-----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, DkNg1DbYzFU0nZ7jEe3WhQItLurlwBEMb0Q5gBV3jMHhq0A01N+5G1M8wQZfNw3A DyBz+JZb78JHS5ZQLzidEw== 0001019056-00-000163.txt : 20000322 0001019056-00-000163.hdr.sgml : 20000322 ACCESSION NUMBER: 0001019056-00-000163 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000321 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: 1227 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07553 FILM NUMBER: 574656 BUSINESS ADDRESS: STREET 1: 50 W SAN FRANCISCO ST CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089387700 MAIL ADDRESS: STREET 1: 50 W SAN FRANCISCO ST CITY: SAN JOSE STATE: CA ZIP: 95113 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 26, 1999 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) 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 price at which the stock was sold as of March 3, 2000: $3,681,884,942. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: March 3, 2000 - 78,934,708 one class Common Stock, $.02 1/12 Par Value DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of registrant's definitive Proxy Statement in connection with the Annual Meeting of Shareholders to be held on April 25, 2000, to be filed with the Securities and Exchange Commission, are incorporated by reference into Part III. Table of Contents for 1999 Form 10-K Page PART I Item 1. Business 2 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risks 19 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46 PART III Item 10. Directors and Executive Officers of the Registrant 46 Item 11. Executive Compensation 49 Item 12. Security Ownership of Certain Beneficial Owners and Management 49 Item 13. Certain Relationships and Related Transactions 49 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50 SIGNATURES 53 SCHEDULES 56 EXHIBITS 56 1 PART I Item 1. BUSINESS THE COMPANY Knight-Ridder, Inc., 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 StaatsZeitung 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, Inc., incorporated in Florida in 1976, is headquartered in San Jose, California, and employs about 22,000 people. NEWSPAPERS Knight Ridder had 31 daily newspapers and 22 nondaily newspapers at the end of 1999. 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 15 foreign correspondents. The service also distributes editorial computer graphics and deadline photos via the Knight Ridder-owned PressLink Online. 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 in obtaining national or general advertising. The table below presents the relative percentage contributions by individual papers to the company's overall operating revenue in 1999, 1998 and 1997. The percentage contributions of each paper to operating revenue are not necessarily indicative of contributions to operating profit. 2 1999 1998 1997 ---- ---- ---- SOURCE OF KNIGHT RIDDER OPERATING REVENUE The Philadelphia Inquirer and Philadelphia Daily News 18.8% 18.8% 19.0% The Miami Herald 10.4 10.6 11.4 San Jose Mercury News 9.5 9.3 10.4 The Kansas City Star(1) 8.5 8.7 6.1 Fort Worth Star-Telegram(1) 7.3 7.1 4.9 Detroit Free Press(2) 7.2 7.3 7.0 The Charlotte Observer 6.1 6.0 6.2 Contra Costa Newspapers 4.1 3.9 3.9 Saint Paul Pioneer Press 4.0 4.0 4.1 Akron Beacon Journal 3.3 3.3 3.6 All other 20.8 21.0 23.4 ----- ----- ----- 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 801,000 metric tons of newsprint in 1999. Approximately 15.2% of the company's total operating expenses during the year were for newsprint. Purchases are made under long-term agreements with 18 newsprint producers. Knight Ridder purchases approximately 60% of its annual consumption from United States mills, with 35% purchased from 17 mills in Canada and 5% from other offshore sources. Management believes that current sources are more than adequate to meet current demands. Approximately 81% of the newsprint consumed by the company contained some recycled content; the average content of these rolls was 49% recycled fiber. This translates into an overall recycled newsprint average of 39.2%. Knight Ridder is a one-third partner with Cox Enterprises and Media General, Inc., in SP Newsprint Co., formerly Southeast Paper Manufacturing Co. It is the fifth-largest newsprint manufacturing company in North America. It recently acquired Smurfit Newsprint Corporation's Newberg, Ore., mill. 3 SP's mill in Dublin, Ga., produces more than 500,000 metric tons per year of 100% recycled content newsprint. The Newberg plant produces more than 363,000 metric tons per year of newsprint with at least 55% recycled content. SP provides recycled content newsprint to its owners and more than 200 publishers and commercial printers. Its SP Recycling Corp. subsidiary will recycle more than 1.2 million short tons of recovered material annually. 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 1999. Knight Ridder's purchases from these three newsprint companies will be approximately 40% of its annual consumption for 2000, providing an important hedge against price volatility and a secure source of supply. TECHNOLOGY YEAR 2000 READINESS: During 1999, the company focused on preparing its technology infrastructure for the Year 2000. All significant operations were Y2K capable by year end. For further information, see page 16, Year 2000 Readiness Disclosure. A major press replacement project was completed at the Fort Worth Star- Telegram in 1999. Another, at The Miami Herald, is due for completion during 2000. GENERAL ADVERTISING SALES Knight Ridder newspapers depend most heavily on two agents for the sale of general advertising. Newspapers First, a national advertising sales cooperative, is the primary sales representative for many of Knight Ridder's newspapers, Detroit Newspapers and several leading independents. It allows customers to place ads in a combination of newspapers. Newspaper National Network, Knight Ridder's second general sales agent, was established in 1994 to focus national selling on behalf of the newspaper industry. It represents all of the Knight Ridder newspapers and more than 500 others. Like Newspapers First, it makes the purchase of newspaper advertising a "one-stop shopping," "one-order, one-bill" prospect. The Philadelphia Inquirer and Philadelphia Daily News Philadelphia Newspapers, Inc. (PNI), publishes two of the nation's most respected newspapers: The Philadelphia Inquirer and the Philadelphia Daily News. They are sold in nine counties in Pennsylvania and southern New Jersey. The weekly net cumulative penetration of the daily Inquirer, Sunday Inquirer and the Daily News is 66% of all adults in the region. Together, the papers have won 19 Pulitzer Prizes. Revenue in 1999 was $607.0 million. The Philadelphia Primary Metropolitan Statistical Area (PMSA) population is expected to decline 0.1% between 1999 and 2004, compared with an increase of 4.2% for the United States. In 1999, Philadelphia had income per capita 15.3% above the U.S. average; by 2004 it is projected to be 16.2% above. 4 The Miami Herald/el Nuevo Herald The Miami Herald, 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, one of the fastest-growing U.S. dailies, serves the growing Spanish-speaking population of Miami-Dade and Broward counties. It is the 12th-largest paper in Florida. Revenue in 1999 was $309.9 million for The Miami Herald and $26.8 million for the el Nuevo Herald. In 1999, The Herald won its 16th Pulitzer Prize, for investigative journalism. The Miami-Fort Lauderdale designated Market Area (DMA) population is expected to grow 6.5% between 1999 and 2004, compared with 4.2% for the United States. In 1999, the DMA had income per capita 5.5% below the U.S. average; by 2004 it is projected to be 11.1% below. San Jose Mercury News The San Jose Mercury News, the newspaper of Silicon Valley, reaches close to 800,000 readers daily and serves one of the most prosperous markets in the nation. Circulation is concentrated in Santa Clara County, which encompasses San Jose - California's third-largest city - and surrounding communities. The region is the world leader in high technology and ranks second nationally in exports. Revenue in 1999 was $306.3 million. The Mercury News recently was named one of the nation's top 10 newspapers in a survey by the Columbia Journalism Review. The population of the San Jose Primary Metropolitan Statistical Area, which includes only Santa Clara County, is expected to grow 6.0% between 1999 and 2004; the U.S. average is 4.2%. In 1999, San Jose had income per capita that was 52.4% above the U.S. average; by 2004 it is projected to be 55.5% above. The Kansas City Star The Kansas City Star serves the Kansas City metropolitan area. The Star's primary market consists of 11 counties in Kansas and Missouri. Revenue in 1999 was $274.5 million. The Kansas City Metropolitan Statistical Area population is expected to grow 4.4% between 1999 and 2004, compared with 4.2% for the United States. Kansas City in 1999 had income per capita 7.8% above the U.S. average; by 2004 it is projected to be 9.6% above. Fort Worth Star-Telegram The Star-Telegram serves the booming western portion of the Dallas/Fort Worth market, the nation's ninth-largest metropolitan area. The four-county Fort Worth/Arlington PMSA metropolitan area ranks as the third-largest in Texas. Revenue in 1999 was $236.8 million. Fort Worth/Arlington's population is expected to grow 8.9% between 1999 and 2004, compared with 4.2% for the United States. In 1999, Fort Worth/Arlington had income per capita 4.5% above the U.S. average; by 2004 it is projected to be 4.8% above. 5 Detroit Free Press The Detroit Free Press, Michigan's oldest daily newspaper, is sold primarily in the six-county area surrounding Detroit. It covers and is sold throughout the state, in Windsor, Ontario, and in Toledo, Ohio. The Detroit Free Press is published in combination with The Detroit News by Detroit Newspapers (DN), a joint operating agency formed in 1989 to combine the business operations of the two partners, Knight Ridder and Gannett Co. The profits (or losses) are split equally. The Free Press, owned by Knight Ridder, is an a.m. paper; The News, owned by Gannett, is p.m. On weekends, they publish combined editions. Knight Ridder's share of revenue in 1999 was $232.1 million. The population of the Detroit Primary Metropolitan Statistical Area is expected to grow 1.8% between 1999 and 2004, compared with 4.2% for the United States. Detroit in 1999 had income per capita 10.8% above the U.S. average; in 2004 it is projected to be 11.5% above. The Charlotte Observer The Charlotte Observer, the largest-circulation daily in both Carolinas, is sold primarily in a 15-county region across the two states. Revenue in 1999 was $197.0 million. Population in the Charlotte Metropolitan Statistical Area is projected to grow 8.2% between 1999 and 2004, compared with the U.S. average of 4.2%. Charlotte in 1999 had per capita income 9.3% above the U.S. average; in 2004 it is projected to be 13.7% above. Online Activities The company announced in the fourth quarter of 1999 the creation of KnightRidder.com, which will consolidate all of the company's Internet operations as a separate business unit by the end of the first quarter of 2000. Historically, Knight Ridder's Internet activities have been reported and managed as a part of the company's newspaper operations, but once the transition to a stand-alone business unit is made, they will be reported and managed separately. KnightRidder.com will continue to operate and manage the Real Cities network, which now consists of all Knight Ridder Web sites as well as those of several other media affiliates. Revenue from Real Cities sites increased by 75.4% in 1999, to $31.4 million. The company expects significant growth from these operations in 2000. Item 2. PROPERTIES Knight Ridder 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 9.1 million square feet. Approximately 2.1 million of the total square footage is leased from others. Virtually all of 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 excellent operating condition and are suitable for present and foreseeable operations. During the three years ended Dec. 26, 1999, the company spent approximately $331.2 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 Detroit Newspapers (DN), which operates both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and DN. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative judge ruled that the strike was caused by the unfair labor practices of DN and The Detroit News and ordered that DN and the newspapers reinstate all strikers, displacing permanent replacements if necessary. DN and the newspapers appealed the decision to the NLRB. On Aug. 27, 1998, the NLRB affirmed certain unfair labor practice findings against The Detroit News and DN and reversed certain findings of unfair labor practices against DN. DN and the newspapers filed a motion to reconsider with the NLRB, which was denied on March 4, 1999. The unions and DN filed appeals to the U.S. Court of Appeals for the District of Columbia Circuit. The case is pending in the U.S. Court of Appeals. The case is currently being briefed and oral argument has been set for May 2000. 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. 6 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 three months ended December 26, 1999. 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. The company's 79.6 million shares outstanding at December 26, 1999 were held in all 50 states by 11,014 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 $47.0625 on March 3, 2000. The average stock trading volume per day for the years 1999, 1998 and 1997 was 417,000, 242,000 and 271,000, respectively. The following table presents the company's common stock market data: 1999 1998 ---------------------- ---------------------- Quarter High Low High Low - ------- -------- ------- ------ ------ 1st 53 1/8 46 57 3/8 50 7/16 2nd 56 15/16 48 7/16 59 5/8 53 1/8 3rd 56 9/16 52 11/16 57 3/4 44 4th 65 52 5/8 54 15/16 40 1/2 Treasury Stock Purchases The table below is a summary of treasury stock purchases since 1989: Shares Cost Purchased (000s) - --------------------------------------------------- 1999 3,703,817 $ 210,141 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 Dividends Common stock dividend history and policy appears in Item 6, "11 Year Financial Highlights" and Item 8, "Financial Statements and Supplementary Data", Note 8 to the consolidated financial statements. 7 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. 26, 1999 (pages 19 through 44 should be read in order to obtain a better understanding of this data.
Compound Growth Rate (In thousands, except per ----------------------- Dec. 26 Dec. 27 Dec. 28 share data and ratios) 5-Year 10-Year 1999 1998 1997 ------- ------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising 9.3% 4.6% $ 2,468,903 $ 2,362,859 $ 2,202,251 Circulation 3.6 4.2 578,769 587,529 567,757 Other 21.9 18.8 180,553 141,531 106,777 ----------- ----------- ----------- Total Operating Revenue 8.6 4.9 3,228,225 3,091,919 2,876,785 ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs 6.9 4.2 2,414,621 2,399,249 2,214,026 Depreciation and amortization 14.4 7.5 189,354 188,052 156,731 ----------- ----------- ----------- Total Operating Costs 7.3 4.4 2,603,975 2,587,301 2,370,757 ----------- ----------- ----------- Operating Income 15.2 7.3 624,250 504,618 506,028 Interest expense 17.1 1.4 (97.444) (105,936) (102,662) Other, net(1) 87.0 (3.3) 41,209 109,234 290,486 Income taxes, net 16.5 7.7 (228,076) (202,285) (297,348) Income from continuing operations(1) 16.4 6.9 339,939 305,631 396,504 Discontinued BIS operations(2) 60,226 16,511 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ----------- ----------- ----------- Net Income(1) 14.7 3.2 $ 339,939 $ 365,857 $ 413,015 ====== ====== =========== =========== =========== Operating income percentage (profit margin) 19.3% 16.3% 17.6% - ------------------------------------------------------------------------------------------------------------------------------- SHARE DATA(4) Basic weighted-average number of shares 80,025 78,882 88,475 Diluted weighted-average number of shares 97,460 98,176 101,314 Earnings per share Basic: Continuing operations(1) 22.4 9.2 $ 4.07 $ 3.70 $ 4.40 Discontinued BIS operations(2) 0.77 0.19 Discontinued broadcast operations (2) Cumulative effect of changes in accounting principles(3) Net income(1) 20.8 5.4 4.07 4.47 4.59 Diluted: Continuing operations(1) 18.9 7.7 $ 3.49 $ 3.11 $ 3.91 Discontinued BIS operations(2) 0.62 0.17 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) Net income(1) 17.3 4.0 3.49 3.73 4.08 Dividends declared per common share(5) 4.0 3.6 0.89 0.80 0.80 Common stock price: High 65 59 5/8 57 1/8 Low 46 40 1/2 35 3/4 Close 58 15/16 50 13/16 50 3/16 Shareholders' equity per common share 10.5 7.9 $ 19.07 $ 17.33 $ 15.65 Price/earnings ratio(6) 16.9 13.6 12.3 Adjusted price/earnings ratio(7) 17.9 19.3 21.8 - ------------------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Treasury Stock Purchases: Number of shares 3,704 4,725 13,824 Cost $ 210,141 $ 255,533 $ 643,375 Payment of cash dividends 85,526 77,152 78,335 Ratio of earnings to fixed charges(8) 6.2 5.3 7.1 At year end Total assets $ 4,192,334 $ 4,257,097 $ 4,355,142 Long-term debt (excluding current maturities) 1,260,814 1,329,001 1,599,133 Total debt 1,300,754 1,527,278 1,668,830 Shareholders' equity 1,780,684 1,662,731 1,551,673 Return on average shareholders' equity(9) 19.8% 22.8% 30.8% Current ratio 1.1 0.8 1.1 Total debt/total capital ratio 42.2% 47.9% 51.8%
8
11-YEAR FINANCIAL HIGHLIGHTS (In thousands, except per Dec. 29 Dec. 31 Dec. 25 Dec. 26 share data and ratios) 1996 1995 1994 1993 ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising $ 1,793,424 $ 1,672,970 $ 1,583,373 $ 1,481,631 Circulation 501,826 495,315 484,581 474,420 Other 78,974 81,897 66,968 56,772 ----------- ----------- ----------- ----------- Total Operating Revenue 2,374,224 2,250,182 2,134,922 2,012,823 ----------- ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs 1,920,444 1,923,179 1,730,158 1,655,138 Depreciation and amortization 120,647 98,741 96,613 96,233 ----------- ----------- ----------- ----------- Total Operating Costs 2,041,091 2,021,920 1,826,771 1,751,371 ----------- ----------- ----------- ----------- Operating Income 333,133 228,262 308,151 261,452 Interest expense (73,137) (59,512) (44,216) (44,403) Other, net(1) 50,213 14,067 1,802 2,987 Income taxes, net (124,829) (72,861) (106,493) (83,281) ----------- ----------- ----------- ----------- Income from continuing operations(1) 185,380 109,956 159,244 136,755 Discontinued BIS operations(2) 82,493 57,426 11,656 11,334 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) (7,320) ----------- ----------- ----------- ----------- Net Income(1) $ 267,873 $ 160,062 $ 170,900 $ 148,089 =========== =========== =========== =========== Operating income percentage (profit margin) 14.0% 10.1% 14.4% 13.0% - ------------------------------------------------------------------------------------------------------------ SHARE DATA(4) Basic weighted-average number of shares 96,021 99,451 107,888 109,702 Diluted weighted-average number of shares 97,420 100,196 108,551 110,663 Earnings per share Basic: Continuing operations(1) $ 1.93 $ 1.11 $ 1.48 $ 1.25 Discontinued BIS operations(2) 0.86 0.57 0.10 0.10 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) (0.07) Net income(1) 2.79 1.61 1.58 1.35 Diluted:Continuing operations(1) $ 1.90 $ 1.10 $ 1.47 $ 1.24 Discontinued BIS operations(2) 0.85 0.57 0.10 0.10 Discontinued broadcast Cumulative effect of changes in accounting principles(3) (0.07) Net income(1) 2.75 1.60 1.57 1.34 Dividends declared per common share(5) 0.58 1/2 0.74 0.73 0.70 Common stock price: High 42 33 5/16 30 1/2 32 1/2 Low 29 7/8 25 1/8 23 1/4 25 5/16 Close 39 1/4 31 1/4 25 7/16 29 11/16 Shareholders' equity per common share $ 12.12 $ 11.43 $ 11.58 $ 11.33 Price/earnings ratio(6) 14.3 19.5 16.2 22.2 Adjusted price/earnings ratio(7) 21.6 28.4 17.3 23.9 - ------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL DATA Treasury Stock Purchases: Number of shares 6,219 11,509 5,045 1,500 Cost $ 221,768 $ 319,363 $ 136,977 $ 40,693 Payment of cash dividends 74,262 74,377 77,942 76,787 Ratio of earnings to fixed charges(8) 4.0 3.2 5.2 4.4 At year end Total assets $ 2,860,907 $ 2,966,321 $ 2,409,239 $ 2,399,067 Long-term debt (excluding current maturities) 771,335 1,000,721 411,504 410,388 Total debt 821,335 1,013,850 411,504 451,075 Shareholders' equity 1,131,508 1,110,970 1,224,654 1,243,169 Return on average shareholders' equity(9) 23.9% 14.3% 13.9% 12.2% Current ratio 1.0 1.1 1.0 1.0 Total debt/total capital ratio 42.1% 47.7% 25.2% 26.6%
9 11-YEAR FINANCIAL HIGHLIGHTS (Continued)
(In thousands, except per Dec. 27 Dec. 29 Dec. 30 Dec. 31 share data and ratios) 1992 1991 1990 1989 ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising $ 1,444,144 $ 1,429,661 $ 1,556,932 $ 1,577,449 Circulation 460,014 439,029 403,188 385,214 Other 39,932 35,127 31,981 32,212 ----------- ----------- ----------- ----------- Total Operating Revenue 1,944,090 1,903,817 1,992,101 1,994,875 ----------- ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs 1,597,983 1,593,847 1,617,138 1,593,186 Depreciation and amortization 89,665 86,896 91,553 91,780 ----------- ----------- ----------- ----------- Total Operating Costs 1,687,648 1,680,743 1,708,691 1,684,966 ----------- ----------- ----------- ----------- Operating Income 256,442 223,074 283,410 309,909 Interest expense (52,358) (68,806) (71,784) (84,492) Other, net(1) 13,868 35,832 17,019 57,505 Income taxes, net (82,496) (67,965) (88,076) (108,883) ----------- ----------- ----------- ----------- Income from continuing operations(1) 135,456 122,135 140,569 174,039 Discontinued BIS operations(2) 10,630 9,933 8,476 5,797 Discontinued broadcast operations(2) 67,366 Cumulative effect of changes in accounting principles(3) (105,200) ----------- ----------- ----------- ----------- Net Income(1) $ 40,886 $ 132,068 $ 149,045 $ 247,202 =========== =========== =========== =========== Operating income percentage (profit margin) 13.2% 11.7% 14.2% 15.5% - ------------------------------------------------------------------------------------------------------------ SHARE DATA(4) Basic weighted-average number of shares 108,948 102,586 100,098 103,110 Diluted weighted-average number of shares 110,356 103,594 101,366 104,878 Earnings per share Basic: Continuing operations(1) $ 1.24 $ 1.19 $ 1.40 $ 1.69 Discontinued BIS operations(2) 0.11 0.10 0.09 0.06 Discontinued broadcast operations(2) 0.65 Cumulative effect of changes in accounting principles(3) (0.97) Net income(1) 0.38 1.29 1.49 2.40 Diluted: Continuing operations(1) $ 1.22 $ 1.18 $ 1.39 $ 1.66 Discontinued BIS operations(2) 0.10 0.09 0.08 0.06 Discontinued broadcast 0.64 Cumulative effect of changes in accounting principles(3) (0.95) Net income(1) 0.37 1.27 1.47 2.36 Dividends declared per common share(5) 0.70 0.70 0.67 0.62 1/4 Common stock price: High 32 1/16 28 3/4 29 29 3/16 Low 25 3/8 21 7/8 18 1/2 21 7/16 Close 29 1/16 25 3/8 22 15/16 29 3/16 Shareholders' equity per common share $ 10.75 $ 10.72 $ 9.05 $ 8.92 Price/earnings ratio(6) 78.5 20.0 15.6 12.4 Adjusted price/earnings ratio(7) 23.8 21.5 16.5 21.2 - ------------------------------------------------------------------------------------------------------------ OTHER FINANCIAL DATA Treasury Stock Purchases: Number of shares 5,325 5,522 Cost $ 129,909 $ 131,885 Payment of cash dividends 75,992 71,087 66,422 63,260 Ratio of earnings to fixed charges(8) 3.8 2.8 3.3 3.6 At year end Total assets $ 2,431,307 $ 2,305,731 $ 2,244,919 $ 2,112,184 Long-term debt (excluding current maturities) 495,941 556,797 803,914 660,900 Total debt 560,245 606,840 823,958 712,940 Shareholders' equity 1,181,812 1,148,620 894,913 917,145 Return on average shareholders' equity(9) 12.0% 12.9% 16.5% 28.4% Current ratio 1.1 1.1 1.2 1.2 Total debt/total capital ratio 32.2% 34.6% 47.9% 43.7%
10 (1) Other, net, Income from continuing operations and Net Income include: The gain on sale of Zip2, AT&T and SportsLine stock during 1999; 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 exchange of the Boulder, Colo., newspaper in 1997; the gain on Netscape Communications Corporation 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, Knight-Ridder Information, Inc., in 1997, Knight-Ridder Financial in 1996 and the Journal of Commerce in 1995. (2) All years have been restated to present the Business Information Services (BIS) Division and Broadcast 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) In the second quarter of 1999, the Board of Directors increased the quarterly dividend to $0.23 per share from $0.20 per share. All share data prior to 1996 is restated for the 1996 stock split; Basic EPS for 1998 and 1997 has been restated to exclude preferred dividends from net income for the purpose of calculating EPS attributable to common stock (see Note 1, page 58). (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 relocation and severance costs and gains on one-time sales. (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. 11 Item 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF OPERATIONS Knight Ridder is the nation's second-largest newspaper publisher, with products in print and online. The company publishes 31 daily newspapers in 28 U.S. markets, with a readership of 8.7 million daily and 12.9 million Sunday. Knight Ridder also has investments in a variety of Internet and technology companies and two newsprint production companies. The company's Internet operation, KnightRidder.com, creates and maintains a variety of online services, including RealCities.com, a national network of regional hubs in 31 U.S. markets. In 1999, the gross revenue from these businesses was about $3.2 billion. 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. NEWSPAPER revenue is derived principally from advertising and newspaper copy sales. Advertising revenue accounted for about 76.5% of consolidated revenue in 1999. 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. Circulation revenue results from the sale of newspapers. Circulation of daily and Sunday newspapers accounted for 17.9% of consolidated revenue in 1999. 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. 12 RESULTS OF OPERATIONS: 1999, 1998 and 1997 The following table sets forth the results of operations for the periods ended Dec. 26, 1999, Dec. 27, 1998, and Dec. 28, 1997.
