-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RQR5YnbZ+1S4aS9IWDP7tQJ0PiDK6oJAi3iSMwGO7jarKuI+u/falwbTbaXjkbZF v4uZbYl8F2/pkvxRTeGZcw== 0001019056-98-000127.txt : 19980317 0001019056-98-000127.hdr.sgml : 19980317 ACCESSION NUMBER: 0001019056-98-000127 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980313 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KNIGHT RIDDER INC CENTRAL INDEX KEY: 0000205520 STANDARD INDUSTRIAL CLASSIFICATION: NEWSPAPERS: PUBLISHING OR PUBLISHING & PRINTING [2711] IRS NUMBER: 380723657 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07553 FILM NUMBER: 98565486 BUSINESS ADDRESS: STREET 1: ONE HERALD PLZ CITY: MIAMI STATE: FL ZIP: 33132 BUSINESS PHONE: 3053763800 MAIL ADDRESS: STREET 1: ONE HERALD PLZ CITY: MIAMI STATE: FL ZIP: 33132 FORMER COMPANY: FORMER CONFORMED NAME: KNIGHT RIDDER NEWSPAPERS INC /FL/ DATE OF NAME CHANGE: 19860707 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 28, 1997 Commission file number 1-7553 KNIGHT-RIDDER, INC. (Exact name of registrant as specified in its charter) A Florida corporation NO. 38-0723657 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Herald Plaza Miami, Florida 33132 (Address of principal executive offices) Registrant's telephone number, including area code (305) 376-3800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.02 1/12 Par Value New York Stock Exchange Frankfurt Stock Exchange Securities registered pursuant to Section 12(g) of the Act: none Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. (The aggregate market value is computed by reference to the price at which the stock was sold as of March 6, 1998: $4,480,605,092. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: March 6, 1998 - 79,302,745 one class Common Stock, $.02 1/12 Par Value DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of definitive Proxy Statement dated March 27, 1998, in connection with the Annual Meeting of Shareholders to be held on April 28, 1998, are incorporated into Part III. (2) Portions of the Company's Form 10-K filed March 10, 1997 are incorporated into Part IV. (3) Portions of the Company's Form 10-K filed March 20, 1996 are incorporated into Part IV. (4) Portions of the Company's Form 10-K filed March 24, 1995 are incorporated into Part IV. (5) Portions of the Company's Form 10-K filed March 23, 1994 are incorporated into Part IV. (6) Rights Agreement filed July 9, 1996 on Form 8-A is incorporated into Part IV. (7) Registration Statement No. 33-28010 on Form S-3 is incorporated into Part IV. (8) Registration Statement No. 333-37603 on Form S-3 is incorporated into Part IV. 1
Table of Contents for 1997 Form 10-K Page PART I Item 1. Business ................................................................................. 3-8 Item 2. Properties ............................................................................... 8 Item 3. Legal Proceedings ........................................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders ...................................... 9 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ..................... 9-10 Item 6. Selected Financial Data .................................................................. 11-14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 15-26 Item 8. Financial Statements and Supplementary Data .............................................. 27-48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 49 PART III Item 10. Directors and Executive Officers of the Registrant ....................................... 49-51 Item 11. Executive Compensation ................................................................... 52 Item 12. Security Ownership of Certain Beneficial Owners and Management ........................... 52 Item 13. Certain Relationships and Related Transactions ........................................... 52 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................... 52-55 SIGNATURES ......................................................................................... 56-58 SCHEDULES .......................................................................................... 59 EXHIBITS ........................................................................................... 59
2 PART I Item 1. BUSINESS THE COMPANY Knight-Ridder, Inc., was formed in 1974 by a merger between Knight Newspapers, Inc., and Ridder Publications, Inc. In 1903, Charles Landon Knight purchased the Akron Beacon Journal. Knight Newspapers was founded by John S. Knight, who inherited the Beacon Journal from his father in 1933. Ridder Publications was founded in 1892 when Herman Ridder acquired the German-language Staats-Zeitung in New York. Both groups flourished, each taking its stock public in 1969. The merger created a company with operations coast to coast. Knight-Ridder, Inc., was incorporated in Florida in 1976, is headquartered in Miami, Florida, and employs about 22,000 people. Recent Developments In 1997, Knight Ridder acquired four newspapers indirectly owned by The Walt Disney Company, exchanged its newspaper in Boulder, Colo., for two newspapers in California owned by the E.W. Scripps Co. and sold four of its newspapers. Also, in 1997, Knight Ridder sold Knight-Ridder Information, Inc. (KRII) and in December the company announced its intent to sell Technimetrics, Inc. The company's announcement to divest KRII and Technimetrics resulted in the reclassification of its former Business Information Services (BIS) segment as discontinued operations. NEWSPAPERS Knight Ridder has 31 daily newspapers and 18 nondaily newspapers. Operating revenue is derived primarily from the sale of newspaper advertising. Due to seasonal factors such as heavier retail selling during the winter and spring holiday seasons, advertising income fluctuates significantly throughout the year. Consecutive quarterly results are not uniform or comparable and are not indicative of the results over an entire year. Each of Knight Ridder's newspapers is operated on a substantially autonomous basis by local management appointed by corporate headquarters in Miami. Each newspaper is free to manage its own news coverage, set its own editorial policies and establish most business practices. Basic business policies, however, are set by the corporate staff in Miami. Editorial services and quality control also are provided by the corporate staff. Each newspaper is served by the company-owned news bureau in Washington, D.C. A supplemental news service provided by KRT Information Services, a partnership between Knight Ridder and Tribune Co., distributes editorial material produced by all Knight Ridder newspapers and by 16 foreign correspondents. The service also distributes editorial computer graphics and deadline photos via the Knight Ridder-owned PressLink Online. All of the company's newspapers compete for advertising and readers' time and attention with broadcast, satellite and cable television, the Internet and other computer services, radio, magazines, nondaily suburban newspapers, free shoppers, billboards and direct mail. In some cases, the newspapers also compete with other newspapers published in nearby cities and towns-- particularly in Miami, St. Paul and Fort Worth. In Detroit and Fort Wayne, Knight Ridder has joint operating agreements with a second newspaper. The rest of Knight Ridder's newspapers are the only daily and Sunday papers of general circulation published in their communities. The newspapers rely on local sales operations for local retail and classified advertising. The larger papers are assisted by Newspapers First and by the Newspaper National Network, a sales force created by a group of some 50 major newspapers, in obtaining national or general advertising. 3 Source of Knight Ridder Operating Revenue The table below presents the relative percentage contributions by individual papers to the company's overall operating revenue in 1997, 1996 and 1995. The percentage contributions of each paper to operating revenue are not necessarily indicative of contributions to operating profit. 1997 1996 1995 ---- ---- ---- The Philadelphia Inquirer and Philadelphia Daily News ............. 19.0% 21.3% 21.7% The Miami Herald ...................... 11.4 13.3 14.3 San Jose Mercury News ................. 10.4 12.0 11.9 The Kansas City Star(1) ............... 6.1 Fort Worth Star-Telegram(1) ........... 4.9 Detroit Free Press(2) ................. 7.0 7.7 8.5 The Charlotte Observer ................ 6.2 6.9 6.8 Saint Paul Pioneer Press .............. 4.1 4.7 4.8 Contra Costa Newspapers(3) ............ 3.9 4.4 1.0 Akron Beacon Journal .................. 3.6 4.0 4.0 All other ............................. 23.4 25.7 27.0 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== ===== (1) The Kansas City Star and Fort Worth Star-Telegram were acquired on May 9, 1997. This table presents their partial year contribution percentage. (2) Knight Ridder portion of Detroit Newspapers. (3) Contra Costa Newspapers was acquired on Oct. 31, 1995. Newsprint Knight Ridder consumed 752,000 metric tons of newsprint in 1997. Approximately 16.8% of the company's total operating expenses during the year was for newsprint. Purchases are made under long-term agreements with 18 newsprint producers. Knight Ridder purchases approximately 70% of its annual consumption from mills in the United States with the remainder purchased from mills in Canada and one in Korea. In the opinion of management, sources are adequate to meet current demands. Approximately 83% of the newsprint consumed by the company contained some recycled content; the average content of these rolls was 47% recycled fiber. This translates into an overall recycled newsprint average of 39%. Knight Ridder is a one-third partner with Cox Newspapers, Inc., and Media General, Inc., in Southeast Paper Manufacturing Co., a newsprint mill in Dublin, Ga. The mill produced 456,000 metric tons in 1997, using more than 600,000 tons of recycled newsprint as the principal raw material and coal as the primary energy source. Knight Ridder also owns a 13.5% equity share of Ponderay Newsprint Company in Usk, Wash., which produced more than 232,000 metric tons in 1997. Knight Ridder's purchases from these two mills reached 22.6% of our annual consumption for 1997, proving an important hedge against price volatility. Technology Efforts to improve the quality of products continued during 1997. The company completed the installation of new publishing systems in Duluth, Contra Costa, Columbia and Grand Forks (made necessary by the flood). Systems installations are under way in Akron, Biloxi, Macon, Myrtle Beach, Philadelphia and San Jose, and have been approved for Charlotte. The Charlotte Observer completed a full conversion to Flexographic printing, and a press replacement project was completed in Duluth. Major press replacement projects are well under way at The Miami Herald and in Akron. New presses were approved for Fort Worth. Significant renovations are continuing at the business and editorial offices in Detroit and Philadelphia. General Advertising Sales Knight Ridder newspapers depend most heavily on three agents for the sale of general advertising. 4 Newspapers First, a national advertising sales cooperative, is the primary sales representative for the larger Knight Ridder newspapers, Detroit Newspapers and several leading independents. It allows customers to place ads in a combination of newspapers. Newspaper National Network (NNN), Knight Ridder's second general sales agent, was established in 1994 to focus on national selling on behalf of the newspaper industry. It represents all the Knight Ridder newspapers, plus more than 500 others. Like Newspapers First, it makes the purchase of newspaper advertising a "one-stop shopping," "one-order, one-bill" prospect. Sawyer, Ferguson and Walker, Inc., a private company, sells sales- representative services for Knight Ridder's medium to small markets and helps with regional retail advertising sales. Knight Ridder/Tribune Knight Ridder/Tribune Information Services (KRT) is a joint venture of Knight Ridder and Tribune Co. that offers news stories, graphics, illustrations and photos for print and online publishers and animations for TV broadcasters. This year, KRT added three new products: graphic packages and news animations for Web publishers and a regional news service for the Southeast. The daily interactive packages and graphics help Web publishers offer unique content, complete with sound and motion. KRT also provides newspaper clients with complementary stories, photos and graphics that they can use to promote the online content. This lets them use print circulation to build traffic on their Web sites. For print customers, KRT expanded coverage of news, features, business and sports in the Southeastern United States, creating a premium service called KRT South. The Philadelphia Inquirer and Philadelphia Daily News 1997 Revenue was $546.5 million. Philadelphia Newspapers, Inc. (PNI), publisher of The Philadelphia Inquirer and Philadelphia Daily News reached an all-time record profit level in 1997. PNI also reported year-over-year circulation gains for the Sunday and daily Inquirer and the Daily News for the six-month period ended Sept. 30, 1997. The year's achievements include the launch of a New Business Development Department for entrepreneurial projects, which resulted in the start-up or acquisition of new revenue-producing enterprises; implementing a strategic planning process; winning a Pulitzer Prize, The Inquirer's 18th, and publishing two record-breaking recruitment advertising sections, in terms of volume and revenue dollars. Also in 1997, both newspapers moved into new, technologically advanced newsrooms, part of the $30 million renovation of PNI's Center City Philadelphia location. Advertising revenue was up 11.1% in 1997, with particularly strong performances in classified and general, up 16.8% and 22.3%, respectively. Retail strengthened in the last months of the year, and is expected to continue to perform well. Opportunities to grow advertising in PNI's products within the nine-county Philadelphia Metropolitan market remain attractive as the market features a diverse economy, including the state's largest manufacturing center, more than 80 higher education institutions and an extensive hospital and health care industry. In 1996, Philadelphia had income per capita 15.2% above the U.S. average; by 2015 it is projected to be 9.1% above. 5 The Miami Herald 1997 Revenue was $324.4 million. The Miami Herald, Florida's largest newspaper, is sold primarily in Miami-Dade, Broward and Monroe counties. Its International Satellite Edition is distributed in 29 countries in Latin America and the Caribbean. El Nuevo Herald, an award-winning Spanish-language newspaper (102,744 daily and 127,028 Sunday), is available to Herald subscribers for a 7-cent daily delivery charge or through single-copy sales. Retail expansion in 1997 was fueled by a wave of new entertainment retailing projects like BeachPlace in Broward; more are planned for both Miami-Dade and Broward. Several retailers are expanding: Bloomingdale's opened a new store; Dillard's will occupy 10 former Mervyn's locations; Nordstrom and OfficeMax each plan to open several stores. Advertising revenue was up 3.1% in 1997. Retail was significantly better for the first time since the aftermath of Hurricane Andrew. Classified was up only slightly, reflecting Miami's relatively high unemployment rate. In 1997, The Herald launched three new online products: HomeHunter, CarHunter and an entertainment guide, JustGo. On its 10th anniversary, el Nuevo Herald extended solo distribution to more than 1,000 single-copy racks. The Herald retooled its Sunday magazine, Tropic. It expanded partnerships with NBC 6 and Channel 23 and agreed to produce a pilot program with Silver King Broadcasting featuring the Herald newsroom. Attendance was strong at the first Americas Conference. A partnership with the Florida Marlins contributed to the largest single-copy sales day in Herald history when the team won the World Series. Installation of state-of-the-art offset presses is ongoing. The Miami/Fort Lauderdale DMA population is expected to grow 26.7% between 1996 and 2015, compared with 18.0% for the U.S. The Miami/Fort Lauderdale market in 1996 had income per capita 0.7% above the U.S. average; by 2015 it is projected to be 6.8% above. San Jose Mercury News 1997 Revenue was $299.3 million. In 1997, Time magazine named the San Jose Mercury News the "most tech-savvy" newspaper in America. The Mercury News serves Silicon Valley, which encompasses San Jose, California's third-largest city, and surrounding communities. The region became the national leader in exports and is the world leader in high technology. Business Week reported: "In 1996, on average, one Valley company went public every five days...More than 50,000 new jobs were created, while wages grew five times the national average." Sharing in Silicon Valley's economic boom, the Mercury News has introduced or developed products in the past year to compensate for a retail market that didn't grow as quickly as other segments. Advertising revenue was up 5.0% in 1997. Classified was up just slightly after the major gains of 1996 and 1995, and retail rebounded strongly after year-earlier consolidations in the market. General, up 25%, has been the high point, driven by high-tech products and services, telecommunications and exports. Mercury Center reflects the newspaper's innovative initiatives. The online edition added Just Go/Bay Area, an online entertainment guide; HomeHunter, a real estate site; and Bay Area Yellow Pages, an online directory. Existing products expanded: the Talent Scout recruitment site, for example, introduced a branded job fair. Founded in 1993, Mercury Center (www.mercurycenter.com) averaged more than 1.2 million users per month in 1997. The site's stature as a news source was demonstrated during October's market tremors, registering over 2 million hits in a single day. 6 Nuevo Mundo, serving the nation's fourth-largest Hispanic market, celebrated its first anniversary. The Spanish-language free weekly ended the year with average circulation of 56,900 copies. The population of the San Jose Metropolitan Statistical Area (MSA), which includes only Santa Clara County, is expected to grow 21.0% between 1996 and 2015; the U.S. average is 18.0%. In 1996, San Jose had income per capita 33.7% above the U.S. average; by 2015 it is projected to be 32.6% above. The Kansas City Star 1997 Revenue was $265.4 million. The Kansas City Star serves the Kansas City metro and outlying areas on both sides of the Kansas and Missouri state lines. The Star's primary market area consists of 11 counties in the two states. After a relatively slow period of economic growth, Kansas City became a boomtown in 1996. Higher personal incomes, stronger economic output and increased employment in retail and service industries have led to a tight job market. Recruitment for the more than 19,000 new jobs created in 1997 brought an upsurge in help-wanted advertising, with a nearly 20% increase in revenue. Kansas City's retail landscape has also been changing with the addition of several major retailers. Kohl's, Jacobson's, Target and Home Depot entered the market in late 1996 and early 1997, with Nordstrom set to debut in early 1998. Coupled with the addition of a major mall, retail advertising increased 9.5% in 1997. Advertising revenue was up 10.1% in 1997 and is expected to increase about 7% in 1998. The profit margin was in the low 30s and is expected to remain steady. The Star's online community site, kansascity.com, and online product, kcstar.com, continue to grow and improve. The kansascity.com site won the 1997 Newspaper Association of America Digital Edge award for best use of classified online. The site saw a 461% year-over-year increase in traffic for November. StarDirect, a subsidiary offering turnkey database marketing solutions, saw a 108% increase in revenue. Additionally, revenue increased 44% for Grand Communications, the event marketing subsidiary. Kansas City in 1996 had income per capita 3.4% above the U.S. average; by 2015 it is projected to be 2.5% above. Fort Worth Star-Telegram 1997 Revenue was $212.6 million. The Star-Telegram is located in the western portion of the Dallas/Fort Worth market. The four-county Fort Worth/Arlington PMSA metropolitan area ranks as the 32nd most populous in the U.S. and third largest in Texas in 1997. The number of jobs hit a historic high in 1997, with 2% growth projected for 1998. Unemployment is just over 3%. In far North Fort Worth, the Texas Motor Speedway and a FedEx national distribution hub opened. Intel Corp. plans to open a $1.3 billion manufacturing facility by the year 2000, and Nokia and Motorola Fort Worth are expanding, making the area a new national technology center. The area is home to such Fortune 500 companies as American Airlines, Tandy Corporation and Burlington Northern Santa Fe Railroad. The 1.8 million-square-foot Grapevine Mills opened and a major expansion of North East Mall is under way, including new Nordstrom and JCPenney stores. The Bass Performing Arts Hall will open in 1998. Renovation of historic buildings and construction of new housing are driving development of Sundance Square and downtown Fort Worth. Ad revenue was up 6.5% in 1997, and we project about a 6% gain in 1998. Profit margin was in the mid-20s. 7 The Star-Telegram continues its intensely zoned approach to local news, advertising and customer service. The Arlington Star-Telegram set new circulation and advertising records in the face of aggressive competition in 1997. In 1998, Northeast Tarrant County will be served by four distinct editions of the successful weekly Hometown Star. Star-Telegram Online Services, under the banner Star-Telegram.com, is undergoing a major strategic repositioning and expansion of advertising opportunities. La Estrella, with its two distinct bilingual and Spanish-predominant weekly editions, continues to develop. Fort Worth/Arlington's population has grown 57% since 1980, and is expected to grow 39.9% between 1996 and 2015, compared with 18.0% for the U.S. Detroit Free Press 1997 Revenue (Knight Ridder's share) was $201.7 million. The Detroit Free Press is the largest newspaper in Michigan. The combined Sunday edition, The Detroit News and Free Press, ranks sixth in circulation in the nation. The two newspapers are published by Detroit Newspapers (DN), an agency combining the business operations of the two newspapers. This joint operating agency (JOA) was formed in 1989. The profits (or losses) are split equally between the two partners, Knight Ridder and Gannett Co. The Free Press is an a.m. paper and The News is a p.m. paper. On weekends, they publish combined editions. On July 13, 1995, six of DN's 11 unions struck over proposed changes in work rules. In February 1997, the unions made an unconditional offer to return to work. In normal times, Detroit will generate approximately $450 million in revenue from its two newspapers. Total advertising at the end of 1997 was at about 90% of prestrike levels. Retail advertising was at nearly 80%; general was about the same, and classified was slightly improved from prestrike levels. Circulation continued to improve; as of the ABC Publisher's Statement for the six months ended Sept. 30, 1997, it was at approximately 71.6% of its prestrike level for the daily Free Press and 74.4% for the combined Sunday paper. DN continues to rebound in both advertising and circulation. The company returned to profitability in the fourth quarter of 1996. Detroit in 1996 had income per capita 15.3% above the U.S. average; in 2015 it is projected to be 9.1% above. The Charlotte Observer 1997 Revenue was $171.9 million. The Charlotte Observer, the largest-circulation daily in North and South Carolina, is sold primarily in a 15-county region across the two states. The Observer enjoyed strong advertising growth in 1997, with retail revenue up 8.7%, general up 2.2% and classified up 13.3% over last year. Continued growth is expected in 1998. Population in the Charlotte Metropolitan Statistical Area (MSA) is expected to grow 26.9% between 1996 and 2015, compared with the U.S. average of 18.0%. Item 2. PROPERTIES The company has daily newspaper facilities in 28 markets located in 18 states. These facilities vary in size from 7,300 square feet at the Florida Keys Keynoter operation in Marathon, Fla., to 2.8 million square feet in Philadelphia. In total, they occupy about 10.5 million square feet. Approximately 2.1 million of the total square footage is leased from others. Virtually all the owned property is owned in fee. The company owns substantially all of its production equipment, although certain office equipment is leased. The company also owns land for future expansion in Columbus and Macon, Ga., Detroit and San Jose. Knight Ridder properties are maintained in excellent operating condition and are suitable for present and foreseeable operations. During the three years ended Dec. 28, 1997, the company spent approximately $311.6 million for capital additions and improvements to its properties, excluding discontinued BIS operations. 8 Item 3. LEGAL PROCEEDINGS On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and the Detroit Newspaper Agency, which operates both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and the Agency. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative law judge ruled that the strike was caused by the unfair labor practices of the Agency and The Detroit News and recommended that the Agency and the newspapers reinstate all strikers, displacing permanent replacements if necessary. The Agency and the newspapers have appealed the decision, which is pending before the NLRB. Various libel actions and environmental and other legal proceedings that have arisen in the ordinary course of business are pending against the company and its subsidiaries. In the opinion of management, the ultimate liability to the company and its subsidiaries as a result of all legal proceedings, including Detroit, will not be material to its financial position or results of operations. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the vote of security holders of Knight-Ridder, Inc., during the quarter ended December 28, 1997. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS KRI Stock Knight Ridder common stock is listed on the New York Stock Exchange and the Frankfurt Stock Exchange under the symbol KRI. The stock is also traded in exchanges in Philadelphia, Chicago, Boston, San Francisco, Los Angeles and Cincinnati, and through the Intermarket Trading System. Options are traded on the Philadelphia Exchange. Knight Ridder stock split two-for-one in 1996. The company's 81.6 million shares outstanding at December 28, 1997, were held in all 50 states by 11,723 shareholders of record. Market Price of Common Stock The last closing price of the company's common stock prior to the preparation of this report was $55.06 on Jan. 30, 1998. The average stock trading volume per day for the years 1997, 1996, and 1995 was 271,016, 181,805, and 132,300, respectively. The following table presents the company's common stock market data:
1997 1996 1995 ------------------- ---------------- -------------------- Quarter High Low High Low High Low -------- ------ ------- ------- ------- -------- 1st ........... 42 3/8 37 3/8 36 1/16 29 7/8 28 1/16 25 1/8 2nd ........... 49 35 3/4 38 7/16 32 11/16 28 7/8 26 3/16 3rd ........... 55 13/16 48 3/4 38 32 7/16 29 3/16 27 5/8 4th ........... 57 1/8 49 1/8 42 35 3/8 33 5/16 28 1/8
9 Treasury Stock Purchases The table below is a summary of treasury stock purchases since 1987: Shares Cost Purchased (000s) ---------- ---------- 1997 ...................... 13,824,300 $ 643,375 1996 ...................... 6,219,100 221,768 1995 ...................... 11,508,600 319,363 1994 ...................... 5,044,600 136,977 1993 ...................... 1,500,000 40,693 1992 1991 1990 ...................... 5,325,400 129,909 1989 ...................... 5,522,200 131,885 1988 ...................... 9,099,200 198,279 1987 ...................... 2,000,000 38,728 Dividends Common stock dividend history and policy appears in Item 6. "11 Year Financial Highlights", Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", Quarterly Operations, and Item 8. "Financial Statements and Supplementary Data", Note E, incorporated herein by reference. 10
Item 6. SELECTED FINANCIAL DATA 11-YEAR FINANCIAL HIGHLIGHTS The following data was compiled from the consolidated financial statements of Knight Ridder and subsidiaries. The consolidated financial statements and related notes and discussions for the year ended Dec. 28, 1997 (Items 7 and 8) should be read in order to obtain a better understanding of this data. - ------------------------------------------------------------------------------------------------------------------------------------ Compound Growth Rate (In thousands, except per share ---------------- Dec. 28 Dec. 29 Dec. 31 data and ratios) 5-Year 10-Year 1997 1996 1995 ------ ------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising ........................ 8.8% 4.2% $ 2,202,251 $ 1,793,424 $ 1,672,970 Circulation ........................ 4.3 4.7 567,757 501,826 495,315 Other .............................. 21.7 8.6 106,777 78,974 81,897 ----------- ----------- ----------- Total Operating Revenue .......... 8.2 4.4 2,876,785 2,374,224 2,250,182 ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs .................. 6.7 4.0 2,214,026 1,920,444 1,923,179 Depreciation and amortization ...... 11.8 7.1 156,731 120,647 98,741 ----------- ----------- ----------- Total Operating Costs ............ 7.0 4.2 2,370,757 2,041,091 2,021,920 ----------- ----------- ----------- Operating Income ..................... 14.6 5.5 506,028 333,133 228,262 Interest expense ................... 12.4 6.6 (102,662) (73,137) (59,512) Other, net(1) ...................... 82.6 30.2 290,486 50,213 14,067 Income taxes, net .................. 29.2 9.7 (297,348) (124,829) (72,861) ----------- ----------- ----------- Income from continuing operations(1).. 24.0 10.3 396,504 185,380 109,956 Discontinued BIS operations(2) ....... 16,511 82,493 57,426 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ........... (7,320) ----------- ----------- ----------- Net Income(1) ........................ 58.8 10.3 $ 413,015 $ 267,873 $ 160,062 =========== =========== =========== Operating income percentage (profit margin) ............................ 17.6% 14.0% 10.1% - ----------------------------------------------------------------------------------------------------------------------- SHARE DATA(4) Basic weighted-average number of shares ............................. 88,475 96,021 99,451 Diluted weighted-average number of shares ............................. 101,314 97,420 100,196 Earnings per share Basic: Continuing operations(1).............. 29.3 13.2 $ 4.48 $ 1.93 $ 1.11 Discontinued BIS operations(2) ....... 0.19 0.86 0.57 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ........... (0.07) Net income(1) ........................ 65.2 13.2 4.67 2.79 1.61 Diluted: Continuing operations(1).............. 26.3 11.9 $ 3.91 $ 1.90 $1.10 Discontinued BIS operations(2) ....... 0.17 0.85 0.57 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ........... (0.07) Net income(1) ........................ 61.6 11.9 4.08 2.75 1.60 Dividends declared per common share(5) ........................... 2.7 4.5 0.80 0.58-1/2 0.74 Common stock price High ............................... 57-1/8 42 33-5/16 Low ................................ 35-3/4 29-7/8 25-1/8 Close .............................. 50-3/16 39-1/4 31-1/4 Shareholders' equity per common share .............................. 7.8 7.0 $ 15.65 $ 12.12 $ 11.43 Price/earnings ratio(6) .............. 21.8:1 21.6:1 28.4:1 - ----------------------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Common stock acquired ................ $ 643,375 $ 221,768 $ 319,363 Payment of cash dividends ............ 78,335 74,262 74,377 Ratio of earnings to fixed charges (7) ........................ 7.1:1 4.0:1 3.2:1 At Year End Total assets ....................... $ 4,355,142 $ 2,860,907 $ 2,966,321 Long-term debt (excluding current maturities) ...................... 1,599,133 771,335 1,000,721 Total debt ......................... 1,668,830 821,335 1,013,850 Shareholders' equity ............... 1,551,673 1,131,508 1,110,970 Return on average shareholders' equity(8) ........................ 30.8% 23.9% 14.3% Current ratio ...................... 1.2:1 1.0:1 1.1:1 Total debt/total capital ratio ..... 51.8% 42.1% 47.7%
11
- ----------------------------------------------------------------------------------------------------------- (In thousands, except per share Dec. 25 Dec. 26 Dec. 27 Dec. 29 data and ratios) 1994 1993 1992 1991 ----------- ----------- ----------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising ..................... $ 1,583,373 $ 1,481,631 $ 1,444,144 $ 1,429,661 Circulation ..................... 484,581 474,420 460,014 439,029 Other ........................... 66,968 56,772 39,932 35,127 ----------- ----------- ----------- ----------- Total Operating Revenue ....... 2,134,922 2,012,823 1,944,090 1,903,817 ----------- ----------- ----------- ----------- Operating Costs Labor, newsprint and other operating costs ............... 1,730,158 1,655,138 1,597,983 1,593,847 Depreciation and amortization ... 96,613 96,233 89,665 86,896 ----------- ----------- ----------- ----------- Total Operating Costs ......... 1,826,771 1,751,371 1,687,648 1,680,743 ----------- ----------- ----------- ----------- Operating Income .................. 308,151 261,452 256,442 223,074 Interest expense ................ (44,216) (44,403) (52,358) (68,806) Other, net(1) ................... 1,802 2,987 13,868 35,832 Income taxes, net ............... (106,493) (83,281) (82,496) (67,965) ----------- ----------- ----------- ----------- Income from continuing operations(1) 159,244 136,755 135,456 122,135 Discontinued BIS operations (2) ... 11,656 11,334 10,630 9,933 Discontinued broadcast operations (2) Cumulative effect of changes in accounting principles(3) ........ (105,200) ----------- ----------- ----------- ----------- Net Income(1) ..................... $ 170,900 $ 148,089 $ 40,886 $ 132,068 =========== =========== =========== =========== Operating income percentage (profit margin) ......................... 14.4% 13.0% 13.2% 11.7% - ----------------------------------------------------------------------------------------------------------- SHARE DATA(4) Basic weighted-average number of shares ....................... 107,888 109,702 108,948 102,586 Diluted weighted-average number of shares .......................... 108,551 110,663 110,356 103,594 Earnings per share Basic: Continuing operations(1)........... $ 1.48 $ 1.25 $ 1.24 $ 1.19 Discontinued BIS operations(2) .... 0.10 0.10 0.11 0.10 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ........ (0.97) Net income(1) ..................... 1.58 1.35 0.38 1.29 Diluted: Continuing operations(1)........... $ 1.47 $ 1.24 $ 1.22 $ 1.18 Discontinued BIS operations(2) 0.10 0.10 0.10 0.09 Discontinued broadcast operations(2) Cumulative effect of changes in accounting principles(3) ........ (0.95) Net income(1) ..................... 1.57 1.34 0.37 1.27 Dividends declared per common share(5) ........................ 0.73 0.70 0.70 0.70 Common stock price High ............................ 30-1/2 32-1/2 32-1/16 28-3/4 Low ............................. 23-1/4 25-5/16 25-3/8 21-7/8 Close ........................... 25-7/16 29-11/16 29-1/16 25-3/8 Shareholders' equity per common share ........................... $ 11.58 $ 11.33 $ 10.75 $ 10.72 Price/earnings ratio(6) ........... 17.3:1 23.9:1 23.8:1 21.5:1 - ----------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Common stock acquired ............. $ 136,977 $ 40,693 $ -- $ -- Payment of cash dividends ......... 77,942 76,787 75,992 71,087 Ratio of earnings to fixed charges(7) ...................... 5.2:1 4.4:1 3.8:1 2.8:1 At Year End Total assets .................... $ 2,409,239 $ 2,399,067 $ 2,431,307 $ 2,305,731 Long-term debt (excluding current maturities) ................... 411,504 410,388 495,941 556,797 Total debt ...................... 411,504 451,075 560,245 606,840 Shareholders' equity ............ 1,224,654 1,243,169 1,181,812 1,148,620 Return on average shareholders' equity(8) ..................... 13.9% 12.2% 12.5% 12.9% Current ratio ................... 1.0:1 1.0:1 1.1:1 1.1:1 Total debt/total capital ratio .. 25.2% 26.6% 32.2% 34.6%
12
