10-Q 1 kri3q.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: September 30, 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 November 6, 2001, 84,090,218 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 .............. 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 23 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 ............................................... 23 Item 6. Exhibits and Reports on Form 8-K ................................ 23 SIGNATURE ................................................................. 24 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (In 000's of dollars, except per share data) September 30, 2001 (unaudited) December 31, 2000 ------------------ ----------------- ASSETS Current Assets Cash, including short-term investments of $1 in 2001, and $7,001 in 2000 $ 34,193 $ 41,661 Accounts receivable, net of allowances of $20,710 in 2001 and $20,238 in 2000 362,500 416,498 Inventories 48,249 52,786 Prepaid expense 35,582 30,767 Other current assets 40,584 34,382 ----------- ----------- Total Current Assets 521,108 576,094 ----------- ----------- Investments and Other Assets Equity in unconsolidated companies and joint ventures 295,936 304,486 Other 218,891 202,951 ----------- ----------- Total Investments and Other Assets 514,827 507,437 ----------- ----------- Property, Plant and Equipment Land and improvements 100,032 96,925 Buildings and improvements 482,813 460,770 Equipment 1,284,712 1,265,866 Construction and equipment installations in progress 67,001 57,694 ----------- ----------- 1,934,558 1,881,255 Less accumulated depreciation (907,231) (841,812) ----------- ----------- Net Property, Plant and Equipment 1,027,327 1,039,443 Goodwill Less accumulated amortization of $447,165 in 2001, and $396,307 in 2000 2,070,462 2,120,552 ----------- ----------- Total $ 4,133,724 $ 4,243,526 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 92,974 $ 121,300 Accrued expenses and other liabilities 138,704 101,660 Accrued compensation and amounts withheld from employees 136,627 114,810 Federal and state income taxes 24,609 16,928 Deferred revenue 74,341 73,300 Short-term borrowings and current portion of long-term debt 40,159 80,362 ----------- ----------- Total Current Liabilities 507,414 508,360 ----------- ----------- Noncurrent Liabilities Long-term debt 1,522,624 1,591,910 Deferred Federal and state income taxes 266,416 269,702 Postretirement benefits other than pensions 143,921 137,791 Employment benefits and other noncurrent liabilities 183,009 191,847 ----------- ----------- Total Noncurrent Liabilities 2,115,970 2,191,250 ----------- ----------- Minority Interests in Consolidated Subsidiaries -- 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 - 74,473,068 in 2001 and 74,036,046 in 2000 1,552 1,542 Additional capital 966,693 919,582 Retained earnings 542,877 622,801 Accumulated other comprehensive income 257 (1,301) Treasury stock, at cost, 35,711 shares in 2001 and 41,009 shares in 2000 (1,994) (2,265) ----------- ----------- Total Shareholders' Equity 1,510,340 1,541,470 ----------- ----------- Total $ 4,133,724 $ 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 Three Quarters Ended ---------------------------- ---------------------------- September 30, September 24, September 30, September 24, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- OPERATING REVENUE Advertising Retail $ 247,363 $ 252,640 $ 764,033 $ 760,156 General 64,295 76,294 221,720 241,571 Classified 221,491 269,490 697,187 815,354 ----------- ----------- ----------- ----------- Total 533,149 598,424 1,682,940 1,817,081 Circulation 127,731 126,533 384,610 387,170 Other 32,242 44,278 99,407 129,718 ----------- ----------- ----------- ----------- Total Operating Revenue 693,122 769,235 2,166,957 2,333,969 ----------- ----------- ----------- ----------- OPERATING COSTS Labor and employee benefits 266,392 289,058 922,123 877,026 Newsprint, ink and supplements 106,500 111,987 337,051 326,243 Other operating costs 150,240 162,449 474,418 506,147 Depreciation and amortization 46,094 50,904 140,328 144,581 ----------- ----------- ----------- ----------- Total Operating Costs 569,226 614,398 1,873,920 1,853,997 ----------- ----------- ----------- ----------- OPERATING INCOME 123,896 154,837 293,037 479,972 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (24,229) (29,314) (79,155) (83,654) Interest expense capitalized 482 429 1,520 1,641 Interest income 159 332 701 1,103 Equity in earnings of unconsolidated companies and joint ventures (1,693) (225) (5,535) 343 Minority interests (2,263) (2,569) (6,358) (8,361) Other, net (3,543) (453) (21,120) 160,768 ----------- ----------- ----------- ----------- Total (31,087) (31,800) (109,947) 71,840 ----------- ----------- ----------- ----------- Income before income taxes 92,809 123,037 183,090 551,812 Income taxes 37,124 46,931 73,242 218,578 ----------- ----------- ----------- ----------- Net Income $ 55,685 $ 76,106 $ 109,848 $ 333,234 =========== =========== =========== =========== NET INCOME PER SHARE Basic $ 0.71 $ 0.99 $ 1.39 $ 4.27 =========== =========== =========== =========== Diluted $ 0.65 $ 0.87 $ 1.28 $ 3.71 =========== =========== =========== =========== DIVIDENDS DECLARED PER COMMON SHARE $ 0.25 $ 0.23 $ 0.75 $ 0.69 =========== =========== =========== =========== AVERAGE SHARES OUTSTANDING (000's) Basic $ 74,799 $ 74,330 $ 73,879 $ 76,013 =========== =========== =========== =========== Diluted $ 85,837 $ 87,686 $ 85,715 $ 89,926 =========== =========== =========== ===========
See "Notes to Consolidated Financial Statements." 4
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited, in 000's of dollars) Three Quarters Ended ----------------------------- September 30, September 24, 2001 2000 ------------- ------------- CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES Net income $ 109,848 $ 333,234 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 140,328 144,581 Provision (benefit) for deferred taxes (4,324) 47,584 Provision for bad debt 20,075 18,409 Distributions in excess of earnings of unconsolidated companies and joint ventures 3,511 4,386 Minority interests in earnings of consolidated subsidiaries 6,358 8,361 Other items, net 7,491 13,080 Change in certain operating assets and liabilities: Accounts receivable 38,695 9,260 Inventories 5,511 (13,509) Other assets (50,148) (99,814) Accounts payable (30,947) (5,092) Federal and state income taxes 16,446 26,777 Other liabilities 60,860 15,728 --------- --------- Net Cash Provided by Operating Activities 335,242 339,511 --------- --------- CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES Proceeds from sale of investments and property, plant and equipment 15,022 1,965 Proceeds from sale of building -- 15,694 Acquisition of subsidiaries, investees, and other investments, net (8,293) (190,416) Additions to property, plant and equipment (75,347) (67,173) Other items, net 304 20,740 --------- --------- Net Cash Required for Investing Activities (68,314) (219,190) --------- --------- CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES Net increase (decrease) in commercial paper, net of unamortized discount (367,558) 379,102 Proceeds from issuance of term debt 297,107 -- Repayment of term debt (40,000) (40,000) Payment of cash dividends (63,224) (61,319) Sale of common stock to employees 57,078 21,215 Purchase of treasury stock (145,356) (407,170) Other items, net (12,443) 9,844 --------- --------- Net Cash Required for Financing Activities (274,396) (98,328) --------- --------- Net Increase (Decrease) in Cash (7,468) 21,993 Cash and short-term investments at the beginning of the period 41,661 34,084 --------- --------- Cash and short-term investments at the end of the period $ 34,193 $ 56,077 ========= ========= 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 September 30, 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 Three Quarters Ended ------------------------------ ------------------------------ September 30, September 24, September 30, September 24, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net income $ 55,685 $ 76,106 $ 109,848 $ 333,234 Total unrealized losses on securities available for sale 257 (27,798) (5,541) (110,353) Less: reclassification adjustment for realized losses, net of taxes -- -- 7,099 5,547 --------- --------- --------- --------- Change in accumulated other comprehensive income 257 (27,798) 1,558 (104,806) --------- --------- --------- --------- Total comprehensive income $ 55,942 $ 48,308 $ 111,406 $ 228,428 ========= ========= ========= =========
6 NOTE 3 - DEBT
(In 000's of dollars) Balance At Effective Interest ----------------------------- Rate as of September 30, December 31, September 30, 2001 2001 2000 ------------------ ------------- ------------ Commercial paper, net of discount (a) 3.3% $ 475,942 $ 843,027 Debentures, net of discount (b) 10.0% 198,754 198,630 Debentures, net of discount (c) 7.7% 94,878 94,731 Debentures, net of discount (d) 7.0% 296,656 296,564 Notes payable, net of discount (e) -- -- 39,969 Notes payable, net of discount (f) 6.1% 98,609 98,438 Notes payable, net of discount (g) 6.5% 297,204 -- Senior notes, net of discount (h) 5.7% 99,580 99,505 Notes payable, other 5.2% 1,160 1,408 ---------- ---------- Total Debt (i) 5.6% 1,562,783 1,672,272 Less amounts classified as current 40,159 80,362 ---------- ---------- Total long-term debt 5.6% $1,522,624 $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 $40 million of 8.5% notes payable due 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 three quarters ended September 30, 2001 and September 24, 2000 were $84.4 million and $74.3 million, respectively. NOTE 4 - INCOME TAX PAYMENTS Income tax payments for the three quarters ended September 30, 2001 and September 24, 2000, were $60.5 million and $136.7 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 of dollars, except per share data):
