UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 26, 1999
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Commission file number: 1-7553
KNIGHT-RIDDER, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 38-0723657
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(State of Incorporation) (I.R.S. Employer
Identification No.)
50 W. SAN FERNANDO ST., SAN JOSE, CA 95113
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(Address of principal executive offices)
(408) 938-7700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date. Common Stock, $.02 1/12 Par Value
83,936,622 shares as of November 3, 1999.
1
<PAGE>
Table of Contents for Form 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet 3-4
Consolidated Statement of Income 5
Consolidated Statement of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
2
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(UNAUDITED IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
September 26, December 27,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets
Cash, including short-term cash investments of $0 at
September 1999 and $4,159 at December 1998 $ 31,704 $ 26,836
Accounts receivable, net of allowances of $15,486
at September 1999 and $15,738 at December 1998 392,163 386,455
Inventories 43,075 59,109
Prepaid expense 7,556 14,078
Other current assets 38,343 39,213
-------------- --------------
Total Current Assets 512,841 525,691
-------------- --------------
Investments and Other Assets
Equity in unconsolidated companies and joint ventures 199,976 201,120
Other 196,760 243,586
-------------- --------------
Total Investments and Other Assets 396,736 444,706
-------------- --------------
Property, Plant and Equipment
Land and improvements 94,853 93,781
Buildings and improvements 489,985 484,367
Equipment 1,195,993 1,175,044
Construction and equipment installations in progress 111,373 84,559
-------------- --------------
1,892,204 1,837,751
Less accumulated depreciation (829,319) (764,750)
-------------- --------------
Net Property, Plant and Equipment 1,062,885 1,073,001
Excess of Cost Over Net Assets Acquired and Other Intangibles
Less accumulated amortization of $314,479 in
September 1999 and $264,001 in December 1998 2,191,575 2,213,699
-------------- --------------
Total $ 4,164,037 $ 4,257,097
============== ==============
</TABLE>
See "Notes to Consolidated Financial Statements".
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET (CONT.)
(UNAUDITED IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 123,994 $ 164,558
Accrued expenses and other liabilities 141,090 111,088
Accrued compensation and amounts withheld from employees 116,870 112,827
Federal and state income taxes 17,917
Deferred revenue 72,031 67,006
Short-term borrowings and current portion of long-term debt 99,591 198,277
----------- -----------
Total Current Liabilities 571,493 653,756
----------- -----------
Noncurrent Liabilities
Long-term debt 1,172,537 1,329,001
Deferred federal and state income taxes 300,305 293,015
Postretirement benefits other than pensions 150,192 147,118
Employment benefits and other noncurrent liabilities 150,665 168,974
----------- -----------
Total Noncurrent Liabilities 1,773,699 1,938,108
----------- -----------
Minority Interests in Consolidated Subsidiaries 3,861 2,502
Commitments and Contingencies (Note 6)
Shareholders' Equity
Preferred stock, $1.00 par value; shares authorized - 2,000,000;
shares outstanding - 1,374,100 at September 1999
and 1,754,930 at December 1998 1,374 1,755
Common stock, $.02 1/12 par value; shares authorized -
250,000,000; shares outstanding - 82,328,432 at
September 1999 and 78,374,195 at December 1998 1,715 1,633
Additional capital 938,276 908,078
Retained earnings 862,801 735,132
Accumulated comprehensive income 13,242 18,738
Treasury stock, at cost, 43,416 shares at September
1999 and 46,667 at December 1998 (2,424) (2,605)
----------- -----------
Total Shareholders' Equity 1,814,984 1,662,731
----------- -----------
$ 4,164,037 $ 4,257,097
=========== ===========
</TABLE>
See "Notes to Consolidated Financial Statements".