- ------------------------------------------------------------------------------------------------------- (In thousands, except per share Dec. 30 Dec. 31 Dec. 31 Dec. 31 data and ratios) 1990 1989 1988 1987 ----------- ----------- ---------- ----------- SUMMARY OF OPERATIONS Operating Revenue Advertising ..................... $ 1,556,932 $ 1,577,449 $1,523,030 $ 1,464,447 Circulation ..................... 403,188 385,214 370,898 357,553 Other ........................... 31,981 32,212 29,743 46,922 ----------- ----------- ---------- ----------- Total Operating Revenue ....... 1,992,101 1,994,875 1,923,671 1,868,922 ----------- ----------- ---------- ----------- Operating Costs Labor, newsprint and other operating costs ............... 1,617,138 1,593,186 1,571,525 1,494,003 Depreciation and amortization ... 91,553 91,780 84,657 78,807 ----------- ----------- ---------- ----------- Total Operating Costs ......... 1,708,691 1,684,966 1,656,182 1,572,810 ----------- ----------- ---------- ----------- Operating Income .................. 283,410 309,909 267,489 296,112 Interest expense ................ (71,784) (84,492) (62,456) (49,550) Other, net(1) ................... 17,019 57,505 26,732 20,053 Income taxes, net ............... (88,076) (108,883) (86,484) (117,369) ----------- ----------- ---------- ----------- Income from continuing operations(1) 140,569 174,039 145,281 149,246 Discontinued BIS operations (2) ... 8,476 5,797 1,494 (512) Discontinued broadcast operations (2) 67,366 9,608 6,429 Cumulative effect of changes in accounting principles(3) ........ ----------- ----------- ---------- ----------- Net Income(1) ..................... $ 149,045 $ 247,202 $ 156,383 $ 155,163 =========== =========== ========== =========== Operating income percentage (profit margin) ......................... 14.2% 15.5% 13.9% 15.8% - ------------------------------------------------------------------------------------------------------- SHARE DATA(4) Basic weighted-average number of shares ....................... 100,098 103,110 111,842 114,794 Diluted weighted-average number of shares .......................... 101,366 104,878 113,406 117,292 Earnings per share Basic: Continuing operations(1)........... $ 1.40 $ 1.69 $ 1.30 $ 1.30 Discontinued BIS operations(2) .... 0.09 0.06 0.01 (0.01) Discontinued broadcast operations(2) 0.65 0.09 0.06 Cumulative effect of changes in accounting principles(3) ........ Net income(1)...................... 1.49 2.40 1.40 1.35 Diluted: Continuing operations(1)........... $ 1.39 $ 1.66 $ 1.28 $ 1.27 Discontinued BIS operations(2)..... 0.08 0.06 0.01 Discontinued broadcast operations(2) 0.64 0.09 0.05 Cumulative effect of changes in accounting principles(3) ........ Net income(1) ..................... 1.47 2.36 1.38 1.32 Dividends declared per common share(5) ........................ 0.67 0.62-1/4 0.57-1/4 0.51-1/2 Common stock price High ............................ 29 29-3/16 23-7/8 30-5/8 Low ............................. 18-1/2 21-7/16 17-7/8 16-5/8 Close ........................... 22-15/16 29-3/16 22-11/16 20-1/16 Shareholders' equity per common share ........................... $ 9.05 $ 8.92 $ 7.74 $ 7.93 Price/earnings ratio(6) ........... 16.5:1 21.2:1 17.7:1 15.8:1 - ------------------------------------------------------------------------------------------------------- OTHER FINANCIAL DATA Common stock acquired ............. $ 129,909 $ 131,885 $ 198,279 $ 38,728 Payment of cash dividends ......... 66,422 63,260 62,990 57,426 Ratio of earnings to fixed charges(7) ...................... 3.3:1 3.6:1 3.8:1 5.3:1 At Year End Total assets .................... $ 2,244,919 $ 2,112,184 $2,340,576 $ 1,904,117 Long-term debt (excluding current maturities) ................... 803,914 660,900 727,043 508,203 Total debt ...................... 823,958 712,940 1,037,075 553,235 Shareholders' equity ............ 894,913 917,145 821,625 901,498 Return on average shareholders' equity(8) ..................... 16.5% 28.4% 18.2% 18.1% Current ratio ................... 1.2:1 1.2:1 1.1:1 1.2:1 Total debt/total capital ratio .. 47.9% 43.7% 55.8% 38.0%
13 (1) Other, net, Income from Continuing Operations and Net Income include: the gains from the sales of TKR Cable and our newspapers in Long Beach, Calif., Boca Raton, Fla., Milledgeville, Ga., and Newberry, S.C., as well as the gain on the Boulder, Colo., exchange in 1997; the gain on Netscape in 1996; and the gain from the sale of Pasadena Star-News in 1989. Net income also includes the gains on the sales of KRII in 1997, KRF in 1996, and the JoC in 1995. (2) All years have been restated to present the Business Information Services Division (BIS) as discontinued operations. Results of operations of the company's BIS Division (discontinued in 1997), and Broadcast Division (discontinued in 1989) and the gains on the sales of BIS and broadcast assets are presented as "discontinued BIS operations" and "discontinued broadcast operations," respectively. (3) For 1995, the cumulative effect of change in accounting principle represents an adjustment from the implementation of FAS 116--Accounting for Contributions Received and Contributions Made. For 1992, the cumulative effect of change in accounting principle represents adjustments from the implementation of FAS 109--Accounting for Income Taxes and FAS 106--Accounting for Postretirement Benefits Other than Pensions. (4) All share data is restated for a stock split in 1996. (5) The Board of Directors declared a $0.20 per share dividend on Jan. 28, 1997. The quarterly dividend previously paid in January was paid in February. (6) Price/earnings ratio is computed by dividing closing market price by diluted earnings per share from continuing operations. 1995 and 1992 earnings exclude the effects of changes in accounting principles. Earnings also exclude the gains from the sales of TKR Cable, our four newspapers in Long Beach, Calif., Boca Raton, Fla., Milledgeville, Ga., and Newberry, S.C., as well as the gain on the Boulder exchange in 1997; the gain on Netscape in 1996; and the gain from the sale of the Pasadena Star-News in 1989. (7) The ratio of earnings to fixed charges is computed by dividing earnings (as adjusted for fixed charges and undistributed equity income from unconsolidated subsidiaries) by fixed charges for the period. Fixed charges include the interest on debt (before capitalized interest), the interest component of rental expense, and the proportionate share of interest expense on guaranteed debt of certain equity-method investees and on debt of 50%-owned companies. (8) Return on average shareholders' equity is computed by dividing net income before the cumulative effect of changes in accounting principles in 1995 and 1992, including the results of discontinued operations in 1987 through 1997, by average shareholders' equity. Average shareholders' equity is the average of shareholders' equity on the first day and the last day of the fiscal year. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Glossary of Newspaper Advertising Terms The following definitions may be helpful when reading Management's Discussion and Analysis of Operations. RETAIL. Display advertising from local merchants, such as department and grocery stores, selling goods and services to the public. GENERAL. Display advertising by national advertisers that promotes products or brand names on a nationwide basis. CLASSIFIED. Small, locally placed ads listed together and organized by category, such as real estate sales, employment opportunities or automobile sales, and display-type advertisements in these categories. FULL-RUN. Advertising appearing in all editions of a newspaper. PART-RUN. Advertising appearing in select editions or zones of a newspaper's market. Part-run advertising is translated into full-run equivalent linage (referred to as factored) based on the ratio of the circulation in a particular zone to the total circulation of a newspaper. RUN-OF-PRESS (ROP). All advertising printed on Knight Ridder presses and appearing within a newspaper. PREPRINT. Advertising supplements prepared by advertisers and inserted into a newspaper. Knight Ridder is the nation's second-largest newspaper publisher in terms of revenue and circulation, with products in print and online. The company publishes 31 daily newspapers in 28 U.S. markets, reaching 9.0 million readers daily and 12.6 million on Sunday. It maintains 34 associated Web sites. In 1997, the gross revenue from these businesses was about $2.9 billion. The company is also involved in other newspaper businesses and newsprint manufacturing through business arrangements, including joint ventures and partnerships. Newspaper revenue is derived principally from advertising and newspaper copy sales. Newspaper advertising currently accounts for about 77% of consolidated revenue. This revenue comes from the three basic categories of advertising -- retail, general and classified discussed herein. Newspaper advertising volume is categorized as either run-of-press (ROP) or preprint. Volume for ROP advertising is measured in terms of either full-run or part-run advertising linage and reported in six-column inches. A six-column inch consists of one inch of advertising in one column of a newspaper page when that page is divided into six columns of equal size. By using part-run advertising, advertisers can direct their messages to selected market segments. Circulation revenue results from the sale of newspapers. Circulation of daily and Sunday newspapers currently accounts for about 20% of consolidated revenue. It is reported at the net wholesale price for newspapers delivered or sold by independent contractors and at the retail price for newspapers delivered or sold by employees. Other newspaper revenue comes from commercial job printing, alternate delivery services, niche publications, online services, newsprint waste sales, book publishing, newspaper trucking services, audiotext and other miscellaneous sources. 15 On April 4, 1997, the company announced that it would divest Knight-Ridder Information, Inc. (KRII). On Dec. 11, 1997, the company announced that it would sell Technimetrics, Inc., its global diversified information subsidiary. These announcements resulted in the reclassification of the former Business Information Services (BIS) segment as discontinued operations. KRII was sold to M.A.I.D plc on Nov. 14, 1997, for $420 million plus a working capital purchase price adjustment of approximately $15 million. Prior to July 1996, the BIS segment included Knight-Ridder Financial (KRF). KRF was sold on July 26, 1996, to Global Financial Information Corporation for $275 million. Prior to April 1995, the BIS segment included the Journal of Commerce (JoC). The JoC was sold on April 3, 1995, to the Economist Group of London for $115 million. Results of Operations SUMMARY OF OPERATIONS. A summary of the company's operations, certain share data and other financial data for the past 11 years is provided in Item 6. Compound growth rates for the past five- and 10-year periods are also included, if applicable. A review of this summary and of the supplemental information in Item 6 will provide a better understanding of the following discussion and analysis of operating results and of the financial statements as a whole. The supplemental information contains financial data for the company's largest newspapers and information regarding the company's properties, technology and the raw materials used in operations. RESULTS OF OPERATIONS: 1997 VS. 1996 Diluted earnings per share from continuing operations was $3.91, up $2.01 from the $1.90 reported in 1996. The $3.91 includes three one-time gains on sales: a $1.27 gain on the sale of TKR Cable, a $.24 gain on the exchange of the Daily Camera in Boulder, Colo., and a $.10 gain on the sale of four newspapers. The $1.90 includes an $.08 gain on the sale of our Netscape Communications Corporation (Netscape), investment, net of adjustments in the carrying value of certain investments. Excluding the one-time gains from 1997 and 1996, diluted EPS for 1997 was $2.30, which was up $.48, or 26.4%, from the $1.82 earned in 1996. Operating income in 1997 was $506.0 million, up $172.9 million, or 51.9%, from 1996. The results include operations from four newspapers acquired from The Walt Disney Company in May and from two newspapers received in exchange from E.W. Scripps Co. for the Boulder, Colo. newspaper in August. They exclude results from the Boulder Daily Camera after August and for the Long Beach (Calif.) Press-Telegram, the Boca Raton (Fla.) News, The (Milledgeville, Ga.) Union-Recorder and the Suburban Newberry (S.C.) Observer after their date of sale in December 1997. On a pro forma basis for the former Disney and Scripps newspapers (that is, including full-year results in 1997 and 1996) and excluding the sold newspapers from both 1997 and 1996 (comparable basis), operating income was up $122.9 million, or 30.2%, from 1996. The increase was due to an 8.0% increase in total advertising revenue offset in part by a 2.7% increase in operating costs. OPERATING REVENUE. Total company revenue of $2.9 billion was up 21.2% from 1996. On a comparable basis, total operating revenue was up 6.7%. Newspaper advertising revenue increased by $408.8 million, or 22.8%, in 1997 on a full-run ROP linage increase of 18.0%. On a comparable basis, total advertising revenue improved by 8.0% from 1996 on a full-run ROP linage increase of 6.7%. The following table summarizes the percentage change in revenue and full-run ROP linage from 1996 as reported in our financial statements, as well as results on a comparable basis. Pro Forma But Excluding Divested Newspapers* ------------------------- % Change % Change % Change in Full-Run % Change in Full-Run Advertising Category in Revenue ROP Linage in Revenue ROP Linage ---------- ----------- ---------- ----------- Retail ................. 22.8 19.0 5.7 5.6 General ................ 23.8 16.7 11.8 8.4 Classified ............. 22.6 17.3 9.6 7.6 Total ................ 22.8 18.0 8.0 6.7 * Including full-year results in 1997 and 1996 for the former Disney and Scripps newspapers and excluding the sold newspapers from both 1997 and 1996. 16 Retail advertising revenue improved by $187.0 million, or 22.8%, from 1996 on a 19.0% increase in full-run ROP linage. On a comparable basis, retail advertising revenue increased 5.7% from 1996, with increases seen at almost all of our newspapers. General advertising revenue was up $47.3 million, or 23.8%, from 1996 on a 16.7% increase in full-run ROP linage. On a comparable basis, general advertising revenue was up 11.8%. Classified advertising revenue was up $174.6 million, or 22.6%, from 1996 on a 17.3% increase in full-run ROP linage. On a comparable basis, classified advertising revenue was up 9.6%. The increase was due primarily to help wanted. Circulation revenue improved by $65.9 million, or 13.1%. On a comparable basis, circulation revenue increased 0.5% on an average daily circulation increase of 16,912 copies, or 0.4%, and an average Sunday circulation decrease of 27,719 copies, or 0.5%. Other revenue increased $27.8 million, or 35.2%, during 1997 due to increases in commercial print and augmentation revenue. OPERATING EXPENSES. Labor and employee benefits costs were up $165.2 million, or 17.1%. On a comparable basis, labor and employee benefits costs were up $67.7 million, or 6.2%, on a 2.9% increase in the work force and an average wage rate increase of 4.2%. Newsprint, ink and supplements costs decreased by $5.9 million, or 1.2%, due to a 20.7% decrease in the average cost per ton of newsprint, offset in part by increased newsprint consumption of 129,000 tons for the year, due to acquisitions, greater ad volume and some increased newshole. Depreciation and amortization increased $36.1 million, or 29.9%, due to amortization expense associated with the acquisition of the former Disney newspapers. Other operating expenses increased by $134.3 million, or 27.9%. On a comparable basis, other operating expenses were up $71.6 million, or 12.6%. Expenditures for circulation promotion accounted for a large part of the increase. NON-OPERATING ITEMS. Net interest expense increased $33.6 million, or 55.8%, from 1996, due to higher debt levels associated with the Disney acquisition. The average debt balance for the year increased $150.8 million from 1996, due to the debt assumed with the former Disney newspaper acquisition. Equity in earnings of unconsolidated companies and joint ventures decreased by $19.1 million, or 63.8%, due to the absence of earnings from the cable investment (sold in January 1997) and lower income from our newsprint mill investments. The "Other, net" line of the non-operating section increased $265.7 million over 1996, due to the gain on TKR Cable, the Boulder exchange and the four newspapers sold in December. The 1996 results included the gain on the sale of our investment in Netscape, net of the reduction in the carrying value of certain other investments. INCOME TAXES. The effective income tax rate on a continuing operations basis for 1997 was 42.9%, up from 40.2% in 1996. The rate increase was due to additional nondeductible goodwill amortization from the Disney acquisition. OTHER. Net income in 1997 includes an after-tax gain on the sale of Knight- Ridder Information, Inc., of $15.3 million, or $.15 per share (diluted), and income from discontinued BIS operations, net of applicable taxes, of $1.3 million, or $.02 per share (diluted). RESULTS OF OPERATIONS: 1996 VS. 1995 Diluted earnings per share from continuing operations were $1.90, up $.80 from the $1.10 reported in 1995. The $1.90 includes an $.08 gain on the sale of our Netscape investment, net of adjustments in the carrying value of certain investments. Excluding this gain, diluted EPS for 1996 was $1.82, which was up $.72 from $1.10 earned in 1995. 17 Operating income in 1996 was $333.1 million, up $104.9 million, or 45.9%, from 1995. The results include Detroit, which was rebuilding throughout the year from a strike that began on July 13, 1995. They also include a full year of operations for Contra Costa Newspapers (CCN), which was purchased on Oct. 31, 1995. And, finally, they reflect a 52-week year for 1996 as opposed to a 53-week year for 1995, an anomaly of our fiscal-year reporting convention. On a pro forma basis for CCN (that is, full-year results for 1995, including the period in which the company did not own CCN), but excluding Detroit from both years and the 53rd week from 1995 (comparable basis), operating income was up $72.8 million, or 27.0%, from 1995. The increase was due to a 5.2% increase in total advertising revenue and improvement in operating profit in Philadelphia and other large markets. OPERATING REVENUE. Total company revenue of $2.4 billion was up 5.5% from 1995. On a comparable basis, total operating revenue was up 4.0%. Advertising revenue increased by $120.5 million, or 7.2%, in 1996 on a full- run ROP linage increase of 10.0%. On a comparable basis, total advertising revenue improved by 5.2% from 1995. The following table summarizes the percentage change in revenue and full-run ROP linage from 1995 as reported in our financial statements, as well as results on a pro forma basis for CCN, but excluding Detroit: Pro Forma Contra Costa Newspapers But Excluding Detroit ------------------------- % Change % Change % Change in Full-Run % Change in Full-Run Advertising Category in Revenue ROP Linage in Revenue* ROP Linage ---------- ----------- ----------- ----------- Retail ............... 1.7 4.7 (0.3) (4.6) General .............. 8.9 21.5 7.5 5.0 Classified ........... 13.2 14.3 10.9 4.3 Total .............. 7.2 10.0 5.2 0.1 * Excludes the 53rd week from 1995 results. Retail advertising revenue improved by $14.0 million, or 1.7%, from 1995 on a 4.7% increase in full-run ROP linage. On a comparable basis, retail advertising revenue decreased 0.3% from 1995, primarily as a result of department store consolidations in Philadelphia and Northern California. Excluding these markets and Detroit, retail was up 1.9% in the rest of the markets on a 52-week basis. General advertising revenue was up $16.3 million, or 8.9%, from the prior year, with an increase in full-run ROP linage of 21.5%. On a comparable basis, general advertising revenue was up 7.5%. Classified revenue improved by $90.2 million, or 13.2%, on a 14.3% increase in full-run ROP volume from 1995. Employment advertising revenue, up 22.8% for the year, was the strength of our classified revenue performance. On a comparable basis, classified advertising revenue was up 10.9%. Philadelphia and San Jose contributed more than half of the classified revenue improvement. Circulation revenue improved by $6.5 million, or 1.3%, on an average daily circulation decrease of 217,957 copies, or 5.9%, and an average Sunday circulation decrease of 307,088 copies, or 6.0%. The circulation copy decline reflects the impact of the Detroit strike. Other revenue decreased $2.9 million, or 3.6%, during 1996, partly due to the decline of newsprint waste sales and one less week in the fiscal year. OPERATING EXPENSES. Labor and employee benefits costs were down $2.4 million, or 0.2%, with a 4.3% decrease in the work force, excluding Detroit. The decrease in labor and employee benefits costs was due primarily to the reduction in the work force, the fourth quarter 1995 charge for buyouts and separation costs and the impact of the 53rd week. These reductions were partly offset by an increase in the average wage per employee of 3.8%, (excluding Detroit and CCN). 18 Newsprint, ink and supplements costs increased by $25.4 million, or 5.7%, due to an 11.5% increase in the average cost per ton of newsprint offset by a 4.0% decrease in newsprint consumption from the prior year. Depreciation and amortization increased $21.9 million, or 22.2%, due mostly to the acquisition of CCN. Other operating costs decreased 5.1% from 1995. On a pro forma basis for CCN, but excluding Detroit and the impact of the 53rd week, other operating costs were down 1.6% from the prior year. NON-OPERATING ITEMS. Net interest expense increased $11.2 million, or 22.8%, from 1995, due primarily to higher debt levels. The average debt balance for the year increased $325.2 million from 1995, due largely to the $221.8 million repurchase of 6.2 million shares in 1996 and the $360 million acquisition of CCN in the fourth quarter of 1995. Equity in earnings of unconsolidated companies and joint ventures increased by $9.2 million during 1996 due to earnings improvements from our newsprint mill investments, which benefited from the rise in newsprint prices. The "Other, net" line of the non-operating section increased $25.0 million over 1995, mostly as a result of the 1996 gain on the sale of our investment in Netscape, net of the reduction in the carrying values of certain other investments. INCOME TAXES. The effective income tax rate on a continuing operations basis for 1996 was 40.2%, up from 39.9% in 1995. The increase was due to a change in the distribution of income to states with higher income tax rates. OTHER. Net income in 1996 includes a one-time after-tax gain on the sale of Knight-Ridder Financial of $86.3 million, or $.89 per share (diluted), and a loss from discontinued BIS operations, net of applicable taxes, of $3.8 million, or $.04 per share (diluted). RESULTS OF OPERATIONS: 1995 VS. 1994 Diluted earnings per share from continuing operations was $1.10, down $.37, or 25.2%, from $1.47 per share in 1994. The decline in earnings per share from 1994 was due to the impact of the Detroit strike, the increase in the cost of newsprint from 1994 and fourth quarter charges related to buyout and separation expenses. Operating income in 1995 was $228.3 million, down from $308.2 million in 1994 on a $115.3 million, or 5.4%, increase in revenue. Operating income as a percentage of revenue was 10.1%, compared with 14.4% in 1994. The decline in operating income from 1994 was due primarily to: - A $72.7 million decline from Detroit's prior year operating profit as a result of the strike that began on July 13, 1995. - A nearly 40% increase in the cost of newsprint from 1994, which resulted in a $105.9 million expense increase. - Charges related to buyout and separation expenses of about $16 million, of which $15.3 million was charged in the fourth quarter of 1995. Excluding the Detroit operations and buyout and separation charges from both years, operating income would have been up 1.8% from 1994. OPERATING REVENUE. Total operating revenue of $2.3 billion was up $115.3 million, or 5.4%, from 1994. 19 Advertising revenue increased by $89.6 million, or 5.7%, in 1995 on a full- run ROP linage increase of 2.8%. The 1995 results reflect: reduction in revenue due to the Detroit strike, two months of revenue recorded for Contra Costa Newspapers (CCN), acquired on Oct. 31, 1995, and an additional week of revenue (53 weeks vs. 52 weeks) in 1995. Excluding the impact of these items from 1995 results, advertising revenue would have increased by 5.8%. The following table summarizes the percentage change in revenue and full-run ROP linage from 1994 as reported in our financial statements, as well as results excluding Detroit and CCN: Excluding Detroit and Contra Costa Newspapers ------------------------- % Change % Change % Change in Full-Run % Change in Full-Run Advertising Category in Revenue ROP Linage in Revenue ROP Linage ---------- ----------- ---------- ----------- Retail ................ 1.9 (0.6) 3.8 (2.4) General ............... (1.1) 2.9 0.6 1.3 Classified ............ 12.6 6.7 14.3 5.4 Total ............... 5.7 2.8 7.5 1.3 Retail advertising revenue improved $15.3 million, or 1.9%, from 1994 on a 0.6% decrease in full-run ROP linage. The increase in average rates and preprint revenue offset the decrease in full-run ROP linage. General advertising revenue was $182.5 million, down from the $184.5 million reported in 1994, with an increase in full-run ROP linage of 2.9%. Classified revenue improved by $76.3 million, or 12.6%, on a 6.7% increase in full-run ROP volume. San Jose contributed nearly half of the classified revenue improvement. Employment advertising revenue, up 24.6% for the year, was the strength of our classified revenue performance. Circulation revenue improved by $10.7 million, or 2.2%, on an average daily circulation increase of 52,866 copies, or 1.5%, and an average Sunday circulation increase of 10,754 copies, or 0.2%. Circulation copies reflect the impact of the Detroit strike, offset by additional circulation from CCN. Other revenue increased $14.9 million, or 22.3%, during 1995, due primarily to increased revenue from newsprint waste sales, commercial printing and other lines of business developed to augment the revenue of our core newspaper business. OPERATING EXPENSES. Labor and employee benefits costs were up $41.8 million, or 4.5%, with a 4.5% increase in the work force. The increase in the work force was due to the CCN acquisition. The increase in labor and employee benefits costs was due primarily to a fourth quarter charge for buyouts and separation costs, the impact of the 53rd week and the addition of CCN. This was partly offset by a decrease in labor costs as a result of the Detroit strike. The average wage per employee, excluding severance, Detroit and CCN, increased 2.9% from 1994. Newsprint, ink and supplements costs increased by $110.9 million, or 33.0%, due to a nearly 40% increase in the average cost of newsprint, offset by a 0.2% decrease in newsprint consumption from the prior year. Depreciation and amortization increased $2.1 million, or 2.2%, due mostly to the acquisition of CCN. Other operating costs increased 8.6% from 1994, due primarily to strike-related costs in Detroit. NON-OPERATING ITEMS. Net interest expense increased $11.0 million, or 29.0%, from 1994, due primarily to higher debt levels. The average debt balance for the year increased $146.0 million from 1994, due largely to the $319.4 million repurchase of 11.5 million shares in 1995 and the $360 million acquisition of CCN in the fourth quarter of 1995. Equity in earnings of unconsolidated companies and joint ventures increased by $13.0 million during 1995 due to earnings improvements from our newsprint mill investments, which benefited from the rise in newsprint prices. The "Other, net" line of the non-operating section decreased $6.6 million from 1994, due to the reduction in the carrying value of certain investments. INCOME TAXES. The effective income tax rate from continuing operations for 1995 was 39.9%, down slightly from 40.1% in 1994. 20 OTHER. Net income in 1995 includes a one-time after-tax gain on the sale of the Journal of Commerce (JoC) of $53.8 million, or $.54 per share (diluted), and income from discontinued BIS operations, net of applicable taxes, of $3.7 million, or $.03 per share (diluted). In the first quarter of 1995, the company adopted Financial Accounting Standard (FAS) 116 -- Accounting for Contributions Received and Contributions Made. Under this standard, unconditional promises, including multiyear promises, are recognized in the period in which the promise is made. The adoption of FAS 116 resulted in a $7.3 million charge (net of tax) to operations, or $.07 per share (diluted), and was recorded as a cumulative effect adjustment. A Look Ahead As we look ahead, we expect another strong year in 1998. Advertising revenue on a pro forma basis will likely increase in the mid-single digits and newspaper profits will continue to grow, most notably in Detroit, where all the momentum is positive. The average price of newsprint for 1998 is expected to increase in the mid teens compared to 1997. This will be offset, in part, by improved earnings from our newsprint mill investments. The company expects to buy back close to 4 million common shares in the first part of 1998. After those purchases are completed, we plan to use our substantial free cash flow to reduce our debt level. IMPACT OF YEAR 2000. The Year 2000 issue results from computer programs using two digits rather than four to define the applicable year. Company computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure, disruption of operations, and/or a temporary inability to conduct normal business activities. Based on a recent assessment, the company currently believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems. If such modifications and conversions are not made, or are not completed in a timely way, the Year 2000 issue could have a material impact on operations. In addition, formal communications with all significant suppliers and customers have been initiated to determine the extent to which related interfaces with company systems are vulnerable if these third parties fail to remediate their own Year 2000 issues. There can be no assurance that these third-party systems will be converted on a timely basis and that they will not adversely affect the company's systems. The company will utilize both internal and external resources to complete and test Year 2000 modifications and expects to substantially complete this process no later than mid-1999. The total estimated cost of this project is in a range of $70 million to $80 million, funded through operating cash flows. Approximately 50% of the total will relate to purchased hardware and software, which will be capitalized. The remainder will be expensed as incurred. Through 1997, related costs incurred were not material. In certain cases, an expedited system replacement schedule will also bring enhanced functionality and should serve to reduce future capital requirements. Certain statements contained herein and in other sections of this report are forward-looking statements. These are based on management's current knowledge of factors affecting Knight Ridder's business. Actual results could differ materially from those currently anticipated. Investors are cautioned that such forward-looking statements involve risk and uncertainty, including, but not limited to, the effects of national and local economies on revenue, negotiations and relations with labor unions, unforeseen changes to newsprint prices, the effects of acquisitions and the evolution of the Internet. Significant Acquisitions and Divestitures In January 1997, the company and Tele-Communications, Inc., closed on the previously announced sale of the company's interest in all but one of their jointly owned cable investments. The remaining system, in Kentucky, accounts for a small portion of the original investment. That sale is expected to close later. The after-tax gain on the sale of TKR Cable was $128.3 million. The sale yielded net after-tax proceeds of $270 million. 21 On May 9, 1997, the company completed the acquisition of four newspapers indirectly owned by The Walt Disney Company for $1.65 billion. The acquisition was accomplished through the merger of a wholly owned subsidiary with and into Cypress Media, Inc., formerly known as ABC Media, Inc., the owner of the four newspapers. The newspapers are: The Kansas City Star, the Fort Worth Star- Telegram, the Belleville (Ill.) News-Democrat and The Times Leader in Wilkes- Barre, Pa. The four newspapers have combined daily and Sunday circulation of 635,000 and 898,000, respectively. On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., the Daily Camera, for two newspapers in California owned by the E.W. Scripps Co. On Nov. 14, 1997, the company completed the sale of Knight-Ridder Information, Inc., (KRII) to M.A.I.D plc for $420 million. The after-tax gain on the sale of KRII was $15.3 million. In December 1997, the company closed on the sale of four newspapers, the Long Beach Press-Telegram, the Boca Raton News, The (Milledgeville) Union-Recorder and the suburban Newberry (S.C.) Observer. The sale of these four newspapers resulted in an after-tax gain of $10.3 million. The sale of the Boca Raton, Milledgeville and Newberry newspapers to Community Newspaper Holdings, Inc., also included the transfer to the company of The Daily Sun and the Buyer's Guide, a shopper, in Warner Robins, Ga., and the Byron (Ga.) Gazette, a weekly newspaper, all of which are located in fast-growing suburbs in our Macon newspapers' market. The sale of a fifth newspaper, the Post-Tribune in Gary, Ind., to Hollinger International, Inc., closed on Feb. 2, 1998. Also in December 1997, the company announced the intended sale of Technimetrics, Inc., its global diversified information subsidiary. The results of Technimetrics have been reclassified as Discontinued BIS Operations, along with the rest of the former BIS segment. In July 1996, the company sold Knight-Ridder Financial (KRF) to Global Financial Information Corporation for $275 million. The after-tax gain on the sale of KRF was $86.3 million. In October 1995, the company acquired 100% of the outstanding shares of Lesher Communications, Inc. (Lesher), for $360 million. Lesher, based in Walnut Creek, Calif., publishes four daily newspapers in contiguous Contra Costa and eastern Alameda County markets in the East Bay area of Northern California. Lesher was renamed Contra Costa Newspapers, Inc. (CCN), in November 1995. In April 1995, the company sold the JoC to the Economist Group of London for $115 million. The after-tax gain on the sale of the JoC was $53.8 million. Capital Spending Program The company's capital spending program includes normal replacements, productivity improvements, capacity increases, building construction and expansion and printing press equipment. Over the past three years, capital expenditures have totaled $311.6 million for additions and improvements to properties, excluding the discontinued BIS operations. A large portion of the 1997 expenditures was for the Miami press project that began in 1995. The $108.0 million press expansion is expected to be completed in 1998. Another large component of 1997 expenditures was the $32.0 million renovation of the Philadelphia Broad Street facility that began in 1995 and the $27.2 million replacement of three presses at Akron. Both of these projects are expected to be completed in 1998. Also included in capital expenditures is an $11.5 million project (before insurance recoveries) for the replacement of the Grand Forks production plant and building that were destroyed by a flood in April 1997. 22 Quarterly Operations The company's largest source of revenue, retail advertising, is seasonal and tends to fluctuate with retail sales in markets served. Historically, retail advertising is higher in the second and fourth quarters. General advertising, while not as seasonal as retail, is lower during the summer months. Classified advertising revenue has in the past been a reflection of the overall economy and has not been significantly affected by seasonal trends. The following table summarizes the company's quarterly results of operations (in thousands, except per share data):
