pursuant to Section 6. 10. RETIREMENT, DISABILITY OR DEATH All options granted less than one year before an Optionee's retirement, disability, or death shall terminate immediately upon such Optionee's retirement, disability, or death. The 9 remaining provisions of this Section 10 shall apply to options granted one year or more before an Optionee's retirement, disability, or death. In the event of the retirement of an Optionee pursuant to a retirement plan of the Company or one of its subsidiaries, as the case may be, the options theretofore granted to him shall be exercisable during such period of time as the Compensation Committee shall specify in the option grant either at the time of grant or by amendment, which period shall not exceed the first to expire of: (i) one (1) year after the date of such retirement with respect to incentive stock options, (ii) three (3) years after the date of such retirement for Optionees whose retirement date is prior to July 1, 1997, (iii) five (5) years after the date of such retirement for Optionees whose retirement date is on or after July 1, 1997, and (iv) the expiration of the term of said option prescribed pursuant to Section 6. Options not exercisable on the date of an Optionee's retirement shall continue to become exercisable during such period in accordance with the schedule specified by the Compensation Committee pursuant to Section 6; provided that no additional options shall become exercisable following an Optionee's death. In the event of the disability or death of an Optionee while in the employ of the Company or one of its subsidiaries, or during the post-employment period referred to in the immediately preceding paragraph, the options theretofore granted to him shall be exercisable during such period of time as the Compensation Committee shall specify in the option grant either at the time of grant or by amendment, which period shall not exceed the first to expire of the following: (i) one (1) year after the date of such disability or death, with respect to incentive stock options, (ii) three (3) years after the date of such disability if the date of such disability is prior to July 1, 1997, (iii) five (5) years after the date of such disability if the date of such disability is on or after July 1, 1997, (iv) three (3) years after the date of such death, (v) the 10 applicable post-retirement period as set forth in the preceding paragraph, and (vi) the expiration of the term of said option prescribed pursuant to Section 6. Options not exercisable on the date of an Optionee's termination of employment by reason of disability shall continue to become exercisable during such period in accordance with the schedule specified by the Compensation Committee pursuant to Section 6; provided that no additional options shall become exercisable following an Optionee's death. Such option (or the related stock appreciation right) may only be exercised by the personal representative of such decedent or by the person or persons to whom such employee's rights under the option shall pass by such employee's Will or by the laws of Descent and Distribution of the state of such employee's domicile at the time of death, and then only as and to the extent that such employee was entitled to exercise the option on the date of death. 11. WRITTEN AGREEMENT Within a reasonable time after the date of grant of an option, an option and stock appreciation right, or a stock appreciation right related to a previously granted option, a written agreement in a form approved by the Compensation Committee shall be duly executed and delivered to the Optionee. 12. ADJUSTMENT BY REASON OF RECAPITALIZATION, STOCK SPLITS, STOCK DIVIDENDS, ETC. If, after the effective date of this Plan, there shall be any changes in the common stock structure of the Company by reason of the declaration of stock dividends, recapitalization resulting in stock split-ups, or combinations or exchanges of shares by reason of merger, consolidation, or by any other means, then the number of shares available under the Plan, the shares subject to any outstanding options, and the maximum number of shares with respect to 11 which options may be granted to any person shall be equitably and appropriately adjusted by the Board of Directors of the Company as in its sole and uncontrolled discretion shall seem just and reasonable in the light of all the circumstances pertaining thereto. 13. RIGHT TO TERMINATE EMPLOYMENT The Plan shall not confer upon any employee any right with respect to being continued in the employ of the Company and its subsidiaries or interfere in any way with the right of the Company and its subsidiaries to terminate his employment at any time, nor shall it interfere in any way with the employee's right to terminate his employment. 14. WITHHOLDING AND OTHER TAXES The Company or one of its subsidiaries shall have the right to withhold from salary or otherwise or to cause an Optionee (or the executor or administrator of his estate or his legatees or distributees) to make payment of any Federal, State, local or foreign taxes required to be withheld with respect to any exercise of a stock option or a stock appreciation right. An Optionee may elect to have the withholding tax obligation or, if the Compensation Committee so determines, any additional tax obligation with respect to any exercise of a stock option or stock appreciation right satisfied by (a) having the Company or one of its subsidiaries withhold shares otherwise deliverable to the Optionee with respect to such exercise, or (b) delivering shares of common stock to the Company. 15. AMENDMENT TO THE PLAN The Board of Directors shall have the right to amend, suspend or terminate the Plan at any time; provided, however, that no such action shall affect or in any way impair the rights of the holder of any option or stock appreciation right theretofore granted under the Plan; and provided further, that unless first duly approved by the common shareholders of the 12 Company entitled to vote thereon at a meeting (which may be the annual meeting) duly called and held for such purpose, no amendment or change shall be made in the Plan (a) increasing the total number of shares which may be purchased or transferred upon exercise of options or stock appreciation rights under the Plan by all employees; (b) changing the minimum purchase price hereinbefore specified for the optioned shares; (c) changing the maximum option period; (d) increasing the amount that may be received upon exercise of a stock appreciation right; or (e) allowing a stock appreciation right to be exercised after the expiration date of the related option. 16. EFFECTIVE DATE OF THE PLAN The Plan shall be effective as of February 24, 1971. 17. SAVINGS CLAUSE Each option and stock appreciation right shall be governed by the terms of the Plan as in effect on the date of its grant unless the option or stock appreciation right is expressly amended to include one or more Plan provisions adopted after the date of grant. The Compensation Committee shall have authority to amend outstanding options to include any provisions permitted by the Plan as in effect at the time of such amendment. STOCK OPTION GRANT UNDER KNIGHT-RIDDER, INC. EMPLOYEE STOCK OPTION PLAN ------------- THIS STOCK OPTION GRANT dated ____________ __, ____ is made by KNIGHT-RIDDER, INC., hereinafter called the "Company," to ______________, hereinafter called the "Optionee." WITNESSETH, THAT: WHEREAS, the Company, by action of its shareholders, adopted and approved an Employee Stock Option Plan, effective February 24, 1971 and subsequently amended by the shareholders or the Board of Directors or the Executive Committee of the Board from time to time (the "Plan"). WHEREAS, the purpose of the Plan is to enable the Company and its subsidiaries to attract and retain key employees. NOW THEREFORE, the Company hereby grants a non-qualified option under the Plan to the Optionee on the following terms and conditions: 1. AMOUNT OF STOCK SUBJECT TO OPTION: The Company hereby grants to the Optionee the right to purchase _______ shares of authorized and unissued Common Stock of the Company or shares reacquired by the Company and held in Treasury, which stock is to be issued by the Company upon the exercise of this option as hereinafter set forth. This option shall NOT be an incentive stock option as defined in Section 422 of the Internal Revenue Code. 2 2. PURCHASE PRICE/TAXES: The purchase price per share for this option shall be ________________ ($________), one hundred percent (100%) of the fair market value (as defined in the Plan) of the Common Stock at the time the option is granted. Upon or before the exercise of this option or any part thereof, the Optionee will also be required to pay to the Company or make arrangements satisfactory to the Company for the payment of the appropriate amount of federal, state, local and foreign taxes required to be withheld in connection with the exercise before the purchased shares will be issued. The Optionee shall have the right to satisfy applicable withholding obligations by having the Company withhold shares otherwise deliverable to the Optionee upon exercise of the option. 3. PERIOD OF OPTION AND EXERCISE THEREOF: (a) Subject to paragraph 5 below, one-third of the shares subject to this option (rounded up to the nearest whole share) may be purchased at any time following the first anniversary of the date of this grant, an additional one-third of the shares subject to this option (rounded up to the nearest whole share) may be purchased at any time following the second anniversary of the date of this grant, and the remaining shares subject to this option may be purchased at any time following the third anniversary of the date of this grant; provided, however, that in no event may any part of this option be exercised following the ___ day of __________________, 200__. (b) In order to exercise this option or any part thereof, the Optionee shall give notice in writing to the Company of the Optionee's intention to purchase all or part of the shares 3 subject to this option, and in said notice the Optionee shall set forth the number of shares as to which he or she desires to exercise the option, and he or she shall pay for such shares in full at the time of the exercise of such option. Such payment may be made in cash, through the delivery to the Company of shares of common stock of the Company which the Optionee has owned for at least six months with a value equal to the total option price, or through a combination of cash and such shares, and any shares so delivered shall be valued at their fair market value on the date on which the option is exercised. Payment of the purchase price may also be made through the delivery to the Company of the sale proceeds of all or part of the shares of common stock of the Company that are the subject of this option; provided that the Optionee instructs ChaseMellon Shareholder Services ("CMSS") to effect on the date such instruction is given to CMSS (which shall be deemed to be the date of exercise) or as early as practicable thereafter the sale of such number of such shares "at the market" in a broker's transaction (within the meaning of Section 4(4) of the Securities Act of 1933, as amended), the proceeds of which shall be at least equal to the purchase price of this option plus the amount of taxes required to be withheld plus transaction costs. In accordance with these instructions, CMSS shall sell such shares, deliver to the Company the portion of the proceeds of such sale which equals the purchase price of this option plus the amount of taxes required to be withheld and remit the remaining sale proceeds (net of transaction costs), to the Optionee. The notice of exercise must be delivered or, if mailed, postmarked on or before the date on which the right to exercise this option expires. No shares shall be issued to the Optionee until final payment for said shares has been made, and the Optionee shall have none of the rights of a shareholder until said shares are issued to the Optionee. 4 4. NON-TRANSFERABILITY OF OPTION: This option is not transferable otherwise than by Will or by the laws of descent and distribution, and this option shall be exercisable during the Optionee's lifetime only by the Optionee. 