10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 25, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _______________ Commission file number 1-7553 KNIGHT-RIDDER, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) FLORIDA 38-0723657 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 50 W. SAN FERNANDO ST., SUITE 1500, SAN JOSE, CA 95113 ------------------------------------------------------ (Address of principal executive offices) (Zip Code) (408) 938-7700 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 [ ] As of August 2, 2000, 75,633,931 shares of Common Stock, $.02 1/12 par value, were outstanding. Table of Contents for Form 10-Q Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheet 3 Consolidated Statement of Income 5 Consolidated Statement of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURE 25 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (Unaudited in thousands of dollars, except share data)
June 25, 2000 December 26, 1999 --------------- ----------------- ASSETS CURRENT ASSETS Cash, including short-term cash investments of $1,060 in 2000, and $5,598 in 1999 $ 34,596 $ 34,084 Accounts receivable, net of allowances of $18,011 in 2000 and $15,917 in 1999 399,947 423,016 Inventories 50,850 39,238 Prepaid expense 36,243 32,246 Other current assets 35,612 41,720 --------------- --------------- Total Current Assets 557,248 570,304 --------------- --------------- INVESTMENTS AND OTHER ASSETS Equity in unconsolidated companies and joint ventures 185,888 206,880 Other 344,381 181,583 --------------- --------------- Total Investments and Other Assets 530,269 388,463 --------------- --------------- PROPERTY, PLANT AND EQUIPMENT Land and improvements 94,925 93,995 Buildings and improvements 482,522 484,163 Equipment 1,248,358 1,244,110 Construction and equipment installations in progress 65,994 67,922 --------------- --------------- 1,891,799 1,890,190 Less accumulated depreciation (851,109) (831,041) --------------- --------------- Net Property, Plant and Equipment 1,040,690 1,059,149 GOODWILL Less accumulated amortization of $363,837 in 2000, and $331,504 in 1999 2,148,410 2,174,418 --------------- --------------- Total $ 4,276,617 $ 4,192,334 =============== ===============
See Notes to Consolidated Financial Statements. 3
June 25, 2000 December 26, 1999 --------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 158,263 $ 142,460 Accrued expenses and other liabilities 130,224 100,668 Accrued compensation and amounts withheld from employees 102,158 126,529 Federal and state income taxes 86,090 16,039 Deferred revenue 73,551 71,505 Short-term borrowings and current portion of long-term debt 39,952 39,940 --------------- --------------- Total Current Liabilities 590,238 497,141 --------------- --------------- NONCURRENT LIABILITIES Long-term debt 1,406,859 1,260,814 Deferred Federal and state income taxes 297,258 306,636 Postretirement benefits other than pensions 146,251 145,143 Employment benefits and other noncurrent liabilities 194,462 197,045 --------------- --------------- Total Noncurrent Liabilities 2,044,830 1,909,638 --------------- --------------- MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 3,528 4,871 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred stock, $1.00 par value; shares authorized - 2,000,000; shares issued - 1,225,000 in 2000 and 1,374,000 in 1999 1,225 1,374 Common stock, $.02 1/12 par value; shares authorized - 250,000,000; shares issued - 75,584,648 in 2000 and 79,654,493 in 1999 1,575 1,659 Additional capital 920,049 938,969 Retained earnings 752,363 798,971 Accumulated other comprehensive income (34,924) 42,084 Treasury stock, at cost, 40,605 shares in 2000 and 42,510 shares in 1999 (2,267) (2,373) --------------- --------------- Total Shareholders' Equity 1,638,021 1,780,684 --------------- --------------- Total $ 4,276,617 $ 4,192,334 =============== =============== See Notes to Consolidated Financial Statements.