QUARTER --------------------------------------------------------------------------------- Description First Second Third Fourth ------------ ----------- ------------- ------------ 1997 Operating revenue ......................... $ 600,830 $ 711,598 $ 748,747 $ 815,610 Operating income .......................... 98,169 136,977 107,936 162,946 Income from continuing operations ......... 175,458(a) 60,950 73,467(b) 86,629(c) Net gain on sale of BIS operations 15,261(d) Income (loss) from BIS operations, net .... (726) 350 545 1,081 Net income ................................ 174,732 61,300 74,012 102,971 Earnings per share(1) Basic: Income from continuing operations ......... 1.88(a) 0.67 0.85(b) 1.04(c) Net gain on sale of BIS operations 0.18(d) Income from BIS operations, net 0.01 Net income ................................ 1.88 0.67 0.85 1.23 Diluted: Income from continuing operations ......... 1.85(a) 0.60 0.69(b) 0.84(c) Net gain on sale of BIS operations 0.15(d) Income from BIS operations, net 0.01 Net income ................................ 1.85 0.60 0.69 1.00 Dividends declared per common share ....... 0.20 0.20 0.20 0.20 1996 Operating revenue ......................... $ 570,756 $ 595,582 $ 576,887 $ 630,999 Operating income .......................... 49,639 78,647 73,948 130,899 Income from continuing operations ......... 22,994 41,481 39,340 81,565(f) Net gain (adjustment) on sale of BIS operations 90,901(e) (4,646)(e) Income (loss) from BIS operations, net .... 523 872 (3,984) (1,173) Net income ................................ 23,517 42,353 126,257 75,746 Earnings per share(1) Basic: Income from continuing operations ......... 0.23 0.42 0.41 0.87(f) Net gain (adjustment) on sale of BIS operations 0.96(e) (0.05)(e) Income (loss) from BIS operations, net .... 0.01 0.01 (0.04) (0.01) Net income ................................ 0.24 0.43 1.33 0.81 Diluted: Income from continuing operations ......... 0.23 0.42 0.41 0.86(f) Net gain (adjustment) on sale of BIS operations .............................. 0.94(e) (0.05)(e) Income (loss) from BIS operations, net .... 0.01 0.01 (0.04) (0.02) Net income ................................ 0.24 0.43 1.31 0.79 Dividends declared per common share ....... 0.18-1/2 0.20 0.20 (g)
23
Quarterly Operations (Continued) QUARTER --------------------------------------------------------------------------------- Description First Second Third Fourth ------------ ----------- ------------- ------------ 1995 Operating revenue ......................... $ 537,133 $ 565,726 $ 515,975 $ 631,348 Operating income .......................... 64,323 81,642 15,438 66,859 Income from continuing operations ......... 29,356 42,278 3,793 34,529 Net gain on sale of BIS operations ........ 53,765(h) Income (loss) from BIS operations, net .... 6,317 (1,923) 2,797 (3,530) Income before cumulative effect of change in accounting principle .......... 35,673 94,120 6,590 30,999 Cumulative effect of change in accounting principle for contributions ........................... (7,320) Net income ................................ 28,353 94,120 6,590 30,999 Earnings per share(1) Basic: Income from continuing operations ......... 0.28 0.43 0.04 0.36 Net gain on sale of BIS operations ........ 0.54(h) Income (loss) from BIS operations, net .... 0.06 (0.02) 0.03 (0.04) Income before cumulative effect of change in accounting principle .......... 0.34 0.95 0.07 0.32 Cumulative effect of change in accounting principle for contributions ........................... (0.07) Net income ................................ 0.27 0.95 0.07 0.32 Diluted: Income from continuing operations ......... 0.28 0.42 0.04 0.35 Net gain on sale of BIS operations ........ 0.54(h) Income (loss) from BIS operations, net .... 0.06 (0.02) 0.03 (0.03) Income before cumulative effect of change in accounting principle .......... 0.34 0.94 0.07 0.32 Cumulative effect of change in accounting principle for contributions ........................... (0.07) Net income ................................ 0.27 0.94 0.07 0.32 Dividends declared per common share ....... 0.18-1/2 0.18-1/2 0.18-1/2 0.18-1/2
(1) Amounts do not total to the annual earnings per share because each quarter and the year are calculated separately based on average outstanding shares (basic) and average outstanding and equivalent shares (diluted) during the periods. (a) Includes the after-tax gain of $128.3 million on the sale of TKR Cable ($1.38 per share, basic; $1.36 per share, diluted). (b) Includes the after-tax gain of $24.5 million on the Boulder, Colo., exchange ($.28 per share, basic; $.23 per share, diluted). (c) Includes the after-tax gain of $10.3 million on the sale of four newspapers ($.12 per share, basic; $.10 per share, diluted). (d) Gain on the sale of KRII. (e) Gain (adjustment) on the sale of KRF. (f) Includes the after-tax gain of $8.1 million on the sale of Netscape, net of adjustments in the carrying value of certain investments ($.09 per share, basic and diluted). (g) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997. The quarterly dividend previously paid in January was paid on Feb. 24, 1997, to shareholders of record as of the close of business on Feb. 12, 1997. (h) Gain on the sale of the Journal of Commerce. 24 Financial Position and Liquidity 1997 VS. 1996. The principal change in the company's financial position during 1997 was the acquisition of four newspapers indirectly owned by The Walt Disney Company for $1.65 billion. The transaction was financed through the issuance of $660 million of the company's convertible preferred stock and the assumption of $990 million of pre-existing debt. Also during 1997, the company authorized a common stock buyback program to repurchase in the open market a minimum of 15 million shares over 12 months. In 1997, 13.8 million shares were bought back. The company utilized proceeds from the sale of its cable investment in January 1997, its subsidiary Knight-Ridder Information, Inc., in November 1997 and four of its newspapers in December 1997 to fund the stock buyback program and pay down debt. In November 1997, the company issued $100 million of notes payable that mature in 2007 and $100 million of debentures maturing in 2027. The new debt was used to reduce commercial paper borrowings. The total-debt- to-total-capital ratio increased to 51.8%, from 42.1% in 1996. Standard & Poor's and Moody's downgraded the company's commercial paper and long-term bonds during the year. The downgrades resulted from the increased leverage associated with the Disney newspaper acquisition combined with the company's common stock repurchase program. Standard & Poor's and Moody's commercial paper rating went from A1+ and P1 to A1 and P2, respectively. Standard & Poor's and Moody's long-term bond ratings went from AA- and A to A and A3, respectively. During 1997, Duff & Phelps Credit Rating Co. began rating the company's commercial paper and long-term bonds. The commercial paper and long-term bonds were rated D1 and A, respectively. Average outstanding commercial paper during the year was $286.7 million, with a weighted-average interest rate of 5.6%. At year-end 1997, commercial paper outstanding was $30.0 million and aggregate unused credit lines were $612.3 million. During 1997, net cash provided by operating activities increased $5.2 million to $231.7 million. The increase was attributed to higher earnings, operating profits from the former Disney newspapers, and other changes in working capital. Cash and short-term investments were $160.3 million at the end of 1997, a $137.4 million increase from last year. The increased cash level will be used for stock repurchases in the first quarter of 1998. The ratio of current assets to current liabilities was 1.2:1 at year end vs. 1.0:1 at the end of 1996. The company's operations have historically generated strong positive cash flow, which, along with the company's commercial paper program, revolving credit lines and ability to issue public debt, has provided adequate liquidity to meet the company's short-term and long-term cash requirements, including requirements for acquisitions. 1996 VS. 1995. The principal change in the company's financial position during 1996 was the application of some KRF after-tax sale proceeds toward the repurchase of 6.2 million shares for $221.8 million and the reduction of debt by $193 million. The total-debt-to-total-capital ratio decreased to 42.1%, from 47.7% in 1995. Average outstanding commercial paper during the year was $495.0 million, with a weighted-average interest rate of 5.5%. During 1996, the company's revolving credit and term loan agreement, which backed up the commercial paper program, decreased from $800 million to $650 million. At year-end 1996, commercial paper outstanding was $366.5 million and aggregate unused credit lines were $283.5 million. During 1996, net cash provided by operating activities increased $114.0 million, to $226.5 million. The increase was attributed to higher earnings, reflecting the improvements in Detroit's and Philadelphia's operations and other changes in working capital. Cash and short-term investments were $22.9 million at the end of 1996, a $3.1 million decrease from 1995. The ratio of current assets to current liabilities was 1.0:1 at year end vs. 1.1:1 at the end of 1995. 1995 VS. 1994. The principal changes in the company's financial position during 1995 were an increase of $602.3 million of debt in connection with the $360 million CCN acquisition and the $319.4 million repurchase of 11.5 million shares of the company's common stock. In early 1995, the company sold the JoC for $115 million. The after-tax proceeds offset other debt increases. The total-debt-to-total-capital ratio increased to 47.7% in 1995, up from 25.2% in 1994. Average outstanding commercial paper during the year was $263.8 million, with a weighted-average interest rate of 5.9%. During 1995, the company's revolving credit and term loan agreement, which backs up the commercial paper program, was increased from $500 million to $800 million. At year-end 1995, commercial paper outstanding was $563.2 million and aggregate unused credit lines were $236.8 million. 25 In December 1995, the company issued $100 million principal amount of 6.3% senior notes due Dec. 15, 2005. During 1995, net cash provided by operating activities decreased $201.6 million to $112.6 million. After excluding the gain on the sale of JoC, the decrease was attributed to lower earnings as a result of the Detroit strike, newsprint price increases, severance costs and other changes in working capital. Cash and short-term investments were $26.0 million at the end of 1995, a $16.8 million increase from 1994. The ratio of current assets to current liabilities was 1.1:1 at year end vs. 1.0:1 at the end of 1994. Shareholders' equity reflected unrealized gains on investments, net of tax, of $42.9 million. This represents the unrealized gains on investments available for sale that are carried on the balance sheet at fair market value, with the unrealized gains (net of tax) reported as a separate component of shareholders' equity. Effect of Changing Prices The Consumer Price Index, a widely used measure of the impact of changing prices, has increased only moderately in recent years, up between 2% and 6% each year since 1990. Historically, when inflation was at higher levels, the impact on the company's operations was not significant. The principal effect of inflation on the company's operating results is to increase reported costs. Subject to normal competitive conditions, the company generally has demonstrated the ability to raise sales prices to offset these cost increases. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Quarterly Operations in Item 7 and Schedule II, Valuation and Qualifying Accounts CONSOLIDATED BALANCE SHEET (In thousands of dollars, Dec. 28 Dec. 29 Dec. 31 except share data) 1997 1996 1995 ----------- ----------- ----------- ASSETS Current Assets Cash, including short-term cash investments of $140,210 in 1997, $50 in 1996 and 1995 ................ $ 160,291 $ 22,880 $ 26,012 Accounts receivable, net of allowances of $14,963 in 1997, $12,685 in 1996 and $14,348 in 1995 .............. 374,746 356,079 339,264 Inventories .................... 50,332 42,941 73,349 Prepaid expense ................ 15,844 90,314 21,543 Other current assets ........... 39,902 53,513 42,754 ----------- ----------- ----------- Total Current Assets ..... 641,115 565,727 502,922 ----------- ----------- ----------- Investments and Other Assets Equity in unconsolidated companies and joint ventures ..................... 197,585 330,267 321,658 Net assets of discontinued BIS operations ............... 24,673 352,102 453,189 Other .......................... 172,859 132,425 222,593 ----------- ----------- ----------- Total Investments and Other Assets ........... 395,117 814,794 997,440 ----------- ----------- ----------- Property, Plant and Equipment Land and improvements .......... 89,375 77,526 77,617 Buildings and improvements ..... 444,952 387,509 384,314 Equipment ...................... 1,127,875 994,455 991,263 Construction and equipment installations in progress .... 111,883 110,590 55,845 ----------- ----------- ----------- 1,774,085 1,570,080 1,509,039 Less accumulated depreciation .. (727,571) (701,232) (667,210) ----------- ----------- ----------- Net Property, Plant and Equipment .............. 1,046,514 868,848 841,829 ----------- ----------- ----------- Excess of Cost Over Net Assets Acquired and Other Intangibles Less accumulated amortization of $197,966 in 1997, $150,491 in 1996 and $131,992 in 1995 ............. 2,272,396 611,538 624,130 ----------- ----------- ----------- Total .................... $ 4,355,142 $ 2,860,907 $ 2,966,321 =========== =========== =========== See "Notes to Consolidated Financial Statements." 27 CONSOLIDATED BALANCE SHEET (Continued) (In thousands of dollars, Dec. 28 Dec. 29 Dec. 31 except share data) 1997 1996 1995 ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable ................... $ 172,021 $ 223,962 $ 127,532 Accrued expenses and other liabilities ...................... 131,491 103,730 105,317 Accrued compensation and amounts withheld from employees ........................ 119,036 96,426 101,357 Federal and state income taxes ............................ 33,920 195 Deferred revenue ................... 72,491 70,452 72,134 Dividends payable .................. 17,978 Short-term borrowings and current portion of long- term debt ........................ 69,697 50,000 13,129 ---------- ---------- ---------- Total Current Liabilities ................ 598,656 544,570 437,642 ---------- ---------- ---------- Noncurrent Liabilities Long-term debt ..................... 1,599,133 771,335 1,000,721 Deferred federal and state income taxes ..................... 282,695 142,727 134,460 Postretirement benefits other than pensions .................... 150,485 158,811 169,057 Employment benefits and other noncurrent liabilities ........... 171,225 109,909 112,713 ---------- ---------- ---------- Total Noncurrent Liabilities ................ 2,203,538 1,182,782 1,416,951 ---------- ---------- ---------- Minority Interests in Consolidated Subsidiaries ............ 1,275 2,047 758 ---------- ---------- ---------- Commitments and Contingencies (Note I) Shareholders' Equity Preferred stock, $1.00 par value; shares authorized -- 2,000,000; shares issued -- 1,754,930 in 1997, and 0 in 1996 and 1995 .................... 1,755 Common stock, $.02-1/12 par value; shares authorized -- 250,000,000; shares issued -- 81,597,631 in 1997, 93,340,652 in 1996 and 97,196,308 in 1995 ........... 1,700 1,945 2,025 Additional capital ................. 911,572 308,320 295,360 Retained earnings .................. 636,646 819,572 770,643 Unrealized gains on investments ...................... 1,671 42,942 ---------- ---------- ---------- Total Shareholders' Equity ..................... 1,551,673 1,131,508 1,110,970 ---------- ---------- ---------- Total ........................ $4,355,142 $2,860,907 $2,966,321 ========== ========== ========== 28 CONSOLIDATED STATEMENT OF INCOME Year Ended ----------------------------------------- (In thousands of dollars, Dec. 28 Dec. 29 Dec. 31 except per share data) 1997 1996 1995 ----------- ----------- ----------- Operating Revenue Advertising Retail ....................... $ 1,008,736 $ 821,768 $ 807,758 General ...................... 246,096 198,797 182,516 Classified ................... 947,419 772,859 682,696 ----------- ----------- ----------- Total .................... 2,202,251 1,793,424 1,672,970 Circulation .................. 567,757 501,826 495,315 Other ........................ 106,777 78,974 81,897 ----------- ----------- ----------- Total Operating Revenue .. 2,876,785 2,374,224 2,250,182 ----------- ----------- ----------- Operating Costs Labor and employee benefits .... 1,132,227 967,069 969,476 Newsprint, ink and supplements .................. 466,329 472,207 446,841 Other operating costs .......... 615,470 481,168 506,862 Depreciation and amortization .. 156,731 120,647 98,741 ----------- ----------- ----------- Total Operating Costs .... 2,370,757 2,041,091 2,021,920 ----------- ----------- ----------- Operating Income ................. 506,028 333,133 228,262 ----------- ----------- ----------- Other Income (Expense) Interest expense ............... (102,662) (73,137) (59,512) Interest expense capitalized ... 5,376 6,397 1,889 Interest income ................ 3,404 6,488 8,576 Equity in earnings of unconsolidated companies and joint ventures ........... 10,800 29,868 20,661 Minority interests in earnings of consolidated subsidiaries ................. (11,503) (9,293) (8,809) Other, net (Note G) ............ 282,409 16,753 (8,250) ----------- ----------- ----------- Total .................... 187,824 (22,924) (45,445) ----------- ----------- ----------- Income before income taxes ....... 693,852 310,209 182,817 Income taxes ..................... 297,348 124,829 72,861 ----------- ----------- ----------- Income From Continuing Operations ....................... 396,504 185,380 109,956 Net gain on sale of discontinued BIS operations, net of applicable income taxes of $8,365 in 1997, $69,631 in 1996 and $38,933 in 1995 (Notes B and G) ........ 15,261 86,255 53,765 Income/(loss) from discontinued BIS operations, net of applicable income taxes of $1,119 in 1997, $4,305 in 1996 and $8,608 in 1995 (Note G) 1,250 (3,762) 3,661 ----------- ----------- ----------- Income Before Cumulative Effect of Change in Accounting Principle ........................ 413,015 267,873 167,382 Cumulative effect of change in accounting principle for contributions .................. (7,320) ----------- ----------- ----------- Net Income ............... $ 413,015 $ 267,873 $ 160,062 =========== =========== =========== 29 CONSOLIDATED STATEMENT OF INCOME (Continued) Year Ended ---------------------------------------- Dec. 28 Dec. 29 Dec. 31 1997 1996 1995 ----------- ----------- ----------- Earnings Per Share Basic: Income from continuing operations ................ $ 4.48 $ 1.93 $ 1.11 Net gain on sale of discontinued BIS operations (Notes B and G) .................... .17 .90 .54 Income/(loss) from discontinued BIS operations, net (Note G) .. .02 (.04) .03 ----------- ----------- ----------- Income before cumulative effect of change in accounting principle ...... 4.67 2.79 1.68 Cumulative effect of change in accounting principle for contributions ......... (.07) ----------- ----------- ----------- Net Income .............. $ 4.67 $ 2.79 $ 1.61 =========== =========== =========== Diluted: Income from continuing operations ................ $ 3.91 $ 1.90 $ 1.10 Net gain on sale of discontinued BIS operations (Notes B and G) .................... .15 .89 .54 Income/(loss) from discontinued BIS operations, net (Note G) .. .02 (.04) .03 ----------- ----------- ----------- Income before cumulative effect of change in accounting principle ...... 4.08 2.75 1.67 Cumulative effect of change in accounting principle for contributions ......... (.07) ----------- ----------- ----------- Net Income .............. $ 4.08 $ 2.75 $ 1.60 =========== =========== =========== Average Shares Outstanding (000s) Basic ......................... 88,475 96,021 99,451 =========== =========== =========== Diluted ....................... 101,314 97,420 100,196 =========== =========== =========== See "Notes to Consolidated Financial Statements." 30 CONSOLIDATED STATEMENT OF CASH FLOWS Year Ended -------------------------------------- Dec. 28 Dec. 29 Dec. 31 (In thousands of dollars) 1997 1996 1995 ---------- ---------- ---------- Cash Provided by (Required for) Operating Activities Net income ......................... $ 413,015 $ 267,873 $ 160,062 Noncash items deducted from (included in) income: Cumulative effect of change in accounting principle .................... 7,320 Gains on sales/exchanges of investee/ subsidiaries (Note G) ........ (283,126) Net gain on sale of discontinued BIS operations ................... (15,261) (86,255) (53,765) Depreciation ................... 94,138 86,976 75,197 Amortization of excess of cost over net assets acquired ..................... 47,475 18,500 11,504 Amortization of other assets ....................... 15,118 15,171 12,040 Provision (benefit) for deferred taxes ........................ (14,750) 40,647 (7,367) Earnings of investees in excess of distributions ...... (14,658) (21,293) (16,250) Minority interests in earnings of consolidated subsidiaries ................. 11,503 9,293 8,809 Other items, net ............... 38,656 (9,648) 34,996 Change in certain assets and liabilities: Accounts receivable .............. (33,853) (42,908) (18,620) Inventories ...................... (326) 30,474 (32,292) Other current assets ............. 380 (159,718) 2,227 Accounts payable ................. (83,969) 86,251 (19,235) Federal and state income taxes .......................... 9,623 972 (55,078) Other liabilities ................ 47,724 (9,826) 3,006 --------- --------- --------- Net Cash Provided by Operating Activities ........ 231,689 226,509 112,554 --------- --------- --------- Cash Provided by (Required for) Investing Activities Proceeds from sale of investee, net (Note G) ........... 130,654 Proceeds from sale of subsidiaries, net (Note G) ....... 50,491 Proceeds from sale of discontinued BIS operations, net (Note G) ......... 416,983 271,859 114,907 Change in net noncurrent assets of discontinued BIS operations ....................... 1,996 4,249 4,523 Acquisition of Contra Costa Newspapers, Inc. (Note G) ........ (335,755) Proceeds from sales of securities available for sale ............................. 241,894 Additions to property, plant and equipment .................... (106,614) (112,896) (92,086) Other items, net ................... (8,165) 45,142 (46,081) --------- --------- --------- Net Cash Provided by (Required for) Investing Activities ........ 727,239 208,354 (354,492) --------- --------- --------- 31 CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) Year Ended ---------------------------------------- Dec. 28 Dec. 29 Dec. 31 (In thousands of dollars) 1997 1996 1995 ---------- ---------- ---------- Cash Provided by (Required for) Financing Activities Proceeds from sale of commercial paper, notes payable and senior notes payable ....................... 833,600 601,010 1,092,620 Reduction of total debt ......... (976,611) (793,525) (490,274) ---------- ---------- ---------- Net Change in Total Debt ... (143,011) (192,515) 602,346 Payment of cash dividends ....... (78,335) (74,262) (74,377) Sale of common stock to employees ..................... 70,531 72,202 75,437 Purchase of treasury stock ...... (643,375) (221,768) (319,363) Other items, net ................ (27,327) (21,652) (25,346) ---------- ---------- ---------- Net Cash Provided by (Required for) Financing Activities ..... (821,517) (437,995) 258,697 ---------- ---------- ---------- Net Increase (Decrease) in Cash ..... 137,411 (3,132) 16,759 Cash and short-term cash investments at beginning of the year ........................ 22,880 26,012 9,253 ---------- ---------- ---------- Cash and short-term cash investments at end of the year ............................ $ 160,291 $ 22,880 $ 26,012 ========== ========== ========== Supplemental Cash Flow Information Noncash investing activities (Note G) Securities received as proceeds on the sale of investee .................... $ 229,163 Noncash financing activities (Note G) Issuance of preferred stock for the acquisition of the Disney newspapers Preferred stock ........... 1,755 Additional capital ........ 658,245 Long-term debt assumed on the acquisition of the Disney newspapers ........... 990,000 See "Notes to Consolidated Financial Statements." 32
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY Preferred Common (In thousands of dollars, except Shares Shares Preferred Common Additional Retained Treasury share data) Outstanding Outstanding Stock Stock Capital Earnings Stock ----------- ----------- --------- ------- ---------- --------- ---------- Balance at Dec. 25, 1994 ........ -- 105,785,440 $ -- $ 2,204 $ 326,392 $ 896,058 $ -- Issuance of common shares under stock option plans .... 152,150 2 3,429 Issuance of treasury shares under stock option plans .... 2,167,760 (9,712) (62,712) Issuance of treasury shares under stock purchase plan ... 599,558 (2,407) (16,925) Purchase of treasury shares ... (11,508,600) 319,363 Retirement of 8,741,282 treasury shares.............. (181) (26,830) (212,715) (239,726) Tax benefits arising from employee stock plans ........ 4,488 Unrealized gains on investments ................. 42,942 Net income .................... 160,062 Cash dividends declared on common stock -- $.74 per share ....................... (72,762) --------- ---------- --------- ------- --------- --------- --------- Balance at Dec. 31, 1995 ........ -- 97,196,308 $ -- $ 2,025 $ 295,360 $ 813,585 $ -- Issuance of common shares under stock option plans .... 1,040,938 22 26,589 (11) Issuance of common shares under stock purchase plan ... 126,808 3 3,724 (1) Issuance of treasury shares under stock option plans .... 868,752 (7,661) (30,783) Issuance of treasury shares under stock purchase plan ... 326,946 (1,278) (11,645) Purchase of treasury shares ... (6,219,100) 221,768 Retirement of 5,023,402 treasury shares ............. (105) (16,586) (162,649) (179,340) Expenses related to capital transactions ................ (203) Tax benefits arising from employee stock plans ........ 8,375 Reductions in unrealized gains on investments .............. (41,271) Net income .................... 267,873 Cash dividends declared on common stock -- $.58-1/2 per share(1) ................ (56,283) --------- ---------- --------- ------- --------- --------- --------- Balance at Dec. 29, 1996 ........ -- 93,340,652 $ -- $ 1,945 $ 308,320 $ 821,243 $ -- Issuance of common shares under stock option plans .... 89,318 2 2,395 Issuance of treasury shares under stock option plans .... 1,604,447 (28,149) (70,785) Issuance of treasury shares under stock purchase plan ... 387,514 (2,222) (17,218) Issuance of convertible preferred shares ............ 1,754,930 1,755 658,245 Purchase of treasury shares ... (13,824,300) 643,375 Retirement of 11,832,339 treasury shares ............. (247) (37,519) (517,606) (555,372) Tax benefits arising from employee stock plans ........ 10,502 Reductions in unrealized gains on investments .............. (1,671) Net income .................... 413,015 Cash dividends declared on common stock -- $.80 per share ....................... (78,335) --------- ---------- --------- ------- --------- --------- --------- Balance at Dec. 28, 1997 ........ 1,754,930 81,597,631 $ 1,755 $ 1,700 $ 911,572 $ 636,646 $ -- ========= ========== ========= ======= ========= ========= ========= (1) The Board of Directors declared a $.20 per share dividend on Jan. 28, 1997. The quarterly dividend previously paid in January was paid on Feb. 24, 1997, to shareholders of record as of the close of business on Feb. 12, 1997. See "Notes to Consolidated Financial Statements." 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Knight Ridder is the nation's second-largest newspaper publisher in terms of circulation and revenue, with products in print and online. The company publishes 31 daily newspapers in 28 U.S. markets, reaching 9.0 million readers daily and 12.6 million on Sunday. It maintains 34 associated Web sites and has investments in two newsprint mills. The company reports on a fiscal year, ending the last Sunday in the calendar year. Results for 1997 and 1996 are for the 52 weeks ended Dec. 28 and Dec. 29, respectively, and results for 1995 are for the 53 weeks ended Dec. 31. The BASIS OF CONSOLIDATION is to include in the consolidated financial statements all the accounts of Knight Ridder and its more-than-50%-owned subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The company is a 50% partner in the DETROIT NEWSPAPER AGENCY (DNA), a joint operating agency between Detroit Free Press, Inc., a wholly owned subsidiary of Knight Ridder, and The Detroit News, Inc., a wholly owned subsidiary of Gannett Co., Inc. In 1989, business operations of the Free Press and The Detroit News were transferred to the DNA. Under the joint operating agreement that expires in the year 2089, as of Dec. 26, 1994, profits are split equally between the partners. The Consolidated Statement of Income includes, on a line-by-line basis, the company's pro rata share of the revenue and expense generated by the operation of the agency. INVESTMENTS in companies in which Knight Ridder has an equity interest of at least 20% but not more than 50% are accounted for under the equity method. Under this method, the company records its share of earnings as income and increases the investment by the equivalent amount. Dividends are recorded as a reduction in the investment. The investment caption "EQUITY IN UNCONSOLIDATED COMPANIES AND JOINT VENTURES" in the Consolidated Balance Sheet represents the company's equity in the net assets of DNA; the Seattle Times Company and subsidiaries; Newspapers First, a company responsible for the sales and servicing of general, retail and classified advertising accounts for a group of newspapers; Southeast Paper Manufacturing Co. and Ponderay Newsprint Company, two newsprint mill partnerships; TKR Cable Company and TKR Cable Partners, cable television joint ventures (all but one of the cable companies jointly owned with TeleCommunications, Inc. (TCI), were sold in January 1997); InfiNet, a joint venture that allows newspapers to offer Internet access to subscribers; Destination Florida, a company that provided online travel information services (ceased operation in 1997); and Interealty (formerly known as PRC Realty Systems, Inc.), a software system producer for the real estate industry. The company owns 49-1/2% of the voting common stock and 65% of the nonvoting common stock of the SEATTLE TIMES COMPANY, owns 32% of the voting stock of NEWSPAPERS FIRST, is a one-third partner in the SOUTHEAST PAPER MANUFACTURING CO., and owns a 13-1/2% equity share of PONDERAY NEWSPRINT COMPANY. The company is a one-third partner in INFINET and owns a 25% interest in INTEREALTY. The investment in unconsolidated companies and joint ventures at Dec. 28, 1997, includes $171.0 million representing the company's share of undistributed earnings (excluding the DNA) accumulated since the investment dates. The company's share of the earnings of the unconsolidated companies (except for the DNA) of $10.8 million in 1997, $29.9 million in 1996 and $20.7 million in 1995 is included in the caption "EQUITY IN EARNINGS OF UNCONSOLIDATED COMPANIES AND JOINT VENTURES" in the Consolidated Statement of Income. Dividends and cash distributions received from the unconsolidated companies and joint ventures (excluding the DNA) were $3.1 million in 1997, $18.6 million in 1996 and $3.2 million in 1995 and were offset against the investment account. FORT WAYNE NEWSPAPERS, INC. is the only consolidated subsidiary that has a minority ownership interest. The minority shareholders' interest in the net income of this subsidiary has been reflected as an expense in the Consolidated Statement of Income in the caption "MINORITY INTERESTS IN EARNINGS OF CONSOLIDATED SUBSIDIARIES." Also included in this caption is a contractual minority interest resulting from a JOA that runs through the year 2021 between The Miami Herald Publishing Company and Cox Newspapers, Inc., covering the publication of The Herald and The Miami News, which ceased publication in 1988. The company's liability to the minority interest shareholders is included in the Consolidated Balance Sheet caption, "MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES." 34 "CASH AND SHORT-TERM CASH INVESTMENTS" includes currency and checks on hand, demand deposits at commercial banks, overnight repurchase agreements of government securities and investment-grade commercial paper with maturities of 90 days or less. Cash and short-term investments are recorded at cost. Due to the short-term nature of marketable securities, cost approximates market value. The majority of the company's "ACCOUNTS RECEIVABLE" as of Dec. 28, 1997, Dec. 29, 1996, and Dec. 31, 1995, are from advertisers, newspaper subscribers and information users. Credit is extended based on the evaluation of the customer's financial condition, and generally collateral is not required. Credit losses are provided for in the financial statements and consistently have been within management's expectations. "INVENTORIES" are priced at the lower of cost (first-in, first-out FIFO method) or market. Most of the inventory is newsprint, ink and other supplies used in printing newspapers. "OTHER ASSETS" includes investments in companies in which Knight Ridder owns less than a 20% interest. These investments are reviewed for appropriate classification at the time of purchase and re-evaluated as of each balance sheet date. Investments available for sale are carried on the balance sheet at fair market value, with the unrealized gains/losses (net of tax) reported as a separate component of shareholders' equity. Unrealized gains (net of tax) were zero at Dec. 28, 1997, $1.7 million at Dec. 29, 1996, and $42.9 million at Dec. 31, 1995. Upon the sale of an investment, the gain/loss is calculated based on the original cost, less the proceeds from the sale. Investments are classified as "held-to-maturity" when the company has the positive intent and ability to hold the investment to maturity. "PROPERTY, PLANT AND EQUIPMENT" is recorded at cost, and the provision for depreciation for financial statement purposes is computed principally by the straight-line method over the estimated useful lives of the assets. "EXCESS OF COST OVER NET ASSETS ACQUIRED AND OTHER INTANGIBLES" includes the unamortized excess of cost over the fair market value on the purchase of at least a 50% interest in a company's net tangible and intangible assets arising from these acquisitions. The excess of cost over net assets acquired and intangible assets from acquisitions accounted for as purchases and occurring subsequent to Oct. 31, 1970, totaled, at Dec. 28, 1997, approximately $2.5 billion, including $390.9 million of intangible assets. The excess of cost over net assets acquired is being amortized over a 40-year period on a straight-line basis, unless management concludes a shorter term is more appropriate. Other intangibles acquired through acquisitions, consist of trademarks, subscriber and advertiser lists and mastheads which are being amortized on a straight-line basis over periods ranging from 5 to 40 years, with a weighted-average life of 26.5 years. If, in the opinion of management, an impairment in value occurs, based on the undiscounted cash flow method, any necessary additional write-downs will be charged to expense. "DEFERRED REVENUE" arises as a normal part of business from advance subscription payments for newspapers. Revenue is recognized in the period in which it is earned. "SHORT-TERM BORROWINGS AND CURRENT PORTION OF LONG TERM DEBT" includes the carrying amounts of commercial paper and other short-term borrowings with original maturities of less than one year, and the portion of long-term debt payable within twelve months. The carrying amounts of short-term borrowings approximate fair value. "LONG-TERM DEBT" represents the carrying amounts of debentures, notes payable and other indebtedness with maturities longer than one year. Fair values, disclosed in Note C, are estimated using discounted cash flow analyses based on the company's current incremental borrowing rates for similar types of borrowing arrangements. In the first quarter of 1995, the company adopted FAS 116 -- ACCOUNTING FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE. Under FAS 116, unconditional promises, including multiyear promises, are recognized in the period the promise is made. The adoption of FAS 116 resulted in a $7.3 million charge (net of tax) to operations, or $.07 per share, and was recorded as a cumulative effect adjustment. 35 In 1996, the company adopted FAS 121 -- ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. FAS 121 requires impairment losses to be recorded on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The adoption of FAS 121 did not materially impact the financial statements. Also in 1996, the company implemented FAS 123 -- ACCOUNTING FOR STOCK-BASED COMPENSATION. Under this statement, the company accounts for stock-based compensation plans under the provisions of APB 25 -- Accounting for Stock Issued to Employees, and discloses the general and pro forma financial information required by FAS 123 (see Note E). In 1997, the company adopted FAS 128 -- EARNINGS PER SHARE (EPS). FAS 128 replaced the calculation of primary and fully diluted EPS with basic and diluted EPS. Unlike primary EPS, basic EPS will typically be higher than primary EPS due to the exclusion of any dilutive effects of options, warrants and convertible securities from the calculation. Diluted EPS is very similar to the previously reported fully diluted EPS. All EPS amounts for all periods presented have been restated where appropriate, to conform to the FAS 128 requirements. "BASIC EARNINGS PER SHARE" is computed by dividing net income by the weighted-average number of common shares outstanding. "DILUTED EARNINGS PER SHARE" is computed by dividing net income by the weighted-average number of common and common equivalent shares outstanding. Quarterly earnings per share may not add to the total for the year, since each quarter and the year are calculated separately based on average outstanding shares during the period. In 1997, the company also adopted FAS 129 -- DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. FAS 129 establishes standards for disclosing information about an entity's capital structure. The adoption of this statement did not result in additional required disclosures. FAS 130 -- REPORTING COMPREHENSIVE INCOME and FAS 131 -- DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION are effective beginning in 1998. FAS 130 establishes standards for reporting and displaying comprehensive income, while FAS 131 abandons the "industry segment approach" in favor of the "management approach" for disclosure purposes. Adoption of FAS 130 is not expected to result in a significant change from the current required disclosures and the adoption of FAS 131 is not expected to result in additional disclosures. USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain amounts in 1996 and 1995 have been reclassified to conform to the 1997 presentation. B. INCOME TAXES The company's income tax expense is determined under the liability method, which requires adjusting previously deferred taxes for changes in tax rates. Substantially all of the company's earnings are subject to domestic taxation. No material foreign income taxes have been imposed on reported earnings. Federal, state and local income taxes consist of the following (in thousands):