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Quarter Ended Three Quarters Ended
-------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Advertising
Retail $ 256,085 $ 254,873 $ 770,816 $ 762,800
General 69,957 59,728 225,914 188,765
Classified 270,869 257,013 804,493 780,890
----------- ----------- ----------- -----------
Total 596,911 571,614 1,801,223 1,732,455
Circulation 143,306 145,093 435,247 441,337
Other 44,522 36,071 128,734 102,161
----------- ----------- ----------- -----------
Total Operating Revenue 784,739 752,778 2,365,204 2,275,953
OPERATING COSTS
Labor and employee benefits 310,100 301,027 923,692 895,526
Newsprint, ink and supplements 106,798 128,064 355,613 392,671
Other operating costs 169,693 165,741 510,952 497,019
Depreciation and amortization 47,171 46,317 142,822 138,796
----------- ----------- ----------- -----------
Total Operating Costs 633,762 641,149 1,933,079 1,924,012
----------- ----------- ----------- -----------
OPERATING INCOME 150,977 111,629 432,125 351,941
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (22,422) (26,030) (71,224) (80,866)
Interest expense capitalized 1,170 776 4,493 3,177
Interest income 525 225 2,064 3,108
Equity in earnings of unconsolidated
companies and joint ventures 1,230 3,896 10,058 16,731
Minority interests in earnings of
consolidated subsidiaries (2,482) (2,507) (7,941) (7,537)
Other, net (1,092) 2,959 7,819 89,119
----------- ----------- ----------- -----------
Total (23,071) (20,681) (54,731) 23,732
----------- ----------- ----------- -----------
Income before income taxes 127,906 90,948 377,394 375,673
Income taxes 51,697 33,965 151,733 150,328
----------- ----------- ----------- -----------
Income from continuing operations 76,209 56,983 225,661 225,345
Gain on sales of discontinued operations, net of
applicable income taxes of $43,752 60,042
Income from discontinued operations, net of
applicable income taxes of $133 184
----------- ----------- ----------- -----------
Net income $ 76,209 $ 56,983 $ 225,661 $ 285,571
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic:
Income from continuing operations $ 0.90 $ 0.68 $ 2.70 $ 2.72
Net gain on sale of discontinued operations 0.76
Income from discontinued operations, net --
----------- ----------- ----------- -----------
Net income $ 0.90 $ 0.68 $ 2.70 $ 3.48
=========== =========== =========== ===========
Diluted:
Income from continuing operations $ 0.78 $ 0.58 $ 2.31 $ 2.29
Net gain on sale of discontinued operations 0.61
Income from discontinued operations, net --
----------- ----------- ----------- -----------
Net income $ 0.78 $ 0.58 $ 2.31 $ 2.90
=========== =========== =========== ===========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.23 $ 0.20 $ 0.66 $ 0.60
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING (000s)
Basic 81,366 78,670 79,597 79,074
=========== =========== =========== ===========
Diluted 97,980 97,746 97,715 98,488
=========== =========== =========== ===========
</TABLE>
See "Notes to Consolidated Financial Statements".
