10-Q 1 kri10q0701.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: July 1, 2001 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 incorporation (I.R.S. Employer or organization) Identification No.) 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 7, 2001, 74,658,683 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 Consolidated Balance Sheet 3 Consolidated Statement of Income 4 Consolidated Statement of Cash Flows 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Operations 10 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 (In 000's of dollars, except per share data)
July 1, 2001 December 31, (unaudited) 2000 ----------- ----------- ASSETS Current Assets Cash, including short-term investments of $3,554 in 2001, and $7,001 in 2000 $ 31,702 $ 41,661 Accounts receivable, net of allowances of $19,346 in 2001 and $20,238 in 2000 376,471 416,498 Inventories 63,046 52,786 Prepaid expense 35,054 30,767 Other current assets 41,132 34,382 ----------- ----------- Total Current Assets 547,405 576,094 ----------- ----------- Investments and Other Assets Equity in unconsolidated companies and joint ventures 293,055 304,486 Other 217,341 202,951 ----------- ----------- Total Investments and Other Assets 510,396 507,437 ----------- ----------- Property, Plant and Equipment Land and improvements 96,048 96,925 Buildings and improvements 469,986 460,770 Equipment 1,276,244 1,265,866 Construction and equipment installations in progress 74,059 57,694 ----------- ----------- 1,916,337 1,881,255 Less accumulated depreciation (884,643) (841,812) ----------- ----------- Net Property, Plant and Equipment 1,031,694 1,039,443 Goodwill Less accumulated amortization of $430,667 in 2001, and $396,307 in 2000 2,086,953 2,120,552 ----------- ----------- Total $ 4,176,448 $ 4,243,526 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 108,361 $ 121,300 Accrued expenses and other liabilities 120,702 101,660 Accrued compensation and amounts withheld from employees 159,948 114,810 Federal and state income taxes -- 16,928 Deferred revenue 75,721 73,300 Short-term borrowings and current portion of long-term debt 80,151 80,362 ----------- ----------- Total Current Liabilities 544,883 508,360 ----------- ----------- Noncurrent Liabilities Long-term debt 1,547,440 1,591,910 Deferred Federal and state income taxes 266,291 269,702 Postretirement benefits other than pensions 144,288 137,791 Employment benefits and other noncurrent liabilities 185,205 191,847 ----------- ----------- Total Noncurrent Liabilities 2,143,224 2,191,250 ----------- ----------- Minority Interests in Consolidated Subsidiaries (953) 2,446 Commitments and Contingencies Shareholders' Equity Preferred stock, $1.00 par value; shares authorized - 20,000,000; shares issued - 954,800 in 2001 and 1,110,500 in 2000 955 1,111 Common stock, $.02 1/12 par value; shares authorized - 250,000,000; shares issued - 74,625,604 in 2001 1,555 1,542 and 74,036,046 in 2000 Additional capital 952,816 919,582 Retained earnings 536,311 622,801 Accumulated other comprehensive income -- (1,301) Treasury stock, at cost, 38,807 shares in 2001 and 41,009 shares in 2000 (2,343) (2,265) ----------- ----------- Total Shareholders' Equity 1,489,294 1,541,470 ----------- ----------- Total $ 4,176,448 $ 4,243,526 =========== ===========
See "Notes to Consolidated Financial Statements." 3 CONSOLIDATED STATEMENT OF INCOME (Unaudited in 000's of dollars, except per share data)
Quarter Ended Two Quarters Ended -------------------------- -------------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 ----------- ----------- ----------- ----------- OPERATING REVENUE Advertising Retail $ 270,317 $ 268,659 $ 516,670 $ 507,516 General 77,641 83,768 157,425 165,277 Classified 228,677 278,546 475,696 545,864 ----------- ----------- ----------- ----------- Total 576,635 630,973 1,149,791 1,218,657 Circulation 127,738 129,447 256,879 260,637 Other 34,064 45,747 67,165 85,440 ----------- ----------- ----------- ----------- Total Operating Revenue 738,437 806,167 1,473,835 1,564,734 ----------- ----------- ----------- ----------- OPERATING COSTS Labor and employee benefits 363,139 296,849 655,731 587,968 Newsprint, ink and supplements 114,355 109,339 230,551 214,256 Other operating costs 161,233 173,527 324,178 343,698 Depreciation and amortization 47,078 46,739 94,234 93,677 ----------- ----------- ----------- ----------- Total Operating Costs 685,805 626,454 1,304,694 1,239,599 ----------- ----------- ----------- ----------- OPERATING INCOME 52,632 179,713 169,141 325,135 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (26,706) (28,291) (54,926) (54,340) Interest expense capitalized 557 651 1,038 1,212 Interest income 257 442 542 771 Equity in earnings of unconsolidated companies and joint ventures 935 1,695 (3,842) 568 Minority interests (1,157) (3,187) (4,095) (5,792) Other, net (4,510) 8,849 (17,577) 161,221 ----------- ----------- ----------- ----------- Total (30,624) (19,841) (78,860) 103,640 ----------- ----------- ----------- ----------- Income before income taxes 22,008 159,872 90,281 428,775 Income taxes 8,582 63,599 36,118 171,647 ----------- ----------- ----------- ----------- Net Income $ 13,426 $ 96,273 $ 54,163 $ 257,128 =========== =========== =========== =========== NET INCOME PER SHARE Basic $ 0.15 $ 1.23 $ 0.67 $ 3.27 =========== =========== =========== =========== Diluted $ 0.15 $ 1.08 $ 0.63 $ 2.82 =========== =========== =========== =========== DIVIDENDS DECLARED PER COMMON SHARE $ 0.25 $ 0.23 $ 0.50 $ 0.46 ----------- ----------- ----------- ----------- AVERAGE SHARES OUTSTANDING (000's) Basic 73,456 75,929 73,419 76,854 =========== =========== =========== =========== Diluted 74,661 89,423 85,655 91,045 =========== =========== =========== ===========