1997 1996 1995 ------------------------ ------------------------ ------------------------- Current Deferred Current Deferred Current Deferred --------- --------- --------- --------- --------- ---------- Federal income taxes ................... $ 286,645 $ (33,176) $ 127,610 $ 28,075 $ 100,568 $(10,128) State and local income taxes ........... 64,519 (11,156) 29,913 13,167 26,721 3,241 --------- --------- --------- -------- --------- --------- Total ................................ $ 351,164 $ (44,332) $ 157,523 $ 41,242 $ 127,289 $ (6,887) ========= ========= ========= ======== ========= ======== Provision for: Continuing operations ................ $ 312,098 $ (14,750) $ 84,182 $ 40,647 $ 80,228 $ (7,367) Discontinued operations .............. 39,066 (29,582) 73,341 595 47,061 480 --------- --------- --------- -------- --------- --------- Total .............................. $ 351,164 $ (44,332) $ 157,523 $ 41,242 $ 127,289 $ (6,887) ========= ========= ========= ======== ========= ========
36 Cash payments of income taxes for the years 1997, 1996 and 1995 were $278.5 million, $147.2 million and $130.1 million, respectively. Payments in 1997, 1996 and 1995 include the tax impact resulting from one-time gains. The 1997 payment included the tax impact from the sale of our cable investment, Knight- Ridder Information, Inc., and our newspaper in Long Beach, Calif., as well as the Boulder exchange. Payments in 1996 and 1995 included the tax impact from the sale of Knight-Ridder Financial and the Journal of Commerce, respectively. Effective Income Tax Rates The differences between income tax expense for continuing operations shown in the financial statements and the amounts determined by applying the federal statutory rate of 35% in each year are as follows (in thousands): 1997 1996 1995 --------- --------- -------- Federal statutory income tax ......... $ 242,848 $ 108,573 $ 63,986 State and local income taxes, net of federal benefit .................... 34,300 13,612 11,421 Statutory rate applied to nondeductible amortization of the excess of cost over net assets acquired ........................... 13,482 2,781 2,712 Other items, net ..................... 6,718 (137) (5,258) --------- --------- --------- Total .............................. $ 297,348 $ 124,829 $ 72,861 ========= ========= ========= The deferred tax asset and liability at the fiscal year end consist of the following components (in thousands): 1997 1996 1995 --------- --------- --------- Deferred Tax Assets Postretirement benefits other than pensions (including amounts relating to partnerships in which the company participates) ...................... $ 88,016 $ 95,764 $ 85,789 Compensation and benefit accruals .... (15,855) (6,802) 21,768 Accrued interest ..................... 8,165 10,576 8,073 Other nondeductible accruals ......... 51,651 43,594 30,068 --------- --------- --------- Gross deferred tax assets .......... $ 131,977 $ 143,132 $ 145,698 ========= ========= ========= Deferred Tax Liability Depreciation and amortization ........ $ 341,872 $ 196,116 $ 154,242 Equity in partnerships and investees . 46,845 73,499 52,708 Unrealized appreciation in equity securities ......................... 1,210 33,478 Research and experimental expenditures 10,964 12,232 Other ................................ 4,010 11,066 31,924 --------- --------- --------- Gross deferred tax liability ....... $ 392,727 $ 292,855 $ 284,584 --------- --------- --------- Net deferred tax liability ......... $ 260,750 $ 149,723 $ 138,886 ========= ========= ========= The components of deferred taxes included in the Consolidated Balance Sheet are as follows (in thousands): 1997 1996 1995 --------- --------- --------- Current asset ........................ $ 23,445 $ 24,296 $ 26,160 Noncurrent liability ................. 282,695 142,727 134,460 Discontinued BIS operations - net liability .......................... 1,500 31,292 30,586 --------- --------- --------- Net deferred tax liability ......... $ 260,750 $ 149,723 $ 138,886 ========= ========= ========= 37 C. DEBT Debt consisted of the following (in thousands):
Dec. 28 Dec. 29 Dec. 31 1997 1996 1995 ----------- --------- ----------- Commercial paper due at various dates through March 25, 1998, at an effective interest rate of 5.6% as of Dec. 28, 1997. Amounts are net of unamortized discounts of $207 in 1997, $1,683 in 1996 and $5,502 in 1995(a) ....... $ 29,793 $ 364,817 $ 557,698 Senior secured bank debt due on Sept. 15, 1999, advanced under a $1.2 billion credit agreement with a variable interest rate indexed to LIBOR plus 27 1/2 basis points(b) ......... 990,000 Debentures due on April 15, 2009, bearing interest at 9.875%, net of unamortized discount of $1,867 in 1997, $2,032 in 1996 and $2,211 in 1995 ....................................... 198,133 197,968 197,789 Debentures due on Nov. 1, 2027, bearing interest at 7.15%, net of unamortized discount of $5,739 in 1997 ....................................... 94,261 Notes payable, bearing interest at 8.5%, subject to mandatory pro rata amortization of 25% annually commencing Sept. 1, 1998, through maturity on Sept. 1, 2001, net of unamortized discount of $383 in 1997, $555 in 1996 and $726 in 1995 ........ 159,617 159,445 159,274 Notes payable due on Nov. 1, 2007, bearing interest at 6.625%, net of unamortized discount of $2,179 in 1997 ....................................... 97,821 Senior notes payable due on Dec. 15, 2005, bearing interest at 6.3%, net of unamortized discount of $795 in 1997, $895 in 1996 and $911 in 1995 ........ 99,205 99,105 99,089 ----------- --------- ----------- 1,668,830 821,335 1,013,850 Less amounts payable in one year(c) .......... 69,697 50,000 13,129 ----------- --------- ----------- Total long-term debt ..................... $ 1,599,133 $ 771,335 $ 1,000,721 =========== ========= ===========
(a) Commercial paper is supported by $642.3 million of revolving credit and term loan agreements, $400 million of which matures on Oct. 25, 2001, and $242.3 million of which matures on Oct. 23, 1998. (b) Senior secured bank debt is collateralized by all personal property assets and four recorded first mortgages of Cypress Media, Inc., a wholly owned subsidiary. (c) In 1997, this represents $39.9 million for the 8.5% note payable due on Sept. 1, 1998, and $29.8 million of commercial paper due within the next 12 months and which management does not intend to refinance. Interest payments during 1997, 1996 and 1995 were $87.2 million, $70.9 million and $45.4 million, respectively. 38 The following table presents the approximate annual maturities of debt for the years after 1997 (in thousands): 1998 ..................................... $ 69,697 1999 ..................................... 1,029,904 2000 ..................................... 39,904 2001 ..................................... 39,904 2002 2003 and thereafter ...................... 489,421 ----------- Total .................................. $ 1,668,830 =========== The carrying amounts and fair values of debt as of Dec. 28, 1997, are as follows (in thousands): Carrying Fair Amount Value ----------- ----------- Commercial paper ..................... $ 29,793 $ 29,793 Senior secured bank debt ............. 990,000 990,000 9.875% Debentures .................... 198,133 249,878 7.15% Debentures ..................... 94,261 102,234 8.5% Notes payable ................... 159,617 171,775 6.625% Notes payable ................. 97,821 100,598 6.3% Senior notes payable ............ 99,205 99,013 ----------- ----------- Total .............................. $ 1,668,830 $ 1,743,291 =========== =========== D. UNCONSOLIDATED COMPANIES AND JOINT VENTURES Summary financial information for the company's unconsolidated companies and joint ventures that are accounted for under the equity method is as follows (in thousands):
1997 1996 1995 ---------- ---------- ---------- Current assets ................................ $ 212,939 $ 258,037 $ 274,815 Property, plant and equipment and other assets ................................ 1,158,224 4,076,604 3,671,364 Current liabilities ........................... 143,683 287,782 323,199 Long-term debt and other noncurrent liabilities ................................. 394,253 2,893,716 2,572,060 Net sales ..................................... 806,587 1,417,668 1,248,694 Gross profit .................................. 124,650 449,383 376,545 Net income .................................... 24,428 55,104 6,517 Company's share of: Net assets .................................. 197,585 330,267 321,658 Net income .................................. 10,800 29,868 20,661
In 1989, the Detroit Free Press and The Detroit News began operating under a joint operating agreement as the Detroit Newspaper Agency (DNA). Balance sheet amounts for the DNA at Dec. 28, 1997, Dec. 29, 1996, and Dec. 31, 1995, are included above, and the net assets contributed to the DNA are included in "Equity in unconsolidated companies and joint ventures" in the Consolidated Balance Sheet. In January 1997, the company and Tele-Communications, Inc. closed on the sale of the company's interest in all but one of their jointly owned cable investments. See Note G. E. CAPITAL STOCK In 1991, shareholders authorized 2 million shares of Series B preferred stock for future issuance (which is convertible into 20 million shares of common stock). 39 In 1997, the Board of Directors authorized 1,758,242 of Series B preferred stock, $1.00 par value per share, for issuance in connection with the acquisition of four newspapers that were indirectly owned by The Walt Disney Company on May 9, 1997. The Series B preferred stock is convertible into 10 shares of common stock. If and when dividends and other distributions are declared by the Board of Directors, holders of the Series B preferred stock shall be entitled to receive the dividends or other distribution paid on the number of shares of the corporation's common stock into which such share of this series is convertible. Each holder of this series is entitled to vote with respect to all matters upon which holders of the corporation's common stock are entitled to vote. On June 21, 1996, the Board of Directors declared a two-for-one stock split in the form of a 100% common stock dividend that was payable on July 31, 1996, to shareholders of record on July 10, 1996. The financial statements have been restated to give retroactive recognition to the stock split in prior periods by reclassifying from retained earnings to common stock the par value of the additional shares arising from the split. In addition, all references in the financial statements to number of shares and per share amounts have been restated. Concurrent with the stock split, the company executed a rights agreement to replace a similar agreement that expired on July 10, 1996. The agreement grants each holder of a common share a right, under certain conditions, to purchase from the company a unit consisting of one one-hundredth of a share of preferred stock, at a price of $150, subject to adjustment. The rights provide that in the event the company is a surviving corporation in a merger, each holder of a right will be entitled to receive, upon exercise, common shares having a value equal to two times the exercise price of the right. In the event the company engages in a merger or other business combination transaction in which the company is not the surviving corporation, the rights agreement provides that proper provision shall be made so that each holder of a right will be entitled to receive, upon the exercise thereof at the then-current exercise price of the right, common stock of the acquiring company having a value equal to two times the exercise price of the right. No rights certificates will be distributed until 10 days following a public announcement that a person or group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the company's outstanding common stock, or 10 business days following the commencement of a tender offer or exchange offer for 20% or more of the company's outstanding stock. Until such time, the rights are evidenced by the common share certificates of the company. The rights are not exercisable until distributed and will expire on July 10, 2006, unless earlier redeemed or exchanged by the company. The company has the option to redeem the rights in whole, but not in part, at a price of $.01 per right subject to adjustment. The company's Board of Directors has reserved for issuance upon exercise of the rights 1,500,000 preferred shares. The Employees Stock Purchase Plan provides for the sale of common stock to employees of the company and its subsidiaries at a price equal to 85% of the market value at the end of each purchase period. Participants under the plan received 387,514 shares in 1997, 453,754 shares in 1996 and 599,558 shares in 1995. The purchase price of shares issued in 1997 under this plan ranged between $34.00 and $43.46, and the market value on the purchase dates of such shares ranged from $40.00 to $51.13. The Employee Stock Option Plans provide for the issuance of nonqualified stock options and incentive stock options. Options are issued at prices not less than market value at date of grant and until 1994 were exercisable at issue date. Options granted after March 1994 are exercisable in three equal installments vesting over a three-year period from the date of grant. There is no expiration date for the granting of options, but options must expire no later than 10 years from the date of grant. The option plan provides for the discretionary grant of stock appreciation rights (SARs) in tandem with previously granted options, which allow a holder to receive in cash, stock or combinations thereof the difference between the exercise price and the fair market value of the stock at date of exercise. Proceeds from the issuance of shares under these plans are included in shareholders' equity and do not affect income. 40 Transactions under the Employee Stock Option Plans are summarized as follows: Weighted- Average Number of Exercise Price Shares Per Share ----------- --------------- Outstanding Dec. 25, 1994 ....................... 8,646,724 $ 25.68 Exercised ......................... (2,319,910) 24.21 Expired Forfeited ......................... (24,800) 26.24 Granted ........................... 1,345,300 32.16 Outstanding Dec. 31, 1995 ....................... 7,647,314 27.26 Exercised ......................... (1,909,690) 25.95 Expired ........................... (8,650) 29.54 Forfeited ......................... (148,579) 28.70 Granted ........................... 1,324,450 39.25 Outstanding Dec. 29, 1996 ....................... 6,904,845 29.89 Exercised ......................... (1,693,765) 26.54 Expired ........................... (340,341) 29.00 Forfeited ......................... (25,873) 32.55 Granted ........................... 1,412,668 51.65 Outstanding Dec. 28, 1997 ....................... 6,257,534 35.74 In 1997, the company established a long-term incentive plan. The plan rewards participants whose leadership helps the company reach levels of total shareholder return, as defined. The plan covers a single three year performance period from Jan. 1, 1997 through Dec. 31, 1999. Participants received an initial grant of 252,406 shares of restricted Knight Ridder common stock. The initial grant of common stock was restricted as the vesting of these shares is triggered upon the occurrence of certain performance goals. In 1997, the company established a compensation plan for nonemployee directors. The purpose of the plan is to attract and retain the services of qualified individuals who are not employees of the company to serve as members of the Board of Directors. Part of the compensation plan includes the issuance of stock options. Options vest in three equal installments over a three-year period and expire no later than 10 years from the date of grant. In 1997, 26,000 options were granted. At Dec. 28, 1997, shares of the company's authorized but unissued common stock were reserved for issuance as follows: Shares --------- Employee Stock Option Plans ................ 2,176,761 Employees Stock Purchase Plan .............. 1,421,106 Nonemployee Directors Stock Option Plan ..................................... 174,000 --------- Total .................................... 3,771,867 ========= As required by FAS 123, pro forma information regarding net income and earnings per share has been determined as if the company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free rates of 5.7%, 6.1% and 5.5%; dividend yields of 1.6%, 2.0% and 2.5%; volatility factors of the expected market price of the company's common stock of 0.14, 0.16 and 0.17; and a weighted-average expected life of the option of 6.4, 6.5 and 6.5 years. The weighted-average fair values of the stock options for 1997, 1996 and 1995 were $12.44, $9.65 and $6.94, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the company's employee stock options have characteristics significantly different from those traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management's opinion, do not necessarily provide a reliable single measure of the fair value of its employee stock options. 41 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. In addition, the 15% discount in market value under the Employees Stock Purchase Plan is treated as compensation expense for pro forma purposes. The company's 1997, 1996 and 1995 pro forma information follows (in thousands, except for earnings per share information): 1997 1996 1995 --------- --------- --------- Net income .......................... $ 407,274 $ 264,600 $ 158,461 Basic earnings per share ............ 4.60 2.76 1.59 Diluted earnings per share .......... 4.02 2.72 1.58 The pro forma effect on net income is not necessarily representative of the effect in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1995. The exercise price of options outstanding at Dec. 28, 1997, ranged between $22.66 and $52.78. The weighted-average remaining contractual life of those options for 1997, 1996 and 1995 is 6.4, 7.3 and 7.1 years, respectively. 3,643,950, 4,305,845 and 5,323,930 options were exercisable at the end of 1997, 1996 and 1995, respectively. In 1997, the company adopted FAS 128 -- EARNINGS PER SHARE (EPS). EPS amounts for all periods presented have been restated as appropriate to conform to the FAS 128 requirements. In 1997, the Series B preferred stock, which is convertible into 10 shares of common stock, and stock options are included in the diluted EPS calculation, but excluded from the basic EPS calculation. The 1997 diluted EPS calculation includes 10,931,741 weighted-average shares of Series B preferred stock and 1,906,912 weighted-average stock options. In 1996 and earlier, the only difference between the basic and diluted EPS calculations is the dilutive impact of options that are included in the diluted EPS calculation. F. RETIREMENT PLANS The company and its subsidiaries maintain several company-administered noncontributory defined benefit plans covering most nonunion employees. Benefits are based on years of service and compensation or stated amounts for each year of service. The company's funding policy for defined benefit plans is to contribute annually not less than the ERISA minimum funding standards nor more than the maximum amount which can be deducted for federal income tax purposes. The company also contributes to certain multi-employer union defined benefit plans, company-administered and jointly administered negotiated plans covering union employees. The funding policy for these plans is to make annual contributions in accordance with applicable agreements. The company also sponsors certain defined contribution plans established pursuant to Section 401(k) of the Internal Revenue Code. Subject to certain dollar limits, employees may contribute a percentage of their salaries to these plans, and the company will match a portion of the employees' contributions. A summary of the components of net periodic pension cost for the defined benefit plans (both company-administered non-negotiated and single-employer negotiated plans) is presented here, along with the total amounts charged to pension expense for multi-employer union defined benefit plans, defined contribution plans and other agreements (in thousands): 1997 1996 1995 --------- --------- --------- Defined benefit plans: Service cost ....................... $ 30,116 $ 28,562 $ 21,550 Interest cost ...................... 61,458 56,698 51,725 Actual return on plan assets ....... (173,445) (106,651) (137,554) Net amortization and deferral ...... 99,825 43,681 84,042 --------- --------- --------- Net .............................. 17,954 22,290 19,763 Multi-employer union plans ........... 11,125 9,157 9,484 Defined contribution plans ........... 10,742 9,022 8,389 Other ................................ 1,968 1,412 1,808 --------- --------- --------- Net periodic pension cost .......... $ 41,789 $ 41,881 $ 39,444 ========= ========= ========= 42 Assumptions used each year in accounting for defined benefit plans were: 1997 1996 1995 ----- ----- ----- Discount rate as of year end ............ 7.0% 7.5% 7.25% Expected long-term rate of return on assets assumed in determining pension expense ....................... 8.5 8.5 8.5 Rate of increase in compensation levels as of year end ................. 4.5 4.5 4.5 The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheet for the defined benefit plans (in thousands):
Dec. 28, 1997 Dec. 29, 1996 Dec. 31, 1995 ----------------------------- ---------------------------- ---------------------------- Plans Whose Plans Whose Plans Whose Plans Whose Plans Whose Plans Whose Assets Exceed Accumulated Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Accumulated Benefits Benefits Exceed Assets Benefits Exceed Assets Benefits Exceed Assets (20 plans) (7 plans) (16 plans) (9 plans) (17 plans) (11 plans) ----------- ------------- ------------- ------------- ------------- ------------- Actuarial present value of benefit obligations: Vested benefit obligations ........... $ 767,330 $ 31,543 $ 601,284 $ 74,766 $ 564,319 $ 83,275 ========== ======== ========= ======== ========= ========= Accumulated benefit obligations ...... $ 781,678 $ 32,484 $ 612,444 $ 77,021 $ 574,642 $ 85,581 ========== ======== ========= ======== ========= ========= Projected benefit obligation ........... $ 911,835 $ 43,497 $ 709,412 $ 87,467 $ 672,691 $ 100,273 Plan assets at fair value .............. 1,056,230 2,529 810,102 49,809 717,475 55,019 ---------- -------- --------- -------- --------- --------- Projected benefit obligation less than (in excess of) plan assets ...... 144,395 (40,968) 100,690 (37,658) 44,784 (45,254) Unrecognized net (gain) loss ........... (138,206) 11,438 (96,564) 11,704 (15,441) 15,032 Prior service cost not yet recognized in net periodic pension cost ................................. 38,940 3,971 33,135 11,283 24,865 12,522 Unrecognized net (asset) obligation at the date FAS 87 was adopted, net of amortization .................. (13,441) 865 (18,592) 1,738 (23,689) 2,190 Adjustment required to recognize minimum liability .................... (5,922) (14,279) (18,071) ---------- -------- --------- -------- --------- --------- Net pension asset (liability) recognized in the Consolidated Balance Sheet ........................ $ 31,688 $(30,616) $ 18,669 $(27,212) $ 30,519 $ (33,581) ========== ======== ========= ======== ========= =========
Of the seven plans whose accumulated benefits exceed assets, one is a qualified pension plan. This qualified plan has vested benefits of $2.4 million and assets of $2.5 million. Net pension assets are included in "Other" noncurrent assets and net pension liabilities are included in "Employment benefits and other noncurrent liabilities." In 1995 and 1996, net pension liabilities related to discontinued operations were included in "Net assets of discontinued BIS operations." These net pension liabilities were assumed by corporate in 1997. Substantially all of the assets of the company-administered plans are invested in listed stocks and bonds. G. ACQUISITIONS AND DISPOSITIONS Acquisitions On May 9, 1997, the company completed the acquisition of four newspapers, indirectly owned by The Walt Disney Company, for $1.65 billion. The acquisition was accomplished through the merger of a wholly owned subsidiary with and into Cypress Media, Inc. ("Media"), formerly known as ABC Media, Inc., the owner of the four newspapers. Media owns newspapers in Kansas City, Mo., Fort Worth, Texas, Belleville, Ill., and Wilkes-Barre, Pa. The company intends to continue to manage and operate Media as a newspaper company. The four newspapers have combined daily and Sunday circulation of 635,000 and 898,000, respectively. 43 The acquisition was accounted for under the purchase method. The purchase price was allocated based on the estimated fair market value of net tangible and intangible assets acquired. The fair market value of the net tangible and intangible assets of Media was approximately $317.3 million at date of purchase, including $351.6 million of intangible assets, which are being amortized on a straight-line basis over periods ranging from 10 years to 40 years. The excess of purchase price over these net assets, of approximately $1.33 billion, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. Pursuant to the merger, the company issued 1,754,930 shares of its Series B convertible preferred stock. Each share of preferred stock is convertible into 10 shares of common stock. At the effective time of the merger, Media had $990 million of bank debt, which was assumed by the company. The company's results of operations include Media from May 9, 1997. The pro forma unaudited results of operations, as though the former Media newspapers acquisition had occurred at the beginning of the fiscal year in which the acquisition took place as well as for the comparable preceding year, were as follows (in thousands of dollars, except share data): 1997 1996 ----------- ----------- Operating revenue ................... $ 3,058,791 $ 2,873,946 Income before income taxes .......... 695,466 313,038 Net income .......................... 413,932 255,602 Earnings per share Basic ............................. $ 4.68 $ 2.66 Diluted ........................... 4.09 2.22 On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two newspapers in California owned by the E.W. Scripps Co. The Monterey County Herald has circulation of 34,000 daily and 38,000 Sunday, and the San Luis Obispo Telegram-Tribune has circulation of 36,000 Monday through Saturday. The exchange was accounted for under the purchase method. The fair market value of the two newspapers received in the exchange was approximately $56.6 million, and that value was allocated to the net tangible and intangible assets of these newspapers. The fair market value of the identified tangible and intangible assets was approximately $51.5 million at date of exchange, including $16.7 million of intangible assets, which are being amortized on a straight-line basis over periods ranging from 10 years to 40 years. The excess of the fair value of these newspapers over their net assets, of approximately $5.1 million, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. The company's results of operations include Boulder through Aug. 24, and Monterey and San Luis Obispo from that same date through the end of the fiscal year. On Oct. 31, 1995, the company acquired 100% of the outstanding shares of Lesher Communications, Inc., ("Lesher") for $360 million. The difference between the purchase price of $360 million and the cash distribution of $335.8 million was due to certain assumed liabilities. Lesher, a privately held newspaper company based in Walnut Creek, Calif., published four daily newspapers in contiguous Contra Costa and eastern Alameda County markets in the East Bay area of Northern California. Lesher, renamed Contra Costa Newspapers, Inc., (CCN) in November 1995, continues to publish four newspapers. The acquisition was accounted for under the purchase method. The purchase price was allocated, based on the estimated fair market value of the net tangible and intangible assets of CCN. The fair market value of the tangible and intangible assets was approximately $106.2 million at date of purchase, including $22.6 million of intangible assets, which are being amortized on a straight-line basis over periods ranging from 15 to 40 years. The excess of purchase price over these net assets, of approximately $253.8 million, has been recorded as goodwill and is being amortized on a straight-line basis over 40 years. The company's results of operations include CCN from Oct. 31, 1995, forward. The pro forma unaudited results of operations, as though the former CCN newspapers acquisition had occurred at the beginning of the 1995 fiscal year were: (1) revenues, $2.4 billion; (2) net income, $161.7 million and (3) basic earnings per share, $1.63, and diluted earnings per share, $1.61. 44 Dispositions Related to Continuing Operations: In July 1997, the company announced that it would sell its newspapers in Boca Raton, Fla., Gary, Ind., Long Beach, Calif., Milledgeville, Ga. and Newberry, S.C. Combined daily and Sunday circulation for the Boca Raton, Gary and Long Beach newspapers is 188,448 and 213,487, respectively. The Milledgeville newspaper has circulation of 8,153 (five days a week) and the Newberry newspaper has circulation of 6,500 (three days a week). In December 1997, the company sold all of these newspapers except the one in Gary. The sale of the Boca Raton, Newberry and Milledgeville newspapers to Community Newspaper Holdings, Inc., also included the transfer to the company of The Daily Sun and the Buyer's Guide, a shopper, in Warner Robins, Ga., and the Byron (Ga.) Gazette, a weekly newspaper. The Long Beach newspaper was sold to Garden State Newspapers, an affiliate of Media News Group. On Feb. 2, 1998, the company closed on the sale of the Gary newspaper to Hollinger International, Inc. The proceeds from the sale of the four newspapers were $50.7 million. The pretax and after-tax gains from their sale were $18.1 million and $10.3 million, respectively. On Aug. 24, 1997, the company exchanged its newspaper in Boulder, Colo., for two newspapers in California owned by the E.W. Scripps Co. The exchange resulted in a pretax and an after-tax gain of $43.2 million and $24.5 million, respectively. In January 1997, the company and Tele-Communications, Inc., closed on the sale of the company's interest in all but one of their jointly owned cable investments. The total sales price was $377.6 million and resulted in a pretax and an after-tax gain of $221.8 million and $128.3 million, respectively. The remaining system, in Kentucky, accounts for a small portion of the original investment. That sale is expected to close later. In November 1996, the company sold its investment in Netscape Communications Corporation, resulting in an after-tax gain of $8.1 million, net of adjustments in the carrying value of certain other investments. Related to Discontinued Operations: On April 4, 1997, the company announced that it would sell Knight-Ridder Information, Inc. (KRII). The announcement resulted in its former Business Information Services (BIS) segment (excluding one business called Technimetrics) being reclassified as discontinued operations in the quarter ended June 29, 1997. On Dec. 11, 1997, the company announced that it would also sell Technimetrics. Since this business was previously included in the BIS segment, it was similarly reclassified and included in discontinued operations. On Nov. 14, 1997, the company sold KRII to M.A.I.D plc for $420 million plus a working capital purchase price adjustment of approximately $15 million. The sale resulted in a pretax gain of $23.6 million and an after-tax gain of $15.3 million. On July 26, 1996, the company sold Knight-Ridder Financial (KRF) to Global Financial Information Corporation for $275 million. The pretax and after-tax gains from the sale of KRF were $155.9 million and $86.3 million, respectively. On April 3, 1995, the company sold the Journal of Commerce (JoC) to the Economist Group of London for $115 million. The pretax and after-tax gains from the sale of the JoC were $92.7 million and $53.8 million, respectively. H. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The company and its subsidiaries have defined postretirement benefit plans that provide medical and life insurance for retirees and eligible dependents. The company's postretirement benefit expense is determined under the provisions of FAS 106 -- EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. This statement requires that the cost of these benefits, which are primarily for health care and life insurance, be recognized in the financial statements throughout the employees' active working careers. 45 The company valued the accumulated postretirement benefit obligation using the following assumptions: 1997 1996 1995 ----- ----- ----- Discount rate at the end of the year .................................... 7.0% 7.5% 7.25% Return on plan assets ..................... 8.5 8.5 8.5 Annual rate of increase in salaries ................................ 4.5 4.5 4.5 Medical trend rate: Projected ............................... 8.0 9.0 10.0 Reducing to this percentage in 2001 and thereafter ................... 5.5 5.5 5.5 The following tables present the funded status of the company's benefit plans (excluding liabilities of the DNA that are reported in the Consolidated Balance Sheet under the caption "Equity in unconsolidated companies and joint ventures") and the components of 1997, 1996 and 1995 periodic expense (in thousands):