4 CONSOLIDATED STATEMENT OF INCOME (Unaudited in thousands of dollars, except per share data)
Quarter Ended Two Quarters Ended -------------------------- -------------------------- June 25, June 27, June 25, June 27, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- OPERATING REVENUE Advertising Retail $ 272,828 $ 266,146 $ 518,012 $ 514,732 General 91,368 81,100 179,938 155,957 Classified 289,689 271,720 568,927 533,624 ----------- ----------- ----------- ----------- Total 653,885 618,966 1,266,877 1,204,313 Circulation 140,754 145,183 285,034 291,940 Other 57,817 45,517 108,247 84,212 ----------- ----------- ----------- ----------- Total Operating Revenue 852,456 809,666 1,660,158 1,580,465 ----------- ----------- ----------- ----------- OPERATING COSTS Labor and employee benefits 320,703 308,493 636,171 613,592 Newsprint, ink and supplements 118,564 121,944 232,593 248,814 Other operating costs 185,157 175,245 369,428 341,260 Depreciation and amortization 48,320 48,499 96,834 95,652 ----------- ----------- ----------- ----------- Total Operating Costs 672,744 654,181 1,335,026 1,299,318 ----------- ----------- ----------- ----------- OPERATING INCOME 179,712 155,485 325,132 281,147 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (28,291) (24,038) (54,340) (48,802) Interest expense capitalized 651 1,006 1,212 3,323 Interest income 443 1,110 774 1,540 Equity in earnings of unconsolidated companies and joint ventures 1,695 3,960 568 8,828 Minority interests (3,187) (2,860) (5,792) (5,459) Other, net 8,849 9,810 161,221 8,910 ----------- ----------- ----------- ----------- Total (19,840) (11,012) 103,643 (31,660) ----------- ----------- ----------- ----------- Income before income taxes 159,872 144,473 428,775 249,487 Income taxes 63,599 57,887 171,647 100,034 ----------- ----------- ----------- ----------- Net Income $ 96,273 $ 86,586 $ 257,128 $ 149,453 =========== =========== =========== =========== NET INCOME PER SHARE Basic $ 1.23 $ 1.04 $ 3.27 $ 1.80 =========== =========== =========== =========== Diluted $ 1.08 $ 0.88 $ 2.82 $ 1.53 =========== =========== =========== =========== DIVIDENDS DECLARED PER COMMON SHARE $ 0.23 $ 0.23 $ 0.46 $ 0.43 =========== =========== =========== =========== AVERAGE SHARES OUTSTANDING (000s) Basic 75,929 79,000 76,854 78,713 =========== =========== =========== =========== Diluted 89,423 97,847 91,045 97,583 =========== =========== =========== =========== See Notes to Consolidated Financial Statements.
5 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, in thousands of dollars)
Two Quarters Ended ---------------------------------- June 25, June 27, 2000 1999 --------------- --------------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 257,128 $ 149,453 Noncash items deducted from (included in) income : Gains on sale of investments (153,982) (11,187) Gain on sale of building (9,492) Depreciation and amortization 96,834 95,652 Provision (benefit) for deferred taxes 33,962 (3,856) Provision for bad debt 12,178 11,830 Distributions in excess of (less than) earnings from equity investees 6,275 (7,375) Minority interests in earnings of consolidated subsidiaries 5,792 5,579 Other items, net 3,409 16,418 Change in certain assets and liabilities: Accounts receivable 11,208 (3,331) Inventories (10,359) 11,748 Other assets (102,832) 6,474 Accounts payable 16,246 (44,259) Federal and state income taxes 71,042 15,640 Other liabilities 10,475 7,915 --------------- --------------- Net Cash Provided by Operating Activities 247,884 250,701 --------------- --------------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Proceeds from sale of investments 1,965 74,076 Proceeds from sale of building 15,694 Acquisition of businesses, investees, and other investments, net (45,783) (55,394) Additions to property, plant and equipment (35,326) (49,422) Other items, net 9,006 7,063 --------------- --------------- Net Cash Required for Investing Activities (54,444) (23,677) --------------- --------------- CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES Proceeds from sale of commercial paper, notes payable and 2,358,827 1,338,921 senior notes payable Reduction of total debt, net of unamortized discount (2,212,770) (1,539,872) --------------- --------------- Net Change in Total Debt 146,057 (200,951) Payment of cash dividends (41,413) (41,362) Sale of common stock to employees 13,400 23,063 Purchase of treasury stock (299,297) Other items, net (11,675) (5,797) --------------- --------------- Net Cash Required for Financing Activities (192,928) (225,047) --------------- --------------- Net Increase in Cash 512 1,977 Cash and short-term cash investments at beginning of the period 34,084 26,836 --------------- --------------- Cash and short-term cash investments at end of the period $ 34,596 $ 28,813 =============== =============== See Notes to Consolidated Financial Statements.
6 CONSOLIDATED STATEMENT OF CASH FLOWS (cont.) (Unaudited, in thousands of dollars)
Two Quarters Ended ---------------------------------- June 25, June 27, 2000 1999 --------------- --------------- SUPPLEMENTAL CASH FLOW INFORMATION: Non cash investing activities Stock received from sale of unconsolidated investment 195,624 Non cash financing activities Conversion of preferred stock to common stock Preferred Stock (149) (100) Additional Capital (55,775) (37,508) Issuance of common stock upon conversion of preferred stock Common Stock 31 21 Additional Capital 55,893 37,587 See Notes to Consolidated Financial Statements.