Quarter Ended Three Quarters Ended ---------------------------- ---------------------------- September 30, September 24, September 30, September 24, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Net income $ 55,685 $ 76,106 $ 109,848 $ 333,234 Less dividends on preferred stock 2,387 2,818 7,550 8,797 --------- --------- --------- --------- Net income attributable to common stock $ 53,298 $ 73,288 $ 102,298 $ 324,437 ========= ========= ========= ========= Average shares outstanding (basic) 74,799 74,330 73,879 76,013 --------- --------- --------- --------- Effect of dilutive securities: Weighted average preferred stock, as converted 9,548 12,254 10,413 12,749 Stock options 1,490 1,102 1,423 1,164 --------- --------- --------- --------- Average shares outstanding (diluted) 85,837 87,686 85,715 89,926 --------- --------- --------- --------- Net income per share (basic) $ 0.71 $ 0.99 $ 1.39 $ 4.27 ========= ========= ========= ========= Net income per share (diluted) $ 0.65 $ 0.87 $ 1.28 $ 3.71 ========= ========= ========= =========
NOTE 6 - COMMITMENTS AND CONTINGENCIES The company's wholly-owned subsidiary, MediaStream, Inc. ("MediaStream"), was named as one of a number of defendants in two separate class action lawsuits that have been consolidated with one other similar lawsuit 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 "Multi-District Litigation"). 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 initially 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. The judge has ordered the parties in the Multi-District Litigation to try to resolve the claims through mediation, which is expected to commence in November 2001, and the parties have agreed to a limited stay to respond to the complaint during such mediation, which may be terminated by the plaintiffs upon 30 days prior written notice. In September 2001, the plaintiffs submitted an amended complaint, which named the company as an additional defendant and makes reference to Knight Ridder Digital, a subsidiary of the company. Plaintiffs in the Multi-District Litigation seek actual damages, statutory damages and injunctive relief, among other remedies. The company and MediaStream intend to contest liability and vigorously defend their positions in the litigation, including opposing class certification. In 8 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. 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):
Knight Ridder Business Segment Information Quarter Ended Three Quarters Ended ---------------------------- ---------------------------- September 30, September 24, September 30, September 24, 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Operating revenue Newspapers $ 682,612 $ 757,460 $ 2,135,382 $ 2,301,826 Online 10,510 11,775 31,575 32,143 ----------- ----------- ----------- ----------- $ 693,122 $ 769,235 $ 2,166,957 $ 2,333,969 =========== =========== =========== =========== Operating income (loss) Newspapers $ 133,711 $ 169,495 $ 335,232 $ 527,122 Online (6,627) (10,460) (25,610) (29,632) Corporate (3,188) (4,198) (16,585) (17,518) ----------- ----------- ----------- ----------- $ 123,896 $ 154,837 $ 293,037 $ 479,972 =========== =========== =========== =========== Depreciation and amortization Newspapers $ 43,893 $ 48,806 $ 133,710 $ 138,173 Online 805 548 2,309 1,736 Corporate 1,396 1,550 4,309 4,672 ----------- ----------- ----------- ----------- $ 46,094 $ 50,904 $ 140,328 $ 144,581 =========== =========== =========== ===========
9 NOTE 8 - WORKFORCE REDUCTION PROGRAM Due to the slowing economy and the resulting decline in advertising revenue and increases in newsprint expense, the company announced in the second quarter a workforce reduction program affecting the majority of its newspapers. The workforce reduction plan eliminated 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 during the second quarter of 2001. Cash payments of $62.6 million related to payroll, pension and benefits costs related to the elimination of 1,284 positions have been made through the quarter ended September 30, 2001. The remaining accrual of $15.9 million for this workforce reduction program is included in "Accrued expenses and other liabilities" on the company's Consolidated Balance Sheet at September 30, 2001 and is 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. The workforce reduction plan is expected to be completed during the last three months of 2001. NOTE 9 - BUSINESS COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS. In June, 2001, the FASB issued Statements of Financial Accounting Standards (FAS) No. 141, BUSINESS COMBINATIONS and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under the new rules, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The amortization provisions of FAS No. 