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: March 28, 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
78,823,661 shares as of May 3, 1999.
<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
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 2. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
EXHIBIT 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 28, December 27, March 29,
1999 1998 1998
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Current Assets
Cash, including short-term cash investments of $297,069 in 1999,
$4,159 in December 1998, and $61,688 in March 1998 $ 326,815 $ 26,836 $ 80,254
Accounts receivable, net of allowances of $15,739 in 1999,
$15,738 in December 1998, and $14,716 in March 1998 352,583 386,455 341,352
Inventories 56,884 59,109 65,456
Prepaid expense 9,379 14,078 11,180
Other current assets 37,945 39,213 39,466
----------- ----------- -----------
Total Current Assets 783,606 525,691 537,708
----------- ----------- -----------
Investments and Other Assets
Equity in unconsolidated companies and joint ventures 208,908 201,120 188,620
Net assets of discontinued BIS operations 25,178
Other 257,135 243,586 217,498
----------- ----------- -----------
Total Investments and Other Assets 466,043 444,706 431,296
----------- ----------- -----------
Property, Plant and Equipment
Land and improvements 93,772 93,781 93,980
Buildings and improvements 485,760 484,367 441,450
Equipment 1,184,368 1,175,044 1,144,223
Construction and equipment installations in progress 97,707 84,559 105,276
----------- ----------- -----------
1,861,607 1,837,751 1,784,929
Less accumulated depreciation (789,628) (764,750) (736,106)
----------- ----------- -----------
Net Property, Plant and Equipment 1,071,979 1,073,001 1,048,823
Excess of Cost Over Net Assets Acquired and Other Intangibles
Less accumulated amortization of $280,708 in 1999,
$264,001 in December 1998, and $214,330 in March 1998 2,220,077 2,213,699 2,252,567
----------- ----------- -----------
Total $ 4,541,705 $ 4,257,097 $ 4,270,394
=========== =========== ===========
</TABLE>
3
<PAGE>
CONSOLIDATED BALANCE SHEET (CONT.)
(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
March 28, December 27, March 29,
1999 1998 1998
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current Liabilities
Accounts payable $ 126,317 $ 164,558 $ 176,344
Accrued expenses and other liabilities 125,753 111,088 120,027
Accrued compensation and amounts withheld from employees 99,522 112,827 95,682
Federal and state income taxes 37,031 92,621
Deferred revenue 74,703 67,006 76,232
Short-term borrowings and current portion of long-term debt 414,499 198,277 42,434
----------- ----------- -----------
Total Current Liabilities 877,825 653,756 603,340
----------- ----------- -----------
Noncurrent Liabilities
Long-term debt 1,320,868 1,329,001 1,599,230
Deferred federal and state income taxes 298,737 293,015 287,814
Postretirement benefits other than pensions 148,813 147,118 152,117
Employment benefits and other noncurrent liabilities 165,524 168,974 166,697
----------- ----------- -----------
Total Noncurrent Liabilities 1,933,942 1,938,108 2,205,858
----------- ----------- -----------
Minority Interests in Consolidated Subsidiaries 2,608 2,502 2,348
Commitments and Contingencies (Note 6)
Shareholders' Equity
Preferred stock, $1.00 par value; shares authorized-2,000,000;
shares issued - 1,754,930 in 1999,
December 1998 and March 1998 1,755 1,755 1,755
Common stock, $.02 1/12 par value; shares authorized -
250,000,000; shares issued -78,639,160 in 1999,
78,374,195 in December 1998 and 78,540,546 in March 1998 1,638 1,633 1,636
Additional capital 918,444 908,078 900,647
Retained earnings 778,813 735,132 551,158
Accumulated other comprehensive income 29,212 18,738 3,652
Treasury stock, at cost, 45,632 shares in 1999,
46,667 in December 1998 and 0 in March 1998 (2,532) (2,605)
----------- ----------- -----------
Total Shareholders' Equity 1,727,330 1,662,731 1,458,848
----------- ----------- -----------
$ 4,541,705 $ 4,257,097 $ 4,270,394
=========== =========== ===========
See "Notes to Consolidated Financial Statements".