1997 1996 1995 ------------------------ ------------------------ ------------------------ Life Life Life Insurance Insurance Insurance Medical and Medical and Medical and Plans Other Plans Plans Other Plans Plans Other Plans --------- ----------- --------- ----------- --------- -------- Accumulated postretirement benefit obligation: Retirees ............................. $ 60,845 $ 13,873 $ 58,225 $ 13,519 $ 69,180 $ 13,313 Fully eligible active plan participants ....................... 13,054 5,931 12,369 5,157 16,778 5,440 Other active plan participants ....... 18,706 20,209 17,650 14,568 21,617 16,243 --------- -------- --------- -------- --------- -------- Accumulated benefit obligation in excess of plan assets ................ 92,605 40,013 88,244 33,244 107,575 34,996 Fair value of assets 12,386 Unfunded status ........................ 92,605 27,627 88,244 33,244 107,575 34,996 Unrecognized net reduction (increase) in prior service costs .... 23,664 (135) 27,693 (158) 31,723 (180) Unrecognized net gain (loss) ........... 2,746 3,978 1,493 8,295 (10,633) 5,576 --------- -------- --------- -------- --------- -------- Accrued liability recognized in the balance sheet ........................ $ 119,015 $ 31,470 $ 117,430 $ 41,381 $ 128,665 $ 40,392 ========= ======== ========= ======== ========= ======== Net periodic postretirement benefit cost includes the following components: Service cost ......................... $ 3,524 $ 3,769 $ 4,414 Interest cost ........................ 10,988 11,229 11,742 Amortization ......................... (4,812) (4,600) (5,095) Actual return on plan assets ......... (773) --------- --------- -------- Net periodic postretirement benefit cost ....................... $ 8,927 $ 10,398 $ 11,061 ========= ========= ======== Impact of 1% increase in medical trend rate: Aggregate impact on 1997 service cost and interest cost ............. $ 945 ========= Increase in Dec. 28, 1997, accumulated postretirement benefit obligation .. $ 5,843 =========
A pretax gain resulting from curtailments, settlements and special termination benefits under these plans was $8.6 million in 1996, which related to restructuring of plans. 46 I. COMMITMENTS AND CONTINGENCIES At Dec. 28, 1997, the company had lease commitments currently estimated to aggregate approximately $54.9 million that expire from 1998 through 2051 as follows (in thousands): 1998 ....................................... $ 13,908 1999 ....................................... 11,615 2000 ....................................... 9,208 2001 ....................................... 6,610 2002 ....................................... 4,330 2003 and thereafter ........................ 9,211 -------- Total .................................... $ 54,882 ======== Payments under the lease contracts were $15.6 million in 1997, $14.2 million in 1996 and $12.7 million in 1995. In connection with the company's insurance program, letters of credit are required to support certain projected worker compensation obligations. At Dec. 28, 1997, the company had approximately $40.3 million of undrawn letters of credit outstanding. On July 13, 1995, six unions struck the Detroit Free Press, The Detroit News and the Detroit Newspaper Agency, which operates both newspapers. Subsequently, the unions filed numerous unfair labor practice charges against the newspapers and the Agency. In June 1997, after a lengthy trial, a National Labor Relations Board (NLRB) administrative law judge ruled that the strike was caused by the unfair labor practices of the Agency and The Detroit News and recommended that the Agency and the newspapers reinstate all strikers, displacing permanent replacements if necessary. The Agency and the newspapers have appealed the decision, which is pending before the NLRB. Various libel actions and environmental and other legal proceedings that have arisen in the ordinary course of business are pending against the company and its subsidiaries. In the opinion of management, the ultimate liability to the company and its subsidiaries as a result of all legal proceedings, including Detroit, will not be material to its financial position or results of operations. 47 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shareholders Knight-Ridder, Inc. We have audited the accompanying consolidated balance sheet of Knight- Ridder, Inc., and subsidiaries as of Dec. 28, 1997, Dec. 29, 1996, and Dec. 31, 1995, and the related consolidated statements of income, cash flows and shareholders' equity for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Knight- Ridder, Inc., and subsidiaries at Dec. 28, 1997, Dec. 29, 1996, and Dec. 31, 1995, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note A to the financial statements, in 1995 the company changed its method of accounting for contributions. /s/ Ernst & Young LLP --------------------- Miami, Florida Jan. 26, 1998 48 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 1997 Proxy Statement page 2, "Election of Directors"; page 3, "Nominees for Election as Directors for Terms Ending 2001; pages 3 through 5, "Continuing Directors"; page 7, "Compensation Committee Interlocks and Insider Participation"; page 16, "Certain Relationships"; and page 16, "Section 16(a) Beneficial Ownership Reporting Compliance". KNIGHT RIDDER EXECUTIVE COMMITTEE Alvah H. Chapman Jr., 76 - -------------------------------------------------------------------------------- Served as chairman of the Executive Committee 1984 to 1995; chairman of the board 1982 to 1989; chief executive officer 1976 to 1988; president 1973 to 1982; executive vice president 1967 to 1973; vice president 1966 to 1967; The Miami Herald general manager 1962 to 1969. B.S., business administration, The Citadel, 1942. Mary Jean Connors, 45 - -------------------------------------------------------------------------------- Senior vice president/human resources since 1996; vice president/human resources 1989 to 1996. Served as Philadelphia Newspapers, Inc., vice president/human resources 1988 to 1989; assistant to the senior vice president/news for Knight Ridder 1988; The Miami Herald assistant managing editor/personnel 1985 to 1988; held various editing positions at The Miami Herald 1980 to 1985. B.A., English, Miami University in Oxford, Ohio, 1973. John C. Fontaine, 66 - -------------------------------------------------------------------------------- Retired president and a partner in the law firm of Hughes Hubbard & Reed. Served as executive vice president 1994 to 1995; senior vice president 1987 to 1993; general counsel 1980 to 1993. Prior to that, a partner with Hughes Hubbard & Reed. LL.B., Harvard Law School, 1956; B.A., political science, University of Michigan, 1953. Ross Jones, 55 - -------------------------------------------------------------------------------- Senior vice president and chief financial officer since 1993. Served as vice president/finance in 1993; vice president and treasurer of Reader's Digest Association, Inc., 1985 to 1993 and in other positions there 1977 to 1985. Served as manager at Brown Brothers Harriman & Co. 1970 to 1977. Advanced Management Program, Harvard Business School, 1988; M.B.A., finance, Columbia University Business School, 1970; B.A., classics, Brown University, 1965. Frank McComas, 52 - -------------------------------------------------------------------------------- Senior vice president/operations since 1996; vice president/operations 1995 to 1996. Served as publisher, The (Columbia) State, 1988 to 1995; publisher, Bradenton Herald, 1980 to 1988; held various positions at The Miami Herald and The Charlotte Observer, 1970 to 1980. Advanced Management Program, Harvard Business School, 1994; B.B.A. in business administration, Kent State University, 1968. Bernard H. Ridder Jr., 81 - -------------------------------------------------------------------------------- Former chairman of the board 1979 to 1982; former chairman of the Executive Committee 1976 to 1984; former vice chairman of the board 1974 to 1979. Served as president and chief executive officer of Ridder Publications, Inc., 1969 to 1974. B.A., history, Princeton University, 1938. 49 P. Anthony Ridder, 57 - -------------------------------------------------------------------------------- Chairman of the Executive Committee since 1995; Knight Ridder chairman and CEO since 1995. Served as president 1989 to 1995; president of the Newspaper Division 1986 to 1995; chairman of the Operating Committee since 1985. Served as publisher of the San Jose Mercury News 1977 to 1986; general manager 1975 to 1977; business manager 1969 to 1975. B.A., economics, University of Michigan, 1962. KNIGHT RIDDER OFFICERS Marty Claus, 49 - -------------------------------------------------------------------------------- Vice president/news since 1993. Served as Detroit Free Press managing editor/ business and features from 1987 to 1992; held various editing positions at the Free Press 1977 to 1987. Held various writing and editing positions at the San Bernardino (Calif.) Sun-Telegram 1970 to 1977. B.A., journalism, Michigan State University Honors College, 1970. Gary R. Effren, 41 - -------------------------------------------------------------------------------- Vice president/controller since 1995. Served as assistant vice president/ assistant treasurer 1993 to 1995; assistant to the vice president/finance and treasurer 1989 to 1993; director of corporate accounting 1986 to 1989; business manager of Viewdata Corp. of America 1984 to 1986; manager of financial reporting 1983 to 1984. M.B.A., University of Miami, 1989; B.S., accounting, Rider College, 1978; CPA. Virginia Dodge Fielder, 49 - -------------------------------------------------------------------------------- Vice president/research since 1989. Served as vice president/news and circulation research 1986 to 1989. Served as director/news and circulation research 1981 to 1985; editorial research manager, Chicago Sun-Times 1979 to 1981; held various positions at Lexington Herald-Leader 1976 to 1979. Ph.D., mass communications, Indiana University, 1976; M.A., journalism, Indiana University, 1974; B.A., psychology, Transylvania University, 1970. Douglas C. Harris, 58 - -------------------------------------------------------------------------------- Vice president and secretary since 1986. Served as vice president/personnel 1977 to 1985; director/personnel 1972 to 1977. Formerly with Peat, Marwick, Mitchell and Co. as director of college and special recruiting. Advanced Management Program, Harvard Business School, 1987; Ed.D., counseling and guidance, Indiana University, 1968; M.S., student personnel, Indiana University, 1964; B.S., business administration, Murray State University, 1961. Clark Hoyt, 55 - -------------------------------------------------------------------------------- Vice president/news since 1993. Served as chief of the Knight Ridder Washington Bureau 1987 to 1993; news editor 1985 to 1987; managing editor, The Wichita Eagle 1981 to 1985; various editing positions, Detroit Free Press 1977 to 1981; various reporting positions, Detroit Free Press and Washington Bureau. B.A., English literature, Columbia College, 1964. Robert D. Ingle, 58 - -------------------------------------------------------------------------------- Vice president/new media since 1995. Served as president and executive editor of the San Jose Mercury News 1981 to 1995; managing editor, The Miami Herald 1977 to 1981; various editing positions, The Miami Herald 1962 to 1977. B.A., journalism and political science, University of Iowa, 1962. Mindi Keirnan, 42 - -------------------------------------------------------------------------------- Vice president/operations since 1996; assistant vice president/assistant to the chairman and CEO 1995 to 1996. Served as assistant to the president 1994 to 1995; managing editor/news, Saint Paul Pioneer Press 1991 to 1994; various editing positions at Gannett News Service, Crain's Chicago Business, the Detroit Free Press and the Tallahassee Democrat 1977 to 1991. B.S., political science, Florida State University, 1984. 50 Polk Laffoon IV, 52 - -------------------------------------------------------------------------------- Vice president/corporate relations since 1994. Served as assistant to the president 1992 to 1994; assistant circulation director/distribution, The Miami Herald 1991 to 1992; executive assistant to the vice president/marketing 1989 to 1991; Living Today editor, 1987 to 1989. Served as director and vice president/investor relations, Taft Broadcasting Co. 1982 to 1987. M.B.A., marketing, Wharton School, 1970; B.A., English, Yale, 1967. Tally C. Liu, 47 - -------------------------------------------------------------------------------- Vice president/finance and administration since 1994. Served as vice president/finance and controller 1993 to 1994; vice president and controller 1990 to 1993. Served as San Jose Mercury News vice president and chief financial officer 1987 to 1990 and in various roles 1983 to 1987; held various finance positions, Boca Raton News, 1978 to 1983. M.B.A., Florida Atlantic University, 1977; B.S., business administration, National Chen-Chi University, 1973; CPA. Larry D. Marbert, 44 - -------------------------------------------------------------------------------- Vice president/technology since 1994. Served as Philadelphia Newspapers, Inc., senior vice president/operations 1991 to 1994; vice president/operations research and planning 1988 to 1991; vice president/production 1986 to 1988; Knight Ridder director of production/Newspaper Division 1981 to 1986; various production positions, The Miami Herald 1977 to 1981. M.S., management science, Auburn University, 1977; B.S., University of North Carolina, business administration, 1976. Cristina Lagueruela Mendoza, 51 - -------------------------------------------------------------------------------- Vice president/general counsel since 1993; vice president/associate general counsel 1992 to 1993; associate general counsel 1990 to 1992. Served as a partner in Murai, Wald, Biondo, Moreno & Mendoza, P.A., 1988 to 1990; associate 1984 to 1988. J.D., University of Miami Law School, 1982; M.A., political science, University of Miami, 1967; B.A., political science, Chatham College, 1966. Alan G. Silverglat, 51 - -------------------------------------------------------------------------------- Vice president/treasurer since 1995. Served as senior vice president/finance and planning for Business Information Services Division 1983 to 1995; other BIS positions 1980 to 1983. Formerly with Ernst & Young. B.S., business administration, University of Missouri, 1968; CPA. Jerome S. Tilis, 55 - -------------------------------------------------------------------------------- Vice president/marketing since 1987. Served as president of the Detroit Free Press 1985 to 1989; senior vice president of Philadelphia Newspapers, Inc., 1980 to 1985; vice president of advertising sales and marketing 1979 to 1980; advertising director 1977 to 1979. Advanced Management Program, Harvard Business School, 1984; B.S., chemistry, Hunter College, 1964. Robert Woodworth, 50 - -------------------------------------------------------------------------------- Vice president since June. Served as president and publisher of The Kansas City Star Company 1993 to 1997; president and general manager 1988 to 1993; and executive vice president and general manager of the Fort Worth Star- Telegram, 1986 to 1988. M.B.A., Darden School of Business, University of Virginia; B.A., economics, Allegheny College. 51 ITEM 11. EXECUTIVE COMPENSATION 1997 Proxy Statement, pages 7 and 8, "Compensation Committee Interlocks and Insider Participation"; page 8, "Executive Compensation"; pages 8 through 10, "Compensation Committee Report"; page 11, "Senior Executive Compensation"; page 12, "Stock Options Granted"; pages 12 and 13, "Stock Options Exercised"; pages 13 and 14, "Long-Term Incentive Plan"; page 14, "Pension Benefits"; page 15, "Performance of the Company's Stock"; and page 16, "Compensation of Directors" ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 1997 Proxy Statement, page 1, "Common Stock Outstanding and Principal Holders" and page 6, "Security Ownership of Management" See Note E in Item 8. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 1997 Proxy Statement, page 16, "Certain Relationships"; page 3, "Nominees for Election as Directors for Terms Ending 2001"; pages 3 through 5, "Continuing Directors"; pages 7 and 8, "Compensation Committee Interlocks and Insider Participation"; and page 1, "Common Stock Outstanding and Principal Holders" PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. The following consolidated financial statements of Knight-Ridder, Inc. and subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 28, 1997, are included in Item 8: Consolidated Balance Sheet - December 28, 1997, December 29, 1996, and December 31, 1995 Consolidated Statement of Income - Years ended December 28, 1997, December 29, 1996, and December 31, 1995 Consolidated Statement of Cash Flows - Years ended December 28, 1997, December 29, 1996, and December 31, 1995 Consolidated Statement of Shareholders' Equity - Years ended December 28, 1997, December 29, 1996, and December 31, 1995 Notes to consolidated financial statements 2. The following consolidated financial statement schedule of Knight-Ridder, Inc. and subsidiaries is included in Item 14(d): Schedule II - Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or have been shown in the consolidated financial statements or notes thereto, and therefore have been omitted from this section. 52 3. Exhibits No. 2 - Acquisition Agreement, dated as of April 4, 1997, is incorporated by reference to the Company's Form 10-Q filed May 9, 1997. - Acquisition and Plan of Merger, dated as of May 9, 1997, is incorporated by reference to the Company's Form 8-K filed May 22, 1997. No. 3(i) - Amended and Restated Articles of Incorporation of Knight-Ridder, Inc. (totally amended and restated as of February, 1998) are filed herein. (ii) - Bylaws of Knight-Ridder, Inc. (As Amended Through January 28, 1997), are incorporated by reference to the Company's Form 10-Q filed May 9, 1997. No. 4 - Indenture, dated as of April 6, 1989, is incorporated by reference to the Company's Registration Statement on Form S-3, effective April 7, 1989. (No. 33-28010) - Rights Agreement, dated as of June 21, 1996, is incorporated by reference to the Company's Form 8-A filed July 9, 1996. - Indenture, dated as of October 9, 1997, is Incorporated by reference to the Company's Registration Statement on Form S-3, effective October 10, 1997 (No. 333-37603). 53 No. 10 - Knight-Ridder, Inc. Compensation Plan for Nonemployee Directors dated July 1, 1997 is filed herein. - Stock Purchase Agreement between Knight-Ridder Business Information Services, Inc. and M.A.I.D plc, dated as of October 1, 1997 is incorporated by reference to the Company's Form 10-Q filed November 12, 1997. - Consulting Agreement is incorporated by reference to the Company's Form 10-Q filed on August 14, 1997. - Knight-Ridder, Inc. Long-Term Incentive Plan is incorporated by reference to the Company's Form 10-Q filed on May 9, 1997. - Knight-Ridder Annual Incentive Plan is incorporated by reference to the Company's Form 10-K filed on March 24, 1995. - Amendment to the Employee Stock Option Plan is incorporated by reference to the Company's Form 10-K filed on March 23, 1994. - Executive Officer's Retirement Agreement dated July 19, 1993 is incorporated by reference to the Company's Form 10-K filed on March 23, 1994. - Executive Officer's Retirement Agreement dated December 19, 1991 is incorporated by reference to the Company's Form 10-K filed on March 23, 1994. - Executive Officer's Consulting/Retirement Agreement dated September 20, 1989 is incorporated by reference to the Company's Form 10-K filed on March 24, 1995. - Knight-Ridder Local Incentive Plan description is incorporated by reference to the Company's Form 10-K filed on March 20, 1996. No. 11 - Statement re Computation of Per Share Earnings is filed herein. No. 12 - Statement re Computation of Earnings to Fixed Charges Ratio From Continuing Operations is filed herein. No. 21 - Subsidiaries of the Registrant is filed herein. No. 23 - "Consent of Independent Certified Public Accountants" is filed herein. No. 24 - "Power of Attorney" for M. Kenneth Oshman is incorporated by reference to the Company's Form 10-K filed on March 10, 1997. "Power of Attorney" for James I. Cash, Jr. is incorporated by reference to the Company's Form 10-K filed on March 20, 1996. "Powers of Attorney" for all other members of the Board of Directors are incorporated by reference to the Company's Form 10-K filed on March 24, 1995. No. 27 - "Financial Data Schedule" is filed herein. 54 (b) Reports on Form 8-K filed during the fourth quarter of 1997: Form 8-K dated and filed October 8, 1997 Item 5. Other Events; Financial statements restated for the reclassification of the company's discontinued Business Information Services segment (excluding one business called Technimetrics) for the years ended December 29, 1996, December 31, 1995 and December 25, 1994. Pro forma financial statements of the company's acquisition of ABC Media, Inc., which was indirectly owned by The Walt Disney Company, restated for the reclassification of the company's discontinued Business Information Services segment for the quarter ended March 30, 1997 and the year ended December 29, 1996. Form 8-K dated November 14, 1997, filed November 26, 1997 Item 2. Disposition of Assets Item 7. Financial Statements and Exhibits; pro forma financial statements filed. (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KNIGHT-RIDDER, INC. /s/ P. Anthony Ridder Dated March 13, 1998 --------------------------------------------- By P. Anthony Ridder Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ P. Anthony Ridder Dated March 13, 1998 --------------------------------------------- P. Anthony Ridder Chairman and Chief Executive Officer /s/ Ross Jones Dated March 13, 1998 --------------------------------------------- Ross Jones Chief Financial Officer and Senior Vice President/Finance /s/ Gary R. Effren Dated March 13, 1998 --------------------------------------------- Gary R. Effren Vice President/Controller (Chief Accounting Officer) 56 /s/ James I. Cash, Jr.* --------------------------------------------- James I. Cash, Jr. Director /s/ Alvah H. Chapman, Jr.* --------------------------------------------- Alvah H. Chapman, Jr. Director /s/ Joan Ridder Challinor * --------------------------------------------- Joan Ridder Challinor Director /s/ John C. Fontaine* --------------------------------------------- John C. Fontaine Director /s/ Peter C. Goldmark, Jr.* --------------------------------------------- Peter C. Goldmark, Jr. Director /s/ Barbara Barnes Hauptfuhrer* --------------------------------------------- Barbara Barnes Hauptfuhrer Director /s/ Jesse Hill, Jr.* --------------------------------------------- Jesse Hill, Jr. Director /s/ C. Peter McColough* --------------------------------------------- C. Peter McColough Director /s/ M. Kenneth Oshman* --------------------------------------------- M. Kenneth Oshman Director /s/ Thomas L. Phillips* --------------------------------------------- Thomas L. Phillips Director 57 /s/ P. Anthony Ridder* --------------------------------------------- P. Anthony Ridder Director /s/ Randall L. Tobias* --------------------------------------------- Randall L. Tobias Director /s/ Gonzalo F. Valdes-Fauli* --------------------------------------------- Gonzalo F. Valdes-Fauli Director /s/ John L. Weinberg* --------------------------------------------- John L. Weinberg Director Dated March 13, 1998 * By /s/ Ross Jones --------------------------------------------- Ross Jones Attorney-in-fact 58 ANNUAL REPORT ON FORM 10-K ITEM 14 (a) (2), (c) and (d) SUPPLEMENTARY DATA CERTAIN EXHIBITS YEAR ENDED DECEMBER 28, 1997 KNIGHT-RIDDER, INC. AND SUBSIDIARIES MIAMI, FLORIDA 59
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS KNIGHT-RIDDER, INC. AND SUBSIDIARIES (IN THOUSANDS OF DOLLARS) COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------- ------------ ---------- ---------- ---------- ADDITIONS --------------------------- BALANCE AT CHARGED CHARGED BEGINNING TO COSTS TO BALANCE OF AND OTHER AT END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - ----------- ------------ ------------ ------------ ------------ ---------- YEAR ENDED DECEMBER 28, 1997: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES ....................... $ 12,685 $ 23,332 $ 752 (1) $ 21,806 (2) $ 14,963 VALUATION ALLOWANCE FOR DEFERRED TAXES ................... 1,357 1,357 ---------- --------- ----- -------- ----------- $ 14,042 $ 23,332 $ 752 $ 21,806 $ 16,320 YEAR ENDED DECEMBER 29, 1996: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES ....................... $ $14,348 $ 19,315 $ 2,097 (1) $ 23,075 (2) $ 12,685 VALUATION ALLOWANCE FOR DEFERRED TAXES ................... 1,357 1,357 ---------- --------- ----- -------- ---------- $ 15,705 $ 19,315 $ 2,097 $ 23,075 $ 14,042 YEAR ENDED DECEMBER 31, 1995: RESERVES AND ALLOWANCES DEDUCTED FROM ASSET ACCOUNT: ACCOUNTS RECEIVABLE ALLOWANCES ....................... $ 13,728 $ 17,211 $ 2,918 (1) $ 19,509 (2) $ 14,348 VALUATION ALLOWANCE FOR DEFERRED TAXES ................... 3,985 2,628 (3) 1,357 ---------- --------- ----- -------- ---------- $ 17,713 $ 17,211 $ 2,918 $ 22,137 $ 15,705
(1) Represents amounts for the former BIS division included in "Income (loss) from discontinued BIS operations" in the Consolidated Statement of Income. (2) Represents uncollectible accounts written-off, net of recoveries, and dispositions of subsidiaries' balances. (3) Represents net reduction in valuation allowance which was determined to be no longer required. EX-3.I 2 EXHIBIT 3(I) EXHIBIT 3(i) Totally Amended and Restated as of 2/98 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF KNIGHT-RIDDER, INC. (ORIGINALLY INCORPORATED AS KRN, INC. ON MARCH 12, 1976) FIRST: The name of the corporation is KNIGHT-RIDDER, INC. (the "Corporation"). SECOND: The purposes of the corporation are as follows: Printing, editing, publishing and distributing daily, Sunday and weekly newspapers, or any or all of them. Also conducting a general business in the distribution and reception of news and general information through the various means of transmission now or hereafter discovered; also conducting a general business of job printing of every kind and nature, including pamphlets, bulletins and periodicals, and the distribution of the same; also engaging in the business of engraving, die casting, stereotyping, lithographing and electrotyping or in any process now or hereafter discovered which is useful to or used in the newspaper business; also preparing, producing, manufacturing, buying, selling and dealing in equipment, tools, supplies and other materials used in the production of a newspaper and the conduct of a printing and publishing business; and the doing of all things necessary and incident to any or all of the foregoing purposes. To collect, formulate, transmit and dispose of news by telegraph, cable, telephone, radio and ether agencies in and for the United States and her dependencies and foreign countries; to buy and sell news; to own, lease, manage, buy and sell news agencies; to acquire press franchises and to become a member of and hold stock in associations and corporations for such purposes. To carry on the business of receiving and transmitting communications, messages, news, news reports, news service, news features, visual representations and pictures by radio and to acquire, construct, lease, own, maintain and operate stations and facilities for such purpose. To buy from and furnish and sell to newspapers, publishers, the press, radio stations, broadcast stations and the public generally, news, news reports, news services, news features, visual representations and pictures. To do any and all things necessary, incidental or convenient to carry out any of the foregoing purposes and the powers herein set forth. The foregoing statement of specific powers shall not be held to limit or restrict the powers of the corporation, and are in furtherance of and in addition to, and not in limitation of, the powers conferred by the Florida General Corporation Act; provided, however, that the corporation will not act as a banking, safe deposit, trust, insurance, surety, express, railroad, canal, telegraph, telephone or cemetery company, a building and loan association, mutual fire insurance association, cooperative association, fraternal benefit society, state fair or exposition. THIRD: The maximum number of shares which the Corporation is authorized to issue is Two Hundred Seventy Million (270,000,000) which shall be classified as follows: (a) Two Hundred Fifty Million (250,000,000) of said shares shall be Common Stock with a par value of Two and One-Twelfth cents (2 1/12(cent)) per share ("Common Stock"); and (b) Twenty Million (20,000,000) of said shares shall be Preferred Stock with a par value of One Dollar ($1.00) per share ("Preferred Stock or Preference Stock"). Preferred Stock shall be entitled to preference over Common Stock in the distribution of dividends or assets, in such manner and to such extent if any as may be determined, from time to time by the Board of Directors. The shares of Preferred Stock may be divided into or issued in series. The Board of Directors is expressly vested with and shall have authority to establish from time to time the number of shares to be included in each series and, within the limitations of law and the provisions of these Amended and Restated Articles of Incorporation, to fix and determine the designation and the relative powers, preferences and rights of the shares of any series so established, and the qualifications, limitations or restrictions thereof. All shares of a series shall have preferences, limitations and relative rights identical with those of other shares of the same series and, except to the extent otherwise provided in the description of the series, with those of the other series of Preferred Stock. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (i) The number of shares constituting such series and the distinctive designation of such series; (ii) The preferences and relative, participating, optional or other special rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to any series; 2 (iii) The dividend rate on the shares of each series, the dates at which dividends, if declared, shall be payable, the conditions upon which such dividends are payable, whether dividends shall be cumulative, noncumulative, or partially cumulative and, if cumulative or partially cumulative, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of such series; (iv) Whether the shares of such series shall have voting rights in addition to any voting rights and/or class voting rights that may be provided by law and, if so, the terms and duration of such voting rights, including the number of votes per share in any such series, which number may be more or less than one vote per share, as the Board of Directors may determine; (v) Whether the shares of such series shall have conversion or exchange privileges, and, if so, the terms and conditions of such conversion or exchange, including the amount and type of consideration per share payable in case of conversion or exchange, the conversion price or prices or ratio or ratios or the rate or rates at which such conversion or exchange may be effected, and provision for adjustments of the conversion rate in such events as the Board of Directors shall determine; (vi) Whether or not the shares of such series shall be redeemable, and, if so, the terms and conditions of redemption, including the date or dates upon or after which the shares of such series shall be redeemable and the amount and type of consideration per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vii) Whether the shares of such series shall be subject to the operation of retirement or sinking funds to be applied to the redemption or purchase of shares of that series for retirement, and if such retirement or sinking fund or funds be established, the amount thereof and the terms and provisions relative to the operation thereof; (viii) The rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of shares of such series; (ix) Such other special rights and protective provisions with respect to any series as the Board of Directors may deem advisable; and (x) Any other relative rights, preferences and limitations of such series. The shares of each series of the Preferred Stock may vary from the shares of any other series thereof in any or all of the foregoing respects. The Board of Directors may increase the number of shares of Preferred Stock designated for any existing series by a resolution adding to such series authorized and unissued shares of the Preferred Stock not designated for any other series. The Board of Directors may decrease the number of shares of the Preferred Stock designated for any existing series by a resolution, subtracting 3 from such series unissued shares of the Preferred Stock designated for such series, and the shares so subtracted shall become authorized, unissued and undesignated shares of the Preferred Stock. A series of Preferred Stock has been established to which the following provisions shall be applicable. Series A Junior Participating Preferred Stock 1. DESIGNATION. The series shall be designated as "Series A Junior Participating Preferred Stock" (hereinafter "this Series"). 2. NUMBER. The number of shares of this Series authorized to be issued is 1,500,000. Such number may be increased or decreased by resolution of the Board of Directors; PROVIDED, HOWEVER, that no decrease shall reduce the number of shares of this Series to a number less than that of the shares then outstanding. 3. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to this Series with respect to dividends, the holders of shares of this Series shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, quarterly dividends payable in cash on the 15th day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date") commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of this Series, in an amount per share (rounded to the nearest cent) equal to the greater of (a) S 1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock by reclassification or otherwise), declared on the Common Stock, par value 2-1/12(cent) per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of this Series. In the event the Corporation shall at any time after July 10, 1996 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock (other than the stock split effected in the form of a 4 stock dividend on the Common Stock approved by the Board of Directors on June 21, 1996 (the "1996 Stock Split")), then in each such case the amount to which holders of shares of this Series were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on this Series as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); PROVIDED, HOWEVER, that in the event no dividend or distribution shall have been DECLARED on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on this Series shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of this Series from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of this Series, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of this Series entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of this Series in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of this Series entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 4. LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation (a "Liquidation"), no distribution shall be made (x) to the holders of Common Stock or any other shares of stock ranking junior (either as to dividends or upon Liquidation) to this Series unless, prior thereto, the holders of shares of this Series shall have received an amount per share equal to the greater of (i) $100, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) subject to the provision for adjustment hereinafter set forth, l00 times the aggregate amount to be distributed per share to holders of Common Stock, or (y) to the holders of stock ranking on a parity (either as to dividends or upon 5 Liquidation) with this Series, except distributions made ratably on this Series and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such Liquidation. In the event the Corporation shall at any time after July 10, 1996 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock (other than the 1996 Stock Split), then in each such case the aggregate amount to which holders of shares of this Series were entitled immediately prior to such event under clause (ii) of clause (x) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. For purposes of this Certificate, the voluntary sale, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation to, or a consolidation or merger of the Corporation with, one or more corporations shall not be deemed to be a Liquidation. 