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter and two quarters ended June 25, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K/A for the year ended December 26, 1999. Certain amounts in the 1999 consolidated statement of cash flows have been reclassified to conform to the 2000 presentation. NOTE 2 - COMPREHENSIVE INCOME The following table sets forth the computation of comprehensive income (in thousands):
Quarter Ended Two Quarters Ended ---------------------- ---------------------- June 25, June 27, June 25, June 27, 2000 1999 2000 1999 --------- --------- --------- --------- Net income $ 96,273 $ 86,586 $ 257,128 $ 149,453 Total unrealized gains (losses) on securities available for sale (42,442) (1,351) (67,736) 11,394 Less: reclassification adjustment for realized gains, net of taxes -- (6,911) (9,272) (9,182) --------- --------- --------- --------- Change in accumulated other comprehensive income (42,442) (8,262) (77,008) 2,212 --------- --------- --------- --------- Total comprehensive income $ 53,831 $ 78,324 $ 180,120 $ 151,665 ========= ========= ========= =========
8 NOTE 3 - DEBT (In Thousands of Dollars) Effective Interest Balance At Rate At -------------------------- June 25, June 25, December 26, 2000 2000 1999 ---------- ----------- ------------ Commercial paper, net of discount (a) 6.6% $ 579,419 $ 433,796 Debentures, net of discount (b) 10.0% 198,547 198,464 Debentures, net of discount (c) 7.4% 94,631 94,534 Debentures, net of discount (d) 6.9% 296,499 296,443 Notes payable, net of discount (e) 8.6% 79,937 79,903 Notes payable, net of discount (f) 6.9% 98,322 98,209 Senior notes, net of discount (g) 6.4% 99,456 99,405 ----------- ----------- Total Debt (h) 7.3% 1,446,811 1,300,754 Less amounts classified as current 39,952 39,940 ----------- ----------- Total long-term debt 7.2% $ 1,406,859 $ 1,260,814 =========== =========== (a) Commercial paper is supported by $1.0 billion of revolving credit and term loan agreements, $500 million of which matures on June 22, 2003 and $500 million of which matures June 18, 2001. (b) Represents $200 million of a 20-year 9 7/8% debenture due in 2009. (c) Represents $100 million of a 7.15% debenture due in 2027. (d) Represents $300 million of a 6.875% debenture due in 2029. (e) Represents $80 million of 8 1/2% notes payable at Sept. 1, 2001, subject to a mandatory repayment of $40.0 million in Sept. 2000. The September 2000 maturity is represented under current activities. (f) Represents $100 million of a 6.625% note due in 2007. (g) Represents $100 million of 10 year 6.3% senior notes due in 2005. (h) Interest payments for the two quarters ended June 2000 and June 1999 were $52.8 million and $43.3 million, respectively. NOTE 4 - INCOME TAX PAYMENTS Income tax payments for the two quarters ended June 25, 2000 and June 27, 1999, were $56.9 million and $90.0 million, respectively. 9 NOTE 5 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share from continuing operations (in thousands, except per share data):
Quarter Ended Two Quarters Ended --------------------------- ---------------------------- June 25, June 27, June 25, June 27, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net income $ 96,273 $ 86,586 257,128 $ 149,453 Less dividends on preferred stock 2,818 4,036 5,979 7,546 ------------ ------------ ------------ ------------ Net income attributable to common stock $ 93,455 $ 82,550 251,149 $ 141,907 ============ ============ ============ ============ Average shares outstanding (basic) 75,929 79,000 76,854 78,713 ------------ ------------ ------------ ------------ Effect of dilutive securities: Weighted average preferred stock, as converted 12,254 17,383 12,997 17,465 Stock options 1,240 1,464 1,194 1,405 ------------ ------------ ------------ ------------ Average shares outstanding (diluted) 89,423 97,847 91,045 97,583 ------------ ------------ ------------ ------------ Net income per share (basic) $ 1.23 $ 1.04 3.27 $ 1.80 ============ ============ ============ ============ Net income per share (diluted) $ 1.08 $ 0.88 2.82 $ 1.53 ============ ============ ============ ============
NOTE 6 - COMMITMENTS AND CONTINGENCIES On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and the Detroit Newspaper Agency (Agency), which handles all business functions for both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and the Agency. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative judge ruled that the strike was caused by the unfair labor practices of the Agency and The Detroit News and ordered that the Agency and the newspapers reinstate all strikers, displacing permanent replacements if necessary. The Agency and the newspapers appealed the decision to the NLRB. On August 27, 1998, the NLRB affirmed certain unfair labor practice findings against The Detroit News and the Agency, and reversed certain findings of unfair labor practices against the Agency. The Agency and the newspapers filed a motion to reconsider with the NLRB, which was denied on March 4, 1999. The unions and the Agency filed appeals to the U.S. Court of Appeals for the District of Columbia Circuit. Oral argument on the case was heard on May 4, 2000, and on July 7, 2000 the Court of Appeals issued its decision. The Court reversed the NLRB and found that there were no unfair labor practices. Accordingly, the Company has no back pay liability to the union or striking workers. 