Change (In thousands of dollars, except --------------------------- per share amounts) 1999 1998 1997 99-98 98-97 ----------- ----------- ----------- ------- ------- Operating revenue $ 3,228,225 $ 3,091,919 $ 2,876,785 4.4% 7.5% Operating income 624,250 504,618 506,028 23.7% (0.3)% Income Continuing operations Before gains on investment sales, severance and relocation costs 321,146 273,162 233,319 17.6% 17.1% Gains on investment sales, severance and relocation costs 18,793 32,469 163,185 Discontinued operations 60,226 16,511 ----------- ----------- ----------- Net income $ 339,939 $ 365,857 $ 413,015 (7.1)% (11.4)% =========== =========== =========== Diluted earnings per share Continuing operations Before gains on investment sales, severance and relocation costs 3.30 2.78 2.30 18.7% 20.9% Gains on investment sales, severance and relocation costs 0.19 0.33 1.61 Discontinued operations 0.62 0.17 ----------- ----------- ----------- Net income $ 3.49 $ 3.73 $ 4.08 (6.4)% (8.6)% =========== =========== ===========
Knight Ridder earned $3.30 per diluted share from continuing operations in 1999, up $0.52, or 18.7%, from the $2.78 earned in 1998, excluding one-time gains and severance from both years and excluding corporate relocation costs in 1998. On a comparable basis, the company's earnings per diluted share was $2.78 in 1998, up $.48, or 20.9%, from the $2.30 earned in 1997. 13 OPERATING REVENUE. The following table summarizes the results of Operating Revenue and related full-run ROP linage statistics for the periods ended Dec. 26, 1999, Dec. 27, 1998, and Dec. 28, 1997.
Change ------------------------ In thousands 1999 1998 1997 99-98 98-97 ----------- ----------- ----------- ----- ----- Operating revenue Advertising Retail $ 1,102,381 $ 1,089,273 $ 1,008,736 1.2% 8.0% General 316,857 261,831 246,096 21.0% 6.4% Classified 1,049,665 1,011,755 947,419 3.7% 6.8% ----------- ----------- ----------- Total 2,468,903 2,362,859 2,202,251 4.5% 7.3% ----------- ----------- ----------- Circulation 578,769 587,529 567,757 (1.5)% 3.5% Other 180,553 141,531 106,777 27.6% 32.5% ----------- ----------- ----------- Total operating revenue $ 3,228,225 $ 3,091,919 $ 2,876,784 4.4% 7.5% =========== =========== =========== Average circulation Daily 3,932 3,998 4,236 (1.7)% (5.6)% Sunday 5,400 5,507 5,816 (1.9)% (5.3)% Advertising linage Full-run Retail 18,876 19,254 19,090 (2.0)% 0.9% General 2,896 2,327 2,271 24.5% 2.5% Classified 20,470 19,952 19,726 2.6% 1.1% ----------- ----------- ----------- Total full-run 42,242 41,533 41,087 1.7% 1.1% =========== =========== ===========
General advertising revenue had unprecedented growth in 1999, up 21.0% on a full-run ROP linage increase of 24.5%. This increase was due largely to a surge of e-commerce and Internet-related advertising and strength in telecommunications, financial and travel advertising. In 1998, general advertising was up 6.4% on a 2.5% increase in full-run ROP linage. Classified advertising was up 3.7% in 1999 on a full-run ROP linage increase of 2.6%. This increase reflected a relatively strong second half of 1999, up 5.8%. In 1998, classified was up 6.8% on a 1.1% increase in full-run ROP linage. Help wanted contributed significantly to the classified growth in both years. Retail was up 1.2% in 1999 on a full-run ROP linage decrease of 2.0%. The weak results were due primarily to consolidations and bankruptcies in many major markets. In 1998, retail was up 8.0% on a 0.9% increase in full-run ROP linage. Circulation revenue decreased by 1.5% in 1999 on a 1.7% decrease in daily circulation and a 1.9% decrease in Sunday circulation. The decline in circulation came primarily from a few large markets, and the company anticipates that these declines will reverse in 2000. In 1998, circulation revenue improved by $19.8 million, or 3.5%, on a 5.6% decrease in daily circulation and a 5.3% decrease in Sunday circulation. Including full-year results in 1997 for the former Disney and Scripps newspapers but excluding the sold newspapers, circulation revenue for 1998 compared to 1997 was essentially flat, on about flat average daily circulation copy and an average Sunday circulation copy decline of 1.1%. 14 OPERATING COSTS. The following table summarizes operating costs for the periods ended Dec. 26, 1999, Dec. 27, 1998, and Dec. 28, 1997.
Change ------------------------ In thousands 1999 1998 1997 99-98 98-97 ----------- ----------- ----------- ------- ----- Operating costs Labor and employee benefits $ 1,246,491 $ 1,200,981 $ 1,132,227 3.8% 6.1% ----------- ----------- ----------- Newsprint, ink and supplements 472,727 529,154 466,329 (10.7)% 13.5% Other operating costs 695,403 669,114 615,470 3.9% 8.7% Depreciation and amortization 189,354 188,052 156,731 0.7% 20.0% ----------- ----------- ----------- Total operating costs $ 2,603,975 $ 2,587,301 $ 2,370,757 0.6% 9.1% =========== =========== ===========
The increase in labor and employee benefits in 1999 resulted from a 3.8% increase in the average wage per employee, offset by a 1.2% decrease in the number of full-time equivalent employees. In addition, bonus and incentive costs were up 16.3% and benefit costs were up 7.4% from 1998. During 1999, the company incurred $4.7 million in severance costs. In 1998, the company incurred $23.9 million in newspaper severance and corporate relocation costs. The corporate relocation costs resulted from the relocation of the company headquarters from Miami to San Jose. Without these severance and corporate relocation costs, labor and employee benefits increased 5.1% in 1999. On a comparable basis and excluding corporate relocation and newspaper severance costs from 1998, labor and employee benefits were up $27.1 million, or 2.3%, from 1997, on a 1.0% increase in the work force and an average wage rate increase of 3.0%, offset by a decline in employee benefit costs. The decrease in the cost of newsprint, ink and supplements in 1999 was due primarily to a 12.3% decrease in the average cost per ton of newsprint, offset slightly by a 0.7% increase in newsprint consumption. For 1998 compared with 1997, the increase in newsprint, ink and supplements was due to a 7.0% increase in the average cost per ton of newsprint and a 5.6% increase in newsprint consumption. The increase in other operating costs in 1999 resulted primarily from an increase in the cost of contract services, legal fees, and an increase in the reserve for bad debt expense. The increase in other operating expenses from 1997 to 1998 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. Previous circulation revenue in Detroit was recorded at the net wholesale price. For 1999, depreciation and amortization expense increased 0.7%. The increase in depreciation resulted from a slightly larger asset base. The increase in depreciation and amortization expense from 1997 to 1998 resulted primarily from an increase in amortization expense associated with the acquisition of newspapers from The Walt Disney Company and E.W. Scripps Company and depreciation expense associated with major press projects. NON-OPERATING ITEMS. Net interest expense decreased $8.2 million, or 8.4%, in 1999 as a result of lower debt levels. For 1998, net interest expense increased $4.1 million, or 4.4%, due to higher debt levels associated with the Disney acquisition and higher interest rates in the early part of 1998. The average debt balance decreased $180.9 million in 1999 and increased $153.7 million from 1997 to 1998. From 1998 to 1999, equity in earnings of unconsolidated companies and joint ventures decreased by $10.7 million due to a decrease in earnings from investments in newsprint mills, InfiNet Company, and various other investments. From 1997 to 1998, equity in earnings of unconsolidated companies increased by $12.5 million, due to improved results from newsprint mill investments and InfiNet. The "OTHER, NET" line of the non-operating section decreased by $55.7 million in 1999, due to the 1998 gains on the sale of the balance of the company's cable systems, the Gary, Ind., newspaper, and final settlements on the 1997 newspaper sales. Results in 1999 included a gain on the sale of AT&T, Zip2 and SportsLine stock, offset by adjustments in the carrying value of certain other investments. Results in 1997 included the sale of the majority of the TKR Cable Company, the Boulder exchange and the sale of four newspapers. 15 On March 18, 1998, the company (through its wholly owned subsidiary Knight- Ridder Cablevision, Inc.), completed the sale of its remaining jointly owned cable television system to Tele-Communications, Inc. 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. DISCONTINUED OPERATIONS. 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. INCOME TAXES. The effective income tax rates on continuing operations for 1999, 1998 and 1997 were 40.2%, 39.8% and 42.9%, respectively. The effective tax rate was higher in 1997 because of the sale of cable assets, which generated income in states with higher tax rates. In addition, in 1998 certain prior year tax matters were settled for amounts lower than originally estimated. ONLINE ACTIVITIES. The company announced in the fourth quarter of 1999 the creation of KnightRidder.com, which will consolidate all of the company's Internet operations as a separate business unit by the end of the first quarter of 2000. Historically, Knight Ridder's Internet activities have been reported and managed as a part of the company's newspaper operations, but once the transition to a stand-alone business unit is made, they will be reported and managed separately. KnightRidder.com will reorganize, manage and control all of Knight Ridder's online efforts, including the Web sites now operated by the newspapers, as well as its current activities. KnightRidder.com will continue to operate and manage the Real Cities network, which now consists of all Knight Ridder Web sites as well as those of several other media affiliates. Revenue from Real Cities sites increased by 75.4% in 1999, to $31.4 million. The company expects significant growth from these operations in 2000. A LOOK AHEAD Looking ahead, the company expects another year of earnings growth in 2000. Advertising revenue will likely increase between 4% and 5%, with general and classified stronger than retail. As in 1999, the company believes some markets will do considerably better than this, while others may lag. The company expects the costs for newsprint to increase 4% to 5% in 2000. YEAR 2000 READINESS DISCLOSURE All Year 2000 statements in this annual report are Year 2000 Readiness Disclosures under the Year 2000 Information and Readiness Disclosure Act. The Year 2000 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. Failure to recognize the correct date may result in a system failure, disruption of operations, and/or a temporary inability to conduct normal business activities. From the initiation of the Year 2000 project, the company has spent approximately $60.0 million of which approximately 65% was related to the purchase of hardware and software, which has been capitalized. The remainder was expensed as incurred. The company has not experienced any Year 2000-related problems. The company believes all existing computer hardware, software and software conversions are Year 2000 capable; however, there can be no assurance the company will not experience Year 2000 problems in the future. The company continues to monitor its hardware and software systems for any Year 2000-related problems and the company continues to have contingency plans in place with alternative solutions in the event that they are required. 16 LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the company's primary source of liquidity. Management continues to have a strong orientation toward cash flows and the effective management of cash generated. In addition, the company uses financial leverage to minimize the overall cost of capital and maintain adequate operating and financial flexibility. Management monitors leverage through its interest coverage ratio, debt to equity ratio and total debt to total capital ratio. The following schedule summarizes these ratios for the periods ended Dec. 26, 1999, and Dec. 27, 1998: 1999 1998 ----- ----- Current assets to current liabilities 1.1:1 0.8:1 Interest coverage ratio(a) 8.3:1 6.5:1 Total debt to equity 73.0% 91.9% Total debt to total capital 42.2% 47.9% (a) Defined as operating income plus depreciation and amortization divided by interest expense. The company's financial position remained strong throughout 1999, with cash and cash equivalents and short-term investments of $34.1 million at Dec. 26, 1999, compared with $26.8 million at Dec. 27, 1998. During 1999, cash flows from operating activity were used to fund treasury stock purchases of $210.1 million and to reduce debt by $227.3 million. In addition, the company increased dividends by $8.4 million from 1998 to 1999. Cash provided by operating activities was $505.7 million in 1999, compared with $297.2 million in 1998. The increase was partially attributed to higher net income, exclusive of gains on sales of investments in both years and the gain on sale of discontinued operations in 1998. At Dec. 26, 1999, working capital was $73.2 million compared with a negative $128.1 million at Dec. 27, 1998. The increase in working capital from 1998 to 1999 was due primarily to a $158.3 million decrease in short-term borrowings. Cash required for investing activities was primarily for the purchase of $92.6 million of property, plant and equipment and $76.6 million for the acquisition of businesses and other investments, offset by proceeds of $119.8 million from the sale of investments. The proceeds from the sale of investments came from the company's disposition of stock of AT&T, Zip2 and SportsLine. The company invests excess cash in short- and long-term investments, depending on projected cash needs from operations, capital expenditures and other business purposes. The company supplements internally generated cash flow with a combination of short- and long-term borrowings. Average outstanding commercial paper during the year was $530.2 million, with an average effective interest rate of 5.5%. At Dec. 26, 1999, the company's revolving credit and term loan agreements, which back up the commercial paper outstanding, had a remaining availability of $466.2 million. The 364-day revolving credit and term loan portion of the facility matures in June 2000; however, the company has the option and intention to renew this facility for an additional term through June 2001. At year end, Standard & Poor's, Moody's and Duff & Phelps continued to rate the company's commercial paper A1, P2 and D1, and long-term debt A, A3 and A, respectively. In February 2000, Moody's upgraded the company's short- and long-term debt to P1 and A2, respectively. During 1999, the company repurchased 3.7 million common shares at a total cost of $210.1 million and an average cost of $56.74 per share. At year end, there was authorization remaining to purchase 5.5 million shares. 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- and long-term cash requirements, including requirements for working capital and capital expenditures. 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 $331.2 million for additions and improvements to properties. Additions to property, plant and equipment decreased by $39.4 million to $92.6 million in 1999 from $132.0 million in 1998, due primarily to higher expenditures in 1998 for major Year 2000 projects. 17 Expenditures in 1999 included $16.8 million for the Fort Worth and Miami press projects. The $37.8 million Fort Worth press expansion was completed during 1999, and the $108.0 million Miami press expansion is scheduled to be completed in 2000. In addition, The Wichita Eagle began a press project in 1999. The total project cost is projected to be $27.7 million through 2002, with expenditures of $8.0 million in 1999. These press projects are replacement projects that are expected to significantly improve reliability, speed, print quality and page and color capacity, and reduce waste. Also included in capital expenditures for 1999 was $3.2 million to complete the Philadelphia Editorial System project, for a total project cost of $13.6 million. This project was completed at the end of 1999 and serves both The Philadelphia Inquirer and the Philadelphia Daily News. Capitalized Year 2000 costs were approximately $15.9 million in 1999. Spending is estimated to be lower in 2000, partly due to the completion of Year 2000 capability and certain major projects. On Jan. 31, 2000, Cadabra, Inc., an investment in which the company held a 19.5% minority ownership position at Dec. 26, 1999, was purchased by GoTo.com, Inc., in exchange for $8.0 million in cash and 3.3 million shares of GoTo.com, Inc., stock. Knight Ridder now holds a minority ownership interest in GoTo.com of 1.57%. The market value of Cadabra was not readily available at Dec. 26, 1999, and therefore was not included in comprehensive income at year end. On Feb. 15, 2000, Prio, Inc., an investment in which the company held a 12.41% minority ownership position at Dec. 26, 1999, was purchased by InfoSpace.com in exchange for 5.4 million shares of InfoSpace.com, Inc., stock. The market value of Prio was not readily available at Dec. 26, 1999, and therefore was not included in comprehensive income at year end. As of the date of these transactions, the company had an after-tax realized gain on its investments in Cadabra and Prio of approximately $100 million. 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. FORWARD-LOOKING STATEMENTS Certain statements in this annual report on Form 10-K 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 that 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. 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS BORROWINGS. By balancing the mix of variable- versus fixed-rate borrowings, the company manages the interest rate risk of its debt portfolio. Note 4 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 approximately $9.1 million. This hypothetical interest rate change would also decrease the fair value of the fixed debt by $80.0 million. NEWSPRINT. The company consumed approximately 801,000 metric tons of newsprint in 1999. This represents 15.2% of the company's 1999 total operating expenses. Under the caption "NEWSPRINT" on page 32 of this annual report, the company has included information on its suppliers, the long-term purchase agreements used to manage the related risk of price increases, and natural hedges the company has in place through its investment in newsprint mills. COLLECTIVE BARGAINING AGREEMENTS. Approximately 37% 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. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Selected quarterly financial data is presented in Note 8 of Notes to Consolidated Financial Statements. Schedule II - Valuations and Qualifying Accounts is included in Item 14 of this report and incorporated herein by reference. CONSOLIDATED BALANCE SHEET (In thousands, except share data) Dec. 26, 1999 Dec. 27, 1998 ------------- ------------- ASSETS CURRENT ASSETS Cash, including short-term cash investments of $5,598 in 1999 and $4,159 in 1998 $ 34,084 $ 26,836 Accounts receivable, net of allowances of $15,917 in 1999 and $15,738 in 1998 423,016 386,455 Inventories 39,238 59,109 Prepaid expense 32,246 14,078 Other current assets 41,720 39,213 ---------- ---------- Total Current Assets $ 570,304 $ 525,691 ---------- ---------- INVESTMENTS AND OTHER ASSETS Equity in unconsolidated companies and joint ventures 206,880 201,120 Other 181,583 243,586 ---------- ---------- Total Investments and Other Assets 388,463 444,706 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT Land and improvements 93,995 93,781 Buildings and improvements 484,163 484,367 Equipment 1,244,110 1,175,044 Construction and equipment installations in progress 67,922 84,559 ---------- ---------- 1,890,190 1,837,751 Less accumulated depreciation (831,041) (764,750) ---------- ---------- Net Property, Plant and Equipment 1,059,149 1,073,001 ---------- ---------- GOODWILL Less accumulated amortization of $331,504 in 1999 and $264,001 in 1998 2,174,418 2,213,699 ---------- ---------- Total $4,192,334 $4,257,097 ========== ========== See "Notes to Consolidated Financial Statements." 19 CONSOLIDATED BALANCE SHEET (Continued) Dec. 26, 1999 Dec. 27, 1998 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 142,460 $ 164,558 Accrued expenses and other liabilities 100,668 111,088 Accrued compensation and amounts withheld from employees 126,529 112,827 Federal and state income taxes 16,039 Deferred revenue 71,505 67,006 Short-term borrowings and current portion of long-term debt 39,940 198,277 ---------- ---------- Total Current Liabilities 497,141 653,756 ---------- ---------- NONCURRENT LIABILITIES Long-term debt 1,260,814 1,329,001 Deferred Federal and state income taxes 306,636 293,015 Postretirement benefits other than pensions 145,143 147,118 Employment benefits and other noncurrent liabilities 197,045 168,974 ---------- ---------- Total Noncurrent Liabilities 1,909,638 1,938,108 ---------- ---------- MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 4,871 2,502 COMMITMENTS AND CONTINGENCIES (Note 11) SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value; shares authorized - 2,000,000; shares issued - 1,374,100 in 1999 and 1,754,930 in 1998 1,374 1,755 Common stock, $.02 1/12 par value; shares authorized - 250,000,000; shares issued - 79,654,493 in 1999 and 78,374,195 in 1998 1,659 1,633 Additional capital 938,969 908,078 Retained earnings 798,971 735,132 Accumulated other comprehensive income 42,084 18,738 Treasury stock, at cost; 42,510 shares in 1999 and 46,667 shares in 1998 (2,373) (2,605) ---------- ---------- Total Shareholders' Equity 1,780,684 1,662,731 ---------- ---------- Total $4,192,334 $4,257,097 ========== ========== See "Notes to Consolidated Financial Statements." 