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the company will apply the new accounting rules beginning December 31, 2001. The company is currently assessing the financial impact FAS No. 141 and No. 142 will have on the Consolidated Financial Statements. For the three quarters ended September 24, 2000 and September 30, 2001, the company recorded $51.6 million and $50.9 million, respectively. NOTE 10 - SUBSEQUENT EVENT In 1997, the company issued 1,758,242 shares of Series B preferred stock in connection with the acquisition of four newspapers that were indirectly owned by The Walt Disney Company. In October, the company learned that Disney had converted the remaining balance of 954,800 shares of the Series B preferred stock into 9,548,000 shares of common stock. 10 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; (i) rapid technological changes and frequent new product introductions prevalent in electronic publishing, including the evolution of the Internet; and (j) acts of war, terrorism or other events that may adversely affect the company's operations or the operations of key suppliers to the company. RESULTS OF OPERATIONS: THIRD QUARTER ENDED SEPTEMBER 30, 2001 COMPARED WITH THIRD QUARTER ENDED SEPTEMBER 24, 2000 The following table sets forth the results of operations for the quarters ended September 30, 2001 and September 24, 2000 (in 000's of dollars, except per share amounts): Quarter Ended ----------------------------- September 30, September 24, 2001 2000 % Change ------------- ------------- -------- Operating revenue $693,122 $769,235 -9.9% Operating income $123,896 $154,837 -20.0% Net income $ 55,685 $ 76,106 -26.8% Diluted earnings per share $ 0.65 $ 0.87 -25.3% ======== ======== 11 NEWSPAPER DIVISION Operating Revenue The table below presents operating revenue and related statistics for newspaper operations for the quarter ended September 30, 2001 compared with the quarter ended September 24, 2000 (in 000's):
Quarter Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating revenue Advertising Retail $ 247,363 $ 252,640 $ (5,277) -2.1% General 64,295 76,294 (11,999) -15.7% Classified 221,491 269,490 (47,999) -17.8% --------- --------- --------- Total 533,149 598,424 (65,275) -10.9% --------- --------- --------- Circulation 127,731 126,533 1,198 0.9% Other 21,732 32,503 (10,771) -33.1% --------- --------- --------- Total operating revenue $682,612 $757,460 $(74,848) -9.9% ========= ========= ========= Average daily circulation Daily 3,739 3,832 (93) -2.4% Sunday 5,106 5,248 (142) -2.7% Advertising linage Full run Retail 3,937.8 4,145.9 (208.1) -5.0% General 619.6 799.1 (179.5) -22.5% Classified 5,030.0 5,267.8 (237.8) -4.5% --------- --------- --------- Total full run 9,587.4 10,212.8 (625.4) -6.1% ========= ========= ========= Factored part-run 545.9 554.3 (8.4) -1.5% --------- --------- --------- Total preprints inserted 1,647.7 1,656.3 (8.6) -0.5% --------- --------- ---------
Advertising revenue and linage for the quarter ended September 30, 2001, declined compared with the same quarter of the prior year due primarily to classified recruitment and general advertising, down $53.9 million, or 11.3%, and $12.0 million, or 15.7%, respectively. While there were declines in classified revenue in most major markets during the third quarter of 2001 compared with the same period in 2000, San Jose and Philadelphia were responsible for a majority of the decrease, down 35.8% and 24.9%, respectively. Classified real estate revenue, which increased 30.5% during the third quarter of 2001, partially offset the declines in recruitment and general advertising. San Jose, up 99.3%, Contra Costa, up 82.7%, and Miami, up 28.3%, were responsible for the majority of the increase in classified real estate revenue. 