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS OF DOLLARS)
Three Quarters Ended
--------------------------------
September 26, September 27,
1999 1998
-------------- --------------
<S> <C> <C>
CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES
Net income $ 225,661 $ 285,571
Noncash items deducted from (included in) income:
Net gains on sales of investments (11,187) (75,251)
Net gain on sale of discontinued BIS operations 0 (60,042)
Depreciation and amortization 142,832 138,796
Provision (benefit) for deferred taxes 9,150 (11,738)
Provision for bad debt 17,949 15,386
Earnings from investees in excess of distributions (2,273) (15,804)
Minority interests in earnings of consolidated subsidiaries 7,941 7,537
Other items, net (1,574) 12,061
Changes in certain assets and liabilities:
Accounts receivable and other current assets (19,221) 1,550
Inventories 16,034 (6,240)
Accounts payable and other liabilities (21,055) (85,606)
Federal and state income taxes 25,079 (39,246)
-------------- --------------
Net Cash Provided by Operating Activities 389,336 166,974
-------------- --------------
CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES
Proceeds from sales of investments 91,963 62,444
Proceeds from sale of discontinued BIS operations 0 125,000
Change in net noncurrent assets of discontinued BIS operations 0 520
Acquisition of businesses (37,737) (1,250)
Acquisition of other investments, net (30,300) 0
Additions to property, plant and equipment (66,976) (106,312)
Other items, net (5,543) (7,788)
-------------- --------------
Net Cash Provided by (Required for) Investing Activities (48,593) 72,614
-------------- --------------
CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES
Proceeds from sale of commercial paper, notes payable and
senior notes payable 2,013,549 952,756
Reduction of total debt (2,268,699) (1,057,325)
-------------- --------------
Net Change in Total Debt (255,150) (104,569)
Payment of cash dividends (63,573) (57,994)
Sale of common stock to employees 28,626 27,369
Purchase of treasury stock (38,004) (238,027)
Other items, net (7,774) (6,305)
-------------- --------------
Net Cash Required for Financing Activities (335,875) (379,526)
-------------- --------------
Net Increase (Decrease) in Cash 4,868 (139,938)
Cash and short-term cash
investments at beginning of the period 26,836 160,291
-------------- --------------
Cash and short-term cash
investments at end of the period $ 31,704 $ 20,353
============== ==============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS OF DOLLARS)
Three Quarters Ended
-----------------------------
September 26, September 27,
1999 1998
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing activities
Securities received as proceeds on the sale of investee $ 0 $ 37,678
Non-cash financing activities
Conversion of preferred stock to common stock
Preferred stock (381)
Additional capital (142,843)
Issuance of common stock upon conversion of preferred stock
Common stock 80
Additional capital 143,144
</TABLE>
See "Notes to Consolidated Financial Statements".
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter, and three quarters ended
September 26, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 26, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
company's annual report on Form 10-K for the year ended December 27, 1998.
Certain amounts in 1998 have been reclassified to conform to the 1999
presentation.
NOTE 2 - COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income (in
thousands):
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 76,209 $ 56,983 $ 225,661 $ 285,571
Unrealized gains (losses) on securities available for sale:
Change in unrealized gain (loss), net of related taxes (7,708) (1,165) 3,687 9,789
Reclassification adjustment for gain realized in
net income -- (650) (9,183) (1,394)
------------- ------------- ------------- -------------
Other comprehensive income (7,708) (1,815) (5,496) 8,395
------------- ------------- ------------- -------------
Total comprehensive income $ 68,501 $ 55,168 $ 220,165 $ 293,966
============= ============= ============= =============
</TABLE>
8
<PAGE>
NOTE 3 - DEBT
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Effective
Interest Balance At
Rate At ---------------------------------
September 26, September 26, December 27,
1999 1999 1998
------------- ------------- ------------
<S> <C> <C> <C>
Commercial paper, net of discount (a) 5.1% $ 405,244 $ 917,533
Debentures, net of discount (b) 10.0% 198,423 198,299
Debentures, net of discount (c) 7.6% 94,531 94,386
Debentures, net of discount (d) 7.0% 296,505
Notes payable, net of discount (e) 8.5% 79,897 119,777
Notes payable, net of discount (f) 6.7% 98,148 97,978
Senior notes, net of discount (g) 6.3% 99,380 99,305
------------- ------------
Total Debt (h) 6.9% 1,272,128 1,527,278
Less amounts classified as current 99,591 198,277
------------- ------------
Total long-term debt 7.0% $ 1,172,537 $ 1,329,001
============= ============
</TABLE>
(a) Commercial paper is supported by $900 million of revolving credit and
term loan agreements, $500 million of which matures on June 22, 2003
and $400 million of which matures June 20, 2000.
(b) Represents $200 million of 9 7/8% debentures due in 2009.
(c) Represents $100 million of 7.15% debentures due in 2027.
(d) Represents $300 million of 6.875% debentures due in 2029.