See "Notes to Consolidated Financial Statements." 4 CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, in 000's of dollars)
Two Quarters Ended -------------------------- July 1, June 25, 2001 2000 ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 54,163 $ 257,128 Noncash items deducted from (included in) income: Losses (gains) on sale of investments 11,538 (153,982) Gain on sale of building -- (9,492) Depreciation and amortization 94,234 93,677 Provision (benefit) for deferred taxes (4,279) 33,962 Provision for bad debt 13,701 12,178 Distributions in excess of earnings of unconsolidated companies and joint ventures 7,527 6,275 Minority interests in earnings of consolidated subsidiaries 4,095 5,792 Other items, net 8,482 6,566 Change in certain operating assets and liabilities: Accounts receivable 31,673 11,208 Inventories (9,237) (10,359) Other assets (41,811) (102,832) Accounts payable (13,694) 16,246 Federal and state income taxes (18,992) 71,042 Other liabilities 67,734 10,475 ----------- ----------- Net Cash Provided by Operating Activities 205,134 247,884 ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Proceeds from sale of investments 13,067 1,965 Proceeds from sale of building -- 15,694 Acquisition of subsidiary, investees, and other investments, net (4,591) (45,783) Additions to property, plant and equipment (50,890) (35,326) Other items, net 58 9,006 ----------- ----------- Net Cash Required for Investing Activities (42,356) (54,444) ----------- ----------- CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES Net increase (decrease) in commercial paper, net of unamortized discount (341,993) 146,057 Proceeds from issuance of term debt 297,107 -- Payment of cash dividends (42,167) (41,413) Sale of common stock to employees 41,425 13,400 Purchase of treasury stock (113,505) (299,297) Other items, net (13,604) (11,675) ----------- ----------- Net Cash Required for Financing Activities (172,737) (192,928) ----------- ----------- Net Increase (Decrease) in Cash (9,959) 512 Cash and short-term cash investments at beginning of the period 41,661 34,084 ----------- ----------- Cash and short-term cash investments at end of the period $ 31,702 $ 34,596 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Non cash investing activities Stock proceeds from sale of unconsolidated investment -- 195,624 Non cash financing activities Conversion of preferred stock held by Disney to common stock Preferred Stock (156) (149) Additional Capital (58,400) (55,775) Issuance of common stock upon conversion to preferred stock Common Stock 32 31 Additional Capital 58,524 55,893
See "Notes to Consolidated Financial Statements." 5 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 ended July 1, 2001 are not necessarily indicative of the results that may be expected for the year ending December 30, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the company's annual report on Form 10-K for the year ended December 31, 2000. Certain amounts in 2000 have been reclassified to conform to the 2001 presentation. New Accounting Standard Emerging Issues Task Force Issue 00-1: The company is a 50% partner in the Detroit Newspaper Agency, a joint operating agency between Detroit Free Press, Inc., a wholly-owned subsidiary of Knight Ridder, and the Detroit News, a wholly-owned subsidiary of Gannett Co., Inc. The company had historically included in its Consolidated Statement of Income, on a line-by-line basis, the company's pro rata share of the revenue and expense generated by the operation of the Detroit Newspaper Agency. In May 2000, the Emerging Issues Task Force (EITF) issued EITF Consensus 00-1, Applicability of the Pro Rata Method of Consolidation to Investments in Certain Partnerships and Other Unincorporated Joint Ventures. This consensus stated that the use of pro rata consolidation is no longer allowed for the company's equity investments. The company adopted this accounting standard for the period ended December 31, 2000, and all prior periods have been reclassified to conform to this current presentation. NOTE 2 - COMPREHENSIVE INCOME The following table sets forth the computation of comprehensive income (in 000's of dollars):
Quarter Ended Two Quarters Ended --------------------- ---------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 --------- --------- --------- --------- Net income $ 13,426 $ 96,273 $ 54,163 $ 257,128 Total unrealized losses on securities available for sale -- (42,442) (5,798) (82,555) Less: reclassification adjustment for realized losses, net of taxes -- -- 7,099 5,547 --------- --------- --------- --------- Change in accumulated other comprehensive income -- (42,442) 1,301 (77,008) --------- --------- --------- --------- Total comprehensive income $ 13,426 $ 53,831 $ 55,464 $ 180,120 ========= ========= ========= =========
6 NOTE 3 - DEBT (In Thousands of Dollars)
Balance At Effective Interest ----------------------------- Rate as of July 1, December 31, July 1, 2001 2001 2000 ------------ ----------- ----------- Commercial paper, net of discount (a) 4.3% $ 501,034 $ 843,027 Debentures, net of discount (b) 10.0% 198,713 198,630 Debentures, net of discount (c) 7.3% 94,829 94,731 Debentures, net of discount (d) 6.9% 296,625 296,564 Notes payable, net of discount (e) 8.6% 39,992 39,969 Notes payable, net of discount (f) 6.5% 98,552 98,438 Notes payable, net of discount (g) 6.5% 297,131 -- Senior notes, net of discount (h) 6.1% 99,555 99,505 Notes payable, other 6.1% 1,160 1,408 ----------- ----------- Total Debt (i) 5.7% 1,627,591 1,672,272 Less amounts classified as current 80,151 80,362 ----------- ----------- Total long-term debt 5.7% $ 1,547,440 $ 1,591,910 =========== ===========