20 CONSOLIDATED STATEMENT OF INCOME (In thousands, except per share data) Year Ended --------------------------------------------- Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- ------------- OPERATING REVENUE Advertising Retail $ 1,102,381 $ 1,089,273 $ 1,008,736 General 316,857 261,831 246,096 Classified 1,049,665 1,011,755 947,419 ----------- ----------- ----------- Total 2,468,903 2,362,859 2,202,251 Circulation 578,769 587,529 567,757 Other 180,553 141,531 106,777 ----------- ----------- ----------- Total Operating Revenue 3,228,225 3,091,919 2,876,785 ----------- ----------- ----------- OPERATING COSTS Labor and employee benefits 1,246,491 1,200,981 1,132,227 Newsprint, ink and supplements 472,727 529,154 466,329 Other operating costs 695,403 669,114 615,470 Depreciation and amortization 189,354 188,052 156,731 ----------- ----------- ----------- Total Operating Costs 2,603,975 2,587,301 2,370,757 ----------- ----------- ----------- OPERATING INCOME 624,250 504,618 506,028 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (97,444) (105,936) (102,662) Interest expense capitalized 5,197 4,516 5,376 Interest income 2,429 3,416 3,404 Equity in earnings of unconsolidated companies and joint ventures 12,571 23,309 10,800 Minority interests in earnings of consolidated subsidiaries (11,984) (10,749) (11,503) Other, net 32,996 88,742 282,409 ----------- ----------- ----------- Total (56,235) 3,298 187,824 ----------- ----------- ----------- Income before income taxes 568,015 507,916 693,852 Income taxes 228,076 202,285 297,348 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS 339,939 305,631 396,504 Net gain on sale of discontinued BIS operations, net of applicable income taxes of $43,752 in 1998 and $8,365 in 1997 60,042 15,261 Income from discontinued BIS operations, net of applicable income taxes of $133 in 1998 and $1,119 in 1997 184 1,250 ----------- ----------- ----------- Net Income $ 339,939 $ 365,857 $ 413,015 =========== =========== =========== 21 CONSOLIDATED STATEMENT OF INCOME (Continued) (In thousands, except per share data) Year Ended --------------------------------------------- Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997 ------------- ------------- ------------- EARNINGS PER SHARE Basic: (Note 1) Income from continuing operations $ 4.07 $ 3.70 $ 4.40 Net gain on sale of discontinued BIS operations .76 .17 Income from discontinued BIS operations, net .01 .02 ----------- ----------- ----------- Net Income $ 4.07 $ 4.47 $ 4.59 =========== =========== =========== Diluted: Income from continuing operations $ 3.49 $ 3.11 $ 3.91 Net gain on sale of discontinued BIS operations .61 .15 Income from discontinued BIS operations, net .01 .02 ----------- ----------- ----------- Net Income $ 3.49 $ 3.73 $ 4.08 =========== =========== =========== AVERAGE SHARES OUTSTANDING (000S) Basic 80,025 78,882 88,475 Diluted 97,460 98,176 101,314 See "Notes to Consolidated Financial Statements." 22 CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands of dollars) Year Ended ---------------------------------------------- Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997 -------------- -------------- -------------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 339,939 $ 365,857 $ 413,015 Noncash items deducted from (included in) income: Gains on sales of investments (37,655) (75,251) (283,126) Net gain on sale of discontinued BIS operations (60,042) (15,261) Depreciation 107,855 101,950 94,138 Amortization 81,499 86,102 62,593 Benefit for deferred taxes (1,895) (8,444) (14,750) Provision for bad debts 25,135 20,854 23,332 Earnings from investees less distributions 2,506 (21,856) (14,658) Minority interests in earnings of consolidated subsidiaries 12,024 10,749 11,503 Other items, net 767 18,576 38,656 Change in certain assets and liabilities: Accounts receivable (64,221) (39,927) (57,185) Inventories 19,871 (9,398) (326) Other current assets (22,452) 3,296 380 Accounts payable (22,098) (20,299) (83,969) Federal and state income taxes 16,176 (52,234) 20,125 Other liabilities 48,253 (22,782) 47,724 --------- --------- --------- Net Cash Provided by Operating Activities 505,704 297,151 242,191 --------- --------- --------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Proceeds from sales of investments 119,810 62,444 423,039 Proceeds from sale of discontinued BIS operations 125,000 416,983 Change in net noncurrent assets of discontinued BIS operations 520 1,996 Acquisition of businesses (38,403) Other investments (38,227) Additions to property, plant and equipment (92,563) (132,025) (106,614) Other items, net 33,205 (35,642) (8,165) --------- --------- --------- Net Cash Provided by (Required for) Investing Activities (16,178) 20,297 727,239 --------- --------- --------- CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES Proceeds from sale of commercial paper, notes payable and senior notes payable 2,397,615 914,926 833,600 Payment of total debt (2,624,906) (1,057,186) (976,611) --------- --------- --------- Net Change in Total Debt excluding amortization of discounts (227,291) (142,260) (143,011) Payment of cash dividends (85,526) (77,152) (78,335) Issuance of common stock to employees and directors 50,335 44,411 60,029 Purchase of treasury stock (210,141) (255,533) (643,375) Other items, net (9,655) (20,369) (27,327) --------- --------- --------- Net Cash Required for Financing Activities (482,278) (450,903) (832,019) --------- --------- --------- Net Increase (Decrease) in Cash 7,248 (133,455) 137,411 Cash and short-term cash investments at beginning of the year 26,836 160,291 22,880 --------- --------- --------- Cash and short-term cash investments at end of the year $ 34,084 $ 26,836 $ 160,291 ========= ========= ========= 23 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (In thousands of dollars) Year Ended ---------------------------------------------- Dec. 26, 1999 Dec. 27, 1998 Dec. 28, 1997 -------------- -------------- -------------- SUPPLEMENTAL CASH FLOW INFORMATION Noncash investing activities Securities received as proceeds on the sale of investee $ -- $ 37,678 $ 229,163 Unrealized gains (net of tax) on investments available for sale 23,346 18,738 1,671 Noncash financing activities Conversion of preferred stock held by Disney to common stock Preferred stock (381) Additional capital (142,842) Issuance of common stock upon conversion to preferred stock Preferred stock 79 Additional capital 143,144 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." 24 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (In thousands of dollars, except share data) Preferred Common Treasury Shares Shares Shares - ------------------------------------------------------------------------------ BALANCE AT DEC. 29, 1996 -- 93,340,652 -- Issuance of common shares under stock option plan 89,318 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 Purchase of treasury shares (13,824,300) Retirement of treasury shares (11,832,339) 11,832,339 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 ------------ ----------- ---------- BALANCE AT DEC. 28, 1997 1,754,930 81,597,631 -- Issuance of common shares under stock option plan 369,372 Issuance of common shares under stock purchase plan 81,672 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 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 ------------ ----------- ---------- BALANCE AT DEC. 27, 1998 1,754,930 78,374,195 (46,667) Issuance of common shares under stock option plan 840,375 Issuance of common shares under stock purchase plan 336,001 Conversion of preferred shares (380,830) 3,808,300 Issuance of treasury shares to nonemployee directors 4,157 Purchase of treasury shares (3,704,378) Retirement of treasury shares (3,704,378) 3,704,378 Tax benefits arising from employee stock plans Comprehensive income: Net income Change in unrealized gains on securities available for sale, net of tax of $15,564 Comprehensive income Cash dividends declared ------------ ----------- ---------- BALANCE AT DEC. 26, 1999 1,374,100 79,654,493 (42,510) ============ =========== ========== See "Notes to Consolidated Financial Statements." 25
Preferred Common Additional Retained Stock Stock Capital Earnings - ----------------------------------------------------------------------------------------------------- BALANCE AT DEC. 29, 1996 $ -- $ 1,945 $ 308,320 $ 819,572 Issuance of common shares under stock option plan 2 2,395 Issuance of treasury shares under stock option plan (28,149) Issuance of treasury shares under stock purchase plan (2,222) Issuance of convertible preferred shares 1,755 658,245 Purchase of treasury shares Retirement of treasury shares (247) (37,519) (517,606) Tax benefits arising from employee stock plans 10,502 Comprehensive income: Net income 413,015 Change in unrealized gains on securities available for sale, net of tax of $1,210 Comprehensive income Cash dividends declared (78,335) ------- ------- --------- --------- BALANCE AT DEC. 28, 1997 $ 1,755 $ 1,700 $ 911,572 $ 636,646 Issuance of common shares under stock option plan 7 10,185 Issuance of common shares under stock purchase plan 2 3,966 Issuance of treasury shares under stock option plan (14,422) Issuance of treasury shares under stock purchase plan (1,352) Issuance of treasury shares to nonemployee directors (13) Issuance of treasury shares Purchase of treasury shares Retirement of treasury shares (76) (11,401) (190,219) Tax benefits arising from employee stock plans 9,543 Comprehensive income: Net income 365,857 Change in unrealized gains on securities available for sale, net of tax of $12,492 Comprehensive income Cash dividends declared (77,152) ------- ------- --------- --------- BALANCE AT DEC. 27, 1998 $ 1,755 $ 1,633 $ 908,078 $ 735,132 Issuance of common shares under stock option plan 17 25,893 Issuance of common shares under stock purchase plan 7 14,996 Conversion of preferred shares (381) 79 302 Issuance of treasury shares to nonemployee directors Purchase of treasury shares Retirement of treasury shares (77) (19,490) (190,574) Tax benefits arising from employee stock plans 9,190 Comprehensive income: Net income 339,939 Change in unrealized gains on securities available for sale, net of tax of $15,564 Comprehensive income Cash dividends declared (85,526) ------- ------- --------- --------- BALANCE AT DEC. 26, 1999 $ 1,374 $ 1,659 $ 938,969 $ 798,971 ======= ======= ========= =========
26
Accumulated Other Compre- Treasury hensive Income Stock Total - -------------------------------------------------------------------------------------- BALANCE AT DEC. 29, 1996 $ 1,671 $ -- $ 1,131,508 Issuance of common shares under stock option plan 2,397 Issuance of treasury shares under stock option plan 70,785 42,636 Issuance of treasury shares under stock purchase plan 17,218 14,996 Issuance of convertible preferred shares 660,000 Purchase of treasury shares (643,375) (643,375) Retirement of treasury shares 555,372 -- Tax benefits arising from employee stock plans 10,502 Comprehensive income: Net income 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 (78,335) -------- -------- ----------- BALANCE AT DEC. 28, 1997 $ -- $ -- $ 1,551,673 Issuance of common shares under stock option plan 10,192 Issuance of common shares under stock purchase plan 3,968 Issuance of treasury shares under stock option plan 32,797 18,375 Issuance of treasury shares under stock purchase plan 13,228 11,876 Issuance of treasury shares to nonemployee directors 186 173 Issuance of treasury shares 5,021 5,021 Purchase of treasury shares (255,533) (255,533) Retirement of treasury shares 201,696 -- Tax benefits arising from employee stock plans 9,543 Comprehensive income: Net income 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 (77,152) -------- -------- ----------- BALANCE AT DEC. 27, 1998 $ 18,738 $ (2,605) $ 1,662,731 Issuance of common shares under stock option plan 25,910 Issuance of common shares under stock purchase plan 15,003 Conversion of preferred shares -- Issuance of treasury shares to nonemployee directors 232 232 Purchase of treasury shares (210,141) (210,141) Retirement of treasury shares 210,141 -- Tax benefits arising from employee stock plans 9,190 Comprehensive income: Net income 339,939 Change in unrealized gains on securities available for sale, net of tax of $15,564 23,346 23,346 ----------- Comprehensive income 363,285 ----------- Cash dividends declared (85,526) -------- -------- ----------- BALANCE AT DEC. 26, 1999 $ 42,084 $ (2,373) $ 1,780,684 ======== ======== ===========
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company reports on a fiscal year, ending on the last Sunday in the calendar year. Results for 1999, 1998 and 1997 are for the 52 weeks ended Dec. 26, Dec. 27 and Dec. 28, 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. REVENUE RECOGNITION Advertising revenue is recognized when ads are published. Circulation revenue is recognized when the newspaper is delivered to the customer. Other revenue is recognized when the related product or service has been delivered. The company is a 50% partner in DETROIT NEWSPAPERS (DN), 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 DN. 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 generally 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 and losses 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 DN; 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; SP Newsprint Co. and Ponderay Newsprint Company, two newsprint mill partnerships; InfiNet Company, a joint venture that allows newspapers to offer Internet access to subscribers; 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); and Interealty, Inc. (formerly known as PRC Realty Systems, Inc., sold in September 1998), a software system producer for the real estate industry. The company owns 49.5% 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 SP NEWSPRINT CO., and an 18.7% partner in CareerPath.com Inc. and owns a 13.5% equity share of PONDERAY NEWSPRINT COMPANY. The company owns 33.3% of the voting stock and 50% of the nonvoting stock of INFINET COMPANY. 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." 28 "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. 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. 26, 1999, and Dec. 27, 1998, 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 an equity 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 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. "GOODWILL" 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 goodwill is being amortized over a 40-year period on a straight-line basis, unless management concludes that a shorter term is more appropriate. Identified intangibles of approximately $400 million 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 which management does not intend to refinance, and the portion of long-term debt payable within 12 months. The carrying amounts of short-term borrowings approximate fair value. "LONG-TERM DEBT" represents the carrying amounts of debentures, notes payable, other indebtedness with maturities longer than one year and commercial paper backed by two revolving credit and term loan agreements that management intends to refinance at maturity. Fair values, disclosed in Note 4, are estimated using discounted cash flow analyses based on the company's current incremental borrowing rates for similar types of borrowing arrangements. In accordance with FAS NO. 121 - ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the company reviews long- lived assets and related intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. To date, no such impairment has been indicated. If this review indicates that the carrying value of these assets will not be recoverable, as measured based on estimated undiscounted cash flows over their remaining life, the carrying amount would be adjusted to fair value. The cash flow estimates that will be used will contain management's best estimates, using appropriate and customary assumptions and projections at the time. 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 6. 29 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 attributable to common stock (net income less preferred stock dividends) by the weighted- average number of common shares outstanding. Net income attributable to common shares was $325.7 million in 1999, $351.8 million in 1998 and $406.0 million in 1997. Basic EPS attributable to common shares was restated in 1998 and 1997 to exclude preferred dividends from net income in the calculation of net income attributable to common shares. Basic EPS decreased by $0.17 in 1998 and $0.08 in 1997 as a result of the restatement. "DILUTED EARNINGS PER SHARE" is computed by dividing net income by the weighted-average number of common and common equivalent shares outstanding. 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 9. 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 Knight Ridder's Real Cities network (see "Management's Discussion and Analysis of Operations: Online Activities" on page 16). Reportable online operations did not meet the definition of a segment per FAS 131. This assessment will be re-evaluated in 2000 as a result of the separation of online activities into a separate business unit. During 1999, the company conducted business as one operating segment. This determination was based on the individual operations that the chief operating decision-maker reviewed for purposes of assessing performance and making operating decisions. 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 7. In 2001, 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. The company adopted STATEMENT OF POSITION 98-5 - REPORTING ON THE COSTS OF START-UP ACTIVITIES as of the beginning of 1999. The statement requires all costs of start-up activities, including organization costs, to be charged to operations as incurred. The adoption of this statement has not had a material effect on the financial statements. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 30 2. INCOME TAXES The company's income tax expense is determined under the provisions of Statement of Financial Accounting Standards 109, Accounting for Income Taxes, which requires the use of the liability method in adjusting previously deferred taxes for changes in tax rates. Substantially all of the company's earnings are subject to domestic taxation. No material foreign income taxes have been imposed on reported earnings. Federal, state and local income taxes (benefits) consist of the following (in thousands):
1999 1998 1997 --------------------------- ------------------------- ------------------------- Current Deferred Current Deferred Current Deferred --------- -------- --------- -------- --------- --------- Federal income taxes $ 203,100 $ (6,447) $ 213,161 $ (4,479) $ 286,645 $ (33,176) State and local income taxes 26,870 4,552 39,953 (2,465) 64,519 (11,156) --------- -------- --------- -------- --------- --------- Total $ 229,970 $ (1,895) $ 253,114 $ (6,944) $ 351,164 $ (44,332) ========= ======== ========= ======== ========= ========= Provision for: Continuing operations $ 229,970 $ (1,895) $ 210,729 $ (8,444) $ 312,098 $ (14,750) Discontinued operations 42,385 1,500 39,066 (29,582) --------- -------- --------- -------- --------- --------- Total $ 229,970 $ (1,895) $ 253,114 $ (6,944) $ 351,164 $ (44,332) ========= ======== ========= ======== ========= =========