(e) Represents $80 million of 8 1/2% notes payable at September 1999 and
$120 million at December 1998. These notes are subject to mandatory
annual repayments, commencing in 1998 through maturity in 2001. Annual
maturities are represented under current liabilities.
(f) Represents $100 million of 6.625% notes due in 2007.
(g) Represents $100 million of 6.3% senior notes due in 2005.
(h) Interest payments for the nine months ended September 1999 and
September 1998 were $68.2 million and $82.9 million, respectively.
NOTE 4 - INCOME TAX PAYMENTS
Income tax payments for the three quarters ended September 26, 1999 and
September 27, 1998, were $120.2 million and $209.2 million, respectively.
Payments in 1998 include the tax impact resulting from one-time gains on the
sale of the balance of the company's jointly owned cable systems and its
newspaper in Gary, Indiana.
9
<PAGE>
NOTE 5 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
--------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Income from continuing operations $ 76,209 $ 56,983 $ 225,661 $ 225,345
Less dividends on preferred stock 3,369 3,510 10,825 10,530
------------ ------------ ------------ ------------
Income from continuing operations attributable to
common stock $ 72,840 $ 53,473 $ 214,836 $ 214,815
============ ============ ============ ============
Average shares outstanding (basic) 81,366 78,670 79,597 79,074
------------ ------------ ------------ ------------
Effect of dilutive securities:
Weighted average preferred stock, as converted 15,115 17,549 16,682 17,549
Stock options 1,499 1,527 1,436 1,865
------------ ------------ ------------ ------------
Average shares outstanding (diluted) 97,980 97,746 97,715 98,488
------------ ------------ ------------ ------------
Earnings per share from continuing operations (basic) $ 0.90 $ 0.68 $ 2.70 $ 2.72
============ ============ ============ ============
Earnings per share from continuing operations (diluted) $ 0.78 $ 0.58 $ 2.31 $ 2.29
============ ============ ============ ============
</TABLE>
Income from continuing operations attributable to common stock for the quarter
ended September 27, 1998 and the three quarters ended September 27, 1998 have
been restated to separately identify dividends on preferred stock. Related
amounts were previously included with dividends on common stock.
The Walt Disney Company received 1.75 million shares of series B convertible
preferred stock in payment for the newspapers the company purchased from them on
May 9, 1997. During the third quarter 1999, Walt Disney Company converted
280,830 of these shares into 2,808,300 common shares. As of November 5, 1999,
Walt Disney Company has converted an aggregate of 380,830 shares of preferred
stock into 3.1 million shares common stock.
10
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
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 judge ruled that the strike was caused by the unfair
labor practices of the Agency and The Detroit News and ordered that the Agency
and the newspapers reinstate all strikers, displacing permanent replacements if
necessary. The Agency and the newspapers appealed the decision to the NLRB.
On August 27, 1998, the NLRB affirmed certain unfair labor practice findings
against The Detroit News and the Agency, and reversed certain findings of unfair
labor practices against the Agency. The Agency and the newspapers filed a motion
to reconsider with the NLRB, which was denied on March 4, 1999. The unions and
the Agency filed appeals to the U.S. Court of Appeals for the District of
Columbia Circuit. The case is pending in the U.S. Court of Appeals. There is no
briefing schedule yet, nor has a hearing date been set for oral argument.
Various libel actions and environmental and other legal proceedings that have
arisen in the ordinary course of business are pending against the company and
its subsidiaries. In the opinion of management, the ultimate liability to the
company and its subsidiaries as a result of all legal proceedings, including
Detroit, will not be material to its financial position or results of
operations, on a consolidated basis.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE THIRD QUARTER 1999 COMPARED
WITH THIRD QUARTER 1998 AND THE YEAR TO DATE RESULTS ENDED SEPTEMBER
26, 1999 COMPARED WITH THE YEAR TO DATE RESULTS ENDED SEPTEMBER 27,
1998.