(a) Commercial paper is supported by $895 million revolving credit facility which matures in 2006. (b) Represents $200 million of 9.875% debentures due in 2009. (c) Represents $100 million of 7.15% debentures due in 2027. (d) Represents $300 million of 6.875% debentures due in 2029. (e) Represents the remaining balance of a $40 million of 8.5% notes payable due at Sept. 1, 2001. (f) Represents $100 million of 6.625% notes due in 2007. (g) Represents $300 million of 7.125% notes due in 2011. (h) Represents $100 million of 6.3% senior notes due in 2005. (i) Interest payments for the two quarters ended July 1, 2001 and June 25, 2000 were $63.4 million and $52.8 million, respectively. NOTE 4 - INCOME TAX PAYMENTS Income tax payments for the two quarters ended July 1, 2001 and June 25, 2000, were $59.4 million and $56.9 million, respectively. 7 NOTE 5 - EQUITY Earnings per share: ------------------- The following table sets forth the computation of basic and diluted earnings per share from continuing operations (in 000's, except per share data):
Quarter Ended Two Quarters Ended ----------------------- ----------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income $ 13,426 $ 96,273 $ 54,163 $ 257,128 Less dividends on preferred stock 2,387 2,818 5,163 5,979 ---------- ---------- ---------- ---------- Net income attributable to common stock $ 11,039 $ 93,455 $ 49,000 $ 251,149 ========== ========== ========== ========== Average shares outstanding (basic) 73,456 75,929 73,419 76,854 ---------- ---------- ---------- ---------- Effect of dilutive securities: Weighted average preferred stock, as converted -- 12,254 10,846 12,997 Stock options 1,205 1,240 1,390 1,194 ---------- ---------- ---------- ---------- Average shares outstanding (diluted) 74,661 89,423 85,655 91,045 ---------- ---------- ---------- ---------- Net income per share (basic) $ 0.15 $ 1.23 $ 0.67 $ 3.27 ========== ========== ========== ========== Net income per share (diluted) $ 0.15 $ 1.08 $ 0.63 $ 2.82 ========== ========== ========== ==========
In the quarter ended July 1, 2001, the impact of the conversion of preferred stock for the computation of diluted net income per share is anti-dilutive and therefore no conversion is assumed in the computation. Accordingly, diluted earnings per share is $0.15 versus $0.16, as previously disclosed in the company's press release dated July 17, 2001. Stock options: -------------- At July 1, 2001, 4,331,911 shares of the company's authorized but unissued common stock were reserved and available for issuance under the Employee Stock Option Plan. At December 31, 2000, shares reserved and available for issuance were 4,178,534. NOTE 6. COMMITMENTS AND CONTINGENCIES The company's wholly-owned subsidiary, MediaStream, Inc. ("MediaStream"), has been named as one of a number of defendants in two separate class action lawsuits that have been consolidated with two other similar lawsuits by the Judicial Panel on Multi-District Litigation under the caption "In re Literary Works in Electronic Databases Copyright Litigation," M.D.L. Docket No. 1379. The two lawsuits originally filed against MediaStream in September, 2000 were: THE AUTHORS GUILD, INC. ET AL. V. THE DIALOG CORPORATION ET AL., AND POSNER ET AL. V. GALE GROUP INC. ET AL. These lawsuits were brought by or on behalf of freelance authors who allege that the defendants have infringed plaintiffs' copyrights by making plaintiffs' works available on databases operated by the defendants. The plaintiffs are seeking to be certified as class representatives of all similarly-situated freelance authors. The two lawsuits were stayed pending disposition by the U.S. Supreme Court of NEW YORK TIMES COMPANY ET AL. V. TASINI ET AL., No. 00-21. On June 25, 2001, the Supreme Court ruled that the defendants in TASINI did not have a privilege under Section 201 of the Copyright Act to republish articles previously appearing in print publications absent the author's separate permission for electronic republication. Although the stay was thereafter lifted in the actions against MediaStream, no proceedings relating to the class certification motions or other proceedings of substance have yet occurred. Plaintiffs in the actions naming MediaStream seek actual damages, statutory damages and injunctive relief, among other remedies. MediaStream intends to contest liability and vigorously defend its position in the litigation, including opposing class certification. In addition, MediaStream has indemnity agreements from various content providers supplying articles to MediaStream's databases that could mitigate its potential exposure. Management is currently unable to predict whether an unfavorable outcome is likely or the magnitude of any potential loss. Various libel and other copyright infringement claims and 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 such legal proceedings will not be material to its financial position or results of operations on a consolidated basis. 8 NOTE 7 - BUSINESS SEGMENT INFORMATION Beginning in the quarter ended March 26, 2000, although 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. Financial data for the company's segments is as follows (in 000's of dollars):
Quarter Ended Two Quarters Ended ----------------------------- ----------------------------- July 1, 2001 June 25, 2000 July 1, 2001 June 25, 2000 ------------- ------------- ------------- ------------- Operating revenue Newspapers $ 727,737 $ 795,691 $ 1,452,770 $ 1,544,366 Online 10,700 10,476 21,065 20,368 ------------- ------------- ------------- ------------- $ 738,437 $ 806,167 $ 1,473,835 $ 1,564,734 ============= ============= ============= ============= Operating income (loss) Newspapers $ 67,171 $ 194,598 $ 201,521 $ 357,627 Online (7,886) (10,968) (18,983) (19,172) Corporate (6,653) (3,917) (13,397) (13,320) ------------- ------------- ------------- ------------- $ 52,632 $ 179,713 $ 169,141 $ 325,135 ============= ============= ============= ============= Depreciation and amortization Newspapers $ 44,905 $ 44,568 $ 89,817 $ 89,367 Online 757 610 1,504 1,188 Corporate 1,416 1,561 2,913 3,122 ------------- ------------- ------------- ------------- $ 47,078 $ 46,739 $ 94,234 $ 93,677 ============= ============= ============= =============