Cash payments of income taxes for the years 1999, 1998 and 1997 were $213.1 million, $262.7 million and $278.5 million, respectively. Payments in 1998 included the tax impact resulting from the sale of the Gary paper and Technimetrics. Payments in 1997 included the tax impact resulting from the gain on the sale of Knight-Ridder Information, Inc., newspapers in Boca Raton and Long Beach, and TKR Cable Company. 31 3. 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): 1999 1998 1997 --------- --------- --------- Federal statutory income tax $ 198,805 $ 177,771 $ 242,848 State and local income taxes, net of federal benefit 20,425 17,033 34,300 Statutory rate applied to nondeductible amortization of the excess of cost over net assets acquired 15,016 15,123 13,482 Other items, net (6,170) (7,642) 6,718 --------- --------- --------- Total $ 228,076 $ 202,285 $ 297,348 ========= ========= ========= The deferred tax asset and liability at the fiscal year end consist of the following components (in thousands): 1999 1998 --------- --------- Deferred Tax Asset Postretirement benefits other than pensions (including amounts relating to partnerships in which the company participates) $ 84,286 $ 84,100 Accrued interest 6,476 7,175 Other nondeductible accruals 71,307 60,022 --------- --------- Gross deferred tax asset $ 162,069 $ 151,297 ========= ========= Deferred Tax Liability Depreciation and amortization $(356,726) $(341,618) Compensation and benefit accruals 965 (7,810) Equity in partnerships and investees (55,408) (51,170) Unrealized appreciation in equity securities (28,056) (12,492) Other (623) (3,361) --------- --------- Gross deferred tax liability $(439,848) $(416,451) --------- --------- Net deferred tax liability $(277,779) $(265,154) ========= ========= The components of deferred taxes included in the Consolidated Balance Sheet are as follows (in thousands): 1999 1998 --------- --------- Current asset $ 28,857 $ 27,861 Noncurrent liability (306,636) (293,015) --------- --------- Net deferred tax liability $(277,779) $(265,154) ========= ========= 32 4. DEBT Debt consisted of the following (in thousands): Dec. 26 Dec. 27 1999 1998 ----------- ----------- Commercial paper due at various dates through June 20, 2000, at an effective interest rate of 5.5% as of Dec. 26, 1999. Amounts are net of unamortized discounts of $4,004 in 1999 and $9,639 in 1998(a) $ 433,796 $ 917,533 Debentures due on April 15, 2009, bearing interest at 9.875%, net of unamortized discount of $1,536 in 1999 and $1,701 in 1998 198,464 198,299 Debentures due on Nov. 1, 2027, bearing interest at 7.15%, net of unamortized discount of $5,466 in 1999 and $5,614 in 1998 94,534 94,386 Debentures due on March 15, 2029, bearing interest at 6.875%, net of unamortized discount of $3,557 in 1999(b) 296,443 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 $97 in 1999 and $223 in 1998 79,903 119,777 Notes payable due on Nov. 1, 2007, bearing interest at 6.625%, net of unamortized discount of $1,791 in 1999 and $2,022 in 1998 98,209 97,978 Senior notes payable due on Dec. 15, 2005, bearing interest at 6.3%, net of unamortized discount of $595 in 1999 and $695 in 1998 99,405 99,305 ----------- ----------- 1,300,754 1,527,278 Less amounts payable in one year(c) 39,940 198,277 ----------- ----------- Total long-term debt $ 1,260,814 $ 1,329,001 =========== =========== (a) Commercial paper is supported by $900 million of revolving credit and term loan agreements, $500 million of which matures on June 22, 2003, and $400 million of which matures on June 20, 2000. The company has the option and intention to renew the $400 million facility before June 22, 2000, for an additional 364-day term through June 2001. (b) During the first quarter 1999, the company issued $300 million of 6.875% debentures under a shelf registration statement filed with the Securities and Exchange Commission in November 1997. Proceeds from the issuance were used to reduce borrowings under the company's commercial paper program in April 1999. (c) In 1999, this represents $39.9 million for the 8.5% notes payable due on Sept. 1, 2000. Interest payments during 1999 and 1998 were $90.6 million and $118.4 million, respectively. 33 The carrying amounts and fair values of debt as of Dec. 26, 1999, are as follows (in thousands): Carrying Fair Amount Value ----------- ----------- Commercial paper $ 433,796 $ 433,796 9.875% Debentures 198,464 228,536 7.15% Debentures 94,534 90,660 6.875% Debentures 296,443 262,338 8.5% Notes payable 79,903 81,754 6.625% Notes payable 98,209 94,360 6.3% Senior notes payable 99,405 94,446 ----------- ----------- Total $ 1,300,754 $ 1,285,890 =========== =========== The following table presents the approximate annual maturities of debt for the years after 1999 (in thousands): 2000 $ 39,940 2001 39,963 2003 433,796 2005 and thereafter 787,055 ----------- Total $ 1,300,754 =========== 5. 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): 1999 1998 1997 ---------- ---------- ---------- Current assets $ 226,155 $ 246,940 $ 212,939 Property, plant and equipment and other assets 1,458,029 1,260,996 1,158,224 Current liabilities 199,114 170,856 143,683 Long-term debt and other noncurrent liabilities 645,555 518,560 394,253 Net sales 807,825 782,893 806,587 Gross profit 20,627 90,719 62,426 Net income (loss) (8,899) 56,201 24,428 Company's share of: Net assets 206,880 201,120 197,585 Net income 12,571 23,309 10,800 In 1989, the Detroit Free Press and The Detroit News began operating under a joint operating agreement as the Detroit Newspaper (DN). Balance sheet amounts for DN at Dec. 26, 1999, Dec. 27, 1998, and Dec. 28, 1997, are included above, and the net assets contributed to DN are included in "Equity in unconsolidated companies and joint ventures" in the Consolidated Balance Sheet. Excluding DN, the company's investment in unconsolidated subsidiaries includes $180.8 million of undistributed earnings accumulated since the investment dates. Dividends and cash distributions received from unconsolidated companies and joint ventures (excluding DN) were $10.8 million in 1999, $6.6 million in 1998 and $3.1 million in 1997. 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. 34 6. 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. During 1999, 380,830 shares of preferred stock were converted into 3.8 million common shares. 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. In 1999, 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 1999, 1998 and 1997 diluted EPS calculations include 15,947,916, 17,549,300 and 10,968,313 weighted-average shares of Series B convertible preferred stock, respectively, and 1,487,231, 1,744,887 and 1,870,340 weighted-average shares of common stock issuable upon exercise of stock options, respectively. 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 336,001 shares in 1999, 349,599 shares in 1998, and 387,514 shares in 1997. The purchase price of shares issued in 1999 under this plan ranged between $42.47 and $45.95, and the market value on the purchase dates of such shares ranged from $49.97 to $54.06. 35 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. Options granted vest in three equal installments over a three-year period from the date of grant. Options 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. 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 Exercised (840,375) 30.88 Expired (24,907) 43.38 Forfeited (140,295) 45.55 Granted 1,652,850 57.82 Outstanding Dec. 26, 1999 7,263,311 44.75 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 originally covered a 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 at Dec. 26, 1999, and Dec. 27, 1998, and 322,286 at Dec. 28, 1997. There were no shares vested as of Dec. 26, 1999, since the company's total shareholder return did not reach the performance goals. The plan was extended for an additional three-year period beginning on Jan. 1, 2000, with an initial grant of 342,012 shares, and ending on Dec. 31, 2002. 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 20,000, 24,000 and 26,000 options in 1999, 1998 and 1997, respectively. In addition, 4,157 and 3,333 shares were awarded under the plan as retainer payments to nonemployee directors in 1999 and 1998, respectively. Proceeds from the issuance of shares under these plans are included in shareholders' equity and do not affect income. At Dec. 27, 1999, shares of the company's authorized but unissued common stock were reserved and available for issuance as follows: Shares --------- Employee Stock Option Plan 6,322,817 Employees Stock Purchase Plan 1,735,506 Nonemployee Directors Plan 122,510 --------- Total 8,180,833 ========= 36 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 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 1999, 1998 and 1997, respectively: risk-free rates of 6.2%, 4.7% and 5.7%; dividend yields of 1.5%, 1.6% and 1.6%; volatility factors of the expected market price of the company's common stock of 0.16, 0.17 and 0.14; and a weighted-average expected life of the option of 5.6, 6.4 and 6.4 years. The weighted-average fair values of the stock options for 1999, 1998 and 1997 were $14.67, $11.58 and $12.44, 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 of 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. 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 1999, 1998 and 1997 pro forma information follows (in thousands, except for earnings per share information): 1999 1998 1997 --------- --------- --------- Pro forma net income $ 329,689 $ 356,777 $ 407,274 Pro forma basic earnings per share 3.94 4.35 4.52 Pro forma diluted earnings per share 3.38 3.63 4.02 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. 26, 1999, ranged between $22.66 and $57.97. The weighted-average remaining contractual life of those options for 1999, 1998 and 1997 is 7.5, 7.3 and 6.9 years, respectively. The weighted-average exercise price of those options for 1999, 1998 and 1997 is $44.75, $39.74 and $35.74, respectively. 4,262,694, 3,882,661 and 3,643,950 options were exercisable at the end of 1999, 1998 and 1997, respectively. 37 7. 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 multiemployer union defined benefit plans, defined contribution plans and other agreements (in thousands):
Pension Benefits Other Benefits ------------------------------------------- --------------------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- ------- ------- ------- Defined benefit plans: Service cost $ 37,421 $ 41,994 $ 30,116 $ 4,368 $ 3,390 $ 3,524 Interest cost 74,264 67,864 61,458 10,876 10,380 10,988 Expected return on plan assets (98,064) (89,264) (75,151) (805) (778) (753) Recognized net actuarial (gain) loss 989 (1,095) 57 (541) (829) (324) Amortization of prior service cost 6,788 6,418 5,990 (4,597) (4,649) (4,508) Amortization of transition asset (4,157) (3,999) (4,516) -------- -------- -------- ------- ------- ------- Net 17,241 21,918 17,954 9,301 7,514 8,927 Multiemployer union plans 15,120 11,731 11,125 Defined contribution plans 11,889 11,681 10,742 Other 3,799 1,695 1,968 -------- -------- -------- ------- ------- ------- Net periodic benefit cost $ 48,049 $ 47,025 $ 41,789 $ 9,301 $ 7,514 $ 8,927 ======== ======== ======== ======= ======= ======= Service cost in 1998 included approximately $7.0 million related to accelerating the retirement of certain employees. Weighted-average assumptions used each year in accounting for defined benefit plans and postretirement benefits were: Pension Benefits Other Benefits -------------------------------- -------------------------------- 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Discount rate as of year end 7.8% 6.8% 7.0% 7.8% 6.8% 7.0% Return on plan assets 9.0 8.8 8.5 6.5 6.5 6.5 Rate of compensation increase 3.5 4.5 4.5 3.5 4.5 4.5 Medical trend rate: Projected 6.0 7.0 8.0 Reducing to this percentage in 2001 and thereafter 5.5 5.5 5.5
38 The assumed health care cost trend rate has a significant effect on the amounts reported. A 1-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 1999 $ 672 $ (573) Effect on postretirement benefit obligation as of Dec. 26, 1999 $ 4,492 $ (3,943) 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 DN 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 --------------------------------------------- ------------------------------------------- 1999 1998 1997 1999 1998 1997 ----------- ----------- ----------- --------- --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 1,053,899 $ 955,332 $ 796,879 $ 121,229 $ 132,618 $ 121,488 Service cost 36,144 38,230 27,423 2,516 2,266 2,316 Interest cost 74,264 67,864 61,458 7,812 7,114 7,987 Plan participants' contributions 1,102 1,216 1,653 Amendments 4,361 5,666 4,483 (868) Actuarial (gains) losses (139,871) 35,582 57,444 (1,575) (11,788) 2,695 Net acquisitions 51,384 6,931 Benefits paid (54,995) (48,775) (43,739) (10,265) (9,329) (10,452) ----------- ----------- ----------- --------- --------- --------- Benefit obligation at end of year $ 973,802 $ 1,053,899 $ 955,332 $ 120,819 $ 121,229 $ 132,618 =========== =========== =========== ========= ========= ========= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 1,149,173 $ 1,058,759 $ 859,911 $ 12,701 $ 12,386 $ 12,400 Actual return on plan assets 127,641 130,259 173,445 520 916 843 Acquisitions 59,495 Company contributions 15,570 8,930 9,647 7,565 7,512 7,942 Plan participants' contributions 1,102 1,216 1,653 Benefits paid (56,659) (48,775) (43,739) (10,265) (9,329) (10,452) ----------- ----------- ----------- --------- --------- --------- Fair value of plan assets at end of year $ 1,235,725 $ 1,149,173 $ 1,058,759 $ 11,623 $ 12,701 $ 12,386 =========== =========== =========== ========= ========= ========= Funded status of plan (underfunded) $ 261,923 $ 95,274 $ 103,427 $(109,196) $(108,528) $ (120,232) Unrecognized net actuarial gain (292,022) (120,239) (126,768) (19,758) (18,297) (6,724) Unrecognized prior service cost 41,395 42,159 42,911 (16,189) (20,293) (23,529) Unrecognized transition asset (4,501) (8,480) (12,576) ----------- ----------- ----------- --------- --------- ---------- Net prepaid (accrued) benefit cost $ 6,795 $ 8,714 $ 6,994 $(145,143) $(147,118) $ (150,485) =========== =========== =========== ========= ========= ==========
39 Amounts recognized in the Consolidated Balance Sheet consist of:
Pension Benefits Other Benefits ------------------------------------------ ------------------------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- --------- --------- --------- Prepaid benefit cost $ 56,547 $ 51,636 $ 56,504 Accrued benefit liability (49,752) (42,922) (49,510) $(145,143) $(147,118) $(150,485) Additional minimum liability (9,200) (5,922) Intangible asset 9,200 5,922 -------- -------- -------- --------- --------- --------- Net prepaid (accrued) benefit cost $ 6,795 $ 8,714 $ 6,994 $(145,143) $(147,118) $(150,485) ======== ======== ======== ========= ========= =========
Amounts applicable to the company's pension plans with accumulated benefit obligations in excess of plan assets are as follows: 1999 1998 1997 --------- ---------- --------- Projected benefit obligation $ (37,666) $ (119,794) $ (43,497) --------- ---------- --------- Accumulated benefit obligation (26,462) (106,092) (32,484) Fair value of plan assets 68,988 2,529 --------- ---------- --------- Unfunded accumulated benefit obligation $ (26,462) $ (37,104) $ (29,955) ========= ========== ========= Of the plans whose accumulated benefit obligations exceed plan assets, the amounts applicable to qualified plans are as follows (none in 1999): 1999 1998 1997 --------- ---------- --------- Projected benefit obligation $ -- $ (79,800) $ (2,934) --------- ---------- --------- Accumulated benefit obligation (75,211) (2,934) Fair value of plan assets 68,988 2,529 --------- ---------- --------- Unfunded accumulated benefit obligation $ -- $ (6,223) $ (405) ========= ========== ========= Net pension assets are included in "Other" noncurrent assets, and net pension liabilities are included in "Employment benefits and other noncurrent liabilities." Substantially all of the assets of the company-administered plans are invested in listed stocks and bonds. In the fourth quarter of 1998, the company changed the method of accounting used to determine the market-related value of pension 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 results of operations, including the cumulative effect of prior years, was not material. 40 EMPLOYEE LABOR ARRANGEMENTS Approximately 37% 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. A six-year extension of all labor contracts in Philadelphia was negotiated in January 2000 and ratified by all unions shortly thereafter. During 2000, there will be negotiations to extend collective bargaining agreements with the Newspaper Guild in Akron and with a single union at each of six other newspapers. 8. QUARTERLY OPERATIONS (Unaudited) The company's largest source of revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the second and fourth quarters. General advertising, while not as seasonal as retail, is lower during the summer months. Classified advertising revenue has in the past been a reflection of the overall economy and has not been significantly affected by seasonal trends. The following table summarizes the company's quarterly results of operations (in thousands, except per share data):
QUARTER ------------------------------------------------------------------------- Description First Second Third Fourth ---------- ---------- ---------- ---------- 1999 Operating revenue $ 770,799 $ 809,666 $ 784,739 $ 863,021 Operating income 125,662 155,485 150,977 192,125 Income from continuing operations 62,867 86,586 76,209 114,278 Net income 62,867(a) 86,586(b) 76,209 114,278(c) Earnings per share Basic: Net income (1) 0.76 1.04 0.90 1.37 Diluted: Net income 0.65 0.88 0.78 1.18 Dividends declared per common share (3) 0.20 0.23 0.23 0.23 - --------------------------------------------------------------------------------------------------------------------------- 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(d) 66,925(e) 56,983(g) 80,286(h) Net gain on sale of BIS operations 60,042(f) Income from BIS operations, net 184 Net income 101,621 126,967 56,983 80,286 Earnings per share Basic: Income from continuing operations (1) 1.22 0.81 0.68 0.98 Net gain on sale of BIS operations 0.76 Income from BIS operations, net 0.01 Net income (1) 1.23 1.57 0.68 0.98 Diluted: Income from continuing operations 1.02 0.68 0.58 0.83 Net gain on sale of BIS operations 0.61 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 (2) $ 600,830 $ 711,656 $ 748,704 $ 815,595 Operating income 98,169 136,977 107,936 162,946 Income from continuing operations 175,458(i) 60,950 73,467(j) 86,629(k) Net gain on sale of BIS operations 15,261(l) Income (loss) from BIS operations, net (726) 350 545 1,081 Net income 174,732 61,300 74,012 102,971 Earnings per share Basic: Income from continuing operations (1) 1.88 0.67 0.81 1.00 Net gain on sale of BIS operations 0.18 Income from BIS operations, net 0.01 0.01 Net income (1) 1.88 0.68 0.81 1.19 Diluted: Income from continuing operations 1.85 0.60 0.69 0.84 Net gain on sale of BIS operations 0.15 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
41 (1) Basic EPS has been restated for the last two quarters of 1997 through the first quarter of 1999 to exclude preferred dividends from the numerator in the calculation of income attributable to common shares. As a result of the restatements, basic EPS decreased by the following amounts in the years indicated for the first, second, third and fourth quarters, respectively: 1999 - $0.04, N/A, N/A, N/A; 1998 - $0.04, $0.04, $0.04, $0.05; and 1997 - N/A, N/A, $0.04, $0.04. (2) Certain amounts in 1997 have been reclassified to conform to the 1998 presentation. (3) The Board of Directors declared a $.23 per share dividend on Jan. 25, 1999, payable on Feb. 21, 2000, to shareholders of record on Feb. 9, 2000. (a) Includes after-tax severance costs of $1.3 million and an after-tax gain of $2.3 million on the sale of SportsLine. (b) Includes after-tax severance costs of $1.4 million and after-tax gains on the sale of Zip2 and AT&T stock (net of adjustments to certain investments to write down permanent declines in their market value) of $6.7 million. (c) Includes an after-tax gain of $14.7 million on the sale of AT&T stock. (d) Includes an after-tax gain of $45.0 million on the sales of the balance of our jointly owned cable systems with Tele-Communications, Inc., and the newspaper in Gary, Ind. (e) Includes after-tax corporate relocation costs, net of settlement adjustments on 1997 newspaper sales totaling $5.1 million. (f) Gain on the sale of Technimetrics, Inc. (g) Includes after-tax corporate relocation costs of $4.4 million. (h) Includes after-tax corporate relocation costs and other severance costs of $3.2 million. (i) Includes the after-tax gain of $128.3 million on the sale of the majority of TKR Cable Company. (j) Includes the after-tax gain of $24.5 million on the Boulder, Colo., exchange. (k) Includes the after-tax gain of $10.3 million on the sale of four newspapers. (l) Gain on the sale of KRII. 9. COMPREHENSIVE INCOME The following table presents the components of other comprehensive income for 1999, 1998 and 1997 as shown in the Statement of Shareholders' Equity (in thousands): 1999 1998 1997 --------- --------- --------- Net income $ 339,939 $ 365,857 $ 413,015 Total gains on securities available for sale, net of taxes 47,462 18,738 (1,086) Less: reclassification adjustment for realized gains, net of taxes (24,116) 0 (585) --------- --------- --------- Change in accumulated comprehensive income 23,346 18,738 (1,671) --------- --------- --------- Comprehensive income $ 363,285 $ 384,595 $ 411,344 ========= ========= ========= (Unaudited) On Jan. 31, 2000, Cadabra, Inc., an investment in which the company held a 19.5% minority ownership position at Dec. 26, 1999, was purchased by GoTo.com, Inc., in exchange for $8.0 million in cash and 3.3 million shares of GoTo.com, Inc., stock. Knight Ridder now holds a minority ownership interest in GoTo.com of 1.57%. The market value of Cadabra was not readily available at Dec. 26, 1999, and therefore was not included in comprehensive income at year end. On Feb. 15, 2000, Prio, Inc., an investment in which the company held a 12.41% minority ownership position at Dec. 26, 1999, was purchased by InfoSpace.com in exchange for 5.4 million shares of InfoSpace.com, Inc., stock. The market value of Prio was not readily available at Dec. 26, 1999, and therefore was not included in comprehensive income at year end. As of the date of these transactions, the company had an after-tax realized gain on its investments in Cadabra and Prio totaling approximately $100 million. 42 10. 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, 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. 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. 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. 43 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 Knight-Ridder Information, Inc., 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. 11. COMMITMENTS AND CONTINGENCIES At Dec. 26, 1999, the company had lease commitments currently estimated to aggregate approximately $77.6 million that expire from 2000 through 2051 as follows (in thousands): 2000 $ 16,397 2001 14,128 2002 11,252 2003 9,245 2004 7,460 2005 and thereafter 19,078 -------- Total $ 77,560 ======== Payments under the lease contracts were $24.7 million in 1999, $19.3 million in 1998 and $15.6 million in 1997. In connection with the company's insurance program, letters of credit are required to support certain projected worker compensation obligations. At Dec. 26, 1999, 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 Detroit Newspapers (DN), which operates both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and DN. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative judge ruled that the strike was caused by the unfair labor practices of DN and The Detroit News and ordered that DN and the newspapers reinstate all strikers, displacing permanent replacements if necessary. DN and the newspapers appealed the decision to the NLRB. On Aug. 27, 1998, the NLRB affirmed certain unfair labor practice findings against The Detroit News and DN and reversed certain findings of unfair labor practices against DN. DN and the newspapers filed a motion to reconsider with the NLRB, which was denied on March 4, 1999. The unions and DN filed appeals to the U.S. Court of Appeals for the District of Columbia Circuit. The case is pending in the U.S. Court of Appeals. The case is currently being briefed and oral argument has been set for May 2000. 