5. REDEMPTION. The shares of this Series shall not be redeemable. 6. VOTING RIGHTS. The holders of shares of this Series shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of this Series shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the Common stockholders of the Corporation. In the event the Corporation shall at any time after July 10, 1996 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock (other than the 1996 Stock Split), then in each such case the number of votes per share to which holders of shares of this Series were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in the Articles of Incorporation of the Corporation or by law, the holders of shares of this Series 6 and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of Common stockholders of the Corporation. (C) (i) If at any time dividends on any shares of this Series shall be in arrears in an amount equal to six full quarterly dividends thereon, the holders of this Series and all other series of Preferred Stock (in each case to the extent then entitled pursuant to the terms of such series), voting together as one class, shall have the exclusive and special right to elect two directors of the Corporation, and the number of directors constituting the Board of Directors of the Corporation shall be increased by two (if not previously increased in connection with the right of other series of Preferred Stock entitled to vote together with this Series to elect directors of the Corporation) for such purpose. (ii) Whenever any such right of the holders of this Series shall have vested, such right may be exercised initially either at a special meeting of the holders of this Series and all other series so entitled to vote, if any, called as hereinafter provided, or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders. The right of the holders of this Series voting separately as a class with such other series to elect members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accrued on all shares of this Series shall have been paid in full, or declared and set apart for payment, at which time the special right of the holders of this Series so to vote separately as a class with such other series for the election of directors shall terminate, subject to revesting in the event of each and every subsequent occurrence of an arrearage specified in subparagraph (C)(i) above. (iii) At any time when such special voting power shall have vested in the holders of this Series as provided in the preceding subparagraph (C)(i), the proper officer of the Corporation shall, upon the written request of the holders of record of at least 10% of the then outstanding voting power of shares of this Series and all other series entitled to vote in the election of such directors addressed to the Secretary of the Corporation, call a special meeting of the holders of this Series for the purpose of electing directors pursuant to this paragraph (C). Such meeting shall be held at the earliest practicable date. If such meeting shall not be called by the proper officer of the Corporation within twenty days after personal service of such written request upon the Secretary of the Corporation, or within twenty days after mailing the same within the United States of America, by registered mail addressed to the Secretary of the Corporation at its principal office, then the holders of record of at least 10% of the then outstanding voting power of shares of this Series and all other series entitled to vote in the election of such directors may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated by giving the notice required for annual meetings of stockholders. Any holder of this Series so designated shall have access to the stock books of the Corporation for the purpose of causing meetings of stockholders to be called pursuant to these provisions. Notwithstanding the provisions of this subparagraph (C)(iii), no such special meeting shall be called during the period within ninety days immediately preceding the date fixed for the next annual meeting of stockholders. 7 (iv) At any meeting held for the purpose of electing directors at which the holders of this Series and any other series of Preferred Stock shall have the special right to elect directors as provided in this paragraph (C), the presence, in person or by proxy, of the holders of 50% of the voting power of the then outstanding aggregate number of shares of this Series and such other series shall be required to constitute a quorum for the election of any director by the holders of such series. At any such meeting or adjournment thereof, (a) the absence of a quorum shall not prevent the election of directors other than those to be elected by all such series of Preferred Stock voting separately as a class, and the absence of a quorum for the election of such other directors shall not prevent the election of the directors to be elected by this Series and any other series of Preferred Stock that may be voting with it separately as a class, and (b) in the absence of either or both such quorums, the holders of a majority of the voting power of the shares present in person or by proxy of the stock or stocks which lack a quorum shall have power to adjourn the meeting for the election of directors who they are entitled to elect from time to time without notice other than announcement at the meeting until a quorum shall be present. (v) During any period when the holders of this Series have the right to vote separately as a class for directors as provided in paragraph (C) hereof, (1) the directors so elected by the holders of the one or more series of Preferred Stock entitled to vote for such directors shall continue in office until the next succeeding annual meeting or until their successors, if any, are elected by such holders and qualify or, until termination of the right of the holders of the one or more series of Preferred Stock entitled to vote for such directors to vote separately as a class for directors as provided in paragraph (C) hereof and (2) vacancies in the Board of Directors shall be filled only by vote of a majority (even if that be only a single director) of the remaining directors theretofore elected by the holders of the one or more series of Preferred Stock which elected the directors whose office shall have become vacant or if there be no such remaining director, directors to fill such vacancies shall be elected by the holders of the one or more series of Preferred Stock entitled to vote for such directors at a special meeting called pursuant to the provisions of paragraph (C) hereof. Immediately upon any termination of the right of the holders of this Series and any other series of Preferred Stock to vote separately as a class for directors as provided in paragraph (C) hereof, the term of office of the directors then in office so elected by the holders of this Series and any such other series shall terminate. Whenever the term of office of the directors so elected by the holders of this Series and any such other series shall terminate and the special voting power vested in the holders of this Series and any such other series as provided in paragraph (C) hereof shall have terminated, the number of directors shall be such number as may be provided for in the by-laws irrespective of any increase made pursuant to the provisions of paragraph (C). (D) So long as any shares of this Series are outstanding, the Corporation shall not, without the consent of the holders of two-thirds of the outstanding shares of this Series, given by such holders as one class, and given by vote in person or by proxy at a meeting called for that purpose or given in 8 writing, amend the Articles of Incorporation or adopt or amend any resolutions of the Board of Directors to alter or change the powers, preferences or special rights of this Series so as to affect them adversely. (E) Except as provided herein, in the Articles of Incorporation of the Corporation or by law, holders of shares of this Series shall have no special voting rights and their consent shall not be required for taking any corporate action. 7. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on this Series as provided in Section 3 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of this Series outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any Common Stock or any other shares of stock ranking junior (either as to dividends or upon Liquidation) to this Series; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon Liquidation) with this Series, except dividends paid ratably on this Series and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon Liquidation) with this Series; PROVIDED, HOWEVER, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon Liquidation) to this Series; or (iv) purchase or otherwise acquire for consideration any shares of this Series, or any shares of stock ranking on a parity (either as to dividends or upon Liquidation) with this Series, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 7, purchase or otherwise acquire such shares at such time and in such manner. 9 8. CONSOLIDATION. MERGER. ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of this Series shall at the same time be similarly exchanged for or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after July 10, 1996 declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock (other than the 1996 Stock Split), then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of this Series shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 9. RANKING. This Series shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets upon Liquidation, unless the terms of any such series shall provide otherwise. 10. FRACTIONAL SHARES. This Series may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of this Series. 11. OTHER RIGHTS. The holders of shares of this Series shall not have any other preferences or special rights. Series B Preferred Stock 1. DESIGNATION The series shall be designated as "Series B Preferred Stock" ("this Series"). 10 2. NUMBER The number of shares of this Series authorized to be issued is 1,758,242 3. DIVIDENDS If and when dividends and other distributions, in cash, in property or in shares of stock or other securities are declared by the Board of Directors on the Corporation's Common Stock, the holders of this Series shall be entitled to receive per share of this Series the dividends and other distributions, in cash, in property or in shares of stock or other securities declared and paid on the number of shares of the Corporation's Common Stock into which such share of this Series is convertible on the record date of such dividend or other distribution, and no more, when and as declared by the Board of Directors of the Corporation out of funds legally available thereof, to be paid to holders of record on the respective dates fixed for that purpose by the Board of Directors in advance of payment of each dividend. This Series shall rank junior as to dividends and distributions to all other shares of Preferred Stock and any other class or series of stock of the Corporation which are not by their terms expressly made junior or equal as to dividends and distributions to this Series. This Series shall rank equally as to dividends and distributions to the Corporation's Common Stock and all other shares of Preferred Stock and any other class or series of stock of the Corporation which are expressly made equal as to dividends and distributions to all other shares of Preferred Stock and any other class or series of stock of the Corporation which are by their terms expressly made junior as to dividends and distributions to this Series. 4. LIQUIDATION RIGHTS In the event of the voluntary or involuntary liquidation, dissolution or winding up ("Liquidation") of the Corporation, each holder of shares of this Series shall be entitled to have paid to him or it out of the assets of the Corporation, before any distribution is made to or set apart for the holders of any shares of any class or series of stock of the Corporation ranking junior to this Series in respect to distribution of assets upon Liquidation, per share of this Series held by such holder, an amount equal to (I) the liquidation preference of $.01 per share PLUS (ii) the amount which would be paid to a holder of the Common Stock Conversion Number (as defined below) of shares of Common Stock. After payment to holders of this Series of the full preferential amount as aforesaid, holders of this Series shall, as such, have no right or claim to any of the remaining assets of the Corporation. If upon any Liquidation of the Corporation the assets of the Corporation or proceeds thereof distributable among the holders of shares of this Series and of any class or series of stock ranking equally with this Series as to distribution of assets upon Liquidation shall be insufficient to pay in 11 full the preferential amounts payable to such holders, then such assets or the proceeds thereof shall be distributed among such holders ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. This Series shall rank junior as to distributions of assets upon Liquidation to all other shares of Preferred Stock and any other class or series of stock of the Corporation which are not by their terms expressly made junior or equal as to distributions of assets upon Liquidation to this Series. This Series shall rank equally as to distribution of assets upon Liquidation to the Corporation's Common Stock and all other shares of Preferred Stock and any other class or series of stock of the Corporation which are expressly made equal as to distribution of assets upon Liquidation to all other shares of Preferred Stock and any other class or series of stock of the Corporation which are by their terms expressly made junior as to distribution of assets upon Liquidation to this Series. For purpose of this Certificate, the voluntary sale, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation to, or a consolidation or merger of the Corporation with, one or more corporations shall not be deemed to be a Liquidation. 5. TRANSFER No Person holding shares of this Series of record may sell, assign, transfer, pledge or otherwise dispose of, and the Corporation shall not register such transfer, sale, assignment, pledge or other disposal of such shares of this Series, whether by sale, assignment, gift, bequest, appointment or otherwise, except to The Walt Disney Company or an Affiliate of The Walt Disney Company. As used in this Section 5. "Affiliate" shall mean, with respect to a Person, any other Person which directly or indirectly through one or more intermediaries controls, or is controlled by or is under common control with, such Person. 6. CONVERSION RIGHTS In the event a holder of shares of this Series sells, assigns, transfers, pledges or otherwise disposes of such shares contrary to the provisions of Section 5 hereof, such sale, assignment, transfer, pledge or other disposition shall be deemed (I) an election by the holder thereof convert such shares of this Series into shares of the Corporation's Common Stock and (ii) a sale, assignment, transfer, pledge or other disposition of such shares of Common Stock. Upon any such sale, assignment, transfer, pledge or other disposition, each share of this Series so sold, assigned, transferred, pledged or other disposed of shall automatically convert into the Common Stock Conversion Number of fully paid and nonassessable whole shares of Common Stock of the Corporation on the date of such sale, assignment, transfer, pledge or other disposition. Upon presentation to the Corporation's Transfer Agent of the certificate or 12 certificates representing the number of shares of Common Stock equal to the number of shares of this Series so presented multiplied by the Common Stock Conversion Number shall be issued in the name of the transferee or pledgee. Upon any conversion of shares of this Series, the holders thereof shall not be entitled to receive any accrued or unpaid dividends and distributions in respect of the shares converted or the shares of Common Stock issued on conversion thereof; PROVIDED, HOWEVER, that such holders shall be entitled to receive any dividends and distributions on such shares of this Series paid or declared prior to such conversion if such holder held such shares on the record date for the payment of such dividend or distribution. For all purposes, except the right to receive dividends and distributions as provided in the foregoing paragraph, the rights of a converting holder as a holder of shares of this Series shall cease, and the person or persons in whose name or names the certificate or certificates for Common Stock issuable upon such conversion are to be issued shall be deemed to have become the record holder or holders of such Common Stock at the close of business on that day (the "Date of Conversion") on which such shares are converted. The issuance of certificates for shares of Common Stock upon conversion of shares of this Series shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than that of the holder of the share or shares of this Series converted, the person or persons requesting issuance thereof shall pay to the Corporation the amount of any tax which may be payable in respect to any transfer involved in such issuance or shall establish to the satisfaction of the Corporation that such tax has been paid. The Corporation shall not be required to issue fractional shares of Common Stock upon conversion of shares of this Series. If more than one share of this Series shall be converted at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares so converted. If any fractional interest in a share of Common Stock would be deliverable upon the conversion of any shares, the Corporation shall, in lieu of delivering the fractional share thereof, make a cash adjustment in respect of such fraction in an amount equal to the same fraction of the Current Market Price of one share of the Common Stock of the Corporation on the last day business day before the Date of Conversion. The "Current Market Price" on any given day shall be: (I) the closing sale price regular way of the shares of Common Stock of the Corporation on The New York Stock Exchange, or, in case no such sale takes place on such day, the reported closing bid price regular way of the shares of Common Stock of the Corporation on such day on The New York Stock Exchange, or if the Common Stock of the Corporation is not listed or admitted to trading on The New York Stock Exchange, the principal exchange on which such stock is traded or (ii) if the Current Market Price on such day of the Common Stock of the Corporation is 13 not available pursuant to one of the methods specified above, then the average of the bid and asked prices for the Corporation's Common Stock on such day as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose. At the option of the Corporation, by vote of the Board of Directors, the Corporation may from time to time cause the holders of the shares of this Series to convert their shares in accordance with this Section 6. In the event that the Corporation causes fewer than all of the shares of this Series to be converted at any one time, the shares so to be converted shall be selected by lot or pro rata. The Corporation shall cause a notice to be mailed, first class postage prepaid, at least 30 days, but not more than 90 days, prior to the Date of Conversion, to each holder of record of shares of this Series. Such notice shall be mailed to all record holders at their respective addresses as they shall appear upon the books of the Corporation and shall set forth the date of such conversion and the place for shares to be converted. In case the Corporation causes fewer than all of the shares represented by any one certificate to be converted, a new certificate representing the unredeemed shares shall be issued to the converting holder at the expense of the Corporation. Notwithstanding the foregoing, the Corporation may not cause the conversion of shares of this Series in accordance with this paragraph if within 15 days after delivery of the conversion notice contemplated by this paragraph, the holder of the shares of this Series which are the subject of the conversion notice (I) advised the Corporation in writing that such holder's Federal Communication Commission ("FCC") counsel has informed such holder that such FCC counsel believes it is reasonably likely that the holder's conversion of shares of this Series into shares of the Corporation's Common Stock would result in the attribution of properties of the Corporation and its Affiliates to the Walt Disney Company and its Affiliates under the multiple ownership rules, or would cause The Walt Disney Company and its Affiliates to be in violation of the cross-interest policy of, the FCC, or (ii) delivers written opinion of counsel reasonably satisfactory to the Corporation to the effect that it is reasonably likely that The Walt Disney Company's and its Affiliates' ownership of shares of the Corporation's Common Stock would cause violation of any federal or state law. The initial Common Stock Conversion Number is 10. (A) Adjustment of the Common Stock Conversion Number. The Common Stock Conversion Number shall be subject to adjustment from time to time as follows. In case the Corporation shall (I) subdivide or split the outstanding Common Stock into a larger number of shares of Common Stock by reclassification or otherwise or (ii) combine outstanding Common Stock into a smaller number of shares of Common Stock by reclassification or otherwise, the Common Stock Conversion Number in effect immediately prior thereto shall be adjusted proportionately so that the holder of a share of this Series thereafter converted shall be entitled to receive the number of shares of Common Stock that her or it would have owned after the happening of either of such events had such share of this Series been converted immediately prior to the happening of such event. An adjustment made pursuant to this subparagraph (A) shall become 14 effective immediately after the effective date of such subdivision, split or combination or reclassification. This provision for adjustment of the Common Stock Conversion Number shall apply in each successive instance in which an adjustment is required thereby. No adjustment in the Common Stock Conversion Number resulting from the application of this provision is to be given effect unless, by making such adjustment, the Common Stock Conversion Number in effect immediately prior to such adjustment would be changed by 1% or more, but any adjustment which would change the Common Stock Conversion Number by less than 1% is to be carried forward and given effect in making future adjustments. All calculations under this Section 6 shall be made to the nearest one-hundredth (1/100th) of a share of Common Stock of the Corporation. (B) EFFECT OF A REORGANIZATION OR CONSOLIDATION. In case the Corporation shall effect any capital reorganization or reclassification of its Common Stock (except as provided in subparagraph (A) and other tan an change in par value, or from par value to no par value, or from no par value to par value) or shall consolidate or merge with or into any other Person (other than a merger in which the Corporation is the surviving corporation which does not result in any reclassification of , or change in, the outstanding shares of the Corporation's Common Stock) or shall sell or transfer substantially al its assets to any other Person, (i) as a condition of such reorganization, reclassification, consolidation, merger, sale or transfer, lawful provision shall be made whereby the holders of shares of this Series shall, if required to convert such shares at any time after the consummation of such transaction, receive upon conversion thereof in lieu of each share of Common Stock issuable upon conversion of such shares prior to such consummation the same kind and amount of stock (or other securities, cash or property, if any) as may be issuable or distributable in connection with such transaction with respect to each outstanding share of Common Stock subject to adjustments for subsequent subdivision, splits or combination or reclassification of shares, capital reorganization, consolidations or mergers as nearly equivalent as possible to the adjustments provided for in this Section 6 or (ii) at the option of the Corporation, by vote of the Board of Directors, the Corporation may cause the holders of the shares of this Series to convert their share in accordance with this Section 6; PROVIDED that such holders receive upon conversion their of consideration equal to the amount which would be paid to the holder of the Common Stock Conversion Number of shares of Common Stock for each share of this Series held by such holder on the date of such reorganization or reclassification, consolidation or merger or sale or transfer of all or substantially all of the Corporation's assets; and PROVIDED FURTHER, that the Corporation may not cause the conversion of shares of this Series in accordance with clause (ii) of this paragraph if within 15 days after delivery of the conversion notice contemplated by Section 6 hereof, the holder of the shares of this Series which are the subject of the conversion notice advises the Corporation in writing that such holder's FCC counsel has informed such holder that such FCC counsel believes it is reasonably likely that the holder's conversion of shares of this Series into shares of the Corporation's Common Stock would result in the attribution of properties of the Corporation and its 15 Affiliates to The Walt Disney Company and its Affiliates under the multiple ownership rules, or would cause The Walt Disney Company and its Affiliates to be in violation of the cross-interest policy of, the FCC. Whenever the number of shares of Common Stock deliverable upon the conversion of shares of this Series shall be adjusted pursuant to the provision hereof, the Corporation shall forthwith file at its principal office and with any Transfer Agent for this Series and for the Common Stock a statement, signed by the President or one of the Vice-Presidents of the Corporation and by its Treasurer or one of its Assistant Treasurers, stating the adjusted number of shares of Common Stock deliverable per share of this Series and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment and upon which such calculation is based, and shall give notice (I) by certified or registered mail, postage prepaid, (ii) by a nationally known overnight delivery service or (iii) by hand, of such adjustment to each holder of record of this Series. Each adjustment shall remain in effect until a subsequent adjustment hereunder is required. In the event: (a) of the occurrence of any of the events referred to in subparagraphs (A) and (B) above whether or not they would require an adjustment in the Common Stock Conversion Number under any such subparagraph (including an adjustment of less than 1%); or (b) of the Liquidation of the Corporation; then the Corporation shall cause to be given to any Transfer Agent for this Series and to the holders of record of the outstanding shares of this Series notice (I) by certified or registered mail, postage prepaid, (ii) by a nationally known overnight delivery service or (iii) by hand at least twenty days prior to the applicable date hereinafter specified, a notice describing the event and stating the effect, if any, that such event will have upon the Common Stock Conversion Number, and the date on which any such subdivision, split or combination or reclassification or other capital reorganization or consolidation, merger or sale of assets referred to in subparagraph (A) or (B) of this Section 6 or such Liquidation is expected to become effective. The Corporation covenants that it will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of issuance upon conversion of the outstanding shares of this Series, such number of shares of Common Stock as shall be issuable upon the conversio0n of all such outstanding share of this Series. The Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any 16 applicable law or regulation, or of any requirement of any national securities exchange upon which the Common Stock may be listed. The Corporation will not take any action which results in any adjustment to the Common Stock Conversion Number if the total number of shares of Common Stock issued and issuable after such action upon conversion of the shares of this Series would exceed the total number of shares of Common Stock then authorized by the Amended and Restated Articles of Incorporation of the Corporation. The shares of Common Stock issuable upon conversion of the shares of this Series, when the same shall be issued in accordance with the terms of this Series, are hereby declared to be in shall be fully paid shares of Common Stock and not liable to any call, taxes or assessments thereon, and the holders thereof shall not be liable for any further payments in respect thereof. "Common Stock: when used in Section 6 with reference to the Common Stock into which this Series in convertible shall mean only Common Stock as authorized by the Amended and Restated Articles of Incorporation of the Corporation to the date of this resolution, and any shares into which such Common Stock may thereafter have been changed, and, when otherwise used throughout this certificate, shall also include shares of the Corporation of any other class or series, whether now or hereafter authorized that ranks or is entitled to participation, as to payment of assets upon Liquidation and payment of dividends, substantially on a parity with such Common Stock or other class of shares into which such Common Stock may have changed. "Person" when used in Section 5 with reference to a transfer of the shares of this Series or Section 6 with reference to the consolidation or merger of the Corporation or the sale or transfer of all or substantially all of the Corporation's assets shall mean and include any individual, corporation, limited liability company, partnership (limited or general), joint venture, joint stock company, association, trust, any other unincorporated organization or entity and a governmental entity or any department or agency thereto. 7. VOTING RIGHTS. In addition to any voting rights provided by law, each holder of this Series Shall be entitled to vote with respect to all matters upon which holders of the Corporation's Common Stock are entitled to vote (except as otherwise provided by law or by any other provision of the Amended and Restated Articles of Incorporation or of this Section). In exercising such voting rights, each holder of shares of this Series who holds such shares on the record date for such vote in his or its name on the transfer books of the Corporation shall be entitled to vote, in person or by proxy, 1/5 of the number of shares of this Series held by such holder multiplied by the Common Stock Conversion Number. Except as otherwise provided by law, the holders of Common Stock and shares of this Series shall vote together as a single class on all matters. At any time when shares of this Series are outstanding, the Corporation shall not, without the approval of a majority of the holders of record of the then outstanding shares of this Series, given in writing or by vote at a meeting 17 consenting or voting (as the case may be) separately as a single class, amend, alter, repeal or modify (I) any rights, preferences or privileges of this Series as set forth in this Certificate of Designations or (ii) any other provisions of the Amended and Restates Articles of Incorporation or this Certificate of Designations, if such amendment, alteration, repeal or modification would have a material adverse effect on the rights of the holders of the shares of this Series. 8. OTHER RIGHTS. The holders of this Series shall not have any other preferences or special rights. FOURTH: The name of the initial registered agent of the corporation is Charles E. Clark and the street address of his initial registered office is One Herald Plaza, Miami, Florida 33101. FIFTH: (a) The number of directors of the corporation shall not be less than ten nor more than twenty, the exact number to be fixed from time to time solely by resolution of the Board of Directors, acting by not less than a majority of the directors then in office. (b) The Board of Directors shall be divided into three classes, with the term of office of one class expiring each year. At the 1989 annual meeting of shareholders, six directors of the first class shall be elected to hold office for a term expiring at the 1990 annual meeting of shareholders, five directors of the second class shall be elected to hold office for a term expiring at the 1991 annual meeting of shareholders and five directors of the third class shall be elected to hold office for a term expiring at the 1992 annual meeting of shareholders. Commencing with the 1990 annual meeting of shareholders, each class of directors whose term shall then expire shall be elected to hold office for a three year term. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification, removal from office or other termination of service. In case of any change in the number of directors, any increase or decrease shall be apportioned among the classes so as to make all classes as nearly equal in number as possible. No reduction in the number of directors shall have the effect of shortening the term of an incumbent director. (c) Any director or the entire Board of Directors of the corporation may be removed only for cause. At any annual meeting of shareholders of the corporation or at any special meeting of shareholders of the corporation the notice of which shall state that the removal of a director or directors is among the purposes of the meeting, the holders of 80 percent of the combined voting power of the then outstanding shares of capital stock entitled to vote thereon, present in person or by proxy, may remove such director or directors for cause. 