NOTE 8 - WORKFORCE REDUCTION PROGRAM Due to the slowing economy and the resulting decline in advertising revenue and a sharp increase in newsprint expense, the company announced in the second quarter a workforce reduction program affecting the majority of its newspapers. The workforce reduction plan eliminates approximately 1,600 positions through early retirement programs as well as voluntary and involuntary buyouts and attrition. As a result of this plan, the company incurred charges of $78.5 million related to employee severance costs and benefits. The accruals for the workforce reduction program are included in "Accrued expenses and other liabilities" on the company's Consolidated Balance Sheet at July 1, 2001 and are recorded in accordance with the provisions of SEC Staff Accounting Bulletin No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES AND EITF 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY. No material cash payments were made for the quarter ended July 1, 2001 in relation to this charge. The majority of this charge is expected to be paid during the last six months of 2001. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements contained in this Form 10-Q 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 accelerated 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) disruptions in electricity and natural gas supplies and increases in energy costs; (g) acquisitions of new businesses or dispositions of existing businesses; (h) increases in interest or financing costs; and (i) rapid technological changes and frequent new product introductions prevalent in electronic publishing, including the evolution of the Internet. RESULTS OF OPERATIONS: SECOND QUARTER ENDED JULY 1, 2001 COMPARED WITH SECOND QUARTER ENDED JUNE 25, 2000 Diluted income per share from operations for the second quarter was $.15, down $.93, or 86.1%, from the comparable period in 2000. Excluding the net gain on the sale of a building in the second quarter of 2000 and the workforce reduction charge in the second quarter of 2001, diluted income per share was $.71, down $.31, or 30.4%, from the quarter ended June 25, 2000. Net income in the second quarter of 2001 was $13.4 million, down $82.8 million, or 86.1%, from the second quarter last year. Excluding the net gain on the sale of a building in the second quarter of 2000 and the workforce reduction charge in the second quarter of 2001, net income for the second quarter was $60.5 million, down $30.2 million, or 33.3% from 2000. The following table sets forth the results of operations for the quarters ended July 1, 2001 and June 25, 2000 (in 000's of dollars, except per share amounts):
Quarter Ended ------------------------- July 1, June 25, 2001 2000 % Change ----------- ----------- ----------- Operating revenue $ 738,437 $ 806,167 -8.4% Operating income $ 52,632 $ 179,713 -70.7% Net income Before gain on building and workforce reduction charge 60,526 90,765 -33.3% Gain on sale of building, net of tax -- 5,508 Workforce reduction, net of tax (47,100) -- ----------- ----------- Net income $ 13,426 $ 96,273 -86.1% =========== =========== Diluted earnings per share Before gain on building and workforce reduction charge $ 0.71 $ 1.02 -30.4% Gain on sale of building, net of tax -- 0.06 Workforce reduction, net of tax (0.56) -- ----------- ----------- Net income $ 0.15 $ 1.08 -86.1% ----------- -----------
10 NEWSPAPER DIVISION Operating Revenue The table below presents operating revenue and related statistics for newspaper operations for the quarter ended July 1, 2001 compared with the quarter ended June 25, 2000 (in 000's): Quarter Ended ------------------------- July 1, June 25, 2001 2000 Variance % Change ----------- ----------- ----------- ----------- Operating revenues Advertising Retail $ 270,317 $ 268,659 $ 1,658 0.6% General 77,641 83,768 (6,127) -7.3% Classified 228,677 278,546 (49,869) -17.9% ----------- ----------- ----------- Total 576,635 630,973 (54,338) -8.6% ----------- ----------- ----------- Circulation 127,738 129,447 (1,709) -1.3% Other 23,364 35,271 (11,907) -33.8% ----------- ----------- ----------- Total operating revenue $ 727,737 $ 795,691 $ (67,954) -8.5% =========== =========== =========== Average daily circulation Daily 3,789 3,908 (119) -3.0% Sunday 5,121 5,320 (199) -3.7% Advertising linage Full run Retail 4,308.0 4,457.5 (149.5) -3.4% General 775.2 891.5 (116.3) -13.0% Classified 5,020.7 5,353.7 (333.0) -6.2% ----------- ----------- ----------- Total full run 10,103.9 10,702.7 (598.8) -5.6% =========== =========== =========== Factored part-run 597.2 602.7 (5.5) -0.9% ----------- ----------- ----------- Total preprints inserted 1,711.8 1,678.4 33.4 2.0% ----------- ----------- ----------- Advertising revenue and linage for the quarter declined compared with the same quarter of the prior year due primarily to classified recruitment and auto advertising, down 38.2% and 1.6%, respectively. While there were declines in classified revenue in most major markets during the second quarter of 2001 compared with the same period in 2000, Philadelphia and San Jose were responsible for a majority of the decrease, down 25.9% and 33.7%, respectively. Classified real estate revenue, which increased 22.8% during the second quarter, partially offset the declines in recruitment and auto advertising. San Jose, up 92.4%, Contra Costa, up 60.2%, and Saint Paul, up 28.0%, were responsible for the majority of the increase. Retail advertising increased slightly during the quarter ended July 1, 2001 compared with the same period last year primarily due to growth in Miami, Fort Worth, and Columbia. Miami's increase came from non-core products, including Direct Marketing, El Nuevo Herald, Jewish Star Times, and Keynoter. Fort Worth's increase was due to department stores, home furnishings, and electronics/computers. Columbia had increases in department stores, grocery stores and home improvement. 