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. 44 REPORT OF INDEPENDENT AUDITORS Shareholders Knight-Ridder, Inc. We have audited the accompanying consolidated balance sheets of Knight-Ridder, Inc., as of December 26, 1999 and December 27, 1998, and the related consolidated statements of income, cash flows and shareholders' equity for each of the three years in the period ended December 26, 1999. Our audits also included the financial statement schedule listed in the index of Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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., at December 26, 1999, and December 27, 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended Dec. 26, 1999, in conformity with accounting principles generally accepted in the United States. 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 7 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 Jan. 18, 2000 45 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 Except for the information regarding the company's executive officers of the company set forth below, the information called for by this item is incorporated by reference to the company's definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be held on April 25, 2000. MANAGEMENT COMMITTEE ROSS JONES, 57 Senior vice president and CFO 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. ALVAH H. CHAPMAN JR., 78 Served as chairman of the Management (formerly Executive) Committee 1984 to 1995; chairman of the Board 1982 to 1989; CEO 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, 47 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. Stanford Executive Program, Stanford University, 1999; B.A., English, Miami University in Oxford, Ohio, 1973. P. ANTHONY RIDDER, 59 Chairman of the Management 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. FRANK McCOMAS, 54 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. STEVEN B. ROSSI, 50 Senior vice president/operations since 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, 49 Vice president and general counsel since 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. 46 OFFICERS MIKE ROGERS, 48 Vice president/marketing since June 1999. Served in various capacities, including president and publisher of Computerworld, Inc., executive vice president of IDG Marketing Services Division, and corporate senior vice president and publisher of Windows NT World, at International Data Group (IDG) in Boston, 1992 to 1999; senior vice president for Ammirati Puris Lintas advertising agency in New York, 1986 to 1992, senior vice president for Campbell-Ewald advertising in Detroit, 1981 to 1986. M.B.A. marketing, University of Denver, 1978; B.S., management, New Mexico State University; 1973. VIRGINIA DODGE FIELDER, 51 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. JACQUI LOVE MARSHALL, 51 Assistant vice president/human resources since 1996. Served as vice president, human resources, Miami Herald Publishing Company, 1993 to 1996; various human resources roles and assistant to the publisher, The Washington Post, 1986 to 1993; human resources roles and assistant to the president, Times Mirror Publishing Company, 1983 to 1986; teaching and counseling jobs, 1970 to 1983. Ed.M, educational counseling, Harvard University, 1970; B.A., education, Trenton State College, 1969. LARRY D. MARBERT, 46 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. POLK LAFFOON IV, 54 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. DAN FINNIGAN, 36 Vice president since July 1999 and president of KnightRidder.com, (formerly Knight Ridder New Media). Served as president and CEO of SBC Interactive from 1998 to 1999; held various positions at SBC Communications, Inc., 1995 to 1998; group manager for product development for ESS Ventures, LLC, 1994 to 1995. M.B.A., finance and marketing, The Wharton School of the University of Pennsylvania, 1993; B.A., communication studies, the University of California, Los Angeles, 1984. ALAN G. SILVERGLAT, 53 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. MARTY CLAUS, 51 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. 47 OFFICERS (Continued) TALLY C. LIU, 49 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 CFO 1987 to 1990 and in various roles 1983 to 1987. Advanced Management Program, Harvard Business School, 1998; M.B.A., Florida Atlantic University, 1977; B.S., business administration, National Chen-Chi University, 1973; CPA. MARSHALL ANSTANDIG, 51 Vice president/senior labor and employment counsel since 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. GARY R. EFFREN, 43 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. LYNDA HAUSWIRTH, 37 Assistant vice president/taxation since 1998. Served as senior tax manager, Ernst & Young LLP 1996 to 1998; senior associate, BDO Seidman 1995 to 1996; various other tax positions 1987 to 1995. B.S., business administration/ accounting, University of Vermont, 1983; CPA. JOSEPH (CHIP) VISCI, 46 Assistant vice president/operations since September 1999 and assistant to the chairman and CEO since 1996. Served as Detroit Free Press managing editor 1996 and held various editing positions 1978 to 1996. Served in various roles at Columbus (Ohio) Citizen-Journal 1977 to 1978 and Naples (Fla.) Daily News 1975 to 1976. M.A., journalism, Ohio State University, 1977; B.A., journalism, Ohio Wesleyan University, 1975. STEVEN J. STEIN, 46 Assistant vice president/human resources since 1995. Served as vice president/ human resources for Knight Ridder Business Information Services 1989 to 1995; Knight Ridder director/human resources from 1983 to 1989; director, Hay Consulting from 1981 to 1983. Ph.D. psychology, University of Florida, 1981; B.A. psychology, George Washington University, 1974. MARIO R. LOPEZ, 60 Assistant vice president/internal audit since 1993. Served as partner at Deloitte & Touche 1978 to 1993 and in other positions there from 1964 to 1978. B.S., business administration, Saint Joseph's University, 1962; CPA. JERRY CEPPOS, 53 Vice president/news since May 1999. Served as vice president and executive editor, San Jose Mercury News, 1995 to 1999; managing editor, 1983 to 1995; various editing positions, 1981 to 1983. B.S., journalism, University of Maryland, 1969. 48 Item 11. EXECUTIVE COMPENSATION The information regarding executive compensation and related matters is incorporated by reference to the company's Proxy Statement for the 1999 Annual Meeting of Shareholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the company's Proxy Statement for the 1999 Annual Meeting of Shareholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the company's Proxy Statement for the 1999 Annual Meeting of Shareholders. 49 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 26, 1999, are included in Item 8: Consolidated Balance Sheet - December 26, 1999 and December 27, 1998 Consolidated Statement of Income - Years ended December 26, 1999, December 27, 1998, and December 28, 1997 Consolidated Statement of Cash Flows - Years ended December 26, 1999, December 27, 1998, and December 28, 1997 Consolidated Statement of Shareholders' Equity - Years ended December 26, 1999, December 27, 1998, and December 28, 1997 Notes to consolidated financial statements - December 26, 1999 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) 50 Rights Agreement, dated as of June 21, 1996, is incorporated by reference to the Company's Form 8-K filed July 9, 1996. 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 incorporated by reference to the Company's Form 10-K filed March 19, 1999. (b) - Knight-Ridder, Inc. Compensation Plan for Nonemployee Directors effective July 1, 1997 (As amended through January 26, 1999) incorporated by reference to the Company's Form 10-K filed March 19, 1999. (c) - Knight Ridder Annual Incentive Plan incorporated by reference to the Company's Form 10-K filed March 19, 1999. (d) - Consulting Agreement incorporated by reference to the Company's Form 10-K filed March 19, 1999. (e) - 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. (f) - Knight-Ridder, Inc. Long-Term Incentive Plan is incorporated by reference to the Company's Form 10-Q filed on May 9, 1997. (g) - Knight-Ridder Local Incentive Plan is incorporated by reference to the Company's Form 10-K filed on March 20, 1996. (h) - 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. (i) - Purchase Agreement dated as of October 19, 1999, between Northwest Publications, Inc. and Spieker Properties, L.P., is filed herein. 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. 21 - Subsidiaries of the Registrant is filed herein. 51 No. 23 - "Consent of Independent Auditors" is filed herein. No. 24 - "Powers of Attorney" for Thomas P. Gerrity and Kathleen Foley Feldstein are incorporated by reference to the Company's Form 10-K filed on March 19, 1999. "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 1999: There were no reports on Form 8-K filed during the quarter ended December 26, 1999. (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. 52 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 21, 2000 - ----------------------------- ------------------------------------ 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 21, 2000 - ----------------------------- ------------------------------------ P. Anthony Ridder Chairman and Chief Executive Officer Dated March 21, 2000 - ----------------------------- ------------------------------------ Ross Jones Chief Financial Officer and Senior Vice President/Finance Dated March 21, 2000 - ----------------------------- ------------------------------------ Gary R. Effren Vice President/Controller (Chief Accounting Officer) 53 /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 54 /s/ Gonzalo F. Valdes-Fauli* ------------------------------------ Gonzalo F. Valdes-Fauli Director /s/John L. Weinberg* ------------------------------------ John L. Weinberg Director Dated March 21, 2000 * By Ross Jones - ------------------------------ ------------------------------------ Ross Jones Attorney-in-fact 55 ANNUAL REPORT ON FORM 10-K ITEM 14 (a) (2), (c) and (d) SUPPLEMENTARY DATA CERTAIN EXHIBITS YEAR ENDED DECEMBER 26, 1999 KNIGHT-RIDDER, INC. AND SUBSIDIARIES SAN JOSE, CALIFORNIA 56
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 DESCRIPTION OF AND OTHER AT END PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD ------------- ----------------- --------------- -------------- ------------ YEAR ENDED DECEMBER 26, 1999: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES $15,738 $25,135 $24,956 (2) $15,917 VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357 ---------- ---------- ------------- --------- ---------- $17,095 $25,135 $0 $24,956 $17,274 ========== ========== ============= ========= ========== YEAR ENDED DECEMBER 27, 1998: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES $14,963 $20,854 (9)(1) $20,070 (2) $15,738 VALUATION ALLOWANCE FOR DEFERRED TAXES 1,357 1,357 ---------- ---------- ------------- --------- ---------- $16,320 $20,854 ($9) $20,070 $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 ========== ========== ============= ========= ==========
(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. 57 EX-10 2 EXHIBIT 10 PURCHASE AGREEMENT THIS PURCHASE AGREEMENT dated as of October _, 1999 (the "EFFECTIVE DATE"), is by and between NORTHWEST PUBLICATIONS, INC., a Delaware corporation ("SELLER"), and SPIEKER PROPERTIES, L.P., a California limited partnership ("BUYER"). IN CONSIDERATION of the respective agreements hereinafter set forth, Seller and Buyer agree as follows: 1. PROPERTY INCLUDED IN SALE. Seller hereby agrees to sell and convey to Buyer, and Buyer hereby agrees to purchase from Seller, subject to the terms and conditions set forth herein, the following: (a) all of Seller's right, title and interest in and to that certain unimproved real property consisting of approximately 17.2 gross acres located on Ridder Park Drive, San Jose, California and more particularly described in EXHIBIT A attached hereto (the "REAL PROPERTY") and all of Seller's right, title and interest in the Real Property, rights relating to the ownership, use, and operation of the Real Property, and all rights, privileges and easements appurtenant to the Real Property, including, without limitation, all minerals, oil, gas and other hydrocarbon substances on and under the Real Property, as well as all development rights, permits and approvals of any kind and nature, air rights, water, water rights, riparian rights and water stock relating to the Real Property and any rights-of-way or other appurtenances used in connection with the beneficial use and enjoyment of the Real Property and all of Seller's right, title and interest in and to all roads and alleys adjoining or servicing the Real Property (except only to the centerline of Ridder Park Drive) (collectively, the "APPURTENANCES") (the Real Property and Appurtenances are referred to collectively as the "PROPERTY"). 2. PURCHASE PRICE. The purchase price of the Property is Eighteen Million Dollars ($18,000,000) (the "PURCHASE PRICE"), subject to adjustments as provided in Paragraphs 2(b) and 7 below. (a) The Purchase Price shall be payable to Seller as follows: (i) Within five (5) days after mutual execution of this Agreement, Buyer shall deposit, in escrow, with First American Title Guaranty Company, located at 1737 North First Street, San Jose, California 95112, Attention: William Perry (the "TITLE COMPANY") the sum of Three Hundred Thousand Dollars ($300,000) as earnest money (the "DEPOSIT"). The Title Company shall be instructed by Buyer and Seller to deposit the Deposit in an interest bearing account with interest payable to Buyer if the Deposit is returned to Buyer and with interest payable to Seller if the Deposit is payable to Seller. The Deposit, together with all interest accrued thereon, shall be credited toward the Purchase Price. If the sale is not closed due to a default under this Agreement by Seller or due to nonsatisfaction of a Buyer's Condition Precedent (defined below), then the Deposit (or a portion thereof as provided for herein) shall be returned to Buyer, together with all interest accrued thereon in accordance with the terms set forth in Paragraphs 2(c) and 4 below; and (ii) the remainder of the Purchase Price shall be paid to Seller in immediately available funds at the closing of the purchase and sale contemplated hereunder (the "CLOSING"). (b) Notwithstanding any provision of this Paragraph 2 to the contrary, in the event that the Zoning Approvals (as hereinafter defined) adopted and approved by the City and approved by Buyer and Seller pursuant to this Agreement provide for the development of an office/research and development complex containing in excess of two hundred forty thousand (240,000) gross buildable square feet, the Purchase Price shall be increased by an amount equal to Fifty Dollars ($50.00) per gross buildable square foot for every gross buildable square foot in excess of two hundred forty thousand (240,000) gross buildable square feet. (c) The Deposit shall be treated as follows: (i) Upon (a) the expiration of the Due Diligence Period (as defined below), (b) receipt by Seller on or prior to the expiration of the Due Diligence Period of Buyer's written notice that Buyer has elected to proceed with the acquisition of the Property pursuant to Paragraph 4 below, and (c) agreement by Buyer and Seller on the CC&Rs (as hereinafter defined) (as provided in Paragraph 4(e) below), then a portion of the Deposit in an amount equal to Seventy Five Thousand Dollars ($75,000) (the "PHASE I DEPOSIT") shall become non-refundable to Buyer except as otherwise expressly provided in this Agreement. The parties acknowledge that Seller has obtained the City's (as hereinafter defined) approval of the Lot Line Adjustment (as hereinafter defined) pursuant to Paragraph 4(d)(i) below. In the event that there is a Challenge (as hereinafter defined) to the Lot Line Adjustment prior to the expiration of the Due Diligence Period, Buyer may elect to terminate this Agreement by delivering written notice to Seller, the Deposit shall be returned to Buyer, Seller shall pay to Buyer all of Buyer's Due Diligence Costs, and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). For purposes of this Agreement, "DUE DILIGENCE COSTS" shall mean any and all title, escrow, survey, and inspections fees incurred by Buyer and any other expenses incurred by Buyer in connection with the performance of its due diligence review of the Property and the entitlements process, including, without limitation, environmental and engineering consultants' fees and expenses. In the event Buyer does not elect to terminate this Agreement and there is a Challenge to the Lot Line Adjustment prior to the expiration of the Due Diligence Period, Buyer shall be subject to the provisions of Paragraphs 4(d)(v) and 7(c) below. (ii) Upon (a) the satisfaction of all of the conditions set forth in Subparagraph 2(c)(i) above, (b) the Adoption (as hereinafter defined) by the City of San Jose (the "CITY") of the General Plan Amendment (the "GPA") as described in the documents attached hereto as EXHIBIT B and in the Application for Environmental Clearance/Initial Study for the Lands of Northwest Publications General Plan Amendments dated September, 1999, (c) the expiration of the General Plan CEQA Challenge Period (as hereinafter defined) without any Challenges, and (d) the expiration of the General Plan Challenge Period (as hereinafter 2 defined) without any Challenges, then an additional portion of the Deposit in an amount equal to One Hundred and Twenty Five Thousand Dollars ($125,000) (the "PHASE II DEPOSIT") shall become non-refundable to Buyer except as otherwise expressly provided in this Agreement. In the event the condition contained in Subparagraph 2(c)(ii)(b) does not occur by March 31, 2000, and the conditions contained in Subparagraph 2(c)(i) above have been satisfied, this Agreement shall terminate, the Phase I Deposit shall be delivered to Seller, the Phase II Deposit and the Phase III Deposit shall be returned to Buyer and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). Upon satisfaction of the conditions contained in Subparagraphs 2(c)(ii)(a), 2(c)(ii)(b), and 2(c)(ii)(c), the Phase II Deposit shall become non-refundable to Buyer except as otherwise expressly provided in this Agreement; provided, however, that in the event the condition contained in Subparagraph 2(c)(ii)(d) is not satisfied, Buyer may terminate this Agreement by delivering written notice to Seller within ten (10) days after expiration of the General Plan Challenge Period, the Phase I Deposit shall be delivered to Seller, the Phase II Deposit and the Phase III Deposit shall be returned to Buyer, and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). In the event Buyer does not elect to terminate this Agreement due to nonsatisfaction of the condition contained in Paragraph 2(c)(ii)(d), Buyer shall be subject to the provisions of Paragraphs 4(d)(v) and 7(c) below. For purposes of this Agreement "ADOPTION OF THE GPA" shall mean thirty (30) days after the approval of the GPA by the City Council. (iii) Upon (a) the satisfaction of all of the conditions set forth in Subparagraph 2(c)(i) above, (b) the satisfaction of all of the conditions set forth in Subparagraph 2(c)(ii) above, and (c) (1) the Adoption by the City of the PD Rezoning (as hereinafter defined) and approval by the City of all Revisions (as hereinafter defined) thereto, if any, (2) the approval by Seller of the PD Rezoning and all Revisions thereto, if any, in accordance with Paragraph 4 below, (3) the approval by Buyer of the PD Rezoning and all Revisions thereto, if any, in accordance with Paragraph 4 below, (4) the expiration of the PD Rezoning Challenge Period (as hereinafter defined) without any Challenges, (5) the Approval by the City of the PD Permit (as hereinafter defined) and the approval by the City of all Revisions thereto, if any, (6) the approval by Seller of the PD Permit and all Revisions thereto, if any, in accordance with Paragraph 4 below, (7) the approval by Buyer of the PD Permit and all Revisions thereto, if any, in accordance with Paragraph 4 below, and (8) the expiration of the PD Permit Challenge Period (as hereinafter defined) without any Challenges, then the remaining portion of the Deposit in an amount equal to One Hundred Thousand Dollars ($100,000) (the "PHASE III DEPOSIT") shall become non-refundable to Buyer except as otherwise expressly provided in this Agreement. In the event the conditions contained in Subparagraphs 2(c)(iii)(c)(1) and 2(c)(iii)(c)(5) do not occur by September 14, 2000, and the conditions contained in Subparagraphs 2(c)(i) and 2(c)(ii) above have been satisfied, this Agreement shall terminate, the Phase I Deposit and Phase II Deposit shall be delivered to Seller, the Phase III Deposit shall be returned to Buyer and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). Upon satisfaction of the conditions contained in Subparagraphs 2(c)(iii)(a), 2(c)(iii)(b), 2(c)(iii)(c)(1), (2), (3), (4), (5), (6), and (7), the Phase III Deposit shall become non-refundable except as otherwise expressly 3 provided in this Agreement; provided, however, that in the event the condition contained in Subparagraph 2(c)(iii)(c)(8) is not satisfied, Buyer may terminate this Agreement by delivering written notice to Seller within ten (10) days after expiration of the PD Permit Challenge Period, the Phase I Deposit and Phase II Deposit shall be delivered to Seller, the Phase III Deposit shall be returned to Buyer, and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). In the event Buyer does not elect to terminate this Agreement due to nonsatisfaction of the condition contained in Paragraph 2(c)(iii)(c)(8), Buyer shall be subject to the provisions of Paragraphs 4(d)(v) and 7(c) below. For purposes of this Agreement "ADOPTION OF THE PD REZONING" shall mean thirty (30) days after the approval of the PD Rezoning by the City Council. For purposes of this Agreement, "APPROVAL OF THE PD PERMIT" shall mean ten (10) days after approval of the PD Permit by the City. 3. TITLE TO THE PROPERTY. At the Closing, Seller shall convey to Buyer marketable and insurable fee simple title to Seller's interest in the Property pursuant to a grant deed ("GRANT DEED") in the form of EXHIBIT C attached hereto, subject only to the Permitted Exceptions (as hereinafter defined) and free of (a) all monetary encumbrances, other than real property taxes and assessments not yet delinquent and (b) any encumbrances against title to the Property arising after the date of this Agreement unless such encumbrances are approved or waived, in writing, by Buyer ("APPROVED NEW MATTERS") pursuant to Paragraph 4 below. At the Closing, Title Company shall issue to Buyer an ALTA Owner's Extended Policy of Title Insurance (Form B, rev. 10/17/70) in the amount of the Purchase Price, at no more than the Title Company's standard rates, insuring fee simple title to the Property in Buyer, subject only to the Permitted Exceptions, real property taxes and assessments not yet delinquent and Approved New Matters (the "TITLE POLICY"). The Title Policy shall contain such special endorsements as Buyer may require prior to the expiration of the Due Diligence Period (the "ENDORSEMENTS"). The Title Company shall also provide for reinsurance with direct access to the reinsurers and in such amounts as Buyer may reasonably request. 