12 Retail advertising decreased during the quarter ended September 30, 2001 compared with the same period last year primarily due to continuing advertising softness, exacerbated by advertising curtailments and cancellations resulting from the terrorist attacks on September 11th. Philadelphia, San Jose, and Kansas City experienced the largest drops in retail during the third quarter. General advertising revenue for the quarter ended September 30, 2001 was below the comparable quarter in 2000 with San Jose, Contra Costa, Fort Worth, and Philadelphia showing the largest decreases, down 48.0%, 45.3%, 17.1%, and 13.7%, respectively. The decrease in general advertising revenue was primarily due to reduced placements by high-tech/dot-com, telecommunications, financial, and software companies. Other revenue declined $10.8 million, or 33.1%, for the quarter ended September 30, 2001 compared with the quarter ended September 24, 2000, primarily due to decreases in earnings from Detroit (see Note 1), and the absence in 2001 of Professional Exchange, MediaStream, and Cable Connection, which were sold late in 2000. Operating Costs The table below presents operating costs for newspaper operations for the quarter ended September 30, 2001 compared with the quarter ended September 24, 2000 (in 000's of dollars):
Quarter Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating costs Labor and employee benefits $ 258,679 $ 277,280 $ (18,601) -6.7% Newsprint, ink and supplements 109,231 115,055 (5,824) -5.1% Other operating costs 137,098 146,824 (9,726) -6.6% Depreciation and amortization 43,893 48,806 (4,913) -10.1% --------- --------- --------- Total operating costs $ 548,901 $ 587,965 $ (39,064) -6.6% ========= ========= =========
Labor and employee benefits decreased $18.6 million, or 6.7%, in the third quarter of 2001 from the third quarter of 2000 as a result of a 10.5% decline in the number of full-time equivalent employees (FTEs) and an 11.6% decline in bonus and incentive costs, offset by a 2.7% increase in the average wage rate. Newsprint, ink and supplements decreased in the third quarter of 2001 from the third quarter of 2000 due to a 14.8% decline in consumption, offset by a 12.2% increase in the price per ton of newsprint. Other operating costs decreased in the third quarter of 2001 from the third quarter of 2000, due to reductions in news and editorial and general and administrative costs of $9.1 million, or 13.9%. Philadelphia was responsible for a majority of the decrease, down 16.3%, partly due to the absence of Professional Exchange, followed by Akron, (13.2%), Fort Wayne, (12.7%), and San Jose, (12.6%). In addition, other operating costs decreased due to the absence in 2001 of MediaStream and Cable Connection. 13 ONLINE DIVISION Operating Revenue The table below presents operating revenue and related statistics for online operations for the quarter ended September 30, 2001 compared with the quarter ended September 24, 2000 (in 000's):
Quarter Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating revenue $ 10,510 $ 11,775 $ (1,265) -10.7% Unique visitors 6,315 4,270 2,045 47.9% Average monthly page views 182,862 164,387 18,475 11.2%
Operating revenue for the third quarter of 2001 decreased from the same period in 2000 due primarily to decreases in banners and sponsorships, recruitment packages and recruitment upsell. Unique visitors and average monthly page views increased due to the second quarter 2001 addition of fifteen cities into the Real Cities network and as a result of the September 11th terrorist attacks. 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 September 30, 2001 and September 24, 2000 (in 000's of dollars):
Quarter Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating costs Labor and employee benefits $ 7,710 $ 9,085 $ (1,375) -15.1% Other operating costs 8,622 12,602 (3,980) -31.6% Depreciation and amortization 805 548 257 46.9% --------- --------- --------- Total operating costs $ 17,137 $ 22,235 $ (5,098) -22.9% ========= ========= =========
The decrease in labor and employee benefits for the third quarter of 2001 compared to the third quarter of 2000 was primarily due to an FTE (full time equivalent) reduction of 120, or 27.9%. Other operating costs for the third quarter of 2001 were down due to a decrease in promotion costs compared to the same quarter in 2000. Depreciation and amortization expense increased slightly during the third quarter of 2001 due to higher capital spending for the implementation of technical projects. 14 CORPORATE AND OTHER NON-OPERATING ITEMS Interest expense, net of interest income and capitalized interest, decreased $5.0 million, or 17.4%, from the third quarter of 2000, due to a lower average debt balance and a lower weighted-average interest rate in the third quarter of 2001. Weighted-average interest rates were lower due to a general decline in short-term interest rates and as a result of the interest rate swaps the company entered into during the second quarter of 2001. Losses from equity investments in unconsolidated companies and joint ventures for the third quarter of 2001 increased by approximately $1.5 million from the comparable period in 2000. Contributing to the year-over-year decline were Infinet, whose 2000 results included a gain on the sale of certain business operations, and losses related to the Seattle Times Company. 