11 General advertising revenue for the quarter ended July 1, 2001 was below the comparable quarter in 2000 with San Jose, Contra Costa, Philadelphia, and Saint Paul showing the largest decreases, down 23.3%, 45.2%, 7.7%, and 17.2%, respectively. The decrease in general advertising revenue was primarily from high-tech/dot-com, financial and software. Offsetting these decreases, Kansas City, Fort Worth, and Miami, were up 14.3%, 6.5%, and 5.1%, respectively, due to strength in telecommunications and travel/transportation. Other revenue declined $11.9 million, or 33.8%, for the quarter ended July 1, 2001 compared with the quarter ended June 25, 2000, primarily reflecting lower profitability from Detroit (see Note 1), and the absence in 2001 of Professional Exchange, MediaStream, and Cable Connection, all of which were sold in 2000. Operating Costs The table below presents operating costs for newspaper operations for the quarter ended July 1, 2001 compared with the quarter ended June 25, 2000 (in 000's of dollars):
Quarter Ended ------------------------- July 1, June 25, 2001 2000 Variance % Change ----------- ----------- ----------- ----------- Operating costs Labor and employee benefits $ 351,964 $ 284,269 $ 67,695 23.8% Newsprint, ink and supplements 117,249 112,531 4,718 4.2% Other operating costs 146,448 159,725 (13,277) -8.3% Depreciation and amortization 44,905 44,568 337 0.8% ----------- ----------- ----------- Total operating costs $ 660,566 $ 601,093 $ 59,473 9.9% =========== =========== ===========
Labor and employee benefit costs increased during second quarter of 2001 from the second quarter 2000 as a result of the workforce reduction program (see Note 8). Excluding the $78.5 million charge relating to the workforce reduction program, labor and employee benefits decreased $10.8 million, or 3.8%, in the second quarter of 2001 from the second quarter of 2000 as a result of a 5.2% decline in the number of full-time equivalent employees (FTE's), and a 29.2% decline in bonus and incentive costs, offset by a 2.4% increase in the average wage rate. Newsprint, ink and supplements increased in the second quarter of 2001 from the second quarter of 2000 due to a 22.3% increase in the price per ton of newsprint, offset by a 12.2% decrease in newsprint consumption and a 9.1% decrease in ink and supplement costs. Other operating costs decreased in the second quarter of 2001 from the second quarter of 2000, due to reductions in circulation costs ($3.2 million), promotion costs ($3.2 million), news and editorial costs ($2.7 million), and production and occupancy costs ($2.2 million). Philadelphia was responsible for a majority of the decrease, down 18.7%, followed by Saint Paul, (11.0%), Charlotte, (9.3%), Akron, (13.7%), and Fort Wayne, (17.0%). 12 ONLINE DIVISION Operating Revenue The table below presents operating revenue and related statistics for online operations for the quarter ended July 1, 2001 compared with the quarter ended June 25, 2000 (in 000's): Quarter Ended ----------------------- July 1, June 25, 2001 2000 Variance % Change ---------- ---------- ---------- ---------- Operating revenue $ 10,700 $ 10,476 $ 224 2.1% Unique visitors 4,480 3,565 915 25.7% Average monthly page views 182,667 148,906 33,761 22.7% Operating revenue for the second quarter of 2001 increased from the same period in 2000 due primarily to increased sales of Classified Ventures cars.com and apartments.com products. Unique visitors and average monthly page views increased due to the second quarter 2001 addition of fifteen cities into the Real Cities network. The Real Cities network now covers 55 cities with 15 of the top 25 markets. Operating Costs The following table summarizes operating costs for online operations for the quarters ended July 1, 2001 and June 25, 2000 (in 000's of dollars): Quarter Ended ---------------------- July 1, June 25, 2001 2000 Variance % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 8,720 $ 10,060 $ (1,340) -13.3% Other operating costs 9,109 10,774 (1,665) -15.5% Depreciation and amortization 757 610 147 24.1% ---------- ---------- ---------- Total operating costs $ 18,586 $ 21,444 $ (2,858) -13.3% ========== ========== ========== The decrease in labor and employee benefits for the second quarter of 2001 compared to the second quarter of 2000 was primarily due to a 54, or 13.4%, reduction in the number of FTE's. Other operating costs for the second quarter of 2001 were down due to lower cost of goods sold as compared to the same quarter in 2000. Depreciation and amortization expense increased slightly during the second quarter of 2001 due to the acquisition of additional equipment. 