Diluted earnings per share from continuing operations for the quarter were $.78,
up $.20, or 34.5%, from the $.58 reported for the same period last year.
Excluding 1998 corporate relocation costs of $.05 per share, earnings per share
were up $.15, or 23.9%, from $.63.
Diluted earnings per share from continuing operations for the first three
quarters of 1999 were $2.31, up $.02, or 0.9%, from $2.29 for the same period in
1998. Year-to-date diluted 1999 earnings per share includes net investment gains
totaling $.07 per share and severance costs of $.03 per share. Year-to-date
diluted 1998 earnings per share includes net investment gains of $0.46 per share
on the sale of the balance of the company's cable investment and its newspaper
business in Gary, Indiana, corporate relocation costs of $.12 per share and
favorable settlements on 1997 newspaper sales of $.02 per share. Excluding these
non-recurring items, diluted earnings per share from continuing operations were
$2.27 for the first three quarters of 1999, up $.34, or 17.9%, from $1.93 for
the same period in 1998.
Net income from continuing operations in the third quarter was $76.2 million, up
$19.2 million, or 33.7%, from the same period last year. Year-to-date net income
from continuing operations was $225.7 million in 1999, up $316,000, or 0.1%
compared to the same period in 1998. Operating profit for the quarter was $151.0
million, up $39.3 million, or 35.2% from the same period last year and for the
year-to-date was $432.1 million, up $80.2 million, or 22.8%, from the same
period last year. The year-over-year increases in operating profit were driven
primarily by increases in advertising revenues and decreases in newsprint, ink
and supplement expense.
OPERATING REVENUE
The table below presents operating revenue variances as of September 26, 1999
compared to September 27, 1998 for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
---------------------------- -------------------------------
Increase/ Increase/
(Decrease) % (Decrease) %
-------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Retail $ 1,212 0.5 $ 8,016 1.1
General 10,229 17.1 37,149 19.7
Classified 13,856 5.4 23,603 3.0
-------- --------
Total Advertising 25,297 4.4 68,768 4.0
Circulation (1,787) (1.2) (6,090) (1.4)
Other 8,451 23.4 26,573 26.0
-------- --------
Total Operating Revenue $ 31,961 4.2 $ 89,251 3.9
======== ========
</TABLE>
Eighteen of the twenty-nine newspapers had improvements in retail advertising
revenue in the third quarter. These were offset by declines in Philadelphia,
down $1.1 million, or 2.8%, and Miami, down $926,000, or 3.5%. Both of these
declines were partially attributable to bankruptcies of major retail accounts.
For the year to date, nineteen of the twenty-nine newspapers had increases in
retail advertising revenue, which were offset by declines in Miami, down $2.2
million, or 2.6%; Kansas City, down $1.7 million, or 2.3%; and Philadelphia,
down $1.1 million, or 0.9%. Charlotte, Contra Costa, and Fort Worth, all had
large year-to-date increases in retail advertising revenue, up $2.4 million, or
5.2%; $2.3 million, or 7.1%; and $2.1 million, or 3.3%, respectively.
General advertising revenue improved in most markets in the third quarter with
strong gains in San Jose, up $3.0 million, or 45.2%; Miami, up $1.9 million, or
19%; Philadelphia, up $1.3 million, or 7.1%; Detroit, up $1.3 million, or 27.8%;
and Contra Costa, up $1.1 million, or 76.2%. Automotive, telecommunications,
internet, financial and travel advertising contributed to the growth in general
advertising revenue for the year.
12
<PAGE>
ITEM 2 (Cont.)
Twenty-seven of the twenty-nine newspapers had increases in classified
advertising revenue in the third quarter with the largest gains in Fort Worth,
up $1.9 million, or 10.1%; Detroit, up $1.5 million, or 10.2%; Charlotte, up
$1.3 million, or 7.1%; and Miami, up $1.1 million, or 4.7%. Year-to-date, there
were large gains in Charlotte, up $4.7 million, or 8.8%; Contra Costa, up $3.4
million, or 11.6%; and Fort Worth, up $2.8 million, or 5.0%.