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. The effective tax rate was 40.0% in the quarter ended September 30, 2001 compared with 38.1% for the comparable quarter in 2000. 15 RESULTS OF OPERATIONS: THREE QUARTERS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE QUARTERS ENDED SEPTEMBER 24, 2000 Diluted income per share from operations for the three quarters ended September 30, 2001 was $1.28, down $2.43, or 65.5%, from the three quarters ended September 24, 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 $1.91, down $.72, or 27.4%, from the three quarters ended September 24, 2000. Net income for the three quarters ended September 30, 2001 was $109.8 million, down $223.4 million, or 67.0%, 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 $164.0 million, down $71.7 million, or 30.4% from 2000. The following table sets forth the results of operations for the three quarters ended September 30, 2001 and September 24, 2000 (in 000's of dollars, except per share amounts):
Three Quarters Ended ---------------------------- September 30, September 24, 2001 2000 % Change ------------- ------------- ----------- Operating revenue $ 2,166,957 $ 2,333,969 -7.2% Operating income $ 293,037 $ 479,972 -38.9% Net income Before gains (losses) on investment sales, gain on building and workforce reduction charge 164,047 235,774 -30.4% Gains (losses) on investment sales, net of tax (7,099) 91,952 Gain on sale of building, net of tax -- 5,508 Workforce reduction, net of tax (47,100) -- ----------- ----------- Net income $ 109,848 $ 333,234 -67.0% =========== =========== Diluted earnings per share Before gains (losses) on investment sales, gain on building and workforce reduction charge $ 1.91 $ 2.63 -27.4% Gains (losses) on investment sales, net of tax (0.08) 1.02 Gain on sale of building, net of tax -- 0.06 Workforce reduction, net of tax (0.55) -- ----------- ----------- Net income $ 1.28 $ 3.71 -65.5% =========== ===========
16 NEWSPAPER DIVISION Operating Revenue The table below presents operating revenue and related statistics for newspaper operations for the three quarters ended September 30, 2001 compared with the three quarters ended September 24, 2000 (in 000's):
Three Quarters Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating revenue Advertising Retail $ 764,033 $ 760,156 $ 3,877 0.5% General 221,720 241,571 (19,851) -8.2% Classified 697,187 815,354 (118,167) -14.5% ---------- ---------- ---------- Total 1,682,940 1,817,081 (134,141) -7.4% ---------- ---------- ---------- Circulation 384,610 387,170 (2,560) -0.7% Other 67,832 97,575 (29,743) -30.5% ---------- ---------- ---------- Total operating revenue $2,135,382 $2,301,826 $ (166,444) -7.2% ========== ========== ========== Average daily circulation Daily 3,803 3,906 (103) -2.6% Sunday 5,159 5,326 (167) -3.1% Advertising linage Full run Retail 12,101.9 12,664.1 (562.2) -4.4% General 2,093.5 2,470.0 (376.5) -15.2% Classified 14,825.7 15,572.9 (747.2) -4.8% ---------- ---------- ---------- Total full run 29,021.1 30,707.0 (1,685.9) -5.5% ========== ========== ========== Factored part-run 1,687.2 1,678.4 8.8 0.5% ---------- ---------- ---------- Total preprints inserted 5,013.2 4,901.9 111.3 2.3% ---------- ---------- ----------
Advertising revenue and linage for the three quarters ended September 30, 2001 declined as compared with the comparable period in the prior year due to classified recruitment, down 31.9%. While there were declines in classified revenue in most major markets during the three quarters ended September 30, 2001 compared with the comparable period in 2000, San Jose and Philadelphia were responsible for a majority of the decrease, down 27.5% and 21.9%, respectively. Classified real estate revenue, which increased 25.3% during the three quarters ended September 30, 2001, partially offset the declines in recruitment. San Jose, Contra Costa, and Miami were responsible for the majority of the increase, up 88.9%, 57.1%, and 16.4%, respectively. Retail advertising increased slightly during the three quarters ended September 30, 2001 compared with the same period last year primarily due to growth in Miami, Charlotte, and Fort Worth. Miami's increase was due to furniture, department stores, healthcare, and government. Charlotte benefited from financial, furniture, and grocery stores. Fort Worth had increases from the prior 17 year from department stores, home improvement, and furniture. Charlotte