13 CORPORATE AND OTHER NON-OPERATING ITEMS Interest expense, net of interest income and capitalized interest, decreased $1.3 million, or 4.8%, from the second quarter of 2000, due to a lower weighted-average interest rate in the second quarter of 2001. Losses from equity investments in unconsolidated companies and joint ventures for the second quarter of 2001 decreased by approximately $760,000 from the comparable period in 2000. Contributing to the year-over-year decline were losses in the Seattle Times Company and from Career Holdings, Inc. Partially offsetting these losses was an increase in earnings from our newsprint mill investments as a result of increases in the average price of newsprint. "Other, net" income was $13.4 million lower in the second quarter of 2001 due to a pre-tax gain of $9.5 million, recorded in the second quarter of 2000 as a result of the sale of land and a building in Philadelphia. The effective tax rate was 39.0% in the quarter ended July 1, 2001 compared with 39.8% for the comparable quarter in 2000. 14 RESULTS OF OPERATIONS: TWO QUARTERS ENDED JULY 1, 2001 COMPARED WITH TWO QUARTERS ENDED JUNE 25, 2000 Diluted income per share from operations for the two quarters ended July 1, 2001 was $.63, down $2.19, or 77.7%, from the two quarters ended June 25, 2000. Excluding the net gains and losses on investments, in both years, the net gain on building in 2000 and the workforce reduction charge in 2001, diluted income per share was $1.27, down $.49, or 27.8%, from the two quarters ended June 25, 2000. Net income for the two quarters ended was $54.2 million, down $203.0 million, or 78.9%, from the same period last year. Excluding the net gains and losses on investments in both years, the net gain on building in 2000, and the workforce reduction charge in 2001, net income was $108.4 million, down $51.2 million, or 32.1% from 2000. The following table sets forth the results of operations for the two quarters ended July 1, 2001 and June 25, 2000 (in 000's of dollars, except per share amounts):
Two Quarters Ended ------------------------- July 1, June 25, 2001 2000 % Change ----------- ----------- ---------- Operating revenue $ 1,473,835 $ 1,564,734 -5.8% Operating income $ 169,141 $ 325,135 -48.0% Net income Before gains (losses) on investment sales, gain on building and workforce reduction charge 108,362 159,517 -32.1% Gains (losses) on investment sales, net of tax (7,099) 91,952 Gain on sale of building, net of tax -- 5,659 Workforce reduction, net of tax (47,100) -- ----------- ----------- Net income $ 54,163 $ 257,128 -78.9% =========== =========== Diluted earnings per share Before gains (losses) on investment sales, gain on building and workforce reduction charge $ 1.27 $ 1.76 -27.8% Gains (losses) on investment sales, net of tax (0.09) 1.00 Gain on sale of building, net of tax -- 0.06 Workforce reduction, net of tax (0.55) -- ----------- ----------- Net income $ 0.63 $ 2.82 -77.7% =========== ===========
15 NEWSPAPER DIVISION Operating Revenue The table below presents operating revenue and related statistics for newspaper operations for the two quarters ended July 1, 2001 compared with the two quarters ended June 25, 2000 (in 000's): Two Quarters Ended ----------------------- July 1, June 25, 2001 2000 Variance % Change ---------- ---------- ---------- ---------- Operating revenues Advertising Retail $ 516,670 $ 507,516 $ 9,154 1.8% General 157,425 165,277 (7,852) -4.8% Classified 475,696 545,864 (70,168) -12.9% ---------- ---------- ---------- Total 1,149,791 1,218,657 (68,866) -5.7% ---------- ---------- ---------- Circulation 256,879 260,637 (3,758) -1.4% Other 46,100 65,072 (18,972) -29.2% ---------- ---------- ---------- Total operating revenue $1,452,770 $1,544,366 $ (91,596) -5.9% ========== ========== ========== Average daily circulation Daily 3,838 3,940 (102) -2.6% Sunday 5,190 5,361 (171) -3.2% Advertising linage Full run Retail 8,164.1 8,518.2 (354.1) -4.2% General 1,473.9 1,670.9 (197.0) -11.8% Classified 9,795.7 10,305.0 (509.3) -4.9% ---------- ---------- ---------- Total full run 19,433.7 20,494.1 (1,060.4) -5.2% ========== ========== ========== Factored part-run 1,141.3 1,124.1 17.2 1.5% ---------- ---------- ---------- Total preprints inserted 3,365.5 3,245.6 119.9 3.7% ---------- ---------- ---------- Advertising revenue and linage for the two quarters ended July 1, 2001 declined as compared with the comparable period in the prior year due to classified recruitment and auto advertising, down 28.2% and 3.2%, respectively. While there were declines in classified revenue in most major markets during the two quarters ended July 1, 2001 compared with the comparable period in 2000, Philadelphia and San Jose were responsible for a majority of the decrease, down 20.4% and 23.4%, respectively. Classified real estate revenue, which increased 22.6% during the two quarters ended July 1, 2001, partially offset the declines in recruitment and auto advertising. San Jose, Contra Costa, and Miami were responsible for the majority of the increase, up 82.8%, 43.5%, and 11.8%, respectively. Retail advertising increased slightly during the two quarters ended July 1, 2001 compared with the same period last year primarily due to growth in Miami, Fort Worth, and Kansas City. Miami's increase was due to furniture, department stores, healthcare, and government. Fort Worth had increases from the prior year from department stores, home improvement, and furniture. Kansas City benefited from entertainment and furniture. 16 General advertising revenue for the two quarters ended July 1, 2001 was below the comparable quarter in 2000 with San Jose, Contra Costa, Philadelphia, and Saint Paul showing the largest decreases, down 20.4%, 40.9%, 7.4%, and 8.8%, respectively. General advertising revenue decreased at approximately half of the newspapers as many advertisers reduced their spending. Other revenue declined $19.0 million, or 29.2%, from the two quarters ended July 1, 2001 compared with the two quarters ended June 25, 2000. This decrease primarily reflects the lower profitability from Detroit (see Note 1), and the absence in 2001 of Professional Exchange, MediaStream, and Cable Connection, all of which were sold in 2000. Operating Costs The table below presents operating costs for newspaper operations for the two quarters ended July 1, 2001 compared with the two quarters ended June 25, 2000 (in 000's):