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. NOTE 7 - BUSINESS SEGMENT INFORMATION Beginning in the quarter ended March 26, 2000, although the Company is not required to do so, the Company elected to begin reporting its online operations as a separate reportable business segment from its newspaper operations pursuant to FASB 131, Disclosures about Segments of an Enterprise and Related Information. FASB 131 requires disclosure of certain information about reportable operating segments management believes are important and allows users to assess the performance of individual operating segments in the same way that management reviews performance and makes decisions. 10 Financial data for the Company's segments is as follows (in thousands):
Quarter Ended Two Quarters Ended ------------------------------ ------------------------------ June 25, 2000 June 27, 1999 June 25, 2000 June 27, 1999 ------------- ------------- ------------- ------------- Operating revenue Newspapers $ 841,507 $ 801,958 $ 1,638,866 $ 1,566,563 Online 10,949 7,708 21,292 13,902 ------------- ------------- ------------- ------------- $ 852,456 $ 809,666 $ 1,660,158 $ 1,580,465 ============= ============= ============= ============= Operating income (loss) Newspapers $ 194,597 $ 165,217 $ 357,624 $ 307,490 Online (10,968) (4,971) (19,172) (9,956) Corporate (3,917) (4,761) (13,320) (16,387) ------------- ------------- ------------- ------------- $ 179,712 $ 155,485 $ 325,132 $ 281,147 ============= ============= ============= ============= Depreciation and amortization Newspapers $ 46,143 $ 46,538 $ 92,508 $ 91,745 Online 617 466 1,205 918 Corporate 1,560 1,495 3,121 2,989 ------------- ------------- ------------- ------------- $ 48,320 $ 48,499 $ 96,834 $ 95,652 ============= ============= ============= =============
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements contained herein are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those anticipated. Potential risks and uncertainties that could adversely affect the Company's ability to obtain these results include, without limitations, the following factors: (a) increased consolidation among major retailers or other events that may adversely affect business operations of major customers and depress the level of local and national advertising; (b) an economic downturn in some or all of the Company's principal newspaper markets that may lead to decreased circulation or decreased local or national advertising; (c) a decline in general newspaper readership patterns as a result of competitive alternative media or other factors; (d) an increase in newsprint costs over the levels anticipated; (e) labor disputes which may cause revenue declines or increased labor costs; (f) acquisitions of new businesses or dispositions of existing businesses; (g) increases in interest or financing costs; and (h) rapid technological changes and frequent new product introductions prevalent in electronic publishing, including the evolution of the Internet. 12 RESULTS OF OPERATIONS: SECOND QUARTER ENDED JUNE 25, 2000 COMPARED WITH SECOND QUARTER ENDED JUNE 27, 1999 The following table sets forth the results of operations for the quarters ended June 25, 2000 and June 27, 1999 (in thousands of dollars, except per share amount): Quarter Ended ------------------------ June 25, June 27, 2000 1999 % Change ---------- ---------- ---------- Operating revenue $ 852,456 $ 809,666 5.3% Operating income 179,712 155,485 15.6% Net income Before gains on investment sales, sale of building and severance 90,765 81,330 11.6% Gains on investment sales -- 6,701 Gain on sale of building 5,508 -- Severance -- (1,445) ---------- ---------- Net income $ 96,273 $ 86,586 11.2% ========== ========== Diluted earnings per share Before gains on investment sales, sale of building and severance $ 1.02 $ 0.83 22.9% Gains on investment sales -- 0.07 Gain on sale of building 0.06 -- Severance -- (0.02) ---------- ---------- Net income $ 1.08 $ 0.88 22.7% ========== ========== During the second quarter of 2000, the Company sold a building in Philadelphia, recording a gain of $5.7 million, net of tax, or $.06 per diluted share. During the same period in 1999, the Company recorded a gain of $6.7 million, net of tax, or $.07 per diluted share on the sale of Zip2 Corp. and AT&T stock, and had non-recurring relocation and severance costs, of $1.4 million, net of tax, or $.02 per diluted share. 13 NEWSPAPERS OPERATING REVENUE The table below presents operating revenue and related statistics for newspaper operations for the quarter ended June 25, 2000 compared to the quarter ended June 27, 1999 (in thousands):