18 (d) Newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled solely by the Board of Directors, acting by not less than a majority of the directors then in office, even if less than a quorum. Any director so chosen shall hold office only until the next election of directors by the shareholders. (e) Notwithstanding any provision of this Article FIFTH, whenever the holders of any one or more series of Preference Stock issued by the corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of shareholders or any class or series, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of these Amended and Restated Articles of Incorporation or the resolution or resolutions adopted by the Board of Directors pursuant to Article THIRD hereof applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms. (f) This Article FIFTH may not be repealed or amended in any respect, and no provision inconsistent with this Article FIFTH may be adopted, unless such action is approved by the affirmative vote of the holders of not less than 80 percent of the combined voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors." SIXTH: Except as otherwise provided herein or by law, the Restated Articles of Incorporation of the corporation shall be amended only by the affirmative vote of the holders of a majority of the shares entitled to vote on such amendment, voting as a single class. SEVENTH: Except as otherwise provided herein, the affirmative vote of the holders of two-thirds of the outstanding shares of the Preference Stock and the Common Stock of the corporation, voting as a single class, and two-thirds of the outstanding shares of each class of shares, if any, entitled by law to a class vote thereon, shall be required for: (a) any consolidation of the corporation and another corporation into a new corporation; (b) any merger of the corporation and another corporation where the corporation is not the surviving corporation; (c) (i) any merger of the corporation and another corporation where the corporation is the surviving corporation, (ii) any acquisition of all or substantially all the assets of another corporation by the corporation or one or more of its subsidiaries, or (iii) any acquisition by the corporation or one or more of its subsidiaries of shares of a corporation entitling the holder thereof 19 to exercise a majority of the voting power in the election of the directors of such corporation without regard to voting power which may thereafter exist upon a default, failure, or other contingency, provided that such merger, acquisition of assets or acquisition of shares involves the issuance or transfer by the corporation of such number of its shares as entitle the holders to exercise one-sixth or more of the voting power of the corporation in the election of its directors immediately after the consummation of such transaction; and (d) any sale, lease, exchange, or other disposition of all, or substantially all, the property and assets of the corporation. EIGHTH: In addition to any affirmative vote required by law or these Articles of Incorporation, the affirmative vote of the holders of not less than 80 percent of the outstanding shares of "Voting Stock" (as hereinafter defined) of the corporation shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) or of any series of transactions which, if taken together, would constitute a Business Combination of the corporation or any subsidiary with any "Related Person" (as hereinafter defined); provided, however, that the 80 percent voting requirement shall not be applicable if: (a) The "Continuing Directors" of the corporation (as hereinafter defined) by a majority vote (i) have expressly approved in advance the acquisition of Voting Stock of the corporation that caused the Related Person to become a Related Person, or (ii) have approved the Business Combination; or (b) The Business Combination is a merger or consolidation and the cash or fair market value of the property, securities or other consideration to be received per share by holders of Common Stock of the corporation in the Business Combination is not less than the highest per share price (with appropriate adjustments for recapitalizations and for stock splits, stock dividends and like distributions) paid by the Related Person in acquiring any of its holdings of the corporation's Common Stock either in or subsequent to the transaction or series of transactions in which the Related Person became a Related Person. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise. For the purposes of this Article EIGHTH: (a) the term "Business Combination" shall mean (i) any merger or consolidation of the corporation or a subsidiary with or into a Related Person, (ii) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or any other security device, of all or any "Substantial Part" (as hereinafter defined) of the assets either of the corporation 20 (including without limitation any voting securities of a subsidiary) or of a subsidiary, to a Related Person, (iii) any merger or consolidation of a Related Person with or into the corporation or a subsidiary of the corporation, (iv) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the corporation or a subsidiary of the corporation, (v) the issuance or transfer of any securities of the corporation or a subsidiary of the corporation to a Related Person, (vi) any reclassification of securities (including a reverse stock split) or recapitalization that would have the effect of increasing the voting power of a Related Person, and (vii) the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of any Related Person. (b) The term "Related Person" shall mean and include any individual, corporation, partnership or other person or entity which, together with its "Affiliates" and "Associates" (as defined on December 20, 1984 in Rule 12b-2 under the Securities Exchange Act of 1934), "Beneficially Owns" (as defined on December 20, 1984 in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934) in the aggregate 15 percent or more of the outstanding Voting Stock of the corporation, any Affiliate or Associate of any such individual, corporation, partnership or other person or entity, and any assignee of any of the foregoing. (c) The term "Substantial Part" shall mean more than 30 percent of the fair market value of the total assets of the corporation in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made. (d) Without limitation, any shares of Voting Stock of the corporation that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by the Related Person. (e) For the purposes of subparagraph (b) of this Article EIGHTH, the term "other consideration to be received" shall include, without limitation, Common Stock of the corporation retained by its existing public stockholders in the event of a Business Combination in which the corporation is the surviving corporation. (f) The term "Voting Stock" shall mean all outstanding shares of capital stock of the corporation or another corporation entitled to vote generally in the election of directors and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares. (g) The term "Continuing Director" shall mean a director who either (i) was a member of the Board of Directors of the corporation immediately prior to the time that the Related Person involved in a Business Combination became a Related Person or (ii) was designated (before his or her initial election as director) as a Continuing Director by a majority of the then Continuing Directors. 21 This Article EIGHTH may not be repealed or amended in any respect, and no provision inconsistent with this Article EIGHTH may be adopted, unless such action is approved by the affirmative vote of the holders of not less than 80 percent of the outstanding shares of Voting Stock of the corporation. NINTH: The power of the shareholders of the corporation to consent in writing, without a vote at an annual or special meeting of shareholders of the corporation, to the taking of any action is specifically denied. This Article NINTH may not be repealed or amended in any respect, and no provision inconsistent with this Article NINTH may be adopted, unless such action is approved by the affirmative vote of the holders of not less than 80 percent of the combined voting power of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors." TENTH: (a) So long as newspapers account for a majority of the consolidated operating revenue of the corporation, the affirmative vote of the holders of not less than 80% of the "Voting Stock" (as hereinafter defined) of the corporation other than Voting Stock of the corporation which is "beneficially owned" (as hereinafter defined), directly or indirectly, by the "Other Party" (as hereinafter defined) shall be required for the approval or authorization of: (i) any "Business Combination" (as hereinafter defined) if, immediately following the consummation of such Business Combination, more than 20% of the Voting Stock of the corporation (or of the surviving entity in the case of a merger or consolidation ) would be beneficially owned, directly or indirectly, by (a) any individual who is not a citizen of the United States, (b) any corporation, partnership or other entity organized under laws other than the laws of the United States or any state of the United States, (c) any foreign government, (d) any "group" (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on January 1, 1989) which includes any individual or entity referred to in this clause (i), or (e) any corporation, partnership or other entity "controlled" (as hereinafter defined), directly or indirectly, by any individual, entity or group referred to in this clause (i); or (ii) any other Business Combination unless the "Continuing Directors" (as hereinafter defined) by majority vote, based upon information known to them after reasonable inquiry and on their good faith assessment of the character, reputation, experience and intentions of the Other Party and its "affiliates" and "associates" (as hereinafter defined), determine in the good faith exercise of their business judgment that, following such Business Combination, newspapers which accounted for at least 90% of the aggregate daily circulation of all newspapers controlled, directly or indirectly, by the corporation immediately prior to the "Initial Date" (as hereinafter defined) would 22 continue to serve their respective communities and other constituencies (including, without limitation, subscribers, readers, advertisers and customers) with the same degree of journalistic excellence, integrity and independence as existed prior to the Initial Date. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, in these Articles of Incorporation or in any agreement with any national securities exchange or otherwise. (b) In evaluating any proposed Business Combination referred to in clause (ii) of paragraph (a) of this Article TENTH, the Continuing Directors shall give due consideration to (but shall not be bound by) the recommendation of a panel of independent experts (the "Independent Panel") selected by the Continuing Directors from individuals who are experts in the field of newspaper journalism and who have no material relationship (through employment, stock ownership or otherwise) with the corporation, the Other Party or any affiliate or associate of the corporation or of the Other Party. The corporation and the Other Party shall be given the opportunity to present information to the Independent Panel in connection with the Independent Panel's deliberations. The Continuing Directors are authorized, if and to the extent they deem such action to be appropriate, to cause the corporation to enter into agreements with the members of the Independent Panel pursuant to which the corporation shall pay such members reasonable compensation for serving on the Independent Panel, reimburse such members for their reasonable expenses incurred in connection therewith and indemnify such panel members against liabilities incurred in connection therewith. (c) For the purposes of this Article TENTH: , (i) The terms "affiliate", "associate" and "control" shall have the respective meanings ascribed to such terms on January 1, 1989 in Rule 12b-2 under the Exchange Act. (ii) The term "Business Combination" shall mean (a) any merger or consolidation (x) to which the corporation is a party in which the corporation is not the continuing or surviving corporation, (y) pursuant to which shares of Common Stock of the corporation are converted into cash, securities or other property, or(z) as a result of which the shareholders of the corporation immediately prior to such consolidation or merger would not, immediately after such consolidation or merger, beneficially own, directly or indirectly, a majority of the Voting Stock of the surviving entity (or to its ultimate parent corporation, if any), (b) any reclassification of securities (including a reverse stock split), recapitalization, merger or reorganization of the corporation or other transaction or series of transactions involving the corporation that would have the effect, directly or 23 indirectly, of increasing the proportion of the Voting Stock of the corporation beneficially owned, directly or indirectly, by any "Person" (as hereinafter defined) immediately following the consummation of such reclassification, recapitalization, merger, reorganization or other transaction or series of transactions to an amount equal to or greater than 80% or (c) any sale, lease, exchange, transfer or other disposition (including, without limitation, a mortgage or other security device) (a "Disposition") of (x) all or substantially all of the assets of the corporation (including, without limitation, any Voting Stock of a subsidiary ) or (y) any assets of the corporation if such Disposition is pursuant to a plan, arrangement or understanding by any Person or Persons for the Disposition of all or substantially all of the assets of the corporation. (iii) A Person shall be deemed to "beneficially own", and shall be deemed to be the "beneficial owner" of, any Voting Stock which such Person or any of such Person's affiliates or associates beneficially owns, directly or indirectly, within the meaning of Rule 13d-3 or Rule 13d-5 under the Exchange Act as in effect on January 1, 1989. Without limitation, any shares of Voting Stock of the corporation that any Person has the right to acquire pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such Person. (iv) The term "Continuing Director" shall mean (a) any member of the Board of Directors of the corporation who is not an Other Party, an affiliate or associate of an Other Party or a representative of an Other Party or any such affiliate or associate and who was a member of the Board of Directors of the corporation on January 1, 1989 and (b) any successor of a Continuing Director who is not an Other Party, an affiliate or associate of an Other Party or a representative of an Other Party or any such affiliate or associate and who is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors of the corporation. (v) The term "Initial Date" shall mean the earlier of (a) the first date on which any Person acquires control, directly or indirectly, of the corporation or (b) the date on which a proposal for a Business Combination referred to in clause (ii) of paragraph (a) of this Article TENTH is first made known to the corporation or publicly announced. (vi) The term "Other Party" shall mean (x) in the case of a merger or consolidation referred to in clause (a) of the definition of Business Combination, any Person (other than the corporation) that is or would be a party to such merger or consolidation, (y) in the case of a transaction referred to in clause (b) of the definition of Business Combination, any Person that would, immediately following the consummation of such transaction or transactions, beneficially own, directly or indirectly, 80% or more of the Voting Stock of the corporation and (z) in the case of a transaction referred to in clause (c) of the definition of Business Combination, any Person that is or 24 would be acquiring assets pursuant to such transaction. In the event there is more than one Other Party to a Business Combination, each reference herein to the "Other Party" shall be deemed to refer to all such Other Parties; and in the event a "group" (as such term is used in the definition of Person) is an Other Party, each member of the group shall be deemed to be an Other Party. (vii) The term "Person" shall mean any individual, corporation, partnership, other entity or "group" (as such term is used in Sections 13(d) (3) and 14(d) (2) of the Exchange Act as in effect on January 1, 1989). (viii) The term "Voting Stock" shall mean all outstanding shares of capital stock of the corporation or (if the context so requires) another corporation entitled to vote generally in the election of directors and each reference to a proportion of shares of Voting Stock shall refer to such proportion of the votes entitled to be cast by such shares. (d) A majority of the Continuing Directors shall have the power and duty to determine for the purposes of this Article TENTH, based upon information known to them after reasonable inquiry, all facts relating to the applicability of, and necessary to determine compliance with, this Article TENTH, including, without limitation, (i) whether newspapers account for a majority of the consolidated operating revenue of the corporation, (ii) whether a Business Combination would have any of the effects specified in clause (i) of paragraph (a) of this Article TENTH, (iii) whether a Person is an associate or affiliate of another Person, (iv) whether any transaction or transactions referred to in the definition of Business Combination would have any of the effects specified therein, (v) whether the Initial Date has occurred and, if so, the date of such occurrence, (vi) the amount, if any, of Voting Stock of the corporation which is beneficially owned, directly or indirectly, by any Person, (vii) whether a Person is an Other Party and (viii) such other matters with respect to which a determination is required under this Article TENTH. The good faith determination of a majority of the Continuing Directors on such matters, and the good faith determination of a majority of the Continuing Directors on matters referred to in clause (ii) of paragraph (a) of this Article TENTH, shall be conclusive and binding for all purposes of this Article TENTH. (e) This Article TENTH may not be repealed or amended in any respect, and no provision inconsistent with this Article TENTH may be adopted, unless such action is approved by the affirmative vote of the holders of not less than 80% of the Voting Stock of the corporation other than Voting Stock of the corporation which is beneficially owned, directly or indirectly, by the Other Party." ELEVENTH: If the Corporation acquires its own shares, such shares shall belong to the 25 Corporation and shall constitute treasury shares unless disposed of or canceled by the Corporation. Executed this 2nd day of February, 1998. KNIGHT-RIDDER, INC. By: P. Anthony Ridder Director 26 EX-10.A 3 EXHIBIT 10(A) ================================================================================ EXHIBIT 10 (a) KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS EFFECTIVE JULY 1, 1997 ================================================================================ KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS TABLE OF CONTENTS Page ARTICLE I PURPOSE AND INTENT OF PLAN........................................1 ARTICLE II DEFINITIONS.......................................................1 ARTICLE III ANNUAL RETAINER FEE...............................................3 III.1 TIME AND FORM OF PAYMENT..........................................3 III.2 ELECTION TO RECEIVE STOCK.........................................3 III.3 DETERMINATION OF NUMBER OF SHARES OF STOCK........................3 III.4 REGISTRATION OF STOCK.............................................4 ARTICLE IV BOARD MEETING AND COMMITTEE FEES..................................4 IV.1 BOARD MEETING FEE.................................................4 IV.2 COMMITTEE MEETING FEE.............................................4 IV.3 COMMITTEE CHAIRPERSON FEE.........................................4 ARTICLE V ANNUAL OPTION GRANTS..............................................4 V.1 GRANT OF OPTIONS..................................................4 V.2 VESTING OF OPTIONS; EXPIRATION....................................5 V.3 EXERCISE OF OPTIONS FOLLOWING TERMINATION OF SERVICE..............5 V.4 TIME AND MANNER OF EXERCISE OF OPTIONS............................5 V.5 RESTRICTIONS ON TRANSFER..........................................7 ARTICLE VI SPECIAL PROVISIONS FOR OUTSIDE DIRECTORS..........................7 VI.1 OUTSIDE DIRECTORS ELIGIBLE FOR PHANTOM SHARE GRANT................7 VI.2 OUTSIDE DIRECTORS ELIGIBLE FOR RETIREMENT PLAN....................7 ARTICLE VII SHARES AVAILABLE UNDER PLAN.......................................7 ARTICLE VIII RECAPITALIZATION OR REORGANIZATION................................8 VIII.1 AUTHORITY OF THE COMPANY AND SHAREHOLDERS.........................8 VIII.2 CHANGE IN CAPITALIZATION..........................................8 ARTICLE IX TERMINATION AND AMENDMENT OF THE PLAN.............................9 IX.1 TERMINATION.......................................................9 IX.2 GENERAL POWER OF BOARD............................................9 IX.3 WHEN DIRECTOR CONSENT REQUIRED....................................9 ARTICLE X ADMINISTRATION OF PLAN............................................9 ARTICLE XI MISCELLANEOUS....................................................10 XI.1 TAX WITHHOLDING..................................................10 XI.2 NO RIGHT TO REELECTION...........................................10 XI.3 UNFUNDED PLAN....................................................10 XI.4 OTHER COMPENSATION ARRANGEMENTS..................................10 XI.5 SECURITIES LAW RESTRICTIONS......................................10 XI.6 COMPLIANCE WITH RULE 16B-3.......................................11 XI.7 EXPENSES.........................................................11 XI.8 GOVERNING LAW; VENUE.............................................11 -i- KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS The KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS is hereby established by Knight-Ridder, Inc. effective July 1, 1997. ARTICLE I PURPOSE AND INTENT OF PLAN The purpose of the Plan is to attract and retain the services of qualified individuals who are not employees of the Company to serve as members of the Board. This Plan sets forth the terms of compensation to be provided to such Directors for their services as members of the Board of the Company. Articles III, IV and V provide for different types of compensation payable to all Directors. Article VI provides for grants of Phantom Share Units to certain Outside Directors and for participation in the Company's Retirement Plan for other Outside Directors. This Plan and the Retirement Plan reflect all compensation programs in effect for Directors. ARTICLE II DEFINITIONS As used in this Plan, the following terms shall have the meaning hereinafter set forth: II.1 "Annual Retainer Fee" means the annual fee payable to a Director for service on the Board. The Annual Retainer Fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The Annual Retainer Fee shall be pro-rated on a quarterly basis for a Board member who serves less than an entire calendar year. II.2 "Beneficiary" means the person designated by the Director to receive benefits hereunder following the death of the Director or, if the Director fails to so designate, the Director's estate. II.3 "Board" means the Board of Directors of the Company. II.4 "Code" means the Internal Revenue Code of 1986, as amended. II.5 "Common Stock" means the Common Stock of the Company, par value $.02 1/12 per share. -1- II.6 "Company" means Knight-Ridder, Inc., a Florida corporation, or any successor legal entity. II.7 "Disability" means a Director's physical or mental condition which is expected to render the Director unable to perform his or her usual duties or any comparable duties for the Company. The determination of a Director's Disability will be made by the Board in its sole discretion. II.8 "Director" means a member of the Board who is not an employee of the Company or any of its subsidiaries or affiliates. II.9 "Effective Date" means July 1, 1997. II.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended. II.11 "Fair Market Value" means the mean between the highest and lowest sales price of a share of Common Stock on the date in question as reported on the composite tape for issues listed on the New York Stock Exchange. If no transaction was reported on the composite tape in the Common Stock on such date, the prices used shall be the prices reported on the nearest day preceding the date in question. If the Common Stock is not then listed or admitted to trading on such Exchange, "fair market value" shall be the mean between the closing bid and asked prices on the date in question as furnished by any member firm of the New York Stock Exchange selected from time to time for that purpose by the Board. II.12 "Option" means an option to purchase shares of Common Stock awarded to a Director pursuant to the Plan, which option shall not be intended to qualify, and shall not be treated, as an "incentive stock option" within the meaning of Section 422 of the Code. II.13 "Outside Director" means any Director who is not, and never was, an employee of the Company or any of its subsidiaries or affiliates. II.14 "Phantom Share Unit" means a bookkeeping unit representing one share of Common Stock. II.15 "Plan" means this Knight-Ridder, Inc. Compensation Plan for Nonemployee Directors. II.16 "Retirement" means the Termination of Service of a Director at or after age sixty-five (65). -2- II.17 "Retirement Plan" means the Knight-Ridder, Inc. Retirement Plan for Outside Directors, a copy of which is attached hereto as Appendix Three. II.18 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. II.19 "Termination of Service" shall mean cessation of service as a Director of the Company. ARTICLE III ANNUAL RETAINER FEE III.1 TIME AND FORM OF PAYMENT. The Annual Retainer Fee is payable in equal quarterly payments on the date of the Board's regularly scheduled quarterly meeting, except as provided in Section 3.3 concerning payment in Common Stock. Through the date of first quarterly meeting in 1998, each Director shall receive his or her quarterly payment of the Annual Retainer Fee entirely in cash. Effective with the date of the second quarterly meeting in 1998, one-half of the quarterly payment of the Annual Retainer Fee shall be paid in Common Stock. The balance of the quarterly payment of the Annual Retainer Fee shall be paid in cash or, if the Director elects, in the manner described below, in Common Stock or a combination of cash and Common Stock. III.2 ELECTION TO RECEIVE STOCK. On or before April 1, 1998, any Director who desires to receive any portion of the balance of each quarterly payment of the Annual Retainer Fee due for the remainder of 1998 in Common Stock shall so indicate on a written election form filed with the Secretary of the Company. On or before November 30, 1998 and November 30th of each succeeding year, any Director who desires to receive any portion of the balance of the Annual Retainer Fee due for the succeeding calendar year in Common Stock shall so indicate on a written election form filed with the Secretary of the Company. A newly elected Director may make such an election with respect to one-half of his or her pro-rated Annual Retainer Fee for the remainder of the calendar year within one month following his or her election to the Board. III.3 DETERMINATION OF NUMBER OF SHARES OF STOCK. The number of shares of Common Stock to be paid to each Director shall be determined by dividing the amount of the Annual Retainer Fee to be paid in Common Stock by the Fair Market Value of a share of Common Stock on the date of payment, described in the next sentence. The date of payment of that portion of the Annual Retainer Fee to be paid in Common Stock shall be the fifth business day before the date of the regularly scheduled quarterly meeting of the Board. -3- III.4 REGISTRATION OF STOCK. The appropriate number of shares of Common Stock shall be registered in the name of the Director and shall be delivered to the Director by paperless transfer effected through records maintained by the Depository Trust Company (the "DTC"). Such registration shall occur as soon as possible after the date for payment of such Common Stock, as provided above. Upon registration, the Director shall have all the rights and privileges of a stockholder as to such shares, including the right to receive dividends and the right to vote such shares. The shares of Common Stock paid to the Director hereunder are immediately vested upon payment, are not forfeitable to the Company for any reason and shall not be subject to any restrictions on transfer (other than those imposed under applicable law or under any trading policy of the Company). ARTICLE IV BOARD MEETING AND COMMITTEE FEES IV.1 BOARD OF MEETING FEE. Each Director also shall receive a fee for attendance, either in person or by electronic medium, at each meeting of the Board. The Board meeting fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The Board meeting fee shall be paid in cash on the date of the Board meeting. IV.2 COMMITTEE MEETING FEE. Each Director also shall receive a fee for attendance, either in person or by electronic medium, at each meeting of a committee of the Board on which the Director serves. The committee meeting fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The committee meeting fee shall be paid in cash on the date of the committee meeting. IV.3 COMMITTEE CHAIRPERSON FEE. Each Director who serves as chairperson of a committee of the Board shall receive an additional fee for such service. The annual committee chairperson fee currently in effect is set forth on Appendix One hereto, which the Board may amend from time to time. The committee chairperson fee shall be paid in quarterly installments in cash on the date of each regularly scheduled quarterly meeting of the Board. The committee chairperson fee shall be pro-rated on a quarterly basis for service as chairperson of a committee for less than a full year. ARTICLE V ANNUAL OPTION GRANTS V.1 GRANT OF OPTIONS. Beginning with December 1997, an annual option grant will be made to each Director to purchase such number of shares of -4- Common Stock of the Company as may be established by the Board. The number of options to be granted on an annual basis is set forth on Appendix One hereto, which the Board may amend from time to time. Such Option shall have a per share exercise price equal to the Fair Market Value of the Common Stock on the date of grant and shall be subject to the vesting schedule provided in Section 5.2 and to the other terms and conditions provided for herein. V.2 VESTING OF OPTIONS; EXPIRATION. One-third of the Options granted in any year shall vest and become exercisable on the first, second and third annual anniversaries of the date of grant. Each Option granted hereunder shall expire no later than ten (10) years after the date the Option is granted, but may expire before such date as provided in Section 5.3. V.3 EXERCISE OF OPTIONS FOLLOWING TERMINATION OF SERVICE (a) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DISABILITY OR RETIREMENT. If a Director ceases to be a member of the Board by reason of Disability or Retirement, all Options granted to such Director may be exercised by the Director at any time within five years after the date of Termination of Service. Options not exercisable at the beginning of the five-year period will become exercisable during such five-year period as if the Director had not Terminated Service, in accordance with Section 5.2, above. At the end of such five-year period, all Options not exercised shall expire. (b) EXERCISE FOLLOWING TERMINATION OF SERVICE DUE TO DEATH. If a Director ceases to be a member of the Board by reason of death, or if a former Director dies during the five-year period following Termination of Service due to Disability or Retirement, all Options granted to such Director may be exercised by such Director's estate, personal representative or beneficiary, as the case may be, at any time within the first to expire of the following periods: (i) three years after the date of the Director's death or (ii) five years after the date of the Director's Termination of Service. Options not exercisable at the date of death will become exercisable during such post-Termination period as if the Director had not died, in accordance with Section 5.2, above. At the end of such period, all Options not exercised shall expire. (c) EXERCISE FOLLOWING OTHER TERMINATIONS OF SERVICE. If a Director ceases to be a member of the Board for any reason other than Disability, Retirement or Death, then (i) the Director shall have the right, subject to the terms and conditions hereof, to exercise the Option, to the extent it has vested as of the date of such Termination of Service, at any time within three months after the date of such termination, and (ii) the unvested portion of any Options awarded to the Director shall be forfeited as of the date of Termination of Service. -5- V.4 TIME AND MANNER OF EXERCISE OF OPTIONS. (a) NOTICE OF EXERCISE. Subject to the other terms and conditions hereof, a Director (or other person exercising such options) may exercise any Options, to the extent such Options are vested, by giving written notice of exercise to the Company; provided, however, that in no event shall an Option be exercisable for a fractional share. The date of exercise of an Option shall be the later of (i) the date on which the Company receives such written notice or (ii) the date on which the conditions provided in Section 5.4(b) are satisfied. (b) PAYMENT. Payment for the shares of Common Stock to be received upon the exercise of Options must be made at the date of exercise of such Options and may be made in cash or by delivery to the Company of shares of Common Stock already owned by the Director (or other person exercising such Options) the Fair Market Value of which on the date of exercise is equal to the total exercise price, or in a combination of cash and shares. Payment of the exercise price in shares of Common Stock shall be made by (i) delivering to the Company the share certificate(s) or other evidence of ownership representing the required number of shares, with the Director (or other person exercising such Options) signing his or her name on the back, (ii) attaching executed stock powers to such share certificate(s) or (iii) paperless transfer of the required number of shares effected through records maintained by the DTC. Such shares shall be endorsed to the Company. The signature of the Director or other owner must be guaranteed by a commercial bank or trust company or by a brokerage firm having membership on the New York Stock Exchange. Exercise of any Options shall comply with Rule 16b-3 of the Exchange Act. (c) STOCKHOLDER RIGHTS. A Director shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until the shares have been issued to the Director, by delivery of stock certificates or by paperless transfer pursuant to Section 5.4(e), and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Director shall become the holder of record thereof. (d) LIMITATION ON EXERCISE. No Option shall be exercisable unless the Common Stock subject thereto has been registered under the Securities Act and qualified under applicable state "blue sky" laws in connection with the offer and sale thereof, or the Company has determined that an exemption from registration under the Securities Act and from qualification under such state "blue sky" laws is available. (e) ISSUANCE OF SHARES. Subject to the foregoing conditions, as soon as is reasonably practicable after its receipt of a proper notice of exercise and payment of the exercise price of the Option for the number of shares with respect to which the Option is exercised, the Company shall deliver to the Director (or such other person who exercised the Option), at the principal office of the Company or at such other location as may be acceptable -6- to the Company and the Director (or such other person), one or more stock certificates for the appropriate number of shares of Common Stock issued in connection with such exercise. Alternatively, the Company may effect such issuance of Shares by paperless transfer through records maintained by the DTC. Such shares shall be fully paid and nonassessable and shall be issued in the name of the Director (or such other person). V.5 RESTRICTIONS ON TRANSFER. An Option may not be transferred, pledged, assigned, or otherwise disposed of, except by will or by the laws of descent and distribution provided, however, that the Board may, subject to such terms and conditions as the Board shall specify, permit the transfer of an Option to a Director's family members or to one or more trusts established solely for the benefit of one or more of such family members. The Option shall be exercisable, during the Director's lifetime, only by the Director or by the person to whom the Option has been transferred in accordance with the previous sentence. A transferee's rights under an Option shall be no greater than the rights held by the Director under said Option. No assignment or transfer of the Option, or of the rights represented thereby, whether voluntary or involuntary, by operation of law or otherwise, except by will or the laws of descent and distribution, or as permitted under this Section, shall vest in the assignee or transferee any interest or right in the Option, but immediately upon any attempt to assign or transfer the Option the same shall terminate and be of no force or effect. ARTICLE VI SPECIAL PROVISIONS FOR OUTSIDE DIRECTORS VI.1 OUTSIDE DIRECTORS ELIGIBLE FOR PHANTOM SHARE GRANT. Each Outside Director shall receive grants of Phantom Share Units as described in Appendix Two to this Plan provided that such Outside Director either (i) was a Board member as of July 1, 1996 and was under age sixty-five on that date or (ii) began service as a Director of the Company on or after July 1, 1996. The Outside Directors who are eligible to receive grants of Phantom Share Units are referred to in the Plan, including Appendix Two, as "Eligible Outside Directors." VI.2 OUTSIDE DIRECTORS ELIGIBLE FOR RETIREMENT PLAN. An Outside Director who was age sixty-five or over on July 1, 1996 is not eligible to receive a grant of a Phantom Share Unit but is eligible to participate in the Retirement Plan. ARTICLE VII SHARES AVAILABLE UNDER PLAN Subject to the