Two Quarters Ended ----------------------- July 1, June 25, 2001 2000 Variance % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 631,730 $ 562,090 $ 69,640 12.4% Newsprint, ink and supplements 236,470 220,500 15,970 7.2% Other operating costs 293,232 314,782 (21,550) -6.8% Depreciation and amortization 89,817 89,367 450 0.5% ---------- ---------- ---------- Total operating costs $1,251,249 $1,186,739 $ 64,510 5.4% ========== ========== ==========
Labor and employee benefit costs increased during the two quarters ended July 1, 2001 compared to the same period in 2000 as a result of the workforce reduction program (see Note 8). Excluding the $78.5 million charge relating to the workforce reduction program, labor and employee benefits decreased $8.9 million, or 1.6%, as a result of a 3.7% decline in the number of full-time equivalent employees (FTE's), and a 17.5% decline in bonus and incentive costs, offset by a 2.2% increase in the average wage rate. Newsprint, ink and supplements increased during the two quarters ended July 1, 2001 as compared to the same period in 2000 due to a 20.4% increase in the price per ton of newsprint, offset by a 9.1% decrease in newsprint consumption. Other operating costs decreased in the second quarter of 2001 from the second quarter of 2000, due to reductions in general and administrative costs ($15.8 million) and production and occupancy costs ($4.3 million). Philadelphia was responsible for a majority of the decrease, down 17.5%, followed by Charlotte, Akron, and Fort Wayne, down 9.9%, 15.1%, and 15.5%, respectively. 17 ONLINE DIVISION Operating Revenue The table below presents operating revenue and related statistics for online operations for the two quarters ended July 1, 2001 compared with the two quarters ended June 25, 2000 (in 000's): Two Quarters Ended ----------------------- July 1, June 25, 2001 2000 Variance % Change ---------- ---------- ---------- ---------- Operating revenue $ 21,065 $ 20,368 $ 697 3.4% Unique visitors 9,356 7,127 2,229 31.3% Average monthly page views 187,249 140,165 47,084 33.6% Operating revenue for the first two quarters of 2001 increased from the same period in 2000 due primarily to sales of Classified Ventures cars.com and apartments.com products. Unique visitors and average monthly page views increased due to the second quarter 2001 addition of fifteen cities into the Real Cities network. Operating Costs The following table summarizes operating costs for online operations for the two quarters ended July 1, 2001 and June 25, 2000 (in 000's of dollars): Two Quarters Ended ---------------------- July 1, June 25, 2001 2000 Variance % Change ---------- ---------- ---------- ---------- Operating costs Labor and employee benefits $ 17,492 $ 17,402 $ 90 0.5% Other operating costs 21,052 20,950 102 0.5% Depreciation and amortization 1,504 1,188 316 26.6% ---------- ---------- ---------- Total operating costs $ 40,048 $ 39,540 $ 508 1.3% ========== ========== ========== The increase in labor and employee benefits for the first two quarters of 2001 was primarily due to a higher average wage rate, increased employee benefits costs, and bonus expense. Other operating costs increased slightly from the two quarters ended June 25, 2000 to the two quarters ended July 1, 2001 primarily as a result of an increase in cost of goods sold offset by decreases in contract services, professional fees, and promotion and advertising costs. Depreciation and amortization expense increased due to the acquisition of additional equipment. 18 CORPORATE AND OTHER NON-OPERATING ITEMS Interest expense, net of interest income and capitalized interest, increased $989,000, or 1.9%, from the two quarters ended June 25, 2000, due to a higher average debt balance in the two quarters ending 2001. Losses from equity investments in unconsolidated companies and joint ventures for the two quarters ended July 1, 2001 increased by $4.4 million from the comparable period in 2000. Contributing to the year-over-year decline were losses in the Seattle Times Company and from Career Holdings, Inc. Partially offsetting these losses was an increase in earnings from our newsprint mill investments as a result of increases in the average price of newsprint. "Other, net" income for the two quarters ended July 1, 2001 decreased $178.8 million from the same period in 2000 due to the net pre-tax gain of $154.0 million from the sale of Internet investments and the net pre-tax gain of $9.5 million from the sale of a building in Philadelphia in the first quarter of 2000, and a pre-tax loss of $11.5 million on the sale and write-down of Internet investments during the first quarter of 2001. The effective tax rate was 40.0% for the two quarters ended July 1, 2001 and June 25, 2000. 