Quarter Ended ------------------------ June 25, June 27, 2000 1999 Variance % Change ---------- ---------- ---------- ---------- Operating revenues Advertising Retail $ 272,828 $ 266,146 $ 6,682 2.5% General 91,368 81,100 10,268 12.7% Classified 289,689 271,720 17,969 6.6% ---------- ---------- ---------- Total 653,885 618,966 34,919 5.6% ---------- ---------- ---------- Circulation 140,754 145,183 (4,429) -3.1% Other 46,868 37,809 9,059 24.0% ---------- ---------- ---------- Total operating revenue $ 841,507 $ 801,958 $ 39,549 4.9% ========== ========== ========== Average daily circulation Daily 3,914 3,934 (20) -0.5% Sunday 5,327 5,355 (28) -0.5% Advertising linage Full run Retail 4,581 4,638 (57) -1.2% General 945 749 196 26.2% Classified 5,556 5,310 246 4.6% ---------- ---------- ---------- Total full run 11,082 10,697 385 3.6% ========== ========== ========== Factored part-run 603 555 48 8.7% ---------- ---------- ---------- Total preprints inserted 1,743 1,772 (29) -1.6% ---------- ---------- ----------
The increase in retail advertising revenue was primarily due to telecommunications, preprints and special publications. The increase in preprint revenue resulted from higher rates offset by a decrease in preprints inserted. General advertising revenue was up primarily from continued strong demand in high-tech, dot-com, telecommunications, automotive, and travel. Classified advertising revenue improved as recruitment advertising continued to contribute significantly to the classified growth and from additional growth in real estate advertising. The increase in other revenue resulted from commercial printing and specialized publication revenue from companies acquired during 1999. 14 OPERATING COSTS The following table summarizes operating costs for newspaper operations for the quarters ended June 25, 2000 and June 27, 1999 (in thousands of dollars):
Quarter Ended -------------------------- June 25, June 27, 2000 1999 Variance % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 307,871 $ 299,119 $ 8,752 2.9% Newsprint, ink and supplements 121,756 125,091 (3,335) -2.7% Other operating costs 171,140 165,993 5,147 3.1% Depreciation and amortization 46,143 46,538 (395) -0.8% ---------- ---------- ---------- Total operating costs $ 646,910 $ 636,741 10,169 1.6% ========== ========== ==========
During the second quarter of 2000, the Company incurred $1.9 million in labor costs related to the union settlement in San Jose, while in the same period in 1999, the Company incurred $2.4 million in severance and relocation costs. Excluding these costs, the increase in labor and employee benefits resulted primarily from an increase in the average wage rate per employee of 2.0% and an increase of 1.1% in the workforce between the second quarters of 1999 and 2000. Newsprint, ink and supplement costs decreased from the second quarter of 1999 on a 5.2% decrease in the average newsprint price, offset in part by a 1.3% increase in newsprint consumption. Other operating costs increased from the second quarter of 1999 primarily due to promotion, relocation and recruiting, repairs and maintenance, and volume-related expenses. ONLINE OPERATING REVENUE The table below presents operating revenue and related statistics for online operations for the quarter ended June 25, 2000 compared to the quarter ended June 27, 1999 (in thousands):
Quarter Ended -------------------------- June 25, June 27, 2000 1999 Variance % Change ---------- ---------- ---------- ---------- Operating revenue $ 10,949 $ 7,708 $ 3,241 42.0% Unique visitors 3,600 2,900 700 24.1% Average monthly page views 151,518 94,230 57,288 60.8%
Operating revenue for the first quarter of 2000 was up due to increases in banner and sponsorship revenue and classified listings revenue. 15 OPERATING COSTS The following table summarizes operating costs for online operations for the quarters ended June 25, 2000 and June 27, 1999 (in thousands of dollars):
Quarter Ended ------------------------ June 25, June 27, 2000 1999 Variance % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 10,313 $ 6,484 $ 3,829 59.1% Other operating costs 10,987 5,729 5,258 91.8% Depreciation and amortization 617 466 151 32.4% ---------- ---------- ---------- Total operating costs $ 21,917 $ 12,679 9,238 72.9% ========== ========== ==========