provisions of Article VIII of the Plan, the maximum number of shares of Common Stock which may be issued under the Plan in payment -7- of a Director's Annual Retainer Fee or upon exercise of Stock Options shall not exceed 200,000 shares (the "Share Limit"). Either authorized and unissued shares of Common Stock or treasury shares may be delivered pursuant to the Plan. For purposes of determining the number of shares that remain available for issuance under the Plan, the following rules shall apply: (a) the number of shares granted under the Plan or subject to any Option granted under the Plan shall be charged against the Share Limit; and (b) the Share Limit (as reduced under clause (a)) shall be increased by: (i) the number of shares subject to an Option which lapses, expires or is otherwise terminated without the issuance of such shares, (ii) the number of shares tendered to pay the exercise price of an Option, and (iii) the number of shares withheld to satisfy any tax withholding obligations of a Director with respect to any shares or other payments hereunder. ARTICLE VIII RECAPITALIZATION OR REORGANIZATION VIII.1 AUTHORITY OF THE COMPANY AND SHAREHOLDERS. The existence of the Plan shall not affect or restrict in any way the right or power of the Company or the shareholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company, any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. VIII.2 CHANGE IN CAPITALIZATION. Notwithstanding any other provision of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, reorganization, merger, consolidation, stock split, combination or exchange of shares or any other significant corporate event affecting the Common Stock, the Board in its discretion, may make (i) such proportionate adjustments as it considers appropriate (in the form -8- determined by the Board in its sole discretion) to prevent diminution or enlargement of the rights of Directors under the Plan with respect to the aggregate number of shares of Common Stock authorized for payment as Annual Retainer Fee under the Plan, for grants of Options under the Plan, the number of shares of Common Stock covered by each outstanding Option and the exercise prices in respect thereof, the number of shares of Common Stock covered by future Option grants and the number of Phantom Share Units credited to a Director's Phantom Share Account and/or (ii) such other adjustments as it deems appropriate. The Board's determination as to what, if any, adjustments shall be made shall be final and binding on the Company and all Directors. ARTICLE IX TERMINATION AND AMENDMENT OF THE PLAN IX.1 TERMINATION. The Plan shall terminate at such date as determined by the Board in it sole discretion. Termination of the Plan will not result in accelerated vesting of Options previously granted or payment of an Outside Director's Phantom Share Account before the date provided for in Appendix Two. Vesting of Options shall continue as described in Article V and payment of the Phantom Share Account will occur as provided in Appendix Two. IX.2 GENERAL POWER OF BOARD. Notwithstanding anything herein to the contrary, the Board may at any time and from time to time terminate, modify, suspend or amend the Plan in whole or in part; provided, however, that no such termination, modification, suspension or amendment shall be effective without shareholder approval if such approval is required to comply with any applicable law or stock exchange rule. IX.3 WHEN DIRECTOR CONSENT REQUIRED. The Board may not alter, amend, suspend, or terminate the Plan without the consent of any Director to the extent that such action would adversely affect his or her rights with respect to Common Stock or Options that have previously been granted or with respect to the amount then credited to the Outside Director's Phantom Share Account. ARTICLE X ADMINISTRATION OF PLAN The Board will be responsible for administering the Plan. The Board will have authority to adopt such rules as it may deem appropriate to carry out the purposes of the Plan, and shall have authority to interpret and construe the provisions of the Plan and any agreements and notices under the Plan and to make determinations pursuant to any Plan provision. Each interpretation, -9- determination or other action made or taken by the Board pursuant to the Plan shall be final and binding on all persons. ARTICLE XI MISCELLANEOUS XI.1 TAX WITHHOLDING. The Company or one of its subsidiaries shall have the right to withhold from payments made to a Director or to cause a Director (or such other person who exercises an Option) to make payment of any federal, state, local or foreign taxes required to be withheld with respect to any exercise of an Option. Subject to compliance with Rule 16b-3 of the Exchange Act and such other procedures established by the Company for this purpose, a Director (or such other person who exercises an Option) may irrevocably elect to have the required withholding tax obligation or, if the Company determines, any additional tax obligation with respect to any exercise of an Option satisfied by (a) having the Company withhold shares otherwise deliverable to the Director (or such other person) with respect to the exercise of the Option, or (b) delivering back to the Company shares received upon the exercise of the Option or delivering other shares of Common Stock; provided, however, that any such election shall be made at least six months prior to the date income, if any, is recognized with respect to the exercise of an Option. XI.2 NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. XI.3 UNFUNDED PLAN. This Plan is unfunded. Amounts payable under the Plan will be satisfied solely out of the general assets of the Company subject to the claims of the Company's creditors. No Director, Beneficiary or any other person shall have any interest in any fund or in any specific asset of the Company by reason of any amount credited to him hereunder, nor shall any Director, Beneficiary or any other person have any right to receive any distribution under the Plan except as, and to the extent, expressly provided in the Plan. XI.4 OTHER COMPENSATION ARRANGEMENTS. Payments received by a Director under any grant made pursuant to the provisions of the Plan shall not be included in, nor have any effect on, the determination of benefits under any other arrangement provided by the Company, including the Retirement Plan. XI.5 SECURITIES LAW RESTRICTIONS. The Company may require each Director purchasing or acquiring shares of Common Stock pursuant to the Plan to agree with the Company in writing that such Director is acquiring the shares for investment and not with a view to the distribution thereof. All certificates for -10- shares of Common Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Company may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission or any exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Company may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. No shares of Common Stock shall be issued hereunder unless the Company shall have determined that such issuance is in compliance with, or pursuant to an exemption from, all applicable federal and state securities laws. XI.6 COMPLIANCE WITH RULE 16b-3. The Plan is intended to comply with Rule 16b-3 under the Exchange Act and the Company shall interpret and administer the provisions of the Plan in a manner consistent therewith. XI.7 EXPENSES. The costs and expenses of administering the Plan shall be borne by the Company. XI.8 GOVERNING LAW; VENUE. The Plan shall be construed in accordance with the laws of the State of Florida. Any legal action or proceeding hereunder may be initiated only in Miami-Dade County, Florida. -11- KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS APPENDIX ONE AMOUNTS OF COMPENSATION AS OF JULY 1, 1997 PLAN SECTION NUMBER FORM OF COMPENSATION AMOUNT - ------------------- -------------------- ------ 2.1 Annual Retainer Fee $ 30,000 4.1 Board Meeting Fee $ 1,500 4.2 Committee Meeting Fee $ 1,000 4.3 Committee Chairperson Annual Fee $ 5,000 5.1 Annual Option Grant 2,000 Options Appendix Two, Annual Phantom Share Grant, Section C Outside Directors 600 Share Units 12 KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS APPENDIX TWO PHANTOM SHARE UNITS FOR ELIGIBLE OUTSIDE DIRECTORS A. ESTABLISHMENT OF PHANTOM SHARE ACCOUNTS. There shall be established on the records of the Company for each Eligible Outside Director a Phantom Share Account to which shall be credited that number of Phantom Share Units as provided herein. The crediting of Phantom Share Units to an Eligible Outside Director shall not confer on the Eligible Outside Director any rights as a shareholder of the Company. B. CREDITING OF PHANTOM SHARE UNITS; STATEMENTS. As of the date of the Board's regularly scheduled quarterly meeting for the last quarter of 1997, the Phantom Share Account of each Eligible Outside Director who also was a Director on July 1, 1996 will be credited with nine hundred (900) Phantom Share Units. The Phantom Share Account of each Eligible Outside Director who became a Director after July 1, 1996 will be credited with seven hundred fifty (750) Phantom Share Units. As of the date of each regularly scheduled quarterly meeting of the Board thereafter, the Phantom Share Account of each Eligible Outside Director shall be credited with one-quarter of the number of annual Phantom Share Units to be credited to Eligible Outside Directors, as established by the Board. The number of annual Phantom Share Units currently in effect is set forth on Appendix One to the Plan, which the Board may amend from to time. The Company will, on a quarterly basis, furnish each Eligible Outside Director with a statement setting forth the number of Phantom Share Units then credited to such Eligible Outside Director's Phantom Share Account and the value of such account as of the end of the preceding calendar quarter and all credits made to the Phantom Share Account during such quarter. C. DIVIDEND EQUIVALENTS ON PHANTOM SHARE UNITS. In the event that the Company pays any cash or other dividend or makes any other distribution in respect of the Common Stock, the Phantom Share Account of each Eligible Outside Director will be credited with an additional number of Phantom Share Units (including fractions thereof) determined by multiplying the number of Phantom Share Units then credited to such Account by the result obtained by dividing (i) the amount of cash, or the value (as determined by the Board) of any securities or other property, paid or distributed in respect of one outstanding share of Common Stock by (ii) the Fair Market Value of a share of Common Stock on the date of such payment or distribution. Such credit shall be made effective as of the date of payment of the dividend or other distribution in respect of the Common Stock. In addition, as of the date of the Board's regularly scheduled quarterly meeting for the last quarter of 1997, the Phantom Share Account of each Eligible Outside Director will be credited with an additional number of Phantom Share Units determined as if (a) the Eligible Outside Director's Phantom Share Account were established as of the later of July 1, 1996 or the date the Eligible Outside Director became a Director of the Company, (b) there had been credited to such Account 150 Phantom Share Units on July 1, 1996 and on the date APPENDIX TWO TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS of each quarterly meeting of the Board thereafter through September 30, 1997 during all of which quarter the Eligible Outside Director served as a Director of the Company and (c) dividend equivalents as described in this Section had been credited on the date of each dividend on Common Stock beginning July 1, 1996 and through September 30, 1997. D. PAYMENT OF PHANTOM SHARE ACCOUNT. The value of an Eligible Outside Director's Phantom Share Account shall be paid in a lump sum in cash to the Eligible Outside Director as soon as practicable (but in no event more than 60 days) after the Eligible Outside Director's Termination of Service. The value of the Eligible Outside Director's Phantom Share Account shall be the product of the number of Phantom Share Units credited to the Eligible Outside Director's Phantom Share Account on the date of payment multiplied by the Fair Market Value of the Common Stock on such date. 1. DEATH. In the event of the death of an Eligible Outside Director before payment of his or her Phantom Share Account, the value of the Eligible Outside Director's Phantom Share Account, determined as provided above, will be distributed in a lump sum in cash to the Eligible Outside Director's Beneficiary or Beneficiaries (or, in the absence of any Beneficiary, to the Eligible Outside Director's estate). 2. DESIGNATION OF BENEFICIARY. Each Eligible Outside Director may designate a Beneficiary to receive the Phantom Share Account due under the Plan upon the Eligible Outside Director's death by executing a Beneficiary designation form. An Eligible Outside Director may change an earlier Beneficiary designation by executing a later Beneficiary designation form. A Beneficiary designation is not binding on the Company until the Company receives the Beneficiary designation form. If no designation is made or no designated Beneficiary is alive (or in the case of an entity designated as a Beneficiary, in existence) at the time of the death of the Eligible Outside Director, payment due under the Plan will be made to the Eligible Outside Director's estate. E. RESTRICTIONS ON TRANSFER. The Company shall pay the value of the Phantom Share Account only to the Eligible Outside Director or his or her estate or the Beneficiary designated under the Plan to receive such amount. Neither an Eligible Outside Director nor his or her Beneficiary shall have any right to anticipate, alienate, sell, transfer, assign, pledge, encumber or change any benefits to which he or she may become entitled under the Plan, and any attempt to do so shall be void. The value of the Eligible Outside Director's Phantom Share Account shall not be subject to attachment, execution by levy, garnishment or other legal or equitable process for an Eligible Outside Director's or Beneficiary's debts or other obligations. 2 KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS APPENDIX THREE (SEE ATTACHMENT) ================================================================================ KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS' RESTATED EFFECTIVE JULY 1, 1996 ================================================================================
KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS TABLE OF CONTENTS Page ARTICLE I PURPOSE AND INTENT OF PLAN......................................................1 ARTICLE II ORIGINAL EFFECTIVE DATE OF THE PLAN; PARTICIPATION..............................1 ARTICLE III DEFINITIONS.....................................................................1 ARTICLE IV ELIGIBILITY FOR BENEFITS........................................................2 IV.1 RETIREMENT BENEFIT..............................................................2 IV.2 DISABILITY BENEFIT..............................................................2 IV.3 LIMITATION ON RECEIPT OF BENEFIT................................................3 ARTICLE V AMOUNT OF BENEFIT...............................................................3 V.1 RETIREMENT BENEFIT..............................................................3 V.2 DISABILITY BENEFIT..............................................................3 ARTICLE VI FORM, MANNER AND DURATION OF PAYMENT OF BENEFIT.................................4 ARTICLE VII ADMINISTRATION..................................................................4 VII.1 ADMINISTRATIVE COMMITTEE........................................................4 VII.2 ACTION BY COMMITTEE; RESIGNATION; VACANCIES; COMPENSATION.......................4 VII.3 DELEGATION OF AUTHORITY; LEGAL, ACCOUNTING, CLERICAL AND OTHER SERVICES.........4 VII.4 INTERPRETATION OF PROVISIONS....................................................5 VII.5 LIABILITY OF COMMITTEE..........................................................5 ARTICLE VIII TERMINATION AND AMENDMENT OF THE PLAN...........................................5 VIII.1 AMENDMENT OF THE PLAN...........................................................5 VIII.2 TERMINATION.....................................................................5 VIII.3 EFFECT OF AMENDMENT OR TERMINATION..............................................5 ARTICLE IX MISCELLANEOUS...................................................................5 IX.1 NO RIGHT TO REELECTION..........................................................5 IX.2 UNFUNDED PLAN...................................................................6 IX.3 OTHER COMPENSATION ARRANGEMENTS.................................................6 IX.4 EXPENSES........................................................................6 IX.5 GOVERNING LAW; VENUE............................................................6
-i- APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS The KNIGHT-RIDDER, INC. RETIREMENT PLAN FOR OUTSIDE DIRECTORS is restated by Knight-Ridder, Inc. effective July 1, 1996. ARTICLE I PURPOSE AND INTENT OF PLAN This plan shall be known as the Knight-Ridder, Inc. Retirement Plan for Outside Directors (the "Plan"). The Plan is intended to advance the best interests of Knight-Ridder, Inc. by providing retirement income to outside directors of Knight-Ridder, Inc. who have satisfied certain age and service requirements. ARTICLE II ORIGINAL EFFECTIVE DATE OF THE PLAN; PARTICIPATION The Plan was effective as of January 1, 1994. All Outside Directors were eligible to participate in the Plan beginning January 1, 1994 and through June 30, 1996. Effective July 1, 1996, however, only those Outside Directors who were age 65 or older on that date will be eligible to participate in the Plan. ARTICLE III DEFINITIONS As used in this Plan, the following terms shall have the meaning hereinafter set forth: III.1 "Annual Retainer Fee" means the annual fee payable to an Outside Director for service on the Board as in effect on the date of an Outside Director's Retirement. III.2 "Board" means the Board of Directors of the Company. III.3 "Code" means the Internal Revenue Code of 1986, as amended. III.4 "Company" means Knight-Ridder, Inc., a Florida corporation, or any successor legal entity. -1- APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS III.5 "Disability" means a Director's physical or mental condition which is expected to render the Director unable to perform his or her usual duties or any comparable duties for the Company. The determination of a Director's Disability will be made by the Board in its sole discretion. III.6 "Director" means a member of the Board. III.7 "Effective Date" means January 1, 1994. III.8 "Outside Director" means any member of the Board who is not, and never was, an employee of the Company or any of its subsidiaries or affiliates and, effective July 1, 1996, who is at least age 65 on that date. III.9 "Plan" means this Knight-Ridder, Inc. Retirement Plan for Outside Directors. III.10 "Retirement" means the Termination of Service of an Outside Director at or after age sixty-five (65). III.11 "Termination of Service" means cessation of service as a Director of the Company. III.12 "Year of Service" means each 12-month period of service as a Director, whether beginning before or after the Effective Date. If a Director Terminates Service and then returns to service, all months of service will be aggregated to determine the Director's Years of Service for purposes of eligibility to receive, and the amount of, any retirement benefit under the Plan. ARTICLE IV ELIGIBILITY FOR BENEFITS IV.1 RETIREMENT BENEFIT. An Outside Director will be entitled to receive the annual retirement benefit described in Section 5.1 upon Retirement if he or she retires after reaching age 65 and completing five full years of Service. IV.2 DISABILITY BENEFIT. An Outside Director will be entitled to receive the annual disability benefit described in Section 5.2 if he or she incurs a Termination of Service as the result of Disability after completing at least two full years of Service. -2- APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS IV.3 LIMITATION ON RECEIPT OF BENEFIT. Notwithstanding the foregoing, an Outside Director will not be entitled to benefits under the Plan if (a) such Outside Director is removed from the Board of Directors for cause (which means only dishonesty, conviction of a felony, or wilful unauthorized disclosure of confidential information, whether involving the Company or otherwise), or (b) the Retirement or Disability of such Outside Director occurs before January 1, 1994. ARTICLE V AMOUNT OF BENEFIT V.1 RETIREMENT BENEFIT. The retirement benefit payable, to an Outside Director under the Plan shall be an annual amount, payable in accordance with Article VI, determined as follows: Completed Years of Service Annual Benefit ---------------- -------------- less than 5 years No benefit 5 50% of Annual Retainer Fee 6 60% of Annual Retainer Fee 7 70% of Annual Retainer Fee 8 80% of Annual Retainer Fee 9 90% of Annual Retainer Fee 10 or more 100% of Annual Retainer Fee V.2 DISABILITY BENEFIT. The disability benefit payable to an Outside Director who incurs a Termination of Service as the result of Disability shall be an annual amount, payable in accordance with Article VI, determined as follows: Completed Years of Service Annual Benefit ---------------- -------------- less than 2 years No benefit 2-5 years 50% of Annual Retainer Fee 6 60% of Annual Retainer Fee 7 70% of Annual Retainer Fee 8 80% of Annual Retainer Fee 9 90% of Annual Retainer Fee 10 or more 100% of Annual Retainer Fee -3- APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS ARTICLE VI FORM, MANNER AND DURATION OF PAYMENT OF BENEFIT The annual Retirement or Disability Benefit determined under Article V shall be paid for the life of the Outside Director. Payments shall be made on the first business day of each calendar quarter, beginning with the quarter next following the date of the Outside Director's Retirement. No benefits shall be payable under the Plan after the death of a Outside Director either before or after Retirement. ARTICLE VII ADMINISTRATION VII.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by an Administrative Committee appointed by the Board, which may be the same committee as serves the Company with respect to other retirement and benefit plans. The Administrative Committee shall adopt such rules for the conduct of its business and the administration of the Plan as it considers to be necessary or desirable, provided that such rules do not conflict with the provisions of the Plan. VII. ACTION BY COMMITTEE; RESIGNATION; VACANCIES; COMPENSATION. The Administrative Committee shall act by a majority (or by all members if there be only one or two members) of the number of members constituting the Administrative Committee at the time of such action, and such action may be taken either by vote at a meeting or in writing without a meeting. Any member of the Administrative Committee may resign upon giving written notice to the Board. Each member of the Administrative Committee shall hold office at the pleasure of the Board. Vacancies arising in the Administrative Committee from death, resignation, removal or otherwise, shall be filled by the Board, but the Administrative Committee may act notwithstanding the existence of vacancies so long as there is at least one member of the Administrative Committee. The members of the Administrative Committee shall serve without compensation for their services as such, but shall be reimbursed by the Company for all necessary expenses incurred in the discharge of their duties. VII.3 DELEGATION OF AUTHORITY; LEGAL, ACCOUNTING, CLERICAL AND OTHER SERVICES. The Administrative Committee may authorize one or more of its members or any agent to act on its behalf and may contract for legal, accounting, clerical and other services to carry out the purposes of the Plan. All expenses of the Administrative Committee shall be paid by the Company. -4- APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS VII.4 INTERPRETATION OF PROVISIONS. The Administrative Committee shall have the full power and discretion to interpret the provisions of the Plan and decide all questions arising in its administration. The decisions and interpretations of the Administrative Committee shall be final and binding on the Company and all other persons. VII.5 LIABILITY OF COMMITTEE. No member of the Administrative Committee shall be liable for any action taken in good faith or for the exercise of any power given the Administrative Committee, or for the actions of other members of the Administrative Committee. To the extent permitted by law, the Company shall indemnify and hold harmless each member of the Administrative Committee against any and all liability or reasonably expense resulting from or arising out of his or her responsibilities in connection with the Plan, provided such person acted in good faith, in what he or she reasonably believed was the proper discharge of his or her duties. ARTICLE VIII TERMINATION AND AMENDMENT OF THE PLAN VIII.1 AMENDMENT OF THE PLAN. The Plan may be amended from time to time by action of the Board of Directors. VIII.2 TERMINATION. The Company intends to continue the Plan indefinitely but reserves the right to terminate it at any time by action of the Board of Directors. VIII.3 EFFECT OF AMENDMENT OR TERMINATION. No amendment or termination of the Plan may adversely affect the benefit which would be payable to any Outside Director receiving benefits under the Plan prior to the effective date of the amendment or termination, or which would be payable to any Outside Director who, prior to the effective date of such amendment or termination, was eligible to retire with an immediate benefit under the Plan. ARTICLE IX MISCELLANEOUS IX.1 NO RIGHT TO REELECTION. Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any of its members for reelection by the Company's stockholders, nor confer upon any Outside Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. -5- APPENDIX THREE TO KNIGHT-RIDDER, INC. COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS IX.2 UNFUNDED PLAN. This Plan is unfunded. Amounts payable under the Plan will be satisfied solely out of the general assets of the Company subject to the claims of the Company's creditors. No Outside Director or any other person shall have any interest in any fund or in any specific asset of the Company by reason of any amount credited to him hereunder, nor shall any Outside Director or any other person have any right to receive any distribution under the Plan except as, and to the extent, expressly provided in the Plan. IX.3 OTHER COMPENSATION ARRANGEMENTS. Payments received by an Outside Director under the Plan shall not have any effect on the determination of benefits under any other arrangement provided by the Company. IV.4 EXPENSES. The costs and expenses of administering the Plan shall be borne by the Company and no contributions from Outside Directors shall be required or permitted. IX.5 GOVERNING LAW; VENUE. The Plan shall be construed in accordance with the laws of the State of Florida. Any legal action or proceeding hereunder may be initiated only in Dade County, Florida. -6- EX-11 4 EXHIBIT 11
EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) Year Ended ---------------------------------- Dec. 28, Dec. 29, Dec. 31, 1997 1996 1995 --------- --------- --------- BASIC Average shares outstanding ............................... 88,475 96,021 99,451 ========= ========= ========= Income before cumulative effect of change in accounting principle ...................... $ 413,015 $ 267,873 $ 167,382 Cumulative effect of change in accounting principle for contributions ................. (7,320) --------- --------- --------- NET INCOME ...................... $ 413,015 $ 267,873 $ 160,062 ========= ========= ========= Earnings per share Income before cumulative effect of change in accounting principle ....................... $ 4.67 $ 2.79 $ 1.68 Cumulative effect of change in accounting principle for contributions ................. (0.07) --------- --------- --------- BASIC EARNINGS PER SHARE ........ $ 4.67 $ 2.79 $ 1.61 ========= ========= ========= DILUTED Average shares outstanding ............................... 88,475 96,021 99,451 Effect of dilutive securities: based upon Treasury Stock method using the average market price Convertible preferred stock........................... 10,932 Stock options ........................................ 1,907 1,399 745 --------- --------- --------- TOTAL ........................... 101,314 97,420 100,196 ========= ========= ========= Income before cumulative effect of change in accounting principle ......................... $ 413,015 $ 267,873 $ 167,382 Cumulative effect of change in accounting principle for contributions ................. (7,320) --------- --------- --------- NET INCOME ...................... $ 413,015 $ 267,873 $ 160,062 ========= ========= ========= Earnings per share Income before cumulative effect of change in accounting principle ................................... $ 4.08 $ 2.75 $ 1.67 Cumulative effect of change in accounting principle for contributions ................. (0.07) --------- --------- --------- DILUTED EARNINGS PER SHARE ...... $ 4.08 $ 2.75 $ 1.60 ========= ========= =========
EX-12 5 EXHIBIT 12
EXHIBIT 12 COMPUTATION OF EARNINGS TO FIXED CHARGES RATIO FROM CONTINUING OPERATIONS (IN THOUSANDS OF DOLLARS, EXCEPT RATIO DATA) YEAR ENDED --------------------------------------------------------------------------- December 28, December 29, December 31, December 25, December 26, 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ FIXED CHARGES COMPUTATION INTEREST EXPENSE: NET INTEREST EXPENSE ...................... $ 97,286 $ 66,740 $ 57,623 $ 43,742 $ 44,283 PLUS CAPITALIZED INTEREST ................. 5,376 6,397 1,889 474 120 ----------- ---------- ---------- ----------- ---------- GROSS INTEREST EXPENSE ............... 102,662 73,137 59,512 44,216 44,403 PROPORTIONATE SHARE OF INTEREST EXPENSE OF 50% OWNED PERSONS .............. 1,948 17,941 13,824 12,351 13,608 INTEREST COMPONENT OF RENT EXPENSE .............................. 6,671 5,787 5,781 5,303 4,946 ----------- ---------- ---------- ----------- ---------- TOTAL FIXED CHARGES .................. $ 111,281 $ 96,865 $ 79,117 $ 61,870 $ 62,957 =========== ========== ========== =========== ========== EARNINGS COMPUTATION PRETAX EARNINGS ................................ $ 693,852 $ 310,209 $ 182,817 $ 265,737 $ 220,036 ADD: FIXED CHARGES ....................... 111,281 96,865 79,117 61,870 62,957 LESS: CAPITALIZED INTEREST... (5,376) (6,397) (1,889) (474) (120) LESS: DISTRIBUTIONS IN EXCESS OF (LESS THAN) EARNINGS OF INVESTEES ....... (7,675) (12,962) (9,285) (4,487) (4,407) ----------- ---------- ---------- ----------- ---------- TOTAL EARNINGS AS ADJUSTED ........... $ 792,082 $ 387,715 $ 250,760 $ 322,646 $ 278,466 =========== ========== ========== =========== ========== RATIO OF EARNINGS TO FIXED CHARGES ................... 7.1:1 4.0:1 3.2:1 5.2:1 4.4:1 =========== ========== ========== =========== ==========
EX-21 6 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State/Country Company Name of Incorporation - ------------ ---------------- Knight-Ridder, Inc. Florida Aberdeen News Company Delaware The Beacon Journal Publishing Company Ohio The Bradenton Herald, Inc. Florida Circom Corporation Pennsylvania Contra Costa Newspapers, Inc. California Cypress Media, Inc. New York Cypress Media, LLC (1) Delaware Belleville News-Democrat * Kansas City Star * Wilkes-Barre Times Leader * Quad County Publishing, Inc. (1) Illinois Star-Telegram Operating, Ltd. (1) Texas Ft. Worth Star-Telegram * Detroit Free Press, Incorporated Michigan Detroit Newspaper Agency Michigan (partnership) Drinnon, Inc. Georgia Grand Forks Herald, Incorporated Delaware Gulf Publishing Company, Inc. Mississippi KR Net Ventures, Inc. Delaware InfiNet Company Virginia (partnership) KR Newsprint Company Florida Southeast Paper Manufacturing Co. Georgia (partnership) KRI Property, Inc. Florida KR Publication Services, Inc. Delaware KR Video, Inc. Delaware Keynoter Publishing Company, Inc. Florida Knight News Services, Inc. Michigan Knight-Ridder Tribune Information Services District of Columbia (partnership) The Knight Publishing Co. Delaware Knight-Ridder Business Information Services, Inc. Delaware Knight-Ridder Financial/Japan, Inc. Delaware Technimetrics, Inc. Delaware Grabill-Bloom, Inc. Illinois Technimetrics Asia, Ltd. Delaware Knight-Ridder Cablevision, Inc. Florida KRC-NJFT, Inc. Delaware KRC-SNJ, Inc. Delaware TKR Cable Partners Colorado (partnership) TCI-TKR L.P. Colorado (partnership) Knight-Ridder International, Inc. Delaware KR U.S.A., Inc. Delaware Knight-Ridder Investment Company Delaware Knight-Ridder Leasing Company Florida Seattle Times Company Delaware
(1) Star-Telegram Operating, Ltd. is owned 90% by Quad County Publishing, Inc. and 10% by Cypress Media, LLC * Indicates that the company name listed is a division, not a legal entity.
State/Country Company Name of Incorporation - ------------ ---------------- Knight-Ridder New Media, Inc. Delaware Knight-Ridder Shared Services, Inc. Florida Lexington Herald-Leader Co. Kentucky MHPC International, Inc. Florida The Macon Telegraph Publishing Company Georgia MediaStream, Inc. Delaware The Miami Herald Publishing Company * Monterey Newspapers, Inc. Colorado The Monterey County Herald * San Luis Obispo Telegram-Tribune * News Publishing Company Indiana Fort Wayne Newspapers, Inc. Indiana Fort Wayne Newspapers Agency Indiana (partnership) Nittany Printing and Publishing Company Pennsylvania Northwest Publications, Inc. Delaware Duluth News-Tribune & Herald * Saint Paul Pioneer Press * The Observer Transportation Company North Carolina Philadelphia Newspapers, Inc. Pennsylvania Apartment Solutions, Inc. Pennsylvania Marketplace Advertising, Inc. Pennsylvania Philadelphia Online, Inc. Delaware Post Tribune Publishing, Inc. Indiana Press-Telegram Publications, Inc. California The R.W. Page Corporation Georgia Ridder Publications, Inc. Delaware KR Land Holding Corporation Delaware San Jose Mercury News, Inc. California The State-Record Company, Inc. South Carolina Newberry Publishing Company, Inc. South Carolina Sun Publishing Company, Inc. South Carolina Tallahassee Democrat, Inc. Florida Tribune Newsprint Company Utah Ponderay Newsprint Company Washington (partnership) Twin Cities Newspaper Services, Inc. Minnesota Wichita Eagle and Beacon Publishing Company, Inc. Kansas
* Indicates that the company name listed is a division, not a legal entity. EX-23 7 EXHIBIT 23 EXHIBIT 23 Consent of Independent Certified Public Accountants We consent to the incorporation by reference in Registration Statement No. 33-11021 on Form S-3 dated December 22, 1986, in Registration Statement No. 33-28010 on Form S-3 dated April 7, 1989, in Registration Statement No. 33-31747 on Form S-8 dated October 30, 1989, in Registration Statement No. 33-69206 on Form S-8 dated May 18, 1993, in Registration Statement No. 333-37603 on Form S-3 dated October 9, 1997 of Knight-Ridder, Inc. and in the related Prospectuses, of our report dated January 26, 1998, with respect to the consolidated financial statements and schedule of Knight-Ridder, Inc. incorporated by reference and included in this Annual Report (Form 10-K) for the year ended December 28, 1997. /s/ Ernst & Young LLP --------------------- Miami, Florida March 13, 1998 EX-27 8 FDS - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF INCOME, THE CONSOLIDATED BALANCE SHEET, AND THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000205520 KNIGHT-RIDDER, INC. 1,000 USD YEAR DEC-28-1997 DEC-30-1996 DEC-28-1997 1 160,291 0 374,746 14,963 50,332 641,115 1,774,085 727,571 4,355,142 598,656 1,639,037 0 1,755 1,700 1,548,218 4,355,142 2,876,785 2,876,785 466,329 2,370,757 (187,824) 23,332 102,662 693,852 297,348 396,504 16,511 0 0 413,015 4.67 4.08 COST OF GOODS SOLD CONSISTS OF NEWSPRINT, INK, AND SUPPLEMENTS. OTHER EXPENSES CONSISTS OF ALL NON-OPERATING INCOME AND COSTS, NET, EXCLUDING INCOME TAXES. AMOUNT INCLUDES INTEREST EXPENSE, NET OF INTEREST INCOME AND OTHER NON-OPERATING COSTS, NET OF NON-OPERATING INCOME THAT INCLUDES PRETAX GAINS AGGREGATING $283.1 MILLION ON THE SALES OF TKR CABLE AND FOUR NEWSPAPERS, AND THE GAIN ON THE BOULDER NEWSPAPER EXCHANGE. SEE ITEM 8, NOTE G. INCLUDES $15.3 MILLION NET GAIN ON THE SALE OF KRII. SEE ITEM 8, NOTE G.
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