19 LIQUIDITY & CAPITAL RESOURCES Cash flow from operations is the company's primary source of liquidity. Management is focused on growing cash flow and on managing cash effectively. In addition, 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 long-term investments depending on projected cash needs from operations, capital expenditures and other business purposes. The company supplements internally generated cash with a combination of short- and long-term borrowings. Commercial paper outstanding at July 1, 2001 was $501.0 million, with an average effective interest rate of 4.3%. During the second quarter of 2001, the company issued $300 million of 7.125% notes due June 1, 2011. The proceeds were used to pay down an equivalent amount of commercial paper. During the second quarter of 2001, the company replaced its existing revolving credit and term loan agreement with a new five-year, $895 million facility. As of July 1, 2001, the company's revolving credit and term loan agreements, which back up the commercial paper outstanding, had remaining availability of $391.9 million. During the second quarter of 2001, the company entered into certain interest rate swap agreements. The principal objective of such agreements is to maintain a roughly equal balance between fixed and floating interest rates in the company's debt structure. The swap agreements expire at various dates in 2005, 2007 and 2011 and convert an aggregate principal amount of $300 million of fixed rate, long-term debt into variable rate borrowings. The variable interest rates are based on 3-month LIBOR rates plus a rate spread. As of July 1, 2001, the weighted average variable interest rates under these agreements were 4.7% and the fixed rates were 6.7%. Cash provided by operating activities was $205.1 million for the two quarters ended July 1, 2001, compared to $247.9 million for the two quarters ended June 25, 2000. The decrease in cash provided by operating activities primarily related to lower net income and changes in certain operating assets and liabilities. Cash required for investing activities decreased from $54.4 million for the two quarters ended June 25, 2000 to $42.4 million for the two quarters ended July 1, 2001. The decrease was primarily related to cash generated from the sale of Internet investments and a decrease in acquisitions of subsidiary, investees, and other investments, offset by cash required for the purchase of property and equipment. Cash required for financing activities for the two quarters ended July 1, 2001, reflects the pay down of $342 million in commercial paper offset by proceeds from the company's $300 million debt offering. Additional cash required for financing activities were related to the repurchase of the company's common stock, in the amount of $113.5 million, and the payment of cash dividends, in the amount of $42.2 million, offset by cash provided from the sale of common stock to employees, in the amount of $41.4 million. In the two quarters ended July 1, 2001, the company repurchased a total of 2.0 million common shares at a total cost of $113.5 million and average cost of $56.57 per share. At July 1, 2001, the company has remaining authorization to repurchase 6.5 million shares of its common stock. During the second quarter, approximately 1.6 million shares of the company's preferred stock were converted to common stock. For the two quarters ended July 1, 2001, the company's interest coverage ratio (defined as operating income plus depreciation and amortization divided by interest expense), excluding the $78.5 million workforce reduction charge in the second quarter of 2001, was 6.2 to 1 compared to 7.7 to 1 for the same period in 20 2000, and 7.3 to 1 for the year ended December 31, 2000. The decrease in the interest coverage ratio from the two quarters ended June 25, 2000 and from the prior year end resulted from a decrease in operating income primarily related to a decrease in operating revenue. The company's recurring cash flow to debt ratio (defined as net income plus depreciation and amortization for the previous four quarters divided by debt, and excluding gains and losses on investments in both years, the gain on the sale of a building in the second quarter of 2000, and the $78.5 million workforce reduction charge in the second quarter of 2001), was 28.7% as of the second quarter of 2001 compared to 36.9% as of the second quarter of 2000. 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 The company has no material changes to the disclosure made on this matter in the company's annual report on Form 10-K for the year ended December 31, 2000. 22 PART II - OTHER INFORMATION Item 1. Legal Proceedings Refer to Part 1, Item 1, Note 6, incorporated herein by reference. 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 24, 2001. The results of the voting with respect to matters presented at the Annual Meeting were as follows: Common Stock Voted ------------------------------ For Withheld ---------- --------- (b) Election of Directors for a three-year term ending 2004: Kathleen F. Feldstein 63,360,089 3,626,660 Thomas P. Gerrity 63,361,312 3,625,437 Gonzalo F. Valdes-Fauli 62,594,495 4,392,254 Continuing Directors: James I. Cash Barbara Barnes Hauptfuhrer M. Kenneth Oshman P. Anthony Ridder Randall L. Tobias John L. Weinberg (c) Ratify the appointment of Ernst & Young LLP as independent auditors of the company for the year 2001: Common Stock Voted ----------------------------------------------------------------- For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 66,420,081 327,826 238,841 8,672,236 (d) Vote on shareholder proposal concerning nomination of candidates to the Board: Common Stock Voted ----------------------------------------------------------------- For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 2,782,820 59,099,466 811,856 12,964,842 23 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None. (b) Reports on Form 8-K On June 1, 2001, the Registrant reported under Item 5, Other Events, execution of a supplemental indenture to its Indenture between Knight-Ridder, Inc. and The Chase Manhattan Bank, and revision of its Statement re Computation of Earnings to Fixed Charges Ratio from Continuing Operations, and filed the exhibits related thereto under Item 7. 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 14, 2001 /s/ GARY R. EFFREN --------------------------------------------- Gary R. Effren Senior Vice President/Chief Financial Officer (Chief Accounting Officer and Duly Authorized Officer of Registrant) 25