5. TERMINATION OF EMPLOYMENT, RETIREMENT OR DEATH OF OPTIONEE: If the Optionee shall cease to be employed by the Company or one of its subsidiaries, as the case may be, for any reason other than (1) death, disability, or retirement pursuant to a retirement plan of the Company or one of its subsidiaries, or (2) the termination of the Optionee's employment for "cause" (as defined below) by the Company or one of its subsidiaries, this option, if not theretofore exercised, shall be exercisable only within three months after such termination, but in no event after the expiration of the term of this option set forth in paragraph 3 above. Notwithstanding the preceding sentence or any other provision of this option grant, if the Optionee's termination of employment for any reason (including death, disability or retirement) occurs within one year of the date of grant of this option, the option shall terminate immediately upon the Optionee's termination of employment. In each case where the option may be exercised for a period following the Optionee's termination of employment other than termination by reason of the Optionee's retirement or disability, the option may be exercised during such period solely to the extent it could have been exercised on the date of the Optionee's termination of employment. In the event that the Optionee's termination of employment is for "cause", this option shall forthwith cease and terminate. The Company or any of its subsidiaries shall have 5 cause to terminate the Optionee's employment only on the basis of the Optionee's having been guilty of fraud, misappropriation, embezzlement or any other act or acts of dishonesty constituting a felony and resulting or intended to result directly or indirectly in a substantial gain or personal enrichment to the Optionee at the expense of the Company or any of its subsidiaries. Notwithstanding the foregoing, the Optionee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Optionee a copy of a resolution (i) duly adopted by three quarters (3/4) of the entire membership of the Compensation Committee of the Board of Directors, or of the Board of Directors of the Company, at a meeting called and held for such purpose after reasonable notice to the Optionee and an opportunity for the Optionee, together with the Optionee's counsel, to be heard before such Committee or the Board of Directors of the Company, as the case may be, and (ii) finding that in the good faith opinion of such Committee or the Board of Directors of the Company, as the case may be, the Optionee was guilty of conduct described in the preceding sentence and specifying the particulars of such conduct in detail. However, the Optionee's right to exercise this option shall be automatically suspended from the moment the Optionee is notified that the Company has commenced an investigation into whether there are grounds for terminating the Optionee's employment for "cause" until a determination has been made that no such grounds exist. In the event of the retirement of the Optionee pursuant to a retirement plan of the Company or one of its subsidiaries, as the case may be, this option shall be exercisable for five (5) years after the date of such retirement, but in no event after the expiration of the term of this option set forth in paragraph 3 above. Options not exercisable on the date of the Optionee's retirement shall continue to become exercisable during such period in accordance with the 6 schedule set forth in paragraph 3(a), but no additional options shall become exercisable following the Optionee's death. In the event of the disability or death of the Optionee while in the employ of the Company or one of its subsidiaries or during any post-employment period during which this option is otherwise exercisable under the Plan and this grant, this option shall be exercisable at any time prior to the expiration of the earliest of (i) five (5) years after the date of such disability, (ii) three (3) years after the date of such death, (iii) five (5) years after the date of the Optionee's retirement, and (iv) the end of the otherwise applicable post-employment exercise period, but in no event after the expiration of the term of this option set forth in paragraph 3 above. Options not exercisable on the date of the Optionee's termination of employment by reason of disability shall continue to become exercisable during such period in accordance with the schedule set forth in paragraph 3(a), but no additional options shall become exercisable following the Optionee's death. In the event of the Optionee's death, this option may only be exercised by the personal representative of the Optionee, or by the person or persons to whom the rights under this option have passed by the Optionee's Will or by the laws of descent and distribution of the state in which the Optionee was domiciled at the time of the Optionee's death, and then this option may only be exercised to the extent that the Optionee was entitled to exercise the same at the time of the Optionee's death. 6. CHANGE IN CAPITAL: If prior to the expiration of this option, there shall be any changes in the Common Stock structure of the Company by reason of the declaration of stock dividends, recapitalization 7 resulting in stock split-ups or combinations or exchanges of shares by reason of merger, consolidation, or by any other means, then the number of shares subject to this option and the purchase price per share shall be equitably and appropriately adjusted by the Board of Directors of the Company as in its sole and uncontrolled discretion shall seem just and reasonable in the light of all the circumstances pertaining thereto. 7. THE RIGHT TO TERMINATE EMPLOYMENT: This option shall not confer upon the Optionee any right with respect to being continued in the employ of the Company and its subsidiaries or interfere in any way with the right of the Company and its subsidiaries to terminate the Optionee's employment at any time, nor shall it interfere in any way with the right of the Optionee to terminate the Optionee's employment. 8. REGISTRATION AND OTHER REQUIREMENTS: This option is subject to the requirement and condition that if the Board of Directors of the Company shall determine that the listing, registration or qualification upon any securities exchange or under any state or federal law, or the approval or consent of any governmental body, or the Optionee's satisfaction of applicable tax withholding obligations or agreement with respect to the disposition of the shares purchased hereunder is necessary or desirable as a condition to the issuance or purchase of any shares subject to this option, then this option may not be exercised in whole or in part unless or until such listing, registration, qualification, approval, consent, satisfaction, or agreement has been obtained, free of any 8 conditions which are not acceptable to the Board of Directors of the Company, and the sale and delivery of stock hereunder is also subject to the above requirements and conditions. 9. INTERPRETATION OF STOCK OPTION GRANT: The interpretation and decision with regard to all questions arising under the Plan or this stock option grant shall be made by the Compensation Committee of the Company's Board of Directors and, unless overruled or modified by the Board of Directors, shall be final and conclusive on the Optionee and the persons to whom the Optionee's rights under this option pass upon his or her death. - ------------------------------- ---------------------------------- Polk Laffoon P. Anthony Ridder Vice President & Secretary Chairman and Chief Executive Officer KNIGHT-RIDDER, INC. KNIGHT-RIDDER, INC. [January 26, 1999] EX-10.B 3 EXHIBIT 10(B) ================================================================================ EXHIBIT 10 (b) KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS EFFECTIVE JULY 1, 1997 ================================================================================ KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS TABLE OF CONTENTS Page ARTICLE I PURPOSE AND INTENT OF PLAN...............................1 ARTICLE II DEFINITIONS............................................. 1 ARTICLE III ANNUAL RETAINER FEE..................................... 3 3.1 Time and Form of Payment................................ 3 3.2 Election to Receive Stock............................... 3 3.3 Determination of Number of Shares of Stock.............. 3 3.4 Registration of Stock................................... 4 ARTICLE IV BOARD MEETING AND COMMITTEE FEES........................ 4 4.1 Board Meeting Fee....................................... 4 4.2 Committee Meeting Fee................................... 4 4.3 Committee Chairperson Fee............................... 4 ARTICLE V ANNUAL OPTION GRANTS.................................... 5 5.1 Grant of Options........................................ 5 5.2 Vesting of Options; Expiration.......................... 5 5.3 Exercise of Options Following Termination of Service.... 5 5.4 Time and Manner of Exercise of Options.................. 6 5.5 Restrictions on Transfer................................ 7 ARTICLE VI SPECIAL PROVISIONS FOR OUTSIDE DIRECTORS................ 7 6.1 Outside Directors Eligible for Phantom Share Grant...... 7 6.2 Outside Directors Eligible for Retirement Plan.......... 8 ARTICLE VII SHARES AVAILABLE UNDER PLAN............................. 8 ARTICLE VIII RECAPITALIZATION OR REORGANIZATION...................... 8 8.1 Authority of the Company and Shareholders............... 8 8.2 Change in Capitalization................................ 9 ARTICLE IX TERMINATION AND AMENDMENT OF THE PLAN................... 9 9.1 Termination............................................. 9 9.2 General Power of Board.................................. 9 9.3 When Director Consent Required..........................10 i ARTICLE X ADMINISTRATION OF PLAN..................................10 ARTICLE XI MISCELLANEOUS...........................................10 11.1 Tax Withholding.........................................10 11.2 No Right to Reelection..................................10 11.3 Unfunded Plan...........................................10 11.4 Other Compensation Arrangements.........................11 11.5 Securities Law Restrictions.............................11 11.6 Compliance with Rule 16b-3..............................11 11.7 Expenses................................................11 11.8 Governing Law; Venue....................................11 ii KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS (AS AMENDED THROUGH JANUARY 26, 1999) The KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS is hereby established by Knight-Ridder, Inc. effective July 1, 1997. ARTICLE I PURPOSE AND INTENT OF PLAN The purpose of the Plan is to attract and retain the services of qualified individuals who are not employees of the Company to serve as members of the Board. This Plan sets forth the terms of compensation to be provided to such Directors for their services as members of the Board of the Company. Articles III, IV and V provide for different types of compensation payable to all Directors. Article VI provides for grants of Phantom Share Units to certain Outside Directors and for participation in the Company's Retirement Plan for other Outside Directors. This Plan and the Retirement Plan reflect all compensation programs in effect for Directors. ARTICLE II DEFINITIONS As used in this Plan, the following terms shall have the meaning hereinafter set forth: 2.1 "Annual Retainer Fee" means the annual fee payable to a Director for service on the Board. The Annual Retainer Fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The Annual Retainer Fee shall be pro-rated on a quarterly basis for a Board member who serves less than an entire calendar year. 2.2 "Beneficiary" means the person designated by the Director to receive benefits hereunder following the death of the Director or, if the Director fails to so designate, the Director's estate. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Common Stock" means the Common Stock of the Company, par value $.02 1/12 per share. 1 2.6 "Company" means Knight-Ridder, Inc., a Florida corporation, or any successor legal entity. 2.7 "Disability" means a Director's physical or mental condition which is expected to render the Director unable to perform his or her usual duties or any comparable duties for the Company. The determination of a Director's Disability will be made by the Board in its sole discretion. 2.8 "Director" means a member of the Board who is not an employee of the Company or any of its subsidiaries or affiliates. 2.9 "Effective Date" means July 1, 1997. 2.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.11 "Fair Market Value" means the mean between the highest and lowest sales price of a share of Common Stock on the date in question as reported on the composite tape for issues listed on the New York Stock Exchange. If no transaction was reported on the composite tape in the Common Stock on such date, the prices used shall be the prices reported on the nearest day preceding the date in question. If the Common Stock is not then quoted on the composite tape, "fair market value" shall be the closing sales price on the mean between the closing bid and asked prices on the date in question, as applicable, as furnished by any member firm of the New York Stock Exchange selected from time to time for that purpose by the Board. 2.12 "Option" means an option to purchase shares of Common Stock awarded to a Director pursuant to the Plan, which option shall not be intended to qualify, and shall not be treated, as an "incentive stock option" within the meaning of Section 422 of the Code. 2.13 "Outside Director" means any Director who is not, and never was, an employee of the Company or any of its subsidiaries or affiliates. 2.14 "Phantom Share Unit" means a bookkeeping unit representing one share of Common Stock. 2.15 "Plan" means this Knight-Ridder, Inc. Compensation Plan for Nonemployee Directors. 