benefited from financial, furniture, and grocery stores. General advertising revenue for the three quarters ended September 30, 2001 was below the comparable quarter in 2000 with Contra Costa, San Jose, and Philadelphia showing the largest decreases, down 42.2%, 29.1%, and 9.3%, respectively. General advertising revenue decreased at approximately half of the newspapers as many advertisers reduced their spending. Other revenue declined $29.7 million, or 30.5%, from the three quarters ended September 30, 2001 compared with the three quarters ended September 24, 2000. This decrease was primarily due to the decline in earnings from Detroit (see Note 1), and the absence of Professional Exchange, MediaStream, and Cable Connection, which were sold in late 2000. Operating Costs The table below presents operating costs for newspaper operations for the three quarters ended September 30, 2001 compared with the three quarters ended September 24, 2000 (in 000's of dollars):
Three Quarters Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating costs Labor and employee benefits $ 890,409 $ 839,370 $ 51,039 6.1% Newsprint, ink and supplements 345,701 335,555 10,146 3.0% Other operating costs 430,330 461,606 (31,276) -6.8% Depreciation and amortization 133,710 138,173 (4,463) -3.2% ---------- ---------- ---------- Total operating costs $1,800,150 $1,774,704 $ 25,446 1.4% ========== ========== ==========
Labor and employee benefit costs increased during the three quarters ended September 30, 2001 compared to the same period in 2000 as a result of the workforce reduction program in the second quarter of 2001. Excluding the $78.5 million charge relating to the workforce reduction program, labor and employee benefits decreased $27.5 million, or 3.3%, as a result of a 5.9% decline in the number of FTEs, and a 15.9% decline in bonus and incentive costs, offset by a 2.0% increase in the average wage rate. Newsprint, ink and supplements increased during the three quarters ended September 30, 2001 as compared to the same period in 2000 due to a 17.6% increase in the price per ton of newsprint, offset by a 11.0% decrease in newsprint consumption. Other operating costs decreased during the three quarters ended September 30, 2001 as compared to the same period in 2000, due to reductions in news and editorial and general and administrative costs ($24.9 million, or 12.1%) and production costs ($4.4 million, or 5.2%). Philadelphia was responsible for a majority of the decrease, down 17.1%, partly due to the absence of Professional Exchange, followed by Fort Wayne and Akron. In addition, other operating costs decreased due to the absence of MediaStream and Cable Connection. 18 ONLINE DIVISION Operating Revenue The table below presents operating revenue and related statistics for online operations for the three quarters ended September 30, 2001 compared with the three quarters ended September 24, 2000 (in 000's):
Three Quarters Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating revenue $ 31,575 $ 32,143 $ (568) -1.8% Unique visitors 17,561 11,397 6,164 54.1% Average monthly page views 185,727 148,239 37,488 25.3%
Operating revenue for the first three quarters of 2001 decreased from the same period in 2000 due primarily to a decline in banners and sponsorships and recruitment packages. 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 three quarters ended September 30, 2001 and September 24, 2000 (in 000's of dollars):
Three Quarters Ended ----------------------------- September 30, September 24, 2001 2000 Variance % Change ------------- ------------- ------------- ------------- Operating costs Labor and employee benefits $ 25,202 $ 26,488 $ (1,286) -4.9% Other operating costs 29,674 33,551 (3,877) -11.6% Depreciation and amortization 2,309 1,736 573 33.0% --------- --------- --------- Total operating costs $ 57,185 $ 61,775 $ (4,590) -7.4% ========= ========= =========
The decrease in labor and employee benefits for the first three quarters of 2001 was primarily due to a decline in FTEs. Other operating costs declined from the three quarters ended September 24, 2000 to the three quarters ended September 30, 2001 primarily as a result of a decrease in advertising and promotional costs. Depreciation and amortization expense increased due to higher capital spending for the implementation of technical projects. 