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED, IN THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Quarter Ended Four Quarters Ended
-------------------------- --------------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUE
Advertising
Retail $ 248,586 $ 240,545 $ 1,097,314 $ 1,055,914
General 74,857 63,684 273,004 258,282
Classified 261,904 260,755 1,012,904 999,658
----------- ----------- ----------- -----------
Total 585,347 564,984 2,383,222 2,313,854
Circulation 146,757 148,597 585,689 589,499
Other 38,695 30,302 149,924 116,485
----------- ----------- ----------- -----------
Total Operating Revenue 770,799 743,883 3,118,835 3,019,838
OPERATING COSTS
Labor and employee benefits 305,099 291,917 1,214,163 1,174,816
Newsprint, ink and supplements 126,870 130,634 525,390 503,499
Other operating costs 166,015 162,368 672,761 648,130
Depreciation and amortization 47,153 45,777 189,428 172,347
----------- ----------- ----------- -----------
Total Operating Costs 645,137 630,696 2,601,742 2,498,792
----------- ----------- ----------- -----------
OPERATING INCOME 125,662 113,187 517,093 521,046
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (24,764) (27,961) (102,739) (115,717)
Interest expense capitalized 2,317 1,150 5,683 4,733
Interest income 430 1,618 2,228 4,585
Equity in earnings of unconsolidated
companies and joint ventures 4,868 4,339 23,838 14,271
Minority interests in earnings of
consolidated subsidiaries (2,599) (2,481) (10,867) (11,325)
Other, net (900) 81,753 6,089 145,042
----------- ----------- ----------- -----------
Total (20,648) 58,418 (75,768) 41,589
----------- ----------- ----------- -----------
Income before income taxes 105,014 171,605 441,325 562,635
Income taxes 42,147 70,168 174,264 240,152
----------- ----------- ----------- -----------
Income from continuing operations 62,867 101,437 267,061 322,483
Gain on sale of discontinued BIS operations, net of applicable income
income taxes of $43,752 and $8,365 for the four quarters ended
1999 and 1998, respectively 60,042 15,261
Income from discontinued BIS operations, net of applicable
income taxes of $133 for the quarter ended 1998 and $1,778
for the four quarters ended 1998 184 2,160
----------- ----------- ----------- -----------
Net income $ 62,867 $ 101,621 $ 327,103 $ 339,904
=========== =========== =========== ===========
EARNINGS PER SHARE
BASIC:
Income from continuing operations $ 0.80 $ 1.27 $ 3.40 $ 3.79
Gain on sale of discontinued BIS operations, net 0.77 0.18
Income from discontinued BIS operations, net 0.02
----------- ----------- ----------- -----------
Net income $ 0.80 $ 1.27 $ 4.17 $ 3.99
=========== =========== =========== ===========
DILUTED:
Income from continuing operations $ 0.65 $ 1.02 $ 2.74 $ 3.15
Gain on sale of discontinued BIS operations, net 0.61 0.15
Income from discontinued BIS operations, net 0.02
----------- ----------- ----------- -----------
Net income $ 0.65 $ 1.02 $ 3.35 $ 3.32
=========== =========== =========== ===========
DIVIDENDS DECLARED PER COMMON SHARE $ 0.20 $ 0.20 $ 0.80 $ 0.80
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING (000s)
Basic 78,425 79,950 78,501 85,182
=========== =========== =========== ===========
Diluted 97,320 99,560 97,616 102,533
=========== =========== =========== ===========
</TABLE>
See "Notes to Consolidated Financial Statements".
5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED, IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Quarter Ended Four Quarters Ended
------------------------ ------------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (REQUIRED FOR) OPERATING ACTIVITIES
Net income $ 62,867 $ 101,621 $ 327,103 $ 339,904
Noncash items deducted from (included in) income :
Gains on sales of businesses (75,251) (136,576)
Net gain on sale of discontinued BIS operations (60,042) (15,261)
Depreciation 27,793 25,927 103,816 98,552
Amortization of excess of cost over
net assets acquired 16,707 16,364 66,378 59,245
Amortization of other assets 2,653 3,486 19,234 14,550
Benefit from deferred taxes (1,669) (1,241) (8,872) (16,670)
Provision for bad debt 5,441 5,219 21,076 23,923
Earnings from investees in excess of distributions (4,117) (3,497) (22,476) (15,776)
Minority interests in earnings of consolidated subsidiaries 2,599 2,481 10,867 11,325
Other items, net 5,749 3,398 20,927 35,841
Change in certain assets and liabilities:
Accounts receivable 30,320 26,060 (35,667) (43,993)
Inventories 2,225 (15,705) 8,532 (10,659)
Other current assets 2,762 5,639 419 4,295
Accounts payable (35,694) 2,747 (58,740) 6,781
Federal and state income taxes 39,017 66,436 (79,653) (28,737)
Other liabilities 7,849 (29,215) 14,282 24,972