2.16 "Retirement" means the Termination of Service of a Director at or after age sixty-five (65). 2.17 "Retirement Plan" means the Knight-Ridder, Inc. Retirement Plan for Outside Directors, a copy of which is attached hereto as Appendix Three. 2 2.18 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. 2.19 "Termination of Service" shall mean cessation of service as a Director of the Company. ARTICLE III ANNUAL RETAINER FEE 3.1 TIME AND FORM OF PAYMENT. The Annual Retainer Fee is payable in equal quarterly payments on the date of the Board's regularly scheduled quarterly meeting, except as provided in Section 3.3 concerning payment in Common Stock. Through the date of the first quarterly meeting in 1998, each Director shall receive his or her quarterly payment of the Annual Retainer Fee entirely in cash. Effective with the date of the second quarterly meeting in 1998, one-half of the quarterly payment of the Annual Retainer Fee shall be paid in Common Stock. The balance of the quarterly payment of the Annual Retainer Fee shall be paid in cash or, if the Director elects, in the manner described below, in Common Stock or a combination of cash and Common Stock. 3.2 ELECTION TO RECEIVE STOCK. On or before April 1, 1998, any Director who desires to receive any portion of the balance of each quarterly payment of the Annual Retainer Fee due for the remainder of 1998 in Common Stock shall so indicate on a written election form filed with the Secretary of the Company. On or before November 30 of any year, any Director who desires to receive any portion of the balance of the Annual Retainer Fee due for the succeeding calendar year in Common Stock shall so indicate on a written election form filed with the Secretary of the Company. A newly elected Director may make such an election with respect to one-half of his or her pro-rated Annual Retainer Fee for the remainder of the calendar year within one month following his or her election to the Board. Any such election shall remain in effect for each succeeding calendar year unless the Director has amended or revoked the election in writing on or before November 30 of the preceding calendar year. 3.3 DETERMINATION OF NUMBER OF SHARES OF STOCK. The number of shares of Common Stock to be paid to each Director shall be determined by dividing the amount of the Annual Retainer Fee to be paid in Common Stock by the Fair Market Value of a share of Common Stock on the date of payment, described in the next sentence. The date of payment of that portion of the Annual Retainer Fee to be paid in Common Stock shall be the fifth business day before the date of the regularly scheduled quarterly meeting of the Board. 3 3.4 REGISTRATION OF STOCK. The appropriate number of shares of Common Stock shall be registered in the name of the Director and shall be delivered to the Director by paperless transfer effected through records maintained by the Depository Trust Company (the "DTC"). Such registration shall occur as soon as possible after the date for payment of such Common Stock, as provided above. Upon registration, the Director shall have all the rights and privileges of a stockholder as to such shares, including the right to receive dividends and the right to vote such shares. The shares of Common Stock paid to the Director hereunder are immediately vested upon payment, are not forfeitable to the Company for any reason and shall not be subject to any restrictions on transfer (other than those imposed under applicable law or under any trading policy of the Company). ARTICLE IV BOARD MEETING AND COMMITTEE FEES 4.1 BOARD MEETING FEE. Each Director also shall receive a fee for attendance, either in person or by electronic medium, at each meeting of the Board. The Board meeting fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The Board meeting fee shall be paid in cash on the date of the Board meeting. 4.2 COMMITTEE MEETING FEE. Each Director also shall receive a fee for attendance, either in person or by electronic medium, at each meeting of a committee of the Board on which the Director serves. The committee meeting fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The committee meeting fee shall be paid in cash on the date of the committee meeting. 4.3 COMMITTEE CHAIRPERSON FEE. Each Director who serves as chairperson of a committee of the Board shall receive an additional fee for such service. The annual committee chairperson fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The committee chairperson fee shall be paid in quarterly installments in cash on the date of each regularly scheduled quarterly meeting of the Board. The committee chairperson fee shall be pro-rated on a quarterly basis for service as chairperson of a committee for less than a full year. 4 ARTICLE V ANNUAL OPTION GRANTS 5.1 GRANT OF OPTIONS. Beginning with December 1997, an annual option grant will be made by the Compensation Committee of the Board to each Director to purchase such number of shares of Common Stock of the Company as may be established by the Board. The number of options to be granted on an annual basis is set forth on Appendix One hereto, which the Board may amend from time to time. Such Option shall have a per share exercise price equal to the Fair Market Value of the Common Stock on the date of grant, which shall be determined by the Compensation Committee of the Board, and shall be subject to the vesting schedule provided in Section 5.2 and to the other terms and conditions provided for herein. 5.2 VESTING OF OPTIONS; EXPIRATION. One-third of the Options granted in any year shall vest and become exercisable on the first, second and third annual anniversaries of the date of grant. Each Option granted hereunder shall expire no later than ten (10) years after the date the Option is granted, but may expire before such date as provided in Section 5.3. 5.3 EXERCISE OF OPTIONS FOLLOWING TERMINATION OF SERVICE. (a) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DISABILITY OR RETIREMENT. If a Director ceases to be a member of the Board by reason of Disability or Retirement, all Options granted to such Director may be exercised by the Director at any time within five years after the date of Termination of Service. Options not exercisable at the beginning of the five-year period will become exercisable during such five-year period as if the Director had not Terminated Service, in accordance with Section 5.2, above. At the end of such five-year period, all Options not exercised shall expire. (b) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DEATH. If a Director ceases to be a member of the Board by reason of death, or if a former Director dies during the five-year period following Termination of Service due to Disability or Retirement, all Options granted to such Director may be exercised by such Director's estate, personal representative or beneficiary, as the case may be, at any time within the first to expire of the following periods: (i) three years after the date of the Director's death or (ii) five years after the date of the Director's Termination of Service. Options not exercisable at the date of death will become exercisable during such post-Termination period as if the Director had not died, in accordance with Section 5.2, above. At the end of such period, all Options not exercised shall expire. (c) EXERCISE FOLLOWING OTHER TERMINATIONS OF SERVICE. If a Director ceases to be a member of the Board for any reason other than Disability, Retirement or Death, then (i) the Director shall have the right, subject to the terms and conditions hereof, to exercise the Option, to the extent it has vested as of the date of such Termination of Service, at any time 5 within three months after the date of such termination, and (ii) the unvested portion of any Options awarded to the Director shall be forfeited as of the date of Termination of Service. 5.4 TIME AND MANNER OF EXERCISE OF OPTIONS. (a) NOTICE OF EXERCISE. Subject to the other terms and conditions hereof, a Director (or other person exercising such options) may exercise any Options, to the extent such Options are vested, by giving written notice of exercise to the Company; provided, however, that in no event shall an Option be exercisable for a fractional share. The date of exercise of an Option shall be the later of (i) the date on which the Company receives such written notice or (ii) the date on which the conditions provided in Section 5.4(b) are satisfied. (b) PAYMENT. Payment for the shares of Common Stock to be received upon the exercise of Options must be made at the date of exercise of such Options and may be made in cash or by delivery to the Company of shares of Common Stock already owned by the Director (or other person exercising such Options) the Fair Market Value of which on the date of exercise is equal to the total exercise price, or in a combination of cash and shares. Payment of the exercise price in shares of Common Stock shall be made by (i) delivering to the Company the share certificate(s) or other evidence of ownership representing the required number of shares, with the Director (or other person exercising such Options) signing his or her name on the back, (ii) attaching executed stock powers to such share certificate(s) or (iii) paperless transfer of the required number of shares effected through records maintained by the DTC. Such shares shall be endorsed to the Company. The signature of the Director or other owner must be guaranteed by a commercial bank or trust company or by a brokerage firm having membership on the New York Stock Exchange. Payment of the purchase price may also be made through the delivery to the Company of the sale proceeds of all or part of the shares of common stock of the Company that are the subject of this option; provided that the Optionee instructs ChaseMellon Shareholder Services ("CMSS") to effect on the date such instruction is given to CMSS (which shall be deemed to be the date of exercise) or as early as practicable thereafter the sale of such number of such shares "at the market" in a broker's transaction (within the meaning of Section 4(4) of the Securities Act of 1933, as amended), the proceeds of which shall be at least equal to the purchase price of this option plus the amount of taxes required to be withheld plus transaction costs. In accordance with these instructions, CMSS shall sell such shares, deliver to the Company the portion of the proceeds of such sale which equals the purchase price of this option plus the amount of taxes required to be withheld and remit the remaining sale proceeds (net of transaction costs), to the Optionee. [Exercise of any Options shall comply with Rule 16b-3 of the Exchange Act.] (c) STOCKHOLDER RIGHTS. A Director shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until 6 the shares have been issued to the Director, by delivery of stock certificates or by paperless transfer pursuant to Section 5.4(e), and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Director shall become the holder of record thereof. (d) LIMITATION ON EXERCISE. No Option shall be exercisable unless the Common Stock subject thereto has been registered under the Securities Act and qualified under applicable state "blue sky" laws in connection with the offer and sale thereof, or the Company has determined that an exemption from registration under the Securities Act and from qualification under such state "blue sky" laws is available. (e) ISSUANCE OF SHARES. Subject to the foregoing conditions, as soon as is reasonably practicable after its receipt of a proper notice of exercise and payment of the exercise price of the Option for the number of shares with respect to which the Option is exercised, the Company shall deliver to the Director (or such other person who exercised the Option), at the principal office of the Company or at such other location as may be acceptable to the Company and the Director (or such other person), one or more stock certificates for the appropriate number of shares of Common Stock issued in connection with such exercise. Alternatively, the Company may effect such issuance of Shares by paperless transfer through records maintained by the DTC. Such shares shall be fully paid and nonassessable and shall be issued in the name of the Director (or such other person). 5.5 RESTRICTIONS ON TRANSFER. An Option may not be transferred, pledged, assigned, or otherwise disposed of, except by will or by the laws of descent and distribution provided, however, that the Board may, subject to such terms and conditions as the Board shall specify, permit the transfer of an Option to a Director's family members or to one or more trusts established solely for the benefit of one or more of such family members. The Option shall be exercisable, during the Director's lifetime, only by the Director or by the person to whom the Option has been transferred in accordance with the previous sentence. A transferee's rights under an Option shall be no greater than the rights held by the Director under said Option. No assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution, or as permitted under this Section, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect. ARTICLE VI SPECIAL PROVISIONS FOR OUTSIDE DIRECTORS 6.1 OUTSIDE DIRECTORS ELIGIBLE FOR PHANTOM SHARE GRANT. Each Outside Director shall receive grants of Phantom Share Units as described in Appendix 7 Two to this Plan provided that such Outside Director either (i) was a Board member as of July 1, 1996 and was under age sixty-five on that date or (ii) began service as a Director of the Company on or after July 1, 1996. The Outside Directors who are eligible to receive grants of Phantom Share Units are referred to in the Plan, including Appendix Two, as "Eligible Outside Directors." 