The increase in labor and employee benefits was primarily due to increases in sales and volume-related full-time employees. Other operating costs increased from the second quarter of 1999 to the second quarter of 2000 primarily as a result of increased promotion-related expenses and volume-related fees paid to advertising and content providers. Depreciation and amortization expense increased due to the acquisition of additional equipment. CORPORATE AND OTHER RELATED NON-OPERATING ITEMS Interest expense, net of interest income and capitalized interest, increased in the second quarter of 2000 by $5.3 million, or 24.1%, from the second quarter of 1999. The quarter's increase was due to higher average debt balances as a result of additional share repurchases, a reduction in capitalized interest due to the completion of various capital projects, and a higher weighted-average interest rate compared to the second quarter of 1999. Earnings from equity investments for the second quarter of 2000 were $2.3 million, or 57.2%, below the comparable period in 1999. The year-over-year decline resulted from losses at the Company's newsprint mill investments due to lower newsprint prices. "Other, net" income was down slightly from the second quarter of 1999. During the second quarter of 2000 the Company recorded a pre-tax gain of $9.5 million on the sale of a building in Philadelphia, while during the comparable period in 1999 the Company recorded a pre-tax gain of $11.2 million on the sale of Zip2 Corp. and AT&T stock. The effective tax rate was 39.8% in the quarter ended June 25, 2000 compared to 40.1% for the comparable quarter in 1999. 16 RESULTS OF OPERATIONS: TWO QUARTERS ENDED 2000 COMPARED WITH TWO QUARTERS ENDED 1999 The following table sets forth the results of operations for the two quarters ended 2000 compared to the two quarters ended 1999 (in thousands of dollars, except per share amount): Two Quarters Endend --------------------------- June 25, June 27, 2000 1999 % Change ------------ ------------ ------------ Operating revenue $ 1,660,158 $ 1,580,465 5.0% Operating income $ 325,132 $ 281,147 15.6% Net income Before gains on investment sales, sale of building and severance 159,517 145,539 9.6% Gains on investment sales 91,952 6,701 100% + Gain on sale of building 5,659 -- Severance -- (2,787) ------------ ------------ Net income $ 257,128 $ 149,453 72.0% ============ ============ Diluted earnings per share Before gains on investment sales, sale of building and severance $ 1.75 $ 1.49 17.5% Gains on investment sales 1.01 0.07 100%+ Gain on sale of building 0.06 -- Severance -- (0.03) ------------ ------------ Net income $ 2.82 $ 1.53 84.3% ============ ============ For the two quarters ended 2000, the Company recorded a gain of $159.5 million, net of tax, or $1.01 per diluted share related to InfoSpace.com's acquisition of Prio and GoTo.com's acquisition of Cadabra and a gain of $5.7 million, net of tax, or $.06 per diluted share, on the sale of a building in Philadelphia. During the same period in 1999, the Company recorded a gain of $6.7 million, net of tax, or $.07 per diluted share on the sale of Zip2 Corp. and AT&T stock and had non-recurring relocation and severance costs of $2.8 million, net of tax, or $.03 per diluted share. 17 NEWSPAPERS OPERATING REVENUE The table below presents operating revenue and related statistics for newspaper operations for the two quarters ended June 25, 2000 compared to the two quarters ended June 27, 1999 (in thousands):
Two Quarters Ended ---------------------------- June 25, June 27, 2000 1999 Variance % Change ------------ ------------ ------------ ---------- Operating revenues Advertising Retail $ 518,012 $ 514,732 $ 3,280 0.6% General 179,938 155,957 23,981 15.4% Classified 568,927 533,624 35,303 6.6% ------------ ------------ ------------ Total 1,266,877 1,204,313 62,564 5.2% ------------ ------------ ------------ Circulation 285,034 291,940 (6,906) -2.4% Other 86,955 70,310 16,645 23.7% ------------ ------------ ------------ Total operating revenue $ 1,638,866 $ 1,566,563 $ 72,303 4.6% ============ ============ ============ Average daily circulation Daily 3,945 3,957 (12) -0.3% Sunday 5,368 5,393 (25) -0.5% Advertising linage Full run Retail 8,757 8,890 (133) -1.5% General 1,768 1,396 372 26.6% Classified 10,651 10,177 474 4.7% ------------ ------------ ------------ Total full run 21,176 20,463 713 3.5% ============ ============ ============ Factored part-run 1,124 1,047 77 7.3% ------------ ------------ ------------ Total preprints inserted 3,389 3,442 (53) -1.5% ------------ ------------ ------------
The increase in retail advertising revenue was primarily due to telecommunications, preprints and special publications offset by decreases in out-of-business accounts and weakness in department store and national chain stores. The increase in preprint revenue resulted from higher rates offset by a decrease in preprints inserted. General advertising revenue was up primarily from strong demand in high-tech, dot-com, telecommunications, automotive, and travel. Classified advertising revenue improved as recruitment advertising continued to contribute significantly to the classified growth and from additional growth in real estate advertising. The increase in other revenue resulted from commercial printing and specialized publication revenue primarily generated by companies acquired in 1999. 18 OPERATING COSTS The following table summarizes operating costs for newspaper operations for the two quarters ended June 25, 2000 and June 27, 1999 (in thousands of dollars):