For the quarter, the decline in circulation revenue was a result of a decline in
seven-day circulation, which was down 1.9% (average daily and Sunday copies were
below last year by 1.8% and 2.4%, respectively) offset in part by an average
rate increase of 0.7%. Twenty of the twenty-nine newspapers had declines in
circulation revenue with the largest declines in Detroit, down $648,000, or
4.7%; Kansas City, down $370,000, or 2.6%; and Contra Costa, down $272,000, or
7.5%. For the year to date, twenty-three of the twenty-nine newspapers had
declines in circulation revenue, with the largest decline in Philadelphia, down
$2.8 million, or 2.9%. Year-to-date, seven-day circulation was down 2.2%, offset
by an average rate increase 0.7%.
The improvement in other revenue for the third quarter and the year to date was
primarily due to greater specialized publication and on-line revenue. The
increase in specialized publication revenues was a result of Philadelphia's
acquisition of ProMedia in the first quarter of 1999.
OPERATING COSTS
The table below presents operating costs variances as of September 26, 1999
compared to September 27, 1998 for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Quarter Ended Three Quarters Ended
---------------------------- -------------------------------
Increase/ Increase/
Decrease % Decrease %
-------------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
Labor and employee benefits $ 9,073 3.0 $ 28,166 3.1
Newsprint, ink and supplements (21,266) (16.6) (37,058) (9.4)
Other operating costs 3,952 2.4 13,933 2.8
Depreciation and amortization 854 1.8 4,026 2.9
-------- ----------
Total operating costs $ (7,387) (1.2) 9,067 0.5
======== ==========
</TABLE>
The increases in labor and employee benefits for the third quarter and
year-to-date were primarily due to increases in the average wage rate of 3.2%
and 2.0%, respectively, while the workforce remained relatively flat for both
the quarter and the year to date. The remaining increase was due to higher bonus
and benefits costs.
Newsprint, ink and supplement costs were down in the third quarter primarily due
to a 19.0% decrease in the average newsprint price, offset in part by a 1.2%
increase in newsprint consumption. Year-to-date, there was a 10.1% decrease in
the average newsprint price and a 0.2% increase in newsprint consumption.
The increases in other operating costs were primarily attributable to new event
marketing, special publication, and circulation initiatives in Philadelphia.
NON-OPERATING ITEMS
For the quarter, interest expense, net of interest income and capitalized
interest, decreased $4.3 million, or 17.2%, and year-to-date decreased $9.9
million, or 13.3%. The decreases were due to decreased debt levels.
Earnings from equity investments declined $2.7 million for the quarter and
declined $6.7 million for the year-to-date. Contributing to the declines were:
the company's newsprint mill investments, down $2.2 million for the quarter and
$2.9 million year-to-date; the Infinet investment, down $328,000 for the quarter
and $2.0 million year-to-date; and the Seattle Times investment, down $216,000
for the quarter and $2.0 million year-to-date.
13
<PAGE>
ITEM 2 (Cont.)
"Other, net" income in the third quarter declined $4.1 million, of which $3.0
million was attributable to the 1998 gain on the sale of Interealty. For the
year to date, "other, net" income declined $81.3 million primarily due to 1998
gains on investments, including a $75.3 million gain on the sale of the
company's cable investments and its newspaper business in Gary, Indiana.
The effective tax rate on continuing operations was 40.4% for the quarter ended
September 26, 1999 compared to 37.3% for the same quarter in 1998. The effective
tax rate on continuing operations for the year to date was 40.2% in 1999
compared to 40.0% for the same period 1998.
OTHER
The company repurchased 695,400 shares of common stock during the third quarter
of 1999. At September 26, 1999, the company had remaining authorization to
repurchase approximately 2.5 million shares and during October 1999, the board
authorized the repurchase of an additional 6.0 million shares.