4. DUE DILIGENCE AND TIME FOR SATISFACTION OF CONDITIONS. (a) Buyer, or its designees, shall commence to review and approve, in Buyer's sole and absolute discretion, due diligence matters relating to the Property promptly upon Seller's execution hereof. The due diligence period (the "DUE DILIGENCE PERIOD") shall expire sixty (60) days after the Effective Date of this Agreement. Buyer acknowledges that Seller has delivered to Buyer the following items relating to the Property: the Archaeological Evaluation Report prepared by Basin Research Associates dated November, 1998; the San Jose Mercury News Residual Parcels Miscellaneous Biological Services prepared by H.T. Harvey & Associates dated November 20, 1998; San Jose Mercury News Traffic Constraints Analysis prepared by DKS Associates dated January 8, 1999; Phase I Environmental Site Assessment prepared by ATC Associates Inc., dated December 10, 1998; and property tax bills for the past three (3) years (collectively, the "SELLER'S DOCUMENTS"). In addition to the foregoing, Seller shall deliver to Buyer all other information relating to the Property that is received or obtained by Seller, any affiliate of Seller, or any consultant employed by Seller from and after the Effective Date. During the Due Diligence Period, Buyer shall have the opportunity to review and approve the physical characteristics and condition of the Property including, but not limited to, an examination for the presence or 4 absence of Hazardous Materials (as defined in Paragraph 8(g) below), which shall be performed or arranged by Buyer at Buyer's sole expense. Further, during the Due Diligence Period, Buyer shall have the opportunity to review and approve, in its sole and absolute discretion (1) all governmental permits and approvals relating to the construction, operation, use or occupancy of the Property, (2) all zoning, land-use, subdivision, environmental, building and construction laws and regulations restricting or regulating or otherwise affecting the use, occupancy or enjoyment of the Property and (3) all correspondence with any and all governmental agencies relating to the Property, including, but not limited to, the City. Notwithstanding anything in this Agreement to the contrary, Buyer shall have the right to terminate this Agreement at any time in Buyer's sole and absolute discretion during the Due Diligence Period. (b) Seller has delivered to Buyer at Seller's sole cost and expense a current extended coverage preliminary title report on the Property, issued by Title Company, accompanied by copies of all documents referred to in the title report (collectively, the "PRELIMINARY REPORT"). (i) Buyer shall advise Seller, ten (10) days prior to the end of the Due Diligence Period what exceptions to title, if any, including such objectionable matters resulting from a review of a survey prepared for the benefit of Buyer at Buyer's sole cost, will be objected to by Buyer. The objectionable survey matters, together with the objectionable exceptions to title are collectively referred to as "OBJECTIONABLE TITLE MATTERS". Seller shall have five (5) days after receipt of Buyer's objections to give Buyer: (i) written notice that said exceptions will be removed on or before the Closing Date; or (ii) written notice that Seller elects not to cause such exceptions to be removed; provided, however, that Seller shall be obligated to remove all deeds of trust encumbering the Property and pay all prepayment fees or expenses owed to beneficiaries thereof and all other monetary encumbrances against the Property, other than real property taxes and assessments not yet delinquent, in full prior to or concurrent with the Closing and all encumbrances against title to the Property that arise as a result of an voluntary act by Seller arising after the date of this Agreement (collectively, "SELLER'S OBLIGATIONS"). If Seller gives Buyer notice under clause (ii) above or fails to give notice within such five (5) day period, Buyer shall have five (5) days to elect to proceed with the purchase or terminate this Agreement. If Buyer shall fail to give Seller notice of its election within said five (5) days, Buyer shall be deemed to have elected to terminate this Agreement. In the event of such termination, the Deposit shall be returned to Buyer, and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). If Seller shall give notice pursuant to clause (i) above and shall fail to remove any such Objectionable Title Matters from title prior to the Closing Date or Seller shall fail to remove Seller's Obligations, and Buyer is unwilling to take title subject thereto, Seller shall be in default and Buyer shall have the rights and remedies set forth in Paragraph 6 below. Exceptions to title accepted by Buyer (or exceptions with respect to which Buyer has waived its objections) are referred to as the "PERMITTED EXCEPTIONS." In the event a new title matter arises after the expiration of the Due Diligence Period, Buyer shall have the right to approve or disapprove, in its sole and absolute discretion, such new title matter and elect to proceed with the purchase or terminate this Agreement. 5 Notwithstanding anything in this Agreement to the contrary, if Buyer, in its sole and absolute discretion, determines after a review of the items described in Paragraphs 4(a) and 4(b) above and other matters with respect to the Property deemed relevant by Buyer in Buyer's sole and absolute discretion that the Property does not meet Buyer's criteria for the acquisition and development of the Property in the manner contemplated by Buyer, or if the information disclosed does not otherwise meet Buyer's investment criteria or underwriting as determined by Buyer in Buyer's sole and absolute discretion, or if Buyer determines in its sole and absolute discretion that it does not desire to acquire the Property and consummate the transactions contemplated hereby, Buyer may terminate this Agreement by written notice to Seller, given not later than the last day of the Due Diligence Period. In the event Buyer has failed to deliver written notice to Seller no later than the last day of the Due Diligence Period that it elects to either terminate this Agreement or proceed with the acquisition of the Property, this Agreement shall be deemed terminated. In the event this Agreement is terminated or deemed terminated, the Deposit shall be promptly returned to Buyer and neither party will have any further rights or obligations hereunder except as provided in Paragraphs 10, 13(b) and 13(l) below. (C) EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT AND IN THE DOCUMENTS EXECUTED AT CLOSING, IT IS UNDERSTOOD AND AGREED THAT SELLER IS NOT MAKING AND HAS NOT AT ANY TIME MADE ANY WARRANTIES OR REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESSED OR IMPLIED, WITH RESPECT TO THE PROPERTY, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OR REPRESENTATIONS AS TO HABITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, ZONING, TAX CONSEQUENCES, LATENT OR PATENT PHYSICAL OR ENVIRONMENTAL CONDITION, UTILITIES, OPERATING HISTORY OR PROJECTIONS, VALUATION, GOVERNMENTAL APPROVALS OR THE COMPLIANCE OF THE PROPERTY WITH GOVERNMENTAL LAWS. BUYER ACKNOWLEDGES AND AGREES THAT UPON CLOSING SELLER SHALL SELL AND CONVEY TO BUYER AND BUYER SHALL ACCEPT THE PROPERTY "AS IS, WHERE IS, WITH ALL FAULTS", EXCEPT TO THE EXTENT EXPRESSLY PROVIDED OTHERWISE IN THIS AGREEMENT OR IN THE DOCUMENTS EXECUTED AT CLOSING. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT AND IN THE DOCUMENTS EXECUTED AT CLOSING, BUYER HAS NOT RELIED AND WILL NOT RELY ON, AND SELLER IS NOT LIABLE FOR OR BOUND BY, ANY EXPRESSED OR IMPLIED WARRANTIES, GUARANTIES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE PROPERTY OR RELATING THERETO MADE OR FURNISHED BY SELLER OR ANY REAL ESTATE BROKER OR AGENT REPRESENTING OR PURPORTING TO REPRESENT SELLER, TO WHOMEVER MADE OR GIVEN, DIRECTLY OR INDIRECTLY, ORALLY OR IN WRITING. UPON CLOSING, OTHER THAN SUCH REPRESENTATIONS, WARRANTIES, AND COVENANTS OF SELLER AS ARE EXPRESSLY SET FORTH IN THIS AGREEMENT AND IN THE CLOSING DOCUMENTS, BUYER SHALL ASSUME THE RISK THAT ADVERSE MATTERS, INCLUDING BUT NOT LIMITED TO, CONSTRUCTION DEFECTS AND ADVERSE PHYSICAL AND ENVIRONMENTAL CONDITIONS, MAY NOT HAVE BEEN REVEALED BY BUYER'S INVESTIGATIONS, AND BUYER, UPON CLOSING, SHALL BE DEEMED TO HAVE WAIVED, RELINQUISHED AND RELEASED SELLER (AND SELLER'S OFFICERS, DIRECTORS, 6 SHAREHOLDERS, EMPLOYEES AND AGENTS) FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION, LOSSES, DAMAGES, LIABILITIES, COSTS AND EXPENSES (INCLUDING ATTORNEYS' FEES AND COURT COSTS) OF ANY AND EVERY KIND OR CHARACTER, KNOWN OR UNKNOWN, WHICH BUYER MIGHT HAVE ASSERTED OR ALLEGED AGAINST SELLER (AND SELLER'S OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS) AT ANY TIME BY REASON OF OR ARISING OUT OF ANY LATENT OR PATENT CONSTRUCTION DEFECTS OR PHYSICAL CONDITIONS, VIOLATIONS OF ANY APPLICABLE LAWS (INCLUDING, WITHOUT LIMITATION, ANY ENVIRONMENTAL LAWS) AND ANY AND ALL OTHER ACTS, OMISSIONS, EVENTS, CIRCUMSTANCES OR MATTERS REGARDING THE PROPERTY. NOTWITHSTANDING THE FOREGOING, IN NO EVENT, SHALL BUYER BE PREVENTED FROM JOINING SELLER IN ANY LITIGATION OR MATTER THAT IS THE SUBJECT OF A GOVERNMENTAL ENFORCEMENT ORDER OR DIRECTIVE (EACH AN "ACTION" AND COLLECTIVELY, THE "ACTIONS") BASED UPON AN ALLEGED VIOLATION OF ANY ENVIRONMENTAL LAW, WHICH ACTION IS BROUGHT BY A THIRD PARTY (PRIVATE OR GOVERNMENTAL) AGAINST BUYER ALLEGING LOSS OR SEEKING EQUITABLE RELIEF RESULTING FROM SELLER'S ACTS OR OMISSIONS OCCURRING DURING SELLER'S OWNERSHIP OF THE PROPERTY, EXCEPT FOR SUCH ACTIONS ARISING OUT OF FACTS OTHERWISE DISCLOSED TO OR ACTUALLY KNOWN TO BUYER PRIOR TO CLOSING. (d) ENTITLEMENTS. (i) LOT LINE ADJUSTMENT. Seller is the owner of certain real property adjacent to the Property and improved with the San Jose Mercury News building ("SELLER'S ADJACENT PROPERTY"). The parties acknowledge that pursuant to the Subdivision Map Act, Seller has recorded a lot line adjustment which modifies the lot line between the Property and Seller's Adjacent Property (the "LOT LINE ADJUSTMENT"). Seller shall pay all engineering, surveying, application and other processing costs in connection with achieving the Lot Line Adjustment. (ii) AMENDMENT TO GENERAL PLAN. The parties acknowledge that the transfer of the Property to the Buyer shall be subject to the Adoption by the City of an amendment to the General Plan in the form of EXHIBIT B attached hereto (the "GPA"). Prior to the execution of this Agreement, Seller has filed the application for the GPA and has paid the costs therefor. From and after the date of this Agreement, Buyer covenants and agrees that it will diligently pursue Adoption of the GPA and Buyer shall pay all additional costs necessary to obtain the GPA. Seller shall cooperate with Buyer in all respects in obtaining the GPA, provided that Seller shall not be obligated to incur any additional cost or expense in connection with the GPA. In the event that the City Adopts the GPA subject to Revisions imposed by the City, Buyer and Seller shall have the right to approve or disapprove the Revisions in their respective sole and absolute discretion. For purposes of this Agreement, "REVISIONS" shall mean a material change, material amendment or a new or different condition. In the event Buyer does not approve the Revisions, Buyer may terminate this Agreement by written notice to Seller, the Phase I Deposit shall be delivered to Seller (provided that 7 the conditions contained in Paragraph 2(c)(i) have been satisfied), the Phase II and Phase III Deposit shall be delivered to Buyer, and neither party will have any further rights or obligations except as provided in Paragraphs 10, 13(b), and 13(l). In the event Seller does not approve the Revisions, Seller may terminate this Agreement by written notice to Buyer, the Deposit shall be delivered to Buyer, Seller shall pay to Buyer one-half (1/2) of Buyer's Due Diligence Costs (which obligation of Seller shall not exceed $200,000), Buyer shall pay to Seller one-half (1/2) of Seller's Property and Entitlement Costs (as hereinafter defined) (which obligation of Buyer shall not exceed $30,000) and neither party will have any further rights or obligations except as provided in Paragraph 10, 13(b) and 13(l). "SELLER'S PROPERTY AND ENTITLEMENT COSTS" shall mean the costs incurred by Seller on or prior to the date of this Agreement in connection with investigating the Property and applying for and pursuing the entitlements referred to herein, including civil engineering costs and consultants' fees, but excluding however, legal fees and costs incurred in connection with obtaining the Lot Line Adjustment. (iii) ZONING APPROVALS. The parties acknowledge that the transfer of the Property to the Buyer shall be subject to the Adoption by the City of the PD rezoning (the "PD REZONING"), the approval by Buyer and Seller of the PD Rezoning, the Approval of the PD permit (the "PD PERMIT", together with the PD Rezoning, the "ZONING APPROVALS"), and the approval by Buyer and Seller of the PD Permit. Buyer covenants and agrees that upon Adoption by the City of the GPA, it will diligently pursue Adoption and Approval of the Zoning Approvals and Buyer shall pay all costs associated therewith. Seller shall act in good faith and shall cooperate with Buyer in all respects in obtaining the Zoning Approvals, provided that Seller shall not be obligated to incur any additional cost or expense in connection with the Zoning Approvals. (iv) APPROVAL RIGHTS FOR ZONING APPROVALS. The parties acknowledge that the transfer of the Property to Buyer shall be subject to the unconditional approvals by Buyer and Seller of the Zoning Approvals pursuant to the terms and conditions as hereinafter provided. (1) Prior to submission to the City of the application for the PD Rezoning and the application for the PD Permit (individually and collectively, the "PD APPLICATION") by Buyer, Buyer shall submit each PD Application to Seller for Seller's approval within ten (10) business days after receipt of the applicable PD Application from Buyer and which approval may be withheld in Seller's sole and absolute discretion. In the event that Seller fails to timely respond to Buyer's submission, Seller shall be deemed to have approved the applicable PD Application. In the event that Seller disapproves the PD Application, this Agreement shall terminate, the Deposit shall be returned to Buyer, Seller shall pay to Buyer one-half (1/2) of Buyer's Due Diligence Costs (which obligation of Seller shall not exceed $200,000), Buyer shall pay to Seller one-half (1/2) of Seller's Property and Entitlement Costs (which obligation of Buyer shall not exceed $30,000) and neither party will have any further rights or obligations hereunder except as set forth in Paragraphs 10, 13(b) and 13(l). 8 (2) If, after Seller's approval of the applicable PD Application (the "APPROVED PD APPLICATION"), the City requires any Revision to the Approved PD Application, such Revision shall be submitted to Seller for its review along with a copy of any drawings or site plans showing the Revisions to the Approved PD Application ("NOTICE OF REVISIONS"). In the event Seller determines that the Revisions to the Approved PD Application are unacceptable, in Seller's sole and absolute discretion, Seller shall notify Buyer within ten (10) business days after receipt of Buyer's Notice of Revisions of Seller's disapproval of the Revisions (the "NOTICE OF DISAPPROVAL") and Seller shall specify in such Notice of Disapproval Seller's objections to the Revisions. After receipt of the Notice of Disapproval, Buyer may negotiate with the City in an attempt to resolve Seller's objections to the Revisions to Buyer's and Seller's satisfaction. If Buyer is able to resolve Seller's objections to Seller's satisfaction, and Buyer is satisfied with the Revisions, in Buyer's sole and absolute discretion, Buyer shall proceed to have the City incorporate the Revisions into the Approved PD Application. If Seller does not submit the Notice of Disapproval within ten (10) business days after receipt of Buyer's Notice of Revisions, Seller shall be deemed to have approved the Revisions. If Buyer is unable to resolve Seller's objections to the Revisions imposed by the City, Buyer shall withdraw its Approved PD Application, this Agreement shall terminate, the Deposit shall be returned to Buyer, Seller shall pay to Buyer one-half (1/2) of Buyer's Due Diligence Costs (which obligation of Seller shall not exceed $200,000), Buyer shall pay to Seller one-half (1/2) of Seller's Entitlement Costs (which obligation of Buyer shall not exceed $30,000), and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l). In the event Seller has approved the Revisions imposed by the City, but Buyer determines in its sole and absolute discretion that the Revisions imposed by the City are unacceptable, Buyer may terminate this Agreement, the Phase I Deposit and Phase II Deposit shall be delivered to Seller in accordance with Paragraphs 2(c)(i) and 2(c)(ii)), the Phase III Deposit shall be returned to Buyer, and neither party shall have any further obligations except as set forth in Paragraph 10, 13(b) and 13(l). (3) If, after the PD Application has been approved by Seller and the City and prior to Closing (the "Post-Approval Period"), Buyer elects to make immaterial modifications to the PD Application, such modifications shall not be subject to review or approval by Seller. If, during the Post-Approval Period, Buyer elects to make Revisions to the PD Application, such Revisions shall be subject to Seller's approval which shall not be unreasonably withheld, conditioned, or delayed. The standard for whether Seller's approval is reasonable shall be set forth in the CC&R's (as hereinafter defined). Seller shall grant or deny such approval within ten (10) business days after written request by Buyer. (v) CHALLENGES. The parties acknowledge that, as provided in Subparagraphs 2(c)(ii) and 2(c)(iii), the transfer of the Property to Buyer shall be subject to the requirements that (i) the General Plan CEQA Challenge Period shall have expired with respect to the GPA 9 without any Challenges, (ii) the General Plan Challenge Period shall have expired with respect to the GPA without any Challenges, (iii) the PD Rezoning Challenge Period shall have expired with respect to the PD Rezoning without any Challenges, and (iv) the PD Permit Challenge Period (as hereinafter defined) shall have expired with respect to the PD Permit without any Challenges. For purposes of this Agreement, the following definitions shall apply. The period of thirty-five (35) days from the approval by the City Council of the GPA shall mean the "GENERAL PLAN CEQA CHALLENGE PERIOD". The period of ninety five (95) days from the approval by the City Council of the GPA shall mean the "GENERAL PLAN CHALLENGE PERIOD". The period of ninety five (95) days from the approval by the City Council of the PD Rezoning shall mean the "PD REZONING CHALLENGE PERIOD". The period of ninety five (95) days from the approval by the City Council of the PD Permit shall mean the "PD PERMIT CHALLENGE PERIOD". A "CHALLENGE" shall mean a filing of a petition or other action in court. In the event that there is a Challenge during one or more of the applicable Challenge Periods, Buyer shall have the right to either (i) terminate this Agreement, in which case the Deposit or a portion thereof (pursuant to Subparagraph 2(c) above) shall be returned to Buyer and neither party shall have any further obligations except as set forth in Paragraphs 10, 13(b) and 13(l) or (ii) elect to maintain this Agreement in effect subject to the following terms and conditions. If all Challenges have been resolved prior to December 31, 2000, then Buyer may proceed with the acquisition of the Property pursuant to the terms of this Agreement. In the event that a Challenge has not been resolved prior to December 31, 2000, and the Challenge does not present a credible threat to the cancellation or termination of the GPA and/or the PD Permit (the "Insufficient Challenge") as reasonably determined by Buyer and Seller, then Buyer may proceed with the acquisition of the Property pursuant to the terms of this Agreement. In the event that a Challenge has not been resolved prior to December 31, 2000, and the Challenge presents a credible threat to the cancellation or termination of the GPA and/or the PD Permit (the "Credible Challenge") as reasonably determined by Buyer and Seller, then the Closing shall be extended until such time as the Credible Challenge has been resolved; provided, however, in no event shall the Closing be extended beyond December 31, 2001. (e) COVENANTS, CONDITIONS AND RESTRICTIONS. The parties acknowledge that the transfer of the Property to Buyer shall be subject to the parties entering into an agreement that restricts certain uses of the Property and of Seller's Adjacent Property from and after the Closing (the "CC&RS"). During the Due Diligence Period, the parties shall negotiate reasonably and in good faith the terms and conditions of the CC&Rs. Buyer and Seller hereby agree that the CC&Rs shall include a provision that with respect to Seller's Adjacent Property, so long as Seller continues to operate a newspaper business on Seller's Adjacent Property, modifications and/or additions to Seller's Adjacent Property shall be allowed so long as the modifications and/or additions are architecturally consistent with the improvements that are present on Seller's Adjacent Property as of the Effective Date of this Agreement. The CC&Rs shall also include design criteria and restrictions on the use of the Property and Seller's Adjacent Property as reasonably determined by Buyer and Seller. 