19 CORPORATE AND OTHER NON-OPERATING ITEMS Interest expense, net of interest income and capitalized interest, decreased $4.0 million, or 4.9%, from the three quarters ended September 24, 2000, due to a lower average debt balance and a lower weighted-average interest rate in the three quarters of 2001. Weighted-average interest rates were lower due to a general decline in short-term interest rates and as a result of the interest rate swaps the company entered into during the second quarter of 2001. Losses from equity investments in unconsolidated companies and joint ventures for the three quarters ended September 30, 2001 increased by $5.9 million from the comparable period in 2000. Contributing to the year-over-year decline were losses in Career Holdings, Inc. and the Seattle Times Company. 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" for the three quarters ended September 30, 2001 decreased $181.9 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 three quarters ended September 30, 2001 compared with 39.6% for the comparable period in 2000. 20 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 September 30, 2001 was $475.9 million, with an average effective interest rate of 3.3%. 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 September 30, 2001, the company's revolving credit agreement, which backs up the commercial paper outstanding, had remaining availability of $367.6 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 plus a rate spread. As of September 30, 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 $335.2 million for the three quarters ended September 30, 2001, compared to $339.5 million for the three quarters ended September 24, 2000. The decrease in cash provided by operating activities is due to lower net income in 2001, partially offset by the gain on sale of investments in 2000, and the timing of payments in certain current assets and liabilities. Cash required for investing activities decreased from $219.2 million for the three quarters ended September 24, 2000 to $68.3 million for the three quarters ended September 30, 2001. The decrease was due to lower acquisition activity (compared to the CareerBuilder acquisition during the same period in 2000), partially offset by cash required for the purchase of property and equipment. Cash required for financing activities for the three quarters ended September 30, 2001, reflects the repayment of $408 million in commercial paper and term debt, partially offset by proceeds from the company's $300 million debt offering. Additional cash required for financing activities was for the repurchase of the company's common stock, in the amount of $145.4 million, and the payment of cash dividends, in the amount of $63.2 million, partially offset by cash provided from the sale of common stock to employees, in the amount of $57.1 million. In the three quarters ended Sept 30, 2001, the company repurchased a total of 2.5 million common shares at a total cost of $145.4 million and average cost of $57.15 per share. At September 30, 2001, the company has remaining authorization to repurchase 5.9 million shares of its common stock. For the three quarters ended September 30, 2001, the company's interest coverage ratio (defined as operating income plus depreciation and amortization divided by interest expense), excluding the 21 $78.5 million workforce reduction charge in the second quarter of 2001, was 6.5 to 1 compared to 7.5 to 1 for the same period in 2000, and 7.3 to 1 for the year ended December 31, 2000. The decrease in the interest coverage ratio from the three quarters ended September 24, 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 workforce reduction charge in the second quarter of 2001), was 28.3% as of the third quarter of 2001 compared to 32.3% as of the third quarter of 2000. On August 24, 2001, the company announced its intention to acquire HeadHunter.NET, Inc., through Career Holdings, Inc., a joint venture between the company's subsidiary, Knight Ridder Digital, and the Tribune Company. The acquisition was completed on November 7, 2001. The acquisition price together with related costs and expenses is estimated to be approximately $240 million, which is being funded in equal amounts by the company and the Tribune Company. The company's operations have historically generated strong positive cash flow, which, along with the company's commercial paper program, revolving credit line and ability to issue public debt, have provided adequate liquidity to meet the company's short- and long-term cash requirements, including requirements for working capital and capital expenditures. 22 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. 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 None Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 23 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: November 10, 2001 /s/ GARY R. EFFREN --------------------------------------------- Gary R. Effren Senior Vice President/Chief Financial Officer (Chief Accounting Officer and Duly Authorized Officer of Registrant) 24