----------- ----------- ----------- -----------
Net Cash Provided by Operating Activities 164,502 134,469 327,184 351,716
----------- ----------- ----------- -----------
CASH PROVIDED BY (REQUIRED FOR) INVESTING ACTIVITIES
Proceeds from sales of businesses 58,125 108,616
Proceeds from sale of discontinued BIS operations 125,000 416,983
Change in net noncurrent assets of discontinued BIS operations 520 (2,931)
Acquisition of businesses (30,438) (1,250) (30,463) (5,450)
Acquisition of other investments, net (12,601) (989) (40,003) (11,802)
Proceeds from sales of securities available for sale 8,818 13,137 224,347
Additions to property, plant and equipment (25,158) (30,694) (126,489) (109,529)
Other items, net (876) (1,763) (5,089) 9,398
----------- ----------- ----------- -----------
Net Cash Provided by (Required for) Investing Activities (60,255) 23,949 (63,907) 629,632
----------- ----------- ----------- -----------
CASH PROVIDED BY (REQUIRED FOR) FINANCING ACTIVITIES
Proceeds from sale of commercial paper, notes payable and
senior notes payable 950,855 1,865,781 764,852
Payment of total debt (754,375) (27,378) (1,784,183) (820,427)
----------- ----------- ----------- -----------
Net Change in Total Debt 196,480 (27,378) 81,598 (55,575)
Payment of cash dividends (19,186) (19,514) (76,824) (79,236)
Sale of common stock to employees 9,189 13,307 40,293 55,372
Purchase of treasury stock (199,625) (55,908) (817,267)
Other items, net 9,249 (5,245) (5,875) (28,940)
----------- ----------- ----------- -----------
Net Cash Provided by (Required for) Financing Activities 195,732 (238,455) (16,716) (925,646)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Cash 299,979 (80,037) 246,561 55,702
Cash and short-term cash
investments at beginning of the period 26,836 160,291 80,254 24,552
----------- ----------- ----------- -----------
Cash and short-term cash
investments at end of the period $ 326,815 $ 80,254 $ 326,815 $ 80,254
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Non cash investing activities
Securities received as proceeds on the sale of investee $ 37,678 $ 37,678
Non cash financing activities
Issuance of prefered 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" .
</TABLE>
6
<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 three month period and four quarters
ended March 28, 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
Registrant Company and Subsidiaries' 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 Four Quarters Ended
-------------------- --------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 62,867 $101,621 $327,103 $339,904
Unrealized gains on securities available for sale:
Change in unrealized gains, net of related taxes 12,745 3,652 29,225 26,280
Less: reclassification adjustment for gains realized in net income (2,271) - (3,665) (6,835)
-------- -------- -------- --------
Other comprehensive income 10,474 3,652 25,560 19,445
-------- -------- -------- --------
Total comprehensive income $ 73,341 $105,273 $352,663 $359,349
======== ======== ======== ========
</TABLE>
7
<PAGE>
NOTE 3 - DEBT
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Effective Balance At
Interest ------------------------------------
Rate At
March 28, March 28, December 27, March 29,
1999 1999 1998 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper, net of discount (a) 5.2% $ 828,625 $ 917,533 $ 2,494
Senior secured bank debt (b) 990,000
Debentures, net of discount (c) 10.0 198,340 198,299 198,175
Debentures, net of discount (d) 7.6 94,434 94,386 94,270
Debentures, net of discount (e) 6.9 296,786
Notes payable, net of discount (f) 8.5 119,817 119,777 159,657
Notes payable, net of discount (g) 6.8 98,035 97,978 97,838
Senior notes, net of discount (h) 6.3 99,330 99,305 99,230
---------- ---------- ----------
Total Debt (i) 6.6 1,735,367 1,527,278 1,641,664
Less amounts classified as current 414,499 198,277 42,434
---------- ---------- ----------
Total long-term debt 6.9% $1,320,868 $1,329,001 $1,599,230
========== ========== ==========
</TABLE>
(a) Commercial paper is supported by $1.1 billion of revolving credit and term
loan agreements, $500 million of which matures on June 22, 2003 and $600
million of which matures June 22, 1999. The company has the option and
intention to renew the portion expiring in 1999, for an additional 364-day
term through June 2000.
(b) Represented $990 million advance under a $1.2 billion credit agreement with
a variable interest rate indexed to Libor plus 27 1/2 basis points. Bank
debt was paid off in June 1998 with proceeds from the sale of commercial
paper.
(c) Represents $200 million of a 20-year 9 7/8% debenture due in 2009.
(d) Represents $100 million of a 7.15% debenture due in 2027.