5. CONDITIONS TO CLOSING. The following conditions are precedent to Buyer's obligation to purchase the Property (the "BUYER'S CONDITIONS PRECEDENT"): 10 (a) This Agreement has not otherwise terminated pursuant to the terms and conditions contained herein. (b) All of Seller's representations and warranties contained in or made pursuant to this Agreement shall have been true and correct when made and shall be true and correct as of the Closing Date in all material respects. At the Closing, Seller shall deliver to Buyer a certificate certifying that each of Seller's representations and warranties contained in Paragraph 8 below are true and correct as of the Closing Date in all material respects or, if not true in all material respects, stating the manner and extent any such representations and warranties are no longer true and correct. In the event any of Seller's representations and warranties are not true and correct in all material respects on the Closing Date, Buyer may elect, in its sole and absolute discretion, to terminate this Agreement in which case the Deposit shall be returned to Buyer and neither party will have any further rights or obligations hereunder except as set forth in Paragraphs 10, 13(b) and 13(l). (c) The physical condition of the Property shall be substantially the same on the Closing Date as on the date of Buyer's execution of this Agreement and, as of the Closing Date, there shall be no litigation or administrative agency or other governmental proceeding of any kind whatsoever, pending or threatened, which as of or after Closing would, in Buyer's sole discretion, materially adversely affect the value of the Property or the ability of Buyer to operate the Property in the manner in which Buyer intends to operate the Property, and, except as permitted by Buyer and Seller, no proceedings shall be pending or threatened which could or would cause the redesignation or other modification of the zoning classification of, or of any building or environmental code requirements applicable to, any of the Property. As of the Closing, Seller shall deliver the Property free of all occupants (including squatters) and abandoned personal property. (d) Satisfaction of all conditions contained in Paragraphs 2 and 4 above. (e) Title Company shall be irrevocably and unconditionally committed to issue to Buyer the Title Policy and Endorsements as described in Paragraph 3 above. (f) Seller has performed all of its obligations under this Agreement. The Buyer's Conditions Precedent contained in Paragraphs 5(a) through (f) are intended solely for the benefit of Buyer. Subject to the provisions of Paragraph 6 below, if any of the Buyer's Conditions Precedent are not satisfied, Buyer shall have the right in its sole discretion either to waive in writing the Condition Precedent (except for the conditions contained in Subparagraphs 4(d)(iv) 4(d)(v) (except for the Insufficient Challenge) and 4(e) above which may not be waived by Buyer) and proceed with the purchase or terminate this Agreement. If Buyer shall not have approved or waived (if not expressly prohibited pursuant to this Agreement) in writing all of the Buyer's Conditions Precedent by the Closing Date, then this Agreement shall automatically terminate, the Deposit (or a portion thereof in accordance with Subparagraph 2(c)) shall be returned to Buyer and neither party will have any further rights or obligations hereunder except for Seller's obligation to pay to Buyer its Due Diligence Costs or a portion thereof and Buyer's obligation to pay to Seller a portion of Seller's Property and Entitlement Costs in accordance with this Agreement and except as set forth in Paragraphs 10, 13(b), and 13(l). 11 The following conditions are precedent to Seller's obligation to sell the Property (the "SELLER'S CONDITIONS PRECEDENT"): (i) All of Buyer's representations and warranties contained in or made pursuant to this Agreement shall have been true and correct when made and shall be true and correct as of the Closing Date in all material respects. At the Closing, Buyer shall deliver to Seller a certificate certifying that each of Buyer's representations and warranties contained in Paragraph 9 below are true and correct as of the Closing Date in all material respects or, if not true in all material respects, stating the manner and extent any such representations and warranties are no longer true and correct. In the event any of Buyer's representations and warranties are not true and correct in all material respects on the Closing Date, Seller may elect, in its sole and absolute discretion, to terminate this Agreement in which case the Deposit shall be returned to Buyer and neither party will have any further rights or obligations hereunder except as set forth in Paragraphs 10, 13(b), and 13(l). (ii) Satisfaction of the conditions set forth in Paragraph 2 and 4 above (except for the conditions set forth in Subparagraph 2(c)(i)(c), which shall solely benefit Buyer). (iii) Buyer has performed all of its obligations under this Agreement. The Seller's Conditions Precedent are intended solely for the benefit of Seller. Subject to the provisions of Paragraph 6 below, if any of the Seller's Conditions Precedent are not satisfied, Seller shall have the right in its sole discretion either to waive in writing the Condition Precedent (except for the conditions contained in Subparagraphs 4(d)(i), 4(d)(iv), 4(d)(v)(except for the Insufficient Challenge) and 4(e) above which may not be waived by Seller) and proceed with the purchase or terminate this Agreement. In the event Seller elects to terminate this Agreement, subject to the provisions of Paragraph 6 below, the Deposit (or a portion thereof in accordance with Subparagraph 2(c)) shall be returned to Buyer, and neither party will have any further rights or obligations hereunder except for Seller's obligation to pay to Buyer its Due Diligence Costs or a portion thereof and Buyer's obligation to pay to Seller a portion of Seller's Property and Entitlement Costs in accordance with this Agreement and except as set forth in Paragraphs 10, 13(b), and 13(l). 6. REMEDIES. (a) IN THE EVENT THIS TRANSACTION IS NOT CONSUMMATED BECAUSE OF A DEFAULT UNDER THIS AGREEMENT SOLELY ON THE PART OF BUYER, THE DEPOSIT PLUS INTEREST ACCRUED THEREON SHALL BE RETAINED BY SELLER AS LIQUIDATED DAMAGES. THE PARTIES HAVE AGREED THAT SELLER'S ACTUAL DAMAGES, IN THE EVENT OF A DEFAULT BY BUYER, WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE. THEREFORE, BY PLACING THEIR INITIALS BELOW, THE PARTIES ACKNOWLEDGE THAT THE DEPOSIT HAS BEEN AGREED UPON, AFTER NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES AND AS SELLER'S SOLE AND EXCLUSIVE REMEDY AGAINST BUYER, AT LAW OR IN 12 EQUITY, IN THE EVENT THAT THIS TRANSACTION DOES NOT CLOSE DUE TO A DEFAULT UNDER THIS AGREEMENT ON THE PART OF BUYER. INITIALS: SELLER _______ BUYER _______ (b) If the sale of the Property is not consummated because of a default under this Agreement on the part of Seller or if a Condition Precedent cannot be satisfied because Seller intentionally frustrated such satisfaction by some affirmative act (provided that so long as Seller is acting in accordance with the terms of this Agreement, Seller shall not be deemed to have intentionally frustrated such satisfaction by some affirmative act), Buyer may either (1) terminate this Agreement by delivery of written notice of termination to Seller, whereupon the Deposit shall be returned to Buyer and, in the instance of an unsatisfied Condition Precedent because Seller intentionally frustrated such satisfaction by some affirmative act, Seller shall pay to Buyer all of Buyer's Due Diligence Costs, and neither party shall have any further rights or obligations hereunder except as otherwise provided in Paragraphs 10, 13(b), and 13(l), or (2) enforce specific performance of Seller's obligation to execute the documents required to convey the Property to Buyer. 7. CLOSING AND ESCROW. (a) Upon mutual execution of this Agreement, the parties hereto shall deposit an executed counterpart of this Agreement with Title Company and this Agreement shall serve as instructions to Title Company as the escrow holder for consummation of the purchase and sale contemplated hereby. Seller and Buyer agree to execute such additional escrow instructions as may be appropriate to enable the escrow holder to comply with the terms of this Agreement; provided, however, that in the event of any conflict between the provisions of this Agreement and any supplementary escrow instructions, the terms of this Agreement shall control. (b) The Closing shall occur ten (10) business days after receipt by Seller of Buyer's written notice of Buyer's intention to pay to the City the Permit Fees (as hereinafter defined) (the "NOTICE OF PAYMENT") (the "CLOSING DATE"). Except as provided in Paragraphs 4(d)(v) and 7(c) below, the Closing shall not occur later than December 31, 2000. For purposes of this Paragraph 7, "PERMIT FEES" shall mean the permit fees and development taxes required by the City to enable Buyer to obtain a permit card from the City. (c) Notwithstanding the provisions of Paragraph 7(b) to the contrary, if all of the conditions set forth in Paragraphs 2 and 4 hereof have been satisfied (or waived in the instance of an Insufficient Challenge) prior to December 31, 2000, Buyer shall have the right to extend the Closing Date in its sole and absolute discretion, upon the following terms and conditions. If Buyer elects to extend the Closing Date, then prior to December 31, 2000, Buyer shall (i) deliver to Seller a written notice of its intention to extend the Closing Date (the "EXTENDED CLOSING DATE") and (ii) deposit with Title Company the sum of One Hundred Thousand Dollars ($100,000) which shall become a part of the Deposit and which amount together with the rest of the Deposit shall be non-refundable except as otherwise expressly provided herein. The Extended Closing Date shall occur ten (10) business days after receipt by Seller of Buyer's Notice of Payment, provided that in no event shall the Extended Closing Date be later than December 31, 2001. Notwithstanding the foregoing, in the event that all of the conditions set forth in Paragraphs 2 and 4 have been 13 satisfied (or waived in the instance of an Insufficient Challenge) prior to December 31, 2000 with the exception of an outstanding Credible Challenge, the Closing shall occur ten (10) days after resolution of such Credible Challenge; provided, however, that in the event such Credible Challenge has not been resolved prior to December 31, 2001, this Agreement shall terminate in accordance with the terms of Paragraph 2(c)(iii). In the event such Credible Challenge is resolved prior to December 31, 2001, and Buyer has not previously delivered the Notice of Payment to Seller, Buyer may elect to extend the Closing Date to a date not later than December 31, 2001 in accordance with the provisions of this Paragraph 7(c)(i) and (ii). If the Closing does not occur on or before the Closing Date, or the Extended Closing Date, if Buyer has exercised its right to extend pursuant to the terms hereof, the escrow holder shall, unless it is notified by both parties to the contrary within five (5) days after the Closing Date, or Extended Closing Date, as applicable, pay the Deposit or portions thereof to the party entitled thereto pursuant to the terms hereof and return to the depositor thereof any other items which were deposited hereunder. Any such return shall not, however, relieve either party of any liability it may have for its wrongful failure to close. (d) At or before the Closing (except to the extent otherwise specifically provided below), Seller shall deliver to Buyer the following: (i) a duly executed and acknowledged Grant Deed, which shall be recorded at Closing by Title Company in the records of the county in which the Property is located. (ii) a duly executed and acknowledged original of the CC&Rs which shall be recorded at Closing by the Title Company in the records of the county in which the Property is located. (iii) an affidavit pursuant to Section 1445(b)(2) of the IRC, and on which Buyer is entitled to rely, that Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the IRC; (iv) Seller's closing statement prepared by the Title Company in form and content satisfactory to Buyer and Seller; (v) the certificate certifying as to Seller's representations and warranties as required by Paragraph 5 above; (vi) any other instruments, records or correspondence called for hereunder which have not previously been delivered; and (vii) a properly executed California Form 590RE certifying that Seller is a California resident if Seller is a corporation or individual or that withholding of tax under Section 18805 or Section 26131 of the California Revenue and Taxation Code will not be required upon the transfer of the Property from Seller to Buyer. (e) At or before the Closing, Buyer shall deliver to Seller the following: 14 (i) a Buyer's closing statement prepared by the Title Company in form and content satisfactory to Buyer and Seller; (ii) a duly executed and acknowledged original of the CC&Rs; (iii) the Purchase Price; (iv) the certificate certifying as to Buyer's representations and warranties as required by Paragraph 5 above; and (v) any other instruments, records or correspondence called for hereunder which have not previously been delivered. (f) Seller and Buyer shall each deposit such other instruments as are reasonably required by the escrow holder or otherwise required to close the escrow and consummate the purchase of the Property in accordance with the terms hereof. (g) The following are to be apportioned at Closing, as follows: (i) CERTAIN APPORTIONMENTS. Seller shall pay for (i) the premium for the CLTA portion of the Title Policy, (ii) escrow fees, (iii) any and all county transfer taxes, (iv) one-half (1/2) of the city transfer taxes, and (v) recording fees. Buyer shall pay (i) the difference between the ALTA and CLTA portion of the Title Policy, (ii) the ALTA survey for the Property, and (iii) one-half (1/2) of the city transfer taxes. Seller shall be responsible for all costs incurred in connection with the prepayment or satisfaction of any loan or bond secured by the Property including, without limitation, any prepayment fees, penalties or charges. Buyer shall pay for all endorsements to its ALTA Owner's Policy of Title Insurance except for endorsements necessary to satisfy Seller's Obligations which shall be paid for by Seller. All other costs and charges of the escrow for the sale not otherwise provided for in this Paragraph 7(g)(i) or elsewhere in this Agreement shall be allocated in accordance with the closing customs for the county in which the Property is located. (ii) REAL ESTATE TAXES AND ASSESSMENTS. (1) All delinquent real estate taxes and assessments shall be paid by Seller at or before Closing. (2) Non-delinquent real estate taxes and assessments shall be prorated at Closing to the Buyer's and Seller's ownership periods using the actual current tax bill, but if such tax bill is not available at Closing, then such proration shall use an estimate calculated to be 102% of the amount of the previous year's tax bill, subject to a post-closing reconciliation using the actual current tax bill when received pursuant to Paragraph 7(g)(iv) below. In the proration(s), Buyer shall be credited with an amount equal to the real estate taxes and assessments 15 applicable to Seller's ownership period, to the extent such amount has not been actually paid by Seller; Seller shall be credited with an amount equal to the real estate taxes and assessments paid by Seller and applicable to Buyer's ownership period. (3) If, after Closing, any additional real estate taxes or assessments applicable to the Seller's ownership period are levied for any reason, including back assessments, then Seller shall pay all such additional amounts. If, after Closing, any refund of real estate taxes or assessments applicable to Seller's ownership period are received by Buyer for any reason, including a successful tax appeal, then Buyer shall remit to Seller any such refund, less Buyer's costs of collection. (iii) PRELIMINARY CLOSING ADJUSTMENT. Prior to Closing, Seller and Buyer shall jointly prepare a preliminary Closing adjustment statement addressing all of the aforesaid apportionments and shall deliver such statement to the Title Company. (iv) POST-CLOSING RECONCILIATION. Subject to the provisions of Paragraph 7(g)(ii) above, if any of the aforesaid apportionments cannot be calculated accurately at the time of the Closing, then they shall be calculated as soon after the Closing as feasible. Either party owing the other party a sum of money based on such subsequent apportionments shall promptly pay said sum to the other party, together with interest thereon at the rate of two percent (2%) over the then applicable publicly announced prime rate of Bank of America, NT&SA per annum or the maximum rate allowed by law, whichever is less (the "RATE"), from the date of the Closing to the date of payment if payment is not made within ten (10) days after delivery of a bill therefor. In making the reconciliation's described in this Paragraph 7(g)(iv), each party shall have the right to review the other party's books and records to the extent relevant to a specific apportionment then being reconciled. (v) SURVIVAL. The provisions of this Paragraph 7(g) shall survive the Closing. (h) Buyer shall deposit with Title Company at Closing the Permit Fees and upon Closing, the Permit Fees shall be disbursed by the Title Company to the City pursuant to the joint instructions by Buyer and Seller. 8. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents and warrants to and covenants with Buyer as follows, which representations and warranties shall survive the Closing (as provided in Paragraph 13(e) below). (a) SELLER'S DOCUMENTS. To the best of Seller's knowledge, the Seller's Documents constitute all of the information and documents known by Seller to be in its possession regarding the Property. (b) COMPLIANCE WITH LAWS. Seller has not received any written notice of violation or alleged violation of environmental, zoning and land use laws, and other applicable local, state and federal laws and regulations applicable to the Property ("APPLICABLE LAWS"). Seller covenants and agrees that it will immediately deliver to Buyer any written notice of violation or alleged 16 violation of Applicable Laws that Seller receives from the date hereof through the Closing Date. (c) PROCEEDINGS. Seller has not received any written notice of any threatened or actual condemnation proceeding, environmental proceeding, zoning or other land-use regulation proceeding, or other governmental proceeding affecting the Property nor has Seller received notice of any special assessment proceedings affecting the Property (other than as set forth in the Preliminary Report). Seller covenants and agrees that it will immediately deliver to Buyer any written notice of any such threatened or actual proceeding affecting the Property that Seller receives from the date hereof through the Closing Date. There is no litigation pending or, to the best of Seller's knowledge threatened, against Seller that arises out of the ownership of the Property or that might detrimentally affect the value or the use or operation of the Property for its intended purpose or the ability of Seller to perform its obligations under this Agreement. From the date hereof through the Closing Date, Seller shall immediately notify Buyer of any such litigation of which Seller becomes aware. (d) AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; this Agreement and all documents executed by Seller which are to be delivered to Buyer at the Closing are and at the time of Closing will be duly authorized, executed and delivered by Seller, are and at the time of Closing will be legal, valid and binding obligations of Seller enforceable against Seller in accordance with their respective terms, are and at the time of Closing will be sufficient to convey title (if they purport to do so), and do not and at the time of Closing will not violate any provision of any agreement or judicial order to which Seller or the Property is subject. (e) CONTRACTS; LIENS. At the time of Closing there will be no outstanding written or oral contracts or other agreements made by Seller concerning the Property which have not been fully paid for and Seller shall cause to be discharged all mechanics' and materialmen's liens arising from any labor or materials furnished to the Property prior to the time of Closing. (f) WITHHOLDING TAXES. Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the IRC. (g) ENVIRONMENTAL. Seller has not received any written notice that the Property or any portion thereof is in violation of any federal, state, local or administrative agency ordinance, law, rule, regulation, order or requirement relating to environmental conditions or Hazardous Material (collectively, "ENVIRONMENTAL LAWS"). For the purposes hereof, "HAZARDOUS MATERIAL" shall mean any substance, chemical, waste or other material which is listed, defined or otherwise identified as "hazardous" or "toxic" under any federal, state, local or administrative agency ordinance or law, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss. 9601 ET SEQ.; and the Resource Conservation and Recovery Act, 42 U.S.C. ss.ss. 6901 ET SEQ.; or any regulation, order, rule or requirement adopted thereunder, as well as any formaldehyde, urea, polychlorinated biphenyls, petroleum, petroleum product or by-product, crude oil, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel or mixture thereof, radon, asbestos, and "source," "special nuclear" and "by-product" material as defined in the Atomic Energy Act of 1985, 42 U.S.C. ss.ss. 3011 ET SEQ. Notwithstanding the foregoing, Seller hereby discloses to Buyer the 17 following: (i) one or more underground storage tanks are or were located on Seller's Adjacent Property and Seller periodically conducts testing with regard thereto; and (ii) the Property may have been used in the past for agricultural purposes and there may exist in the soil on the Property residues of fertilizers, pesticides and fungicides as a result thereof. (h) THIRD PARTY RIGHTS. Seller has not granted any option or right of first refusal or first opportunity to any party to acquire any interest in any of the Property and to the best of Seller's knowledge, no party has an interest in the Property as a result of adverse possession. (i) CONTRACTS. To the best of Seller's knowledge, there are no obligations in connection with the Property which will be binding upon Buyer after Closing, except Permitted Exceptions. (j) INSOLVENCY. Seller has not filed or been the subject of any filing of a petition under the Federal Bankruptcy Law or any federal or state insolvency laws or laws for composition of indebtedness or for the reorganization of debtors. For purposes of this Agreement, "to the best of Seller's knowledge" shall mean the actual knowledge, but not the implied or constructive knowledge, of Alan Silverglat without any duty of investigation or inquiry. 9. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby represents and warrants to Seller as follows: Buyer is a limited partnership duly organized, validly existing and in good standing under the laws of the State of California; this Agreement and all documents executed by Buyer which are to be delivered to Seller at the Closing are or at the time of Closing will be duly authorized, executed and delivered by Buyer, and are or at the Closing will be legal, valid and binding obligations of Buyer enforceable against Buyer in accordance with their respective terms, and do not and at the time of Closing will not violate any provisions of any agreement or judicial order to which Buyer is subject. 10. POSSESSION. Possession of the Property shall be delivered to Buyer on the Closing Date, provided, however, that prior to the Closing Date Seller shall afford authorized representatives of Buyer reasonable access to the Property for purposes of satisfying Buyer with respect to the representations, warranties and covenants of Seller contained herein and with respect to satisfaction of any Condition Precedent. Buyer shall maintain, and shall ensure that its contractors maintain, not less than $1,000,000 comprehensive general liability coverage written on an occurrence basis and reasonably adequate to insure against all liability of Buyer and its agents, employees or contractors, arising out of any entry or inspections of the Property pursuant to the provisions hereof and naming Seller as an additional insured. Buyer shall provide Seller with certificates of such insurance coverage prior to any entry onto the Property by Buyer or its employees, agents or contractors. Seller shall reasonably (except in the case of Phase II testing where Seller shall approve or disapprove such testing in its sole and absolute discretion) approve or disapprove any proposed environmental testing within two (2) business days after receipt of a request from Buyer concerning the same. If Seller fails to respond within two (2) business days after receipt of such notice, Seller shall be deemed to have denied such request. If Seller denies Buyer the right to perform Phase II testing on the Property, Buyer may terminate this Agreement by giving written notice thereof to Seller prior to the expiration of the Due Diligence Period, in 18 which case this Agreement shall terminate and all of the Phase I Deposit, Phase II Deposit and Phase III Deposit, as applicable, shall be returned to Buyer. Buyer hereby agrees to indemnify and hold Seller harmless from any damage or injury to persons or property caused by Buyer or its authorized representatives during their entry and investigation prior to the Closing; provided, however, nothing herein shall obligate Buyer to indemnify Seller for the mere discovery by Buyer of any matters during the course of Buyer's testing of the Property conducted pursuant to this Paragraph 10. If this Agreement is terminated, Buyer shall repair the damage caused by Buyer's entry and investigation. This indemnity shall (A) survive the termination of this Agreement or the Closing, as applicable, provided that Seller must give notice of any claim it may have against Buyer under such indemnity (i) within three (3) months of such termination or the Closing Date, as applicable, if the claim involves damage to Seller's Property or any other claim not described in clause (ii) below, or (ii) if the claim is brought by a third party against Seller, within one (1) year of such termination or the Closing Date, as applicable, and (B) shall not be limited by the liquidated damages provision set forth in Paragraph 6 above. 11. BUYER'S CONSENT TO CONTRACTS AND LEASES. Seller shall not, after the date of Seller's execution of this Agreement, enter into any lease, contract, other agreement, or any amendment thereof affecting the Property, without in each case obtaining Buyer's prior written consent thereto. Notwithstanding the provisions of this Paragraph 11 to the contrary, Seller may enter into new contracts as long as such contract(s) will be terminated as of the Closing Date. Seller shall terminate prior to the Closing, at no cost or expense to Buyer, any and all agreements, contracts or similar agreements affecting the Property that are not Permitted Exceptions or otherwise expressly assumed in writing by Buyer in Buyer's sole and absolute discretion. 12. COOPERATION. Seller shall cooperate and do all acts as may be reasonably required or requested by Buyer, at no material cost to Seller, with regard to the fulfillment of any Condition Precedent including execution by Seller of any documents, applications or permits or similar items, and using its best efforts to obtain the signature from any third party required on such documents, applications or permits or similar items. Seller hereby irrevocably authorizes Buyer and its agents to make all inquiries with and applications to any third party, including any governmental authority as Buyer may reasonably require to complete its due diligence and the proceedings contemplated in this Agreement. Buyer shall not place any encumbrance on the Property in connection with obtaining the entitlements contemplated herein without first obtaining Seller's written consent and Buyer shall not do anything in the process of obtaining the entitlements which will materially decrease the value of the Property. 13. MISCELLANEOUS. (a) NOTICES. Any notice, consent or approval required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given upon (i) hand delivery; (ii) one (1) day after being deposited with Federal Express or another reliable overnight courier service or (iii) transmission by facsimile telecopy during the recipient's normal business hours as evidenced by a regular machine-printed confirmation of such transmission, and addressed as follows: 19 IF TO SELLER: Northwest Publications, Inc. c/o Knight-Ridder, Inc. 50 W. San Fernando Street San Jose, CA 95113-2413 Attention: Mr. Alan Silverglat Vice President/Treasurer Telephone: (408) 938-7790 Facsimile: (408) 938-7812 with copies to: Northwest Publications, Inc. c/o Knight-Ridder, Inc. 50 W. San Fernando Street San Jose, CA 95113-2413 Attention: Karen Stevenson, Esq. General Counsel Telephone: (408) 938-7765 Facsimile: (408) 938-7812 Shartsis, Friese & Ginsburg LLP One Maritime Plaza, Eighteenth Floor San Francisco, CA 94111 Attention: David H. Kremer, Esq. Telephone: (415) 421-6500 Facsimile: (415) 421-2922 IF TO BUYER: Spieker Properties, L.P. 2180 Sand Hill Road, Suite 200 Menlo Park, CA 94025 Attention: Eric T. Luhrs Vice President Telephone: (650) 854-5600 Facsimile: (650) 233-3820 with copies to: Spieker Properties, L.P. 2180 Sand Hill Road, Suite 200 Menlo Park, CA 94025 Attention: Sara Steppe, Esq. General Counsel Telephone: (650) 854-5600 Facsimile: (650) 233-3838 20 Orrick Herrington & Sutcliffe LLP 400 Sansome Street San Francisco, CA 94111 Attention: Pamela H. Bennett, Esq. Telephone: (415) 773-5983 Facsimile: (415) 773-5979 or such other address as either party may from time to time specify in writing to the other. (b) BROKERS AND FINDERS. Neither party has had any contact or dealings regarding the Property, or any communication in connection with the subject matter of this transaction, through any real estate broker or other person who can claim a right to a commission or finder's fee in connection with the sale contemplated herein, except for contact and dealings with Gibson Speno LLC, whose compensation shall be paid by Seller. If any other broker or finder perfects a claim for a commission or finder's fee based upon any such contact, dealings or communication, the party through whom the broker or finder makes its claim shall be responsible for said commission or fee and all costs and expenses (including reasonable attorneys' fees) incurred by the other party in defending against the same. The provisions of this paragraph shall survive the Closing. (c) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors, heirs, administrators and assigns. Buyer may not assign its rights under this Agreement without first obtaining Seller's written approval, which approval may be given or withheld in Seller's sole discretion. Notwithstanding the foregoing, Buyer shall have the right, upon written notice to Seller, to assign its right, title and interest in and to this Agreement to one or more assignees affiliated with Buyer at any time before the Closing Date; provided, however, in such event, the party originally designated as Buyer shall not be relieved of its obligations under this Agreement. (d) AMENDMENTS. Except as otherwise provided herein, this Agreement may be amended or modified only by a written instrument executed by Seller and Buyer. (e) CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All representations and warranties by the respective parties contained herein or made in writing pursuant to this Agreement are intended to and shall remain true and correct as of the time of Closing (unless otherwise provided in the certificates to be delivered pursuant to Paragraphs 7(c)(vi) and 7(d)(iv)), and, together with all conditions, covenants and indemnities made by the respective parties contained herein or made in writing pursuant to this Agreement (except as otherwise expressly limited or expanded by the terms of this Agreement), shall survive the execution and delivery of this Agreement and the Closing for a period of twelve (12) months. (f) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (g) MERGER OF PRIOR AGREEMENTS. This Agreement and the exhibits hereto constitute the entire agreement between the parties and supersede all prior agreements and understandings between the parties relating to the subject matter hereof. 21 (h) ENFORCEMENT. If either party hereto fails to perform any of its obligations under this Agreement or if a dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Agreement, then the party not prevailing in such dispute shall pay any and all costs and expenses incurred by the other party in enforcing or establishing its rights hereunder, including, without limitation, court costs or costs of arbitration and reasonable attorneys' fees and costs. Any such attorneys' fees and other reasonable expenses incurred by either party in enforcing a judgment in its favor under this Agreement shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Agreement and to survive and not be merged into any such judgment. The provisions of this Paragraph 13(h) shall not be limited by the liquidated damages provision set forth in Paragraph 6 above. (i) TIME OF THE ESSENCE. Time is of the essence of this Agreement. (j) SEVERABILITY. If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court of competent jurisdiction to be invalid, unenforceable or void, the remainder of this Agreement and such provisions as applied to other persons, places and circumstances shall remain in full force and effect. (k) MARKETING. During the term of this Agreement, Seller shall not market the Property, accept any offer to purchase, offer the Property for sale to or enter into any contract for the sale of the Property with any other prospective purchaser. After the expiration of the Due Diligence Period, Buyer may offer the Property for lease and place signs on the Property reflecting the same. (l) CONFIDENTIALITY. Buyer and Seller agree that to the extent reasonably practical, they shall keep the contents of this Agreement confidential and that prior to Closing, no publicity or press release to the general public with respect to this transaction shall be made by either party without the prior written consent of the other. (m) LIKE-KIND EXCHANGE. Buyer and Seller hereby acknowledge that Buyer may desire to effectuate a tax-deferred exchange (also known as a "1031" exchange) (the "EXCHANGE") in connection with Buyer's acquisition of the Property. Seller hereby agrees to cooperate with Buyer in connection with the Exchange contemplated by Buyer, provided that: (i) All documents executed in connection with the Exchange (the "EXCHANGE DOCUMENTS") shall recognize that Seller is acting solely as an accommodating party to such Exchange, shall have no liability with respect thereto, and is making no representation or warranty that the transactions qualify as a tax-free exchange under Section 1031 of the Internal Revenue Code or any applicable state or local laws and shall have no liability whatsoever if any such transactions fail to so qualify. (ii) Such Exchange shall not result in Seller incurring any additional costs or liabilities (and Buyer shall pay all additional costs and expenses to the extent that such are incurred), and in no 22 event will there be any extension of the Closing Date in order to permit Buyer to initiate or consummate such Exchange. (iii) In no event shall Seller be obligated to acquire any property or otherwise be obligated to take title, or appear in the records of title, to any property in connection with the Exchange. (iv) In no event shall Buyer's consummation of such Exchange constitute a condition precedent to Buyer's obligations under this Agreement, and Buyer's failure or inability to consummate such Exchange shall not be deemed to excuse or release Buyer from its obligations under this Agreement. Seller further agrees that, in connection with the foregoing, and subject in all respects to the foregoing provisions, Seller shall consent to Buyer's assigning all or a portion of its rights under this Agreement to an exchange intermediary solely for the purpose of consummating such Exchange. In no event shall any such assignment release Buyer of its obligations under this Agreement, including, without limitation, its indemnity obligations thereunder, or affect in any manner any of Buyer's representations, warranties or covenants set forth in this Agreement. Buyer shall indemnify and hold Seller harmless from and against all loss, liability, damage or expense (including reasonable attorney's fees and costs) actually incurred or suffered by Seller as a direct result of such Exchange. (n) COUNTERPART EXECUTION. This Agreement may be executed in any number of identical counterparts, any or all of which may contain the signatures of less than all of the parties, and all of which shall be construed together as but a single instrument. 23 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BUYER: SPIEKER PROPERTIES, L.P., a California limited partnership By: Spieker Properties, Inc., a Maryland corporation, Its: General Partner By: /s/ JOE RUSSELL ------------------------------ Joe Russell Its: President, Silicon Valley SELLER: NORTHWEST PUBLICATIONS, INC., a Delaware corporation By: /s/ ALAN SILVERGLAT ------------------------------ Alan Silverglat Its: Assistant Vice President/ Treasury 24 COUNTERPART SIGNATURE PAGE TO PURCHASE AGREEMENT DATED AS OF OCTOBER 21, 1999 (TITLE COMPANY) Title Company agrees to act as escrow holder and title company in accordance with the terms of this Agreement and to act as the Reporting Person in accordance with Section 6045(e) of the Internal Revenue Code and the regulations promulgated thereunder. FIRST AMERICAN TITLE GUARANTY COMPANY By: /s/ HEATHER KUCALA ------------------------------ Heather Kucala Its: Escrow Officer By: /s/ ------------------------------ Its: Date: October 21, 1999 25 LIST OF EXHIBITS Exhibit A -- Description of Real Property Exhibit B -- Application for Amendment to General Plan Exhibit C -- Form of Grant Deed EX-11 3 EXHIBIT 11
EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended - ----------------------------------------------------------------------------------------- Dec. 26, Dec. 27, Dec. 28, 1999 1998 1997 -------- -------- -------- Income from continuing operations $339,939 $305,631 $396,504 Less dividends on preferred stock 14,075 14,040 7,020 -------- -------- -------- Income from continuing operations attributable to common stock $325,864 $291,591 $389,484 ======== ======== ======== Average shares outstanding (basic) 80,025 78,882 88,475 -------- -------- -------- Effect of dilutive securities: Convertible preferred stock 15,948 17,549 10,968 Stock options 1,487 1,745 1,871 -------- -------- -------- Average shares outstanding (diluted) 97,460 98,176 101,314 ======== ======== ======== Earnings per share from continuing operations (basic) $ 4.07 $ 3.70 $ 4.40 ======== ======== ======== Earnings per share from continuing operations (diluted) $ 3.49 $ 3.11 $ 3.91 ======== ======== ========
EX-12 4 EXHIBIT 12
Exhibit 12 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO FROM CONTINUING OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT RATIO DATA) YEAR ENDED ------------------------------------------------------------------- December 26, December 27, December 28, December 29, December 31, 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ FIXED CHARGES COMPUTATION INTEREST EXPENSE: NET INTEREST EXPENSE $ 92,247 $ 101,420 $ 97,286 $ 66,740 $ 57,623 PLUS CAPITALIZED INTEREST 5,197 4,516 5,376 6,397 1,889 ------------ ------------ ------------ ------------ ------------ GROSS INTEREST EXPENSE 97,444 105,936 102,662 73,137 59,512 PROPORTIONATE SHARE OF INTEREST EXPENSE OF 50% OWNED PERSONS 1,948 17,941 13,824 INTEREST COMPONENT OF RENT EXPENSE 8,229 7,688 6,671 5,787 5,781 ------------ ------------ ------------ ------------ ------------ TOTAL FIXED CHARGES $ 105,673 $ 113,624 $ 111,281 $ 96,865 $ 79,117 ============ ============ ============ ============ ============ EARNINGS COMPUTATION PRETAX EARNINGS $ 568,015 $ 507,916 $ 693,852 $ 310,209 $ 182,817 ADD: FIXED CHARGES 105,673 113,624 111,281 96,865 79,117 LESS: CAPITALIZED INTEREST (5,197) (4,516) (5,376) (6,397) (1,889) LESS: DISTRIBUTIONS IN EXCESS OF (LESS THAN) EARNINGS OF INVESTEES (8,934) (16,693) (7,675) (12,962) (9,285) ------------ ------------ ------------ ------------ ------------ TOTAL EARNINGS AS ADJUSTED $ 659,557 $ 600,331 $ 792,082 $ 387,715 $ 250,760 ============ ============ ============ ============ ============ RATIO OF EARNINGS TO FIXED CHARGES 6.2:1 5.3:1 7.1:1 4.0:1 3.2:1 ============ ============ ============ ============ ============
EX-21 5 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.com, Inc. 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 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 6 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, in the Registration Statement No. 333-79025 on Form S-3 dated May 21, 1999, in the Registration Statement No. 33-80163 on Form S-8 dated June 7, 1999 of Knight-Ridder, Inc. and in the related Prospectuses, of our report dated January 18, 2000, with respect to the consolidated financial statements and schedule of Knight-Ridder, Inc. included in this Annual Report (Form 10-K) for the year ended December 26, 1999. /s/ Ernst & Young LLP San Jose, California March 16, 2000 EX-27 7 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 12-MOS DEC-26-1999 DEC-28-1998 DEC-26-1999 1 34,084 0 438,933 15,917 39,238 570,304 1,890,190 831,041 4,192,334 497,141 1,260,814 0 1,374 1,659 1,777,651 4,192,334 3,228,225 3,228,225 472,727 2,603,975 56,235 25,135 97,444 568,015 228,076 339,939 0 0 0 339,939 4.07 3.49 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
-----END PRIVACY-ENHANCED MESSAGE-----