6.2 OUTSIDE DIRECTORS ELIGIBLE FOR RETIREMENT PLAN. An Outside Director who was age sixty-five or over on July 1, 1996 is not eligible to receive a grant of a Phantom Share Unit but is eligible to participate in the Retirement Plan. ARTICLE VII SHARES AVAILABLE UNDER PLAN Subject to the provisions of Article VIII of the Plan, the maximum number of shares of Common Stock which may be issued under the Plan in payment of a Director's Annual Retainer Fee or upon exercise of Stock Options shall not exceed 200,000 shares (the "Share Limit"). Either authorized and unissued shares of Common Stock or treasury shares may be delivered pursuant to the Plan. For purposes of determining the number of shares that remain available for issuance under the Plan, the following rules shall apply: (a) the number of shares granted under the Plan or subject to any Option granted under the Plan shall be charged against the Share Limit; and (b) the Share Limit (as reduced under clause (a)) shall be increased by: (i) the number of shares subject to an Option which lapses, expires or is otherwise terminated without the issuance of such shares, (ii) the number of shares tendered to pay the exercise price of an Option, and (iii) the number of shares withheld to satisfy any tax withholding obligations of a Director with respect to any shares or other payments hereunder. ARTICLE VIII RECAPITALIZATION OR REORGANIZATION 8.1 AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the Plan shall 8 not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 8.2 CHANGE IN CAPITALIZATION. Notwithstanding any other provision of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, reorganization, merger, consolidation, stock split, combination or exchange of shares or any other significant corporate event affecting the Common Stock, the Board in its discretion, may make (i) such proportionate adjustments as it considers appropriate (in the form determined by the Board in its sole discretion) to prevent diminution or enlargement of the rights of Directors under the Plan with respect to the aggregate number of shares of Common Stock authorized for payment as Annual Retainer Fee under the Plan, for grants of Options under the Plan, the number of shares of Common Stock covered by each outstanding Option and the exercise prices in respect thereof, the number of shares of Common Stock covered by future Option grants and the number of Phantom Share Units credited to a Director's Phantom Share Account and/or (ii) such other adjustments as it deems appropriate. The Board's determination as to what, if any, adjustments shall be made shall be final and binding on the Company and all Directors. ARTICLE IX TERMINATION AND AMENDMENT OF THE PLAN 9.1 TERMINATION. The Plan shall terminate at such date as determined by the Board in its sole discretion. Termination of the Plan will not result in accelerated vesting of Options previously granted or payment of an Outside Director's Phantom Share Account before the date provided for in Appendix Two. Vesting of Options shall continue as described in Article V and payment of the Phantom Share Account will occur as provided in Appendix Two. 9.2 GENERAL POWER OF BOARD. Notwithstanding anything herein to the contrary, the Board may at any time and from time to time terminate, modify, suspend or amend the Plan in whole or in part; provided, however, that no such termination, modification, suspension or amendment shall be effective without shareholder approval if such approval is required to comply with any applicable law or stock exchange rule. 9 9.3 WHEN DIRECTOR CONSENT REQUIRED. The Board may not alter, amend, suspend, or terminate the Plan without the consent of any Director to the extent that such action would adversely affect his or her rights with respect to Common Stock or Options that have previously been granted or with respect to the amount then credited to the Outside Director's Phantom Share Account, including the right to continued crediting of dividend equivalents. ARTICLE X ADMINISTRATION OF PLAN The Board will be responsible for administering the Plan. The Board will have authority to adopt such rules as it may deem appropriate to carry out the purposes of the Plan, and shall have authority to interpret and construe the provisions of the Plan and any agreements and notices under the Plan and to make determinations pursuant to any Plan provision. Each interpretation, determination or other action made or taken by the Board pursuant to the Plan shall be final and binding on all persons. ARTICLE XI MISCELLANEOUS 11.1 TAX WITHHOLDING. The Company shall have the right to withhold from payments made to a Director or Beneficiary (under the Plan or otherwise), or to cause a Director or Beneficiary to pay or make arrangements satisfactory to the Company for the payment of any federal, state, local or foreign taxes required to be withheld with respect to any award or payment under the Plan. 11.2 NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. 11.3 UNFUNDED PLAN. This Plan is unfunded. Amounts payable under the Plan will be satisfied solely out of the general assets of the Company subject to the claims of the Company's creditors. No Director, Beneficiary or any other person shall have any interest in any fund or in any specific asset of the Company by reason of any amount credited to him hereunder, nor shall any Director, Beneficiary or any other person have any right to receive any distribution under the Plan except as, and to the extent, expressly provided in the Plan. 10 11.4 OTHER COMPENSATION ARRANGEMENTS. Payments received by a Director under any grant made pursuant to the provisions of the Plan shall not be included in, nor have any effect on, the determination of benefits under any other arrangement provided by the Company, including the Retirement Plan. 11.5 SECURITIES LAW RESTRICTIONS. The Company may require each Director purchasing or acquiring shares of Common Stock pursuant to the Plan to agree with the Company in writing that such Director is acquiring the shares for investment and not with a view to the distribution thereof. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission or any exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. No shares of Common Stock shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws. 11.6 COMPLIANCE WITH RULE 16B-3. The Plan is intended to comply with Rule 16b-3 under the Exchange Act and the Company shall interpret and administer the provisions of the Plan in a manner consistent therewith. 11.7 EXPENSES. The costs and expenses of administering the Plan shall be borne by the Company. 11.8 GOVERNING LAW; VENUE. The Plan shall be construed in accordance with the laws of the State of Florida. Any legal action or proceeding hereunder may be initiated only in Santa Clara County, California. 11 KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS APPENDIX ONE AMOUNTS OF COMPENSATION AS OF JULY 1, 1997 PLAN SECTION NUMBER FORM OF COMPENSATION AMOUNT - ------------------- -------------------- ------ 2.1 Annual Retainer Fee $ 30,000 4.1 Board Meeting Fee $ 1,500 4.2 Committee Meeting Fee $ 1,000 4.3 Committee Chairperson Annual Fee $ 5,000 5.1 Annual Option Grant 2,000 Options Appendix Two, Annual Phantom Share Grant, Section C Outside Directors 600 Share Units KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS APPENDIX TWO PHANTOM SHARE UNITS FOR ELIGIBLE OUTSIDE DIRECTORS A. ESTABLISHMENT OF PHANTOM SHARE ACCOUNTS. There shall be established on the records of the Company for each Eligible Outside Director a Phantom Share Account to which shall be credited that number of Phantom Share Units as provided herein. The crediting of Phantom Share Units to an Eligible Outside Director shall not confer on the Eligible Outside Director any rights as a shareholder of the Company. B. CREDITING OF PHANTOM SHARE UNITS; STATEMENTS. As of the date of the Board's regularly scheduled quarterly meeting for the last quarter of 1997, the Phantom Share Account of each Eligible Outside Director who also was a Director on July 1, 1996 will be credited with nine hundred (900) Phantom Share Units. The Phantom Share Account of each Eligible Outside Director who became a Director after July 1, 1996 will be credited with seven hundred fifty (750) Phantom Share Units. As of the date of each regularly scheduled quarterly meeting of the Board thereafter, the Phantom Share Account of each Eligible Outside Director shall be credited with one-quarter of the number of annual Phantom Share Units to be credited to Eligible Outside Directors, as established by the Board. The number of annual Phantom Share Units currently in effect is set forth on Appendix One to the Plan, which the Board may amend from to time. The Company will, on a quarterly basis, furnish each Eligible Outside Director with a statement setting forth the number of Phantom Share Units then credited to such Eligible Outside Director's Phantom Share Account and the value of such account as of the end of the preceding calendar quarter and all credits made to the Phantom Share Account during such quarter. C. DIVIDEND EQUIVALENTS ON PHANTOM SHARE UNITS. In the event that the Company pays any cash or other dividend or makes any other distribution in respect of the Common Stock, the Phantom Share Account of each Eligible Outside Director will be credited with an additional number of Phantom Share Units (including fractions thereof) determined by multiplying the number of Phantom Share Units then credited to such Account by the result obtained by dividing (i) the amount of cash, or the value (as determined by the Board) of any securities or other property, paid or distributed in respect of one outstanding share of Common Stock by (ii) the Fair Market Value of a share of Common Stock on the date of such payment or distribution. Such credit shall be made effective as of the date of payment of the dividend or other distribution in respect of the Common Stock. In addition, as of the date of the Board's regularly scheduled quarterly meeting for the last quarter of 1997, the Phantom Share Account of each Eligible Outside Director will be credited with an additional number of Phantom Share Units determined as if (a) the Eligible Outside Director's Phantom Share Account were established as of the later of July 1, 1996 or the date the Eligible Outside Director became a Director of the Company, (b) there had been credited to such Account 150 Phantom Share Units on July 1, 1996 and on the date of each quarterly meeting of the Board thereafter through September 30, 1997 during all of which quarter the Eligible Outside Director served as a Director of the Company and (c) dividend equivalents as described in this Section had been credited on the date of each dividend on Common Stock beginning July 1, 1996 and through September 30, 1997. D. PAYMENT OF PHANTOM SHARE ACCOUNT. The value of an Eligible Outside Director's Phantom Share Account shall be paid in a lump sum in cash to the Eligible Outside Director as soon as practicable (but in no event more than 60 days) after the Eligible Outside Director's Termination of Service. The value of the Eligible Outside Director's Phantom Share Account shall be the product of the number of Phantom Share Units credited to the Eligible Outside Director's Phantom Share Account on the date of payment multiplied by the Fair Market Value of the Common Stock on such date. 1. DEATH. In the event of the death of an Eligible Outside Director before payment of his or her Phantom Share Account, the value of the Eligible Outside Director's Phantom Share Account, determined as provided above, will be distributed in a lump sum in cash to the Eligible Outside Director's Beneficiary or Beneficiaries (or, in the absence of any Beneficiary, to the Eligible Outside Director's estate). 2. DESIGNATION OF BENEFICIARY. Each Eligible Outside Director may designate a Beneficiary to receive the Phantom Share Account due under the Plan upon the Eligible Outside Director's death by executing a Beneficiary designation form. An Eligible Outside Director may change an earlier Beneficiary designation by executing a later Beneficiary designation form. A Beneficiary designation is not binding on the Company until the Company receives the Beneficiary designation form. If no designation is made or no designated Beneficiary is alive (or in the case of an entity designated as a Beneficiary, in existence) at the time of the death of the Eligible Outside Director, payment due under the Plan will be made to the Eligible Outside Director's estate. E. RESTRICTIONS ON TRANSFER. The Company shall pay the value of the Phantom Share Account only to the Eligible Outside Director or his or her estate or the Beneficiary designated under the Plan to receive such amount. Neither an Eligible Outside Director nor his or her Beneficiary shall have any right to anticipate, alienate, sell, transfer, assign, pledge, encumber or change any benefits to which he or she may become entitled under the Plan, and any attempt to do so shall be void. The value of the Eligible Outside Director's Phantom Share Account shall not be subject to attachment, execution by levy, garnishment or other legal or equitable process for an Eligible Outside Director's or Beneficiary's debts or other obligations. KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS APPENDIX THREE (SEE ATTACHMENT) APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS ================================================================================ KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS' RESTATED EFFECTIVE JULY 1, 1996 ================================================================================
APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS TABLE OF CONTENTS Page ARTICLE I PURPOSE AND INTENT OF PLAN................................................1 ARTICLE II ORIGINAL EFFECTIVE DATE OF THE PLAN; PARTICIPATE..........................1 ARTICLE III DEFINITIONS...............................................................1 ARTICLE IV ELIGIBILITY FOR BENEFITS..................................................2 4.1 Retirement Benefit........................................................2 4.2 Disability Benefit........................................................2 4.3 Limitation on Receipt of Benefit..........................................2 ARTICLE V AMOUNT OF BENEFIT.........................................................3 5.1 Retirement Benefit........................................................3 5.2 Disability Benefit........................................................3 ARTICLE VI FORM, MANNER AND DURATION OF PAYMENT OF BENEFIT...........................3 ARTICLE VII ADMINISTRATION............................................................4 7.1 Administrative Committee..................................................4 7.2 Action by Committee; Resignation; Vacancies; Compensation.................4 7.3 Delegation of Authority; Legal, Accounting, Clerical and Other Services...4 7.4 Interpretation of Provisions..............................................4 7.5 Liability of Committee....................................................4 ARTICLE VIII TERMINATION AND AMENDMENT OF THE PLAN.....................................5 8.1 Amendment of the Plan.....................................................5 8.2 Termination...............................................................5 8.3 Effect of Amendment or Termination........................................5 ARTICLE IX MISCELLANEOUS.............................................................5 9.1 No Right to Reelection....................................................5 9.2 Unfunded Plan.............................................................5
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PAGE 9.3 Other Compensation Arrangements...........................................5 9.4 Expenses..................................................................5 9.5 Governing Law; Venue......................................................5
ii APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS The KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS is restated by Knight-Ridder, Inc. effective July 1, 1996. ARTICLE I PURPOSE AND INTENT OF PLAN This plan shall be known as the Knight-Ridder, Inc. Retirement Plan for Outside Directors (the "Plan"). The Plan is intended to advance the best interests of Knight-Ridder, Inc. by providing retirement income to outside directors of Knight-Ridder, Inc. who have satisfied certain age and service requirements. ARTICLE II ORIGINAL EFFECTIVE DATE OF THE PLAN; PARTICIPATION The Plan was effective as of January 1, 1994. All Outside Directors were eligible to participate in the Plan beginning January 1, 1994 and through June 30, 1996. Effective July 1, 1996, however, only those Outside Directors who were age 65 or older on that date will be eligible to participate in the Plan. ARTICLE III DEFINITIONS As used in this Plan, the following terms shall have the meaning hereinafter set forth: 3.1 "Annual Retainer Fee" means the annual fee payable to an Outside Director for service on the Board as in effect on the date of an Outside Director's Retirement. 3.2 "Board" means the Board of Directors of the Company. 3.3 "Code" means the Internal Revenue Code of 1986, as amended. 3.4 "Company" means Knight-Ridder, Inc., a Florida corporation, or any successor legal entity. 1 3.5 "Disability" means a Director's physical or mental condition which is expected to render the Director unable to perform his or her usual duties or any comparable duties for the Company. The determination of a Director's Disability will be made by the Board in its sole discretion. 3.6 "Director" means a member of the Board. 3.7 "Effective Date" means January 1, 1994. 3.8 "Outside Director" means any member of the Board who is not, and never was, an employee of the Company or any of its subsidiaries or affiliates and, effective July 1, 1996, who is at least age 65 on that date. 3.9 "Plan" means this Knight-Ridder, Inc. Retirement Plan for Outside Directors. 3.10 "Retirement" means the Termination of Service of an Outside Director at or after age sixty-five (65). 3.11 "Termination of Service" means cessation of service as a Director of the Company. 3.12 "Year of Service" means each 12-month period of service as a Director, whether beginning before or after the Effective Date. If a Director Terminates Service and then returns to service, all months of service will be aggregated to determine the Director's Years of Service for purposes of eligibility to receive, and the amount of, any retirement benefit under the Plan. ARTICLE IV ELIGIBILITY FOR BENEFITS 4.1 RETIREMENT BENEFIT. An Outside Director will be entitled to receive the annual retirement benefit described in Section 5.1 upon Retirement if he or she retires after reaching age 65 and completing five full years of Service. 4.2 DISABILITY BENEFIT. An Outside Director will be entitled to receive the annual disability benefit described in Section 5.2 if he or she incurs a Termination of Service as the result of Disability after completing at least two full years of Service. 4.3 LIMITATION ON RECEIPT OF BENEFIT. Notwithstanding the foregoing, an Outside Director will not be entitled to benefits under the Plan if (a) such Outside Director is removed from the Board of Directors for cause (which means only dishonesty, conviction of a felony, or wilful unauthorized disclosure of confidential information, whether involving the Company or otherwise), or (b) the Retirement or Disability of such Outside Director occurs before January 1, 1994. 2 ARTICLE V AMOUNT OF BENEFIT 5.1 RETIREMENT BENEFIT. The retirement benefit payable, to an Outside Director under the Plan shall be an annual amount, payable in accordance with Article VI, determined as follows: Completed Years of Service Annual Benefit ---------------- -------------- less than 5 years No benefit 5 50% of Annual Retainer Fee 6 60% of Annual Retainer Fee 7 70% of Annual Retainer Fee 8 80% of Annual Retainer Fee 9 90% of Annual Retainer Fee 10 or more 100% of Annual Retainer Fee 5.2 DISABILITY BENEFIT. The disability benefit payable to an Outside Director who incurs a Termination of Service as the result of Disability shall be an annual amount, payable in accordance with Article VI, determined as follows: Completed Years of Service Annual Benefit ---------------- -------------- less than 2 years No benefit 2-5 years 50% of Annual Retainer Fee 6 60% of Annual Retainer Fee 7 70% of Annual Retainer Fee 8 80% of Annual Retainer Fee 9 90% of Annual Retainer Fee 10 or more 100% of Annual Retainer Fee ARTICLE VI FORM, MANNER AND DURATION OF PAYMENT OF BENEFIT The annual Retirement or Disability Benefit determined under Article V shall be paid for the life of the Outside Director. Payments shall be made on the first business day of each calendar quarter, beginning with the quarter next following the date of the Outside Director's Retirement. No benefits shall be payable under the Plan after the death of a Outside Director either before or after Retirement. 3 ARTICLE VII ADMINISTRATION 7.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by an Administrative Committee appointed by the Board, which may be the same committee as serves the Company with respect to other retirement and benefit plans. The Administrative Committee shall adopt such rules for the conduct of its business and the administration of the Plan as it considers to be necessary or desirable, provided that such rules do not conflict with the provisions of the Plan. 7.2 ACTION BY COMMITTEE; RESIGNATION; VACANCIES; COMPENSATION. The Administrative Committee shall act by a majority (or by all members if there be only one or two members) of the number of members constituting the Administrative Committee at the time of such action, and such action may be taken either by vote at a meeting or in writing without a meeting. Any member of the Administrative Committee may resign upon giving written notice to the Board. Each member of the Administrative Committee shall hold office at the pleasure of the Board. Vacancies arising in the Administrative Committee from death, resignation, removal or otherwise, shall be filled by the Board, but the Administrative Committee may act notwithstanding the existence of vacancies so long as there is at least one member of the Administrative Committee. The members of the Administrative Committee shall serve without compensation for their services as such, but shall be reimbursed by the Company for all necessary expenses incurred in the discharge of their duties. 7.3 DELEGATION OF AUTHORITY; LEGAL, ACCOUNTING, CLERICAL AND OTHER SERVICES. The Administrative Committee may authorize one or more of its members or any agent to act on its behalf and may contract for legal, accounting, clerical and other services to carry out the purposes of the Plan. All expenses of the Administrative Committee shall be paid by the Company. 7.4 INTERPRETATION OF PROVISIONS. The Administrative Committee shall have the full power and discretion to interpret the provisions of the Plan and decide all questions arising in its administration. The decisions and interpretations of the Administrative Committee shall be final and binding on the Company and all other persons. 7.5 LIABILITY OF COMMITTEE. No member of the Administrative Committee shall be liable for any action taken in good faith or for the exercise of any power given the Administrative Committee, or for the actions of other members of the Administrative Committee. To the extent permitted by law, the Company shall indemnify and hold harmless each member of the Administrative Committee against any and all liability or reasonably expense resulting from or arising out of his or her responsibilities in connection with the Plan, provided such person acted in good faith, in what he or she reasonably believed was the proper discharge of his or her duties. 4 ARTICLE VIII TERMINATION AND AMENDMENT OF THE PLAN 8.1 AMENDMENT OF THE PLAN. The Plan may be amended from time to time by action of the Board of Directors. 8.2 TERMINATION. The Company intends to continue the Plan indefinitely but reserves the right to terminate it at any time by action of the Board of Directors. 8.3 EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of the Plan may adversely affect the benefit which would be payable to any Outside Director receiving benefits under the Plan prior to the effective date of the amendment or termination, or which would be payable to any Outside Director who, prior to the effective date of such amendment or termination, was eligible to retire with an immediate benefit under the Plan. ARTICLE IX MISCELLANEOUS 9.1 NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Outside Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. 9.2 UNFUNDED PLAN. This Plan is unfunded. Amounts payable under the Plan will be satisfied solely out of the general assets of the Company subject to the claims of the Company's creditors. No Outside Director or any other person shall have any interest in any fund or in any specific asset of the Company by reason of any amount credited to him hereunder, nor shall any Outside Director or any other person have any right to receive any distribution under the Plan except as, and to the extent, expressly provided in the Plan. 9.3 OTHER COMPENSATION ARRANGEMENTS. Payments received by an Outside Director under the Plan shall not have any effect on the determination of benefits under any other arrangement provided by the Company. 9.4 EXPENSES. The costs and expenses of administering the Plan shall be borne by the Company and no contributions from Outside Directors shall be required or permitted. 