(e) During the first quarter 1999, the company issued $300 million of 6.875%
debentures under a shelf registration statement filed with the Securities
and Exchange Commission in November 1997. The debentures are due March 15,
2029. Proceeds from the issuance were used to reduce borrowings under the
company's commercial paper program in April 1999.
(f) Represents $120 million of 8 1/2% notes payable at March 1999 and December
1998, and $160 million at March 1998. These notes are subject to mandatory
annual repayments, commencing in 1998 through maturity in 2001. Annual
maturities are presented under current liabilities.
(g) Represents $100 million of 6.625% notes due in 2007.
(h) Represents $100 million of 10 year 6.3% senior notes due in 2005.
(i) Interest payments for the quarters ended March 28, 1999 and March 29, 1998
were $11.6 million and $33.3 million, respectively.
8
<PAGE>
NOTE 4 - INCOME TAX PAYMENTS
Income tax payments for the quarters ended March 28, 1999 and March 29, 1998,
were $4.2 million and $8.8 million, respectively. Payments in 1998 included 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.
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 share data):
<TABLE>
<CAPTION>
Quarter Ended Four Quarters Ended
------------------- -------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income from continuing operations $ 62,867 $101,437 $267,061 $322,483
======== ======== ======== ========
Average shares outstanding (basic) 78,425 79,950 78,501 85,182
-------- -------- -------- --------
Effect of dilutive securities:
Convertible preferred stock 17,549 17,549 17,549 15,355
Stock options 1,346 2,061 1,566 1,996
-------- -------- -------- --------
Average shares outstanding (diluted) 97,320 99,560 97,616 102,533
-------- -------- -------- --------
Earnings per share from continuing operations (basic) $ 0.80 $ 1.27 $ 3.40 $ 3.79
======== ======== ======== ========
Earnings per share from continuing operations (diluted) $ 0.65 $ 1.02 $ 2.74 $ 3.15
======== ======== ======== ========
</TABLE>
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 filed
an appeal 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
Earnings per share for the first quarter of 1999 was $.65, up $.08 per share, or
14.0%, from the $.57 per share earned in 1998, excluding the $.45 gain on the
1998 sale of the balance of the company's jointly owned cable systems and its
newspaper in Gary, Indiana. The $.08 per share improvement from 1998, excluding
the 1998 one-time gains, was due to operating margin improvement in Miami,
Philadelphia and Detroit, and a decrease in net interest expense. Including the
1998 one-time gains, earnings per share for the first quarter of 1999 was down
$.37 per share, or 36.3%, from the $1.02 per share earned in the same period
last year.
OPERATING REVENUE
Newspaper advertising revenue increased $20.4 million, or 3.6%, over the first
quarter last year.
General advertising revenue was up $11.2 million, or 17.5%, from the first
quarter last year. Automotive and financial advertising helped boost
performance.
Retail advertising revenue improved by $8.0 million, or 3.3%, over last year.
Retail benefited from increased preprint advertising, helped by an early Easter.
Classified advertising revenue increased $1.1 million, or 0.4%, over the first
quarter last year. Declines in San Jose and Philadelphia were offset by
double-digit gains in Charlotte and Contra Costa.
Circulation revenue was down $1.8 million, or 1.2%, from 1998, on a 2.3% decline
in the seven-day circulation, offset by a 1.1% increase in average rate.
Other newspaper revenue increased by $8.4 million, or 27.7%, from the prior
year. The increase was due to growth in event marketing, online, special
publications and commercial print revenue.
OPERATING COSTS
Labor and employee benefit costs increased $13.2 million, or 4.5% over the first
quarter last year. Excluding a $2.2 million buyout expense in Detroit, labor and
employee benefit costs increased $10.9 million, or 3.7%, on a 2.4% increase in
the average wage rate and a 0.1% decrease in the workforce.
Newsprint, ink and supplement costs decreased $3.8 million, or 2.9%, from first
quarter 1998 on a 1.7% decline in the average newsprint price and a 1.0% decline
in consumption.
Other operating costs increased $3.6 million, or 2.2%, from first quarter 1998,
due to increases in contract services, primarily in Philadelphia due to new
event marketing and special publication initiatives, and outside solicitor
costs, also in Philadelphia, due to circulation initiatives.
Depreciation and amortization increased $1.4 million, or 3.0%, from first
quarter 1998, primarily due to the press projects in Miami and Fort Worth, and
year 2000 (Y2K) readiness spending.
10
<PAGE>
NON-OPERATING ITEMS
Interest expense, net of interest income and interest expense capitalized,
decreased $3.2 million, or 12.6%, from first quarter 1998 due to the decline in
average debt. The average debt balance, net of invested cash for the quarter,
decreased $277.9 million from the first quarter of last year.