Two Quarters Ended -------------------------- June 25, June 27, 2000 1999 Variance % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 609,848 $ 591,187 $ 18,661 3.2% Newsprint, ink and supplements 238,837 255,022 (16,185) -6.3% Other operating costs 340,049 321,119 18,930 5.9% Depreciation and amortization 92,508 91,745 763 0.8% ---------- ---------- ---------- Total operating costs $1,281,242 $1,259,073 $ 22,169 1.8% ========== ========== ==========
During the first two quarters of 2000, the Company incurred $1.9 million in labor costs related to the union settlement in San Jose, while in the same period in 1999, the Company incurred $4.7 million in severance and relocation costs. Excluding these costs, the increase in labor and employee benefits resulted primarily from an increase in the average wage rate per employee of 3.2% and an increase of .5% in the workforce between the first half of 1999 and 2000. Newsprint, ink and supplement costs decreased from the two quarters ended 1999 on a 9.3% decrease in the average newsprint price, offset in part by a 1.4% increase in newsprint consumption. Other operating costs increased from the two quarters ended 1999 due to strike preparation costs, promotion, relocation and recruiting, repairs and maintenance, and volume-related expenses. The increase was also due to the inclusion of the operations of three recently acquired businesses - Promedia Publishing Company in February 1999, MACDirect in March 1999 and Consumer and Community Publishing in September 1999. ONLINE OPERATING REVENUE The table below presents operating revenue and related statistics for online operations for the two quarters ended June 25, 2000 compared to the two quarters ended June 27, 1999 (in thousands):
Two Quarters Ended -------------------------- June 25, June 27, 2000 1999 Variance % Change ---------- ---------- ---------- ---------- Operating revenue $ 21,292 $ 13,902 $ 7,390 53.2% Unique visitors 7,162 6,147 1,015 16.5% Average monthly page views 143,206 95,025 48,181 50.7%
Operating revenue for the two quarters ended June 25, 2000 was up due to increases in banner and sponsorship revenue and classified listings revenue. 19 OPERATING COSTS The following table summarizes operating costs for online operations for the two quarters ended June 25, 2000 and June 27, 1999 (in thousands of dollars):
Two Quarters Ended ----------------------- June 25, June 27, 2000 1999 $ Change % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 17,849 $ 12,390 $ 5,459 44.1% Other operating costs 21,410 10,550 10,860 102.9% Depreciation and amortization 1,205 918 287 31.3% ---------- ---------- ---------- Total operating costs $ 40,464 $ 23,858 $ 16,606 69.6% ========== ========== ==========
The increase in labor and employee benefits was primarily due to increases in sales and volume-related full-time employees. Other operating costs increased primarily as a result of increased promotion-related expenses and volume-related fees paid to advertising and content providers. Depreciation and amortization expense increased due to the acquisition of additional equipment. CORPORATE AND OTHER RELATED NON-OPERATING ITEMS Interest expense, net of interest income and capitalized interest, increased for the two quarters ended June 25, 2000 by $8.4 million, or 19.2%, from the same period in 1999. The increase was due to higher average debt balances as a result of additional share repurchases, a reduction in capitalized interest due to the completion of various capital projects, and a higher weighted-average interest rate compared to the first two quarters of 1999. Earnings from equity investments for the two quarters ended 2000 were $8.3 million, or 93.6%, below the comparable period in 1999. The year-over-year decline resulted from losses at the Company's newsprint mill investments due to lower newsprint prices. "Other, net" income increased significantly for the two quarters of 2000 as compared to the previous year. For the two quarters ended June 25, 2000, the Company recorded a pre-tax gain of $154.0 million related to InfoSpace.com's acquisition of Prio and GoTo.com's acquisition of Cadabra, and $9.5 million gain on the sale of a building in Philadelphia. During the comparable period in 1999, the Company recorded a pre-tax gain of $11.2 million on the sale of Zip2 Corp. and AT&T stock. In connection with the gain recorded in 2000, the Company received stock in GoTo.com and InfoSpace.com. The effective tax rate was 40.0% in the two quarters ended June 25, 2000 compared to 40.1% for the comparable period in 1999. 