LIQUIDITY
Net cash provided by operating activities increased to $389.3 million from
$167.0 million for the three quarters ended September 27, 1998. The increase was
attributable to higher earnings excluding the gains on the sales of investments
and discontinued operations in 1998, as well as large decreases in liabilities
last year, caused in part by the timing of payments to vendors and decreases in
federal and state income taxes. Net cash required for investing activities was
$48.6 million for the three quarters ended September 26, 1999, primarily due to
investments in businesses, securities, and property plant and equipment. Cash
provided by investing activities was $72.6 million for the three quarters ended
September 27, 1998, largely due to proceeds from the 1998 sale of Technimetrics,
Inc. Cash required by financing activities for the first three quarters was
$335.9 million primarily due to a reduction in debt of $255.2 million, dividends
of $63.6 million and the repurchase of treasury stock of $38.0 million. Cash
required by financing activities for the three quarters ended September 27, 1998
was $379.5 million primarily due to a reduction in debt of $104.6 million,
dividends of $58.0 million and the repurchase of treasury stock of $238.0
million.
The total-debt-to-total-capital ratio was 41.2% compared to 47.9% at year-end.
At September 26, 1999, approximately $495.0 million in aggregate unused credit
line remained. The ratio of current assets to current liabilities was 0.9:1 at
September 26, 1999 and 0.8:1 at December 27, 1998.
YEAR 2000 READINESS DISCLOSURE
All Year 2000 statements in this Form 10-Q are Year 2000 Readiness Disclosures
under the Year 2000 Information and Readiness Disclosure Act (the "Act").
The Year 2000 ("Y2K") issue results from computer programs using two digits
rather than four to define the applicable year. 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.
In the spring of 1997, the company initiated a comprehensive project to address
Y2K issues. The Y2K project has been divided into five phases: Scope Definition,
Impact Assessment, Conversion, Testing and Implementation.
To implement this project, the company established a Y2K Project Management
Office ("PMO") to act as a central point of coordination for Y2K activity. The
PMO team includes executive management and employees with expertise from various
disciplines. At each business unit, a Y2K coordinator has been appointed to
direct all local Y2K activities. The Y2K coordinator works closely with the PMO
team and local executive management and employees. Organization-wide support is
provided through special forums for Y2K coordinators. The company engaged
experts to assist in developing work plans and cost estimates to complete
remediation activities. The company's Internal Audit Department reviews
periodically the project status at the business units.
The Scope Definition Phase, completed in June 1997, determined that the Y2K
project would encompass both Information Technology ("IT") and non-IT assets
(embedded chips), including: software, microprocessor-based
14
<PAGE>
ITEM 2 (Cont.)
hardware (including embedded chips found in facilities and production
environments) and significant suppliers, customers and other relevant third
parties.
The Impact Assessment Phase included a comprehensive inventory of both
internally developed software and vendor products, as well as
microprocessor-based hardware. These inventoried systems were evaluated for Y2K
issues, if any, and a preliminary assessment on replacement or remediation was
developed to make these systems Y2K capable, as necessary. The company also
developed a central database repository that contains each Y2K project
prioritized on the basis of perceived business risk. This phase was completed in
November 1997.
Conversion, Testing and Implementation Phases have been ongoing since mid 1997.
Software, hardware, third-party interfaces and related items for all critical
systems are being tested to determine Y2K capability under various
circumstances. A majority of the software used by the company's business units
is vendor-packaged. Y2K testing will be performed for all critical systems prior
to implementation. When possible, previously created test cases are run and
results are compared to the baseline results.
For systems developed in-house, regression and other Y2K data testing is done as
appropriate after Y2K remediation is complete. Results of regression testing are
documented and compared to previous baseline results. Upon successful completion
of the Testing Phase, the systems will be implemented in the live production
environment (Implementation Phase). As of September 26, 1999 the Conversion,
Testing and Implementation Phases were 99% complete and the company expects that
the balance will be completed before year-end.