9.5 GOVERNING LAW; VENUE. The Plan shall be construed in accordance with the laws of the State of Florida. Any legal action or proceeding hereunder may be initiated only in Dade County, Florida. 5 STOCK OPTION GRANT UNDER KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS ------------- THIS STOCK OPTION GRANT dated ____________________, _____ is made by KNIGHT-RIDDER, INC., hereinafter called the "Company," to _______________________, hereinafter called the "Director." WITNESSETH, THAT: WHEREAS, the Company, by action of its Board of Directors, adopted and approved a Compensation Plan for Nonemployee Directors, effective July 1, 1997 (the "Plan"). WHEREAS, the purpose of the Plan is to attract and retain the services of qualified individuals who are not employees of the Company to serve as members of the Board. NOW, THEREFORE, the Company hereby grants a non-qualified option under the Plan to the Director on the following terms and conditions: 1. AMOUNT OF STOCK SUBJECT TO OPTION: The Company hereby grants to the Director the right to purchase 2,000 shares of Common Stock of the Company, which stock is to be issued by the Company upon the exercise of this option as hereinafter set forth. 2. PURCHASE PRICE: The purchase price per share for this option shall be ______________ ($________), one hundred percent (100%) of the fair market value (as defined in the Plan) of the Common Stock at the time the option is granted. 3. PERIOD OF OPTION AND EXERCISE THEREOF: (a) Subject to paragraph 5 below, one-third of the shares subject to this option (rounded up to the nearest whole share) may be purchased at any time following the first anniversary of the date of this grant, an additional one-third of the shares subject to this option (rounded up to the nearest whole share) may be purchased at any time following the second anniversary of the date of this grant, and the remaining shares subject to this option may be purchased at any time following the third anniversary of the date of this grant; provided, however, that in no event may any part of this option be exercised following the ______ day of ____________________, 200_____. (b) In order to exercise this option or any part thereof, the Director shall give notice in writing to the Company of the Director's intention to purchase all or part of the shares subject to this option, and in said notice the Director shall set forth the number of shares as to which he or she desires to exercise the option, and he or she shall pay for such shares in full at the time of the exercise of such option. Such payment may be made in cash, through the delivery to the Company of shares of common stock of the Company with a value equal to the total option price, or through a combination of cash and shares, and any shares so delivered shall be valued at their fair market value on the date on which the option is exercised. Payment of the purchase price may also be made through the delivery to the Company of the sale proceeds of all or part of the shares of common stock of the Company that are the subject of this option; provided that the Director instructs ChaseMellon Shareholder Services ("CMSS") to effect on the date such instruction is given to CMSS (which shall be deemed to be the date of exercise) or as early as practicable thereafter the sale of such number of such shares "at the market" in a broker's transaction (within the meaning of Section 4(4) of the Securities Act of 1933, as amended), the proceeds of which shall be at least equal to the purchase price of this option plus the amount of any taxes which may be required to be withheld plus transaction costs. In accordance with these instructions, CMSS shall sell such shares, deliver to the Company the portion of the proceeds of such sale which equals the purchase price of this option plus the amount of any taxes required to be withheld and remit the remaining sale proceeds (net of transaction costs), to the Director. The notice of exercise must be delivered or, if mailed, postmarked on or before the date on which the right to exercise this option expires. No shares shall be issued to the Director until final payment for said shares has been made, and the Director shall have none of the rights of a shareholder until said shares are issued to the Director. 4. RESTRICTIONS ON TRANSFER: This Option may not be transferred, pledged, assigned, or otherwise disposed of, except by Will or by the laws of descent and distribution; provided, however, that the Board may, subject to such terms and conditions as the Board shall specify, permit the transfer of an Option to a Director's family members or to one or more trusts established solely for the benefit of one or more of such family members. The Option shall be exercisable, during the Director's lifetime, only by the Director or by the person to whom the Option has been transferred in accordance with the previous sentence. A transferee's rights under the Option shall be no greater than the rights held by the Director under said Option. No assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by Will or the laws of descent and distribution, or as permitted under this paragraph 4, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect. 5. EXERCISE OF OPTIONS FOLLOWING TERMINATION OF SERVICE: If a Director ceases to be a member of the Board by reason of Disability or Retirement, this Option shall be exercisable at any time prior to the expiration of five years after the date of such Termination of Service, but in no event after the expiration of the term of this Option set forth in paragraph 3. Options not exercisable on the date of Termination of Service due to Disability or Retirement will become exercisable pursuant to the schedule set forth in paragraph 3 above during the five-year period after Termination of Service as if the Director had continued to serve on the Board during such time. At the end of the five-year period or expiration of the Term of this Option set forth in paragraph 3, whichever first occurs, the Option shall expire. If a Director ceases to be a member of the Board by reason of death, or if a former Director dies during the five-year period following Termination of Service due to Disability or Retirement, this Option may be exercised only by such Director's personal representative or beneficiary, as the case may be, at any time within the first to expire of the following periods: (i) three years after the date of the Director's death; (ii) five years after the date of the Director's Termination of Service; or (iii) the expiration of the Term of this Option set forth in paragraph 3. Options not exercisable at the date of death will become exercisable during such post-death period pursuant to the Schedule set forth in Paragraph 3 above as if the Director had continued to serve on the Board during such period. At the end of the applicable period, the Option shall expire. If a Director ceases to be a member of the Board for any reason other than Disability, Retirement or Death, this Option shall be exercisable, to the extent it has vested as of the date of cessation of service, only within three months after such cessation of service, but in no event after the expiration of the term of this Option. The unvested portion of this Option shall be forfeited as of the date of cessation of service for any reason other than Disability, Retirement or Death. 6. CHANGE IN CAPITAL: Notwithstanding any other provision of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, reorganization, merger, consolidation, stock split, combination or exchange of shares or any significant corporate event affecting the Common Stock, the Board in its discretion, may make (i) such proportionate adjustments as it considers appropriate (in the form determined by the Board in its sole discretion) to prevent diminution or enlargement of the rights of the Director with respect to the number of shares of Common Stock covered by this Option and the exercise price in respect thereof, and/or (ii) such other adjustments as it deems appropriate. The Board's determination as to what, if any, adjustments shall be made shall be final and binding on the Company and the Director. 7. REGISTRATION AND OTHER REQUIREMENTS: This option is subject to the requirement and condition that if the Board of Directors of the Company shall determine that the listing, registration or qualification upon any securities exchange or under any state or federal law, or the approval or consent of any governmental body, or the Director's satisfaction of any tax withholding obligations or agreement with respect to the disposition of the shares purchased hereunder is necessary or desirable as a condition to the issuance or purchase of any shares subject to this option, then this option may not be exercised in whole or in part unless or until such listing, registration, qualification, approval, consent, satisfaction or agreement has been obtained, free of any conditions which are not acceptable to the Board of Directors of the Company, and the sale and delivery of stock hereunder is also subject to the above requirements and conditions. 8. INTERPRETATION OF STOCK OPTION GRANT: All capitalized terms used in this stock option grant and not defined herein shall have the meanings set forth in the Plan. The Board of Directors has the authority to interpret the Plan and this stock option grant and to conclusively decide all questions arising under the Plan or this stock option grant. Its decision shall be binding on the Director and any other person to whom this Option shall have been transferred. - --------------------------- ------------------------------ Polk Laffoon P. Anthony Ridder Vice President & Secretary Chairman and Chief Executive Officer KNIGHT-RIDDER, INC. KNIGHT-RIDDER, INC. [January 26, 1999] EX-10.C 4 EXHIBIT 10.(C) EXHIBIT 10 (c) KNIGHT RIDDER ANNUAL INCENTIVE PLAN INTRODUCTION The Knight Ridder Annual Incentive Plan (the "Plan") is intended to motivate and reward corporate executives and top management at individual operating units who contribute significantly to Knight Ridder's success. Specific Plan objectives include: o Focus participants on achieving key annual objectives o Link rewards to results relative to financial and non-financial goals at the corporate and business unit levels o Provide participants the opportunity to earn competitive compensation commensurate with performance The Plan provides participants the opportunity to earn cash awards each year based on the performance of the corporation and/or the business unit in which they work. Awards are earned on a calendar year basis (the "Plan Year") and are paid in cash following the end of the Plan Year. The first year in which the Plan described in this document will be in effect will be 1998. This plan replaces the Knight Ridder Annual Incentive Plan, which was introduced in 1994. PLAN ADMINISTRATION The Plan will be administered by the Compensation Committee of the Knight Ridder Board of Directors (the "Committee"). The Committee has the authority to interpret the provisions of the Plan and to make any rules and regulations necessary to administer the Plan. The Committee's decision is final in all matters of judgment pertaining to the Plan, and the Committee may, without notice, amend, suspend or revoke the Plan. ELIGIBILITY Employees in the following categories are eligible to participate in the Plan: corporate officers and certain director-level corporate employees; newspaper publishers and other business unit operating heads who report directly to top officers; top editors, general managers and all division directors; and selected other positions that can have significant impact on results. Operating unit heads should present proposed changes in eligible positions to the appropriate Vice President Operations and then to the Knight Ridder senior Human Resources officer. Page 2 PLAN OVERVIEW BONUS AMOUNTS PAYABLE FOR MEETING GOALS Each plan participant will have a potential bonus award that is payable for meeting goals. The size of this potential award varies by salary range. The bonus potential for each salary range is stated as a percentage of the salary earned during the year. Therefore, the dollar amount of an individual's opportunity is computed by multiplying the applicable percentage by the salary. The potential bonus payable for meeting goals for each salary range is as follows: Salary Range Potential Award ------------ --------------- $250,000 and above 50.0% $150,000 to $249,999 45.0% $100,000 to $149,999 40.0% $50,000 to $99,999 32.5% Up to $49,999 25.0% TYPES OF PERFORMANCE MEASURES AND THEIR WEIGHTINGS Each participant's bonus will be determined based on measures of how well the corporation or the business unit in which the individual works performed relative to two type of goals: Financial Performance and Non-financial Performance. The potential award for meeting goals will be divided between the two types of measures in the following way: 65% of each participant's potential award for meeting goals will be based on Financial Performance, and 35% will be based on Non-financial Performance, as shown in the following table: Potential Award ------------------------------------------ Salary Range Total Financial Non-financial ------------ ----- --------- ------------- $250,000 and above 50.0% 32.5% 17.5% $150,000 to $249,999 45.0% 29.25% 15.75% $100,000 to $149,999 40.0% 26.0% 14.0% $50,000 to $99,999 32.5% 21.125% 11.375% Up to $49,999 25.0% 16.25% 8.75% Page 3 As a general rule, the measurement will be based on the organizational level at which the individual is employed: corporate performance for those at the corporate level and business unit performance for those in a newspaper or other business unit. However, the Knight Ridder CEO may determine that the measures for selected individuals will consist of a specified mix of two or more bases, or that those in a business unit will have awards based on corporate performance. PERFORMANCE MEASUREMENT FINANCIAL PERFORMANCE MEASURE Financial performance will be evaluated relative to budgeted goals set at the beginning of the Plan Year, subject to approved adjustments during the year. Unless otherwise determined by the Committee, the financial measure will be Economic Value Added, or "EVA". Definitions include: EVA = Net operating profit after tax minus a capital charge Capital charge = Average capital employed during the Plan Year times the cost of that capital Average capital employed = Average assets on the balance sheet minus the average of any amounts owed that do not incur an interest charge (called non-interest-bearing liabilities, or NIBLs), with the average computed on a monthly basis Cost of capital = Percentage approved annually by the Committee; 12% for 1998 The financial performance measure and the goals for the year will be communicated to participants by the early part of each year. NON-FINANCIAL PERFORMANCE MEASURES At the beginning of each Plan Year, Knight Ridder and each of the business units will establish Non-financial goals that represent major elements of their strategies. Quantifiable measures are preferred, and measures that are redundant with the financial goal should be avoided. There should be no more than eight measures. Corporate measures and goals will be approved by the Knight Ridder CEO, and business unit measures and goals will be approved by the appropriate Knight Ridder Vice President. All participants at corporate and in each of the business units will have the Non-financial component of their awards based on the measures selected for their unit. However, the weightings of these measures may vary among participants to reflect each individual's impact on the achievement of the goals. The weightings assigned to all measures must total 100 points for each of the participants. Page 4 The achievement of a goal will result in target awards being paid for that goal. Awards for performance on the Non-financial measures cannot exceed 100% of target, but standards for partial achievement of goals (and therefore payouts below 100%) as well as threshold standards for achieving any award should be established. DETERMINING AND PAYING AWARDS OVERVIEW Each participant's award will be determined by adding together the award earned based on Financial Performance and the award earned based on Non-financial Performance. An award may be paid for one type of measure even if no award was earned for the other type of measure. The only constraint is that a corporate performance threshold must be achieved for any award to be payable. Normally this threshold requirement will be that corporate operating income, as reported in the annual report, must equal at least 80% of prior year operating income, although the Committee reserves the right to adjust the threshold. DETERMINING FINANCIAL AWARDS Target awards will be paid to all participants in a unit (either corporate or one of the business units) if that unit's EVA equals budgeted EVA. If EVA is above (or below) budget, then the aggregate of financial awards paid to participants at that unit will equal the aggregate of their target financial awards plus (or minus) a percentage of the amount by which actual EVA exceeds (or falls below) budgeted EVA. This percentage is referred to as a "sharing percentage". The "standard" percentages of EVA above and below budget that will be shared with participants are expected to be 15% for the newspapers and 5% for corporate. However, these sharing percentages are at the discretion of the Committee, which may change them from year to year or have different percentages for different newspapers within a given year. The process of determining the aggregate financial award paid to participants in a unit will start with the calculation of the sum of the target financial awards for all approved participants in the unit as of the end of the Plan Year. This aggregate target will equal the sum of all participants' target awards, with each participant's target equaling his or her salary for the year (or period of participation, if less than a year) times 65% of the target award percentage for the range in which the salary falls. The target awards are calculated before taxes. If EVA equals budget, then the "bonus pool" (i.e., total payments that will be made for the financial component of the award for participants in that unit) will equal the sum of all participants' financial target awards. Page 5 If EVA is above budget, steps to calculate the financial bonus pool will include: o Determine the amount by which EVA (including the target bonus accrual only) exceeds budget o Multiply this amount by the approved sharing percentage. (For example, if the sharing percentage is 15%, multiply 15% times the amount by which EVA exceeds budget). This equals the after-tax amount that will be added to the target bonus pool. (It is after-tax because EVA is an after-tax number) o Calculate the pre-tax amount that will be added to the target bonus pool as a result of EVA being above budget. (It is necessary to calculate the pre-tax amount before doing the addition, since the target bonus pool is pre-tax). To calculate the pre-tax amount, divide the after-tax amount by 1.00 minus the tax rate that was used in developing the EVA budget for the year. (For example, with a tax rate of 42%, the after-tax amount would be divided by 1.00 minus .42, or .58. If the after-tax amount were $100, then the pre-tax amount would be $100 divided by .58, or $172.4) o Add the resulting pre-tax amount to the aggregate target award to determine the size of the financial bonus pool. This becomes the final bonus pool, subject to two conditions: - To be eligible for awards above 200% on the financial component, a company's net operating profit after tax (NOPAT) must be at least 12% above the prior year's NOPAT, and EVA must be positive and improved over the prior year. If these conditions are not met, then the maximum pool will equal 200% of target - The pool is subject to a maximum equal to 300% of target; if the calculated pool is above the maximum, then the pool will equal 300% of target If EVA is below budget, steps to calculate the financial bonus pool will include: o Determine the amount by which EVA (including the target bonus accrual) is below budget o Determine the after-tax amount that will be subtracted from the target bonus pool by multiplying the amount by which EVA is below budget times the approved sharing percentage o Calculate the pre-tax amount that will be subtracted from the target bonus pool as a result of EVA being below budget, using the methodology described above (i.e., divide the after-tax amount by 1.00 minus the tax rate) Page 6 o Subtract the resulting pre-tax amount from the aggregate target award to determine the size of the financial bonus pool. The minimum pool size will be zero Once the financial bonus pool is determined, every participant in a unit will receive the same financial award as a percentage of his or her target. Calculation steps will include: o Calculate the aggregate financial bonus pool for the unit as a percentage of the aggregate target financial bonus pool o Apply this percentage to the target financial award for each participant. For example, if the aggregate financial bonus pool were $1,200 and the aggregate target bonus pool were $1,000, then that unit's financial award would be 120% of target. Every participant in the unit would receive 120% of his or her target financial award The Knight Ridder Controller will calculate the corporate awards. Each business unit's chief financial officer will calculate the business unit's awards, using EVA results that have been agreed upon with the Knight Ridder Controller. All calculations will be based on the approved list of participants and their target award opportunities. The attached exhibits illustrate the calculations of the financial bonus pool for three situations: o Exhibit 1: EVA is above budget, and pool is below 200% of target o Exhibit 2: EVA is above budget, and pool is potentially above 200% of target, making it necessary to apply the test of whether the pool can exceed 200% o Exhibit 3: EVA is below budget DETERMINING NON-FINANCIAL AWARDS A performance score will be determined for each of the Non-financial measures at corporate and each of the business units. A score will be 100% of the points assigned if the goal was achieved, zero if threshold performance was not achieved, and between 0 and 100% if performance was above threshold and the goal was partially achieved. An individual's Non-financial award will equal the sum of the scores on each of the measures times the weighting given to that measure for that individual. Awards can range from 100% of the Non-financial target if all goals were achieved, down to zero if performance on all goals was below threshold. Page 7 OTHER PLAN FEATURES AWARD PAYMENT Awards will be paid in cash following the end of the Plan Year and the computation of results, unless deferral has been elected under the annual incentive deferral plan. Required tax amounts will be withheld. PARTIAL YEAR PARTICIPANTS AND CHANGES IN POSITION Individuals who are hired or promoted into positions that qualify for Plan participation will be eligible for a pro rata award based on the amount of salary earned while a participant and the performance levels achieved. If a participant's responsibilities change during a year and a different part of the company's performance is used in computing awards for the two positions, then ordinarily the award will be determined on a pro rata basis relative to the time spent in the two positions, although exceptions may be made on a case by case basis. TERMINATION In the event of death, permanent disability (as defined by Knight Ridder's disability plan) or retirement prior to the date of payment, a participant (or the participant's estate) will be entitled to receive a pro rata award based on the time employed during the year. Pro-rated payments will be made following the end of the Plan Year and computation of results. Required tax amounts will be withheld. In the event of resignation or termination for other reasons at any time during the Plan Year, no award will be paid. EMPLOYMENT RIGHTS The Plan does not constitute a contract of employment, nor does participation in one Plan Year guarantee participation in another Plan Year. Page 8 Exhibit 1 - -------------------------------------------------------------------------------- EXAMPLE OF CALCULATING FINANCIAL BONUS POOL EVA IS ABOVE BUDGET POOL IS BELOW 200% OF TARGET ================================================================================ TARGET BONUS OPPORTUNITIES AT A NEWSPAPER: $500,000 Target bonus $325,000 Financial component of target (65%) DETERMINING AFTER-TAX AMOUNT TO BE ADDED TO TARGET BONUS POOL: $750,000 EVA above budget 15% Sharing percentage $112,500 15% of amount by which EVA is above budget DETERMINING PRE-TAX AMOUNT TO BE ADDED TO TARGET BONUS POOL: 42% Tax rate $193,966 $112,500 divided by .58 (1.00-.42) DETERMINING FINANCIAL BONUS POOL (PRE-TAX): $325,000 Target + $193,966 Amount above EVA budget shared with management $518,966 Financial bonus pool 160% Pool as a percentage of target - -------------------------------------------------------------------------------- Page 9 Exhibit 2 - -------------------------------------------------------------------------------- EXAMPLE OF CALCULATING FINANCIAL BONUS POOL EVA IS ABOVE BUDGET POOL IS POTENTIALLY ABOVE 200% OF TARGET ================================================================================ TARGET BONUS OPPORTUNITIES AT A NEWSPAPER: $ 500,000 Target bonus $ 325,000 Financial component of target (65%) DETERMINING AFTER-TAX AMOUNT TO BE ADDED TO TARGET BONUS POOL: $1,500,000 EVA above budget 15% Sharing percentage $ 225,000 15% of amount by which EVA is above budget DETERMINING PRE-TAX AMOUNT TO BE ADDED TO TARGET BONUS POOL: 42% Tax rate $ 387,931 $225,000 divided by .58 (1.00-.42) DETERMINING POTENTIAL FINANCIAL BONUS POOL (PRE-TAX): $ 325,000 Target + $ 387,931 Amount above EVA budget shared with management ---------- $ 712,931 Potential financial bonus pool 219% Potential pool as a percentage of target DETERMINING ACTUAL FINANCIAL BONUS POOL (PRE-TAX): Is NOPAT at least 12% above prior year's, and is EVA positive and improved? If yes: Pool = $712,931 If no: Pool = $650,000 (200% of target) - -------------------------------------------------------------------------------- Page 