20 LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations is the Company's primary source of liquidity. The Company uses financial leverage to minimize the overall cost of capital and maintain adequate operating and financial flexibility. The Company invests excess cash in short- and mid-term investments, depending on projected cash needs from operations, capital expenditures and other business purposes. As of June 25, 2000, the Company's total debt to total capital ratio was 47.5%, compared to 44.2% as of June 27, 1999. Interest coverage ratio (defined as operating income plus depreciation and amortization divided by interest expense) was 7.8 at June 25, 2000, compared to 7.7 at June 27, 1999. Cash and short-term investments were $34.6 million at June 25, 2000, compared to $28.8 million at June 27, 1999. During the first two quarters of 2000, cash provided by borrowings and by operations was used to fund treasury stock purchases of $299.3 million. During the first two quarters of 2000, total debt increased by $146.1 million from fiscal year-end 1999. Approximately $420.6 million in aggregate unused credit lines remained at the end of the second quarter. In February 2000, Moody's upgraded the Company's short- and long-term debt to P1 and A2, respectively. Standard & Poor's and Fitch continued to rate the Company's short- and long-term debt at A-1 and F1, and A and A, respectively. Additions to property, plant and equipment decreased by $14.1 million from the first two quarters of 1999 to $35.3 million, due primarily to the completion of major projects and Year 2000 computer-related expenditures in 1999. During the first two quarters the Company invested $45.8 million for the acquisitions of two businesses and for increases in ownership interest of certain minority-owned companies. Other assets increased by $162.8 million primarily as a result of advanced funding of certain union employee benefits and of InfoSpace.com's acquisition of Prio and GoTo.com's acquisition of Cadabra. During the first two quarters of 2000, the Company purchased 5.9 million shares of its common stock at a total cost of $299.3 million and an average cost of $50.67 per share. At quarter-end, the Company had remaining authorization to purchase approximately 5.6 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. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There are no material changes to the disclosure made on this matter in the Company's annual report on Form 10-K/A for the year ended December 26, 1999. 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings Refer to Part 1, Item 1, Note 6, incorporated herein by reference, for a discussion of legal proceedings relating to the Detroit Free Press. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on April 25, 2000. The results of the voting with respect to matters presented at the Annual Meeting were as follows: Common Stock Voted --------------------------------- For Against Withheld ---------- ------- -------- (b) Election of Directors For a three- year term ending 2003: Barbara Barnes Hauptfuhrer 68,839,861 0 1,257,599 M. Kenneth Oshman 69,137,064 0 960,396 John L. Weinberg 67,980,831 0 2,116,629 Continuing Directors: James I. Cash Joan Ridder Challinor Gonzalo Valdes-Fauli Kathleen Foley Feldstein Thomas P. Gerrity P. Anthony Ridder Randall L. Tobias 23 (c) Ratify the appointment of Ernst & Young LLP as independent auditors of the company for the year 2000: Common Stock Voted ---------- -------------------- ---------------- For Against Abstained Broker Non-Votes ---------- ------- --------- ---------------- 69,788,339 91,918 217,203 None (d) Vote on the amendment of the Incentive Plan to preserve the tax deductibility of certain compensation paid under the Plan: Common Stock Voted ---------- -------------------- ---------------- For Against Abstained Broker Non-Votes ---------- ------- --------- ---------------- 68,309,711 1,437,427 350,322 None (e) Vote on shareholder proposal requesting that the company prepare and distribute a report regarding equal employment opportunity: Common Stock Voted ---------- -------------------- ---------------- For Against Abstained Broker Non-Votes ---------- ------- --------- ---------------- 4,022,597 58,637,373 1,737,602 None Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3 (ii) - Bylaws of Knight-Ridder, Inc. (as amended through July 25, 2000) 27 - Financial Data Schedule (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended June 25, 2000. 24 SIGNATURE Pursuant to the requirements 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. (Registrant) Date: August 9, 2000 /s/ GARY R. EFFREN ---------------------------------- Gary R. Effren Vice President/Controller (Chief Accounting Officer and Duly Authorized Officer of Registrant) 25 EXHIBIT INDEX 3 (ii) - Bylaws of Knight-Ridder, Inc. (as amended through July 25, 2000) 27 - Financial Data Schedule 26