All significant suppliers, customers and other relevant third parties have been
contacted to determine the extent to which interfaces with company systems are
vulnerable if these third parties fail to remediate their own Y2K issues. There
can be no assurance that these third-party systems will be converted on a timely
basis. The failure of any critical third-party systems could have a material
adverse impact on operations. However, the company is monitoring vendor
compliance and will consider alternatives if vendors cannot meet the company's
Y2K requirements.
Generally, the company's business units are not dependent on a single source for
any products or services, except for products or services supplied by public
utilities. In the event a significant supplier or other vendor is unable to
provide products or services to the company due to a Y2K failure, the company
believes there are adequate alternative sources for such products or services.
There is no guarantee, however, that such alternative products or services would
be available on the same terms and conditions, or that the company's business
units would not experience some adverse effects as a result of switching to
alternative sources.
The total cost of the Y2K project currently is estimated to range from $55
million to $60 million and is being funded with operating cash flows.
Approximately 70% of the total relates to purchased hardware and software, which
is capitalized. The remainder is expensed as incurred. Expenditures through
September 26, 1999 totaled $52.0 million, of which approximately 64.9% has been
capitalized. In certain cases, an expedited system replacement schedule will
also bring enhanced functionality and should serve to reduce future capital
requirements. The company believes that the acceleration of certain projects has
not resulted in the deferral of other IT projects, which would have a material
impact on the financial condition and results of operation.
There can be no assurance that these cost estimates will not be exceeded, and
actual costs may differ from those projected.
As part of normal business practices, the company maintains site-specific
emergency publication plans to be followed during emergency circumstances.
Emergency publication plans are being reviewed and updated with Y2K contingency
considerations in mind. This effort, plus additional contingency planning
activities to minimize potential disruption to operations, especially from
externally interfaced systems over which the company has limited or no control,
will be completed before year-end 1999.
Based on a recent assessment of its internal operations, those over which the
company has direct control, the company believes that with modifications to
existing software and conversions to new software, the Y2K issue will not pose
significant operational problems. The remediation or replacement of these
systems is nearly complete.
15
<PAGE>
ITEM 2 (Cont.)
Furthermore, the contingency plan will outline alternative solutions in the
event that they are required. However, if such modifications and conversions are
not made or are not completed timely, the Y2K issue could have a material
adverse impact on the operations of the company.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are forward-looking statements. These
forward-looking statements are subject to certain risks and uncertainties, that
could cause actual results and events to differ materially from those
anticipated.
Potential risks and uncertainties that could adversely affect the company's
ability to obtain these results include, without limitations, the following
factors: (a) increased consolidation among major retailers or other events that
may adversely affect business operations of major customers and depress the
level of local and national advertising; (b) an economic downturn in some or all
of the company's principal newspaper markets that may lead to decreased
circulation or decreased local or national advertising; (c) a decline in general
newspaper readership patterns as a result of competitive alternative media or
other factors; (d) an increase in newsprint costs over the levels anticipated;
(e) labor disputes which may cause revenue declines or increased labor costs;
(f) acquisitions of new businesses or dispositions of existing businesses; (g)
increases in interest or financing costs; and (h) rapid technological changes
and frequent new product introductions prevalent in electronic publishing,
including the evolution of the Internet.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company has no material changes to the disclosure made on this matter in the
company's annual report on Form 10-K for the year ended December 27, 1998.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Part 1, Item 1, Note 6, incorporated herein by reference, for a
discussion of legal proceedings relating to the Detroit Free Press.
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits Filed
No. 27 - Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended September 26, 1999.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KNIGHT-RIDDER, INC.
(Registrant)
Date: November 8, 1999
/s/ GARY R. EFFREN
------------------------------------
Gary R. Effren
Vice President/Controller
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
18
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<NAME> Knight-Ridder, Inc.
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