10 Exhibit 3 - -------------------------------------------------------------------------------- EXAMPLE OF CALCULATING FINANCIAL BONUS POOL EVA IS BELOW BUDGET ================================================================================ TARGET BONUS OPPORTUNITIES AT A NEWSPAPER: $500,000 Target bonus $325,000 Financial component of target (65%) DETERMINING AFTER-TAX AMOUNT TO BE SUBTRACTED FROM TARGET BONUS POOL: - $750,000 Amount of EVA below budget 15% Sharing percentage - $112,500 15% of amount by which EVA is below budget DETERMINING PRE-TAX AMOUNT TO BE SUBTRACTED FROM TARGET BONUS POOL: 42% Tax rate - $193,966 $112,500 divided by .58 (1.00-.42) DETERMINING FINANCIAL BONUS POOL (PRE-TAX): $325,000 Target + $193,966 Amount below EVA budget subtracted from management pool $131,034 Financial bonus pool 40% Pool as a percentage of target EX-10.D 5 EXHIBIT 10(D) EXHIBIT 10(d) Personal and Confidential February 23, 1998 John C. Fontaine HUGHES HUBBARD & REED One Battery Park Plaza New York, NY 10004 Dear Jack: This letter sets forth our agreement with respect to your service to Knight Ridder following the expiration of your Board term at the annual meeting on April 28, 1998. You have agreed to continue to serve as a member of the Executive Committee and a consultant to the Company for a period of 12 months, beginning July 1, 1998 (when the May 5, 1997 agreement expires). Your new consultant period will run from July 1, 1998 thru June 30, 1999, for which the Company will pay you $100,000 in equal monthly installments, plus Executive Committee meeting fees. Our consulting relationship will not preclude you from accepting consulting assignments from other companies and from other profit-making activities, provided your other assignments and activities do not constitute a conflict of interest with Knight Ridder. The Company will reimburse you for travel and other out-of-pocket expenses incurred in connection with your Knight Ridder consulting activities. Office space will be provided, when and if required. I am happy we will continue to work together. If I have accurately summarized our understanding, I'd appreciate your signing and returning one copy of this letter to me for the Company's files. Sincerely, /s/ P. ANTHONY RIDDER ----------------------------- P. Anthony Ridder Agreed: /s/ JOHN C. FONTAINE 2/26/98 - --------------------------- --------------- John C. Fontaine Date EX-11 6 COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended ------------------------------ Dec. 27, Dec. 28, Dec. 29, 1998 1997 1996 -------- -------- -------- Income from continuing operations $305,631 $396,504 $185,380 ======== ======== ======== Average shares outstanding (basic) 78,882 88,475 96,021 -------- -------- -------- Effect of dilutive securities: Convertible preferred stock 17,549 10,968 Stock options 1,745 1,871 1,399 -------- -------- -------- Average shares outstanding (diluted) 98,176 101,314 97,420 ======== ======== ======== Earnings per share from continuing operations (basic) $ 3.87 $ 4.48 $ 1.93 ======== ======== ======== Earnings per share from continuing operations (diluted) $ 3.11 $ 3.91 $ 1.90 ======== ======== ========
EX-12 7 COMPUTATION OF RATIOS
Exhibit 12 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO FROM CONTINUING OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT RATIO DATA) YEAR ENDED -------------------------------------------------------------------------- December 27, December 28, December 29, December 31, December 25, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ FIXED CHARGES COMPUTATION INTEREST EXPENSE: NET INTEREST EXPENSE $ 101,420 $ 97,286 $ 66,740 $ 57,623 $ 43,742 PLUS CAPITALIZED INTEREST 4,516 5,376 6,397 1,889 474 --------- --------- --------- --------- --------- GROSS INTEREST EXPENSE 105,936 102,662 73,137 59,512 44,216 PROPORTIONATE SHARE OF INTEREST EXPENSE OF 50% OWNED PERSONS 1,948 17,941 13,824 12,351 INTEREST COMPONENT OF RENT EXPENSE 7,688 6,671 5,787 5,781 5,303 --------- --------- --------- --------- --------- TOTAL FIXED CHARGES $ 113,624 $ 111,281 $ 96,865 $ 79,117 $ 61,870 ========= ========= ========= ========= ========= EARNINGS COMPUTATION PRETAX EARNINGS $ 507,916 $ 693,852 $ 310,209 $ 182,817 $ 265,737 ADD: FIXED CHARGES 113,624 111,281 96,865 79,117 61,870 LESS: CAPITALIZED INTEREST (4,516) (5,376) (6,397) (1,889) (474) LESS: DISTRIBUTIONS IN EXCESS OF (LESS THAN) EARNINGS OF INVESTEES (16,693) (7,675) (12,962) (9,285) (4,487) --------- --------- --------- --------- --------- TOTAL EARNINGS AS ADJUSTED $ 600,331 $ 792,082 $ 387,715 $ 250,760 $ 322,646 ========= ========= ========= ========= ========= RATIO OF EARNINGS TO FIXED CHARGES 5.3:1 7.1:1 4.0:1 3.2:1 5.2:1 ========= ========= ========= ========= =========
EX-18 8 EXHIBIT 18 EXHIBIT 18 Change in Accounting Principle January 22, 1999 Board of Directors Knight-Ridder, Inc. 50 W. San Fernando Street, Suite 1200 San Jose, California 95113 Dear Board Members: Note F of the notes to consolidated financial statements of Knight-Ridder, Inc. included in its 1998 Form 10-K for the year ended December 27,1998 describes a change in the method used to determine the market related value of plan assets from market value to a calculated value. You have advised us that you believe that the change is to a preferable method in your circumstances because doing so aligns the method of calculating the return component of net periodic pension costs with the related plans' investment strategy and it minimizes significant year-to-year fluctuations in pension cost caused by financial market volatility. There are no authoritative criteria for determining a 'preferable' method of calculating the market related value of plan assets based on the particular circumstances; however, we conclude that the change in the method used to determine the market related value of plan assets from market value to a calculated value is to an acceptable alternative method which, based on your business judgment to make this change for the reasons cited above, is preferable in your circumstances. Very truly yours, /s/ Ernst & Young LLP EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State/Country Company Name of Incorporation - ------------ ---------------- Knight-Ridder, Inc. Florida Aberdeen News Company Delaware Bay Area Media, Inc. Delaware The Beacon Journal Publishing Company Ohio The Bradenton Herald, Inc. Florida Circom Corporation Pennsylvania Contra Costa Newspapers, Inc. California Cypress Media, Inc. New York Cypress Media, LLC (1) Delaware Belleville News-Democrat * Kansas City Star * Wilkes-Barre Times Leader * Quad County Publishing, Inc. (1) Illinois Star-Telegram Operating, Ltd. (1) Texas Ft. Worth Star-Telegram * Detroit Free Press, Incorporated Michigan Detroit Newspaper Agency Michigan (partnership) Grand Forks Herald, Incorporated Delaware Gulf Publishing Company, Inc. Mississippi The Hills Newspapers, Inc. California KR Net Ventures, Inc. Delaware InfiNet Company Virginia (partnership) KR Newsprint Company Florida Southeast Paper Manufacturing Co. Georgia (partnership) KRI Properties, Inc. Florida KR Publication Services, Inc. Delaware KR Video, Inc. Delaware Keynoter Publishing Company, Inc. Florida Knight News Services, Inc. Michigan Knight-Ridder Tribune Information Services District of Columbia (partnership) The Knight Publishing Co. Delaware Knight-Ridder Financial/Japan, Inc. Delaware Knight-Ridder International, Inc. Delaware KR U.S.A., Inc. Delaware Knight-Ridder Investment Company Delaware Seattle Times Company - 49% Interest Delaware Knight-Ridder Leasing Company Florida
(1) Star-Telegram Operating, Ltd. is owned 90% by Quad County Publishing, Inc. and 10% by Cypress Media, LLC * indicates that the company name listed is a division, not a legal entity.
SUBSIDIARIES OF THE REGISTRANT (Continued) State/Country Company Name of Incorporation - ------------ ---------------- Knight-Ridder New Media, Inc. Delaware Knight Ridder Newspaper Sales, Inc. New York Knight-Ridder Shared Services, Inc. Florida Knight Ridder Ventures, LLC Delaware (LLC) Lexington Herald-Leader Co. Kentucky MHPC International, Inc. Florida The Macon Telegraph Publishing Company Georgia MediaStream, Inc. Delaware The Miami Herald Publishing Company * Monterey Newspapers, Inc. Colorado The Monterey County Herald * San Luis Obispo Telegram-Tribune * News Publishing Company Indiana Fort Wayne Newspapers, Inc. Indiana Fort Wayne Newspapers Agency Indiana (partnership) Nittany Printing and Publishing Company Pennsylvania Northwest Publications, Inc. Delaware Duluth News-Tribune & Herald * Saint Paul Pioneer Press * The Observer Transportation Company North Carolina Philadelphia Media Corporation Pennsylvania Philadelphia Newspapers, Inc. Pennsylvania Apartment Solutions, Inc. Pennsylvania IT-HR, Inc. Delaware Marketplace Advertising, Inc. Pennsylvania Job Fair Ventures, Inc. Delaware The Professional Exchange LLC (80%) Delaware Philadelphia Online, Inc. Delaware The R.W. Page Corporation Georgia Ridder Publications, Inc. Delaware KR Land Holding Corporation Delaware San Jose Mercury News, Inc. California Silicon Valley D.A.T.A, Inc. California The State-Record Company, Inc. Delaware Sun Publishing Company, Inc. South Carolina Tallahassee Democrat, Inc. Florida Tribune Newsprint Company Utah Ponderay Newsprint Company Washington (partnership) Twin Cities Newspaper Services, Inc. Minnesota Warner Robins Shopper, Inc. f/k/a Newberry Publishing Company, Inc. South Carolina The Warner Robins Daily Sun f/k/a Drinnon, Inc. Georgia Wichita Eagle and Beacon Publishing Company, Inc. Kansas
* indicates that the company name listed is a division, not a legal entity. EX-23 10 CONSENT OF EXPERTS AND COUNSELS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in Registration Statement No. 33-11021 on Form S-3 dated December 22, 1986, in Registration Statement No. 33-28010 on Form S-3 dated April 7, 1989, in Registration Statement No. 33-31747 on Form S-8 dated October 30, 1989, in Registration Statement No. 33-69206 on Form S-8 dated May 18, 1993, in Registration Statement No. 333-37603 on Form S-3 dated October 9, 1997, in Registration Statement No. 333-68171 on Form S-8 dated December 1, 1998 of Knight-Ridder, Inc. and in the related Prospectuses, of our report dated January 22, 1999, with respect to the consolidated financial statements and schedule of Knight-Ridder, Inc. incorporated by reference and included in this Annual Report (Form 10-K) for the year ended December 27, 1998. /s/ ERNST & YOUNG LLP San Jose, California March 18, 1999 EX-24 11 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY The undersigned member of the Board of Directors of Knight-Ridder, Inc., does hereby constitute and appoint Ross Jones, and Gary R. Effren, and each of them, his/her true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution for him/her in his/her name, place and stead in any and all capacities to sign any and all Reports on Form 10-K (Annual Report pursuant to the Securities Exchange Act of 1934) and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or the undersigned substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed his/her name hereto on the date set forth opposite his or her name. Dated: March 8, 1999 /s/ THOMAS P. GERRITY --------------------- Thomas P. Gerrity POWER OF ATTORNEY The undersigned member of the Board of Directors of Knight-Ridder, Inc., does hereby constitute and appoint Ross Jones, and Gary R. Effren, and each of them, his/her true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution for him/her in his/her name, place and stead in any and all capacities to sign any and all Reports on Form 10-K (Annual Report pursuant to the Securities Exchange Act of 1934) and any amendments thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents and each of them full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or the undersigned substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has signed his/her name hereto on the date set forth opposite his or her name. Dated: March 8, 1999 /s/ KATHLEEN FOLEY FELDSTEIN ------------------------------ Kathleen Foley Feldstein EX-27 12 FDS - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME, THE CONSOLIDATED BALANCE SHEET, AND THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000205520 KNIGHT-RIDDER, INC. 1,000 USD YEAR DEC-27-1998 DEC-28-1997 DEC-27-1998 1 22,677 4,159 402,193 15,738 59,109 525,691 1,837,751 764,750 4,257,097 653,756 609,745 0 1,755 1,633 1,659,343 4,257,097 3,091,919 3,091,919 529,154 2,587,301 (3,298) 20,854 105,936 507,916 202,285 305,631 60,226 0 0 365,857 4.64 3.73 COST OF GOODS SOLD CONSISTS OF NEWSPRINT, INK, AND SUPPLEMENTS. OTHER EXPENSES CONSISTS OF ALL NON-OPERATING INCOME AND COSTS, NET, EXCLUDING INCOME TAXES. AMOUNT INCLUDES INTEREST EXPENSE, NET OF INTEREST INCOME AND OTHER NON-OPERATING COSTS, NET OF NON-OPERATING INCOME THAT INCLUDES PRETAX GAINS AGGREGATING $75.3 MILLION ON THE SALES OF THE BALANCE OF THE CABLE SYSTEMS WITH TCI AND THE NEWSPAPER IN GARY, IND. SEE ITEM 8, NOTE G. INCLUDES $60.0 MILLION NET GAIN ON SALE OF TECHNIMETRICS. SEE ITEM 8, NOTE G.
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