Equity in earnings of unconsolidated companies and joint ventures increased by
$529,000, or 12.2%, mostly due to improved results from the company's newsprint
mill investments.
The "Other, net" line of the non-operating section reflects a decrease of $82.7
million from first quarter 1998. The first quarter 1998 includes a pre-tax gain
of $75.3 million on the sale of the Gary newspaper and the sale of the company's
jointly owned cable systems. Excluding the one-time gains from 1998, "other,
net" declined by $7.4 million, largely due to a 1998 insurance settlement from
the Grand Forks flood and gains on the sale of miscellaneous investments
reflected in first quarter 1998's results.
The effective tax rate for first quarter 1999 was 40.1%, compared with 40.9% in
the first quarter of 1998.
OTHER
The company did not repurchase any common stock during the first quarter of
1999. The company has authorization to repurchase approximately 3.7 million
shares and will consider market opportunities for share repurchases.
LIQUIDITY
Net cash provided by operating activities in the first quarter of 1999 increased
to $164.5 million from $134.5 million in the first quarter of 1998. The increase
was attributed to higher earnings, excluding gains on sales of businesses in
1998. Net cash provided by investing activities in the first quarter of 1999
decreased $84.2 million from the first quarter of 1998, largely due to proceeds
from the sale of the Gary newspaper and the company's jointly owned cable
systems in 1998 and the acquisition of businesses and other investments in 1999.
Cash and short term cash investments were up $246.6 million from March 29, 1998,
and up $300.0 million from year end, due to proceeds received from the issuance
of $300 million of 30-year debentures on March 26, 1999. Total debt increased
$208.1 million during the quarter due to the issuance of these debentures. In
April 1999, the net proceeds were used to reduce short-term commercial paper
borrowings. Debt, net of invested cash, actually decreased $84.8 million from
December 27, 1998.
Total-debt-to-total-capital ratio was 50.1% (45.4% net of invested cash)
compared to 47.9% at year end and 52.9% in March 1998. Approximately $265.7
million in aggregate unused credit lines remained at the end of the quarter. The
ratio of current assets to current liabilities was 0.9:1 at March 28, 1999 and
March 29, 1998, and 0:8:1 at December 27, 1998.
11
<PAGE>
YEAR 2000 READINESS DISCLOSURES
All Year 2000 statements in this Form 10-Q are Year 2000 Readiness Disclosures
under the Year 2000 Information and Readiness Disclosure 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, chaired
by the vice president and chief information officer, who reports directly to the
chief executive officer. 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 also provided through special forums for
Y2K coordinators. The company also engaged experts to assist in developing work
plans and cost estimates to complete remediation activities. The company's
Internal Audit Department also 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 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.
12
<PAGE>
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). The company expects that the Conversion,
Testing and Implementation Phases will be at least 90% complete by June 30,
1999, with the balance to be completed no later than September 30, 1999.
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 $65 million and is being funded with operating cash flows.
Approximately 70% of the total will relate to purchased hardware and software,
which will be capitalized. The remainder will be expensed as incurred.
Expenditures through March 28, 1999 totaled $34.6 million, of which 70.2% 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.
At this time there can be no assurance that these cost estimates will not be
exceeded, and actual costs may differ significantly from those projected. Some
factors that may cause actual expenditures to differ include the availability
and cost of trained personnel, and the ability to locate and correct all
relevant computer problems.
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 well under way. 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.
13
<PAGE>
OUTLOOK FOR THE REMAINDER OF THE YEAR
Looking ahead to the second quarter and the full year, the company anticipates
advertising growth will be moderately above 1998. The cost of newsprint is lower
than originally anticipated as the expected price increases look to be smaller
and later than previously thought.
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.
PART II - OTHER INFORMATION
Item 2. Legal Proceedings
Refer to Part I, 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
4.1 - Indenture dated as of November 4, 1997, between the
Registrant and The Chase Manhattan Bank, incorporated
by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-3, Registration No.
333-37603.
27 - Financial Data Schedule, filed herein.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
March 28, 1999.
14
<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: May 11, 1999
/s/ GARY R. EFFREN
----------------------------------------
Gary R. Effren
Vice President/Controller
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0000205520
<NAME> Knight Rider, Inc.
<MULTIPLIER> 1,000
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0
1,755
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<F1> COST OF GOODS SOLD CONSISTS OF NEWSPRINT, INK, AND SUPPLEMENTS.
<F2> OTHER EXPENSES CONSISTS OF ALL NON-OPERATING INCOME AND COSTS, NET,
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